Company Quick10K Filing
Quick10K
Hemisphere Media Group
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$14.75 20 $290
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-08-02 Earnings, Exhibits
8-K 2019-07-29 Other Events, Exhibits
8-K 2019-05-21 Officers, Other Events, Exhibits
8-K 2019-05-21 Shareholder Vote
8-K 2019-05-07 Earnings, Exhibits
8-K 2019-03-12 Other Events
8-K 2018-11-27 Other Events, Exhibits
8-K 2018-11-05 Earnings, Exhibits
8-K 2018-08-15 Other Events, Exhibits
8-K 2018-08-03 Earnings, Exhibits
8-K 2018-06-15 Regulation FD, Exhibits
8-K 2018-05-30 Officers
8-K 2018-05-22 Shareholder Vote
8-K 2018-05-04 Regulation FD, Exhibits
8-K 2018-04-05 Other Events, Exhibits
8-K 2018-03-14 Other Events
8-K 2018-03-05 Earnings, Exhibits
BIIB Biogen Idec 44,300
BMS Bemis 5,240
TNC Tennant 1,180
ACBI Atlantic Capital Bancshares 429
NWFL Norwood Financial 205
CACG Chart Acquisition 97
CAAS China Automotive Systems 82
VAPA Vaparia 0
CLIC CLIC Technology 0
NANX Nanophase Technologies 0
HMTV 2019-06-30
Part I
Part I - Financial Information
Note 1. Nature of Business
Note 2. Revenue Recognition
Note 3. Related Party Transactions
Note 4. Snap Media Acquisition
Note 5. Goodwill and Intangible Assets
Note 6. Equity Method Investments
Note 7. Income Taxes
Note 8. Long-Term Debt
Note 9. Derivative Instruments
Note 10. Fair Value Measurements
Note 11. Stockholders' Equity
Note 12. Contingencies
Note 13. Leases
Note 14. Commitments
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.1 a19-10356_1ex10d1.htm
EX-31.1 a19-10356_1ex31d1.htm
EX-31.2 a19-10356_1ex31d2.htm
EX-32.1 a19-10356_1ex32d1.htm
EX-32.2 a19-10356_1ex32d2.htm

Hemisphere Media Group Earnings 2019-06-30

HMTV 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a19-10356_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2019

 

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: 001-35886

 

HEMISPHERE MEDIA GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

80-0885255

(State or other jurisdiction of incorporation or

 

(I.R.S. Employer

organization)

 

Identification No.)

 

Hemisphere Media Group, Inc.

 

 

4000 Ponce de Leon Boulevard

 

 

Suite 650

 

 

Coral Gables, FL

 

33146

(Address of principal executive offices)

 

(Zip Code)

 

(305) 421-6364

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Trading Symbol(s)

 

Name of Each Exchange on Which Registered

Class A common stock, par value $0.0001 per share

 

HMTV

 

The NASDAQ Stock Market LLC

 

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. Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer x

Non-accelerated filer o

 

Smaller reporting company x

 

 

Emerging growth company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

Class of Stock

 

Shares Outstanding as of August 2, 2019

Class A common stock, par value $0.0001 per share

 

19,751,791 shares

Class B common stock, par value $0.0001 per share

 

19,720,381 shares

 

 

 


Table of Contents

 

HEMISPHERE MEDIA GROUP, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

June 30, 2019

(Unaudited)

 

 

 

PAGE
NUMBER

 

 

 

PART I -

FINANCIAL INFORMATION

6

 

 

 

Item 1.

Financial Statements

6

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

12

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

29

 

 

 

Item 4.

Controls and Procedures

29

 

 

 

PART II -

OTHER INFORMATION

30

 

 

 

Item 1.

Legal Proceedings

30

 

 

 

Item 1A.

Risk Factors

30

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

 

 

 

Item 3.

Defaults Upon Senior Securities

30

 

 

 

Item 4.

Mine Safety Disclosures

30

 

 

 

Item 5.

Other Information

30

 

 

 

Item 6.

Exhibits

31

 

 

 

SIGNATURES

32

 

2


Table of Contents

 

PART I

 

Unless otherwise indicated or the context requires otherwise, in this disclosure, references to the “Company,” “Hemisphere,” “registrant,” “we,” “us” or “our” refers to Hemisphere Media Group, Inc., a Delaware corporation and, where applicable, its consolidated subsidiaries; “Business” refers collectively to our consolidated operations; “Cable Networks” refers to our Networks (as defined below) with the exception of WAPA and WAPA Deportes; “Canal 1” refers to a joint venture among us and Radio Television Interamericana S.A., Compania de Medios de Informacion S.A.S. and NTC Nacional de Television y Comunicaciones S.A. to operate a broadcast television network in Colombia; “Centroamerica TV” refers to HMTV Centroamerica TV, LLC, a Delaware limited liability company; “Cinelatino” refers to Cine Latino, Inc., a Delaware corporation; “Distributors” refers collectively to satellite systems, telephone companies (“telcos”), and cable multiple system operators (“MSO”s), and the MSO’s affiliated regional or individual cable systems; “MarVista” refers to Mar Vista Entertainment, LLC, a Deleware limited liability company; “MVS” refers to Grupo MVS, S.A. de C.V., a Mexican Sociedad Anonima de Capital Variable (variable capital corporation) and its affiliates, as applicable; “Networks” refers collectively to WAPA, WAPA Deportes, WAPA America, Cinelatino, Pasiones, Centroamerica TV and Television Dominicana; “Nielsen” refers to Nielsen Media Research; “Pantaya” refers to Pantaya, LLC, a Delaware limited liability company, a joint venture among us and a subsidiary of Lions Gate Entertainment, Inc.; “Pasiones” refers collectively to HMTV Pasiones US, LLC, a Delaware limited liability company, and HMTV Pasiones LatAm, LLC, a Delaware limited liability company; “REMEZCLA” refers to Remezcla, LLC, a New York limited liability company; “Second Amended Term Loan Facility” refers to our Term Loan Facility amended on February 14, 2017 as set forth on Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017; “Snap Media” refers to Snap Global, LLC, a Delaware limited liability company and its wholly owned subsidiaries; “Television Dominicana” refers to HMTV TV Dominicana, LLC, a Delaware limited liability company; “Term Loan Facility” refers to our term loan facility amended on July 31, 2014 as set forth on Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017; “WAPA” refers to Televicentro of Puerto Rico, LLC, a Delaware limited liability company; “WAPA America” refers to WAPA America, Inc., a Delaware corporation; “WAPA Deportes” refers to a sports television network in Puerto Rico operated by WAPA; “WAPA.TV” refers to a news and entertainment website in Puerto Rico operated by WAPA; “United States” or “U.S.” refers to the United States of America, including its territories, commonwealths and possessions.

 

FORWARD-LOOKING STATEMENTS

 

CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.

 

Statements in this Quarterly Report on Form 10-Q (this “Quarterly Report”), including the exhibits attached hereto, future filings by us with the Securities and Exchange Commission, our press releases and oral statements made by, or with the approval of, our authorized personnel, that relate to our future performance or future events, may contain certain statements about Hemisphere Media Group, Inc. (the “Company”) and its consolidated subsidiaries that do not directly or exclusively relate to historical facts. These statements are, or may be deemed to be, “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995.

 

These forward-looking statements are necessarily estimates reflecting the best judgment and current expectations, plans, assumptions and beliefs about future events (in each case subject to change) of our senior management and management of our subsidiaries (including target businesses) and involve a number of risks, uncertainties and other factors, some of which may be beyond our control that could cause actual results to differ materially from those expressed or implied in such forward-looking statements. Without limitation, any statements preceded or followed by or that include the words “targets,” “plans,” “believes,” “expects,” “intends,” “will,” “likely,” “may,” “anticipates,” “estimates,” “projects,” “should,” “would,” “expect,” “positioned,” “strategy,” “future,” “potential,” “forecast,” or words, phrases or terms of similar substance or the negative thereof, are forward-looking statements. These include, but are not limited to, the Company’s future financial and operating results (including growth and earnings), plans, objectives, expectations and intentions and other statements that are not historical facts.

 

We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all forward-looking statements.

 

Forward-looking statements are not guarantees of performance. If one or more of these factors materialize, or if any underlying assumptions prove incorrect, our actual results, performance, or achievements may vary materially from any future results, performance or achievements expressed or implied by these forward-looking statements. In addition to the risk factors described in “Item 1A—Risk Factors” in this Quarterly Report on Form 10-Q, those factors include:

 

3


Table of Contents

 

·                  the effects of Hurricanes Irma and Maria in the short and long-term on our business, including, without limitation, affiliate revenue that we receive and the advertising market in Puerto Rico as well as our customers, employees, third-party vendors and suppliers and the short and long-term migration shifts in Puerto Rico;

 

·                  our ability to timely and fully recover proceeds under our insurance policies in Puerto Rico following Hurricanes Maria and Irma, including one of our policies with an insurance carrier which was recently placed under an order of rehabilitation;

 

·                  the reaction by advertisers, programming providers, strategic partners, the Federal Communications Commission (the “FCC”) or other government regulators to businesses that we acquire;

 

·                  the potential for viewership of our Networks’ programming to decline or unexpected reductions in the number of subscribers to our Networks;

 

·                  the risk that we may fail to secure sufficient or additional advertising and/or subscription revenue;

 

·                  the inability of advertisers or affiliates to remit payment to us in a timely manner or at all;

 

·                  the risk that we may become responsible for certain liabilities of the businesses that we acquire or joint ventures we enter into;

 

·                  future financial performance, including our ability to obtain additional financing in the future on favorable terms;

 

·                  the failure of our Business to produce projected revenues or cash flows;

 

·                  reduced access to capital markets or significant increases in borrowing costs;

 

·                  our ability to successfully manage relationships with customers and Distributors and other important third parties;

 

·                  continued consolidation of Distributors in the marketplace;

 

·                  a failure to secure affiliate agreements or renewal of such agreements on less favorable terms;

 

·                  disagreements with our Distributors over contract interpretation;

 

·                  our success in acquiring, investing in and integrating complementary businesses;

 

·                  the outcome of any pending or threatened litigation;

 

·                  the loss of key personnel and/or talent or expenditure of a greater amount of resources attracting, retaining and motivating key personnel than in the past;

 

·                  strikes or other union job actions that affect our operations, including, without limitation, failure to renew our collective bargaining agreements on mutually favorable terms;

 

·                  changes in technology, including changes in the distribution and viewing of television programming, expanded deployment of personal video recorders, video on demand, internet protocol television, mobile personal devices and personal tablets and their impact on subscription and television advertising revenue;

 

·                  the failure or destruction of satellites or transmitter facilities that we depend upon to distribute our Networks;

 

·                  uncertainties inherent in the development of new business lines and business strategies;

 

·                  changes in pricing and availability of products and services;

 

·                  uncertainties regarding the financial results of equity method investees and changes in the nature of key strategic relationships with partners and Distributors;

 

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Table of Contents

 

·                  changes in domestic and foreign laws or regulations under which we operate;

 

·                  changes in laws or treaties relating to taxation, or the interpretation thereof, in the U.S. or in the countries in which we operate;

 

·                  the ability of suppliers and vendors to deliver products and services;

 

·                  fluctuations in foreign currency exchange rates and political unrest and regulatory changes in the international markets in which we operate;

 

·                  the deterioration of general economic conditions, either nationally or in the local markets in which we operate, including, without limitation, in the Commonwealth of Puerto Rico;

 

·                  changes in the size of the U.S. Hispanic population, including the impact of federal and state immigration legislation and policies on both the U.S. Hispanic population and persons emigrating from Latin America;

 

·                  changes in, or failure or inability to comply with, government regulations including, without limitation, regulations of the FCC, and adverse outcomes from regulatory proceedings; and

 

·                  competitor responses to our products and services.

