HEMISPHERE MEDIA GROUP, INC. - 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 September 30, 2017

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

For the transition period from to

Commission file number: 001-35886

HEMISPHERE MEDIA GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware		80-0885255
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Hemisphere Media Group, Inc.
4000 Ponce de Leon Boulevard
Suite 650
Coral Gables, FL		33146
(Address of principal executive offices)		(Zip Code)

(305) 421-6364

(Registrant’s telephone number, including area code)

Not Applicable

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

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer x
Non-accelerated filer o		Smaller reporting company o
		Emerging growth company o

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

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

Class of Stock		Shares Outstanding as of November 6, 2017
Class A common stock, par value $0.0001 per share		20,327,636 shares
Class B common stock, par value $0.0001 per share		20,800,998 shares

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HEMISPHERE MEDIA GROUP, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

September 30, 2017

(Unaudited)

		PAGE NUMBER

PART I -	FINANCIAL INFORMATION	5

Item 1.	Financial Statements	5

	Notes to Unaudited Condensed Consolidated Financial Statements	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26

Item 4.	Controls and Procedures	27

PART II -	OTHER INFORMATION	27

Item 1.	Legal Proceedings	27

Item 1A.	Risk Factors	27

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28

Item 3.	Defaults Upon Senior Securities	28

Item 4.	Mine Safety Disclosures	28

Item 5.	Other Information	28

Item 6.	Exhibits	28

SIGNATURES		30

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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 WAPA2 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, WAPA2 Deportes, WAPA America, Cinelatino, Pasiones, Centroamerica TV and Television Dominicana; “Nielsen” refers to Nielsen Media Research; “Pasiones” refers collectively to HMTV Pasiones US, LLC, a Delaware limited liability company and HMTV Pasiones LatAm, LLC, a Delaware 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 our Annual Report on Form 10-K filed with the SEC on March 15, 2017; “Television Dominicana” refers to HMTV TV Dominicana, LLC, a Delaware limited liability company; “WAPA” refers to Televicentro of Puerto Rico, 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 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,” “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:

· the effects of Hurricanes Irma and Maria in the short and long-term on our business and the advertising market in Puerto Rico as well as our customers, employees, third-party vendors and suppliers;

· 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 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;

· 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.

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)

	September 30,			December 31,
	2017			2016
	(Unaudited)			(Audited)
Assets
Current Assets
Cash	$	140,321		$	163,090
Accounts receivable, net of allowance for doubtful accounts of $1,746 and $1,711, respectively	25,243			25,566
Due from related parties	1,889			1,505
Programming rights	7,922			5,450
Prepaids and other current assets	8,686			7,904
Total current assets	184,061			203,515

Programming rights	11,852			10,450
Property and equipment, net	24,603			25,501
Broadcast license	41,356			41,356
Goodwill	164,887			164,887
Other intangibles, net	54,967			64,849
Deferred taxes	18,830			18,638
Equity method investments	24,406			—
Other assets	808			1,245
Total Assets	$	525,770		$	530,441

Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable	$	5,034		$	3,525
Due to related parties	1,236			413
Accrued agency commissions	3,116			6,725
Accrued compensation and benefits	4,258			4,488
Accrued marketing	5,183			6,378
Taxes payable	36			1,619
Other accrued expenses	3,434			3,610
Programming rights payable	3,971			3,293
Current portion of long-term debt	2,133			—
Total current liabilities	28,401			30,051

Programming rights payable	805			107
Long-term debt, net of current portion	205,897			210,270
Deferred taxes	17,829			17,829
Swap liability	208			—
Defined benefit pension obligation	2,595			2,844
Total Liabilities	255,735			261,101

Stockholders’ Equity
Preferred stock, $0.0001 par value; 50,000,000 shares authorized; 0 shares issued and outstanding at September 30, 2017 and December 31, 2016	—			—
Class A common stock, $.0001 par value; 100,000,000 shares authorized; and 25,171,432 and 24,944,913 shares issued at September 30, 2017 and December 31, 2016	2			2
Class B common stock, $.0001 par value; 33,000,000 shares authorized; 20,800,998 shares issued and outstanding at September 30, 2017 and December 31, 2016	2			2
Additional paid-in capital	264,366			261,051
Treasury stock, at cost 4,481,439 and 3,606,696 at September 30, 2017 and December 31, 2016, respectively	(46,089		)	(35,069		)
Retained earnings	52,445			43,837
Accumulated other comprehensive loss	(691		)	(483		)
Total Stockholders’ Equity	270,035			269,340
Total Liabilities and Stockholders’ Equity	$	525,770		$	530,441

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 September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Net revenues	$	32,173		$	33,116		$	100,512		$	99,118

Operating Expenses:
Cost of revenues	9,883			9,826			30,426			30,647
Selling, general and administrative	9,510			8,999			28,845			27,775
Depreciation and amortization	4,041			4,083			12,223			12,500
Other expenses	332			638			3,056			770
(Gain) loss on disposition of assets	—			(9		)	2			6
Total operating expenses	23,766			23,537			74,552			71,698

Operating income	8,407			9, 579			25,960			27,420

Other:
Interest expense, net	(2,863		)	(2,954		)	(8,089		)	(8,779		)
Loss on equity method investments, net	(2,571		)	—			(2,450		)	—
Loss on impairment of fixed assets	(533		)	—			(533		)	—
Total other expenses, net	(5,967		)	(2,954		)	(11,072		)	(8,779		)

Income before income taxes	2,440			6,625			14,888			18,641

Income tax expense	(1,758		)	(2,276		)	(6,280		)	(6,563		)

Net income	$	682		$	4,349		$	8,608		$	12,078

Earnings per share:
Basic	$	0.02		$	0.11		$	0.21		$	0.29
Diluted	$	0.02		$	0.11		$	0.21		$	0.28

Weighted average shares outstanding:
Basic	40,398			40,499			40,515			42,057
Diluted	40,925			41,035			40,831			42,764

See accompanying notes to unaudited 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 September 30,				Nine Months Ended September 30,
	2017		2016		2017			2016

Net income	$	682	$	4,349	$	8,608		$	12,078
Net change in fair value of cash flow hedge	132		—		(208		)	—
Other comprehensive loss	—		—		—			(8		)
Comprehensive income	$	814	$	4,349	$	8,400		$	12,070

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

Nine Months Ended September 30, 2017

(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, 2016	24,944	$	2	20,801	$	2	$	261,051	$	(35,069	)	$	43,837	$	(483	)	$	269,340
Net income	—	—		—	—		—		—			8,608		—			8,608
Vesting of restricted stock	204	—		—	—		—		(324		)	—		—			(324		)
Stock-based compensation	—	—		—	—		3,104		—			—		—			3,104
Repurchase of Class A common stock	—	—		—	—		—		(10,696		)	—		—			(10,696		)
Exercise of warrants	23	—		—	—		211		—			—		—			211
Other comprehensive loss	—	—		—	—		—		—			—		(208		)	(208		)

