Attached files
file | filename |
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EX-32.2 - EXHIBIT 32.2 - Here Media Inc. | c00919exv32w2.htm |
EX-31.1 - EXHIBIT 31.1 - Here Media Inc. | c00919exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - Here Media Inc. | c00919exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - Here Media Inc. | c00919exv32w1.htm |
EX-10.1 - EXHIBIT 10.1 - Here Media Inc. | c00919exv10w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: March 31, 2010
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-53690
HERE MEDIA INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE (State or Other Jurisdiction of Incorporation or Organization) |
26-3962587 (I.R.S. Employer Identification No.) |
|
10990 WILSHIRE BOULEVARD, PENTHOUSE | ||
LOS ANGELES, CALIFORNIA | 90024 | |
(Address of Principal Executive Offices) | (Zip Code) |
(310) 806-4288
(Registrants Telephone Number, Including Area Code)
(Registrants Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ
Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of
large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
o
Yes þ No
Number of shares outstanding of the registrants Common Stock, $0.001 par value, outstanding
as of April 30, 2010: 20,700,675
Here Media Inc.
INDEX
Form 10-Q
For the Period ended March 31, 2010
INDEX
Form 10-Q
For the Period ended March 31, 2010
PAGE | ||||||||
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27 | ||||||||
Exhibit 10.1 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
i
Table of Contents
PART I
FINANCIAL INFORMATION
FINANCIAL INFORMATION
Here Media Inc.
Item 1. Financial Statements
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
December 31, | March 31, | |||||||
2009 | 2010 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 981 | $ | 227 | ||||
Receivable from factor |
150 | 324 | ||||||
Accounts receivable, net |
2,415 | 988 | ||||||
Inventory |
579 | 527 | ||||||
Program broadcasting rights, current portion |
2,606 | 2,473 | ||||||
Prepaid expenses and other current assets |
759 | 656 | ||||||
Total current assets |
7,490 | 5,195 | ||||||
Property and equipment, net |
1,379 | 1,078 | ||||||
Intangible assets, net |
2,234 | 2,162 | ||||||
Program broadcasting rights, including $13,199 and $12,763 from related parties
as of December 31, 2009 and March 31, 2010, respectively, net of current portion |
11,971 | 11,484 | ||||||
Other assets |
551 | 616 | ||||||
Total assets |
$ | 23,625 | $ | 20,535 | ||||
LIABILITIES AND STOCKHOLDERS DEFICIT |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 6,867 | $ | 5,712 | ||||
Accrued expenses and other liabilities |
3,387 | 4,065 | ||||||
Accrued restructuring |
523 | 225 | ||||||
Due to related parties, current portion |
1,233 | 1,465 | ||||||
Deferred revenue, current portion |
2,913 | 2,785 | ||||||
Capital lease obligations, current portion |
273 | 272 | ||||||
Deferred rent, current portion |
29 | 29 | ||||||
Total current liabilities |
15,225 | 14,553 | ||||||
Lines of credit from related parties |
3,835 | 3,958 | ||||||
Deferred revenue, less current portion |
2,016 | 2,173 | ||||||
Capital lease obligations, less current portion |
131 | 80 | ||||||
Deferred rent, less current portion |
58 | 51 | ||||||
Due to related parties, less current portion |
12,435 | 11,094 | ||||||
Other long-term liabilities |
158 | 129 | ||||||
Total liabilities |
33,858 | 32,038 | ||||||
Commitments and contingencies (Note 8) |
||||||||
Stockholders deficit: |
||||||||
Common stock: $0.001 par value, 40,000 shares authorized, 20,701 shares
issued and outstanding at December 31, 2009 and March 31, 2010 |
21 | 21 | ||||||
Preferred stock: $0.001 par value, 10,000 shares authorized, zero shares
issued and outstanding at December 31, 2009 and March 31, 2010 |
| | ||||||
Special stock: $0.001 par value, 4,200 shares authorized, 4,071 shares
issued and outstanding at December 31, 2009 and March 31, 2010 |
4 | 4 | ||||||
Additional paid-in capital |
5,097 | 5,192 | ||||||
Accumulated other comprehensive loss |
(17 | ) | (3 | ) | ||||
Accumulated deficit |
(15,338 | ) | (16,717 | ) | ||||
Total stockholders deficit |
(10,233 | ) | (11,503 | ) | ||||
Total liabilities and stockholders deficit |
$ | 23,625 | $ | 20,535 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
Table of Contents
Here Media Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three Months Ended March 31, | ||||||||
2009 | 2010 | |||||||
Revenue: |
||||||||
Advertising services (*) |
$ | 2,221 | $ | 3,771 | ||||
Subscription services |
1,146 | 2,566 | ||||||
Transaction services (*) |
3,054 | 453 | ||||||
Total revenue |
6,421 | 6,790 | ||||||
Operating costs and expenses: |
||||||||
Cost of revenue |
4,626 | 4,652 | ||||||
Sales and marketing |
1,369 | 1,464 | ||||||
General and administrative |
1,514 | 1,580 | ||||||
Acquisition transaction costs |
378 | | ||||||
Depreciation and amortization |
143 | 368 | ||||||
Total operating costs and expenses |
8,030 | 8,064 | ||||||
Loss from operations |
(1,609 | ) | (1,274 | ) | ||||
Interest expense |
(3 | ) | (105 | ) | ||||
Loss from operations before income taxes |
(1,612 | ) | (1,379 | ) | ||||
Provision for income taxes |
| | ||||||
Net loss |
$ | (1,612 | ) | $ | (1,379 | ) | ||
Net loss per share - |
||||||||
Basic and diluted |
$ | (0.10 | ) | $ | (0.07 | ) | ||
Weighted-average shares used to compute loss per share - |
||||||||
Basic and diluted |
16,630 | 20,701 | ||||||
(*) Supplemental disclosure of related party revenue (see Note 5): |
||||||||
Advertising services revenue: |
||||||||
Non-related parties |
$ | 2,221 | $ | 2,664 | ||||
Related parties |
| 1,107 | ||||||
$ | 2,221 | $ | 3,771 | |||||
Transaction services revenue: |
||||||||
Non-related parties |
$ | 374 | $ | 401 | ||||
Related parties |
2,680 | 52 | ||||||
$ | 3,054 | $ | 453 | |||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Table of Contents
Here Media Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS DEFICIT AND
COMPREHENSIVE LOSS
COMPREHENSIVE LOSS
(In thousands)
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||||||
Common Stock | Special Stock | Paid-in | Comprehensive | Accumulated | Stockholders | |||||||||||||||||||||||||||
Shares | Par Value | Shares | Par Value | Capital | Loss | Deficit | Deficit | |||||||||||||||||||||||||
Balance as of
December 31, 2009 |
20,701 | $ | 21 | 4,071 | $ | 4 | $ | 5,097 | $ | (17 | ) | $ | (15,338 | ) | $ | (10,233 | ) | |||||||||||||||
Net loss |
| | | | | | (1,379 | ) | (1,379 | ) | ||||||||||||||||||||||
Foreign currency
translation adjustment |
| | | | | 14 | | 14 | ||||||||||||||||||||||||
Comprehensive loss |
(1,365 | ) | ||||||||||||||||||||||||||||||
Contribution of
services |
| | | | 95 | | | 95 | ||||||||||||||||||||||||
Balance as of
March 31, 2010 |
20,701 | $ | 21 | 4,071 | $ | 4 | $ | 5,192 | $ | (3 | ) | $ | (16,717 | ) | $ | (11,503 | ) | |||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
Table of Contents
Here Media Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended March 31, | ||||||||
2009 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (1,612 | ) | $ | (1,379 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation and amortization |
143 | 368 | ||||||
Program broadcasting rights amortization |
1,130 | 663 | ||||||
Sale of accounts receivable |
| 2,663 | ||||||
Contributed services |
| 95 | ||||||
Provision for (reversal of) doubtful accounts |
25 | (55 | ) | |||||
Amortization of deferred rent |
(8 | ) | (7 | ) | ||||
Changes in operating assets and liabilities, net of acquisition effects: |
||||||||
Receivable from factor |
| (174 | ) | |||||
Accounts receivable |
1,416 | (1,181 | ) | |||||
Inventory |
29 | 52 | ||||||
Program broadcasting rights |
(1,681 | ) | (43 | ) | ||||
Prepaid expenses and other assets |
(94 | ) | 38 | |||||
Accounts payable |
144 | (1,030 | ) | |||||
Accrued expenses and other liabilities |
(204 | ) | 684 | |||||
Accrued restructuring |
| (298 | ) | |||||
Due to related parties |
(3,656 | ) | (1,227 | ) | ||||
Deferred revenue |
337 | 29 | ||||||
Net cash used in operating activities |
(4,031 | ) | (802 | ) | ||||
Cash flows from investing activities: |
||||||||
Purchases of property and equipment |
| (2 | ) | |||||
Net cash used in investing activities |
| (2 | ) | |||||
Cash flows from financing activities: |
||||||||
Principal payments under capital lease obligations |
(12 | ) | (52 | ) | ||||
Borrowings under lines of credit from related parties |
| 183 | ||||||
Repayments under lines of credit from related parties |
| (95 | ) | |||||
Loans from related parties |
1,598 | | ||||||
Net cash provided by financing activities |
1,586 | 36 | ||||||
Effect of exchange rate on cash and cash equivalents |
| 14 | ||||||
Net decrease in cash and cash equivalents |
(2,445 | ) | (754 | ) | ||||
Cash and cash equivalents, beginning of period |
2,530 | 981 | ||||||
Cash and cash equivalents, end of period |
$ | 85 | $ | 227 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Table of Contents
Here Media Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 The Company and Summary of Significant Accounting Policies
The Company
Here Media Inc. (Here Media or the Company) is the parent company of Here Networks, LLC
(Here Networks), Here Publishing Inc. (Here Publishing) and PlanetOut Inc. (PlanetOut). The
Company refers to Here Networks and Here Publishing collectively as the HMI Entities. Here Media
was incorporated in Delaware in January 2009 in connection with the business combination of the HMI
Entities and PlanetOut, which was completed on June 11, 2009. See Note 2, Business Combinations
and Intangible Assets.
