Note 1. Nature of business

Nature of business: The accompanying Condensed Consolidated Financial Statements include the accounts of Hemisphere Media Group, Inc. (“Hemisphere” or the “Company”), the parent holding company of Cine Latino, Inc. (“Cinelatino”), WAPA Holdings, LLC (formerly known as InterMedia Español Holdings, LLC) (“WAPA”), and HMTV Cable, Inc., the parent companyof Pasiones, TV Dominicana, and Centroamerica TV. The Company determines its operating segments based upon (i) financial information reviewed by the chief operating decision maker, the Chief Executive Officer, (ii) internal management and related reporting structure and (iii) the basis upon which the chief operating decision maker makes resource allocation decisions. We have one operating segment, Hemisphere. In these notes, the terms “Company,” “we,” “us” or “our” mean Hemisphere and all subsidiaries included in our Condensed Consolidated Financial Statements.

Basis of presentation: The accompanying unaudited Condensed Consolidated Financial Statements for Hemisphere and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“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, 2016 are not necessarily indicative of the financial condition or results that may be expected for any future interim period or for the year ending December 31, 2016. These Condensed Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015.

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

The following table sets forth the computation of the common shares outstanding used in determining basic and diluted EPS (amounts in thousands, except per share amounts):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Numerator for earnings per common share calculation:
Net income	$	4,349	$	2,910	$	12,078	$	8,805


Denominator for earnings per common share calculation:
Weighted-average common shares, basic	40,499		43,103		42,057		42,748
Effect of dilutive securities
Stock options, restricted stock and warrants	536		1,040		707		815

Weighted-average common shares, diluted	41,035		44,143		42,764		43,563


EPS
Basic	$	0.11	$	0.07	$	0.29	$	0.21
Diluted	$	0.11	$	0.07	$	0.28	$	0.20

We apply the treasury stock method to measure the dilutive effect of our outstanding stock options and restricted stock awards and include the respective common share equivalents in the denominator of our diluted income per common share calculation. Potentially dilutive securities representing 1.0 million shares of common stock for the three and nine months ended September 30, 2016, respectively, were excluded from the computation of diluted income per common share for this period because their effect would have been anti-dilutive. The net income per share amounts are the same for our Class A common stock, par value $0.0001 per share (“Class A common stock”) and Class B common stock, par value $0.0001 per share (“Class B common stock”), because the holders of each class are legally entitled to equal per share distributions whether through dividends or in liquidation. For information regarding the conversion of certain shares of Class B common stock to Class A common stock following the end of this fiscal quarter, see Note 9, “Subsequent Events”, of Notes to our Condensed Consolidated Financial Statements, included elsewhere in this Quarterly Report.

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, 2016 and 2015. 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.

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

Recent accounting pronouncements: In October 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”, “Update”) 2016-16 — Income Taxes (Topic 740) Intra-entity Transfers of Assets Other Than Inventory. The amendments in this Update do not include new disclosure requirements; however, existing disclosure requirements might be applicable when accounting for the current and deferred income taxes for an intra-entity transfer of an asset other than inventory. ASU 2016-16 aligns the recognition of income tax consequences for intra-entity transfer of assets other than inventory with International Financial Reporting Standards, which require the recognition of current and deferred income taxes resulting from the transfer of any asset when the transfer occurs. The amendments in this update are effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. We are currently in the process of determining the impact that the updated accounting guidance will have on our consolidated financial statements.