HEMISPHERE MEDIA GROUP, INC. - Quarter Report: 2016 June (Form 10-Q)

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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, 2016

 

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)

 

 

 

(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.

 

 

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 5, 2016
Class A common stock, par value $0.0001 per share		12,366,696 shares
Class B common stock, par value $0.0001 per share		30,027,418 shares

 

 

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HEMISPHERE MEDIA GROUP, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

June 30, 2016

(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	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	24
PART II -	OTHER INFORMATION	25
Item 1.	Legal Proceedings	25
Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3.	Defaults Upon Senior Securities	26
Item 4.	Mine Safety Disclosures	26
Item 5.	Other Information	26
Item 6.	Exhibits	27
SIGNATURES		28

 

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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; “Business” refers collectively to our consolidated operations; “Cable Networks” refers to our Networks (as defined below) with the exception of WAPA and WAPA2 Deportes; “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; “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; “Term Loan Facility” refers to our term loan facility amended on July 31, 2014 as set forth on Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015; “WAPA” refers to Televicentro of Puerto Rico, LLC, a Delaware limited liability company; “WAPA America” refers to WAPA America, Inc., a Delaware corporation; “WAPA2 Deportes” refers to a sports television network in Puerto Rico operated by WAPA; WAPA.TV refers to a news and entertainment website in Puerto Rico operated by WAPA.

 

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.  These statements are, or may be deemed to be, “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  continued consolidation of Distributors in the marketplace;

 

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

 

·                  disagreements with our Distributors over contract interpretation;

 

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

 

·                  the outcome of any pending or threatened litigation;

 

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

 

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

 

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

 

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

 

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

 

·                  changes in pricing and availability of products and services;

 

·                  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, without limitation, in the Commonwealth of Puerto Rico;

 

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

 

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

 

·                  competitor responses to our products and services.

 

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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

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

 

		June 30,			December 31,
		2016			2015
		(Unaudited)
Assets
Current Assets
Cash		$	147,168		$	179,532
Accounts receivable, net of allowance for doubtful accounts of $1,825 and $1,512, respectively		25,089			25,519
Due from related parties		1,437			1,722
Programming rights		6,826			5,552
Prepaids and other current assets		6,220			4,541
Total current assets		186,740			216,866
Programming rights		9,629			7,457
Property and equipment, net		25,568			25,397
Deferred financing costs, net		2,004			2,254
Broadcast license		41,356			41,356
Goodwill		164,887			164,887
Other intangibles, net		71,494			78,185
Deferred taxes		13,280			13,280
Other assets		1,905			1,468
Total Assets		$	516,863		$	551,150
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable		$	2,478		$	2,463
Due to related parties		548			1,182
Accrued agency commissions		3,413			8,168
Accrued compensation and benefits		3,739			3,995
Accrued marketing		6,886			6,569
Taxes payable		1,149			1,722
Other accrued expenses		2,968			3,047
Programming rights payable		4,192			4,426
Current portion of long-term debt		—			8,278
Total current liabilities		25,373			39,850
Programming rights payable		2,221			365
Long-term debt, net of current portion		211,834			211,645
Deferred taxes		18,269			17,928
Defined benefit pension obligation		2,821			2,721
Total Liabilities		260,518			272,509
Stockholders’ Equity
Preferred stock, $0.0001 par value; 50,000,000 shares authorized; 0 shares issued and outstanding at June 30, 2016 and December 31, 2015		—			—
Class A common stock, $.0001 par value; 100,000,000 shares authorized; and 15,690,159 and 15,342,440 shares issued at June 30, 2016 and December 31, 2015, 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, 2016 and December 31, 2015		3			3
Additional paid-in capital		258,351			256,551
Treasury stock, at cost 3,597,346 and 236,171 at June 30, 2016 and December 31, 2015, respectively		(34,961		)	(3,144		)
Retained earnings		33,566			25,837
Accumulated other comprehensive loss		(615		)	(607		)
Total Stockholders’ Equity		256,345			278,641
Total Liabilities and Stockholders’ Equity		$	516,863		$	551,150

 