The HMI Entities, collectively, have been determined to be the acquiring entity in the
business combination, and the historical information for the HMI Entities is presented as combined
with Here Media. Both Here Networks and Here Publishing were commonly owned and controlled prior
to the business combination with PlanetOut.
Here Networks offers original programming content tailored for the lesbian, gay, bisexual
and transgender (LGBT) community on a subscription basis via cable television, direct-to-home
(DTH) satellite television, fiber-optic television and the Internet under the brand name here!
Here Publishing publishes magazines and books and operates companion websites targeting the LGBT
community. Products include the magazines Out, The Advocate and HIVPlus and books published by
Alyson Books which are distributed through traditional newsstands as well as other retail outlets,
and by subscriptions of print and digital editions of the magazines. PlanetOut is an online media
company serving the LGBT community. PlanetOut serves this audience through its website Gay.com,
which is a social networking website.
Unaudited Interim Financial Information
The unaudited condensed consolidated financial statements have been prepared in accordance
with the regulations of the Securities and Exchange Commission (the SEC) but omit certain
information and footnote disclosures necessary to present the statements in accordance with United
States generally accepted accounting principles (U. S. GAAP). The accompanying unaudited
condensed consolidated financial statements are unaudited but reflect all adjustments, including
normal recurring adjustments which in the opinion of management are necessary to state fairly the
financial position and the results of operations for the interim periods. Results of interim
periods are not necessarily indicative of results for the entire year. These unaudited condensed
consolidated financial statements should be read in conjunction with the Companys Annual Report on
Form 10-K and the Companys Amendment No. 1 to the Companys Annual Report on Form 10-K/A for the
fiscal year ended December 31, 2009.
Principles of Consolidation and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation. Investments in entities in which the Company holds
less than a 20 percent ownership interest and over which the Company does not have the ability to
significantly influence the operations of the investee are accounted for using the cost method of
accounting. The Company has performed an evaluation of subsequent events through the date the
unaudited condensed consolidated financial statements were issued.
As a result of the Company experiencing losses and negative cash flow from operations in the
year ended December 31, 2009 and the three months ended March 31, 2010, the Company has assessed
its anticipated cash needs for the next twelve months and has adopted an operating plan to manage
its capital expenditures and costs of operating activities consistent with its revenues in order to
meet its working capital needs for the next twelve months. Although the Company believes that it
will have sufficient working capital to conduct its operations and meet its current obligations for
the next twelve months, it can give no assurance that it will be able to do so. The accompanying
unaudited condensed consolidated financial statements are presented on the basis that the Company
is a going concern and do not include any adjustments that might be necessary if the Company is
unable to continue as a going concern.
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Reclassifications
Certain reclassifications have been made in the unaudited condensed consolidated financial
statements for prior periods contained herein to conform to the current year presentation. These
reclassifications do not change the previously reported net income (loss) or net income (loss) per
share of the Company.
Use of Estimates
The preparation of financial statements in conformity with U. S. GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting periods. Significant estimates and
assumptions made by management include, among others, the assessment of collectability of accounts
receivable, the determination of the allowance for doubtful accounts, the determination of the
reserve for inventory obsolescence, determination of ultimate revenue in the amortization of
program broadcasting rights, the valuation and useful life of capitalized software and long-lived
assets, any impairment of long-lived assets such as program broadcasting rights and intangible
assets, the valuation of deferred tax asset balances and the fair value of the stock issued in the
business combination. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original or remaining
maturities of three months or less to be cash equivalents.
Receivable from Factor
Receivable from factor consists of approximately $150,000 and $324,000 as of December 31, 2009
and March 31, 2010, respectively, related to reserve requirements on sales of accounts receivable
under the Companys factoring agreement. See Note 7, Accounts Receivable Factoring.
Fair Value Disclosures of Financial Instruments
The Company has estimated the fair value of its financial instruments using the available
market information and valuation methodologies considered to be appropriate and has determined that
the book value of the Companys accounts receivable, inventories, prepaid expenses, accrued
expenses, due to related parties, deferred revenue and lines of credit from related parties as of
December 31, 2009 and March 31, 2010 approximate fair value.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk
consist principally of cash, cash equivalents and accounts receivable. Cash and cash equivalents
are maintained by financial institutions in the United States. Deposits in the United States may
exceed federally insured limits. Management believes that the financial institutions that hold the
Companys cash and cash equivalents are financially credit worthy and, accordingly, that minimal
credit risk exists with respect to the Companys cash and cash equivalents.
The Companys accounts receivable are derived primarily from advertising customers, from major
cable or satellite operators and from wholesale distributors of the Companys magazines and books
with limited risk. The Company performs ongoing credit evaluations of its customers, does not
require collateral and maintains allowances for potential credit losses when deemed necessary. To
date, such losses have been within managements expectations. No single customer accounted for 10%
or more of the Companys total revenue in the three months ended March 31, 2009 and 2010, or for
more than 10% or more of the accounts receivable as of December 31, 2009 and March 31, 2010.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for estimated losses resulting from
the inability of its customers to make required payments. The Company determines the adequacy of
this allowance by regularly reviewing the composition of its aged accounts receivable and
evaluating individual customer receivables, considering (i) the customers financial condition,
(ii) the customers credit history, (iii) current economic conditions and (iv) other known factors.
As of December 31, 2009 and March 31, 2010 the allowance for doubtful accounts included in
accounts receivable, net was approximately $213,000 and $135,000, respectively.
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Table of Contents
Sales Returns and Allowances
The Company accrues an estimated amount for sales returns and allowances in the same period
that the related revenue is recorded based on historical information, adjusted for current economic
trends. To the extent actual returns and allowances vary from the estimated experience, revisions
to the allowance may be required. Significant management judgments and estimates are made and used
in connection with establishing the sales and allowances reserve. As of December 31, 2009 and
March 31, 2010, the provision for sales returns and allowances included in accounts receivable, net
was approximately $429,000 and $388,000, respectively.
Inventory
Inventory consists of books held for sale and materials related to the production of future
publications such as editorial and artwork costs, advances on books, paper, other publishing and
novelty products and shipping materials. Inventory is stated at the lower of cost or market. Cost
is determined using the specific identification method for books held for sale and using the
first-in, first-out method for materials related to future production.
The Company regularly reviews inventory quantities on hand and writes down obsolete
inventories to their estimated net realizable value. Significant management estimates and
assumptions are made based on judgments of inventory age, shipment history and the Companys
forecast of future demand. Recoveries of previously written down inventory are recognized only
when the related inventory has been sold and revenue has been recognized. As of December 31, 2009
and March 31, 2010, the reserve for obsolete inventory was approximately $26,000 and $32,000,
respectively.
Program Broadcasting Rights
Program broadcasting rights consist of the non-reimbursable amounts paid by the Company for
rights to distribute particular films or film libraries. Rights to programs available for
broadcast under program license agreements are initially recorded at the beginning of the license
period on the basis of the amounts of total license fees payable under the license agreements and
are charged to operating expense over the license period. Program broadcasting rights are recorded
at the lower of cost, less accumulated amortization, or net realizable value. The Companys
distribution agreements with the producers of the films or programs typically include rights to
exploit the films and television programming via most forms of media in the United States and its
territories for the duration of the licensing agreement.
The Company offers multiple hours of programming each month to subscribers to its subscription
video-on-demand (SVOD) and linear television channel services, refreshing the content by 50% or
more on a monthly basis. In general, the Company is unable to attribute the monthly fees earned
per subscriber to individual programs or films. As a result, the Company is generally unable to
recognize expenses utilizing the individual film forecast method. Therefore, the majority of the
Companys program broadcasting rights are amortized utilizing the straight-line method, generally
over the license term. The Company believes that this method provides a reasonable matching of
expenses with total estimated revenues over the periods that revenues associated with the films and
programs are expected to be realized. During the year ended December 31, 2009, the Company acquired
program broadcasting rights for a particular film library which it is amortizing using the
individual film forecast method. Under the individual film forecast method, costs are amortized
and participation and residual costs are accrued in the proportion that the current years revenue
bears to managements estimate at the beginning of the current year of the ultimate revenue
expected to be recognized from the exploitation, exhibition or sale of the films. Ultimate revenue
includes estimates over a period not to exceed ten years following the date of initial release.
Revenue estimates are reviewed annually by management and revised when warranted by changing
conditions. When estimates of total revenues and costs indicate that a film will result in an
ultimate loss, an impairment charge is recognized to the extent that total film costs exceed
estimated recoverable value.
When certain factors indicate that impairment may exist, the Company tests for impairment of
its program broadcasting rights. The carrying value of a long-lived asset held for use is
considered impaired when the anticipated discounted cash flow from such asset is separately
identifiable and is less than its carrying value. In that event, a loss is recognized based on the
amount by which the carrying value exceeds the fair market value of the long-lived asset held for
use. Fair market value is determined primarily using the anticipated cash flows discounted at a
rate commensurate with the risk involved to estimate the fair value of the film assets. In
determining the film assets fair value, the Company considers key indicators such as the
anticipated growth in subscriber level, and the plan for expansion of its linear carriages. The
Company also considers cash outflows necessary to generate the film assets revenues. The Company
uses a discount rate that it believes is appropriate to the risk level for film production. During
the three months ended March 31, 2009 and 2010, the Company had no impairment of program
broadcasting rights included in amortization expense.
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Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation is calculated using the straight-line method over the estimated useful lives of the
related assets, generally ranging from three to five years. Leasehold improvements are amortized
over the shorter of their economic lives or lease term, including the option to extend if extension
is probable, generally ranging from two to seven years. Maintenance and repairs are charged to
expense as incurred. Expenditures that increase the value or productive capacity of assets are
capitalized. When assets are retired or otherwise disposed of, the cost and accumulated
depreciation and amortization are removed from the accounts and any resulting gain or loss is
reflected in the Condensed Consolidated Statement of Operations in the period realized.
