HEMISPHERE MEDIA GROUP, INC. - Quarter Report: 2019 March (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 March 31, 2019

 

or

 

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

 

For the transition period from                    to

 

Commission file number: 001-35886

 

HEMISPHERE MEDIA GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

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

 

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

 

 

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

 

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

 

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

 

 

Class of Stock		Shares Outstanding as of May 6, 2019
Class A common stock, par value $0.0001 per share		19,683,711 shares
Class B common stock, par value $0.0001 per share		19,720,381 shares

 

 

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HEMISPHERE MEDIA GROUP, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

March 31, 2019

(Unaudited)

 

		PAGE NUMBER
PART I -	FINANCIAL INFORMATION	6
Item 1.	Financial Statements	6
	Notes to Unaudited Condensed Consolidated Financial Statements	12
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	29
PART II -	OTHER INFORMATION	29
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3.	Defaults Upon Senior Securities	30
Item 4.	Mine Safety Disclosures	30
Item 5.	Other Information	30
Item 6.	Exhibits	30
SIGNATURES		32

 

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

 

FORWARD-LOOKING STATEMENTS

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  continued consolidation of Distributors in the marketplace;

 

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

 

·                  disagreements with our Distributors over contract interpretation;

 

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

 

·                  the outcome of any pending or threatened litigation;

 

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

 

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

 

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

 

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

 

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

 

·                  changes in pricing and availability of products and services;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  competitor responses to our products and services.

 

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

 

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

 

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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)

 

		March 31,			December 31,
		2019			2018
		(Unaudited)			(Audited)
Assets
Current Assets
Cash		$	86,205		$	94,478
Accounts receivable, net of allowance for doubtful accounts of $555 and $2,645, respectively		28,624			30,840
Due from related parties		1,481			970
Programming rights		11,905			10,735
Prepaids and other current assets		6,646			7,801
Total current assets		134,861			144,824
Programming rights, net of current portion		14,795			15,321
Property and equipment, net		34,390			32,209
Operating lease right-of-use assets		1,792			—
Broadcast license		41,356			41,356
Goodwill		170,068			169,994
Other intangibles, net		35,752			39,086
Deferred income taxes		4,485			4,290
Equity method investments		57,153			51,658
Other assets		2,220			2,529
Total Assets		$	496,872		$	501,267
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable		$	3,771		$	2,515
Due to related parties		1,268			626
Accrued agency commissions		1,569			5,061
Accrued compensation and benefits		3,684			5,855
Accrued marketing		5,155			5,619
Other accrued expenses		6,042			6,810
Income taxes payable		3,467			2,265
Programming rights payable		4,947			4,051
Investee losses in excess of investment		4,056			4,982
Current portion of long-term debt		2,133			2,134
Total current liabilities		36,092			39,918
Programming rights payable, net of current portion		1,561			1,133
Long-term debt, net of current portion		203,570			203,957
Deferred income taxes		19,520			19,520
Other long-term liabilities		2,545			1,080
Defined benefit pension obligation		2,192			2,260
Total Liabilities		265,480			267,868
Stockholders’ Equity
Preferred stock, $0.0001 par value; 50,000,000 shares authorized; 0 shares issued and outstanding at March 31, 2019 and December 31, 2018		—			—
Class A common stock, $.0001 par value; 100,000,000 shares authorized; 24,849,589 shares issued at March 31, 2019 and December 31, 2018.		2			2
Class B common stock, $.0001 par value; 33,000,000 shares authorized; 19,720,381 shares issued and outstanding at March 31, 2019 and December 31, 2018		2			2
Additional paid-in capital		270,674			270,345
Treasury stock, at cost 5,509,793 and 5,523,838 at March 31, 2019 and December 31, 2018, respectively		(59,013		)	(59,088		)
Retained earnings		17,756			19,495
Accumulated other comprehensive income		530			1,155
Total Hemisphere Media Group Stockholders’ Equity		229,951			231,911
Equity attributable to non-controlling interest		1,441			1,488
Total Stockholders’ Equity		231,392			233,399
Total Liabilities and Stockholders’ Equity		$	496,872		$	501,267

 