Balance at September 30, 2017	25,171	$	2	20,801	$	2	$	264,366	$	(46,089	)	$	52,445	$	(691	)	$	270,035

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)

	Nine Months Ended September 30,
	2017			2016
Reconciliation of Net Income to Net Cash Provided by Operating Activities:
Net income	$	8,608		$	12,078
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	12,223			12,500
Program amortization	9,572			9,010
Amortization of deferred financing costs	217			375
Amortization of original issue discount	258			284
Stock-based compensation	3,104			2,522
Provision for bad debts	48			262
Loss on disposition of assets	2			6
Deferred tax expense	(192		)	(2,781		)
Loss on equity method investments, net	2,450			—
Loss on impairment of fixed assets	533			—
Excess tax benefits	—			209
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable	275			879
Programming Rights	(13,446		)	(12,754		)
Due from related parties	(384		)	423
Prepaids and other assets	(345		)	(3,496		)
(Decrease) increase in:
Accounts payable	1,509			(126		)
Due to related parties	823			(851		)
Accrued expenses	(5,210		)	(2,432		)
Programming rights payable	1,376			(123		)
Taxes payable	(1,583		)	(1,665		)
Other liabilities	(249		)	150
Net cash provided by operating activities	19,589			14,470
Cash Flows From Investing Activities:
Funding of equity investments	(26,856		)	—
Proceeds from sale of assets	—			10
Capital expenditures	(1,979		)	(2,927		)
Net cash used in investing activities	(28,835		)	(2,917		)
Cash Flows From Financing Activities:
Repayments of long-term debt	(1,600		)	(8,278		)
Purchase of common stock	(11,020		)	(31,846		)
Financing fees	(1,114		)	—
Warrant repurchase	—			(976		)
Warrant exercise	211			420
Exercise of stock options	—			155
Net cash used in financing activities	(13,523		)	(40,525		)

Net decrease in cash	(22,769		)	(28,972		)
Cash:
Beginning	163,090			179,532
Ending	$	140,321		$	150,560

Supplemental Disclosures of Cash Flow Information:
Cash payments for:
Interest	$	7,654		$	8,215
Income taxes	$	8,268		$	11,230

See accompanying notes to unaudited condensed consolidated financial statements.

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Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Nature of business

Nature of business: The accompanying unaudited condensed consolidated financial statements include the accounts of Hemisphere Media Group, Inc. (“Hemisphere” or the “Company”), the parent holding company of Cine Latino, Inc. (“Cinelatino”), WAPA Holdings, LLC (formerly known as InterMedia Español Holdings, LLC) (“WAPA Holdings”), HMTV Cable, Inc., the parent company of the entities for the acquired networks consisting of Pasiones, TV Dominicana, and Centroamerica TV (see below) and HMTV Uno, S.A.S. Hemisphere was incorporated in Delaware on January 16, 2013 and consummated its initial public offering 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.

We also consider for consolidation entities in which we have certain interests, where the controlling financial interest may be achieved through arrangements that do not involve voting interests. Such an entity, known as a variable interest entity (“VIE”), is required to be consolidated by its primary beneficiary. The primary beneficiary is the entity that possesses the power to direct the activities of the VIE that most significantly impact its economic performance and has the obligation to absorb losses or the right to receive benefits from the VIE that are significant to it. We have no consolidating variable interests as of September 30, 2017. Refer to Note 5, “Equity method investments,” of Notes to unaudited condensed consolidated financial statements, included in this Quarterly Report on Form 10-Q for further information.

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 and nine months ended September 30, 2017 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, 2017. 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, 2016.

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 September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Numerator for earnings per common share calculation:
Net income	$	682	$	4,349	$	8,608	$	12,078

Denominator for earnings per common share calculation:
Weighted-average common shares, basic	40,398		40,499		40,515		42,057
Effect of dilutive securities
Stock options, restricted stock and warrants	527		536		316		707
Weighted-average common shares, diluted	40,925		41,035		40,831		42,764

EPS
Basic	$	0.02	$	0.11	$	0.21	$	0.29
Diluted	$	0.02	$	0.11	$	0.21	$	0.28

On June 20, 2017, the Company announced that its Board of Directors authorized the repurchase of up to $25 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

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and market conditions and other factors. As of September 30, 2017, the Company had $14.3 million of remaining authorization for future repurchases under the existing stock repurchase program, which will expire on July 17, 2018.

All common stock repurchases have been made through open market transactions and have been recorded as treasury stock on the condensed consolidated balance sheet. As of September 30, 2017, the Company had repurchased 0.8 million shares of Class A common stock under the repurchase program for an aggregate purchase price of $10.7 million.

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 1.9 million and 2.0 million shares of common stock for the three and nine months ended September 30, 2017, 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 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 nine months ended September 30, 2017 and 2016. Such estimates are based on historical experience and other assumptions that are considered appropriate in the circumstances. However, actual results could differ from those estimates.

Recent accounting pronouncements: In August 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU” or “Update”) 2017-12 — Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments in this Update apply 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 Update amends effectiveness testing requirements, income statement presentation and disclosures and permits additional risk management strategies to qualify for hedge accounting. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019. Early application is permitted; the effect of the adoption should be reflected as of the beginning of the fiscal year of adoption. We are currently evaluating the impact of this Update on our consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09 — Compensation - Stock Compensation (Topic 718) Scope of Modification Accounting. The amendments in this Update affect any entity that changes the terms or conditions of a share-based payment award and provides guidance on which changes to terms or conditions of an award require an entity to apply modification accounting. The amendments in this ASU are effective for all entities for annual periods, and all interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. Our consolidated financial statements would only be impacted if we were to make changes to share-based payment awards.

In March 2016, the FASB issued ASU 2016-09 — Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements, such as requiring all income tax effects of awards to be recognized in the income statement when the awards vest or are settled and allowing a policy election to account for forfeitures as they occur. In addition, all related cash flows resulting from share-based payments will be reported as operating activities on the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2016, and has been adopted by the Company.

In May 2014, the FASB issued ASU 2014-09 — Revenue from Contracts with Customers, a comprehensive revenue recognition model that supersedes the current revenue recognition requirements and most industry-specific guidance. Subsequent accounting standard updates have also been issued which amend and/or clarify the application of ASU 2014-09. The guidance provides a five-step framework to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration it expects to be entitled to in exchange for those goods or services. The guidance will be effective for the first interim period of our 2018 fiscal year and allows adoption either under a full retrospective or a modified retrospective approach. The Company has identified retransmission/subscriber fees and advertising sales as significant and has substantially completed its review of each of these revenue streams in accordance with the new guidance. The Company has determined that it will use the prospective method of transition in adopting the new standard.