Internal Use Software and Website Development Costs
The Company capitalizes internally developed software and website development costs incurred
in the application development stage of an internal-use software project when the preliminary
project stage has been completed and technological and economic feasibility has been determined.
The Company exercises judgment in determining which stage of development a software project is in
at any point in time. Capitalized costs are amortized on a straight-line basis over the estimated
useful life of the software, generally three years, once it is available for its intended use.
Intangible Assets and Other Long-Lived Assets
The Company evaluates identifiable intangible assets and other long-lived assets for
impairment whenever events or changes in circumstances indicate that the carrying amount of a
long-lived asset may not be recoverable. The Company records an impairment charge on intangibles
or long-lived assets when it determines that the carrying value of these assets may not be
recoverable and/or exceeds their fair value. Based on the existence of one or more indicators of
impairment, the Company measures any impairment based on a projected discounted cash flow method
using a discount rate that it determines to be commensurate with the risk inherent in its business
model. These estimates of cash flow require significant judgment based on the Companys historical
results and anticipated results and are subject to many factors including assumptions about the
timing and amount of future cash flows, growth rates and discount rates.
Investment in OUTtv
The Company has invested $200,000 for its 33% ownership stake in the holding company that owns
a 58% interest in OUTtv (or a 19% effective ownership interest in OUTtv), a digital specialty
television network providing programming of particular interest to the gay and lesbian community
across Canada. The Company accounts for this investment using the cost method of accounting as it
does not exercise significant influence over the investment (see Principles of Consolidation and
Basis of Presentation). As part of this investment, the Company entered into a programming
service and intellectual property agreement which calls for a barter exchange of programming rights
deliverable by the Company in exchange for certain amounts of advertising time on OUTtv. Also,
OUTtv is obligated to pay $1.00 per month for every 1,000 subscribers over 300,000. In addition,
in consideration of the programming service and intellectual property agreement, OUTtvs holding
company is obligated to pay a license fee of $15,000 per month. The license fee payments were
deferred until OUTtv or the holding company raises $2.0 million in a private placement or a public
offering. Since the Company is uncertain that OUTtv will raise $2.0 million, the Company deems
that the collectability requirement for revenue recognition is not met, and therefore does not
account for the license fee revenues in the unaudited condensed consolidated financial statements.
Related Party Transactions
Here Management, LLC (Here Management) is the controlling stockholder of the Company and is
51% owned by the Companys Chairman of the Board, Stephen P. Jarchow, and 35% owned by the
Companys Chief Executive Officer, Paul A. Colichman. Mr. Jarchow and Mr. Colichman are also the
majority owners of Regent Releasing LLC (Regent Releasing), Oxford Media LLC (Oxford Media),
Studios Funding LLC (Studios Funding), Convergent Funding LLC (Convergent Funding), Regent
Studios LLC (Regent Studios), Hyperion Media LLC (Hyperion), Regent Worldwide Sales LLC
(RWS), Regent Entertainment International Inc. and Regent Entertainment Partnership, L.P.
(collectively, the Affiliates). During the three months ended March 31, 2009 and 2010, the
Company was a party to agreements with certain of the Affiliates related to publicity and marketing
services agreements, expense sharing arrangements and the acquisition, licensing or distribution of
programming and motion pictures.
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The Company and several of the Affiliates share certain general and administrative expenses.
Expenses shared by the Company and the Affiliates require the use of judgments and estimates in
determining the allocation of these expenses. Prior to the business combination on June 11, 2009,
these shared expenses included salary and other non-payroll related costs. Allocation of salary
costs among the Company and the Affiliates was performed on an individual employee basis and was
based upon the proportionate share of each employees time spent per affiliate company.
Non-payroll costs, such as insurance, office rent, utilities, information technology and other
office expenses were allocated in proportion to allocated payroll costs. Subsequent to the
business combination on June 11, 2009, the sharing of employees with the Affiliates has been
eliminated and non-payroll costs have been allocated among the Company and the Affiliates based
primarily on usage. The Companys management believes the allocation methodology is reasonable and
represents managements best available estimate of actual costs incurred by each company.
The Company is also a party to agreements with several of its affiliates relating to the
acquisition, licensing or distribution of programming and motion pictures and the provision of
publicity and marketing services. See Note 5, Related Party Transactions.
During the year ended December 31, 2009, the Company entered into line of credit agreements
with Mr. Colichman and Mr. Jarchow. See Note 6, Lines of Credit from Related Parties.
The Company has barter agreements with Regent Releasing under which Regent Releasing supplies
program license rights to the Company in exchange for advertising in the Companys print
publications and on the Companys websites. The Company recognizes the license rights as program
broadcasting rights and deferred advertising revenue at the estimated fair value when the product
is available for telecast. Program broadcasting rights licensed under these barter agreements are
amortized in the same manner as the non-barter component of the licensed programming, and
advertising revenue is recognized when impressions are delivered or
when magazines are placed on sale at the newsstands. See Note 5, Related Party
Transactions.
The Company has a barter agreement with OUTtv under which the Company supplies program license
rights to OUTtv in exchange for advertising time on OUTtv. The Company recognizes transaction
services revenue related to the program license rights upon delivery and acceptance of the programs
by OUTtv and advertising expense as the advertisements are broadcast. See Note 5, Related Party
Transactions.
Revenue Recognition
The Companys revenue is derived principally from advertising services, subscription services
and transaction services. Advertising services revenue is generated from banner and sponsorship
advertisements on the Companys websites and from advertisements placed in the Companys printed
publications. Subscription services revenue is generated from paid membership subscriptions to
Gay.com, from fees paid by subscribers for the Companys SVOD and linear television channel
services and from print and digital subscriptions to Out magazine. Transaction services revenue
includes sales of Out magazine through traditional newsstands as well as other retail outlets,
sales of books through the Companys Alyson Books publishing business, theatrical box office
receipts, consulting fees earned for publicity and marketing services provided to Regent Releasing
under marketing agreements related to theatrical motion picture releases and revenue earned under a
barter agreement with OUTtv for programming rights.
The duration of the Companys banner advertising commitments has ranged from one week to one
year. Sponsorship advertising contracts have terms ranging from three months to two years and also
involve more integration with the Companys services, such as the placement of units that provide
users with direct links to the advertisers website. Advertising revenue on both banner and
sponsorship contracts is recognized ratably over the term of the contract, provided that no
significant Company obligations remain at the end of a period and collection of the resulting
receivables is reasonably assured, at the lesser of the ratio of impressions delivered over the
total number of undertaken impressions or the straight-line basis. The Companys obligations
typically include undertakings to deliver a minimum number of impressions, or times that an
advertisement appears in pages viewed by users of the Companys websites. To the extent that these
minimums are not met, the Company defers recognition of the corresponding revenue until the
minimums are achieved.
Magazine advertising revenues are recognized, net of related agency commissions, on the date
the magazines are placed on sale at the newsstands. Revenues received for advertisements in
magazines to go on sale in future months are classified as deferred advertising revenue.
Premium online subscription services are generally for a period of one to twelve months.
Premium online subscription services are generally paid for upfront by credit card, subject to
cancellations by subscribers or charge backs from transaction processors. Revenue, net of
estimated cancellations and charge backs, is recognized ratably over the service term. To date,
cancellations and charge backs have not been significant and have been within managements
expectations.
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Subscription services revenue from television services is recognized for the month in which
programming is broadcast to viewers. The relevant cable or satellite television operator collects
the fees from subscribers and pays to the Company its corresponding portion, typically within 90
days of receipt from the customer. Viewership counts are reported monthly by system operators.
Generally, under the terms of the Companys agreements with the cable, satellite and fiber-optic
television operators, the Company is paid based on a percentage of the amount charged to
subscribers, typically ranging from 40% to 50% of those charges, subject to a negotiated minimum
dollar amount per subscriber and to any additional incentives that the Company may offer an
operator for carrying its service for a specified period of time. These additional incentives may
include the operator effectively retaining the full amount of monthly subscriber fees for a
specified period, such as the first three months of a twelve-month period, before fees are paid to
the Company. The incentives are recognized as a reduction of revenues. The Company recognizes
revenue earned from viewers net of the portion retained by the relevant system operator. The
determination of whether the Company acts as a principal or an agent in a transaction is based on
an evaluation of whether the Company has the substantial risks and rewards of ownership under the
terms of the transaction. If the Company is acting as a principal in a transaction, the Company
reports revenue based on the gross amount billed to the ultimate customer. If the Company is
acting as an agent in a transaction, the Company reports revenue on the net amount received from
the customer after commissions and other payments to third parties. To the extent revenues are
recorded on a gross basis, any commissions or other payments to third parties are recorded as
expense so that the net amount (gross revenues less expense) is reflected in operating income
(loss). Accordingly, the impact on operating income (loss) is the same whether the Company records
revenue on a gross or net basis.
Deferred subscription revenue results from advance payments for premium online subscriptions
to Gay.com and magazine subscriptions received from subscribers and is amortized on a straight-line
basis over the subscription period. The Company provides an estimated reserve for magazine
subscription cancellations at the time such subscription revenues are recorded.
Transaction services revenue from sales of Out magazine through traditional newsstands as well
as other retail outlets is recognized based on the on-sale dates of magazines and is recorded based
upon estimates of sales, net of product placement costs paid to resellers. Estimated returns from
newsstand revenues are recorded based upon historical experience. Transaction revenue generated
from the sale of books held in inventory is recognized when the books are shipped, net of estimated
returns. Revenues from theatrical box office receipts are recognized as they are exhibited.
Transaction services revenue derived from publicity and marketing consulting services related to
theatrical motion picture releases provided to Regent Releasing was recognized as the services were
performed.
Advertising Expense
Costs related to advertising and promotion are charged to sales and marketing expense as
incurred. Direct-response advertising costs consist primarily of production costs associated with
direct-mail promotion of magazine subscriptions and are recorded as
prepaid expenses and are amortized on a straight-line basis over the
subscription period. As of December 31, 2009 and March 31, 2010, the
balance of unamortized direct-response advertising costs was approximately $350,000 and $162,000,
respectively. Total advertising
costs in the three months ended March 31, 2009 and 2010 were approximately $641,000 and $322,000,
respectively.
