HEMISPHERE MEDIA GROUP, INC. - Quarter Report: 2017 September (Form 10-Q)

Table of Contents

 

 

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

 

or

 

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

 

For the transition period from                    to                  

 

Commission file number:   001-35886

 

HEMISPHERE MEDIA GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

(305) 421-6364

(Registrant’s telephone number, including area code)

 

Not Applicable

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

 

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

 

 

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

 

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

 

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

 

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.

 

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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