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,
		2016			2015			2016			2015
Net revenues		$	35,031		$	32,618		$	66,002		$	62,089
Operating Expenses:
Cost of revenues		10,638			9,908			20,821			19,360
Selling, general and administrative		9,520			9,325			18,776			17,909
Depreciation and amortization		4,061			4,265			8,417			8,646
Other expenses		119			306			132			306
Loss on disposition of assets		16			34			15			31
Total operating expenses		24,354			23,838			48,161			46,252
Operating income		10,677			8,780			17,841			15,837
Other Expenses:
Interest expense, net		(2,869		)	(3,008		)	(5,825		)	(5,991		)
Income before income taxes		7,808			5,772			12,016			9,846
Income tax expense		(2,779		)	(2,341		)	(4,287		)	(3,952		)
Net income		$	5,029		$	3,431		$	7,729		$	5,894
Earnings per share:
Basic		$	0.12		$	0.08		$	0.18		$	0.14
Diluted		$	0.12		$	0.08		$	0.18		$	0.14
Weighted average shares outstanding:
Basic		42,546			42,737			42,844			42,566
Diluted		42,807			43,290			43,638			43,267

 

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,
		2016			2015			2016			2015
Net income		$	5,029		$	3,431		$	7,729		$	5,894
Other comprehensive loss		—			—			(8		)	—
Comprehensive income		$	5,029		$	3,431		$	7,721		$	5,894

 

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, 2016

(Unaudited)

(amounts in thousands)

 

																					Accumulated
												Additional			Class A						Other
		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, 2015		15,342		$	1		30,027		$	3		$	256,551		$	(3,144	)	$	25,837		$	(607	)	$	278,641
Net income		—		—			—		—			—			—			7,729			—			7,729
Stock-based compensation		—		—			—		—			1,989			—			—			—			1,989
Vesting of restricted stock		300		—			—		—			—			(1,082		)	—			—			(1,082		)
Repurchase of shares		—		—			—		—			—			(30,735		)	—			—			(30,735		)
Repurchase of warrants		—		—			—		—			(976		)	—			—			—			(976		)
Exercise of warrants		35		—			—		—			420			—			—			—			420
Exercise of stock options		13		—			—		—			155			—			—			—			155
Excess tax benefits, stock compensation		—		—			—		—			212			—			—			—			212
Other comprehensive loss		—		—			—		—			—			—			—			(8		)	(8		)
Balance at June 30, 2016		15,690		$	1		30,027		$	3		$	258,351		$	(34,961	)	$	33,566		$	(615	)	$	256,345

 

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,
		2016			2015
Reconciliation of Net Income to Net Cash Provided by Operating Activities:
Net income		$	7,729		$	5,894
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		8,417			8,646
Program amortization		5,990			5,581
Amortization of deferred financing costs		250			251
Amortization of original issue discount		189			191
Stock-based compensation		1,989			2,687
Provision for bad debts		321			669
Loss on disposition of assets		15			31
Deferred tax expense		341			—
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable		101			514
Due from related parties		285			(62		)
Programming rights		(9,436		)	(7,351		)
Prepaids and other assets		(2,116		)	(598		)
(Decrease) increase in:
Accounts payable		15			(224		)
Due to related parties		(634		)	(381		)
Accrued expenses		(4,773		)	(1,737		)
Programming rights payable		1,622			910
Taxes payable		(573		)	914
Other liabilities		100			101
Net cash provided by operating activities		9,832			16,036
Cash Flows From Investing Activities:
Proceeds from sale of assets		2			3
Capital expenditures		(1,914		)	(1,848		)
Net cash used in investing activities		(1,912		)	(1,845		)
Cash Flows From Financing Activities:
Repayments of long-term debt		(8,278		)	(1,125		)
Purchase of treasury stock		(31,817		)	(1,079		)
Warrant repurchase		(976		)	—
Warrant exercise		420			—
Proceeds from the issuance of stock		—			5,407
Exercise of stock options		155			—
Excess tax benefits		212			274
Net cash (used in) provided by financing activities		(40,284		)	3,477
Net (decrease) increase in cash		(32,364		)	17,668
Cash:
Beginning		179,532			142,010
Ending		$	147,168		$	159,678
Supplemental Disclosures of Cash Flow Information:
Cash payments for:
Interest		$	5,488		$	5,621
Income taxes		$	3,493		$	2,474

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Note 1. Nature of business

 