Stock-Based Compensation
The Company does not have stock-based compensation expense.
Segment Reporting
The Company operates in one segment. Although the chief operating decision maker does review
revenue results across the three revenue streams of advertising, subscription and transaction
services, the profitability of each revenue stream is not measured separately. Financial reporting
is consistent with the Companys method of internal reporting where the profitability of the
Company is measured on an overall basis since the chief operating decision maker evaluates,
assesses performance and makes decisions on the allocation of resources at a consolidated results
of operations level. The Company has no operating managers reporting to the chief operating
decision maker over components of the enterprise for which separate financial information of
revenue, results of operations and assets is available.
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Income Taxes
The Company accounts for income taxes using an asset and liability approach, which requires
the recognition of taxes payable or refundable for the current year and deferred tax liabilities
and assets for the future tax consequences of events that have been recognized in the Companys
financial statements or tax returns. The measurement of current and deferred tax assets and
liabilities is based on provisions of enacted tax laws; the effects of future changes in tax laws
or rates are not anticipated. If necessary, the measurement of deferred tax assets is reduced by
the amount of any tax benefits that are not expected to be realized based on available evidence.
The Company has adopted guidance related to the accounting for uncertainty in income taxes
which prescribes rules for recognition, measurement and classification in financial statements of
tax positions taken or expected to be taken in a tax return. The guidance prescribes a two-step
approach which involves evaluating whether a tax position will be more likely than not (greater
than 50 percent likelihood) sustained upon examination based on the technical merits of the
position. The second step requires that any tax position that meets the more likely than not
recognition threshold be measured and recognized in the financial statements at the largest amount
of benefit that is a greater than 50 percent likelihood of being realized upon settlement. The
Companys policy is to recognize interest and penalties, if any, related to unrecognized tax
benefits in income tax expense. The Company has determined that there is no material impact on the
financial position, results of operations or cash flows due to uncertain tax positions. The
Company is not currently under examination by any taxing authority nor has the Company been
notified of an impending examination. Due to the Companys net operating loss carryforwards, the
oldest tax year that remains open to possible evaluation and interpretation of the Companys tax
position is 1999 and is related to the PlanetOut pre-acquisition net operating losses.
Comprehensive Loss
Comprehensive loss includes net income (loss) and foreign currency translation adjustments and
is reported in the Unaudited Condensed Consolidated Statement of Stockholders Deficit and
Comprehensive Loss.
Income (Loss) Per Share
Basic net income (loss) per share (Basic EPS) is computed by dividing net income (loss) by
the sum of the weighted-average number of common shares outstanding during the period. Diluted net
income per share (Diluted EPS) gives effect to all dilutive potential common shares outstanding
during the period. The computation of Diluted EPS does not assume conversion, exercise or
contingent exercise of securities that would have an anti-dilutive effect on earnings. The
dilutive effect of outstanding warrants is computed using the treasury stock method. Common stock
equivalents included in the denominator for purposes of computing basic and diluted net loss per
share do not include 87,000 shares issuable upon conversion of warrants, as their effect would be
anti-dilutive. Due to the net loss in the three months ended March 31, 2009 and 2010, Basic EPS
and Diluted EPS are the same, as the effect of potential common stock equivalents would be
antidilutive.
The following table sets forth the computation of basic and diluted net loss per share (in
thousands, except per share amounts):
Three months ended March 31, | ||||||||
2009 | 2010 | |||||||
Numerator: |
||||||||
Net loss |
$ | (1,612 | ) | $ | (1,379 | ) | ||
Denominator for basic and diluted net loss
per share: |
||||||||
Weighted-average shares |
16,630 | 20,701 | ||||||
Net loss per share: |
||||||||
Basic and diluted |
$ | (0.10 | ) | $ | (0.07 | ) | ||
Recent Accounting Guidance
In September 2009, the FASB issued new accounting guidance related to the revenue recognition
of multiple element arrangements. The new guidance states that if vendor specific objective
evidence or third party evidence for deliverables in an arrangement cannot be determined, companies
will be required to develop a best estimate of the selling price to separate deliverables and
allocate arrangement consideration using the relative selling price method. The accounting
guidance will be applied prospectively
and will become effective for the Company during the first quarter of fiscal 2011. Early
adoption is allowed. The Company is currently evaluating the impact of this accounting guidance on
its unaudited condensed consolidated financial statements.
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In February 2010, the Company adopted new accounting guidance related to subsequent events as
issued by the FASB. This guidance requires SEC filers to evaluate subsequent events through the
date the financial statements are issued, but removes the requirement to disclose the date to which
subsequent events were evaluated. The adoption of this accounting guidance did not have a material
impact on the Companys unaudited condensed consolidated financial statements.
Note 2 Business Combinations and Intangible Assets
Business Combinations
Merger with PlanetOut Inc.
On June 11, 2009, the HMI Entities and PlanetOut combined their businesses and became
wholly-owned subsidiaries of the Company. As a result of the merger, the Company operates the
businesses formerly conducted by the HMI Entities and PlanetOut.
On June 11, 2009, the owners of the HMI Entities contributed to the Company all of their
interests in the HMI Entities, which constituted 100% of the ownership interest in each of those
companies, in exchange for the common stock of the Company, $0.001 par value per share (the Common
Stock). The aggregate number of shares of Common Stock received by the former owners of the HMI
Entities equaled approximately 80% of the issued and outstanding shares of the Common Stock, or
16,630,140 shares.
On June 11, 2009, PlanetOut merged with a subsidiary of the Company. In connection with the
merger, each of the issued and outstanding shares of PlanetOuts common stock was exchanged for one
share of the Common Stock and one share of the special stock of the Company, $0.001 par value per
share (the Special Stock). The aggregate number of shares of Common Stock received by PlanetOut
stockholders equaled approximately 20% of the issued and outstanding shares of the Common Stock, or
4,070,535 shares of such stock, and 100% of the issued and outstanding shares of the Special Stock,
or 4,070,535 shares of such stock. In addition, the Company assumed warrants to purchase up to
87,000 shares of PlanetOuts common stock in connection with the transaction and has reserved
87,000 shares of both Common Stock and Special Stock of the Company for issuance upon exercise of
the warrants.
The merger was accounted for under the acquisition method of accounting. The Company acquired
PlanetOut for approximately $900,000 based on the estimated fair value of the tangible assets and
intangible assets acquired and liabilities assumed on the acquisition date. The purchased assets
and assumed liabilities were recorded at their respective acquisition date fair values, and
identifiable intangible assets were recorded at fair value. The intangible assets consist of
tradenames, customer lists and content databases.
There is no active market or established fair value for either of the Common Stock or the
Special Stock of Here Media which was exchanged in the PlanetOut acquisition. Therefore, the value
of the Common Stock and Special Stock was recorded at a value equal to the net assets acquired in
the PlanetOut acquisition. Each of the Common Stock and Special Stock was recorded at its extended
par value based on the number of shares exchanged and the remainder of the value exchanged was
recorded as additional paid-in-capital. No recording of goodwill resulted from the PlanetOut
acquisition.
Pro Forma Information
Supplemental consolidated information on an unaudited pro forma consolidated basis, as if the
PlanetOut merger were completed at the beginning of each period presented, is as follows (in
thousands, except per share amounts):
Three Months Ended | ||||
March 31, 2009 | ||||
Revenue |
$ | 10,265 | ||
Loss from continuing operations |
$ | (4,524 | ) | |
Basic loss from continuing operations per share |
$ | (0.22 | ) |
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Intangible Assets
The components of acquired intangible assets are as follows (in thousands):
December 31, 2009 | March 31, 2010 | |||||||||||||||||||||||
Gross | Net | Gross | Net | |||||||||||||||||||||
Carrying | Accumulated | Carrying | Carrying | Accumulated | Carrying | |||||||||||||||||||
Amount | Amortization | Amount | Amount | Amortization | Amount | |||||||||||||||||||
Tradenames |
$ | 1,292 | $ | | $ | 1,292 | $ | 1,292 | $ | | $ | 1,292 | ||||||||||||
Customer lists |
605 | 70 | 535 | 605 | 101 | 504 | ||||||||||||||||||
Content database |
506 | 99 | 407 | 506 | 140 | 366 | ||||||||||||||||||
$ | 2,403 | $ | 169 | $ | 2,234 | $ | 2,403 | $ | 241 | $ | 2,162 | |||||||||||||
Intangible assets subject to amortization consist of customer lists and content databases with
amortization periods of three to five years. As of March 31, 2010, the weighted-average useful
economic life of customer lists and content databases being amortized was 4.1 years. During the
three months ended March 31, 2009 and 2010, the Company did not record amortization expense on its
tradenames which it considers to be indefinitely lived assets. During the three months ended March
31, 2009 and 2010, amortization expense of intangible assets was approximately $0 and $72,000,
respectively.
As of March 31, 2010, expected future intangible asset amortization is as follows (in
thousands):
Fiscal Years: |
||||
2010 (remaining nine months) |
$ | 218 | ||
2011 |
290 | |||
2012 |
191 | |||
2013 |
121 | |||
2014 |
50 | |||
$ | 870 | |||
Note 3 Other Balance Sheet Components
December 31, | March 31, | |||||||
2009 | 2010 | |||||||
(In thousands) | ||||||||
Accounts receivable: |
||||||||
Trade accounts receivable |
$ | 3,057 | $ | 1,511 | ||||
Less: Allowance for doubtful accounts |
(213 | ) | (135 | ) | ||||
Less: Provision for returns |
(429 | ) | (388 | ) | ||||
$ | 2,415 | $ | 988 | |||||
In the three months ended March 31, 2009 and 2010, the Company provided for an increase
(decrease) in the allowance for doubtful accounts of approximately $126,000 and ($8,000),
respectively, and wrote-off $106,000 and approximately $70,000, respectively, against the allowance
for doubtful accounts.
