10-Q 1 a15-12112_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, 2015

 

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
organization)

 

(I.R.S. Employer
Identification No.)

 

Hemisphere Media Group, Inc.

 

 

2000 Ponce de Leon Boulevard

 

 

Suite 500

 

 

Coral Gables, FL

 

33134

(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)

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

 

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 10, 2015

 

Class A common stock, par value $0.0001 per share

 

15,587,725 shares

 

Class B common stock, par value $0.0001 per share

 

30,027,418 shares

 

 

 

 



Table of Contents

 

HEMISPHERE MEDIA GROUP, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

June 30, 2015

(Unaudited)

 

 

 

PAGE
NUMBER

 

 

 

PART I -

FINANCIAL INFORMATION

6

 

 

 

Item 1.

Financial Statements

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

11

 

 

 

Item 2.

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

18

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

22

 

 

 

Item 4.

Controls and Procedures

22

 

 

 

PART II -

OTHER INFORMATION

24

 

 

 

Item 1.

Legal Proceedings

24

 

 

 

Item 1A.

Risk Factors

24

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

25

 

 

 

Item 3.

Defaults Upon Senior Securities

25

 

 

 

Item 4.

Mine Safety Disclosures

25

 

 

 

Item 5.

Other Information

25

 

 

 

Item 6.

Exhibits

26

 

 

 

SIGNATURES

 

27

 

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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; “Acquired Cable Networks” refers to (i) Pasiones, (ii) Centroamerica TV and (iii) Television Dominicana; “Amended Term Loan Facility” refers to our term loan facility amended on July 31, 2014 as set forth on Exhibit 10.4 to the Company’s Annual Report on Form 10-K; “Azteca” refers to Azteca Acquisition Corporation, a Delaware blank check corporation; “Azteca Merger Sub” refers to Hemisphere Merger Sub II, Inc., a Delaware corporation; “Business” refers collectively to our consolidated operations; “Cable Networks Acquisition” refers to the acquisition of the Acquired Cable Networks; “Centroamerica TV” refers to HMTV Centroamerica TV, LLC, a Delaware limited liability company; “Cinelatino” refers to Cine Latino, Inc., a Delaware corporation; “Cine Merger Sub” refers to Hemisphere Merger Sub III, Inc., a Delaware corporation; “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; “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. “Networks” refers collectively to WAPA, WAPA2 Deportes, WAPA America, Cinelatino, Pasiones, Centroamerica TV and Television Dominicana; “Pasiones” refers collectively to HMTV Pasiones US, LLC, a Delaware limited liability company and HMTV Pasiones LatAm, LLC, a Delaware limited liability company; “Television Dominicana” refers to HMTV TV Dominicana, LLC, a Delaware limited liability company; “Transaction” collectively refers to the mergers of WAPA Holdings and WAPA Merger Sub, Azteca and Azteca Merger Sub, and Cinelatino and Cine Merger Sub, resulting in Azteca, WAPA Holdings and Cinelatino becoming indirect wholly-owned subsidiaries of Hemisphere; “WAPA” refers to Televicentro of Puerto Rico, LLC, a Delaware limited liability company; “WAPA America” refers to WAPA America, Inc., a Delaware corporation; “WAPA Holdings” refers to WAPA Holdings, LLC, a Delaware limited liability company and, where applicable, its consolidated subsidiaries; “WAPA Merger Sub” refers to Hemisphere Merger Sub I, LLC, a Delaware limited liability company; “WAPA2 Deportes” refers to a sports television network in Puerto Rico operated by WAPA.

 

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 us and our consolidated subsidiaries that do not directly or exclusively relate to historical facts.  The statements are “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,” “plan,” “forecast,” or words, phrases or terms of similar substance or the negative thereof, are forward-looking statements. These include, but are not limited to, statements relating to the synergies and the benefits that we expect to achieve from the Cable Networks Acquisition, including future financial and operating results, the Company’s 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 report, those factors include:

 

·                  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;

 

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

 

·                  our ability to successfully integrate the Acquired Cable Business and achieve the expected synergies from that integration at the expected costs;

 

·                  the ability to realize anticipated growth and growth strategies of the company since the completion of (i) the Transaction and (ii) the Cable Networks Acquisition;

 

·                  the ability to realize the anticipated benefits of (i) the Transaction and (ii)  the Cable Networks Acquisition, in each case, which may be affected by, among other things, competition in the industry in which we operate;

 

·                  the risk that we may become responsible for certain liabilities of the Acquired Cable Networks;

 

·                  the costs expected to be incurred in connection with the integration of us and the Acquired Cable Networks;

 

·                  the risk that integrating our Business with that of the Acquired Cable Networks may divert our management’s attention;

 

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

 

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

 

·                  our ability to successfully manage relationships with customers and distributors and other important relationships;

 

·                  continued consolidation of Distributors in the marketplace;

 

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

 

·                  disagreements with our distributors over contract interpretation;

 

·                  the risk that ratings on Cinelatino may be negatively impacted by the introduction of advertising on Cinelatino;

 

·                  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;

 

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

 

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

 

·                  changes in pricing and availability of products and services;

 

·                  changes in the nature of key strategic relationships with partners and Distributors;

 

·                  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 Puerto Rico;

 

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

 

·                  competitor responses to our products and services; and

 

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

 

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.

 

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PART I - FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

HEMISPHERE MEDIA GROUP, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

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

 

 

 

June 30,

 

December 31,

 

 

 

2015

 

2014

 

Assets

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash

 

$

159,678

 

$

142,010

 

Accounts receivable, net of allowance for doubtful accounts of $1,541 and $1,072, respectively

 

23,882

 

25,065

 

Due from related parties

 

1,094

 

1,032

 

Programming rights

 

5,970

 

5,441

 

Deferred taxes

 

4,222

 

4,222

 

Prepaid taxes and other current assets

 

8,680

 

8,071

 

Total current assets

 

203,526

 

185,841

 

 

 

 

 

 

 

Programming rights

 

7,894

 

6,652

 

Property and equipment, net

 

23,802

 

23,867

 

Deferred financing costs, net

 

2,507

 

2,758

 

Broadcast license

 

41,356

 

41,356

 

Goodwill

 

164,887

 

164,887

 

Other intangibles, net

 

84,845

 

91,611

 

Other assets

 

1,413

 

1,425

 

Total Assets

 

$

530,230

 

$

518,397

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Accounts payable

 

$

1,952

 

$

2,176

 

Due to related parties

 

406

 

787

 

Accrued agency commissions

 

3,545

 

6,642

 

Accrued compensation and benefits

 

3,491

 

3,391

 

Accrued marketing

 

2,791

 

3,245

 

Other accrued expenses

 

7,941

 

5,312

 

Programming rights payable

 

4,307

 

4,228

 

Current portion of long-term debt

 

2,250

 

2,250

 

Total current liabilities

 

26,683

 

28,031

 

 

 

 

 

 

 

Programming rights payable

 

942

 

111

 

Long-term debt, net of current portion

 

218,607

 

219,541

 

Deferred taxes

 

11,670

 

11,670

 

Defined benefit pension obligation

 

2,732

 

2,631

 

 

 

 

 

 

 

Total Liabilities

 

260,634

 

261,984

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

Preferred stock, $0.0001 par value; 50,000,000 shares authorized; 0 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively

 

 

 

Class A common stock, $.0001 par value; 100,000,000 shares authorized; 15,302,441 and 14,518,734 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively

 

1

 

1

 

Class B common stock, $.0001 par value; 33,000,000 shares authorized; 30,027,418 shares issued and outstanding at June 30, 2015 and December 31, 2014

 

3

 

3

 

Additional paid-in capital

 

255,226

 

246,858

 

Treasury stock, at cost; 229,100 and 146,703 at June 30, 2015 and December 31, 2014, respectively

 

(3,040

)

(1,961

)

Retained earnings

 

17,992

 

12,098

 

Accumulated comprehensive loss

 

(586

)

(586

)

Total Stockholders’ Equity

 

269,596

 

256,413

 

Total Liabilities and Stockholders’ Equity

 

$

530,230

 

$

518,397

 

 

See accompanying notes to condensed consolidated financial statements.