Nature of business:  The accompanying Condensed Consolidated Financial Statements include the accounts of Hemisphere Media Group, Inc. (“Hemisphere” or the “Company”), the parent holding company of Cine Latino, Inc. (“Cinelatino”), WAPA Holdings, LLC (formerly known as InterMedia Español Holdings, LLC) (“WAPA”), and HMTV Cable, Inc., the parent company of the Acquired Cable 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, 2016 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, 2016. These Condensed Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

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 (amounts in thousands, except per share amounts):

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2016			2015			2016			2015
Numerator for earnings per common share calculation:
Net income		$	5,029		$	3,431		$	7,729		$	5,894
Denominator for earnings per common share calculation:
Weighted-average common shares, basic		42,546			42,737			42,844			42,566
Effect of dilutive securities
Stock options, restricted stock and warrants		261			553			794			701
Weighted-average common shares, diluted		42,807			43,290			43,638			43,267
EPS
Basic		$	0.12		$	0.08		$	0.18		$	0.14
Diluted		$	0.12		$	0.08		$	0.18		$	0.14

 

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 1.1 million shares of common stock for the three and six months ended June 30, 2016, 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 (“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, 2016 and 2015. Such estimates are based on historical

 

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experience and other assumptions that are considered appropriate in the circumstances. However, actual results could differ from those estimates.

 

Reclassification: Certain prior year amounts presented in Other accrued expenses have been reclassified to Taxes payable on the accompanying condensed consolidated balance sheet, which resulted in an increase to Taxes payable to conform with the fiscal 2016 presentation with no impact to current liabilities.

 

Recent accounting pronouncements:  In May 2014, the FASB and the International Accounting Standards Board updated the accounting guidance related to revenue recognition. The updated accounting guidance provides a single, contract-based revenue recognition model to help improve financial reporting by providing clearer guidance on when an entity should recognize revenue, and by reducing the number of standards to which an entity has to refer. In July 2015, the FASB voted to defer the effective date by one year to December 15, 2017 for annual reporting periods beginning after that date. The updated accounting guidance provides companies with alternative methods of adoption.  In March 2016, the FASB issued ASU 2016-08- Revenue from Contracts with Customers (Topic 606): Principle versus Agent Considerations (Reporting Revenue Gross versus Net).  The amendments in this update do not change the core principle of the guidance in Topic 606; they clarify the implementation guidance on principal versus agent considerations.  In April 2016, the FASB issued further guidance related to revenue recognition with ASU 2016-10 — Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“Update 2016-10”).  The amendments in Update 2016-10 do not change the core principle of the guidance in Topic 606, rather it clarifies identifying performance obligations and licensing implementation. In May 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updated (“ASU”) 2016-12 — Revenue from contracts with Customers (Topic 605) Narrow-Scope Improvements and Practical Expedients.  Similar to ASU 2016-08 and ASU 2016-10, the amendments in ASU 2016-12 do not change the core principle of the guidance in Topic 606, rather if clarifies issues around assessing collectability and issues concerning implementation at transition to the ASU.  The effective date for implementation remains unchanged and will impact the first interim period of our 2018 fiscal year.  We are currently in the process of determining the impact that the updated accounting guidance will have on our consolidated financial statements and our method of adoption.

 

In March 2016, the FASB issued ASU 2016-09 — Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting as part of its simplification initiative.  The areas for simplification in this update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  The amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. We are currently in the process of determining the impact that the updated accounting guidance will have on our consolidated financial statements.

 

The FASB issued ASU 2016-02 — Leases (Topic 842) in February 2016.  ASU 2016-02 amends the FASB Accounting Standards Codification, creating Topic 842, Leases.  Topic 842 affects any entity that enters into a lease, with specified scope exemptions, and supersedes Topic 840, Leases.  The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases, including operating leases. The recognition, measurement and presentation of expenses and cash flows from a lease by a lessee have not changed significantly from previous GAAP.  The principle difference from previous guidance is that the assets and liabilities arising from an operating lease should be recognized in the statement of financial position.  The guidance will be effective for the first interim period of our 2019 fiscal year. Early application of the amendments in this update is permitted. We are currently evaluating the impact of the new standard.

 

Note 2. Related party transactions

 

The Company has various agreements with 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 unaudited condensed consolidated statements of operations.  Total expenses incurred were $0.6 million and $0.5 million for the three months ended June 30, 2016 and 2015, respectively, and $1.3 million and $1.1 million for the six months ended June 30, 2016 and 2015, respectively.