In the three months ended March 31, 2009 and 2010, the Company provided for an increase in the
provision for returns of approximately $453,000 and $284,000, respectively, and wrote-off accounts
receivable against the provision for returns totaling approximately $472,000 and $325,000,
respectively.
In December 2009, the Company entered into an agreement with Amegy Bank National Association,
providing the Company with a facility with which to finance accounts receivable of the Company.
During the three months ended March 31, 2010, the Company sold approximately $2,663,000 of accounts
receivable under this agreement. Receivables sold under this facility at December 31, 2009 and
March 31, 2010 of approximately $744,000 and $1,734,000, respectively, are excluded from accounts
receivables in the Unaudited Condensed Consolidated Balance Sheets. See Note 7, Accounts Receivable Factoring.
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December 31, | March 31, | |||||||
2009 | 2010 | |||||||
(In thousands) | ||||||||
Inventory: |
||||||||
Materials for future publications |
$ | 148 | $ | 117 | ||||
Finished goods available for sale |
457 | 442 | ||||||
605 | 559 | |||||||
Less: reserve for obsolete inventory |
(26 | ) | (32 | ) | ||||
$ | 579 | $ | 527 | |||||
In the three months ended March 31, 2009 and 2010, the Company provided for an increase in the
provision for obsolete inventory of approximately $18,000 and $11,000, respectively, and wrote-off
inventory against the reserve for obsolete inventory totaling approximately $133,000 and $5,000,
respectively.
December 31, | March 31, | |||||||
2009 | 2010 | |||||||
(In thousands) | ||||||||
Prepaid expenses and other current assets: |
||||||||
Unamortized direct-response advertising costs |
$ | 350 | $ | 162 | ||||
Other prepaid expenses and other current assets |
409 | 494 | ||||||
$ | 759 | $ | 656 | |||||
December 31, | March 31, | |||||||
2009 | 2010 | |||||||
(In thousands) | ||||||||
Property and equipment: |
||||||||
Computer equipment and software |
$ | 1,922 | $ | 1,924 | ||||
Furniture and fixtures |
861 | 861 | ||||||
Leasehold improvements |
489 | 489 | ||||||
Website development costs |
202 | 202 | ||||||
3,474 | 3,476 | |||||||
Less: Accumulated depreciation and amortization |
(2,095 | ) | (2,398 | ) | ||||
$ | 1,379 | $ | 1,078 | |||||
In the three months ended March 31, 2009 and 2010, the Company recorded depreciation and
amortization expense of property and equipment of approximately $143,000 and $296,000, respectively
December 31, | March 31, | |||||||
2009 | 2010 | |||||||
(In thousands) | ||||||||
Accrued expenses and other liabilities: |
||||||||
Accrued payroll and related liabilities |
$ | 1,345 | $ | 1,347 | ||||
Other accrued liabilities |
2,042 | 2,718 | ||||||
$ | 3,387 | $ | 4,065 | |||||
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Note 4 Program Broadcasting Rights
Program broadcasting rights are subject to amortization, and the balances are as follows:
December 31, | March 31, | |||||||
2009 | 2010 | |||||||
(In thousands) | ||||||||
Program broadcasting rights: |
||||||||
Related parties |
$ | 23,420 | $ | 23,420 | ||||
Non-related parties |
2,608 | 2,651 | ||||||
Less accumulated amortization: |
||||||||
Related parties |
(10,221 | ) | (10,657 | ) | ||||
Non-related parties |
(1,230 | ) | (1,457 | ) | ||||
Program broadcasting rights |
14,577 | 13,957 | ||||||
Less : current portion |
2,606 | 2,473 | ||||||
Program broadcasting rights, less current portion |
$ | 11,971 | $ | 11,484 | ||||
Amortization expense for the three months ended March 31, 2009 and 2010 was approximately
$1,130,000 and $663,000, respectively. During the three months ended March 31, 2009 and 2010, the
Company had no impairment of program broadcasting rights included in amortization expense.
As of March 31, 2010, expected future program broadcasting rights amortization is as follows
(in thousands):
Fiscal Years: |
||||
2010 (remaining nine months) |
$ | 1,945 | ||
2011 |
2,035 | |||
2012 |
1,336 | |||
2013 |
1,097 | |||
2014 |
1,002 | |||
2015 |
929 | |||
Thereafter |
5,613 | |||
$ | 13,957 | |||
Note 5 Related Party Transactions
Related party revenue and expense
The Company had several one-year term publicity and marketing agreements with Regent
Releasing, whose terms expired in the first quarter of fiscal 2009. Under these agreements, Regent
Releasing agreed to pay a total of approximately $16,696,000 in consulting fees over the terms of
the agreements for use of the Companys marketing staff expertise in creating content and
strategically releasing films and for providing assistance with marketing plans, press releases and
advertising campaigns. The Company has several ongoing service agreements with Hyperion, Regent
Releasing and RWS. Under the agreements with Hyperion, the Company provides circulation,
production and information technology services for a monthly fee of approximately $13,000. Under
the agreement with Regent Releasing and RWS, the Company provides distribution services in
connection with motion pictures for a monthly fee of approximately $5,000. The Company has barter
agreements with Regent Releasing and OUTtv. Under the agreement with Regent Releasing, Regent
Releasing supplies program license rights to the Company in exchange for advertising in the
Companys print publications and on the Companys websites. Under the barter agreement with OUTtv,
the Company supplies program license rights to OUTtv in exchange for advertising time on OUTtv.
15
Table of Contents
The following table summarizes related party revenue (in thousands):
Three Months Ended March 31, | ||||||||
2009 | 2010 | |||||||
(In thousands) | ||||||||
Related party revenue: |
||||||||
Advertising services: |
||||||||
Regent Releasing |
$ | | $ | 1,107 | ||||
Total advertising services revenue from related parties |
| 1,107 | ||||||
Transaction services: |
||||||||
Regent Releasing |
2,680 | | ||||||
Hyperion |
| 37 | ||||||
Regent Releasing / RWS |
| 15 | ||||||
Total transaction services revenue from related parties |
2,680 | 52 | ||||||
Total revenue from related parties |
$ | 2,680 | $ | 1,159 | ||||
There were no related party expenses in the three months ended March 31, 2009 or 2010.
Related party deferred revenue
As of December 31, 2009 and March 31, 2010, the Company had outstanding deferred license fee
revenue of approximately $1,200,000 included in deferred revenue from Oxford Media related to
rights sub-licensed by the Company to Oxford Media to distribute certain motion picture and
television programs.
Related party receivables/payables
At December 31, 2009 and March 31, 2010, the Company had outstanding approximately $134,000
and $190,000 of funds due from various companies affiliated through common ownership, respectively.
The amounts are unsecured, non-interest bearing and due on demand.
At December 31, 2009, the Company had outstanding commitments of approximately $11,387,000,
$2,951,000 and $147,000 in programming license fees payable to Studios Funding, Convergent Funding
and Regent Studios, respectively. At March 31, 2010, the Company had outstanding commitments of
approximately $11,387,000, $2,881,000, $147,000 and $125,000 in programming license fees payable to
Studios Funding, Convergent Funding, Regent Studios and OUTtv, respectively. The license fees
payable pertain to license rights for films and TV programs.
At December 31, 2009, the Company had outstanding approximately $413,000 and $270,000 of
receivables due from Regent Releasing and OUTtv, respectively, related to barter agreements. At
March 31, 2010, the Company had outstanding approximately $1,521,000 and $270,000 of receivables
due from Regent Releasing and OUTtv, respectively, related to barter agreements.
Program broadcasting rights
During the three months ended March 31, 2009, the Company entered into license agreements with
Convergent Funding, Studios Funding and RWS for programming rights, which agreements provide for
payments aggregating approximately $580,000, $410,000 and $100,000, respectively, over terms of one
to 15 years. During the three months ended March 31, 2010, the Company did not enter into any new
license agreements with related parties for programming rights. During the three months ended
March 31, 2010, the Company licensed program broadcasting rights under its existing barter
agreements with Regent Releasing of approximately $1,181,000. Rights to programs available for
broadcast under program license agreements are initially recorded at the beginning of the license
period on the basis of the amounts of total license fees payable under the license agreements and
are charged to operating expense over the license period, generally one to 15 years.
At December 31, 2009 and March 31, 2010, the Companys carrying value for program
broadcasting rights purchased from related parties amounted to: approximately $7,292,000 and
$7,071,000, respectively, from Regent Studios; $4,176,000 and $4,037,000, respectively, from RWS;
$1,627,000 and $1,558,000, respectively, from Convergent Funding; and $104,000 and $97,000,
respectively, from Regent Releasing.
16
Table of Contents
Note 6 Lines of Credit from Related Parties
On August 17, 2009, the Company entered into a line of credit agreement with Mr. Colichman and
a separate line of credit agreement with Mr. Jarchow (collectively, the Credit Agreements), which
set forth the terms upon which Mr. Colichman and Mr. Jarchow (collectively, the Lenders) may lend
up to $2,000,000 and $3,000,000, respectively, to the Company in their respective discretion as and
when requested by the Company from time to time until August 17, 2011.
The outstanding principal balance of advances made under the Credit Agreements accrue interest
at a rate equal to the U.S. prime rate, as set forth in the Wall Street Journal, plus 1.00% per
annum (4.25% at March 31. 2010). Advances made under the Credit Agreements are secured by the
collateral specified in the Credit Agreements, including certain domain names owned or under the
control of the Company, trademarks and tradenames. The Credit Agreements provide for customary
events of default. Upon an event of default, the Lenders may declare all or any part of the
outstanding principal balance of the advances to be immediately due and payable. During the three
months ended March 31, 2010, the Company borrowed approximately $183,000, made repayments of
approximately $95,000 and recognized approximately $35,000 of interest expense related to those
borrowings under the Credit Agreements. As of December 31, 2009 and March 31, 2010, the Company
had approximately $3,835,000 and $3,958,000, respectively, of principal outstanding under the
Credit Agreements.