 

The list of factors above is illustrative, but by no means exhaustive. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. All subsequent written and oral forward-looking statements concerning the matters addressed in this Quarterly Report and attributable to us or any person acting on our behalf are qualified by these cautionary statements.

 

The forward-looking statements are based on current expectations about future events and are not guarantees of future performance, and are subject to certain risks, uncertainties and assumptions. Although we believe that the expectations reflected in the forward-looking statements are reasonable, these expectations may not be achieved. We may change our intentions, beliefs or expectations at any time and without notice, based upon any change in our assumptions or otherwise. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

5


Table of Contents

 

PART I - FINANCIAL INFORMATION

 

ITEM I. FINANCIAL STATEMENTS

 

HEMISPHERE MEDIA GROUP, INC.

Condensed Consolidated Balance Sheets

(amounts in thousands, except share and par value amounts)

 

 

 

June 30,

 

December 31,

 

 

 

2019

 

2018

 

 

 

(Unaudited)

 

(Audited)

 

Assets

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash

 

$

79,481

 

$

94,478

 

Accounts receivable, net of allowance for doubtful accounts of $673 and $2,645, respectively

 

31,943

 

30,840

 

Due from related parties

 

1,196

 

970

 

Programming rights

 

10,492

 

10,735

 

Prepaids and other current assets

 

7,841

 

7,801

 

Total current assets

 

130,953

 

144,824

 

Programming rights, net of current portion

 

14,657

 

15,321

 

Property and equipment, net

 

34,939

 

32,209

 

Operating lease right-of-use assets

 

2,090

 

 

Broadcast license

 

41,356

 

41,356

 

Goodwill

 

170,068

 

169,994

 

Other intangibles, net

 

33,997

 

39,086

 

Deferred income taxes

 

4,824

 

4,290

 

Equity method investments

 

53,858

 

51,658

 

Other assets

 

1,285

 

2,529

 

Total Assets

 

$

488,027

 

$

501,267

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Accounts payable

 

$

2,347

 

$

2,515

 

Due to related parties

 

619

 

626

 

Accrued agency commissions

 

2,636

 

5,061

 

Accrued compensation and benefits

 

4,619

 

5,855

 

Accrued marketing

 

4,867

 

5,619

 

Other accrued expenses

 

5,629

 

6,810

 

Income taxes payable

 

 

2,265

 

Programming rights payable

 

4,786

 

4,051

 

Investee losses in excess of investment

 

2,409

 

4,982

 

Current portion of long-term debt

 

2,133

 

2,134

 

Total current liabilities

 

30,045

 

39,918

 

Programming rights payable, net of current portion

 

1,678

 

1,133

 

Long-term debt, net of current portion

 

203,182

 

203,957

 

Deferred income taxes

 

19,520

 

19,520

 

Other long-term liabilities

 

3,657

 

1,080

 

Defined benefit pension obligation

 

2,194

 

2,260

 

Total Liabilities

 

260,276

 

267,868

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

Preferred stock, $0.0001 par value; 50,000,000 shares authorized; 0 shares issued and outstanding at June 30, 2019 and December 31, 2018

 

 

 

Class A common stock, $.0001 par value; 100,000,000 shares authorized; 25,033,981 and 24,849,589 shares issued at June 30, 2019 and December 31, 2018, respectively.

 

3

 

2

 

Class B common stock, $.0001 par value; 33,000,000 shares authorized; 19,720,381 shares issued and outstanding at June 30, 2019 and December 31, 2018

 

2

 

2

 

Additional paid-in capital

 

271,117

 

270,345

 

Treasury stock, at cost 5,547,078 and 5,523,838 at June 30, 2019 and December 31, 2018, respectively

 

(59,573

)

(59,088

)

Retained earnings

 

15,398

 

19,495

 

Accumulated other comprehensive (loss) income

 

(647

)

1,155

 

Total Hemisphere Media Group, Inc. Stockholders’ Equity

 

226,300

 

231,911

 

Equity attributable to non-controlling interest

 

1,451

 

1,488

 

Total Stockholders’ Equity

 

227,751

 

233,399

 

Total Liabilities and Stockholders’ Equity

 

$

488,027

 

$

501,267

 

 

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

 

6


Table of Contents

 

HEMISPHERE MEDIA GROUP, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

(amounts in thousands, except per share amounts)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2019

 

2018

 

2019

 

2018

 

Net revenues

 

$

39,147

 

$

34,791

 

$

74,257

 

$

63,826

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of revenues

 

11,317

 

10,834

 

21,531

 

20,261

 

Selling, general and administrative

 

10,813

 

11,108

 

21,714

 

21,692

 

Depreciation and amortization

 

2,556

 

4,020

 

6,623

 

8,017

 

Other expenses

 

422

 

541

 

653

 

774

 

Gain from FCC spectrum repack and other

 

(45

)

(35

)

(1,507

)

(38

)

Total operating expenses

 

25,063

 

26,468

 

49,014

 

50,706

 

Operating income

 

14,084

 

8,323

 

25,243

 

13,120

 

Other expenses, net:

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(3,005

)

(3,019

)

(5,965

)

(5,903

)

Loss on equity method investments

 

(9,784

)

(8,826

)

(17,160

)

(18,621

)

Total other expenses, net

 

(12,789

)

(11,845

)

(23,125

)

(24,524

)

Income (loss) before income taxes

 

1,295

 

(3,522

)

2,118

 

(11,404

)

Income tax expense

 

(3,643

)

(1,584

)

(6,199

)

(1,261

)

Net loss

 

(2,348

)

(5,106

)

(4,081

)

(12,665

)

Net (income) loss attributable to non-controlling interest

 

(10

)

 

37

 

 

Net loss attributable to Hemisphere Media Group, Inc.

 

$

(2,358

)

$

(5,106

)

$

(4,044

)

$

(12,665

)

 

 

 

 

 

 

 

 

 

 

Loss per share attributable to Hemisphere Media Group, Inc.:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.06

)

$

(0.13

)

$

(0.10

)

$

(0.32

)

Diluted

 

$

(0.06

)

$

(0.13

)

$

(0.10

)

$

(0.32

)

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

39,164

 

39,021

 

39,098

 

38,988

 

Diluted

 

39,164

 

39,021

 

39,098

 

38,988

 

 

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

 

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HEMISPHERE MEDIA GROUP, INC.

Condensed Consolidated Statement of Comprehensive Loss

(Unaudited)

(amounts in thousands)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2019

 

2018

 

2019

 

2018

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(2,348

)

$

(5,106

)

$

(4,081

)

$

(12,665

)

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

Change in fair value of interest rate swap, net of income taxes

 

(1,177

)

487

 

(1,855

)

1,637

 

Comprehensive loss

 

(3,525

)

(4,619

)

(5,936

)

(11,028

)

Comprehensive (income) loss attributable to non-controlling interest

 

(10

)

 

37

 

 

Comprehensive loss attributable to Hemisphere Media Group, Inc.

 

$

(3,535

)

$

(4,619

)

$

(5,899

)

$

(11,028

)

 

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

 

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HEMISPHERE MEDIA GROUP, INC.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

Three and Six Months Ended June 30, 2019

(Unaudited)

(amounts in thousands)

 

 

 

Class A
Common Stock

 

Class B
Common Stock

 

Additional
Paid In

 

Class A
Treasury

 

Retained

 

Accumulated
Comprehensive

 

Non-
controlling

 

 

 

 

 

Shares

 

Par Value

 

Shares

 

Par Value

 

Capital

 

Stock

 

Earnings

 

Income (Loss)

 

Interest

 

Total

 

Balance at March 31, 2019

 

24,850

 

$

2

 

19,720

 

$

2

 

$

270,674

 

$

(59,013

)

$

17,756

 

$

530

 

$

1,441

 

$

231,392

 

Net (loss) income

 

 

 

 

 

 

 

(2,358

)

 

10

 

(2,348

)

Stock-based compensation

 

 

 

 

 

443

 

 

 

 

 

443

 

Vesting of restricted stock

 

184

 

1

 

 

 

 

(532

)

 

 

 

(531

)

Repurchases of Class A common Stock

 

 

 

 

 

 

(135

)

 

 

 

(135

)

Issuance of treasury shares for option exercise

 

 

 

 

 

 

107

 

 

 

 

107

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

(1,177

)

 

 

(1,177

)

Balance at June 30, 2019

 

25,034

 

$

3

 

19,720

 

$

2

 

$

271,117

 

$

(59,573

)

$

15,398

 

$

(647

)

$

1,451

 

$

227,751

 

 

 

 

Class A
Common Stock

 

Class B
Common Stock

 

Additional
Paid In

 

Class A
Treasury

 

Retained

 

Accumulated
Comprehensive

 

Non-
controlling

 

 

 

 

 

Shares

 

Par Value

 

Shares

 

Par Value

 

Capital

 

Stock

 

Earnings

 

Income (Loss)

 

Interest

 

Total

 

Balance at December 31, 2018

 

24,850

 

$

2

 

19,720

 

$

2

 

$

270,345

 

$

(59,088

)

$

19,495

 

$

1,155

 

$

1,488

 

$

233,399

 

Net loss

 