 

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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,

 

 

 

2015

 

2014

 

2015

 

2014

 

Net revenues

 

$

32,618

 

$

29,055

 

$

62,089

 

$

50,006

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

Cost of revenues

 

9,908

 

9,292

 

19,360

 

16,890

 

Selling, general and administrative

 

9,325

 

8,241

 

17,909

 

15,122

 

Depreciation and amortization

 

4,265

 

4,832

 

8,646

 

7,410

 

Other expenses

 

306

 

62

 

306

 

311

 

Loss on disposition of assets

 

34

 

16

 

31

 

14

 

Total operating expenses

 

23,838

 

22,443

 

46,252

 

39,747

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

8,780

 

6,612

 

15,837

 

10,259

 

 

 

 

 

 

 

 

 

 

 

Other Expenses:

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(3,008

)

(2,936

)

(5,991

)

(5,843

)

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

5,772

 

3,676

 

9,846

 

4,416

 

 

 

 

 

 

 

 

 

 

 

Income tax (expense) benefit

 

(2,341

)

1,642

 

(3,952

)

1,150

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

3,431

 

$

5,318

 

$

5,894

 

$

5,566

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.08

 

$

0.13

 

$

0.14

 

$

0.13

 

Diluted

 

$

0.08

 

$

0.13

 

$

0.14

 

$

0.13

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

42,737

 

42,345

 

42,566

 

42,259

 

Diluted

 

43,290

 

42,518

 

43,267

 

42,507

 

 

See accompanying notes to condensed consolidated financial statements.

 

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HEMISPHERE MEDIA GROUP, INC.

Condensed Consolidated Statement of Comprehensive Income

(Unaudited)

(amounts in thousands)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

3,431

 

$

5,318

 

$

5,894

 

$

5,566

 

Other comprehensive income

 

 

 

 

 

Comprehensive income

 

$

3,431

 

$

5,318

 

$

5,894

 

$

5,566

 

 

See accompanying notes to condensed consolidated financial statements.

 

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HEMISPHERE MEDIA GROUP, INC.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

Six Months Ended June 30, 2015

(Unaudited)

(amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Class A

 

 

 

Accumulated

 

 

 

 

 

Class A Common Stock

 

Class B Common Stock

 

Paid In

 

Treasury

 

Retained

 

Comprehensive

 

 

 

 

 

Shares

 

Par Value

 

Shares

 

Par Value

 

Capital

 

Stock

 

Earnings

 

Loss

 

Total

 

Balance at December 31, 2014

 

14,519

 

$

1

 

30,027

 

$

3

 

$

246,858

 

$

(1,961

)

$

12,098

 

$

(586

)

$

256,413

 

Net income

 

 

 

 

 

 

 

5,894

 

 

5,894

 

Stock-based compensation

 

 

 

 

 

2,687

 

 

 

 

2,687

 

Vesting of restricted stock

 

304

 

 

 

 

274

 

(1,079

)

 

 

(805

)

Issuance of shares

 

479

 

 

 

 

5,407

 

 

 

 

5,407

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2015

 

15,302

 

$

1

 

30,027

 

$

3

 

$

255,226

 

$

(3,040

)

$

17,992

 

$

(586

)

$

269,596

 

 

See accompanying notes to 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,

 

 

 

2015

 

2014

 

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

 

 

 

 

 

Net income

 

$

5,894

 

$

5,566

 

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

 

 

 

 

 

Depreciation and amortization

 

8,646

 

7,410

 

Program amortization

 

5,581

 

4,877

 

Amortization of deferred financing costs

 

251

 

254

 

Amortization of original issue discount

 

191

 

128

 

Stock-based compensation

 

2,687

 

3,216

 

Provision for bad debts

 

669

 

190

 

Loss on disposition of assets

 

31

 

14

 

Deferred taxes

 

 

(2,868

)

Changes in assets and liabilities:

 

 

 

 

 

Decrease (increase) in:

 

 

 

 

 

Accounts receivable

 

514

 

(4,687

)

Due from related parties

 

(62

)

44

 

Programming rights

 

(7,351

)

(5,892

)

Prepaid taxes and other current assets

 

(598

)

(3,989

)

(Decrease) increase in:

 

 

 

 

 

Accounts payable

 

(224

)

881

 

Due to related parties

 

(381

)

357

 

Accrued expenses

 

(823

)

(2,908

)

Programming rights payable

 

910

 

614

 

Other liabilities

 

101

 

52

 

Net cash provided by operating activities

 

16,036

 

3,259

 

Cash Flows From Investing Activities:

 

 

 

 

 

Acquisition of Cable Networks

 

 

(101,891

)

Proceeds from sale of assets

 

3

 

10

 

Capital expenditures

 

(1,848

)

(1,396

)

Net cash used in investing activities

 

(1,845

)

(103,277

)

Cash Flows From Financing Activities:

 

 

 

 

 

Repayments of long-term debt

 

(1,125

)

(875

)

Purchase of treasury stock

 

(1,079

)

(969

)

Proceeds from issuance of stock

 

5,407

 

1

 

Excess tax benefits

 

274

 

106

 

Net cash provided by (used in) financing activities

 

3,477

 

(1,737

)

Net increase (decrease) in cash

 

17,668

 

(101,755

)

Cash:

 

 

 

 

 

Beginning

 

142,010

 

176,622

 

Ending

 

$

159,678

 

$

74,867

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

Cash payments for:

 

 

 

 

 

Interest

 

$

5,621

 

$

5,465

 

Income taxes

 

$

2,474

 

$

3,720

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Notes to Condensed Consolidated Financial Statements

 

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”), and HMTV Cable, Inc., the parent company of the entities for the newly acquired networks consisting of Pasiones, TV Dominicana, and Centroamerica TV (see below).  The Company determines its operating segments based upon (i) financial information reviewed by the chief operating decision maker, the Chief Executive Officer, (ii) internal management and related reporting structure and (iii) the basis upon which the chief operating decision maker makes resource allocation decisions. We have one operating segment, Hemisphere. In these notes, the terms “Company,” “we,” “us” or “our” mean Hemisphere and all subsidiaries included in our Condensed Consolidated Financial Statements.

 

Basis of presentation:  The accompanying unaudited 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 (“U.S. 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 U.S. 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, 2015 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, 2015. These Condensed Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2014 Annual Report.

 

On April 1, 2014, we acquired the assets of three Spanish-language cable television networks for $101.9 million in cash. The three acquired cable networks include Pasiones, Centroamerica TV and Television Dominicana.

 

Reclassification: Certain prior year due from related parties accounts have been reclassified to accounts receivable on the accompanying condensed consolidated balance sheet, which resulted in an increase to accounts receivable and the related allowance for doubtful accounts to conform with the fiscal 2015 presentation with no impact to current assets.