Note 7 Accounts Receivable Factoring
On December 14, 2009, the Company entered into a Purchase and Sale Agreement/Security
Agreement (the Agreement) with Amegy Bank National Association, providing the Company with a
facility with which to finance accounts receivable of the Company. Under the terms of the
Agreement, the Company can sell accounts receivable from time to time at an annual discount rate
ranging from 6.6% to 20% based on the collection date of the receivables. During the three months
ended March 31, 2010, the Company sold approximately $2,663,000 of accounts receivable
under the Agreement and recognized costs associated with the Agreement of approximately $63,000. As of
December 31, 2009 and March 31, 2010, the Company had a receivable from factor of approximately
$150,000 and $324,000, respectively, related to reserve requirements under the Agreement. These
transactions are accounted for as sales because the Company has relinquished control of the
receivables. Accordingly, receivables sold under this facility at December 31, 2009 and March 31,
2010 of approximately $744,000 and $1,734,000, respectively, are excluded from accounts receivables
in the Unaudited Condensed Consolidated Balance Sheets.
Note 8 Commitments and Contingencies
January 2008 Severance Plan
Certain employees acquired through the PlanetOut business combination were provided in January
2008 with an incentive to remain committed to the Companys business (the Severance Plan). The
Severance Plan provides for certain cash payments in the event of termination without cause. The
Company did not make any payments under the Severance Plan in the three months ended March 31, 2009
or March 31, 2010. As of March 31, 2010, the Company estimates that the total outstanding
potential payments remaining under the Severance Plan that have not been paid or accrued to date is
approximately $104,000. The actual amounts may vary as they depend on numerous factors outside of
the Companys control, such as whether the eligible participants choose to remain with the Company.
Employment Agreements
The Company has entered into employment agreements with certain senior executives for various
terms up to three years. Aggregate future commitments under these agreements are as follows (in
thousands):
Fiscal Years: |
||||
2010 (remaining nine months) |
$ | 692 | ||
2011 |
397 | |||
2012 |
134 | |||
$ | 1,223 | |||
Contingencies
The Company is not currently subject to any material legal proceedings. The Company may from
time to time, however, become
a party to various legal proceedings arising in the ordinary course of business. The Company
may also be indirectly affected by administrative or court proceedings or actions in which the
Company is not involved but which have general applicability to the Internet industry.
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Note 9 Stockholders Equity
Common Stock
The Company has 40,000,000 shares of Common Stock authorized with a par value of $0.001 per
share. The Company had 20,700,675 common shares issued and outstanding at December 31, 2009 and
March 31, 2010. The Company issued 16,630,140 shares of Common Stock to the former owners of the
HMI Entities and 4,070,535 shares of Common Stock to the former owners of PlanetOut common stock in
the business combination on June 11, 2009. Since the HMI Entities have been determined to be the
acquiring entity in the business combination, and the historical information for the HMI Entities
is presented as combined with Here Media, the Common Stock issued to the former owners of the HMI
Entities is presented as issued and outstanding as of December 31, 2008. See Note 1, The Company
and Summary of Significant Accounting Policies The Company and Note 2, Business Combinations
and Intangible Assets Business Combinations Merger with PlanetOut Inc., for more detail.
Preferred Stock
The Company has 10,000,000 shares of preferred stock authorized with a par value of $0.001 per
share. The Company had no preferred shares issued and outstanding at December 31, 2009 and March
31, 2010.
Special Stock
The Company has 4,200,000 shares of Special Stock authorized with a par value of $0.001 per
share. In conjunction with the merger with PlanetOut on June 11, 2009, the Company issued
4,070,535 shares of Special Stock to the former stockholders of PlanetOut common stock. The
Special Stock was issued to provide a limited form of downside protection in the event of a
liquidation, dissolution or winding up of the Company or a sale of the Company for cash or publicly
tradable securities within four years after the merger and in which the holders of the Companys
Common Stock would, but for the effect of the Special Stock, receive less than $4.00 per share.
The former stockholders of PlanetOut would have a priority claim to any liquidation proceeds
distributable to holders of the Common Stock of Here Media to the extent necessary (and to the
extent liquidation proceeds are available) to provide the former PlanetOut stockholders with total
liquidation proceeds of at least $4.00 per share.
Warrants
In connection with the merger with PlanetOut, the Company assumed warrants to purchase up to
87,000 shares of PlanetOut common stock, which warrants became exercisable for Common Stock and
Special Stock of the Company upon completion of the merger. Warrants to purchase 12,000 shares at
an exercise price of $37.40 per share will expire in September 2013. Warrants to purchase 75,000
shares at an exercise price of $0.69 per share will expire in January 2018.
Note 10 Restructuring
In July 2009, the Companys management committed to a restructuring plan to align the
Companys resources with its strategic business objectives. The restructuring included a reduction
of the Companys total workforce by approximately 24%, or a total of 39 employees, and the
consolidation of certain facilities. Restructuring costs of approximately $1,688,000, related to
employee severance benefits of approximately $243,000 and net facilities consolidation expenses of
approximately $1,445,000 were recorded during the year ended December 31, 2009. The Company
completed this restructuring in the fourth quarter of fiscal 2009, with certain payments continuing
beyond the fourth quarter of fiscal 2009 in accordance with the terms of existing agreements.
The following is a summary of the restructuring activities:
Facilities | ||||||||||||
Termination | Consolidation | |||||||||||
Benefits | Expenses | Total | ||||||||||
(In thousands) | ||||||||||||
Accrued restructuring as of January 1, 2010 |
$ | 10 | $ | 513 | $ | 523 | ||||||
Payments |
(10 | ) | (288 | ) | (298 | ) | ||||||
Accrued restructuring as of March 31, 2010 |
$ | | $ | 225 | $ | 225 | ||||||
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Note 11 Subsequent Events
On April 9, 2010, the Company borrowed $350,000 from Mr. Jarchow and executed an unsecured
promissory note (the Note) in favor of Mr. Jarchow setting forth the terms of the Companys
obligations with respect to such borrowing. The Note bears interest at the rate of 10% per annum.
Principal and interest on the Note are payable monthly beginning on May 3, 2010 with the final
payment becoming due on or before July 1, 2010. The Note provides for prepayment in certain
events, including receipt by the Company of payments on certain customer accounts.
19
Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
As used in this Managements Discussion and Analysis of Financial Condition and Results of
Operations, except where the context requires, the term we, us, our, or Here Media refers
to the consolidated businesses of Here Media Inc. and its wholly-owned subsidiaries Here Networks,
LLC, or Here Networks, Here Publishing Inc., or Here Publishing, and PlanetOut Inc., or PlanetOut.
Forward-Looking Statements
This Quarterly Report on Form 10-Q, including Managements Discussion and Analysis of
Financial Condition and Results of Operations and other sections, contains forward-looking
statements as that term is defined in the Private Securities Litigation Reform Act of 1995.
Forward-looking statements reflect managements current beliefs and estimates of future economic
circumstances, industry conditions, company performance and financial results. Forward-looking
statements include statements concerning the possible or assumed future results of operations of
the Company. Such statements typically are preceded by, followed by or include words such as
future, position, anticipate(s), expect, believe(s), intend, estimate, predict,
may, see, plan, further improve, outlook, should, or similar words or phrases.
Forward-looking statements are not guarantees of future performance or results. They involve
risks, uncertainties and assumptions, many of which are outside of our control or our ability to
accurately predict. You should understand that many factors, in addition to those discussed
elsewhere in this document, could affect the future results of the Company and could cause those
results to differ materially and adversely from those expressed in our forward-looking statements.
Additional information concerning these important factors can be found in our filings with the SEC.
Forward-looking statements in this Quarterly Report on Form 10-Q should be evaluated in light of
these important factors.
You should not place undue reliance on the forward-looking statements included in this
Quarterly Report on Form 10-Q, which apply only as of the date of this Quarterly Report on Form
10-Q. We expressly disclaim any duty to update the forward-looking statements, and the estimates
and assumptions associated with them, after the date of this Quarterly Report on Form 10-Q to
reflect changes in circumstances or expectations or the occurrence of unanticipated events, except
to the extent required by applicable securities laws.
Overview
We are the parent company of Here Networks, Here Publishing and PlanetOut. We were formed in
connection with a business combination in which these companies became our wholly-owned
subsidiaries that was completed on June 11, 2009. The results of operations for PlanetOut have
been included in our Unaudited Condensed Consolidated Statements of Operations for the period
subsequent to its acquisition date.
Here Networks offers programming content tailored for the LGBT community on a subscription
basis via cable television, DTH satellite television, fiber-optic television and the Internet under
the brand name here!. Here Networks has agreements with major cable, satellite and fiber-optic
television operators in the United States for its SVOD and/or regularly scheduled (also referred to
as linear) television channel services. Here Networks generates revenue primarily from the receipt
of fees paid by its subscribers for its SVOD and linear television channel services.
Here Publishing publishes magazines and books and operates companion websites targeting the
LGBT community. Products include the websites out.com and advocate.com, the magazines Out, The
Advocate and HIVPlus and books published by Alyson Books. Here Publishings websites publish
original content as well as content from the magazines. Here Publishing sells and distributes Out
on a subscription and newsstand basis, and delivers The Advocate as a supplement to subscribers to
Out magazine as a separate edition. Here Publishing offers HIVPlus free to health care
professionals and organizations. Here Publishings revenues are derived principally from fees
charged for advertising on its websites and in its magazines. Here Publishing also derives
revenues from print and digital subscriptions to Out magazine and sales of Out magazine and books
published by Alyson Books through traditional newsstands as well as other retail outlets.
PlanetOut is an online media and entertainment company serving the LGBT community through its
flagship website, Gay.com. This website provides revenues from advertising services and
subscription services.
The combined businesses of Here Networks, Here Publishing and PlanetOut function as a
multi-platform content company serving and marketing to the LGBT community.
20
Table of Contents
Executive Operating and Financial Summary
Our total revenue was $6.8 million in the three months ended March 31, 2010, increasing 6%
from total revenue of $6.4 million in the three months ended March 31, 2009. This increase was
primarily due to the incremental effect of the merger with PlanetOut and revenues generated under
barter agreements with Regent Releasing LLC (Regent Releasing), a related party, for advertising
services, partially offset by decreases in advertising and transaction services revenues generated
under marketing agreements with Regent Releasing whose terms expired in the first quarter of fiscal
2009.