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Note 2. 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:

· 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 for each of the three months ended September 30, 2017 and 2016, and $1.9 million for each of the nine months ended September 30, 2017 and 2016.

· 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 in effect 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. In February 2016, MVS terminated the agreement. We continued to operate under the terms of the agreement through December 31, 2016. As of January 1, 2017, we assumed the management of all the rights for Latin American third party distributors, and MVS retained the non-exclusive right in Mexico. 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 by MVS from third party distributors. Total revenues recognized were $0.3 million and $0.8 million for each of the three months ended September 30, 2017 and 2016, respectively, and $1.4 million and $3.1 million for the nine months ended September 30, 2017 and 2016, respectively.

· 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. We continue to operate under the terms of this agreement while we negotiate the renewal. Total revenues recognized were $0.5 million and $0.6 million for the three months ended September 30, 2017 and 2016, respectively, and $1.6 million and $1.7 million for of the nine months ended September 30, 2017 and 2016, respectively.

Amounts due from MVS pursuant to the agreements noted above amounted to $1.9 million and $1.3 million at September 30, 2017 and December 31, 2016, respectively, and are remitted monthly. Amounts due to MVS pursuant to the agreements noted above amounted to $1.3 million and $0.5 million at September 30, 2017 and December 31, 2016, respectively, and are remitted monthly.

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 September 30, 2017 and 2016, and $0.4 million and $0.2 million for the nine months ended September 30, 2017 and 2016, respectively. No amounts were due to this related party at September 30, 2017 and December 31, 2016.

We have entered into programming agreements with Panamax Films, LLC (“Panamax”), an entity owned by James M. McNamara, for the licensing of three specific movie titles. Expenses incurred under this agreement are included in cost of revenues and amounted to $0.0 million for each of the three and nine months ended September 30, 2017 and 2016. At September 30, 2017 and December 31, 2016, $0.1 million is included in programming rights related to these agreements.

We entered into agreements to license the rights to motion pictures from Lionsgate for a total license fee of $1.0 million. Some of the titles are owned or controlled by Pantelion Films, LLC (“Pantelion”), for which Lionsgate acts as Pantelion’s exclusive licensing agent. Pantelion is a joint venture made up of several organizations, including Panamax (an entity owned by James M. McNamara), Lionsgate and Grupo Televisa. Fees paid by Cinelatino to Lionsgate may be remunerated to Pantelion in accordance with their financial arrangements. Expenses incurred under this agreement are included in cost of revenues and amounted to $0.1 million and $0.0 million for the three months ended September 30, 2017 and 2016, respectively, and $0.2 million and $0.1 million for the nine months ended September 30, 2017 and 2016, respectively. At September 30, 2017 and December 31, 2016, $0.1 million and $0.3 million, respectively, is included in programming rights.

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We entered into an agreement to purchase the rights to motion pictures from Frontera Productions, LLC. One of our former Board members, Gabriel Brenner, holds an equity stake in this entity. The total license fee is $0.1 million. No expenses have been incurred as of September 30, 2017. Refer to Note 12, “Commitments”, of Notes to unaudited condensed consolidated financial statements.

We entered into a services agreement with InterMedia Advisors, LLC (“IMA”) which has officers, directors and stockholders in common with the Company for services including, without limitation, office space and operational support pursuant to a reimbursement agreement with IMA’s affiliate, InterMedia Partners VII, L.P. Expenses incurred under this agreement are included in selling, general and administrative expenses and amounted to $0.0 million for each of the three and nine month periods ended September 30, 2017 and amounted to $0.0 million and $0.1 million for the three and nine month periods ended September 30, 2016. The amounts due from this related party totaled $0.0 million as of September 30, 2017 and December 31, 2016.

Note 3. Property Plant and Equipment

On September 20, 2017, Hurricane Maria made landfall in Puerto Rico, causing damage to WAPA’s infrastructure. WAPA suffered limited damage to its studios and headquarters and to two of its three broadcast transmission towers, but the third transmission tower was completely destroyed. Accordingly, based on our assessment, we have recorded a $0.5 million fixed asset impairment charge related to the net book value of the identified damaged assets in the quarter ended September 30, 2017. A significant portion of the damaged assets have been in service for more than 10 years and, as such, are largely fully depreciated. We anticipate the replacement cost will be well in excess of the net book value, though we expect insurance will cover most of the replacement costs, subject to deductibles and other costs. There can be no assurances of the timing and amount of proceeds we may recover under our insurance policies. We have not recognized any potential insurance recoveries related to these assets.

Note 4. Goodwill and intangible assets

Goodwill and intangible assets consist of the following at September 30, 2017 and December 31, 2016 (amounts in thousands):

	September 30,		December 31,
	2017		2016
Broadcast license	$	41,356	$	41,356
Goodwill	164,887		164,887
Other intangibles	54,967		64,849
Total intangible assets	$	261,210	$	271,092

A summary of changes in the Company’s goodwill and other indefinite-lived intangible assets, on a net basis, for the nine months ended September 30, 2017 is as follows (amounts in thousands):

	Net Balance at December 31, 2016		Additions		Impairment		Net Balance at September 30, 2017
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 nine months ended September 30, 2017 is as follows (amounts in thousands):

	Net Balance at December 31, 2016		Additions		Amortization			Net Balance at September 30, 2017
Affiliate relationships	$	44,468	$	—	$	(9,109	)	$	35,359
Advertiser relationships	1,792		—		(414		)	1,378
Non-compete agreement	1,784		—		(412		)	1,372
Other intangibles	119		85		(32		)	172
Total finite-lived intangibles	$	48,163	$	85	$	(9,967	)	$	38,281

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The aggregate amortization expense of the Company’s amortizable intangible assets was $3.3 million and $3.4 million for the three months ended September 30, 2017 and 2016, respectively, and $10.0 million and $10.1 million for the nine months ended September 30, 2017 and 2016, respectively. The weighted average remaining amortization period is 3.6 years at September 30, 2017.

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

Year Ending December 31,	Amount
Remainder of 2017	$	3,318
2018	13,234
2019	8,483
2020	6,057
2021 and thereafter	7,189
	$	38,281

Note 5. 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 consistent with its ownership in the underlying net assets of the investees. 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 VIE that is accounted for under the equity method. As of September 30, 2017, we have not funded any capital contributions to PANTAYA. We record income/loss on investment on a one quarter lag. For the three and nine month periods ended September 30, 2017, we have recorded $0.4 million in Loss on equity method investments related to this investment.