 

Net earnings per common share:  Basic earnings per share (“EPS”) are computed by dividing income attributable to common stockholders by the number of weighted-average outstanding shares of common stock.  Diluted EPS 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 EPS (Dollar and share amounts in thousands):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Numerator for earnings per common share calculation:

 

 

 

 

 

 

 

 

 

Net income

 

$

3,431

 

$

5,318

 

$

5,894

 

$

5,566

 

 

 

 

 

 

 

 

 

 

 

Denominator for earnings per common share calculation:

 

 

 

 

 

 

 

 

 

Weighted-average common shares, basic

 

42,737

 

42,345

 

42,566

 

42,259

 

Effect of dilutive securities

 

 

 

 

 

 

 

 

 

Stock options, resticted stock and warrants

 

553

 

173

 

701

 

248

 

Weighted-average common shares, diluted

 

43,290

 

42,518

 

43,267

 

42,507

 

 

 

 

 

 

 

 

 

 

 

EPS

 

 

 

 

 

 

 

 

 

Basic

 

$

0.08

 

$

0.13

 

$

0.14

 

$

0.13

 

Diluted

 

$

0.08

 

$

0.13

 

$

0.14

 

$

0.13

 

 

We apply the treasury stock method to measure the dilutive effect of our outstanding stock options and restricted stock awards and include the respective common share equivalents in the denominator of our diluted income per common share calculation. Potentially dilutive securities representing 1.0 million shares of common stock for the three and six months ended June 30, 2015, respectively, were excluded from the computation of diluted income per common share for this period because their effect would have been anti-dilutive. The net income per share amounts are the same for our Class A common stock, par value $0.0001 per share (“Class A common stock”) and Class B common stock, par value $0.0001 per share

 

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(“Class B common stock”), because the holders of each class are legally entitled to equal per share distributions whether through dividends or in liquidation.

 

Use of estimates:  In preparing these 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, 2015 and 2014. 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.

 

Recent accounting pronouncements: In May 2014, the Financial Accounting Standards Board (“FASB”) issued the Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (Topic 606). ASU 2014-09 replaces the majority of all U.S. GAAP guidance that currently exists on revenue recognition with a single model to be applied to all contracts with customers. The core principle of ASU 2014-09 is that “an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” For a public entity, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is permitted, but not before annual periods beginning after December 15, 2016. An entity must apply ASU 2014-09 using either the full retrospective approach, by restating all years presented, or the cumulative effect at the date of adoption approach. We are currently evaluating the adoption methodology and the impact of this update on its consolidated financial position, results of operations and cash flows.

 

In April 2015, the FASB issued, ASU 2015-03 Interests — Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs, requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability. Recognition and measurement guidance are not impacted by the ASU.  The guidance is effective for fiscal years beginning after December 15, 2015, with retrospective disclosure upon transition, for all periods presented.  We will adopt the guidance in the first quarter of 2016, with the impact to our consolidated statement of position to be a reduction in assets where deferred costs are currently disclosed, and a reduction to long-term debt where these costs will be recorded after the transition.

 

Note 2. Related party transactions

 

The Company has various agreements with MVS Multivision Digital S. de R.L. de C.V. and its affiliates (collectively “MVS”), a Mexican media and television conglomerate, which have directors and stockholders in common with the Company as follows:

 

·                  An agreement through August 1, 2017 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”). This agreement was amended on May 20, 2015, to expand the services MVS provides to Cinelatino to include commercial insertion and editing services to support advertising sales on Cinelatino’s U.S. feed.  Expenses incurred under this agreement are included in cost of revenues in the accompanying condensed consolidated statements of operations.  Total expenses incurred were $0.5 million for each of the three months ended June 30, 2015 and 2014, and $1.1 million for each of the six months ended June 30, 2015 and 2014.

 

·                  A ten-year master license agreement through July 2017, which grants MVS the non-exclusive right (except with respect to pre-existing distribution arrangements between MVS and third party distributors that are effective at the time of the consummation of the Transaction) to duplicate, distribute and exhibit Cinelatino’s service via cable, satellite or by any other means in Latin America and in Mexico to the extent that Mexico distribution is not owned by MVS. Pursuant to the agreement, Cinelatino receives revenue net of MVS’s distribution fees, which is presently equal to 13.5% of all license fees collected from distributors in Latin America and Mexico. Total revenues recognized were $1.2 million and $1.1 million for the three months ended June 30, 2015 and 2014, respectively, and $2.4 million and $2.2 million for the six months ended June 30, 2015 and 2014, respectively.

 

·                  An affiliation agreement through August 1, 2017 for the distribution and exhibition of Cinelatino’s programming service through Dish Mexico (dba Commercializadora de Frecuencias Satelitales, S de R.L. de C.V.), an MVS affiliate that transmits television programming services throughout Mexico. Total revenues recognized were $0.5 million and $0.5 million for the three months ended June 30, 2015 and 2014, respectively, and $1.0 million and $0.9 million for the six months ended June 30, 2015 and 2014, respectively.

 

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·                  In November 2013, Cinelatino licensed six movies from MVS. Expenses incurred under this agreement are included in cost of revenues and amounted to $0 for each of the three months ended June 30, 2015 and 2014. At June 30, 2015 and December 31, 2014, $0.0 million, is included in programming rights related to this agreement.

 

Amounts due from MVS pursuant to the agreements noted above, net of an allowance for doubtful accounts, amounted to $3.5 million and $3.4 million at June 30, 2015 and December 31, 2014, respectively, and are remitted monthly. Amounts due to MVS pursuant to the agreements noted above amounted to $0.4 million and $0.7 million at June 30, 2015 and December 31, 2014, respectively, and are remitted monthly.

 

We entered into a three year consulting agreement effective April 9, 2013 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 in the accompanying condensed consolidated statements of operations and amounted to $0.1 million and $0.1 million for the three months ended June 30, 2015 and 2014, respectively, and $0.2 million and $0.2 million for the six months ended June 30, 2015 and 2014, respectively.  Amounts due to this related party totaled $0.0 million and $0.1 million at June 30, 2015 and December 31, 2014, respectively.

 

We have entered into programming agreements with Panamax Films, LLC (“Panamax”), an entity owned by James M. McNamara for the licensing of three movie titles. Expenses incurred under this agreement are included in cost of revenues in the accompanying condensed consolidated statements of operations, and amounted to $0 million for each of the six months ended June 30, 2015 and 2014.  At June 30, 2015 and December 31, 2014, $0.2 million, is included in Programming Rights in the accompanying condensed consolidated balance sheets.

 

During 2013, we engaged Pantelion to assist in the licensing of a feature film in the United States. Pantelion is a joint venture made up of several organizations, including Panamax Films, LLC (“Panamax”), Lions Gate Films Inc. (“Lions Gate”) and Grupo Televisa. Panamax is owned by James McNamara, who is also the Chairman of Pantelion. We agreed to pay to Pantelion, in connection with their services, up to 12.5% of all “licensing revenues”.  Total licensing revenues are included in net revenues in the accompanying condensed consolidated statements of operations and amounted to $0.0 million for the three and six months ended June 30, 2015 and 2014.  Total expenses incurred are included in cost of revenues in the accompanying condensed consolidated statements of operations and amounted to $0.0 million for each of the three and six months ended June 30, 2015 and 2014.  There are no amounts due to Pantelion at June 30, 2015 and December 31, 2014.

 

Since February, 2015, we are operating under a non-binding term sheet (subject to documentation and execution of a definitive agreement) to license the rights to fourteen (14) motion pictures from Lions Gate for a total license fee of $0.8 million. Some of the fourteen titles are owned by Panetlion, for which Lions Gate acts as Pantelion’s exclusive licensing agent. Fees paid by Cinelatino to Lions Gate may be remunerated to Pantelion in accordance with their financial arrangements. Expenses incurred under this agreement are included in cost of revenues in the accompanying condensed consolidated statements of operations, and amounted to $0.0 million for each of the three and six months ended June 30, 2015, respectively.  At June 30, 2015, $0.1 million is included in programming rights in the accompanying condensed consolidated balance sheets related to this agreement.