Total operating costs and expenses were $8.1 million in the three months ended March 31, 2010,
compared to operating costs and expenses of $8.0 million in the three months ended March 31, 2009.
This increase was primarily due to the incremental effect of the merger with PlanetOut, offset
partially by the non-recurrence of acquisition transaction costs of approximately $0.4 million
related to the merger that were recognized in the three months ended March 31, 2009.
Loss from operations was $1.3 million in the three months ended March 31, 2010, compared to
loss from operations of $1.6 million in the three months ended March 31, 2009.
Outlook
We expect that revenue will increase for the remainder of fiscal 2010 in comparison to fiscal
2009, primarily as a result of the incremental effect of the merger with PlanetOut in June 2009.
We expect operating costs and expenses to decrease for the remainder of fiscal 2010 in comparison
to fiscal 2009 primarily as a result of the non-recurrence of acquisition transaction costs related
to the merger that were recognized in fiscal 2009, a decrease in program broadcasting rights
amortization expenses as a result of term extensions in our existing program broadcasting rights
agreements ranging from two years to 15 years and a decrease in payroll and related benefits as a
result of the reduction in our workforce related to the July 2009 restructuring plan, partially
offset by an increase due to the incremental effect of the merger with PlanetOut including an
increase in depreciation and amortization expense related to intangible assets. Our results of
operations in fiscal 2010 will be dependent on how successful we are in implementing our operating
plan discussed in Liquidity and Capital Resources.
Results of Operations
Revenue
Advertising Services. We derive advertising revenue from advertising contracts in which we
typically undertake to deliver a minimum number of impressions, or times that an advertisement
appears in pages viewed by users on our websites and from advertisements placed in our printed
publications. In addition, we generate advertising services revenue under barter agreements with
Regent Releasing under which Regent Releasing has exclusively licensed to us the television and
Internet rights to certain motion pictures in exchange for advertising in our print publications
and on our websites. Our advertising services revenue was $3.8 million in the three months ended
March 31, 2010, an increase of 70% from revenue of $2.2 million in the three months ended March 31,
2009. This increase in advertising services revenue was primarily due to revenues generated under
the barter agreements with Regent Releasing and the merger with PlanetOut in June 2009.
Advertising services revenue included $1.1 million in advertising services provided to Regent
Releasing under barter agreements in the three months ended March 31, 2010.
Subscription Services. We derive subscription services revenue from paid membership
subscriptions to Gay.com, fees paid by subscribers for SVOD and linear television channel services
and print and digital subscriptions to Out magazine. Our subscription services revenue was $2.6
million in the three months ended March 31, 2010, an increase of 124% from revenue of $1.1 million
in the three months ended March 31, 2009. This increase in subscription services revenue was
primarily due to the incremental effect of the merger with PlanetOut.
Transaction Services. Transaction services revenue includes sales of Out magazine through
traditional newsstands as well as other retail outlets, sales of books through our Alyson Books
publishing business, theatrical box office revenues, consulting fees for publicity and marketing
services provided to Regent Releasing under marketing agreements related to theatrical motion
picture releases and revenue earned under a barter agreement with OUTtv for programming rights.
Our transaction services revenue was $0.5 million in the three months ended March 31, 2010, a
decrease of 85% from revenue of $3.1 million in the three months ended March 31, 2009. This
decrease in transaction services revenue was primarily due to a decrease of $2.7 million in
consulting fees generated under the marketing agreements with Regent Releasing, whose terms expired
in the first quarter of fiscal 2009.
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Operating Costs and Expenses
Cost of Revenue. Cost of revenue primarily consists of amortization of program broadcasting
rights, expenses related to the delivery of programming to cable satellite and fiber-optic
television providers and on-air promotional segments or interstitials that are broadcast between
programs on here! television network, payroll and related benefits associated with supporting our
subscription-based services, the cost of paper used in producing our magazines, mailing costs
incurred in the delivery of magazines to our subscribers, the development and expansion of site
operations and support infrastructure and producing and maintaining content for our various
websites. Other expenses directly related to generating revenue included in cost of revenue
include transaction processing fees, computer equipment maintenance, occupancy costs, co-location
and Internet connectivity fees, purchased content and cost of goods sold. Cost of revenue was $4.7
million in the three months ended March 31, 2010, increasing 1% from cost of revenue of $4.6
million in the three months ended March 31, 2009. This increase was primarily due to the
incremental effect of the merger with PlanetOut, partially offset by reductions in printing,
distribution and content costs as a result of converting The Advocate from a subscription-based
magazine to a supplement of Out magazine, a reduction in amortization of program broadcasting
rights as a result of term extensions in our existing program broadcasting rights agreements
ranging from two years to 15 years, and a reduction in broadcasting expense as a result of
negotiated cost reductions in contracts with existing vendors.
Sales and Marketing. Sales and marketing expense primarily consists of publicity and
marketing activities, payroll and related benefits for employees involved in publicity, sales,
advertising client service, customer service, marketing and other support functions; product,
service and general corporate marketing and promotions; and occupancy costs related to sales and
marketing functions. Sales and marketing expenses were $1.5 million in the three months ended
March 31, 2010, increasing 7% from sales and marketing expenses of $1.4 million in the three months
ended March 31, 2009. Sales and marketing expenses as a percentage of revenue were 22% for the
three months ended March 31, 2010, up from 21% in the three months ended March 31, 2009. These
increases in sales and marketing expenses in both absolute dollars and as a percentage of revenue
were primarily due to the incremental effect of the merger with PlanetOut, partially offset by
reductions in print marketing expenses as a result of reduced spending and converting The Advocate
from a subscription-based magazine to a supplement of Out magazine and a reduction in travel and
entertainment expenses.
General and Administrative. General and administrative expense consists primarily of payroll
and related benefits for executive, finance, administrative and other corporate personnel,
occupancy costs, professional fees, insurance and other general corporate expenses. General and
administrative expenses were $1.6 million for the three months ended March 31, 2010, increasing 4%
from general and administrative expenses of $1.5 million in the three months ended March 31, 2009.
This increase was due primarily to the incremental effect of the merger with PlanetOut and
increased legal and accounting fees, partially offset by a reduction in bad debt expense and
occupancy costs as a result of the consolidation of certain facilities. General and administrative
expenses as a percentage of revenue were 23% for the three months ended March 31, 2010, down from
24% in the three months ended March 31, 2009.
Acquisition Transaction Costs. During the three months ended March 31, 2009, we recognized
$0.4 million of transaction costs related to the merger with PlanetOut. These expenses included
legal costs, transaction fees to our investment bankers, printing costs and accounting fees related
to the transaction.
Depreciation and Amortization. Depreciation and amortization expense was $0.4 million for the
three months ended March 31, 2010, increasing 157% from depreciation and amortization expense of
$0.1 million in the three months ended March 31, 2009. This increase was primarily due to the
incremental effect of the merger with PlanetOut.
Interest Expense
Interest expense was $105,000 and $3,000 in the three months ended March 31, 2010 and 2009,
respectively. During fiscal 2009, we entered into line of credit agreements with Stephen P.
Jarchow and Paul A. Colichman, who are our principal stockholders and our Chairman of the Board and
President, respectively. Advances made under the lines of credit accrue interest at a rate equal
to the U.S. prime rate, as set forth in the Wall Street Journal, plus 1.00% per annum from the date
of issuance of such advances to and including the date of repayment. During the three months ended
March 31, 2010, we recognized approximately $35,000 of interest expense related to the lines of
credit. During the fourth quarter of fiscal 2009, we entered into a factoring agreement with Amegy
Bank National Association, providing us with a facility with which to finance our accounts
receivable. Under the terms of the Agreement, we can sell accounts receivable from time to time at
an annual discount rate ranging from 6.6% to 20% based on the collection date of the receivables.
During the three months ended March 31, 2010, we recognized approximately $63,000 of interest
expense related to the factoring agreement.
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Liquidity and Capital Resources
Cash used in operating activities for the three months ended March 31, 2010 was $0.8 million,
due primarily to our net loss of $1.4 million, an increase in accounts receivable of $1.2 million
and decreases in accounts payable of $1.0 million and due to related parties of $1.2 million,
partially offset by the sale of accounts receivable under our accounts receivable factoring
agreement of $2.7 million and non-cash charges related to amortization of program broadcasting
rights of $0.7 million and depreciation and amortization expenses of $0.4 million. Cash used in operating activities for the three months ended March 31,
2009 was $4.0 million, and was primarily attributable to our net loss of $1.6 million, a decrease
in due to related parties of $3.7 million and an increase in program broadcasting rights of $1.7
million, partially offset by a decrease in accounts receivable of $1.4 million and non-cash charges
related to amortization of program broadcasting rights of $1.1 million.
Cash used in investing activities in the three months ended March 31, 2010 was $2,000 and was
attributable to purchases of property and equipment. Cash used in investing activities in the
three months ended March 31, 2009 was $0.
Net cash provided by financing activities in the three months ended March 31, 2010 was
$36,000, due to net borrowings under lines of credit from related parties of $0.1 million,
partially offset by payments under capital lease obligations of $0.1 million. Net cash provided by
financing activities in the three months ended March 31, 2010 was $1.6 million, primarily due to
borrowings from related parties to cover net cash used in operating activities.
We expect that cash used in operating activities may fluctuate in future periods as a result
of a number of factors, including fluctuations in our operating results, acquisitions of program
broadcasting rights, changes in theatrical box office revenues, advertising sales, subscription
trends and accounts receivable collections.
Our capital requirements depend on many factors, including the level of our revenues, the
resources we devote to developing, marketing and selling our products and services, the timing and
extent of our introduction of new features and services, the extent and timing of potential
investments and other factors. In particular, our subscription services consist of prepaid
subscriptions that provide cash flows in advance of the actual provision of services. We expect to
invest capital resources to continue our product development and marketing efforts and for other
general corporate activities.