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 (“Canal 1 Partnership”). Canal 1 is one of only three national broadcast television networks in Colombia. The Canal 1 Partnership began operations of the network through a newly formed joint venture vehicle on May 1, 2017. The Company has a 20% interest in the JV, which is deemed a VIE that is accounted for under the equity method. Additionally, we earn a preferred return on the capital funded, which is recorded quarterly as an offset to the loss on the investment. For the period ended September 30, 2017, we have recorded $21.7 million in Equity method investments, related to Canal 1. We record the income/loss on investment on a one quarter lag. For the three and nine month periods ended September 30, 2017, we recorded $2.3 million and $2.2 million, net of preferred return, in Loss on equity method investments, respectively. The Canal 1 Partnership losses to date have exceeded the capital contributions of the common equity partners. In accordance with equity method accounting, equity losses in excess of the common equity have been recorded against the next layer of the capital structure, in this case, preferred equity. Accordingly, in the quarter, the Company recorded 100% of the losses in excess of the common equity, which is greater than the Company’s 20% ownership interest in the Partnership. For the three and nine month periods ended September 30, 2017, we recorded $0.6 million and $0.8 million of income, respectively as an offset to losses incurred in Loss on equity method investments.

On April 28, 2017, we acquired a 25.5% interest in REMEZCLA, an influential digital media company targeting English speaking and bilingual U.S. Hispanics aged 18-35 through innovative content. For the nine months ended September 30, 2017, we have recorded $5.0 million in Equity method investments related to REMEZCLA. The Company records the income/loss on investment on a one quarter lag. For the three and nine month periods ended September 30, 2017, we have recorded $0.1 million in loss in Loss on equity method investments related to this investment. Additionally, we earned a preferred return on capital funded. For the three and nine month periods ended September 30, 2017, we recorded $0.3 million of income as an offset to the loss incurred in Loss on equity method investments.

Note 6. Income taxes

For the nine months ended September 30, 2017 and 2016, our income tax expense has been computed utilizing the estimated annual effective rates of 36.1% and 35.8%, respectively. The difference between the annual effective rate of 36.1% and the statutory Federal income tax rate of 35% in the nine months ended September 30, 2017, was driven by foreign withholding taxes and foreign permanent differences, which were offset by foreign tax credits. The difference between the annual effective rate of 35.8% and the statutory Federal income tax rate of 35% in the nine month period ended September 30, 2016, was primarily due to state and foreign income taxes.

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Income tax expense for the three and nine months ended September 30, 2017, was $1.8 million and $6.3 million, respectively. Income tax expense for the three and nine months ended September 30, 2016, was $2.3 million and $6.6 million, respectively.

Note 7. Long-term debt

Long-term debt at September 30, 2017 and December 31, 2016 consists of the following (amounts in thousands):

	September 30, 2017		December 31, 2016
Senior Notes due February 2024	$	208,030	$	—
Senior Notes due July 2020	—		210,270
Less: Current portion	2,133		—
	$	205,897	$	210,270

On July 31, 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 was due to mature 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%).

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) LIBOR plus a margin of 3.50% (decreased from a margin of 4.00% under the Term Loan Facility) or (ii) or an Alternate Base Rate (“ABR”) plus a margin of 2.50% (decreased from a margin of 3.00% under the Term Loan Facility). There is no LIBOR floor (a decrease from a LIBOR floor of 1.00% under the Term Loan Facility). 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 (increased from $45.0 million under the Term Loan Facility). Additionally, the Second Amended Term Loan Facility also provides for an uncommitted incremental revolving loan option (the “Incremental Revolving Facility”) allowing for an aggregate principal amount of up to $30.0 million, which will be secured on a pari passu basis by the collateral securing the Second Amended Term Loan Facility.

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

In addition, pursuant to the terms of the Second Amended Term Loan Facility, within 90 days after the end of each fiscal year, the Borrowers are required to make a prepayment of the loan principal in an amount equal to a percentage of the excess cash flow of the most recently completed fiscal year. Excess cash flow is generally defined as net income plus depreciation and amortization expense, less mandatory prepayments of the term loan, 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 the Second Amended Term Loan Facility, our net leverage ratio was 2.6x at December 31, 2016, resulting in an excess cash flow percentage of 0% and therefore, no excess cash flow payment was required to be paid in 2017.

In accordance with Accounting Standards Codification (“ASC”) 470 - Debt, the refinancing arrangement was deemed a modification of the Term Loan Facility and as such, an additional $1.1 million of original issue discount (“OID”) incurred in connection with the Second Amended Term Loan Facility was added to the existing OID. As of September 30, 2017, the OID balance was $2.1 million, net of accumulated amortization of $1.4 million and was recorded as a reduction to the principal amount of the Second Amended Term Loan Facility outstanding as presented on the unaudited condensed consolidated balance sheet and will be amortized as a component of interest expense over the term of the Second Amended Term Loan Facility. Financing costs of $1.4 million incurred in connection with the Second Amended Term Loan Facility were expensed in the period in accordance with ASC 470 — Debt and are included in Other expenses in the unaudited condensed consolidated statement of operations at September 30, 2017. 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 $1.6 million, net of

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accumulated amortization of $2.3 million, are presented as a reduction to the Second Amended Term Loan Facility outstanding at September 30, 2017 as presented on the unaudited condensed consolidated balance sheet, 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 September 30, 2017 and December 31, 2016, 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 September 30, 2017 (amounts in thousands):

Year Ending December 31,	Amount
Remainder of 2017	$	533
2018	2,133
2019	2,133
2020	2,133
2021 and thereafter	204,815
	$	211,747

Note 8. Derivative instruments

At 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 March 31, 2022. At inception, these interest rate swaps were designated as cash flow hedges of interest rate risk, and as such, the effective portion of unrealized changes in market value is recorded in Accumulated other comprehensive income (“AOCI”). Any losses from hedge ineffectiveness will be recognized in current earnings.

The change in the fair value of the interest rate swap agreements in the three month period ended September 30, 2017 was a gain of $0.1 million, and was included in AOCI. For the nine month period ended September 30, 2017, we have recorded a loss of $0.2 million related to the interest rate swap agreements. The Company paid $0.2 million of net interest on the settlement of the interest rate swap agreements for the three month period ended September 30, 2017. As of September 30, 2017, the Company estimates that none of the unrealized loss included in AOCI related to these interest rate swap agreements will be realized and reported in earnings within the next twelve months. No gain or loss was recorded in earnings for the three and nine months ended September 30, 2017.

The fair value of the interest rate swaps as of September 30, 2017 was $0.2 million and was recorded in Swap liability in non-current liabilities on the unaudited condensed consolidated balance sheets.

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

Note 9. 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 unaudited condensed consolidated balance sheets as of September 30, 2017 (amounts in thousands):

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Estimated Fair Value

September 30, 2017

Category

Balance Sheet Location

Level 1

Level 2

Level 3

Total

Cash flow hedges:

Swap Liability

Other non-current liabilities

—

208

—

208

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.

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 10. Stockholders’ equity

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 September 30, 2017, 2.9 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. Other event-based restricted stock awards granted to certain members of our Board vest on the day preceding the Company’s annual stockholder meeting.