 

Note 3. Goodwill and intangible assets

 

Goodwill and intangible assets consist of the following at June 30, 2015 and December 31, 2014 (amounts in thousands):

 

 

 

June 30,

 

December 31,

 

 

 

2015

 

2014

 

Broadcast license

 

$

41,356

 

$

41,356

 

Goodwill

 

164,887

 

164,887

 

Other intangibles

 

84,845

 

91,611

 

Total intangible assets

 

$

291,088

 

$

297,854

 

 

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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, 2015 is as follows (amounts in thousands):

 

 

 

Net Balance at December
31, 2014

 

Additions

 

Impairment

 

Net Balance at June
30, 2015

 

Broadcast license

 

$

41,356

 

$

 

$

 

$

41,356

 

Goodwill

 

164,887

 

 

 

164,887

 

Brands

 

15,986

 

 

 

15,986

 

Other intangibles

 

700

 

 

 

700

 

Total indefinite-lived intangibles

 

$

222,929

 

$

 

$

 

$

222,929

 

 

A summary of the changes in the Company’s other amortizable intangible assets for the six months ended June 30, 2015 is as follows (amounts in thousands):

 

 

 

Net Balance at December
31, 2014

 

Additions

 

Amortization

 

Net Balance at
June 30, 2015

 

Affiliate relationships

 

$

69,064

 

$

 

$

(6,150

)

$

62,914

 

Advertiser Relationships

 

2,896

 

 

(276

)

2,620

 

Non-Compete Agreement

 

2,882

 

 

(274

)

2,608

 

Other intangibles

 

83

 

17

 

(83

)

17

 

Total Finite-lived intangibles

 

$

74,925

 

$

17

 

$

(6,783

)

$

68,159

 

 

The aggregate amortization expense of the Company’s amortizable intangible assets was $3.3 million and $3.9 million for the three months ended June 31, 2015 and 2014, respectively, and $6.8 million and $5.5 million for the six months ended June 30, 2015 and 2014, respectively. The weighted average remaining amortization period is 5.5 years at June 30, 2015.

 

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

 

Year Ending December 31,

 

Amount

 

Remainder 2015

 

$

6,700

 

2016

 

13,405

 

2017

 

13,232

 

2018

 

13,175

 

2019

 

8,432

 

2020

 

6,027

 

2021 and thereafter

 

7,188

 

 

 

$

68,159

 

 

Note 4. Income taxes

 

For the six month periods ended June 30, 2015 and 2014, our income tax expense has been computed utilizing the estimated annual effective rates of 40.1% and 38.8% respectively. The difference between the annual effective rate of 40.1% and the statutory Federal income tax rate of 35% in the six month period in 2015, is primarily due to state and foreign income taxes. The difference between the annual effective rate of 38.8% and the actual effective rate in the six month period in 2014, is primarily due to the reversal of the valuation allowance previously recorded of $2.5 million, as we determined that it was reasonably certain that our foreign tax credits will be realized following the Cable Networks Acquisition on April 1, 2014.

 

Income tax expense for the three and six months ended June 30, 2015, was $2.3 million and $4.0 million, respectively.  Income tax benefit for the three and six months ended June 30, 2014, was $1.6 million and $1.2 million, respectively.

 

Note 5. Long-term debt

 

Long-term debt at June 30, 2015 and 2014 consists of the following (amounts in thousands):

 

 

 

June 30, 2015

 

December 31, 2014

 

Senior Notes due July 2020

 

$

220,857

 

$

221,791

 

Less: Current portion

 

(2,250

)

(2,250

)

 

 

$

218,607

 

$

219,541

 

 

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On July 30, 2013 certain of our subsidiaries (the “Borrowers”) entered into a credit agreement providing for a $175.0 million senior secured term loan B facility (the “Term Loan Facility”) which matures on July 30, 2020. On July 31, 2014, certain of our subsidiaries amended the Term Loan Facility (the “Amended Term Loan Facility”) which provides for an aggregate principal amount of $225.0 million and matures on July 30, 2020.  Pricing on the Amended Term Loan Facility was set at LIBOR plus 400 basis points (decreased from a margin of 500 basis points) subject to a LIBOR floor of 1.00% (decreased from a LIBOR floor of 1.25%), resulting in an effective interest rate of 5.00% in the current quarter and 0.5% of original issue discount (“OID”). The Amended Term Loan Facility also provides an uncommitted accordion option (the “Incremental Facility”) allowing for additional borrowings under the Term Loan Facility up to an aggregate principal amount equal to (i) $40.0 million plus (ii) an additional amount of up to 4.0x first lien net leverage. The obligations under the Amended Term Loan Facility are guaranteed by HMTV, LLC, our direct wholly-owned subsidiary, and all of our existing and future subsidiaries (subject to certain exceptions in the case of immaterial subsidiaries). Additionally, the Amended Term Loan Facility provides for an uncommitted incremental revolving loan option in an aggregate principal amount of up to $20.0 million, which shall be secured on a pari passu basis by the collateral securing the Amended Term Loan Facility.  The Amended Term Loan Facility is secured by a first-priority perfected security interest in substantially all of our assets.

 

The proceeds of the Term Loan Facility, as amended, were used to pay fees and expenses associated with the Transaction and the Cable Networks Acquisition, and for general corporate purposes including potential future acquisitions.  The OID of $1.9 million, net of accumulated amortization of $0.5 million at June 30, 2015, was recorded as a reduction to the principal amount of the Term Loan Facility outstanding and will be amortized as a component of interest expense over the term of the Amended Term Loan Facility. We recorded $2.5 million of deferred financing costs associated with the Term Loan Facility, as amended, net of accumulated amortization of $0.7 million at June 30, 2015, which will be amortized utilizing the effective interest rate method over the remaining term of the Amended Term Loan Facility.

 

The Amended Term Loan Facility principal payments are payable on quarterly due dates commencing September 30, 2014, with a final installment on July 30, 2020.

 

In addition, pursuant to the terms of the Amended Term Loan Facility, within 90 days after the end of each fiscal year (commencing with the fiscal year ending December 31, 2015), the Borrowers are required to make a prepayment of the loan principal in an amount equal to 50% 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, interest charges, 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.

 

The carrying value of the long-term debt approximates fair value at June 30, 2015 and December 31, 2014. The estimated fair value of our variable-rate debt 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, 2015 (amounts in thousands):

 

Year Ending December 31,

 

 

 

2015

 

$

1,125

 

2016

 

2,250

 

2017

 

2,250

 

2018

 

2,250

 

2019 and thereafter

 

214,875

 

 

 

$

222,750

 

 

Note 6. Stockholders’ equity

 

Secondary Offering

 

In May 2015, the Company completed a secondary offering on behalf of certain selling stockholders of 3,195,583 shares of Class A common stock at a price of $12.00 per share, less underwriting discounts and commissions. In connection with the offering, the underwriters exercised their additional share purchase option, where an additional 479,337 shares were offered by the Company at $12.00 per share, less underwriting discounts and commissions (the “Option Shares”).  The Company did not receive any of the proceeds related to the sale of the 3,195,583 shares of Class A common stock from the secondary offering, and received net proceeds of approximately $5.4 million from the sale of the Option Shares.

 

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Equity incentive plans

 

An aggregate of 4.0 million shares of our Class A common stock were authorized for issuance under the terms of the Hemisphere Media Group, Inc. 2013 Equity Incentive Plan (the “2013 Equity Incentive Plan). At June 30, 2015, 0.9 million shares remained available for issuance of stock options or other stock-based awards under our 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 and available for issuance). The expiration date of the 2013 Equity Incentive Plan, on and after which date no awards may be granted, is April 4, 2023. The Company’s board of directors 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; (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 either 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, 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 shareholder meeting.