See accompanying notes to Unaudited 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 March 31,
		2019			2018
Net revenues		$	35,110		$	29,035
Operating Expenses:
Cost of revenues		10,214			9,427
Selling, general and administrative		10,901			10,584
Depreciation and amortization		4,067			3,997
Other expenses		231			233
Gain from FCC repack and other		(1,462		)	(3		)
Total operating expenses		23,951			24,238
Operating income		11,159			4,797
Other expenses:
Interest expense, net		(2,960		)	(2,884		)
Loss on equity method investments		(7,376		)	(9,795		)
Total other expenses		(10,336		)	(12,679		)
Income (loss) before income taxes		823			(7,882		)
Income tax (expense) benefit		(2,556		)	323
Net loss		(1,733		)	(7,559		)
Net loss attributable to non-controlling interest		47			—
Net loss available to Hemisphere Media Group		$	(1,686	)	$	(7,559	)
Loss per share available to Hemisphere Media Group:
Basic		$	(0.04	)	$	(0.19	)
Diluted		$	(0.04	)	$	(0.19	)
Weighted average shares outstanding:
Basic		39,031			38,955
Diluted		39,031			38,955

 

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

 

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HEMISPHERE MEDIA GROUP, INC.

Condensed Consolidated Statement of Comprehensive Loss

(Unaudited)

(amounts in thousands)

 

		Three Months Ended March 31,
		2019			2018
Net loss		$	(1,733	)	$	(7,559	)
Other comprehensive (loss) income:
Change in fair value of interest rate swap, net of income taxes		(678		)	1,150
Comprehensive loss		(2,411		)	(6,409		)
Comprehensive loss attributable to non-controlling interest		47			—
Comprehensive loss attributable to Hemisphere Media Group		$	(2,364	)	$	(6,409	)

 

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

 

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HEMISPHERE MEDIA GROUP, INC.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

Three Months Ended March 31, 2019

(Unaudited)

(amounts in thousands)

 

		Class A Common Stock					Class B Common Stock					Additional Paid In			Class A Treasury			Retained			Accumulated Comprehensive			Non- controlling
		Shares		Par Value			Shares		Par Value			Capital			Stock			Earnings			Income			Interest			Total
Balance at December 31, 2018		24,850		$	2		19,720		$	2		$	270,345		$	(59,088	)	$	19,495		$	1,155		$	1,488		$	233,399
Net loss		—		—			—		—			—			—			(1,686		)	—			(47		)	(1,733		)
Issuance of treasury shares for acquisition of Snap Media		—		—			—		—			(588		)	588			—			—			—			—
Stock-based compensation		—		—			—		—			917			—			—			—			—			917
Repurchases of Class A common Stock		—		—			—		—			—			(513		)	—			—			—			(513		)
Adoption of accounting standards		—		—			—		—			—			—			(53		)	53			—			—
Other comprehensive loss, net of tax		—		—			—		—			—			—			—			(678		)				(678		)
Balance at March 31, 2019		24,850		$	2		19,720		$	2		$	270,674		$	(59,013	)	$	17,756		$	530		$	1,441		$	231,392

 

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

 

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HEMISPHERE MEDIA GROUP, INC.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

Three Months Ended March 31, 2018

(Unaudited)

(amounts in thousands)

 

		Class A Common Stock					Class B Common Stock					Additional Paid In			Class A Treasury			Retained			Accumulated Comprehensive			Non- controlling
		Shares		Par Value			Shares		Par Value			Capital			Stock			Earnings			Income			Interest			Total
Balance at December 31, 2017		25,171		$	3		20,801		$	2		$	265,329		$	(57,303	)	$	30,401		$	472		—			$	238,904
Net loss		—		—			—		—			—			—			(7,559		)	—			—			(7,559		)
Stock-based compensation		—		—			—		—			996			—			—			—			—			996
Repurchases of Class A common Stock		—		—			—		—			—			(34		)	—			—			—			(34		)
Exercise of warrants		2		0			—		—			20			—			—			—			—			20
Other comprehensive income, net of tax		—		—			—		—			—			—			—			1,150			—			1,150
Balance at March 31, 2018		25,173		$	3		20,801		$	2		$	266,345		$	(57,337	)	$	22,842		$	1,622		$	—		$	233,477

 

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

 

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HEMISPHERE MEDIA GROUP, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(amounts in thousands)

 