 

·                  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 were effective at the time of the consummation of our initial public offering) 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 fee, which is presently equal to 13.5% of all license fees collected from Distributors in Latin America and Mexico. Total revenues recognized were $0.9 million

 

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and $1.2 million for the three months ended June 30, 2016 and 2015, respectively, and $2.3 million and $2.4 million for the six months ended June 30, 2016 and 2015, respectively.  MVS has terminated the agreement effective February 29, 2016. We continue to operate under the terms of the terminated agreement until a transition arrangement has been finalized.

 

·                  An affiliation agreement through August 1, 2017, for the distribution and exhibition of Cinelatino’s programming service through Dish Mexico (d/b/a Comercializadora de Frecuencias Satelitales, S. de R.L. de C.V.), an MVS affiliate that transmits television programming services throughout Mexico. Total revenues recognized were $0.6 million and $0.5 million for the three months ended June 30, 2016 and 2015, respectively, and $1.1 million and $1.0 million for the six months ended June 30, 2016 and 2015, respectively.

 

·                  An affiliation agreement, effective July 2015 through January 2018 for the distribution and exhibition of Pasiones’ Latin American programming service through Dish Mexico (d/b/a Comercializadora de Frecuencias Satelitales, S. de R.L. de C.V.), an MVS affiliate that transmits television programming services throughout Mexico. Total revenues recognized were $0.0 million for the three and six months ended June 30, 2016.

 

·                  In November 2013, Cinelatino licensed six movies from MVS. Expenses incurred under this agreement are included in cost of revenues and amounted to $0.0 million for each of the three months ended June 30, 2016 and 2015, and $0.0 million for each of the six months ended June 30, 2016 and 2015.  At June 30, 2016 and December 31, 2015, $0.0 million is included in programming rights related to this agreement.

 

Amounts due from MVS pursuant to the agreements noted above amounted to $1.4 million and $1.7 million at June 30, 2016 and December 31, 2015, respectively, and are remitted monthly. Amounts due to MVS pursuant to the agreements noted above amounted to $0.6 million and $1.1 million at June 30, 2016 and December 31, 2015, 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. We continue to operate under the terms of this agreement, as we renegotiate a new consulting agreement. Total expenses incurred under this agreement are included in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations and amounted to $0.1 million for each of  the three months ended June 30, 2016 and 2015.  There were no amounts due to this related party at June 30, 2016 or December 31, 2015.

 

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 unaudited condensed consolidated statements of operations and amounted to $0.0 million for each of the three months and six months ended June 30, 2016 and 2015.  Programming Rights in the accompanying condensed consolidated balance sheets included $0.1 million as of June 30, 2016 and December 31, 2015.

 

During 2013, we engaged Pantelion Films, LLC (“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, 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 unaudited condensed consolidated statements of operations and amounted to $0.1 million for the three and six months ended June 31, 2016 and $0.0 million for the three and six months ended June 30, 2015.  Total expenses incurred are included in cost of revenues in the accompanying unaudited condensed consolidated statements of operations and amounted to $0.0 million for the three and six months ended June 30, 2016 and 2015.  There were no amounts due to this related party as of June 30, 2016 and December 31, 2015.

 

Effective February 1, 2015, we entered into a licensing 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 Pantelion, 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 and $0 for the three months ended June 30, 2016 and 2015, respectively, and $0.1 million and $0 for the six months ended June 30, 2016 and 2015, respectively.  At June 30, 2016, $0.2 million is included in programming rights in the accompanying condensed consolidated balance sheets related to this agreement.

 

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We entered into a services agreement with InterMedia Advisors, LLC (“IMA”), which has officers, directors and stockholders in common with the Company, for the provision of services including, without limitation, office space and operational support pursuant to a reimbursement agreement with IMA’s affiliate, InterMedia Partners VII, L.P.  Amounts due to this related party amounted to $0.0 million at June 30, 2016 and December 31, 2015. Amounts receivable from the related party and amounts due to the related party netted to $0.0 million at June 30, 2016 and December 31, 2015.