 

 

 

 

 

 

(4,044

)

 

(37

)

(4,081

)

Issuance of treasury shares for acquisition of Snap Media

 

 

 

 

 

(588

)

588

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

1,360

 

 

 

 

 

1,360

 

Vesting of restricted stock

 

184

 

1

 

 

 

 

(532

)

 

 

 

(531

)

Repurchases of Class A common Stock

 

 

 

 

 

 

(648

)

 

 

 

(648

)

Issuance of treasury shares for option exercise

 

 

 

 

 

 

107

 

 

 

 

107

 

Adoption of accounting standards

 

 

 

 

 

 

 

(53

)

53

 

 

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

(1,855

)

 

 

(1,855

)

Balance at June 30, 2019

 

25,034

 

$

3

 

19,720

 

$

2

 

$

271,117

 

$

(59,573

)

$

15,398

 

$

(647

)

$

1,451

 

$

227,751

 

 

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

 

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HEMISPHERE MEDIA GROUP, INC.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

Three and Six Months Ended June 30, 2018

(Unaudited)

(amounts in thousands)

 

 

 

Class A
Common Stock

 

Class B
Common Stock

 

Additional
Paid In

 

Class A
Treasury

 

Retained

 

Accumulated
Comprehensive

 

Non-
controlling

 

 

 

 

 

Shares

 

Par Value

 

Shares

 

Par Value

 

Capital

 

Stock

 

Earnings

 

Income

 

Interest

 

Total

 

Balance at March 31, 2018

 

25,173

 

$

3

 

20,801

 

$

2

 

$

266,345

 

$

(57,337

)

$

22,842

 

$

1,622

 

 

$

233,477

 

Net loss

 

 

 

 

 

 

 

(5,106

)

 

 

(5,106

)

Stock-based compensation

 

 

 

 

 

1,002

 

 

 

 

 

1,002

 

Vesting of restricted stock

 

199

 

0

 

 

 

(0

)

(326

)

 

 

 

(326

)

Repurchases of Class A common Stock

 

 

 

 

 

 

(1,521

)

 

 

 

(1,521

)

Forfeiture of Class A common stock earnouts

 

(544

)

(0

)

 

 

0

 

 

 

 

 

 

Forfeiture of Class B common stock earnouts

 

 

 

(1,081

)

(0

)

0

 

 

 

 

 

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

487

 

 

487

 

Balance at June 30, 2018

 

24,828

 

$

3

 

19,720

 

$

2

 

$

267,347

 

$

(59,184

)

$

17,736

 

$

2,109

 

$

 

$

228,013

 

 

 

 

Class A
Common Stock

 

Class B
Common Stock

 

Additional
Paid In

 

Class A
Treasury

 

Retained

 

Accumulated
Comprehensive

 

Non-
controlling

 

 

 

 

 

Shares

 

Par Value

 

Shares

 

Par Value

 

Capital

 

Stock

 

Earnings

 

Income

 

Interest

 

Total

 

Balance at December 31, 2017

 

25,171

 

$

3

 

20,801

 

$

2

 

$

265,329

 

$

(57,303

)

$

30,401

 

$

472

 

 

$

238,904

 

Net loss

 

 

 

 

 

 

 

(12,665

)

 

 

(12,665

)

Stock-based compensation

 

 

 

 

 

1,998

 

 

 

 

 

1,998

 

Vesting of restricted stock

 

199

 

0

 

 

 

(0

)

(326

)

 

 

 

(326

)

Repurchases of Class A common Stock

 

 

 

 

 

 

(1,555

)

 

 

 

(1,555

)

Forfeiture of Class A common stock earnouts

 

(544

)

(0

)

 

 

0

 

 

 

 

 

 

Forfeiture of Class B common stock earnouts

 

 

 

(1,081

)

(0

)

0

 

 

 

 

 

 

Exercise of warrants

 

2

 

0

 

 

 

20

 

 

 

 

 

20

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

1,637

 

 

1,637

 

Balance at June 30, 2018

 

24,828

 

$

3

 

19,720

 

$

2

 

$

267,347

 

$

(59,184

)

$

17,736

 

$

2,109

 

$

 

$

228,013

 

 

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

 

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HEMISPHERE MEDIA GROUP, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(amounts in thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2019

 

2018

 

Reconciliation of Net Loss to Net Cash Provided by Operating Activities:

 

 

 

 

 

Net loss

 

$

(4,081

)

$

(12,665

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

6,623

 

8,017

 

Program amortization

 

6,953

 

5,537

 

Amortization of deferred financing costs and original issue discount

 

290

 

296

 

Stock-based compensation

 

1,360

 

1,998

 

Provision for bad debts

 

219

 

129

 

Gain on disposition of assets

 

39

 

(38

)

Loss on equity method investments

 

17,160

 

18,621

 

Gain from FCC spectrum repack

 

(1,546

)

 

Amortization of operating lease right-of-use assets

 

228

 

 

Changes in assets and liabilities:

 

 

 

 

 

Decrease (increase) in:

 

 

 

 

 

Accounts receivable

 

(1,322

)

(5,599

)

Programming rights

 

(6,046

)

(9,263

)

Prepaids and other assets

 

(2,807

)

355

 

(Decrease) increase in:

 

 

 

 

 

Accounts payable

 

(168

)

708

 

Due to related parties, net

 

(233

)

907

 

Other accrued expenses

 

(5,594

)

(1,970

)

Programming rights payable

 

1,280

 

1,600

 

Income taxes payable

 

(2,265

)

 

Other liabilities

 

1,741

 

90

 

Net cash provided by operating activities

 

11,831

 

8,723

 

Cash Flows From Investing Activities:

 

 

 

 

 

Funding of equity method investments

 

(21,931

)

(24,878

)

Capital expenditures

 

(4,303

)

(6,172

)

FCC spectrum repack proceeds

 

1,546

 

 

Net cash used in investing activities

 

(24,688

)

(31,050

)

Cash Flows From Financing Activities:

 

 

 

 

 

Repayments of long-term debt

 

(1,067

)

(2,133

)

Purchases of common stock

 

(1,180

)

(1,881

)

Proceeds from exercise of warrants

 

 

20

 

Proceeds from exercise of options

 

107

 

 

Net cash used in financing activities

 

(2,140

)

(3,994

)

 

 

 

 

 

 

Net decrease in cash

 

(14,997

)

(26,321

)

Cash:

 

 

 

 

 

Beginning

 

94,478

 

124,299

 

Ending

 

$

79,481

 

$

97,978

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

Cash payments for:

 

 

 

 

 

Interest

 

$

6,979

 

$

5,659

 

Income taxes

 

$

6,343

 

$

 

Non-cash investing activity:

 

 

 

 

 

Acquisition financed in part by treasury shares

 

$

588

 

$

 

 

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Note 1. Nature of business

 

Nature of business:  The accompanying Condensed Consolidated Financial Statements include the accounts of Hemisphere Media Group, Inc. (“Hemisphere” or the “Company”), the parent holding company of Cine Latino, Inc. (“Cinelatino”), WAPA Holdings, LLC (formerly known as InterMedia Español Holdings, LLC) (“WAPA Holdings”), HMTV Cable, Inc., the parent company of the entities for the acquired networks consisting of Pasiones, TV Dominicana, and Centroamerica TV (see below), and HMTV Distribution, LLC, the parent of Snap Global, LLC, a Delaware limited liability company and its wholly owned subsidiaries (“Snap Media”), which we acquired a 75% interest on November 26, 2018. Hemisphere was formed on January 16, 2013 for purposes of effecting its initial public offering, which was consummated on April 4, 2013. In these notes, the terms “Company,” “we,” “us” or “our” mean Hemisphere and all subsidiaries included in our Condensed Consolidated Financial Statements.

 

Reclassification:  Certain prior year amounts on the presented condensed consolidated balance sheets and condensed consolidated statement of cash flows have been reclassified to conform with current period presentation.

 

Basis of presentation:  The accompanying Condensed Consolidated Financial Statements for Hemisphere and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to make the information not misleading. In our opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement have been included. Our financial condition as of, and operating results, for the three and six months ended June 30, 2019 are not necessarily indicative of the financial condition or results that may be expected for any future interim period or for the year ending December 31, 2019. These Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

Net loss per common share:  Basic loss per share is computed by dividing income attributable to Hemisphere Media Group common stockholders by the number of weighted-average outstanding shares of common stock. Diluted loss per share reflects the effect of the assumed exercise of stock options and vesting of restricted shares only in the periods in which such effect would have been dilutive.

 

The following table sets forth the computation of the common shares outstanding used in determining basic and diluted loss per share attributable to Hemisphere Media Group, Inc. (amounts in thousands, except per share amounts):

 

 

 

Three Months
Ended June 30,

 

Six Months
Ended June 30,

 

 

 

2019

 

2018

 

2019

 

2018

 

Numerator for loss per common share calculation:

 

 

 

 

 

 

 

 

 

Net loss attributable to Hemisphere Media Group, Inc.

 

$

(2,358

)

$

(5,106

)

$

(4,044

)

$

(12,665

)

 

 

 

 

 

 

 

 

 

 

Denominator for loss per common share calculation:

 

 

 

 

 

 

 

 

 

Weighted-average common shares, basic

 

39,164

 

39,021

 

39,098

 

38,988

 

Effect of dilutive securities

 

 

 

 

 

 

 

 

 

Stock options, restricted stock and warrants

 

 

 

 

 

Weighted-average common shares, diluted

 

39,164

 

39,021

 

39,098

 

38,988

 

 

 

 

 

 

 

 

 

 

 

Loss per share attributable to Hemisphere Media Group, Inc.

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.06

)

$

(0.13

)

$

(0.10

)

$

(0.32

)

Diluted

 

$

(0.06

)

$

(0.13

)

$

(0.10

)

$

(0.32

)

 

We apply the treasury stock method to measure the dilutive effect of its outstanding stock options and restricted stock awards and include the respective common share equivalents in the denominator of our diluted loss per common share calculation. Per the Accounting Standards Codification (“ASC”) 260 accounting guidance, under the treasury stock method, the incremental shares (difference between the number of shares assumed issued and the number of shares assumed purchased) shall be included in the denominator of the diluted loss per share computation (ASC 260-10-45-23). The assumed exercise only occurs when the options are “In the Money” (exercise price is lower than the average market price for the period). If the options are “Out of the Money” (exercise price is higher than the average market price for the period), the exercise is not assumed since the result would be anti-dilutive. Potentially dilutive securities representing 0.9 million and 2.0 million shares of common stock for the three months ended June 30, 2019 and 2018, respectively, were excluded from the computation of diluted loss per common share for these periods because their

 

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effects would have been anti-dilutive. Potentially dilutive securities representing 1.0 million and 2.0 million shares of common stock for the six months ended June 30, 2019 and 2018, respectively, were excluded from the computation of diluted loss per common share for these periods because their effects would have been anti-dilutive. The net loss per share attributable to Hemisphere Media Group, Inc. amounts are the same for our Class A and Class B common stock because the holders of each class are legally entitled to equal per share distributions whether through dividends or in liquidation.