Stock-based compensation

Stock-based compensation expense related to stock options and restricted stock was $1.0 million and $0.5 million for the three months ended September 30, 2017 and 2016, respectively, and $3.1 million and $2.5 million for the nine months ended September 30, 2017 and 2016, respectively. At September 30, 2017, there was $2.1 million of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted-average period of 1.5 years. At September 30, 2017, there was $2.5 million of total unrecognized compensation cost related to unvested restricted stock, which is expected to be recognized over a weighted-average period of 1.3 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.

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Black-Scholes Option Valuation Assumptions	Nine Months Ended September 30, 2017	Year Ended December 31, 2016
Risk-free interest rate	—	1.6%-2.4%
Dividend yield	—	—
Volatility	—	26.4%-32.4%
Weighted-average expected term (years)t	—	6.2

The following table summarizes stock option activity for the nine months ended September 30, 2017 (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, 2016	2,920		$	11.64	7.6	$	1,274
Granted	—		—		—	—
Exercised	—		—		—	—
Forfeited	(37	)	13.26		—	—
Expired	(40	)	11.51		—	—
Outstanding at September 30, 2017	2,843		$	11.62	6.7	$	2,311
Vested at September 30, 2017	1,875		$	11.67	6.0	$	1,760
Exercisable at September 30, 2017	1,875		$	11.67	6.0	$	1,760

No options were granted during the nine months ended September 30, 2017. At September 30, 2017, 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 nine months ended September 30, 2017 (shares in thousands):

	Number of shares		Weighted-average grant date fair value
Outstanding at December 31, 2016	561		$	10.58
Granted	99		11.10
Vested	(204	)	11.80
Forfeited	(8	)	13.38
Outstanding at September 30, 2017	448		$	10.09

At September 30, 2017, 0.2 million shares of restricted stock issued were unvested, event-based shares.

Warrants

At September 30, 2017, 12.1 million warrants, exercisable into 6.0 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 20 trading days within the 30-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 nine months ended September 30, 2017, no warrants were repurchased. There were 190,749 warrants exercised during the nine months ended September 30, 2017, in connection with such exercises 23,911 shares of Class A common stock were issued and the Company received $0.2 million in cash proceeds, as some of the warrant exercises were done on a cashless basis.

Note 11. 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.

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Note 12. 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 for each of the three months ended September 30, 2017 and 2016, and $0.6 million and $0.5 million for the nine months ended September 30, 2017 and 2016, respectively.

We have certain commitments including various operating leases and funding obligations for certain equity investments.

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

Nine months Ending September 30,	Operating Leases		Other Commitments		Total
Remainder of 2017	$	235	$	4,734	$	4,969
2018	503		9,325		9,828
2019	449		5,833		6,282
2020	358		2,118		2,476
2021 and thereafter	997		1,242		2,239
Total	$	2,542	$	23,252	$	25,794

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. Headquartered in Miami, Florida, we own and operate a variety of media businesses. Our portfolio consists of:

· Cinelatino: the leading Spanish-language cable movie network with over 20 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 #2-Nielsen rated Spanish-language cable television network in the U.S. overall, based on coverage ratings.

· WAPA: the leading broadcast television network and television content producer in Puerto Rico. WAPA has been the #1-rated broadcast television network in Puerto Rico for the last eight years. WAPA is Puerto Rico’s news leader and the largest local producer of news and entertainment programming, producing approximately 70 hours in the aggregate 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 U.S. WAPA America’s programming includes approximately 70 hours per week of news and entertainment programming produced by WAPA. WAPA America is distributed in the U.S. to approximately 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 many of the best telenovelas licensed from top producers throughout the world. Pasiones has over 18 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 approximately 4.1 million subscribers.

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· Television Dominicana: a cable television network targeting Dominicans living in the U.S., the fourth largest U.S. Hispanic group. Television Dominicana features the most popular news and entertainment from the Dominican Republic and is distributed in the U.S. to over 3.4 million subscribers.

· Canal 1: a partnership with leading Colombian content producers, is the #3 rated broadcast television network in Colombia. The partnership was awarded a 10-year renewable broadcast television concession for Canal 1 in 2016. The partnership began operating the network on May 1, 2017 and launched a new programming lineup on August 14, 2017.

· PANTAYA: a cross-platform Spanish-language digital subscription service that is well positioned to be the dominant player in the Spanish-language OTT space. The service, which launched in August 2017, allows audiences to access many of the best and most current Spanish-language films and includes content from our movie library, Pantelion’s U.S. theatrical titles, Lionsgate’s movie library, and Grupo Televisa’s theatrical releases in Mexico.

· REMEZCLA: an influential digital media company targeting English speaking and bilingual U.S. Hispanics aged 18-35 through innovative digital content.

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

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

WAPA has been the #1-rated broadcast television network in Puerto Rico for the last eight 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 2016 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, FOX and the CW. As a result of its ratings success in the last eight 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 is presently rated by Nielsen.

Hispanics represent 18% of the total U.S. population and approximately 10% of the total U.S. buying power, but the aggregate media spend targeted at U.S. Hispanics significantly under-indexes both of these metrics. As a result, advertisers have been allocating a higher proportion of marketing dollars to the Hispanic market, but U.S. Hispanic cable advertising still under-indexes relative to its consumption. U.S. Hispanic cable network advertising revenue grew at a 14% CAGR from 2009 to 2016, more than doubling from $204 million to $520 million. Going forward, U.S. Hispanic cable advertising is expected to continue to grow at a 11% CAGR from 2016 to 2019, outpacing forecasted growth for U.S. cable advertising, U.S. Hispanic broadcast advertising and U.S. general market broadcast advertising.

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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 Bureau estimated that 57 million Hispanics resided in the United States in 2015, representing an increase of approximately 21 million people between 2000 and 2015, and that number is projected to grow to 70 million by 2025. Hispanic television households grew by 34% during the period from 2007 to 2017, from 11.6 million households to 15.6 million households. Similarly, Hispanic pay-TV subscribers increased 39% since 2007 to 12.2 million subscribers in 2017. 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 44% from 2012 to 2016, and are projected to grow an additional 15 million from 53 million in 2016 to 69 million by 2021 representing projected growth of over 28%. Furthermore, Cinelatino and Pasiones are each presently distributed to only 29% and 25%, 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, technical and distribution services to Cinelatino pursuant to several agreements. An agreement that had granted MVS the non-exclusive right to distribute the service throughout Latin America was terminated by MVS effective February 29, 2016. We continued to operate under the terms of the agreement through December 31, 2016. As of January 1, 2017, we assumed the management of all of the rights for Latin American third party distributors and MVS retained the non-exclusive right in Mexico.

An agreement between Cinelatino and Dish Mexico (an affiliate of MVS), pursuant to which Dish Mexico distributes the network and Cinelatino receives revenue, expired on August 1, 2017. We continue to operate under the terms of the expired agreement.