		Three Months Ended March 31,
		2019			2018
Reconciliation of Net Loss to Net Cash Provided by Operating Activities:
Net loss		$	(1,733	)	$	(7,559	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		4,067			3,997
Program amortization		3,256			2,490
Amortization of deferred financing costs and original issue discount		145			146
Stock-based compensation		917			996
Provision for bad debts		84			84
Gain on disposition of assets		—			(3		)
Loss on equity method investments		7,376			9,795
Gain from FCC repack		(1,462		)	—
Amortization of operating lease right-of-use assets		118			—
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable		2,132			(2,486		)
Programming rights		(3,900		)	(3,489		)
Prepaids and other assets		(1,393		)	(1,945		)
(Decrease) increase in:
Accounts payable		1,256			838
Due to related parties, net		131			444
Other accrued expenses		(6,895		)	(4,936		)
Programming rights payable		1,324			735
Income taxes payable		1,202			—
Other liabilities		1,397			2,617
Net cash provided by operating activities		8,022			1,724
Cash Flows From Investing Activities:
Funding of equity method investments		(13,796		)	(14,803		)
Capital expenditures		(2,914		)	(1,696		)
FCC repack proceeds		1,462			—
Net cash used in investing activities		(15,248		)	(16,499		)
Cash Flows From Financing Activities:
Repayments of long-term debt		(534		)	(2,133		)
Purchases of common stock		(513		)	(34		)
Proceeds from exercise of warrants		—			20
Net cash used in financing activities		(1,047		)	(2,147		)
Net decrease in cash		(8,273		)	(16,922		)
Cash:
Beginning		94,478			124,299
Ending		$	86,205		$	107,377
Supplemental Disclosures of Cash Flow Information:
Cash payments for:
Interest		$	3,974		$	2,768
Income taxes		$	—		$	—
Non-cash investing activity:
Acquisition financed in part by treasury shares		$	588		$	—

 

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

 

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Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Note 1. Nature of business

 

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

 

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

 

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 (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to make the information not misleading. In our opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement have been included. Our financial condition as of, and operating results, for the three months ended March 31, 2019 are not necessarily indicative of the financial condition or results that may be expected for any future interim period or for the year ending December 31, 2019. These Unaudited 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, 2018.

 

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

 

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

 

		Three Months Ended March 31,
		2019			2018
Numerator for loss per common share calculation:
Net loss available to Hemisphere Media Group		$	(1,686	)	$	(7,559	)
Denominator for loss per common share calculation:
Weighted-average common shares, basic		39,031			38,955
Effect of dilutive securities
Stock options, restricted stock and warrants		—			—
Weighted-average common shares, diluted		39,031			38,955
Loss per share available to Hemisphere Media Group
Basic		$	(0.04	)	$	(0.19	)
Diluted		$	(0.04	)	$	(0.19	)

 

We apply the treasury stock method to measure the dilutive effect of its outstanding stock options and restricted stock awards and include the respective common share equivalents in the denominator of our diluted loss per common share calculation. Per the Accounting Standards Codification (“ASC”) 260 accounting guidance, under the treasury stock method, the incremental shares (difference between the number of shares assumed issued and the number of shares assumed purchased) shall be included in the denominator of the diluted loss per share computation (ASC 260-10-45-23). The assumed exercise only occurs when the options are “In the Money” (exercise price is lower than the average market price for the period). If the options are “Out of the Money” (exercise price is higher than the average market price for the period), the exercise is not assumed since the result would be anti-dilutive. Potentially dilutive securities representing 1.1 million and 2.1 million shares of common stock for the three months ended March 31,

 

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2019 and 2018, respectively, were excluded from the computation of diluted loss per common share for this period because their effect would have been anti-dilutive. The net loss per share available to Hemisphere Media Group amounts are the same for our Class A and Class B common stock because the holders of each class are legally entitled to equal per share distributions whether through dividends or in liquidation.

 

As a result of the loss from continuing operations for each of the three months ended March 31, 2019 and 2018, 0.5 million and 0.2 million outstanding awards, respectively, were not included in the computation of diluted loss per share because their effect was anti-dilutive.

 

In computing loss per share, the Company’s Nonvoting Stock is considered a participating security. Each share of Nonvoting Stock has identical rights, powers, limitations and restrictions in all respects as each share of common of the Company, including the right to receive the same consideration per share payable in respect of each share of common stock, except that holders of Nonvoting Stock shall have no voting rights or powers whatsoever.

 

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 months ended March 31, 2019 and 2018. Such estimates are based on historical experience and other assumptions that are considered appropriate in the circumstances. However, actual results could differ from those estimates.

 

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

 

On January 1, 2019, we adopted the FASB Accounting Standards Update (“ASU”) 2018-07—Compensation —Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The amendments in this ASU applied to any entity that enters into share-based payment transactions with nonemployees. The new guidance eliminated the requirement to revalue nonemployee share-based transactions on a recurring quarterly basis. The adoption of this ASU did not have an impact on our condensed consolidated financial statements as of and for the three months ended March 31, 2019.