 

As a result of the loss from continuing operations for each of the three and six months ended June 30, 2019 and 2018, 0.5 million and 0.2 million outstanding awards, respectively, were not included in the computation of diluted loss per share because their effect was anti-dilutive.

 

Use of estimates:  In preparing these condensed consolidated financial statements, management had to make estimates and assumptions that affected the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the balance sheet dates, and the reported revenues and expenses for the three and six months ended June 30, 2019 and 2018. Such estimates are based on historical experience and other assumptions that are considered appropriate in the circumstances. However, actual results could differ from those estimates.

 

Recently adopted Accounting Standards: On January 1, 2019, we adopted Financial Accounting Standards Board (“the FASB”) ASC Topic 842, Leases (ASC 842) (the “new lease standard”), using a modified retrospective transition approach with application as of the effective date of initial application without restating comparative period financial statements.  The core principle of the new lease standard is that a lessee should recognize the assets and liabilities that arise from leases, including operating leases, in the statement of financial position. We elected to apply the package of practical expedients to our adoption of the new lease standard, which includes allowing us to continue utilizing historical classification of leases. We did not elect the practical expedient that permits a reassessment of lease terms for existing leases. Upon our transition to the new lease standard, we recognized $2.1 million and $1.9 million of operating lease liabilities and corresponding right of use (“ROU”) assets, respectively. The adoption of the new lease standard did not have an impact on the Condensed Consolidated Statement of Operations. For additional information about our leases, see Note 13, “Leases” of Notes to Condensed Consolidated Financial Statements.

 

On January 1, 2019, we adopted the FASB Accounting Standards Update (“ASU”) 2018-07—Compensation —Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The amendments in this ASU applied to any entity that enters into share-based payment transactions with nonemployees. The new guidance eliminated the requirement to revalue nonemployee share-based transactions on a recurring quarterly basis. The adoption of this ASU did not have an impact on our condensed consolidated financial statements.

 

On January 1, 2019, we adopted ASU 2018-02—Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this ASU applied to any entity that has items of other comprehensive income (“OCI”) for which the related tax effects are presented in accumulated other comprehensive income (“AOCI”), as previously required by GAAP. This ASU permitted a one-time reclassification from AOCI to Retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act enacted on December 22, 2017. The adoption of this ASU resulted in a one-time reclassification of $0.1 million from AOCI to Retained earnings, which was recorded in the current period. For the impact of this adoption, see Condensed Consolidated Statement of Changes in Stockholders’ Equity for the six months ended June 30, 2019, located in Part I, Item I - Financial Statements.

 

On January 1, 2019, we adopted ASU 2017-12 — Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments in this ASU applied to any entity that elects to apply hedge accounting and is intended to better align an entity’s risk management activities and financial reporting for hedging relationships. The ASU amends effectiveness testing requirements, income statement presentation and disclosures and permits additional risk management strategies to qualify for hedge accounting.  The adoption of this ASU did not have an impact on our condensed consolidated financial statements.

 

Accounting guidance not yet adopted:  In March 2019, the FASB issued ASU 2019-02—Entertainment—Films-Other Assets-Film Costs (Subtopic 926-20): Improvements to Accounting for Costs of Films. The updated guidance aligns the accounting for production costs of episodic television series with those of films, allowing for costs to be capitalized in excess of amounts of revenue contracted for each episode. The updated guidance also updates certain presentation and disclosure requirements for capitalized film and television costs, and requires impairment testing to be performed at a group level for capitalized film and television costs when the content is predominately monetized with other owned or licensed content. The updated guidance is effective for the fiscal years beginning after December 15, 2019 and early adoption is permitted. We are currently in the process of determining the impact, if any, that the updated accounting guidance will have on our condensed consolidated financial statements.

 

Note 2. Revenue recognition

 

The following is a description of principal activities from which we generate our revenue:

 

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Affiliate fees: We enter into arrangements with multi-channel video distributors, such as cable, satellite and telecommunications companies (referred to as “MVPDs”) to provide a continuous feed of our programming generally based on a per subscriber fee pursuant to multi-year contracts, referred to as “affiliation agreements”, which typically provide for annual rate increases. We have used the practical expedient related to the right to invoice and recognize revenue at the amount to which we have the right to invoice for services performed. The specific affiliate fees we earn vary from period to period, distributor to distributor and also vary among our Networks, but are generally based upon the number of each distributor’s paying subscribers who subscribe to our Networks. Changes in affiliate fees are primarily derived from changes in contractual per subscriber rates charged for our Networks and changes in the number of subscribers. MVPDs report their subscriber numbers to us generally on a two month lag. We record revenue based on estimates of the number of subscribers utilizing the most recently received remittance reporting of each MVPD, which is consistent with our past practice and industry practice.  Revenue is recognized on a month by month basis when the performance obligations to provide service to the MVPDs is satisfied. Payment is typically received within sixty days of the remittance.

 

Advertising revenue: Advertising revenues are generated from the sale of commercial time, which is typically sold pursuant to sale orders with advertisers providing for an agreed upon commitment and price per spot. We recognize revenue from the sale of advertising as performance obligations are satisfied upon airing of the advertising; therefore, revenue is recognized at a point in time when each advertising spot is transmitted. Agency fees are calculated based on a stated percentage applied to gross billing revenue for our advertising inventory and are reported as a reduction of advertising revenue. Payment is typically due and received within thirty days of the invoice date.

 

Other revenue: Other revenues are derived primarily through the licensing of content to third parties. We enter into agreements to license content and recognize revenue when the performance obligation is satisfied and control is transferred, which is generally upon delivery of the content.

 

The following table presents the revenues disaggregated by revenue source (amounts in thousands):

 

 

 

Three months ended June 30,

 

Revenues by type

 

2019

 

2018

 

Affiliate fees

 

$

21,537

 

$

19,511

 

Advertising revenue

 

15,699

 

14,766

 

Other revenue

 

1,911

 

514

 

Total revenue

 

$

39,147

 

$

34,791

 

 

 

 

Six months ended June 30,

 

Revenues by type

 

2019

 

2018

 

Affiliate fees

 

$

42,886

 

$

37,944

 

Advertising revenue

 

28,845

 

24,684

 

Other revenue

 

2,526

 

1,198

 

Total revenue

 

$

74,257

 

$

63,826

 

 

Note 3. Related party transactions

 

The Company has various agreements with MVS, a Mexican media and television conglomerate, which has directors and stockholders in common with the Company as follows:

 

·                  On November 15, 2018, the Company executed an amended agreement, pursuant to which MVS provides Cinelatino with satellite and support services including origination, uplinking and satellite delivery of two feeds of Cinelatino’s channel (for U.S. and Latin America), master control and monitoring, dubbing, subtitling and close captioning, and other support services (the “Satellite and Support Services Agreement”). The Satellite and Support Services Agreement expires February 28, 2022. Expenses incurred under this agreement are included in cost of revenues in the accompanying condensed consolidated statements of operations. Total expenses incurred were $0.7 million for each of the three month periods ended June 30, 2019 and 2018. Total expenses incurred were $1.3 million for each of the six month periods ended June 30, 2019 and 2018. Amounts due to MVS pursuant to this agreement totaled $0.6 million and $0.7 million at June 30, 2019 and December 31, 2018, respectively.

 

·                  On November 15, 2018, the Company extended its affiliation agreement with Dish Mexico (d/b/a Comercializadora de Frecuencias Satelitales, S. de R.L. de C.V.), an MVS affiliate that transmits television programming services throughout Mexico, including Cinelatino. This agreement expires on February 28, 2022. Total revenues recognized were

 

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$0.5 million for each of the three month periods ended June 30, 2019 and 2018. Total revenues recognized were $0.9 million and $1.0 million for the six month periods ended June 30, 2019 and 2018, respectively. Amounts due from Dish Mexico amounted to $0.7 million and $0.3 million at June 30, 2019 and December 31, 2018, respectively.

 

·                  On November 15, 2018, the Company amended and extended its license agreement with MVS, pursuant to which MVS has the non-exclusive right to duplicate, distribute and exhibit Cinelatino’s service via cable, satellite or by any other means in Mexico. Pursuant to the amendment, Cinelatino receives revenues net of MVS’s distribution fee, which is equal to 13.5% of all license fees collected from third party distributors managed but not owned by MVS. Total revenues recognized were $0.3 million for each of the three month periods ended June 30, 2019 and 2018. Total revenues recognized were $0.6 million for each of the six month periods ended June 30, 2019 and 2018. Amounts due from MVS pursuant to this agreement totaled $0.5 million and $0.7 million at June 30, 2019 and December 31, 2018, respectively.

 

The Company has a consulting agreement with James M. McNamara, a member of the Company’s board of directors, to provide the development, production and maintenance of programming, affiliate relations, identification and negotiation of carriage opportunities, and the development, identification and negotiation of new business initiatives including sponsorship, new channels, direct-to-consumer programs and other interactive initiatives. Total expenses incurred under these agreements are included in selling, general and administrative expenses and amounted to $0.1 million for each of the three month periods ended June 30, 2019 and 2018, and $0.2 million for each of the six month periods ended June 30, 2019 and 2018. No amounts were due to this related party at June 30, 2019 and December 31, 2018.

 

The Company is party to an output agreement with Pantelion Films, LLC (“Pantelion”), a joint venture made up of several organizations, including Panamax Films, LLC (an entity owned by James M. McNamara), Lions Gate Films, Inc. (“Lionsgate”) and Grupo Televisa, for the licensing of movie titles. Expenses incurred under this agreement are included in cost of revenues in the accompanying consolidated statements of operations and amounted to $0.1 million for each of the three and six month periods ended June 30, 2019, and $0 million for each of the three and six month periods ended June 30, 2018. At June 30, 2019 and December 31, 2018, $0.9 million and $0.5 million is included in programming rights, respectively, in the accompanying condensed consolidated balance sheets related to these agreements.

