Nature of Business

9 Months Ended

Sep. 30, 2020

Nature of Business

Nature of Business

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 Holdings”), HMTV Cable, Inc., the parent company of the entities for the acquired networks consisting of Pasiones, TV Dominicana, and Centroamerica TV (see below), and HMTV Distribution, LLC, the parent of Snap Global, LLC, a Delaware limited liability company and its wholly owned subsidiaries (“Snap Media”), in which we own a 75% interest. Hemisphere was formed on January 16, 2013 for purposes of effecting its initial public offering, which was consummated on April 4, 2013. In these notes, the terms “Company,” “we,” “us” or “our” mean Hemisphere and all subsidiaries included in our Condensed Consolidated Financial Statements.

Reclassification: Certain prior period amounts on the presented Condensed Consolidated Statement of Cash Flows have been reclassified to conform to current period presentation.

Basis of presentation:   The accompanying 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, 2020 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, 2020, especially when considering the risks and uncertainties associated with the coronavirus (“COVID-19”) and the impact it may have on our business, results of operations and financial condition. 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, 2019.

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 each of the three and nine months ended September 30, 2020 and 2019. Such estimates are based on historical experience and other assumptions that are considered appropriate in the circumstances, but could change in the future as more information becomes known about the impact of COVID-19, and actual results could differ from those estimates.

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

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Numerator for income (loss) per common share calculation:
Net income (loss) attributable to Hemisphere Media Group, Inc.	$	5,297	$	(3,169)	$	(10,813)	$	(7,213)
Denominator for income (loss) per common share calculation:
Weighted-average common shares, basic		39,489		39,209		39,415		39,135
Effect of dilutive securities
Stock options and restricted stock		36		—		—		—
Weighted-average common shares, diluted		39,525		39,209		39,415		39,135
Income (loss) per share attributable to Hemisphere Media Group, Inc.
Basic	$	0.13	$	(0.08)	$	(0.27)	$	(0.18)
Diluted	$	0.13	$	(0.08)	$	(0.27)	$	(0.18)

We apply the treasury stock method to measure the dilutive effect of its outstanding stock options and restricted stock awards and include the respective common share equivalents in the denominator of our diluted income (loss) per common share calculation. Per the Accounting Standards Codification (“ASC”) 260 accounting guidance, under the treasury stock method, the incremental shares (difference between the number of shares assumed issued and the number of shares assumed purchased) shall be included in the denominator of the diluted income (loss) per share computation (ASC 260-10-45-23). The assumed exercise only occurs when the options are “In the Money” (exercise price is lower than the average market price for the period). If the options are “Out of the Money” (exercise price is higher than the average market price for the period), the exercise is not assumed since the result would be anti-dilutive. Potentially dilutive securities representing 3.9 million and 1.7 million shares of common stock for the three months ended September 30, 2020 and 2019, respectively, were excluded from the computation of diluted income (loss) per common share for these periods because their effect would have been anti-dilutive. Potentially dilutive securities representing 3.1 million and 1.2 million shares of common stock for the nine months ended September 30, 2020 and 2019, respectively, were excluded from the computation of diluted loss per common share for these periods because their effect would have been anti-dilutive. The net income (loss) per share attributable to Hemisphere Media Group, Inc. amounts are the same for our Class A and Class B common stock because the holders of each class are legally entitled to equal per share distributions whether through dividends or in liquidation.

As a result of the loss from operations for the three months ended September 30, 2019, 0.3 million outstanding awards were excluded from the computation of diluted loss per share because their effect was anti-dilutive. As a result of the loss from operations for the nine months ended September 30, 2020 and 2019, 0.2 million and 0.3 million, respectively, outstanding awards were excluded from the computation of diluted loss per share because their effect was anti-dilutive.

Risks and Uncertainties: In March 2020, the World Health Organization characterized COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The rapid spread of COVID-19 and the continuously evolving responses to combat it have had an increasingly negative impact on the global economy. Even during these unprecedented times, we have continued the production of news and entertainment programming, as our viewers rely on our Networks to keep them informed.

The impact of COVID-19 and measures to prevent its spread have continued to affect our businesses in a number of ways. Beginning in March 2020, the Company has experienced adverse advertising revenue impacts. Operationally, most non-production and programming personnel are working remotely, and the Company has restricted business travel. The Company has managed the remote workforce transition effectively and there have been no material adverse impacts on operations as of September 30, 2020. While the Company’s advertising revenue improved in the current quarter, the Company is unable to predict the impact that a significant change in circumstances including the ability of our workforce and/or key personnel to work effectively because of illness, government actions or other restrictions in connection with the COVID-19 pandemic may have on our businesses in the future. The extent of the impact of the COVID-19 pandemic on our future operations will depend on numerous factors, all of which are highly uncertain and cannot be predicted. These factors include the length and severity of the outbreak, the responses of private sector businesses and governments including the timing and amount of government stimulus, the impact on economic activity and the impact

on our customers, employees and suppliers. For more information on the risks associated with the COVID-19 pandemic, see "Item 1A-Risk Factors" included elsewhere in this Quarterly Report.

The Company has evaluated and continues to evaluate the potential impact of the COVID-19 pandemic on its Condensed Consolidated Financial Statements, including the impairment of goodwill and indefinite-lived intangible assets and the fair value of equity method investments. The ultimate impact of the COVID-19 pandemic, including the extent of any adverse impact on our business, results of operations and financial condition, remains uncertain. The negative effect of the pandemic on the Company’s business in the current year was significant and the adverse impact of COVID-19 could be material to the Company's future operating results. The Company believes it has substantial liquidity to satisfy its financial commitments.

Recently adopted Accounting Standards: On January 1, 2020, we adopted Financial Accounting Standards Board (“the FASB”) Accounting Standards Update (“ASU”) 2019- 02—Entertainment-Films-Other Assets-Film Costs (Subtopic 926-20): Improvements to Accounting for Costs of Films. The updated guidance aligns the accounting for production costs of episodic television series with those of films, allowing for costs to be capitalized in excess of amounts of revenue contracted for each episode. The updated guidance also updates certain presentation and disclosure requirements for capitalized film and television costs, and requires impairment testing to be performed at a group level for capitalized film and television costs when the content is predominately monetized with other owned or licensed content. The adoption of this ASU did not have an impact on our accompanying Condensed Consolidated Financial Statements as of and for the three and nine months ended September 30, 2020.

Accounting guidance not yet adopted: In January 2017, the FASB issued ASU 2017 04—Intangibles—Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment. The amendments in this Update simplify how an entity is required to test goodwill for impairment by eliminating step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under amendments in this Update, an entity would perform its annual, or interim, testing by comparing the fair value of a reporting unit with its carrying amount. An entity would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The amendments in this Update are effective for Small Reporting Companies with fiscal years beginning after December 15, 2022, and interim periods within those annual periods. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the impact, if any, that the updated accounting guidance will have on our accompanying Condensed Consolidated Financial Statements.

In December 2019, the FASB issued ASU 2019-12—Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The updated guidance simplifies the accounting for income taxes in several areas by removing certain exceptions and by clarifying and amending existing guidance applicable to accounting for income taxes. The updated guidance is effective for the fiscal years beginning after December 15, 2020, and interim periods within those fiscal periods and early adoption is permitted. We are currently evaluating the impact, if any, that the updated accounting guidance will have on our accompanying Condensed Consolidated Financial Statements.