 

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

 

On January 1, 2019, we adopted ASU 2017-12 — Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.  The amendments in this ASU applied to any entity that elects to apply hedge accounting and is intended to better align an entity’s risk management activities and financial reporting for hedging relationships. The ASU amends effectiveness testing requirements, income statement presentation and disclosures and permits additional risk management strategies to qualify for hedge accounting.  The adoption of this ASU did not have an impact on our condensed consolidated financial statements as of and for the three months ended March 31, 2019.

 

Accounting guidance not yet adopted:  In March 2019, the FASB issued Accounting Standards Update (“ASU”) 2019-02—Entertainment—Films-Other Assets-Film Costs (Subtopic 926-20): Improvements to Accounting for Costs of Films. The updated guidance aligns the accounting for production costs of episodic television series with those of films, allowing for costs to be capitalized in excess of amounts of revenue contracted for each episode. The updated guidance also updates certain presentation and disclosure requirements for capitalized film and television costs, and requires impairment testing to be performed at a group level for capitalized film and television costs when the content is predominately monetized with other owned or licensed content. The updated

 

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guidance is effective for the fiscal years beginning after December 15, 2019 and early adoption is permitted. We are currently in the initial stages of our assessment in determining the impact, if any, that the updated accounting guidance will have on our consolidated financial statements.

 

Note 2. Revenue Recognition

 

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

 

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

 

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

 

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

 

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

 

		Three months ended March 31,
Revenues by type		2019			2018
Affiliate revenue		$	21,349		$	18,433
Advertising revenue		13,146			9,918
Other revenue		615			684
Total revenue		$	35,110		$	29,035

 

Note 3. Related party transactions

 

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

 

·                  On November 15, 2018, an amendment to an agreement was executed, effective through February 28, 2022, 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 original 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 $0.6 million and $0.7 million for the three months ended March 31, 2019 and 2018, respectively. Amounts due to MVS pursuant to the agreements noted above amounted to $1.3 million and $0.7 million at March 31, 2019 and December 31, 2018, respectively.

 

·                  On November 15, 2018, an amendment to an affiliation agreement was executed, effective through February 28, 2022 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

 

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Mexico. Total revenues recognized were $0.5 million for each of the three months ended March 31, 2019 and 2018. Amounts due from Dish Mexico amounted to $0.3 million at March 31, 2019 and December 31, 2018.

 

·                  On November 15, 2018, an amendment was executed to extend MVS the non-exclusive right to duplicate, distribute and exhibit Cinelatino’s service via cable, satellite or by any other means in Mexico. Pursuant to the arrangement, Cinelatino receives revenues net of MVS’s distribution fee, which is presently equal to 13.5% of all license fees collected from third party distributors managed by MVS to the extent that distribution is not owned by MVS. Total revenues recognized were $0.3 million for each of the three months ended March 31, 2019 and 2018. Amounts due from MVS pursuant to the agreements noted above amounted to $1.2 million and $0.7 million at March 31, 2019 and December 31, 2018, respectively.

 

We renewed the three-year consulting agreement effective April 9, 2016 with James M. McNamara, a member of the Company’s board of directors, to provide the development, production and maintenance of programming, affiliate relations, identification and negotiation of carriage opportunities, and the development, identification and negotiation of new business initiatives including sponsorship, new channels, direct-to-consumer programs and other interactive initiatives. Total expenses incurred under these agreements are included in selling, general and administrative expenses and amounted to $0.1 million for each of the three months ended March 31, 2019 and 2018, respectively. No amounts were due to this related party at March 31, 2019 and December 31, 2018.

 

We entered into an output agreement effective November 2, 2016, with Pantelion Films, LLC (“Pantelion”), a joint venture made up of several organizations, including Panamax Films, LLC (an entity owned by James M. McNamara), Lions Gate Films, Inc. (“Lionsgate”) and Grupo Televisa, for the licensing of movie titles. Expenses incurred under this agreement are included in cost of revenues in the accompanying consolidated statements of operations and amounted to $0.0 million and $0 million for three months ended March 31, 2019 and 2018, respectively. At March 31, 2019 and December 31, 2018, $0.4 million and $0.5 million is included in programming rights, respectively, in the accompanying condensed consolidated balance sheets related to these agreements.