 

Note 4. Snap Media Acquisition

 

On November 26, 2018, the Company completed the acquisition of a seventy five percent (75%) interest in Snap Global, LLC (“Snap Media”), pursuant to the terms of a Transaction Agreement (the “Snap Media Acquisition”). Snap Media is a leading independent distributor of content in Latin America to broadcast, pay TV and OTT platforms. The opportunity is to leverage Snap Media to drive licensing of our content and to identify co-production opportunities in Latin America. The Snap Media Acquisition was accounted for as a business combination using the acquisition method of accounting.

 

Total consideration in connection with the Snap Media Acquisition was $4.8 million (net of $0.7 million of cash acquired), consisting of cash and shares of the Company’s Class A common stock. At closing, we paid $1.5 million in cash and issued 101,818 shares of the Company’s Class A common stock. During the six months ended June 30, 2019, 54,825 shares of the Company’s Class A common stock were issued and $0.8 million paid in cash. Future consideration includes $0.5 million to be paid in each of 2020 and 2021, subject to downward adjustment. The fair value of shares of the Company’s Class A common stock included in consideration is based on the closing price of the Company’s Class A common stock on November 26, 2018. Future consideration is classified as Other long-term liabilities in the accompanying condensed consolidated balance sheets.

 

The preliminary allocation of consideration to the net tangible and intangible assets acquired as of November 26, 2018 is presented in the table below (amounts in thousands):

 

Accounts receivable

 

$

1,419

 

Other current assets

 

30

 

Intangible asset—content library

 

616

 

Accounts payable

 

(259

)

Accrued expenses

 

(589

)

Deferred revenue

 

(140

)

Fair value of net assets acquired

 

1,077

 

Goodwill

 

5,107

 

Non-controlling interest

 

(1,379

)

Total purchase price consideration

 

$

4,805

 

 

Programming rights intangible assets have an amortization period of approximately 7.0 years.

 

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The purchase price allocation reflects preliminary fair value estimates based on preliminary work and analyses performed by management and is subject to change as additional information to assist in determining the fair value of the net assets acquired at the closing date is obtained during the post-closing measurement period.

 

Goodwill attributable to the Snap Media Acquisition is expected to be deductible for tax purposes. Goodwill represents the excess of the purchase price consideration over the fair value of the underlying net assets acquired and largely results from expected future synergies from combining operations as well as an assembled workforce, which does not qualify for separate recognition.

 

The non-controlling interest fair value reflects the fair value of purchase price consideration for a controlling interest, less discounts for lack of control and marketability.

 

The Snap Media Acquisition is not material to our condensed consolidated financial statements, and therefore, supplemental pro forma financial information related to the acquisition is not included herein.

 

Note 5. Goodwill and intangible assets

 

Goodwill and intangible assets consist of the following as of June 30, 2019 and December 31, 2018 (amounts in thousands):

 

 

 

June 30,

 

December 31,

 

 

 

2019

 

2018

 

Broadcast license

 

$

41,356

 

$

41,356

 

Goodwill

 

170,068

 

169,994

 

Other intangibles

 

33,997

 

39,086

 

Total intangible assets

 

$

245,421

 

$

250,436

 

 

A summary of changes in the Company’s goodwill and other indefinite-lived intangible assets, on a net basis, for the six months ended June 30, 2019 is as follows (amounts in thousands):

 

 

 

Net Balance at
December 31, 2018

 

Additions

 

Impairment

 

Net Balance at
June 30, 2019

 

Broadcast license

 

$

41,356

 

$

 

$

 

$

41,356

 

Goodwill

 

169,994

 

74

 

 

170,068

 

Brands

 

15,986

 

 

 

15,986

 

Other intangibles

 

700

 

 

 

700

 

Total indefinite-lived intangibles

 

$

228,036

 

$

74

 

$

 

$

228,110

 

 

A summary of the changes in the Company’s other amortizable intangible assets for the six months ended June 30, 2019 is as follows (amounts in thousands):

 

 

 

Net Balance at
December 31, 2018

 

Additions

 

Amortization

 

Net Balance at
June 30, 2019

 

Affiliate relationships

 

$

20,273

 

$

 

$

(4,456

)

$

15,817

 

Advertiser relationships

 

690

 

 

(276

)

414

 

Non-compete agreement

 

686

 

 

(274

)

412

 

Other intangibles

 

144

 

 

(38

)

106

 

Programming contracts

 

607

 

 

(45

)

562

 

Total finite-lived intangibles

 

$

22,400

 

$

 

$

(5,089

)

$

17,311

 

 

The aggregate amortization expense of the Company’s amortizable intangible assets was $1.8 million and $3.3 million for the three months ended June 30, 2019 and 2018, respectively, and $5.1 million and $6.6 million for the six months ended June 30, 2019 and 2018, respectively.  The weighted average remaining amortization period is 2.8 years at June 30, 2019.

 

Future estimated amortization expense is as follows (amounts in thousands):

 

Year Ending December 31,

 

Amount

 

Remainder of 2019

 

$

3,508

 

2020

 

6,170

 

2021

 

5,857

 

2022

 

1,528

 

2023 and thereafter

 

248

 

Total

 

$

17,311

 

 

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Note 6. Equity method investments

 

The Company makes investments that support its underlying business strategy and enable it to enter new markets. The carrying values of the Company’s equity method investments are typically consistent with its ownership in the underlying net assets of the investees, with the exception of Canal 1 and Pantaya. Due to losses in excess of capital contributions, the Company has recorded nearly 100% of the losses on Canal 1. The Company has recorded losses in excess of the amount invested in Pantaya. Certain of the Company’s equity investments are variable interest entities, for which the Company is not the primary beneficiary.

 

On November 3, 2016, we acquired a 25% interest in Pantaya, a newly formed joint venture with Lionsgate, to launch a Spanish-language OTT movie service. The service launched on August 1, 2017. The investment is deemed a variable interest entity (“VIE”) that is accounted for under the equity method. As of June 30, 2019, we have funded $7.6 million in capital contributions to Pantaya. We record the income or loss on investment on a one quarter lag. As of March 31, 2019, our applicable pro rata share of the inception-to-date losses exceeded our contractual funding commitment of $10 million, as such, our cumulative share of the losses is limited to $10 million and no additional losses were recorded in the three month period ended June 30, 2019. For the three and six months ended June 30, 2019, we recorded $0 and $0.3 million, respectively in loss on equity method investments in the accompanying unaudited condensed consolidated statements of operations. For the three and six months ended June 30, 2018, we recorded $1.8 million and $4.4 million, respectively in loss on equity method investments in the accompanying unaudited condensed consolidated statements of operations. In accordance with U.S. GAAP, since we are committed to provide future capital contributions to Pantaya, we also present as a liability in the accompanying condensed consolidated balance sheets the net balance recorded for our share of Pantaya’s losses in excess of the amount funded into Pantaya, which was $2.4 million and $5.0 million at June 30, 2019 and December 31, 2018, respectively.

 

On November 30, 2016, we, in partnership with Colombian content producers, Radio Television Interamericana S.A., Compania de Medios de Informacion S.A.S. and NTC Nacional de Television y Comunicaciones S.A., were awarded a ten (10) year renewable television broadcast concession license for Canal 1 in Colombia. The partnership began operating Canal 1 on May 1, 2017. On February 7, 2018, Colombian regulatory authorities approved an increase in our ownership in the joint venture from 20% to 40%. In July 2019, the Colombian government enacted legislation resulting in the extension of the concession license for Canal 1 for an additional ten years. The concession is now due to expire on April 30, 2037 and is renewable for an additional 20-year period. The joint venture is deemed a VIE that is accounted for under the equity method. As of June 30, 2019, we have funded $102.9 million in capital contributions to Canal 1. The Canal 1 joint venture losses-to-date have exceeded the capital contributions of the common equity partners and in accordance with equity method accounting, losses in excess of the common equity have been recorded against the next layer of the capital structure, in this case, preferred equity. The Company is currently the sole preferred equity holder in Canal 1 and therefore, the Company has recorded nearly 100% of the losses of the joint venture. We record the income or loss on investment on a one quarter lag. For the three months ended June 30, 2019 and 2018, we recorded $9.9 million and $6.9 million, respectively, in loss on equity method investment, net of a preferred return on capital funded, in the accompanying unaudited condensed consolidated statements of operations. For the six months ended June 30, 2019 and 2018, we recorded $16.9 million and $14.1 million, respectively, in loss on equity method investment, net of a preferred return on capital funded, in the accompanying unaudited condensed consolidated statements of operations. The net balance recorded in equity method investments related to Canal 1 joint venture was $48.5 million and $46.7 million at June 30, 2019 and December 31, 2018, respectively, and is included in equity method investments in the accompanying condensed consolidated balance sheets.

 

On April 28, 2017, we acquired a 25.5% interest in REMEZCLA, a digital media company targeting English speaking and bilingual U.S. Hispanic millennials through innovative content. As of June 30, 2019, we have recorded $5.0 million in equity method funding related to REMEZCLA. We record the income or loss on investment on a one quarter lag. For each of the three and six months ended June 30, 2019, we recorded $0.2 million in gain on equity method investment inclusive of preferred return on capital funded, in the accompanying unaudited condensed consolidated statement of operations. For the three and six months ended June 30, 2018, we recorded $0.1 million and $0.2 million in loss on equity method investment, net of preferred return on capital funded, in the accompanying unaudited condensed consolidated statement of operations. The net balance recorded in equity method investments was $5.1 million and $5.0 million at June 30, 2019 and December 31, 2018, respectively, and is included in the accompanying condensed consolidated balance sheets. We have no additional commitment to fund the operations of the venture.

 

On November 26, 2018, Snap Media acquired a 50% interest in Snap JV, LLC (“Snap JV”) (we own 75% of Snap Media), a newly formed joint venture with Mar Vista Entertainment, LLC (“MarVista”), to co-produce original movies and series. The investment is deemed a VIE that is accounted for under the equity method. As of June 30, 2019, we have funded $0.3 million in capital contributions to Snap JV. We record the income or loss on investment on a one quarter lag.  For the three and six months ended June 30, 2019, we have recorded $0.0 million and $0.1 million in loss on equity method investments in the accompanying unaudited

 

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condensed consolidated statements of operations. The net balance recorded in equity method investments related to Snap JV was $0.2 million at June 30, 2019, and is included in equity method investments in the accompanying condensed consolidated balance sheets.