 

Stock-based compensation

 

Stock-based compensation expense related to stock options and restricted stock was $1.4 million and $1.7 for the three months ended June 30, 2015 and 2014, respectively, and $2.7 million and $3.2 for the six months ended June 30, 2015 and 2014, respectively. At June 30, 2015, there was $2.8 million of total unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over weighted-average period of 2.0 years. At June 30, 2015, there was $2.9 million of total unrecognized compensation cost related to non-vested restricted stock, which is expected to be recognized over a weighted-average period of 0.9 years.

 

Stock options

 

The fair value of stock options granted is estimated at the date of grant using the Black-Scholes 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 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, 2015

 

2014

 

Risk-free interest rate

 

1.77% - 2.12%

 

1.76%-1.92%

 

Dividend yield

 

 

 

Volatility

 

26.2% - 29.5%

 

28.4%-30.9%

 

Weighted-average expected term (years)

 

6.7

 

6.0-6.3

 

 

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The following table summarizes stock option activity for the six months ended June 30, 2015 (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, 2014

 

1,870

 

$

11.23

 

8.4

 

$

4,721

 

Granted

 

75

 

13.30

 

 

 

Exercised

 

 

 

 

 

Forfeited

 

 

 

 

 

Expired

 

 

 

 

 

Outstanding at June 30, 2015

 

1,945

 

$

11.31

 

7.9

 

$

2,296

 

Vested at June 30, 2015

 

1,027

 

$

11.30

 

7.7

 

$

1,296

 

Exercisable at June 30, 2015

 

1,027

 

$

11.30

 

7.7

 

$

1,296

 

 

The weighted average grant date fair value of options granted for the six months ended June 30, 2015 was $4.36. At June 30, 2015, 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, 2015 (shares in thousands):

 

 

 

Number of shares

 

Weighted-average
grant date fair value

 

Outstanding at December 31, 2014

 

719

 

$

9.82

 

Granted

 

74

 

12.10

 

Vested

 

(304

)

10.53

 

Forfeited

 

 

 

Outstanding at June 30, 2015

 

489

 

$

9.72

 

 

At June 30, 2015, 0.2 million shares of restricted stock issued were unvested, event-based shares.

 

Warrants

 

In connection with our capitalization noted above, we have issued 14.7 million warrants, which qualify as equity instruments. Each warrant entitles the holder to purchase one-half of one share of our Class A common stock at a price of $6.00 per half share. At June 30, 2015, 14.7 million warrants were issued and outstanding, which are exercisable into 7.3 million shares of our Class A common stock. Warrants are only exercisable for a whole number of shares of common stock (i.e. only an even number of warrants may be exercised at any given time by a registered holder). As a result, a holder must exercise a least two warrants, at an effective exercise price of $12.00 per share. At the option of the Company, 10.0 million warrants may be called for redemption, provided that the last sale price of our Class A common stock reported has been at least $18.00 per share on each of twenty trading days within the thirty-day period ending on the third business day prior to the date on which notice of redemption is given. The warrants expire on April 4, 2018. During the six months ended June 30, 2015, no warrants were exercised.

 

Note 7.  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 materially affect our financial condition.

 

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Note 8. Commitments

 

We have entered into certain rental property contracts with third parties, which are accounted for as operating leases. Rental expense was $0.1 million for each of the three months ended June 30, 2015 and 2014, and $0.3 million and $0.2 million for the six months ended June 30, 2015 and 2014, respectively.

 

We have certain commitments including various operating leases.

 

Future minimum payments for these commitments and other commitments are as follows (amounts in thousands):

 

Year Ending December 31,

 

Operating Leases

 

Other
Commitments

 

Total

 

2015

 

$

127

 

$

6,096

 

$

6,223

 

2016

 

59

 

6,026

 

6,085

 

2017

 

49

 

2,625

 

2,674

 

2018

 

48

 

1,824

 

1,872

 

2019 and thereafter

 

5

 

2,001

 

2,006

 

Total

 

$

288

 

$

18,572

 

$

18,860

 

 

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 five Spanish-language cable television networks distributed in the U.S., two Spanish-language cable television networks distributed in Latin America, and the #1-rated broadcast television network in Puerto Rico.

 

Headquartered in Miami, Florida, we own and operate the following leading Spanish language networks and content production platform, including leading movie and telenovela channels, two of the most popular Hispanic entertainment genres, and the leading cable television networks targeting the second, third and fourth largest U.S. Hispanic groups:

 

·                  Cinelatino:  the leading Spanish-language cable movie network with over 15 million subscribers across the U.S., Latin America and Canada, including 4.4 million subscribers in the U.S. and 11.1 million subscribers in Latin America. Cinelatino is programmed with a lineup featuring the best contemporary films and original television series from Mexico, Latin America, the U.S. and Spain. Driven by the strength of its programming and distribution, Cinelatino is the #1-rated Spanish-language cable movie network in the U.S. and the #2-rated Spanish-language cable television network in the U.S. overall (excluding sports networks).

 

·                  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 for the last six years. WAPA is Puerto Rico’s news leader and the largest local producer of entertainment programming, producing over 70 hours each week of programming that is aired on WAPA and WAPA America. Through WAPA’s multicast signal, we distribute WAPA2 Deportes, a leading sports television network in Puerto Rico, featuring Major League Baseball and professional sporting events from Puerto Rico. Additionally, we operate WAPA.TV, the leading broadband news and entertainment website in Puerto Rico featuring news and content produced by WAPA.

 

·                  WAPA America:  a cable television network serving primarily Puerto Ricans and other Caribbean Hispanics in the United States, collectively the second largest segment of the U.S. Hispanic population. WAPA America’s programming features news and entertainment offerings produced by WAPA. WAPA America is distributed in the U.S. to over 5 million subscribers.

 

·                  Pasiones:  a cable television network dedicated to showcasing the best telenovelas and serialized dramas, licensed from the most important producers. Pasiones is distributed in the U.S. to 4.3 million subscribers and in Latin America to 9.4 million subscribers.

 

·                  Centroamerica TV:  a cable television network targeting Central Americans, 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 3.9 million subscribers.

 

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·                  Television Dominicana:  a cable television network targeting Dominicans living in the U.S., the fourth largest U.S. Hispanic group. Television Dominicana features the most popular news and entertainment from the Dominican Republic, as well as the professional winter baseball league from the Dominican Republic. Television Dominicana is distributed in the U.S. to over 2.8 million subscribers.

 

Our two primary sources of revenue are advertising revenues and retransmission/subscriber fees. Advertising revenue is generated from the sale of advertising time. Our advertising revenue 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 2012, we experienced higher advertising sales as a result of political advertising spending during the 2012 governmental elections.

 

Retransmission and subscriber fees are charged to distributors of our Networks, including cable, satellite and telecommunication service providers, pursuant to multi-year agreements. We believe our Networks are well positioned to further grow our retransmission and subscriber fees, fueled by our Networks’ strong ratings, continued growth in our target demographic audiences and robust content portfolio. 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 subscriber fees will, to a certain extent, be dependent on the growth in subscribers of the cable, satellite and telecommunication service providers distributing our Networks, and new system launches.

 

WAPA primarily derives its revenue from advertising, though retransmission fees are growing rapidly and becoming a larger contributor to revenue. WAPA America, Pasiones, Centroamerica TV and Television Dominicana derive revenue from both subscriber fees and advertising revenue. As of June 30, 2015, Cinelatino was commercial-free, and generated 100% of its revenue from subscriber fees. However, to further monetize Cinelatino’s strong ratings and attractive audience, we have introduced advertising on Cinelatino’s U.S feed in July 2015.