 

Note 4. Snap Media Acquisition

 

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

 

Total consideration in connection with the Snap Media Acquisition was $4.8 million (net of $0.7 million of cash acquired), which included 101,818 shares of the Company’s Class A common stock issued and $1.5 million paid in cash at closing. During the three months ended March 31, 2019, 54,825 shares of the Company’s Class A common stock were issued and $0.8 million paid in cash. Future consideration includes $0.5 million to be paid in each of 2020 and 2021, subject to downward adjustment. The fair value of shares of the Company’s Class A common stock included in consideration is based on the closing price of the Company’s Class A common stock on November 26, 2018. Future consideration is classified as Other long-term liabilities in the  accompanying condensed consolidated balance sheets.

 

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

 

Accounts receivable		$	1,419
Other current assets		30
Intangible asset—content library		616
Accounts payable		(259		)
Accrued expenses		(589		)
Deferred revenue		(140		)
Fair value of net assets acquired		1,077
Goodwill		5,107
Non-controlling interest		(1,379		)
Total purchase price consideration		$	4,805

 

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

 

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

 

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

 

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

 

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

 

Note 5. Goodwill and intangible assets

 

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

 

		March 31,			December 31,
		2019			2018
Broadcast license		$	41,356		$	41,356
Goodwill		170,068			169,994
Other intangibles		35,752			39,086
Total intangible assets		$	247,176		$	250,436

 

A summary of changes in the Company’s goodwill and other indefinite-lived intangible assets, on a net basis, for the three months ended March 31, 2019 is as follows (amounts in thousands):

 

		Net Balance at December 31, 2018			Additions			Impairment			Net Balance at March 31, 2019
Broadcast license		$	41,356		$	—		$	—		$	41,356
Goodwill		169,994			74			—			170,068
Brands		15,986			—			—			15,986
Other intangibles		700			—			—			700
Total indefinite-lived intangibles		$	228,036		$	74		$	—		$	228,110

 

A summary of the changes in the Company’s other amortizable intangible assets for the three months ended March 31, 2019 is as follows (amounts in thousands):

 

		Net Balance at December 31, 2018			Additions			Amortization			Net Balance at March 31, 2019
Affiliate relationships		$	20,273		$	—		$	(3,018	)	$	17,255
Advertiser relationships		690			—			(138		)	552
Non-compete agreement		686			—			(137		)	549
Other intangibles		144			—			(19		)	125
Programming contracts		607			—			(22		)	585
Total finite-lived intangibles		$	22,400		$	—		$	(3,334	)	$	19,066

 

The aggregate amortization expense of the Company’s amortizable intangible assets was $3.3 million for each of the three months ended March 31, 2019 and 2018. The weighted average remaining amortization period is 3.0 years at March 31, 2019.

 

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

 

Year Ending December 31,		Amount
Remainder of 2019		$	5,263
2020		6,170
2021		5,857
2022		1,528
2023 and thereafter		248
Total		$	19,066

 

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Note 6. Equity method investments

 

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

 

On November 3, 2016, we acquired a 25% interest in Pantaya, a newly formed joint venture with Lionsgate, to launch a Spanish-language OTT movie service. The service launched on August 1, 2017. The investment is deemed a variable interest entity (“VIE”) that is accounted for under the equity method. As of March 31, 2019, we have funded $5.9 million in capital contributions to Pantaya. We record the income or loss on investment on a one quarter lag.  For the three months ended March 31, 2019 and 2018, we have recorded $0.3 million and $2.6 million, respectively in loss on equity method investments in the accompanying unaudited condensed consolidated statements of operations. In accordance with U.S. GAAP, since we are committed to provide future capital contributions to Pantaya, we also present as a liability in the accompanying condensed consolidated balance sheets the net balance recorded for our share of Pantaya’s losses in excess of the amount funded into Pantaya, which was $4.1 million and $5.0 million at March 31, 2019 and December 31, 2018, respectively. As of March 31, 2019, our applicable pro rata share of the inception to date losses exceeds our contractual funding commitment of $10 million, as such our cumulative share of the losses is limited to $10 million.