 

The Company records the income or loss on investments on a one quarter lag. Summary unaudited financial data for our equity investments in the aggregate as of and for the six months ended March 31, 2019 are included below (amounts in thousands):

 

 

 

Total Equity
Investees

 

Current assets

 

$

27,974

 

Non-current assets

 

$

34,058

 

Current liabilities

 

$

57,941

 

Non-current liabilities

 

$

31,674

 

Redeemable stock and non-controlling interests

 

$

(433

)

Net revenue

 

$

15,961

 

Operating loss

 

$

(22,000

)

Net loss

 

$

(29,937

)

 

Note 7. Income taxes

 

The 2017 Tax Cut and Jobs Act (“Tax Act”) was signed into law on December 22, 2017. The Tax Act revised the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21% in 2018, eliminating certain deductions, imposing a mandatory one-time transition tax, or deemed repatriation tax on accumulated earnings of foreign subsidiaries as of 2017 that were previously tax deferred. The Company generates income in higher tax rate foreign locations, which result in foreign tax credits. The lower federal corporate tax rate reduces the likelihood or our utilization of foreign tax credits created by income taxes paid in Puerto Rico and Latin America, resulting in a valuation allowance.

 

For the six months ended June 30, 2019 and 2018, our income tax expense has been computed utilizing the estimated annual effective rates of 33.1% and 47.7%, respectively. The difference between the annual effective rate of 33.1% and the statutory Federal income tax rate of 21% in the six month period ended June 30, 2019, is primarily due to the impact of the Tax Act and the related impact to the valuation allowance on foreign tax credits. Due to the reduced U.S. tax rate, the Company determined that a portion of its foreign income, which is taxed at a higher rate, will result in the generation of excess foreign tax credits that will not be available to offset U.S. income tax, resulting in a required valuation allowance against the excess foreign tax credits, and raising the annual effective tax rate for the six month period ended June 30, 2019 to 33.1%. The difference between the annual effective rate of 47.7% and the statutory Federal income tax rate of 21% in the six month period ended June 30, 2018, is primarily due to the impact of the Tax Act and the related impact to the valuation allowance on foreign tax credits.

 

Income tax expense was $3.6 million and $1.6 million for the three month period ended June 30, 2019 and 2018, respectively. Income tax expense was $6.2 million and $1.3 million for the six month period ended June 30, 2019 and 2018, respectively.

 

Note 8. Long-term debt

 

Long-term debt as of June 30, 2019 and December 31, 2018 consists of the following (amounts in thousands):

 

 

 

June 30, 2019

 

December 31, 2018

 

Senior Notes due February 2024

 

$

205,315

 

$

206,091

 

Less: Current portion

 

2,133

 

2,134

 

 

 

$

203,182

 

$

203,957

 

 

On February 14, 2017 (the “Closing Date”), the Borrowers amended the Term Loan Facility (the “Second Amended Term Loan Facility”). The Second Amended Term Loan Facility provides for a $213.3 million senior secured term loan B facility, which matures on February 14, 2024. The Second Amended Term Loan Facility bears interest at the Borrowers’ option of either (i) London Inter-bank Offered Rate (“LIBOR’) plus a margin of 3.50% or (ii) an Alternate Base Rate (“ABR”) plus a margin of 2.50%. The Second Amended Term Loan Facility, among other terms, provides for an uncommitted incremental loan option (the “Incremental Facility”) allowing for increases for borrowings under the Second Amended Term Loan Facility and borrowing of new tranches of term loans, up to an aggregate principal amount equal to (i) $65.0 million plus (ii) an additional amount (the “Incremental Facility Increase”) provided, that after giving effect to such Incremental Facility Increase (as well as any other additional term loans), on a pro forma basis, the First Lien Net Leverage Ratio (as defined in the Second Amended Term Loan Facility) for the most recent four

 

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consecutive fiscal quarters does not exceed 4.00:1.00 and the Total Net Leverage Ratio (as defined in the Second Amended Term Loan Facility) for the most recent four consecutive fiscal quarters does not exceed 6.00:1.00. The First Lien Net Leverage Ratio and the Total Net Leverage Ratio each cap the cash netted against debt up to a maximum amount of $60.0 million. Additionally, the Second Amended Term Loan Facility also provides for an uncommitted incremental revolving loan option (the “Incremental Revolving Facility”) allowing for an aggregate principal amount of up to $30.0 million, which will be secured on a pari passu basis by the collateral securing the Second Amended Term Loan Facility.

 

The Second Amended Term Loan Facility requires the Borrowers to make amortization payments (in quarterly installments) equal to 1.00% per annum with respect to the Second Amended Term Loan Facility with any remaining amount due at final maturity. The Second Amended Term Loan Facility principal payments commenced on March 31, 2017, with a final installment due on February 14, 2024. Voluntary prepayments are permitted, in whole or in part, subject to certain minimum prepayment requirements.

 

In addition, pursuant to the terms of the Second Amended Term Loan Facility, within 90 days after the end of each fiscal year, the Borrowers are required to make a prepayment of the loan principal in an amount equal to a percentage of the excess cash flow of the most recently completed fiscal year. Excess cash flow is generally defined as net income plus depreciation and amortization expense, less mandatory prepayments of the term loan, income taxes and capital expenditures, and adjusted for the change in working capital. The percentage of the excess cash flow used to determine the amount of the prepayment of the loan declines from 50% to 25%, and again to 0% at lower leverage ratios. Pursuant to the terms of the Second Amended Term Loan Facility, our net leverage ratio was 2.5x at December 31, 2018, resulting in an excess cash flow percentage of 0% and therefore, no excess cash flow payment was due in March 2019.

 

As of June 30, 2019, the original issue discount balance was $1.5 million, net of accumulated amortization of $2.0 million and was recorded as a reduction to the principal amount of the Second Amended Term Loan Facility outstanding as presented on the accompanying condensed consolidated balance sheets and will be amortized as a component of interest expense over the term of the Second Amended Term Loan Facility. In accordance with ASU 2015-15 Interest—Imputation of Interest (Subtopic 835-30) Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line of Credit Arrangements, deferred financing fees of $1.1 million, net of accumulated amortization of $2.2 million, are presented as a reduction to the Second Amended Term Loan Facility outstanding at June 30, 2019 as presented on the accompanying condensed consolidated balance sheets, and will be amortized as a component of interest expense over the term of the Second Amended Term Loan Facility.

 

The carrying value of the long-term debt approximates fair value at June 30, 2019 and December 31, 2018 and was derived from quoted market prices by independent dealers (Level 2 in the fair value hierarchy under ASC 820, Fair Value Measurements and Disclosures). The following are the maturities of our long-term debt as of June 30, 2019 (amounts in thousands):

 

Year Ending December 31,

 

Amount

 

Remainder of 2019

 

$

1,067

 

2020

 

2,133

 

2021

 

2,133

 

2022

 

2,133

 

2023 and thereafter

 

200,548

 

Total

 

$

208,014

 

 

Note 9. Derivative instruments

 

We use derivative financial instruments in the management of our interest rate exposure. Our strategy is to eliminate the cash flow risk on a portion of the variable rate debt caused by changes in the designated benchmark interest rate, LIBOR. The Company does not enter into or hold derivative financial instruments for speculative trading purposes.

 

On May 4, 2017, we entered into two identical pay-fixed, receive-variable, interest rate swaps with two different counterparties, to hedge the variability in the LIBOR interest payments on an aggregate notional value of $100.0 million of our Second Amended Term Loan Facility beginning May 31, 2017, through the expiration of the swaps on March 31, 2022. At inception, these interest rate swaps were designated as cash flow hedges of interest rate risk, and as such, the unrealized changes in market value are recorded in accumulated other comprehensive income (“AOCI”).

 

The change in the fair value of the interest rate swap agreements for the three months ended June 30, 2019 and 2018, resulted in an unrealized loss of $1.5 million and an unrealized gain of $0.6 million, respectively, which were included in AOCI net of taxes. The change in the fair value of the interest rate swap agreements for the six months ended June 30, 2019 and 2018, resulted in an unrealized loss of $2.4 million and an unrealized gain of $2.1 million, respectively, which were included in AOCI net of taxes. The Company received $0.1 million and $0.3 million of net interest on the settlement of the interest rate swap agreements for the three and six months ended June 30, 2019, respectively. The Company received $0.0 million and paid $0.1 million of net interest on the settlement of interest rate swap agreements for the three and six months ended June 30, 2018, respectively. As of June 30, 2019, the

 

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Company estimates that none of the unrealized loss included in AOCI related to these interest rate swap agreements will be realized and reported in operations within the next twelve months. No loss or gain was recorded in operations for the three and six months ended June 30, 2019 and 2018, respectively.

 

The aggregate fair value of the interest rate swaps was $0.8 million and $1.6 million as of June 30, 2019 and December 31, 2018, respectively. These were recorded in Derivative liability in other long-term liabilities and Swap assets in other non-current assets on the accompanying condensed consolidated balance sheets.

 

By entering into derivative instrument contracts, we are exposed to counterparty credit risk. Counterparty credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is in an asset position, the counterparty has a liability to us, which creates credit risk for us. We attempt to minimize this risk by selecting counterparties with investment grade credit ratings and regularly monitoring our market position with each counterparty. Our derivative instruments do not contain any credit-risk related contingent features.

 

Note 10. Fair value measurements

 

Our derivatives are valued using a discounted cash flow analysis that incorporates observable market parameters, such as interest rate yield curves, classified as Level 2 within the valuation hierarchy. Derivative valuations incorporate credit risk adjustments that are necessary to reflect the probability of default by us or the counterparty.

 

The following table presents our assets and liabilities measured at fair value on a recurring basis and the levels of inputs used to measure fair value, which include derivatives designated as cash flow hedging instruments, as well as their location on our accompanying condensed consolidated balance sheets as of June 30, 2019 and December 31, 2018 (amounts in thousands):

 

 

 

 

 

Estimated Fair Value

 

 

 

 

 

June 30, 2019

 

Category

 

Balance Sheet Location

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap

 

Other long-term liabilities

 

 

$

769

 

 

$

769

 

 

 

 

 

 

Estimated Fair Value

 

 

 

 

 

December 31, 2018

 

Category

 

Balance Sheet Location

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap

 

Other assets

 

 

$

1,619

 

 

$

1,619

 

 

Certain non-financial assets and liabilities are measured at fair value on a nonrecurring basis. These assets and liabilities are not measured at fair value on an ongoing basis but are subject to periodic impairment tests. These items primarily include long-lived assets, goodwill and other intangible assets. As of June 30, 2019, there were no changes to the fair value of non-financial assets and liabilities measured on a nonrecurring basis.