 

WAPA has been the #1-rated broadcast television network in Puerto Rico for the last six years 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 retransmission fees. In fact, WAPA’s primetime household rating in 2014 was more than three times higher than the most highly rated English language U.S. broadcast network in the U.S., CBS. As a result of its ratings success in the last six years, management believes WAPA is well positioned for future growth in retransmission fees, similar to the growth in retransmission fees that the four major U.S. networks have experienced in the U.S. (ABC, CBS, NBC and Fox).

 

WAPA America, Cinelatino, Pasiones, Centroamerica TV and Television Dominicana occupy a valuable and unique position as they are among the few Hispanic cable networks to have achieved broad distribution in the U.S. As a result, management believes our U.S. 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 significant growth in subscribers, as the U.S. Hispanic population continues to grow rapidly. Cinelatino and WAPA America are presently rated by Nielsen.

 

Hispanics represent 17% of the total U.S. population and approximately 10% of the total U.S. discretionary consumption, but only 5% of the aggregate media spend targets U.S. Hispanics. As a result of the under-indexing of the media spend targeting U.S. Hispanics, advertisers have been and are expected to continue to increase the portion of their marketing dollars targeted towards U.S. Hispanics. U.S. Hispanic cable network advertising revenue grew at a 14% CAGR from 2007 to 2014, more than doubling from $178 million to $435 million. Going forward, advertising on U.S. Hispanic cable networks is expected to grow to $719 million in 2017, representing a CAGR of 18%, presenting a significant and growing opportunity for our U.S. networks.

 

Management expects our U.S. networks to benefit from significant growth in subscribers, as the U.S. Hispanic population continues to grow rapidly. As of the 2014 U.S. Census Update, 55 million Hispanics resided in the United States, which represents an increase of 20 million people, or 57%, between 2000 and 2015, and is expected to grow to 64 million by 2020. Hispanic television households grew by 31% during the period from 2006 to 2014, from 11.2 million households to 14.8 million households. Similarly, Hispanic pay-TV subscribers increased 57% since 2006 to 12.3 million subscribers. The continued rapid growth of Hispanic television households and pay-TV subscribers creates a significant opportunity for WAPA America and Cinelatino.

 

Similarly, management expects Cinelatino and Pasiones to benefit from significant growth in Latin America. Fueled by a sizeable and growing population, a strong macroeconomic backdrop and rising disposable incomes, as well as investments in network infrastructure resulting in improved service and performance, pay-TV subscribers in Latin America (excluding Brazil) are projected to grow from 45 million in 2014 to 56 million in 2018, representing approximately 124% growth. Furthermore, Cinelatino and Pasiones are each presently distributed to less than 25% of total pay-TV subscribers throughout Latin America. Accordingly, growth through new system launches represents a significant growth opportunity. Management believes Cinelatino and Pasiones have widespread appeal throughout Latin America, and therefore will be able to expand distribution throughout the region.

 

MVS, one of our stockholders, provides operational and technical services to Cinelatino pursuant to several agreements. Also Cinelatino’s affiliation agreement with Dish Mexico (an affiliate of MVS), is party to an affiliation agreement with Cinelatino pursuant to which Dish Mexico distributes the network and Cinelatino receives revenue.  These agreements expire August 1, 2017.

 

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Comparison of Consolidated Operating Results for the Three and Six Months Ended June 30, 2015 and 2014:

(Unaudited)

(amounts in thousands)

 

 

 

 

 

 

 

$ Change

 

% Change

 

 

 

 

 

$ Change

 

% Change

 

 

 

Three Months Ended June 30,

 

Favorable/

 

Favorable/

 

Six Months Ended June 30,

 

Favorable/

 

Favorable/

 

 

 

2015

 

2014

 

(Unfavorable)

 

(Unfavorable)

 

2015

 

2014

 

(Unfavorable)

 

(Unfavorable)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

32,618

 

$

29,055

 

$

3,563

 

12.3

%

$

62,089

 

$

50,006

 

$

12,083

 

24.2

%

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

9,908

 

9,292

 

(616

)

(6.6

)%

19,360

 

16,890

 

(2,470

)

(14.6

)%

Selling, general and administrative

 

9,325

 

8,241

 

(1,084

)

(13.2

)%

17,909

 

15,122

 

(2,787

)

(18.4

)%

Depreciation and amortization

 

4,265

 

4,832

 

567

 

11.7

%

8,646

 

7,410

 

(1,236

)

(16.7

)%

Other expenses

 

306

 

62

 

(244

)

(393.7

)%

306

 

311

 

5

 

1.6

%

Loss on disposition of assets

 

34

 

16

 

(18

)

112.5

%

31

 

14

 

(17

)

121.4

%

Total operating expenses

 

23,838

 

22,443

 

(1,395

)

(6.2

)%

46,252

 

39,747

 

(6,505

)

(16.4

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

8,780

 

6,612

 

2,168

 

32.8

%

15,837

 

10,259

 

5,578

 

54.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(3,008

)

(2,936

)

(72

)

(2.5

)%

(5,991

)

(5,843

)

(148

)

(2.5

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

5,772

 

3,676

 

2,096

 

57

%

9,846

 

4,416

 

5,430

 

123.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax (expense) benefit

 

(2,341

)

1,642

 

(3,983

)

NM

 

(3,952

)

1,150

 

(5,102

)

NM

 

Net Income

 

$

3,431

 

$

5,318

 

$

(1,887

)

35.5

%

$

5,894

 

$

5,566

 

$

328

 

5.9

%

 

NM = Not meaningful

 

Net Revenues

 

Net revenues increased $3.6 million, or 12%, for the three months ended June 30, 2015, and increased $12.1 million, or 24%, for the six months ended June 30, 2015.  The increases, in both the three and six month periods, were driven by growth in advertising revenues and subscriber and retransmission fees across all of the Company’s networks driven by growth in subscribers and rate increases.  The increase in the six months ended June 30, 2015 was also due to the inclusion of the Acquired Cable Networks, which were not included in the prior year’s first quarter.

 

The following table presents estimated subscriber information:

 

 

 

Subscribers (a)
(amounts in thousands)

 

 

 

June 30, 2015

 

December 31, 2014

 

U.S. Cable Networks:

 

 

 

 

 

WAPA America

 

5,218

 

5,115

 

Cinelatino

 

4,367

 

4,297

 

Pasiones

 

4,298

 

4,004

 

Centroamerica TV

 

3,921

 

3,571

 

Television Dominicana

 

2,856

 

2,437

 

Total

 

20,660

 

19,424

 

 

 

 

 

 

 

Latin America Cable Networks:

 

 

 

 

 

Cinelatino

 

11,103

 

10,544

 

Pasiones

 

9,421

 

8,702

 

Total

 

20,524

 

19,246

 

 


(a)         Amounts presented are based on most recent remittances received from the Company’s distributors as of the respective dates shown above.

 

Operating Expenses

 

Cost of Revenues: Cost of revenues consists primarily of programming and production costs, programming amortization and technical distribution costs.  Cost of revenues increased $0.6 million, or 7%, for the three months ended June 30, 2015, and increased $2.5 million, or 15%, for the six months ended June 30, 2015.  The increase for the three months ended June 30, 2015, was driven primarily by increased investment in programming at the Acquired Cable Networks.  The increase for the six months ended June 30, 2015, was due to the inclusion of the Acquired Cable Networks, which were not included in the prior year’s first quarter, and the increased investment in programming during the current quarter.