 

Note 3. Goodwill and intangible assets

 

Goodwill and intangible assets consist of the following at June 30, 2016 and December 31, 2015 (amounts in thousands):

 

		June 30,			December 31,
		2016			2015
Broadcast license		$	41,356		$	41,356
Goodwill		164,887			164,887
Other intangibles		71,494			78,185
Total intangible assets		$	277,737		$	284,428

 

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, 2016 is as follows (amounts in thousands):

 

		Net Balance at December 31, 2015			Additions			Impairment			Net Balance at June 30, 2016
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, 2016 is as follows (amounts in thousands):

 

		Net Balance at December 31, 2015			Additions			Amortization			Net Balance at June 30, 2016
Affiliate relationships		$	56,766		$	—		$	(6,149	)	$	50,617
Advertiser relationships		2,344			—			(276		)	2,068
Non-compete agreement		2,333			—			(274		)	2,059
Other intangibles		56			23			(15		)	64
Total Finite-lived intangibles		$	61,499		$	23		$	(6,714	)	$	54,808

 

The aggregate amortization expense of the Company’s amortizable intangible assets was $3.4 million and $3.3 million for the three months ended June 30, 2016 and 2015, respectively and  $6.7 million and $6.8 million for the six months ended June 30, 2016 and 2015, respectively. The weighted average remaining amortization period is 4.6 years at June 30, 2016.

 

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

 

Year Ending December 31,		Amount
2016		6,714
2017		13,257
2018		13,187
2019		8,432
2020 and thereafter		13,218
		$	54,808

 

Note 4. Income taxes

 

For the six months ended June 30, 2016 and 2015, our income tax expense has been computed utilizing the estimated annual effective rates of 35.8% and 40.1%, respectively. The decrease in the estimated annual effective tax rate is primarily due to the apportionment of  income before income taxes for state income tax purposes in 2016 due to the expansion of our business, which

 

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resulted in a reduced state tax rate.  The difference between the annual effective rate in both periods and the statutory Federal income tax rate of 35% is primarily due to state and foreign income and foreign withholding taxes offset by foreign  tax credits.

 

Income tax expense for the three and six months ended June 30, 2016 was $2.8 million and $4.3 million, respectively. Income tax expense for the three and six months ended June 30, 2015 was $2.3 million and $4.0 million, respectively.

 

Note 5. Long-term debt

 

Long-term debt at June 30, 2016 and 2015 consists of the following (amounts in thousands):

 

		June 30, 2016			December 31, 2015
Senior Notes due July 2020		$	211,834		$	219,923
Less: Current portion		—			(8,278		)
		$	211,834		$	211,645

 

On July 30, 2014, certain of our subsidiaries (the “Borrowers”) entered into an amended credit agreement providing for a $225.0 million senior secured term loan B facility (the “Term Loan Facility”), which matures on July 30, 2020. Pricing on the Term Loan Facility was set at LIBOR plus 400 basis points (subject to a LIBOR floor of 1.00%, resulting in an effective interest rate of 5.00% in the current quarter and 0.5% of original issue discount (“OID”)). The 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 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 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 Term Loan Facility.  The Term Loan Facility is secured by a first-priority perfected security interest in substantially all of our assets.

 

The OID of $1.5 million, net of accumulated amortization of $0.9 million at June 30, 2016, 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 Term Loan Facility. We recorded $2.0 million of deferred financing costs associated with the Term Loan Facility, net of accumulated amortization of $1.3 million at June 30, 2016, which will be amortized utilizing the effective interest rate method over the remaining term of the Term Loan Facility.

 

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

 

In addition, pursuant to the terms of the Term Loan Facility, within 90 days after the end of each fiscal year (commencing with the fiscal year ended 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.  Pursuant to the terms of our Term Loan Facility, our net leverage ratio was 3.0x at December 31, 2015, resulting in an excess cash flow percentage of 25% being used to determine the principal payment of $8.3 million in March 2016 allocated in direct order of maturity.  As a result, we will not be required to make scheduled quarterly principal payments for several quarters.

 

The carrying value of the long-term debt approximates fair value at June 30, 2016 and December 31, 2015 and was derived from quoted market prices by independent dealers (Level 2 in the fair value hierarchy under ASC 820, Fair Value Measurements and Disclosures). The following are the maturities of our long-term debt as of June 30, 2016 (amounts in thousands):

 

Year Ending December 31,
2016		$	—
2017		—
2018		—
2019		722
2020		212,625
		$	213,347

 

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Note 6. Stockholders’ equity

 

Common stock repurchases

 

On June 8, 2016, the Company completed a privately negotiated stock repurchase of 2,800,000 shares of Class A common stock at a price of $10.50 per share for $29.4mm. On March 16, 2016, the Company completed a repurchase of 100,000 shares of Class A common stock at a price of $13.35 per share for $1.3mm.  The repurchased shares were placed into treasury to be used for general corporate purposes.  For more information, see Part II Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds”, included elsewhere in this Quarterly Report.