Hurricanes Irma and Maria

On September 6, 2017, Hurricane Irma resulted in a loss of power to over 70% of the homes in Puerto Rico. Two weeks later, on September 20, 2017, Hurricane Maria made landfall in Puerto Rico causing widespread devastation and loss of power to 100% of the island. Additionally, the high sustained winds of Hurricane Maria caused one of our three transmission towers to fall, completely destroying the tower and the transmission equipment housed on the tower. Since the storm, we have been transmitting WAPA’s signal via the multicast spectrum of another broadcast television network. At the same time, we have been evaluating alternate long-term transmission solutions, and have identified several acceptable solutions.

The back-to-back hurricanes in Puerto Rico adversely affected WAPA’s business in September, and given the timing of the restoration of power and possible declines of television households, will have an adverse effect on both advertising revenue and retransmission fees, for several months. We are still estimating the replacement cost of the damaged property, but we do expect insurance will cover most of the cost, subject to deductibles and other costs. We also anticipate that a portion of the lost income will be mitigated through business interruption insurance, although it will not offset the full extent of the income loss. There can be no assurances of the timing and amount of the proceeds we may recover under our insurance policies.

Comparison of Consolidated Operating Results for the Three and Nine Months Ended September 30, 2017 and 2016

(Unaudited)

(amounts in thousands)

	Three Months Ended						$ Change			% Change		Nine Months Ended						$ Change			% Change
	September 30,						Favorable/			Favorable/		September 30,						Favorable/			Favorable/
	2017			2016			(Unfavorable)			(Unfavorable)		2017			2016			(Unfavorable)			(Unfavorable)

Net revenues	$	32,173		$	33,116		$	(943	)	(2.8	)%	$	100,512		$	99,118		$	1,394		1.4	%
Operating Expenses:
Cost of revenues	9,883			9,826			(57		)	(0.6	)%	30,426			30,647			221			0.7	%
Selling, general and administrative	9,510			8,999			(511		)	(5.7	)%	28,845			27,775			(1,070		)	(3.9	)%
Depreciation and amortization	4,041			4,083			42			1.0	%	12,223			12,500			277			2.2	%
Other expenses	332			638			306			48.0	%	3,056			770			(2,286		)	NM
(Gain) loss on disposition of assets	—			(9		)	(9		)	NM		2			6			4			66.7	%
Total operating expenses	23,766			23,537			(229		)	(1.0	)%	74,552			71,698			(2,854		)	(4.0	)%

Operating income	8,407			9,579			(1,172		)	(12.2	)%	25,960			27,420			(1,460		)	(5.3	)%

Other, net:
Interest expense, net	(2,863		)	(2,954		)	91			3.1	%	(8,089		)	(8,779		)	690			7.9	%
Loss on equity method investments, net	(2,571		)	—			(2,571		)	NM		(2,450		)	—			(2,450		)	NM
Loss on impairment of assets	(533		)	—			(533		)	NM		(533		)	—			(533		)	NM
Total Other, net	5,967			(2,954		)	(3,013		)	(102.0	)%	(11,072		)	(8,779		)	(2,293		)	(26.1	)%

Income before income taxes	2,440			6,625			(4,185		)	(63.2	)%	14,888			18,641			(3,753		)	(20.1	)%

Income tax expense	(1,758		)	(2,276		)	518			22.8	%	(6,280		)	(6,563		)	283			4.3	%
Net Income	$	682		$	4,349		$	(3,667	)	(84.3	)%	$	8,608		$	12,078		$	(3,470	)	(28.7	)%

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NM = Not meaningful

Net Revenues

Net revenues decreased $0.9 million, or 3%, for the three months ended September 30, 2017, due to a decline in advertising revenue, partially offset by growth in subscriber and retransmission fees and other revenues. Advertising revenue decreased $2.3 million, or 16%, primarily due to the negative impact of Hurricanes Irma and Maria on the television advertising market in Puerto Rico in September. Subscriber and retransmission fees increased $0.9 million, or 5%, driven by subscriber growth, new launches and annual rate increases. Other revenues, which are primarily related to the licensing of our content, grew $0.5 million, due to the timing and availability of content we licensed to third parties. Excluding political advertising revenue in the prior year period, net revenue decreased $0.8 million, or 3%, for the three months ended September 30, 2017.

Net revenues increased $1.4 million, or 1%, for the nine months ended September 30, 2017, due to growth in subscriber and retransmission fees and other revenue, which were partially offset by a decline in advertising revenue. Subscriber and retransmission fees increased $4.1 million, or 8%, due to subscriber growth, new launches and annual rate increases. Advertising revenue decreased $3.7 million, or 8%, due primarily to the impact of Hurricanes Irma and Maria, political advertising revenue generated in 2016 of $0.8 million. Other revenues increased $0.9 million, due to the timing and availability of content licensed to third parties. Excluding political advertising revenue in the prior year period, net revenue increased $2.2 million, or 7%, for the nine months ended September 30, 2017.

The following table presents estimated subscriber information:

	Subscribers (a) (amounts in thousands)
	September 30, 2017	December 31, 2016	September 30, 2016
U.S. Cable Networks:
WAPA America (b)	4,330	4,189	4,096
Cinelatino	4,563	4,588	4,581
Pasiones	4,602	4,620	4,530
Centroamerica TV	4,125	4,063	4,055
Television Dominicana	3,468	3,249	3,159
Total	21,088	20,709	20,421

Latin America Cable Networks:
Cinelatino	16,139	15,430	13,003
Pasiones	13,504	13,235	11,126
Total	29,643	28,665	24,129

(a) Amounts presented are based on most recent remittances received from our Distributors as of the respective dates shown above, which are typically two months prior to the dates shown above.

(b) Excludes digital basic subscribers. Subscribers to WAPA America including digital basic subscribers decreased 3.2% from September 30, 2016 to September 30, 2017, and decreased by 5.0% from December 31, 2016 to September 30, 2017.

Operating Expenses

Cost of Revenues: Cost of revenues consists primarily of programming and production costs, programming amortization and distribution costs. Cost of revenues increased $0.1 million, or 1%, for the three months ended September 30, 2017, and decreased $0.2 million, or 1%, for the nine months ended September 30, 2017. The increase in the three months ended September 30, 2017, was driven by the timing of certain sports rights, which shifted from the second quarter in 2016 to the third quarter in 2017, offset in part by lower programming amortization. The decrease in the nine months ended September 30, 2017, was driven by lower news costs, due to coverage of the political elections in 2016, and to the cancellation of certain programs, offset in part by higher programming

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amortization and costs for events incurred in 2017, but not in 2016, including the World Baseball Classic, Miss Universe and Miss Puerto Rico.