 

The carrying amounts of cash, accounts receivable and accounts payable approximate fair value because of the short maturity of these items. The carrying value of the long-term debt approximates fair value because this instrument bears interest at a variable rate, is pre-payable, and is at terms currently available to the Company.

 

Note 11.  Stockholders’ equity

 

Capital stock

 

As of June 30, 2019, the Company had 19,749,173 shares of Class A common stock, and 19,720,381 shares of Class B common stock, issued and outstanding.

 

On June 20, 2017, the Company announced that its Board of Directors authorized the repurchase of up to $25.0 million of the Company’s Class A common stock, par value $0.0001 per share (“Class A common stock”). Under the Company’s stock repurchase program, management is authorized to purchase shares of the Company’s common stock from time to time through open market purchases at prevailing prices, subject to stock price, business and market conditions and other factors. During the six months ended June 30, 2019, the Company repurchased 51,227 shares of Class A common stock under the repurchase program for an aggregate purchase price of $0.6 million. As of June 30, 2019, the Company repurchased 2.0 million shares of Class A common stock under the repurchase program for an aggregate purchase price of $25.0 million, and the repurchased shares were recorded as treasury stock on the accompanying condensed consolidated balance sheets. As of June 30, 2019, the Company completed this stock repurchase program.

 

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On August 15, 2018, the Company announced that its Board of Directors authorized the repurchase of up to an additional $25.0 million of the Company’s Class A common stock on an opportunistic basis.

 

Equity incentive plans

 

Effective May 16, 2016, the stockholders of all classes of capital stock of the Company approved at the annual stockholder meeting the Hemisphere Media Group, Inc. Amended and Restated 2013 Equity Incentive Plan (the “2013 Equity Incentive Plan”) to increase the number of shares of Class A common stock that may be delivered under the 2013 Equity Incentive Plan to an aggregate of 7.2 million shares of our Class A common stock. At June 30, 2019, 2.6 million shares remained available for issuance of stock options or other stock-based awards under our 2013 Equity Incentive Plan (including shares of restricted Class A common stock surrendered to the Company in payment of taxes required to be withheld in respect of vested shares of restricted Class A common stock, which are available for re-issuance). The expiration date of the 2013 Equity Incentive Plan, on and after which date no awards may be granted, is May 16, 2026. The Company’s board of directors, or a committee thereof, administers the 2013 Equity Incentive Plan and has the sole and plenary authority to, among other things: (i) designate participants; (ii) determine the type, size, and terms and conditions of awards to be granted; and (iii) determine the method by which an award may be settled, exercised, canceled, forfeited or suspended.

 

The Company’s time-based restricted stock awards and option awards generally vest in three equal annual installments beginning on the first anniversary of the grant date, subject to the grantee’s continued employment or service with the Company. The Company’s event-based restricted stock awards and option awards generally vest upon the Company’s Class A common stock attaining a $15.00 closing price per share, as quoted on the NASDAQ Global Market, on at least 10 trading days (which need not be consecutive), subject to the grantee’s continued employment or service with the Company. Other event-based restricted stock awards granted to certain members of our Board vest on the day preceding the Company’s annual stockholder meeting.

 

Stock-based compensation

 

Stock-based compensation expense related to stock options and restricted stock was $0.4 million and $1.0 million for the three months ended June 30, 2019 and 2018, respectively, and $1.4 million and $2.0 million for the six months ended June 30, 2019 and 2018, respectively. At June 30, 2019, there was $0.5 million of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted-average period of 2.0 years. At June 30, 2019, there was $1.3 million of total unrecognized compensation cost related to unvested restricted stock, which is expected to be recognized over a weighted-average period of 1.0 years.

 

Stock options

 

The fair value of stock options granted is estimated at the date of grant using the Black-Scholes option pricing model for time-based options and the Monte Carlo simulation model for event-based options. The expected term of options granted is derived using the simplified method under ASC 718-10-S99-1/SEC Topic 14.D for “plain vanilla” options and the Monte Carlo simulation for event-based options. Expected volatility is based on the historical volatility of the Company’s competitors given its lack of trading history. The risk-free interest rate is based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. The Company has estimated forfeitures of 1.5%, as the awards are granted to management for which the Company expects lower turnover, and has assumed no dividend yield, as dividends have never been paid to stock or option holders and will not be paid for the foreseeable future.

 

Black-Scholes Option Valuation Assumptions

 

Six Months Ended
June 30, 2019

 

Year Ended
December 31, 2018

 

Risk-free interest rate

 

 

2.7% - 3.0%

 

Dividend yield

 

 

 

Volatility

 

 

39.0% - 41.0%

 

Weighted-average expected term (years)

 

 

6.0

 

 

The following table summarizes stock option activity for the six months ended June 30, 2019 (shares and intrinsic value in thousands):

 

 

 

Number of shares

 

Weighted-average
exercise price

 

Weighted-average
remaining contractual
term

 

Aggregate intrinsic
value

 

Outstanding at December 31, 2018

 

2,910

 

$

11.62

 

5.6

 

$

2,806

 

Granted

 

 

 

 

 

Exercised

 

(9

)

11.63

 

 

 

Forfeited

 

 

 

 

 

Expired

 

 

 

 

 

Outstanding at June 30, 2019

 

2,901

 

$

11.62

 

5.1

 

$

4,649

 

Vested at June 30, 2019

 

2,464

 

$

11.73

 

5.1

 

$

3,725

 

Exercisable at June 30, 2019

 

2,464

 

$

11.73

 

5.1

 

$

3,725

 

 

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There were no options granted during the six months ended June 30, 2019. At June 30, 2019, 0.3 million options granted are unvested, event-based options.

 

Restricted stock

 

Certain employees and directors have been awarded restricted stock under the 2013 Equity Incentive Plan.  The time-based restricted stock grants vest primarily over a period of three years. The fair value and expected term of event-based restricted stock grants is estimated at the grant date using the Monte Carlo simulation model.

 

The following table summarizes restricted share activity for the six months ended June 30, 2019 (shares in thousands):

 

 

 

Number of shares

 

Weighted-average
grant date fair value

 

Outstanding at December 31, 2018

 

370

 

$

9.86

 

Granted

 

76

 

14.46

 

Vested

 

(184

)

11.88

 

Forfeited

 

 

 

Outstanding at June 30, 2019

 

262

 

$

9.76

 

 

At June 30, 2019, 0.2 million shares of restricted stock issued were unvested, event-based shares.

 

Note 12.  Contingencies

 

We are involved in various legal actions, generally related to our operations.  Management believes, based on advice from legal counsel, that the outcomes of such legal actions will not adversely affect our financial condition.

 

Note 13. Leases

 

On January 1, 2019, we adopted Financial Accounting Standards Board (“the FASB”) ASC Topic 842, Leases (ASC 842) (the “new lease standard”), using a modified retrospective transition approach with application as of the effective date of initial application without restating comparative period financial statements.  The core principle of the new lease standard is that a lessee should recognize the assets and liabilities that arise from leases, including operating leases, in the statement of financial position. We measure our lease liabilities as the present value of remaining lease payments using our incremental borrowing rate applicable to the lease term as the discount rate. We elected to apply the package of practical expedients to our adoption of the new lease standard, which includes allowing us to continue utilizing historical classification of leases. We did not elect the practical expedient that permits a reassessment of lease terms for existing leases.

 

The Company is a lessee under leases for land, office space and equipment with third parties, all of which are accounted for as operating leases. These leases generally have an initial term of one to seven years and provide for fixed monthly payments.  Some of these leases provide for future rent escalations and renewal options and certain leases also obligate us to pay the cost of maintenance, insurance and property taxes. Operating lease cost was $0.2 million and $0.6 million for the three months ended June 30, 2019 and 2018, respectively. Operating lease cost was $0.3 million and $1.1 million for the six months ended June 30, 2019 and 2018, respectively.

 

A summary of the classification of operating leases on our condensed consolidated balance sheet as of June 30, 2019 (amounts in thousands):

 

 

 

 

 

June 30, 2019

 

Operating lease right-of-use assets

 

 

 

$

2,090

 

Operating lease liability, current

 

(Other accrued expenses)

 

670

 

Operating lease liability, non-current

 

(Other long-term liabilities)

 

$

1,808

 

 

Components of lease cost reflected in our condensed consolidated statement of operations for the three and six months ended June 30, 2019 (amounts in thousands):

 

 

 

Three Months Ended
June 30, 2019

 

Six Months Ended
June 30, 2019

 

Operating lease cost

 

$

161

 

$

316

 

Short-term lease cost

 

61

 

110

 

Total lease cost

 

$

222

 

$

426

 

 

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A summary of weighted-average remaining lease term and weighted-average discount rate as of June 30, 2019:

 

Weighted-average remaining lease term

 

4.5 years

 

Weighted average discount rate

 

6.9

%

 

Supplemental cash flow and other non-cash information for the six months ended June 30, 2019 (amounts in thousands):

 

Operating cash flows from operating leases

 

$

269

 

Operating lease right-of-use assets obtained in exchange for new operating lease liabilities

 

393

 

 

Future annual minimum lease commitments as of June 30, 2019 were as follows (amounts in thousands):

 

 

 

June 30, 2019

 

Remainder of 2019

 

$

510

 

2020

 

601

 

2021

 

591

 

2022

 

473

 

2023

 

715

 

Total minimum payments

 

$

2,890

 

Less: amount representing interest

 

(412

)

Lease liability

 

$

2,478

 

 

The Company adopted ASU 2016-02 on January 1, 2019 as noted above, and as required, the future annual minimum lease commitments as of December 31, 2018 are provided below (in thousands):

 

 

 

December 31, 2018

 

2019

 

$

1,571

 

2020

 

367

 

2021

 

350

 

2022

 

355

 

2023

 

302

 

Total minimum payments

 

$

2,945

 

 

Note 14. Commitments

 

The Company has other commitments in addition to the various operating leases included in Note 13, “Leases” of Notes to Condensed Consolidated Financial Statements, primarily programming.