 

Event-based Class A common stock awards

 

Pursuant to the Equity Restructuring and Warrant Purchase Agreement, dated as of January 22, 2013, by and among Azteca Acquisition Holdings, LLC and the Company and the other parties identified therein, certain initial stockholders of Azteca Acquisition Corporation (which merged with the Company in connection with its initial public offering), agreed to subject 378,788 shares of Class A common stock to certain forfeiture provisions if the market price of shares of Hemisphere Class A common stock did not equal or exceed $15.00 per share for any 20 trading days within at least one 30-trading day period within 36 months of April 4, 2013.  Effective the close of trading on April 4, 2016, such holders forfeited 378,788 shares of Class A common stock back to the Company as a result.

 

Equity incentive plans

 

Effective May 16, 2016, the stockholders of all classes of capital stock of the Company approved at the annuals stockholder meeting the Hemisphere Media Group, Inc. Amended and Restated 2013 Equity Incentive Plan (the “2013 Equity Incentive Plan”) to increase the number of shares of Class A common stock that may be delivered under the 2013 Equity Incentive Plan by 3,225,920 shares, provide limits on non-employee director awards and additional provisions as set forth in plan (a copy of which is provided in the Company’s 2016 annual proxy statement).   An aggregate of 7.2 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. At June 30, 2016, 4.4 million shares remained available for issuance of stock options or other stock-based awards under our 2013 Equity Incentive Plan (including shares of restricted Class A common stock surrendered to the Company in payment of taxes required to be withheld in respect of vested shares of restricted Class A common stock, which are available for re-issuance). The expiration date of the 2013 Equity Incentive Plan, on and after which date no awards may be granted, is April 4, 2023. The Company’s board of directors, or a committee thereof, administers the 2013 Equity Incentive Plan and has the sole and plenary authority to, among other things: (i) designate participants; (ii) determine the type, size, and terms and conditions of awards to be granted; and (iii) determine the method by which an award may be settled, exercised, canceled, forfeited or suspended.

 

The Company’s time-based restricted stock awards and option awards generally vest in three equal annual installments beginning on the first anniversary of the grant date, subject to the grantee’s continued employment or service with the Company. The Company’s event-based restricted stock awards and option awards generally vest upon the Company’s Class A common stock attaining a $15.00 closing price per share, as quoted on the NASDAQ Global Market, on at least 10 trading days, subject to the grantee’s continued employment or service with the Company.

 

Stock-based compensation

 

Stock-based compensation expense related to stock options and restricted stock was $0.6 million and $1.4 million for the three months ended June 30, 2016 and 2015, respectively, and $2.0 million and $2.7 million for the six months ended June 30, 2016 and 2015, respectively.   At June 30, 2016, there was $1.5 million of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted-average period of 2.1 years. At June 30, 2016, there was $1.1 million of total unrecognized compensation cost related to unvested restricted stock, which is expected to be recognized over a weighted-average period of 1.1 years.

 

Stock options

 

The fair value of stock options granted is estimated at the date of grant using the Black-Scholes option pricing model for time-based options and the Monte Carlo simulation model for event-based options. The expected term of options granted is derived using the simplified method under ASC 718-10-S99-1/SEC Topic 14.D for “plain vanilla” options and the Monte Carlo simulation for event-based options. Expected volatility is based on the historical volatility of the Company’s competitors given its lack of trading history. The risk-free interest rate is based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. The Company has estimated forfeitures of 1.5%, as the awards are 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.