Selling, General and Administrative: Selling, general and administrative expenses consist principally of promotion, marketing and research, stock-based compensation, employee costs, rent and other general administrative costs. Selling, general and administrative expenses increased $0.5 million, or 6%, for the three months ended September 30, 2017, and increased $1.1 million, or 4%, for the nine months ended September 30, 2017. The increases were primarily due to higher stock compensation expense. The increase in the nine month period was also due to consulting fees incurred in connection with our equity method investments and higher corporate and legal expenses.

Depreciation and Amortization: Depreciation and amortization expense consists of depreciation of fixed assets and amortization of intangibles. Depreciation and amortization expense was flat for the quarter ended September 30, 2017, and decreased $0.3 million, or 2%, for the nine months ended September 30, 2017. The decrease in the nine month period, was due to the expiration of the useful lives of certain fixed assets, which were reflected in depreciation and amortization expense in the prior year period.

Other Expenses: Other expenses include legal, financial advisory and other fees incurred in connection with corporate finance activities, including debt and equity financings, and acquisition activities. Other expenses for the three months ended September 30, 2017, decreased $0.3 million, and for the nine months ended September 30, 2017, increased $2.3 million. The decrease in the three months ended September 30, 2017 was due primarily to higher costs in the prior year related to the liquidity transaction of our controlling stockholder. The increase in the nine month period ended September 30, 2017 was primarily due to costs incurred in connection with the refinancing of our Second Amended Term Loan Facility in the first quarter of this year.

Loss on Disposition of Assets: Loss on disposition of assets reflects loss on disposal of equipment no longer used in our operations.

Interest Expense, net

For the three and nine months ended September 30, 2017, interest expense decreased $0.1 million, or 3%, and $0.7 million, or 8%, due to lower interest rates as a result of refinancing our Second Amended Term Loan Facility in February 2017, and a lower outstanding principle balance.

Other expense net

Other expense, net increased $3.1 million and $3.0 million for the three and nine months ended September 30, 2017, respectively. The increases in both the three and nine month periods were driven by the loss on equity method investments and on the impairment of assets that were written off due to damage sustained from Hurricane Maria. For the quarter, our share of losses from our equity method investments of $3.4 million was partially offset by the preferred return on capital funding related to our Colombian joint venture of $0.8 million. For the nine months ended September 30, 2017, our share of losses from our equity method investments of $3.5 million was partially offset by the preferred return on capital funding related to our Colombian joint venture of $1.0 million. See Note 5, “Equity method investments”, and Note 3, “Property, Plant and Equipment” of the Notes to unaudited condensed consolidated financial statements, included elsewhere in this Quarterly Report.

Income Tax Expense

Income tax expense decreased by $0.5 million and $0.3 million for the three and nine months ended September 30, 2017, respectively, driven by lower pretax income. For more information, see Note 6, “Income taxes” of Notes to unaudited condensed consolidated financial statements, included elsewhere in this Quarterly Report.

Net Income

Net income decreased by $3.7 million and $3.5 million in the three and nine months ended September 30, 2017, respectively due to the loss on equity method investments and on the impairment of assets damaged by Hurricane Maria.

OFF-BALANCE SHEET ARRANGEMENTS

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

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LIQUIDITY AND CAPITAL RESOURCES

Sources and Uses of Cash

Our principal sources of cash are cash on hand and cash flows from operating activities. At September 30, 2017, we had $140.3 million of cash on hand. Our primary uses of cash include the production and acquisition of programming, operational costs, personnel costs, equipment purchases, principal and interest payments on our outstanding debt and income tax payments, and cash may be used to fund investments, acquisitions and repurchases of common stock.

On June 20, 2017, the Company announced a stock repurchase program. 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, privately negotiated transactions at prevailing prices, subject to stock price, business and market conditions and other factors. As of September 30, 2017, the total amount authorized under the stock repurchase program was $25 million, and the Company had $14.3 million of remaining authorization for future repurchases under the existing stock repurchase program, which will expire on July 17, 2018.

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

Cash Flows

	Nine Months Ended September 30,
Amounts in thousands:	2017			2016
Cash provided by (used in):
Operating activities	$	19,589		$	14,470
Investing activities	(28,835		)	(2,917		)
Financing activities	(13,523		)	(40,525		)
Net decrease in cash	$	(22,769	)	$	(28,972	)

Comparison for the Nine Months Ended September 30, 2017 and September 30, 2016

Operating Activities

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

Net cash provided by operating activities of $19.6 million for the nine months ended September 30, 2017, an increase of $5.1 million compared to the prior year period, was primarily due to an increase in non-cash items of $5.8 million, an increase in net working capital of $2.8 million, offset by a decrease in net income of $3.5 million. The increase in non-cash items was driven by lower deferred taxes of $2.6 million, losses on equity method investments of $2.5 million, increased stock-based compensation of $0.6 million, an increase in program amortization of $0.6 million and the loss on impairment of assets of $0.5 million, offset by a decrease in depreciation and amortization expense of $0.3 million, lower bad debt expense of $0.2 million, lower amortization of deferred financing costs of $0.2 million and lower excess tax benefits of $0.2 million. The increase in net working capital was driven by a decrease in Prepaid expenses and other current assets of $3.1 million, an increase in Accounts payable of $1.6 million, an increase in Program rights payable of $1.5 million, an increase in Due to related parties, net of $0.9 million, offset by a decrease in Accrued expenses of $2.8 million, an increase in Accounts receivable of $0.6 million, an increase in Programming rights of $0.7 million and a decrease in Other liabilities of $0.4 million.

Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2017, was $28.8 million, an increase of $25.9 million as compared to $2.9 million in the prior year period. The increase is primarily due to the funding of equity method investments totaling $26.9 million, offset in part by lower capital expenditures.

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Financing Activities

Net cash used in financing activities for the nine months ended September 30, 2017, was $13.5 million, a decrease of $27.0 million, as compared to $40.5 million in the prior year period. The decrease is primarily due to a $21.8 million decrease in repurchases of common stock and warrants made in the current year period as compared to the level of repurchases made in the 2016 period. The decrease is also due to higher principal debt payments made in the 2016 period of $6.7 million, which was driven by an excess cash flow payment of $8.3 million made in 2016 pursuant to the terms of the Term Loan Facility, which the Company was not obligated to make in the current year period. The decreases were offset in part by $1.1 million of financing fees incurred in connection with the Second Amended Term Loan Facility in the current period. For more information, see Note 7, “Long-term debt” and Note 10, “Stockholders’ equity” of Notes to unaudited condensed consolidated financial statements, included elsewhere in this Quarterly Report.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

The variable rate of interest on the Second Amended Term Loan Facility exposes us to market risk for changes in interest rates. Loans thereunder bear interest at rates that vary with changes in prevailing market rates. As of September 30, 2017, our exposure to changing market rates with respect to the Term Loan Facility was as follows (amounts in thousands):

	September 30, 2017
Variable rate debt	$	211.7
Interest rate	4.7		%

As of September 30, 2017, the total outstanding balance on the Second Amended Term Loan Facility was approximately $211.7 million. In the event of an increase in the interest rate of 100 basis points, assuming a principal of $211.7 million, we would incur an increase in interest expense of approximately $2.1 million per year. Such potential increases or decreases in interest expense are based on certain simplifying assumptions, including a constant level of debt, no interest rate swap or hedge in place, and an immediate, across-the-board increase in the level of interest rates with no other subsequent changes for one year.