 

On November 30, 2016, we, in partnership with Colombian content producers, Radio Television Interamericana S.A., Compania de Medios de Informacion S.A.S. and NTC Nacional de Television y Comunicaciones S.A., were awarded a ten (10) year renewable television broadcast concession license for Canal 1 in Colombia. The partnership began operating Canal 1 on May 1, 2017. On February 7, 2018, Colombian regulatory authorities approved an increase in our ownership in the joint venture from 20% to 40%. The joint venture is deemed a VIE that is accounted for under the equity method. As of March 31, 2019, we have funded $96.6 million in capital contributions to Canal 1. The Canal 1 joint venture losses to date have exceeded the capital contributions of the common equity partners and in accordance with equity method accounting, losses in excess of the common equity have been recorded against the next layer of the capital structure, in this case, preferred equity. The Company is currently the sole preferred equity holder in Canal 1 and therefore, the Company has recorded nearly 100% of the losses of the joint venture. We record the income or loss on investment on a one quarter lag. For the three months ended March 31, 2019 and 2018, we recorded $7.0 million and $7.1 million in loss on equity method investment, net of a preferred return on capital funded, in the accompanying unaudited condensed consolidated statements of operations, respectively. The net balance recorded in equity method investments related to Canal 1 joint venture was $52.2 million and $46.7 million at March 31, 2019 and December 31, 2018, respectively, and is included in equity method investments in the accompanying condensed consolidated balance sheets.

 

On April 28, 2017, we acquired a 25.5% interest in REMEZCLA, a digital media company targeting English speaking and bilingual U.S. Hispanic millennials through innovative content. As of March 31, 2019, we have recorded $5.0 million in equity method funding related to REMEZCLA. We record the income or loss on investment on a one quarter lag. For the three months ended March 31, 2019 and 2018, we recorded $0.0 million and $0.1 million in loss on equity method investment, net of preferred return on capital funded, in the accompanying unaudited condensed consolidated statement of operations, respectively. The net balance recorded in equity method investments was $4.9 million and $5.0 million at March 31, 2019 and December 31, 2018, respectively, and is included in the accompanying condensed consolidated balance sheets. We have no additional commitment to fund the operations of the venture.

 

On November 26, 2018, Snap Media acquired a 50% interest in Snap JV, LLC (“Snap JV”) (the Company owns 75% of Snap Media), a newly formed joint venture with Mar Vista Entertainment, LLC (“Mar Vista”), to co-produce original movies and series. The investment is deemed a VIE that is accounted for under the equity method. As of March 31, 2019, we have funded $0.1 million in capital contributions to the Snap JV. We record the income or loss on investment on a one quarter lag.  For the three months ended March 31, 2019, we have recorded $0.0 million in loss on equity method investments in the accompanying unaudited condensed consolidated statements of operations. The net balance recorded in equity method investments related to the Snap JV was $0.0 million at March 31, 2019, and is included in equity method investments in the accompanying condensed consolidated balance sheets.

 

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The Company records the income or loss on investments on a one quarter lag. Summary unaudited financial data for our equity investments in the aggregate as of and for the three months ended December 31, 2018 are included below (amounts in thousands):

 

		Total Equity Investees
Current assets		$	21,192
Non-current assets		$	33,842
Current liabilities		$	52,279
Non-current liabilities		$	92,012
Redeemable stock and non-controlling interests		$	(453	)
Net revenue		$	7,307
Operating loss		$	(9,501	)
Net loss		$	(13,521	)

 

Note 7. Income taxes

 

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

 

For the three months ended March 31, 2019 and 2018, our income tax expense has been computed utilizing the estimated annual effective rates of 32.7% and 47.7%, respectively. The difference between the annual effective rate of 32.7% and the statutory Federal income tax rate of 21% in the three month period ended March 31, 2019, is primarily due to the impact of the Tax Act and the related impact to the valuation allowance on foreign tax credits. The annual effective tax rate related to income generated in the U.S. is 23.1%. Due to the reduced U.S. tax rate, the Company determined that a portion of its foreign income, which is taxed at a higher rate, will result in the generation of excess foreign tax credits that will not be available to offset U.S. income tax. As a result, 9.6% of the annual effective rate relates to the required valuation allowance against the excess foreign tax credits, bringing the annual effective tax rate for the three month period ended March 31, 2019 to 32.7%. The difference between the annual effective rate of 47.7% and the statutory Federal income tax rate of 21% in the three month period ended March 31, 2018, is primarily due to the impact of the Tax Act and the related impact to the valuation allowance on foreign tax credits.

 

Income tax expense was $2.6 million for the three month period ended March 31, 2019 as compared to an income tax benefit of $0.3 million for the three month period ended March 31, 2018.