 

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Black-Scholes Option Valuation Assumptions		Six Months Ended June 30, 2016		2015
Risk-free interest rate		1.60	%	1.76%-2.12	%
Dividend yield		—		—
Volatility		26.37	%	25.8%-29.5	%
Weighted-average expected term (years)		6.0		6.3

 

The following table summarizes stock option activity for the six months ended June 30, 2016 (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, 2015		2,043		$	11.49		7.6		$	6,740
Granted		30		13.64			—		—
Exercised		(13	)	10.60			—		—
Forfeited		—		—			—		—
Expired		—		—			—		—
Outstanding at June 30, 2016		2,060		$	11.53		7.2		$	2,081
Vested at June 30, 2016		1,433		$	11.47		6.9		$	1,569
Exercisable at June 30, 2016		1,433		$	11.47		6.9		$	1,569

 

The weighted average grant date fair value of options granted for the six months ended June 30, 2016 was $3.96.  At June 30, 2016, 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, 2016 (shares in thousands):

 

		Number of shares		Weighted-average grant date fair value
Outstanding at December 31, 2015		494		$	9.79
Granted		79		11.41
Vested		(300	)	10.71
Forfeited		—		—
Outstanding at June 30, 2016		273		$	9.25

 

At June 30, 2016, 0.2 million shares of restricted stock issued were unvested, event-based shares.

 

Warrants

 

At June 30, 2016, 12.3 million warrants, exercisable into 6.1 million shares of our Class A common stock, were issued and outstanding. 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. Warrants may be exercised only through the date of expiration and 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, 7.6 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, 2016, we repurchased 1.0 million warrants for $1.0 million, and we issued 35,000 shares of Class A Common Stock upon the exercise of 70,000 warrants for total exercise proceeds of $0.4 million.

 

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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 adversely affect our financial condition.

 

Note 8. Commitments

 

We have entered into certain rental property contracts with third parties, which are accounted for as operating leases. Rental expense was $0.2 million and $0.1 million for the three months ended June 30, 2016 and 2015, respectively, and $0.3 million for each of the six months ended June 30, 2016 and 2015.

 

We have certain commitments including various operating leases.

 

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

 

Year Ending December 31,		Operating Leases			Other Commitments			Total
Remainder of 2016		$	82		$	5,822		$	5,904
2017		386			3,508			3,894
2018		390			2,539			2,929
2019		378			1,256			1,634
2020 and thereafter		1,330			631			1,961
Total		$	2,566		$	13,756		$	16,322

 

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

 

OVERVIEW

 

Our Company

 

We are a leading U.S. Spanish-language media company serving the fast growing and highly attractive U.S. Hispanic and Latin American markets with 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 17 million subscribers across the U.S., Latin America and Canada. Cinelatino is programmed with a lineup featuring the best contemporary films and original television series from Mexico, Latin America, 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 in primetime (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 seven years. WAPA is Puerto Rico’s news leader and the largest local producer of entertainment programming, producing over 75 hours of news and entertainment programming each week. Through its multicast signal, WAPA distributes WAPA2 Deportes, a leading sports television network in Puerto Rico featuring Major League Baseball (MLB),  National Basketball Association (NBA) and professional sporting events from Puerto Rico. Additionally, we operate WAPA.TV, 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. WAPA America’s programming includes over 75 hours of news and entertainment programming produced by WAPA. WAPA America is distributed in the U.S. to over 5.0 million subscribers.

 

·                  Pasiones:  a cable television network dedicated to showcasing the most popular telenovelas and serialized dramas, distributed in the U.S. and Latin America. Pasiones features the best novelas licensed from the most popular television networks. Pasiones has over 15 million subscribers across the U.S. and Latin America.

 

·                  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 4.0 million subscribers.

 

·                  Television Dominicana:  a cable television network targeting Dominicans living in the U.S. 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 3.1 million subscribers.

 

Our two primary sources of revenues are advertising revenues and retransmission/subscriber fees. Advertising revenues are generated from the sale of advertising time which are typically pursuant to advertising arrangements with advertisers providing for a set number of advertising units to run over a specific period of time at a negotiated price per unit.  Our advertising revenues are tied to the success of our programming, including the popularity of our programming as measured by Nielsen Media Research (“Nielsen”).  But unlike some of our peers, our Networks do not currently guarantee specified viewer ratings, and are not required to provide additional units at no charge if the guaranteed viewer ratings are not met.  Our advertising is variable in nature and tends to reflect seasonal patterns of our advertisers’ demand, which is generally greatest during the fourth quarter of each year, driven by the holiday buying season. In addition, Puerto Rico’s political election cycle occurs every four years, and we benefit from increased advertising sales in an election year. For example, in 2012, we experienced higher advertising sales as a result of political advertising spending during the 2012 gubernatorial elections.  We expect to benefit from political advertising sales in 2016. Prior to July 2015, Cinelatino was commercial free, and now all of our Networks generate advertising revenues.