Interest Rate Risk

We use derivative financial instruments in the management of our exposure to interest rate. 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 and we only enter into interest rate swap contracts with financial institutions that we believe are creditworthy counterparties. We monitor the financial institutions that are counterparties to our interest rate swap contracts and to the extent necessary, may diversify our swap contracts among various counterparties to mitigate exposure to any single financial institution.

As of September 30, 2017, we have interest rate swap contracts outstanding with notional amounts aggregating $100.0 million. The aggregate fair values of interest rate swap contracts at September 30, 2017, was a net liability of $0.2 million. Cumulative unrealized losses, on the portion of floating-to-fixed interest rate swaps designated as cash flow hedges was $0.2 million and is included in accumulated other comprehensive loss. At September 30, 2017, our interest rate swap contracts designated as cash flow hedges were highly effective, in all material respects.

Foreign Currency Exchange Risk

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

Our objective in managing exposure to foreign currency fluctuations is to reduce volatility of earnings and cash flow. Accordingly, we may enter into foreign currency derivative instruments that change in value as foreign exchange rates change, such as foreign currency forward contracts or foreign currency options. Any gains and losses on the fair value of derivative contracts would be largely offset by gains and losses on the underlying assets being hedged. We held no foreign currency derivative financial instruments at September 30, 2017.

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ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated our disclosure controls and procedures, as of September 30, 2017. Our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2017, our disclosure controls and procedures were effective to ensure that all information required to be disclosed is recorded, processed, summarized and reported within the time periods specified, and that information required to be filed in the reports that we file or submit under the Securities Exchange Act of 1934 (the “Exchange Act”) is accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosure.

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

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

Changes in Internal Controls

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

You should carefully consider the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2016, in addition to other information included in this Quarterly Report on Form 10-Q, including under the section entitled, “Forward-Looking Statements,” and in other documents we file with the SEC, in evaluating our Company and our Business. If any of the risks occur, our Business, financial condition, liquidity and results of operations could be materially adversely affected. We caution the reader that these risk factors may not be exhaustive. We operate in a continually changing business environment and new risks emerge from time to time. Management cannot predict such new risk factors, nor can we assess the impact, if any, of such new risk factors on our Business or the extent to which any factor or combination of factors may impact our Business. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our Business, financial condition and/or operating results.

Except as set forth in this Item 1A, there have not been any material changes during the quarter ended September 30, 2017 from the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.

We have operations, properties and viewers that are located in Puerto Rico and Florida and could be adversely affected in the event of a hurricane or other extreme weather conditions.

WAPA’s corporate office and production facilities are located in Puerto Rico, where major hurricanes have occurred, as well as other extreme weather conditions, such as tornadoes, floods, fires, unusually heavy or prolonged rain, droughts and heat waves. Additionally, our corporate office and certain of our operations provided by our service providers are located in Miami, Florida, where similar weather conditions have occurred, including major hurricanes. Depending on where any particular hurricane or other weather event makes landfall, our properties or those of our service providers could experience significant damage. Such event could have an adverse effect on our ability to broadcast our programming or produce new shows, which could have an adverse effect on our Business and results of operations. Additionally, many of WAPA’s regular viewers may be left without power and unable to view our programming which could have an adverse effect on our Business and results of operations.

Recently, Hurricanes Irma and Maria caused substantial damage to property and infrastructure in Puerto Rico, including limited damage to our studios and offices and to two of our three transmission towers and significant damage beyond repair to the third of our transmission towers. The hurricanes destroyed residential and commercial buildings, agriculture, communications networks and most of Puerto Rico’s electric grid. Although we expect that insurance will cover most of the replacement costs, we are still estimating the impact of property damage. Beyond physical damage, the extraordinary situation in Puerto Rico will adversely affect WAPA’s business in the coming months. Following the hurricanes, there was a steep drop off in advertising revenue in Puerto Rico. We also expect that there will be a significant impact on retransmission and subscriber fee revenue in Puerto Rico for the fourth quarter. Generally, for both advertising and retransmission and subscriber fee revenues in Puerto Rico, we do not expect significant improvement until power is more widely restored. While we anticipate that a portion of the adverse impact to the operations of our business will be mitigated through business interruption insurance, it will likely not offset the full extent of the revenue loss. Furthermore, there can be no assurances of the timing and amount of proceeds we may recover under our insurance policies. Finally, as a result of the hurricanes, a significant number of citizens have left, or may leave, Puerto Rico, and there can be no assurance about when they will return, if at all. As a result, the disruption from the storms, coupled with the uncertainty regarding the timing of the recovery and possible declines in television households, could have a material adverse effect on our results of operations and financial position.

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

Set forth below is the information concerning acquisitions of Hemisphere Media Group, Inc. Class A common stock by the Company during the three months ended September 30, 2017:

Period (a)	Total Number of Shares Purchased (b)	Average Price Paid per Share (c)		Total Number of shares Purchased as Part of a Publicly Announced Program	Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Program (d)

July 17, 2017 - July 31, 2017	148,425	$	12.23	148,425	$	23,187,405
August 1, 2017 - August 31, 2017	248,213	$	12.86	248,213	$	20,000,099
September 1, 2017 - September 30, 2017	450,752	$	12.62	450,752	$	14,320,594

Total	847,390	$	12.62	847,390

(a) The stock repurchase plan was announced on June 20, 2017.

(b) The Board of Directors authorized the repurchase of up to $25 million of the Company’s Class A common stock.

(d) The plan will expire on July 17, 2018.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS

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

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Exhibit Index

Exhibit No.		Description of Exhibit

31.1		Certification of Chief Executive Officer required by Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2		Certification of Chief Financial Officer required by Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.1*		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
32.2*		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema
101.CAL		XBRL Taxonomy Extension Calculation Linkbase
101.LAB		XBRL Taxonomy Extension Label Linkbase
101.PRE		XBRL Taxonomy Extension Presentation Linkbase
101.DEF		XBRL Taxonomy Extension Definition Document

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

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SIGNATURES

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

	HEMISPHERE MEDIA GROUP, INC.


DATE: November 9, 2017	By:	/s/ Alan J. Sokol
		Alan J. Sokol
		Chief Executive Officer and President
		(Principal Executive Officer)


DATE: November 9, 2017	By:	/s/ Craig D. Fischer
		Craig D. Fischer
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

HEMISPHERE MEDIA GROUP, INC. - FORM 10-Q - November 9, 2017

Attached files

HEMISPHERE MEDIA GROUP, INC. Reports