 

Selling, General and Administrative: Selling, general and administrative expenses consist principally of promotion, marketing and research, stock-based compensation, corporate employee costs, occupancy costs and other general administrative costs. Selling, general and administrative expenses increased $1.1 million, or 13%, for the three months ended June 30, 2015, and increased $2.8 million, or 18% for the six months ended June 30, 2015.  The increases were driven by higher salaries and benefits expense as we expand our infrastructure to support the expansion of our business, higher professional fees, particularly audit and Sarbanes-Oxley consulting fees.  The increase in the six months ended June 30, 2015 was also due to the inclusion of the Acquired Cable Networks, which were not included in the prior year’s first quarter.

 

Depreciation and Amortization: Depreciation and amortization expense consists of depreciation of fixed assets and amortization of intangibles. Depreciation and amortization expense decreased $0.6 million, or 12% for the three months ended June 30, 2015, primarily due to the expiration of the useful lives of certain intangibles identified in the Cable Networks Acquisition, which were fully reflected in the prior year’s quarter, but not in the current quarter.  Depreciation and amortization expense increased $1.2 million or 17% for the six months ended June 30, 2015 primarily due to inclusion of the Acquired Cable Networks, which were not included in the prior year’s first quarter, offset in part by the decline in amortization of intangibles in the current quarter.

 

                                                Other Expenses: Other expenses include legal and financial advisory fees, and other fees incurred in connection with corporate finance activities, including debt and equity financings, and acquisition activities.  Other expenses increased $0.2 million for the three months ended June 30, 2015, due primarily to the incurrence of fees in connection with the secondary equity offering in May 2015.  Other expenses were unchanged for the six months ended June 30, 2015, due primarily to the fees incurred in connection

 

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with the secondary equity offering in May 2015 being offset in part by fees incurred in the Cable Networks Acquisition, which closed on April 1, 2014. For more information, see Note 6, “Stockholders’ Equity”, of Notes to our Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report. 

 

Interest Expenses

 

Interest expense increased $0.1 million for the three and six months ended June 30, 2015, due to an increase in our Term Loan Facility from $173.7 million at June 30, 2014 to $222.8 million at June 30, 2015, offset in part by a reduction in the interest rate on the Term Loan Facility from 6.25% in 2014 to 5.00% in 2015.

 

Income Tax (Expense) Benefit

 

Income tax expense increased $4.0 million and $5.1 million for the three and six months ended June 30, 2015, due to the reversal in the prior year’s second quarter of a $2.5 million valuation allowance related to foreign tax credits, and an increase in income before taxes of $2.1 million and $5.4 million for the three and six months ended June 30, 2015.  For more information, see Note 4, “Income Taxes,” of Notes to our Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report.

 

Net Income

 

Net income decreased $1.9 million for the three months ended June 30, 2015, and increased $0.3 million for the six months ended June 30, 2015.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

We do not have any off-balance sheet financing arrangements.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Sources and Uses of Cash

 

Our principal sources of cash are cash on hand and cash flows from operating activities. At June 30, 2015, we had $159.7 million of cash on hand.  Our primary uses of cash include the production and acquisition of programming, operational costs, personnel costs, equipment purchases, principal and interest payments on our outstanding debt and income tax payments, and may be used to fund acquisitions.

 

Management believes cash on hand and cash flow from operations will be sufficient to meet our current contractual financial obligations and to fund anticipated working capital and capital expenditure requirements for existing operations. Our current financial obligations include maturities of debt, operating lease obligations and other commitments from ordinary course of business that require cash payments to vendors and suppliers.

 

Cash Flows

 

 

 

Six Months Ended June 30,

 

Anounts in thousands:

 

2015

 

2014

 

Cash provided by (used in):

 

 

 

 

 

Operating activities

 

$

16,036

 

$

3,259

 

Investing activities

 

(1,845

)

(103,277

)

Financing activities

 

3,477

 

(1,737

)

Net increase (decrease) increase in cash

 

$

17,668

 

$

(101,755

)

 

Comparison for the Six Months Ended June 30, 2015 and June 30, 2014

 

Operating Activities

 

Cash provided by operating activities was primarily driven by our net income, adjusted for non-cash items and changes in working capital.  Non-cash items consist primarily of depreciation of property and equipment, amortization of intangibles, programming amortization, amortization of deferred financing costs, stock-based compensation expense and provision for bad debts.

 

Net cash provided by operating activities for the six months ended June 30, 2015 was $16.0 million, an increase of $12.8 million, as compared to $3.3 million in the prior year period, due primarily to an $0.3 million increase in net income, a $4.8 million

 

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increase in non-cash items and a $7.6 million decrease in net working capital.  Non-cash items increased primarily as a result of a $2.9 million decrease in deferred taxes, a $1.2 million increase in depreciation and amortization expense, and a $0.7 million increase in programming amortization.

 

Investing Activities

 

Net cash used in investing activities for the six months ended June 30, 2015, was $1.9 million, as compared to $103.3 million in the prior year period.  The decrease is primarily due to the Cable Networks Acquisition in 2014, which was funded with $101.9 million from cash on our balance sheet, offset in party by an increase of $0.5 million in capital expenditures.

 

Financing Activities

 

For the six months ended June 30, 2015, net cash provided by financing activities was $3.5 million, as compared to a net cash use of $1.7 million in the prior year period.  This increase was due to $5.4 million of net proceeds from the secondary equity offering in May 2015, offset in party by higher principal payments made in the current year period on the Amended Term Loan Facility entered into on July 31, 2014, as compared to principal payments made in the prior year quarter on the Term Loan Facility entered into on July 30, 2013.  For more information, see Note 5, “Long-Term Debt” and Note 6, “Stockholders’ Equity” of Notes to Condensed Consolidated Financial Statements, included elsewhere in this Quarterly Report.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We finance our capital needs through our Amended Term Loan Facility at our indirect wholly-owned subsidiary, Hemisphere Media Holdings, LLC.

 

The variable-rate of interest on the Amended Term Loan Facility exposes us to market risk for changes in interest rates. Loans thereunder bear interest at rates that vary with changes in prevailing market rates. With respect to the Amended Term Loan Facility, we do not speculate on the future direction of interest rates. As of June 30, 2015, our exposure to changing market rates with respect to the Amended Term Loan Facility was as follows (amounts in thousands):

 

 

 

June 30, 2015

 

Variable rate debt

 

$

222.8

 

Interest rate

 

5.00

%

 

As of June 30, 2015, the total outstanding balance on the Amended Term Loan Facility was approximately $222.8 million. In the event of an increase in the interest rate of 100 basis points, assuming a principal of $222.8 million, we would incur an increase in interest expense of approximately $2.2 million per year. Such potential increases or decreases are based on certain simplifying assumptions, including a constant level of debt, no interest rate swap or hedge in place, and an immediate, across-the-board increase in the level of interest rates with no other subsequent changes for one year.

 

Foreign Currency Exchange Risk

 

Although we currently conduct business in various countries outside the United States, we are not subject to any material currency risk because our cash flows are collected primarily in U.S. Dollars. Reported earnings and assets may be reduced in periods in which the U.S. dollar increases in value relative to those currencies.

 

Our objective in managing exposure to foreign currency fluctuations is to reduce volatility of earnings and cash flow. Accordingly, we may enter into foreign currency derivative instruments that change in value as foreign exchange rates change, such as foreign currency forward contracts or foreign currency options. We held no foreign currency derivative financial instruments at June 30, 2015.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated our disclosure controls and procedures, as of June 30, 2015. Our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2015, our disclosure controls and procedures were effective to ensure that all information

 

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required to be disclosed is recorded, processed, summarized and reported within the time periods specified, and that information required to be filed in the reports that we file or submit under the Securities Exchange Act of 1934 (the “Exchange Act”) is accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosure.