 

Note 8. Long-term debt

 

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

 

		March 31, 2019			December 31, 2018
Senior Notes due February 2024		$	205,703		$	206,091
Less: Current portion		2,133			2,134
		$	203,570		$	203,957

 

On February 14, 2017 (the “Closing Date”), the Borrowers amended the Term Loan Facility (the “Second Amended Term Loan Facility”). The Second Amended Term Loan Facility provides for a $213.3 million senior secured term loan B facility, which matures on February 14, 2024. The Second Amended Term Loan Facility bears interest at the Borrowers’ option of either (i) London Inter-bank Offered Rate (“LIBOR’) plus a margin of 3.50% or (ii) an Alternate Base Rate (“ABR”) plus a margin of 2.50%. The Second Amended Term Loan Facility, among other terms, provides for an uncommitted incremental loan option (the “Incremental Facility”) allowing for increases for borrowings under the Second Amended Term Loan Facility and borrowing of new tranches of term loans, up to an aggregate principal amount equal to (i) $65.0 million plus (ii) an additional amount (the “Incremental Facility Increase”) provided, that after giving effect to such Incremental Facility Increase (as well as any other additional term loans), on a pro forma basis, the First Lien Net Leverage Ratio (as defined in the Second Amended Term Loan Facility) for the most recent four consecutive fiscal quarters does not exceed 4.00:1.00 and the Total Net Leverage Ratio (as defined in the Second Amended Term Loan Facility) for the most recent four consecutive fiscal quarters does not exceed 6.00:1.00. The First Lien Net Leverage Ratio and the Total Net Leverage Ratio each cap the cash netted against debt up to a maximum amount of $60.0 million. Additionally, the Second Amended Term Loan Facility also provides for an uncommitted incremental revolving loan option (the “Incremental Revolving Facility”) allowing for an aggregate principal amount of up to $30.0 million, which will be secured on a pari passu basis by the collateral securing the Second Amended Term Loan Facility.

 

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

 

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

 

As of March 31, 2019, the original issue discount balance was $1.6 million, net of accumulated amortization of $1.9 million and was recorded as a reduction to the principal amount of the Second Amended Term Loan Facility outstanding as presented on the accompanying condensed consolidated balance sheets and will be amortized as a component of interest expense over the term of the Second Amended Term Loan Facility. In accordance with ASU 2015-15 Interest—Imputation of Interest (Subtopic 835-30) Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line of Credit Arrangements, deferred financing fees of $1.2 million, net of accumulated amortization of $2.1 million, are presented as a reduction to the Second Amended Term Loan Facility outstanding at March 31, 2019 as presented on the accompanying condensed consolidated balance sheets, and will be amortized as a component of interest expense over the term of the Second Amended Term Loan Facility.

 

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

 

Year Ending December 31,		Amount
Remainder of 2019		$	1,600
2020		2,133
2021		2,133
2022		2,133
2023 and thereafter		200,548
Total		$	208,547

 

Note 9. Derivative instruments

 

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

 

On May 4, 2017, we entered into two identical pay-fixed, receive-variable, interest rate swaps with two different counter parties, to hedge the variability in the LIBOR interest payments on an aggregate notional value of $100.0 million of our Second Amended Term Loan Facility beginning May 31, 2017, through the expiration of the swaps on June 30, 2022. At inception, these interest rate swaps were designated as cash flow hedges of interest rate risk, and as such, the unrealized changes in market value are recorded in accumulated other comprehensive income (“AOCI”).

 

The change in the fair value of the interest rate swap agreements for the three months ended March 31, 2019 and 2018, resulted in an unrealized loss of $0.9 million and an unrealized gain of $1.5 million, respectively, which were included in AOCI net of taxes. The Company received $0.1 million of net interest on the settlement of the interest rate swap agreements for the three months ended March 31, 2019. The Company paid $0.1 million of net interest on the settlement of interest rate swap agreements for the three months ended March 31, 2018. As of March 31, 2019, the Company estimates that none of the unrealized gain included in AOCI related to these interest rate swap agreements will be realized and reported in operations within the next twelve months. No gain or loss was recorded in operations for the three months ended March 31, 2019 and 2018, respectively.

 

The aggregate fair value of the interest rate swaps was $0.7 million and $1.6 million as of March 31, 2019 and December 31, 2018, respectively. These were recorded in Swap assets in other non-current assets on the accompanying condensed consolidated balance sheets.