 

Future minimum payments as of June 30, 2019, are as follows (amounts in thousands):

 

 

 

June 30, 2019

 

Remainder of 2019

 

$

9,781

 

2020

 

7,393

 

2021

 

4,111

 

2022

 

1,394

 

2023 and thereafter

 

128

 

Total

 

$

22,807

 

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

OVERVIEW

 

Our Company

 

We are a leading U.S. Spanish-language media company serving the fast growing and highly attractive U.S. Hispanic and Latin American markets with broadcast and cable television networks and digital content platforms including five Spanish-language cable television networks distributed in the U.S., two Spanish-language cable television networks distributed in Latin America, the #1-rated broadcast television network in Puerto Rico, the #3-rated broadcast television network in Colombia, a Spanish-language OTT video subscription service distributed in the U.S. and a leading distributor of content to television and digital media platforms in Latin America.

 

Headquartered in Miami, Florida, our portfolio consists of the following:

 

·                  Cinelatino:  the leading Spanish-language cable movie network with approximately 21.5 million subscribers across the U.S., Latin America and Canada. Cinelatino is programmed with a lineup featuring the best contemporary films and original television series from Mexico, Latin America, and the United States. Driven by the strength of its programming and distribution, Cinelatino is the #2-Nielsen rated Spanish-language cable television entertainment network in the U.S. overall, based on coverage ratings.

 

·                  WAPA:  the leading broadcast television network and television content producer in Puerto Rico. WAPA has been the #1-rated broadcast television network in Puerto Rico since the start of Nielsen audience measurement nine years ago. WAPA is Puerto Rico’s news leader and the largest local producer of news and entertainment programming, producing nearly 70 hours in the aggregate each week. Through its multicast signal, WAPA distributes WAPA Deportes, a leading sports television network in Puerto Rico, featuring Major League Baseball (MLB), National Basketball Association (NBA) and professional sporting events from Puerto Rico. Additionally, we operate WAPA.TV, a leading news and entertainment website in Puerto Rico, featuring content produced by WAPA.

 

·                  WAPA America:  a cable television network serving primarily Puerto Ricans and other Caribbean Hispanics living in the U.S. WAPA America’s programming features news and entertainment programming produced by WAPA. WAPA America is distributed in the U.S. to approximately 4.3 million subscribers, excluding digital basic subscribers.

 

·                  Pasiones:  a cable television network dedicated to showcasing the most popular telenovelas and serialized dramas, distributed in the U.S. and Latin America. Pasiones features top-rated telenovelas from Latin America, Turkey, India, and Korea (dubbed into Spanish), and is currently the highest rated cable television network devoted to telenovelas in prime time. Pasiones has over 21 million subscribers across the U.S. and Latin America.

 

·                  Centroamerica TV:  a cable television network targeting Central Americans living in the U.S., the third largest U.S. Hispanic group and the fastest growing segment of the U.S. Hispanic population. Centroamerica TV features the most popular news and entertainment from Central America, as well as soccer programming from the top professional soccer leagues in the region. Centroamerica TV is distributed in the U.S. to approximately 4.2 million subscribers.

 

·                  Television Dominicana:  a cable television network targeting Dominicans living in the U.S., the fourth largest U.S. Hispanic group. Television Dominicana airs the most popular news and entertainment from the Dominican Republic, as well as the Dominican Republic professional baseball league featuring current and former players from Major League Baseball. Television Dominicana is distributed in the U.S. to approximately 2.4 million subscribers.

 

·                  Canal 1:  the #3-rated broadcast television network in Colombia. We own a 40% interest in Canal 1 in partnership with leading producers of news and entertainment content in Colombia. The partnership was awarded a 10-year renewable broadcast television concession in 2016. In July 2019, the Columbian government enacted legislation resulting in the extension of the concession license for an additional ten years. The concession is now due to expire on April 30, 2037 and is renewable for an additional 20-year period. The partnership began operating Canal 1 on May 1, 2017 and launched a new programming lineup on August 14, 2017.

 

·                  Pantaya:  a cross-platform Spanish-language OTT video subscription service that allows audiences to access many of the best and most current Spanish-language films and series, and includes content from our library, as well as Pantelion’s U.S. theatrical titles, Lionsgate’s movie library, and Grupo Televisa’s theatrical releases in Mexico. We own a 25% interest in Pantaya in partnership with Lionsgate. The service launched in August 2017.

 

·                  Snap Media:  a distributor of content to broadcast and cable television networks and OTT and SVOD platforms in Latin America. On November 26, 2018, we acquired a 75% interest in Snap Media, and in connection with the acquisition, Snap Media entered into a joint venture with MarVista, an independent entertainment studio and a shareholder of Snap Media, to produce original movies and series. Snap Media is responsible for the distribution of content owned and/or controlled by our Networks, as well as content to be produced by the production joint venture between Snap Media and MarVista.

 

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Table of Contents

 

·                  REMEZCLA:  a digital media company targeting English speaking and bilingual U.S. Hispanic millennials through innovative content. On April 28, 2017, we acquired a 25.5% interest in REMEZCLA.

 

Our two primary sources of revenues are advertising revenues and affiliate revenues. All of our Networks derive revenues from advertising. Advertising revenues are generated from the sale of advertising time, which is typically sold pursuant to advertising orders with advertisers providing for an agreed upon advertising commitment and price per spot. Our advertising revenues are tied to the success of our programming, including the popularity of our programming as measured by Nielsen. Our advertising is variable in nature and tends to reflect seasonal patterns of our advertisers’ demand, which is generally greatest during the fourth quarter of each year, driven by the holiday buying season. In addition, Puerto Rico’s political election cycle occurs every four years and we benefit from increased advertising sales in an election year. For example, in 2016, we experienced higher advertising sales as a result of political advertising spending during the 2016 gubernatorial elections. The next election in Puerto Rico will be in 2020.

 

All of our Networks receive fees paid by distributors, including cable, satellite and telecommunications service providers. These revenues are generally based on a per subscriber fee pursuant to multi-year contracts, commonly referred to as “affiliation agreements,” which typically provide for annual rate increases. The specific affiliate revenues we earn vary from period to period, distributor to distributor and also vary among our Networks, but are generally based upon the number of each distributor’s paying subscribers who receive our Networks. The terms of certain non-U.S. affiliation agreements provide for payment of a fixed contractual monthly fee. Changes in affiliate revenues are primarily derived from changes in contractual affiliation rates charged for our Networks and changes in the number of subscribers. Accordingly, we continually review the quality of our programming to ensure that it is maximizing our Networks’ viewership and giving our Networks’ subscribers a premium, high-value experience. The continued growth in our affiliate revenues will, to a certain extent, be dependent on the growth in subscribers of the cable, satellite and telecommunication service providers distributing our Networks, new system launches and continued carriage of our channels by our distribution partners. Our revenues also benefit from contractual rate increases stipulated in most of our affiliation agreements.

 

WAPA has been the #1-rated broadcast television network in Puerto Rico since the start of Nielsen audience measurement nine years ago and management believes it is highly valued by its viewers and Distributors. WAPA is distributed by all pay-TV distributors in Puerto Rico and has been successfully growing affiliate revenues. WAPA’s primetime household rating in 2018, which because of Hurricanes Irma and Maria, is measured beginning as of May 1, 2018, was four times higher than the most highly rated English-language U.S. broadcast network in the U.S., NBC, and higher than the combined ratings of CBS, NBC, ABC, FOX and the CW. As a result of its ratings success since the start of Nielsen audience measurement, management believes WAPA is well positioned for future growth in affiliate revenues.

 

WAPA America, Cinelatino, Pasiones, Centroamerica TV and Television Dominicana occupy a valuable and unique position, as they are among the small group of Hispanic cable networks to have achieved broad distribution in the U.S. As a result, management believes our U.S. cable networks are well-positioned to benefit from growth in both the growing national advertising spend targeted at the highly sought-after U.S. Hispanic cable television audience, and growth in subscribers, as the U.S. Hispanic population continues its long-term upward trajectory.

 

The U.S. Census Bureau estimated that over 58 million Hispanics resided in the United States in 2017, representing an increase of more than 23 million people between 2000 and 2017, and that number is projected to grow to 75 million by 2030. U.S. Hispanic television households grew by 26% during the period from 2010 to 2019, from 12.9 million households to 16.2 million households. Hispanic pay-TV subscribers increased 4% since 2010 to 11.2 million subscribers in 2019. As a result, our U.S. cable networks total subscribers grew by 4% from December 31, 2017 to December 31, 2018, compared to a 4% decline in overall U.S. pay-TV subscribers over the same time period. The continued long-term growth of Hispanic television households and pay-TV subscribers creates a significant opportunity for all of our cable networks. Hispanics represent over 18% of the total U.S. population and over 10% of the total U.S. buying power, yet the aggregate media spend targeted at U.S. Hispanics significantly under-indexes both of these metrics. As a result, advertisers have been allocating a higher proportion of marketing dollars to the Hispanic market. However, U.S. Hispanic cable advertising spending still under-indexes relative to its viewing share, which we believe is a growth opportunity for us as we continue to demonstrate value to advertisers looking for exposure to this market.

 

Similarly, management expects Cinelatino and Pasiones to benefit from significant growth in Latin America. Fueled by a sizeable and growing population, rising disposable incomes and investments in network infrastructure resulting in improved service and performance, pay-TV subscribers in Latin America (excluding Brazil) grew by 32% from 2013 to 2018, and are projected to grow from 57 million in 2018 to 67 million in 2022, representing projected growth of 18%. Furthermore, Cinelatino and Pasiones are each presently distributed to only 30% and 28%, respectively, of total pay-TV subscribers throughout Latin America (excluding Brazil).

 

MVS, one of our stockholders, provides operational, technical and distribution services to Cinelatino pursuant to several agreements. An agreement that had granted MVS the non-exclusive right to distribute the service to third-party distributors in Mexico, pursuant to which MVS collects affiliate fees and remits those fess to Cinelatino net of MVS’s distribution fee.

 

In November 2018, an agreement between Cinelatino and Dish Mexico (an affiliate of MVS), pursuant to which Dish Mexico distributes Cinelatino, and pays subscriber fees to Cinelatino, was renewed and extended until February 28, 2022.

 

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Table of Contents

 

Comparison of Consolidated Operating Results for the Three and Six Months Ended June 30, 2019 and 2018

(Unaudited)

(amounts in thousands)

 

 

 

Three Months
Ended June 30,

 

$ Change
Favorable/

 

% Change
Favorable/

 

Six Months
Ended June 30,

 

$ Change

Favorable/

 

% Change
Favorable/

 

 

 

2019

 

2018

 

(Unfavorable)

 

(Unfavorable)

 

2019

 

2018

 

(Unfavorable)

 

(Unfavorable)

 

Net revenues

 

$

39,147

 

$

34,791