 

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error and mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of controls.

 

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions or because the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost- effective control system, misstatements due to error or fraud may occur and may not be detected.

 

Changes in Internal Controls

 

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended June 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

From time to time, we or our subsidiaries may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and determination as to the amount of the accrual required for such contingencies is highly subjective and requires judgments about future events. An adverse result in these or other matters may arise from time to time that may harm our Business. Neither we nor any of our subsidiaries are presently a party to any material litigation, nor to the knowledge of management is any litigation threatened against us or our subsidiaries, which may materially affect us.

 

ITEM 1A. RISK FACTORS

 

You should carefully consider the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2014, in addition to other information included in this Quarterly Report on Form 10-Q, including under the section entitled, “Forward-Looking Statements,” and in other documents we file with the SEC, in evaluating our Company and our business.  If any of the risks occur, our business, financial condition, liquidity and results of operations could be materially adversely affected. We caution the reader that these risk factors may not be exhaustive.  We operate in a continually changing business environment and new risks emerge from time to time.  Management cannot predict such new risk factors, nor can we assess the impact, if any, of such new risk factors on our business or the extent to which any factor or combination of factors may impact our business. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

Except as set forth in this Item 1A, there have not been any material changes during the quarter ended June 30, 2015 from the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014.

 

Puerto Rico’s continuing economic hardships may have a negative effect on the overall performance of our Business, financial condition and results of operations.

 

Financial and economic conditions in Puerto Rico have further deteriorated and continue to be uncertain.  The continuation or worsening of such conditions could have an adverse effect on our Business, results of operations, and/or financial condition.

 

Puerto Rico’s track record of poor budget controls and high poverty levels compared to the U.S. average presents ongoing challenges.  Puerto Rico’s government is facing a poor fiscal condition, high unemployment rate and extremely low labor force participation.  Serious fiscal challenges have recently surfaced that are closely interrelated with Puerto Rico’s weak economic performance.  Although Puerto Rico has implemented measures intended to address its budgetary gaps and economic challenges, including raising the corporate tax rate from 30% to 39%, passing amendments to the income tax, sales tax and use tax, or IVU, effective July 1, 2015, which implements a rate of 11.5%, and passing a new value added tax system (that will replace the IVU on April 1, 2016) that implements a rate of 10.5%, which will apply to certain taxable transactions and articles, including a merchant’s sale into Puerto Rico of goods and services, a non-resident’s rendering of a service to a person in Puerto Rico, and other combined transactions, passing a balanced budget for fiscal 2015, and other significant expenditure controls and revenue enhancement measures, the Puerto Rican economy has been and continues to be in a recession since 2006, and has been burdened by limited economic activity, lower-than-estimated revenue collections, high government debt levels relative to the size of the economy and other potential fiscal challenges.  There can be no assurance that any historical or new actions taken by any governmental or regulatory body for the purpose of stabilizing the economy or financial markets will achieve their intended effect.

 

Persistent deficits in Puerto Rico’s fiscal accounts, as well as mounting deficits in the operation of several major public corporations have substantially raised Puerto Rico’s overall public debt to approximately $72 billion.  On June 28, 2015 the Governor of Puerto Rico publicly announced that his administration will seek broad concessions from the commonwealth’s creditors, warning that Puerto Rico’s obligations on its outstanding municipal bonds are not otherwise payable.  Unlike U.S. municipalities, Puerto Rican public corporations and municipalities do not have the protections of Chapter 9 of the U.S. Bankruptcy Code.  On July 28, 2015, U.S. Treasury Secretary Jacob Lew urged immediate action from Congress to pass pending legislation in order open a bankruptcy path for Puerto Rican public corporations and municipalities.  Secretary Lew warned the Senate Finance Committee that without a tested legal regime in place, any resolution of Puerto Rico’s financial obligations would likely be a chaotic, protracted, and costly process both for Puerto Rico and more broadly for the United States.

 

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On August 3, 2015, Puerto Rico’s Government Development Bank failed to make a $58 million payment in full due on behalf of the Public Finance Corporation, citing lack of appropriated funds for such payment, which prompted Moody’s to declare an event of default.  Inability to extract concessions from the Puerto Rico’s bondholders, lack of legislative action to allow Chapter 9 protection to Puerto Rican public corporations and municipalities, a potential government shutdown, potential expenses and delays implementing budget solutions, the loss or reduction in the flow of federal funds, additional unemployment, and contraction in the manufacturing and construction sectors could have serious negative consequences for Puerto Rico’s economy and further heighten the risks associated with the our exposure to Puerto Rico’s economy.  In addition, continued volatile economic conditions in Puerto Rico or declines in consumer confidence could have a negative impact on the broadcast television industry or the industries of our advertisers, resulting in reduced advertising sales.

 

In addition to any negative direct consequences to our Business or results of operations arising from these financial and economic developments, some of these actions may adversely affect financial institutions, advertisers, or other consumers on whom we rely.  Our Business and results of operations could be negatively affected as a result.  Additionally, our access to future capital or financing arrangements, or the cost of such capital or financings, may be affected by the economic climate in Puerto Rico.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

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ITEM 6. EXHIBITS

 

The exhibits listed on the accompanying Exhibit Index are filed, furnished or incorporated by reference (as stated therein) as part of this Quarterly Report.

 

Exhibit Index

 

Exhibit No.

 

Description of Exhibit

4.1

 

Joinder and Waiver to Registration Rights Agreement, by and among the Company and the parties identified as Transferees and Investors therein, dated April 2, 2015 (incorporated herein by reference to Exhibit 4.10 to the Company’s Registration Statement on Form S-3 filed with the Commission on April 2, 2015 (File No. 333-203223)).

31.1

 

Certification of Chief Executive Officer required by Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

31.2

 

Certification of Chief Financial Officer required by Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

32.1*

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

32.2*

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase

101.LAB

 

XBRL Taxonomy Extension Label Linkbase

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase

101.DEF

 

XBRL Taxonomy Extension Definition Document

 


*                                         A signed original of the written statement required by Section 906 has been provided to the Company and will be retained by the Company and forwarded to the SEC or its staff upon request.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

HEMISPHERE MEDIA GROUP, INC.

 

 

 

 

 

 

DATE: August 11, 2015

By:

/s/ Alan J. Sokol

 

 

Alan J. Sokol

 

 

Chief Executive Officer and President

 

 

(Principal Executive Officer)

 

 

 

 

 

 

DATE: August 11, 2015

By:

/s/ Craig D. Fischer

 

 

Craig D. Fischer

 

 

Chief Financial Officer

 

 

(Principal Financial and Accounting Officer)

 

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Table of Contents

 

Exhibit Index

 

Exhibit No.

 

Description of Exhibit

4.1

 

Joinder and Waiver to Registration Rights Agreement, by and among the Company and the parties identified as Transferees and Investors therein, dated April 2, 2015 (incorporated herein by reference to Exhibit 4.10 to the Company’s Registration Statement on Form S-3 filed with the Commission on April 2, 2015 (File No. 333-203223)).

31.1

 

Certification of Chief Executive Officer required by Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

31.2

 

Certification of Chief Financial Officer required by Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

32.1*

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

32.2*

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase

101.LAB

 

XBRL Taxonomy Extension Label Linkbase

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase

101.DEF

 

XBRL Taxonomy Extension Definition Document

 


*                                         A signed original of the written statement required by Section 906 has been provided to the Company and will be retained by the Company and forwarded to the SEC or its staff upon request.

 

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