 

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

 

Note 10. Fair Value Measurements

 

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

 

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

 

Estimated Fair Value

March 31, 2019

Category

Balance Sheet Location

Level 1

Level 2

Level 3

Total

Cash flow hedges:

Interest rate swap

Other assets

—

$

746

—

$

746

 

Estimated Fair Value

December 31, 2018

Category

Balance Sheet Location

Level 1

Level 2

Level 3

Total

Cash flow hedges:

Interest rate swap

Other assets

—

$

1,619

—

$

1,619

 

Certain non-financial assets and liabilities are measured at fair value on a nonrecurring basis. These assets and liabilities are not measured at fair value on an ongoing basis but are subject to periodic impairment tests. These items primarily include long-lived assets, goodwill and other intangible assets. As of March 31, 2019, there were no assets and liabilities measured at fair value on a nonrecurring basis.

 

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

 

Note 11.  Stockholders’ equity

 

Capital stock

 

As of March 31, 2019, the Company had 19,710,855 shares of Class A common stock, and 19,720,381 shares of Class B common stock, issued and outstanding.

 

On June 20, 2017, the Company announced that its Board of Directors authorized the repurchase of up to $25.0 million of the Company’s Class A common stock, par value $0.0001 per share (“Class A common stock”). Under the Company’s stock repurchase program, management is authorized to purchase shares of the Company’s common stock from time to time through open market purchases at prevailing prices, subject to stock price, business and market conditions and other factors. During the three months ended March 31, 2019, the Company repurchased 40,780 shares of Class A common stock under the repurchase program for an aggregate purchase price of $0.5 million. As of March 31, 2019, the Company repurchased 2.0 million shares of Class A common stock under the repurchase program for an aggregate purchase price of $24.9 million, and the repurchased shares were recorded as treasury stock on the accompanying condensed consolidated balance sheets. As of March 31, 2019, the Company had $0.1 million remaining for future repurchases under the existing stock repurchase program, which expires on May 24, 2019.

 

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

 

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Equity incentive plans

 

Effective May 16, 2016, the stockholders of all classes of capital stock of the Company approved at the annual stockholder meeting the Hemisphere Media Group, Inc. Amended and Restated 2013 Equity Incentive Plan (the “2013 Equity Incentive Plan”) to increase the number of shares of Class A common stock that may be delivered under the 2013 Equity Incentive Plan to an aggregate of 7.2 million shares of our Class A common stock. At March 31, 2019, 2.7 million shares remained available for issuance of stock options or other stock-based awards under our 2013 Equity Incentive Plan (including shares of restricted Class A common stock surrendered to the Company in payment of taxes required to be withheld in respect of vested shares of restricted Class A common stock, which are available for re-issuance). The expiration date of the 2013 Equity Incentive Plan, on and after which date no awards may be granted, is May 16, 2026. The Company’s board of directors, or a committee thereof, administers the 2013 Equity Incentive Plan and has the sole and plenary authority to, among other things: (i) designate participants; (ii) determine the type, size, and terms and conditions of awards to be granted; and (iii) determine the method by which an award may be settled, exercised, canceled, forfeited or suspended.

 

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

 

Stock-based compensation

 

Stock-based compensation expense relates to both stock options and restricted stock. Stock-based compensation expense was $0.9 million and $1.0 million for the three months ended March 31, 2019 and 2018, respectively. At March 31, 2019, there was $0.6 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 March 31, 2019, there was $0.5 million of total unrecognized compensation cost related to unvested restricted stock, which is expected to be recognized over a weighted-average period of 1.2 years.

 

Stock options

 

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

 

Black-Scholes Option Valuation Assumptions		Three Months Ended March 31, 2019		Year Ended December 31, 2018
Risk-free interest rate		—		2.7% - 3.0	%
Dividend yield		—		—
Volatility		—		39.0% - 41.0	%
Weighted-average expected term (years)		—		6.0

 

The following table summarizes stock option activity for the three months ended March 31, 2019 (shares and intrinsic value in thousands):

 

		Number of shares		Weighted-average exercise price			Weighted-average remaining contractual term		Aggregate intrinsic value
Outstanding at December 31, 2018		2,910		$	11.62		5.6		$	2,806
Granted		—		—			—		—
Exercised		—		—			—		—
Forfeited		—		—			—		—
Expired		—		—			—		—
Outstanding at March 31, 2019		2,910		$	11.62		5.4		$	7,547
Vested at March 31, 2019		2,195		$	11.71		5.0		$	5,559
Exercisable at March 31, 2019		2,195		$	11.71		5.0		$	5,559

 

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