 

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All of our Networks receive fees paid by distributors, including cable, satellite and telecommunications service providers.  These revenues are generally based on a per subscriber fee pursuant to multi-year contracts, commonly referred to as “affiliation agreements,” which generally provide for annual rate increases.  The specific retransmission/subscriber fees we earn vary from period to period, distributor to distributor and also vary among our Networks, but are generally based upon the number of each distributor’s subscribers who receive our Networks.  The terms of certain non-U.S. affiliation agreements provide that the fee revenues are paid as a fixed contractual monthly fee.  Changes in retransmission/subscriber fees are primarily derived from changes in contractual affiliation rates charged for our Networks and changes in the number of subscribers.  We seek to grow our revenues by increasing the number of viewing subscribers of the distributors that carry our services.  Accordingly, we continually review the quality of our programming to ensure that it is maximizing our Networks’ viewership and giving our Networks’ subscribers a premium, high-value experience. The continued growth in our retransmission/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.  Our revenues may also increase over time through contractual rate increases stipulated in most of our affiliation agreements.

 

WAPA has been the #1-rated broadcast television network in Puerto Rico for the last seven 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. WAPA’s primetime household rating in 2015 was nearly four times higher than the most highly rated English-language U.S. broadcast network in the U.S., CBS, and higher than the combined ratings of CBS, NBC, ABC and FOX. As a result of its ratings success in the last seven 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 (ABC, CBS, NBC and Fox) have experienced in the U.S.

 

WAPA America, Cinelatino, Pasiones, Centroamerica TV and Television Dominicana occupy a valuable and unique position as they are among the small group of Hispanic cable networks to have achieved broad distribution in the U.S. As a result, management believes our U.S. 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 its long-term growth. Cinelatino and WAPA America are presently rated by Nielsen.

 

Hispanics represent over 17% of the total U.S. population and approximately 10% of the total U.S. buying power, but only 7% of the aggregate media spend targets U.S. Hispanics. As a result, while advertisers have been allocating a higher proportion of marketing dollars to the Hispanic market, U.S. Hispanic cable advertising still under-indexes relative to its consumption. U.S. Hispanic cable network advertising revenue grew at a 13% CAGR from 2009 to 2015, more than doubling from $204 million to $436 million. Going forward, U.S. Hispanic cable advertising is expected to continue to grow at a 13% CAGR from 2015 to 2019, outpacing forecasted growth for U.S. cable advertising, U.S. Hispanic broadcast advertising and U.S. general market broadcast advertising.

 

Management expects our U.S. Networks to benefit from significant growth in subscribers as the U.S. Hispanic population continues its long-term growth. The U.S. Census Department estimated that over 55 million Hispanics resided in the United States in 2014, representing an increase of approximately 20 million people between 2000 and 2014 and that number is projected to grow to 70 million by 2025. Hispanic television households grew by 35% during the period from 2006 to 2016, from 11.2 million households to 15.1 million households. Similarly, Hispanic pay-TV subscribers increased 53% since 2006 to 12.1 million subscribers in 2016. The continued long-term growth of Hispanic television households and pay-TV subscribers creates a significant opportunity for all of our Networks.

 

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, rising disposable incomes and investments in network infrastructure resulting in improved service and performance, pay-TV subscribers in Latin America (excluding Brazil) grew by 32% from 2012 to 2015 and are projected to grow an additional 15 million from 51 million in 2015 to 66 million by 2020, representing projected growth of approximately 29%. Furthermore, Cinelatino and Pasiones are each presently distributed to only 23% and 20%, respectively, 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. Upon consummation of our initial public offering, certain of the agreements were amended or terminated to what management believes to be to the benefit of Cinelatino. As consideration for the terminated agreement, we made a one-time payment of $3.8 million to MVS. An agreement which had granted MVS the exclusive right to distribute the service in the U.S. was terminated upon consummation of our initial public offering. We have assumed responsibility for those activities previously provided by MVS, thus having no impact on Cinelatino’s operations. A similar agreement which had granted MVS the exclusive right to distribute the service throughout Latin America was amended upon consummation of our initial public offering so that MVS’s rights would be on a

 

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