As a result of experiencing losses and negative cash flow from operations in the year ended
December 31, 2009 and the three months ended March 31, 2010, we have assessed our anticipated cash
needs for the next twelve months and adopted an operating plan to manage our capital expenditures
and costs of operating activities consistent with our revenue in order to meet our working capital
needs for the next twelve months. To this end, we have negotiated cost reductions with existing
vendors and adopted a restructuring plan in the third quarter of fiscal 2009 under which we have
reduced our headcount and terminated some of our existing lease obligations in order to consolidate
facilities. We may make further reductions as necessary to meet our working capital needs.
On August 17, 2009, we entered into line of credit agreements with Mr. Colichman and Mr.
Jarchow, under which we may borrow an aggregate of up to $5.0 million. Advances under the lines of
credit bear interest at a rate equal to the U.S. prime rate, as set forth in the Wall Street
Journal, plus 1.00% per annum. During the three months ended March 31, 2010, we borrowed
approximately $0.2 million under the lines of credit, made repayments of approximately $0.1 million
and recognized approximately $35,000 of interest expense related to those borrowings.
On December 14, 2009, we entered into a Purchase and Sale Agreement/Security Agreement (the
Agreement) with Amegy Bank National Association, providing us with a facility with which to
finance our accounts receivable. Under the terms of the Agreement, we can sell accounts receivable
from time to time at an annual discount rate ranging from 6.6% to 20% based on the collection date
of the receivables. During the three months ended March 31, 2010, we sold approximately $2.7
million of accounts receivable under the Agreement and recognized costs associated with the
Agreement of approximately $0.1 million. As of December 31, 2009 and March 31, 2010, we had a
receivable from factor of approximately $0.2 million and $0.3 million, respectively, related to
reserve requirements under the Agreement. These transactions are accounted for as sales because we
have relinquished control of the receivables. Accordingly, receivables sold under this facility at
December 31, 2009 and March 31, 2010 of approximately $0.7 million and $1.7 million, respectively,
are excluded from accounts receivables in the Unaudited Condensed Consolidated Balance Sheets.
Prior to the business combination on June 11, 2009, we met our liquidity requirements
primarily through capital contributions from equity holders and borrowings from related parties.
If we do not have sufficient cash available to finance our operations, we may be required to obtain
additional public or private debt or equity financing. We cannot be certain that additional
financing will be available to us on favorable terms when required or at all. If we are unable to
raise sufficient funds, we may need to reduce our planned operations. In that event, we cannot
provide any assurance that our assets will be sufficient to meet our liabilities.
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Table of Contents
Off-Balance Sheet Arrangements
We did not have any off-balance sheet liabilities or transactions as of March 31, 2010.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based
upon our unaudited condensed consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States. The preparation of
these unaudited condensed consolidated financial statements requires us to make estimates and
judgments that affect the reported amount of assets, liabilities, revenue and expenses and related
disclosure of contingent assets and liabilities.
We base our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the basis on which we
make judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Because this can vary in each situation, actual results may differ from the
estimates under different assumptions and conditions.
For additional information regarding our critical accounting policies and estimates, see the
section entitled Managements Discussion and Analysis of Financial Condition and Results of
Operations in our Annual Report on Form 10-K for the year ended December 31, 2009.
Seasonality
We anticipate that our business may be affected by the seasonality of certain revenue lines.
For example, advertising buys are usually higher approaching year-end and lower at the beginning of
a new year than at other times during the year.
Recent Accounting Pronouncements
See Note 1, The Company and Summary of Significant Accounting Policies, of Notes to
Unaudited Condensed Consolidated Financial Statements regarding the impact of certain recent
accounting pronouncements on our financial statements.
Item 4. | Controls and Procedures |
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31,
2010. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended, means controls and other procedures of a
company that are designed to ensure that information required to be disclosed by the company in the
reports that it files or submits under the Exchange Act is recorded, processed, summarized, and
reported, within the time periods specified in the SECs rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to ensure that such
information is accumulated and communicated to the companys management, including its chief
executive officer and chief financial officer, as appropriate, to allow timely decisions to be made
regarding required disclosure. It should be noted that any system of controls and procedures,
however well designed and operated, can provide only reasonable, and not absolute, assurance that
the objectives of the system are met and that, due to resource constraints, management was
necessarily required to apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures. Based on the evaluation of our disclosure controls and procedures as of
March 31, 2010, our Chief Executive Officer and Chief Financial Officer concluded that, as of such
date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting during the quarter
ended March 31, 2010, that have materially affected or are reasonably likely to materially affect
our internal control over financial reporting.
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PART II OTHER INFORMATION
Item 6. | Exhibits |
(a) Exhibits
Exhibit | ||||
Number | Description of Documents | |||
2.1 | Agreement and Plan of Merger, dated as of January 8, 2009, by and among Here Media Inc.,
PlanetOut Inc., HMI Merger Sub, Inc. and other parties signatory thereto (incorporated by
reference to Annex C to the Form 242(b) filing with the SEC on May 20, 2009, supplementing the
Prospectus filed on the Registration Statement on Form S-4, effective May 14, 2009) |
|||
2.2 | First Amendment to Agreement and Plan of Merger, dated as of April 27, 2009, by and among
PlanetOut Inc., Here Media Inc., HMI Merger Sub, Inc. and the HMI Owners and HMI Entities
signatory thereto (incorporated by reference to Exhibit 2.2 to Amendment No. 3 to the
Registration Statement on Form S-4 filed with the SEC on April 30, 2009) |
|||
2.3 | Letter Agreement, dated as of May 13, 2009, by PlanetOut Inc. and Here Media Inc. (incorporated
by reference to Exhibit 2.3 to Amendment No. 4 to the Registration Statement on Form S-4 filed
with the SEC on May 14, 2009) |
|||
2.4 | Second Amendment to Agreement and Plan of Merger, dated as of June 1, 2009, by and among
PlanetOut Inc., Here Media Inc., HMI Merger Sub, Inc. and the HMI Owners and HMI Entities
signatory thereto (incorporated by reference to Exhibit 2.1 to PlanetOut Inc.s current report on
Form 8-K filed on June 4, 2009) |
|||
3.1 | Amended and Restated Certificate of Incorporation of Here Media Inc. (incorporated by reference
to Exhibit 3.2 to Post-Effective Amendment No. 1 to the Registration Statement on Form S-4 filed
with the SEC on June 10, 2009) |
|||
3.2 | Amended and Restated Bylaws of Here Media Inc. (incorporated by reference to Exhibit 3.4 to
Post-Effective Amendment No. 1 to the Registration Statement on Form S-4 filed with the SEC on
June 10, 2009) |
|||
4.1 | Form of Certificate representing the Common Stock, par value $0.001 per share, of Here Media Inc.
(incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-4 filed with
the SEC on January 15, 2009) |
|||
4.2 | Form of Certificate representing the Special Stock, par value $0.001 per share, of Here Media
Inc. (incorporated by reference to Exhibit 4.2 to Amendment No. 1 to the Registration Statement
on Form S-4 filed with the SEC on March 5, 2009) |
|||
10.1 | Promissory Note, dated April 9, 2010, between Here Media Inc. and Stephen P. Jarchow |
|||
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|||
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|||
32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|||
32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
25
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HERE MEDIA INC. |
||||
Date: May 12, 2010 | By: | /s/ TONY SHYNGLE | ||
Tony Shyngle | ||||
Chief Financial Officer (Principal Financial and Accounting Officer) |
26
Table of Contents
EXHIBIT INDEX
Exhibit | ||||
Number | Description of Documents | |||
2.1 | Agreement and Plan of Merger, dated as of January 8, 2009, by and among Here Media Inc.,
PlanetOut Inc., HMI Merger Sub, Inc. and other parties signatory thereto (incorporated by
reference to Annex C to the Form 242(b) filing with the SEC on May 20, 2009, supplementing the
Prospectus filed on the Registration Statement on Form S-4, effective May 14, 2009) |
|||
2.2 | First Amendment to Agreement and Plan of Merger, dated as of April 27, 2009, by and among
PlanetOut Inc., Here Media Inc., HMI Merger Sub, Inc. and the HMI Owners and HMI Entities
signatory thereto (incorporated by reference to Exhibit 2.2 to Amendment No. 3 to the
Registration Statement on Form S-4 filed with the SEC on April 30, 2009) |
|||
2.3 | Letter Agreement, dated as of May 13, 2009, by PlanetOut Inc. and Here Media Inc. (incorporated
by reference to Exhibit 2.3 to Amendment No. 4 to the Registration Statement on Form S-4 filed
with the SEC on May 14, 2009) |
|||
2.4 | Second Amendment to Agreement and Plan of Merger, dated as of June 1, 2009, by and among
PlanetOut Inc., Here Media Inc., HMI Merger Sub, Inc. and the HMI Owners and HMI Entities
signatory thereto (incorporated by reference to Exhibit 2.1 to PlanetOut Inc.s current report on
Form 8-K filed on June 4, 2009) |
|||
3.1 | Amended and Restated Certificate of Incorporation of Here Media Inc. (incorporated by reference
to Exhibit 3.2 to Post-Effective Amendment No. 1 to the Registration Statement on Form S-4 filed
with the SEC on June 10, 2009) |
|||
3.2 | Amended and Restated Bylaws of Here Media Inc. (incorporated by reference to Exhibit 3.4 to
Post-Effective Amendment No. 1 to the Registration Statement on Form S-4 filed with the SEC on
June 10, 2009) |
|||
4.1 | Form of Certificate representing the Common Stock, par value $0.001 per share, of Here Media Inc.
(incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-4 filed with
the SEC on January 15, 2009) |
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4.2 | Form of Certificate representing the Special Stock, par value $0.001 per share, of Here Media
Inc. (incorporated by reference to Exhibit 4.2 to Amendment No. 1 to the Registration Statement
on Form S-4 filed with the SEC on March 5, 2009) |
|||
10.1 | Promissory Note, dated April 9, 2010, between Here Media Inc. and Stephen P. Jarchow |
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31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|||
32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|||
32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
27