Note 8. Stockholders' Equity

Capitalization

Capital Stock

In connection with the Transaction (i) the holders of Cinelatino common stock and the holder of membership interests in WAPA Holdings (the "Cinelatino/WAPA Investors") surrendered their respective interests and received an aggregate of 33,000,000 shares of Hemisphere Class B common stock, par value $0.0001 ("Class B common stock")(of which 1.5 million Class B Common Stock is subject to forfeiture if the market price of shares of Hemisphere Class A common stock does not reach certain levels), a cash payment equal to an aggregate of $5.0 million, and purchased 2,333,334 warrants from Azteca founders to purchase Hemisphere Class A common stock, par value $0.0001 (such warrants, "Warrants" and such stock, "Class A common stock"); (ii) each share of Azteca common stock was automatically converted into one share of Class A common stock; (iii) each Amended Azteca Warrant, as defined below, was automatically converted into an equal number of Warrants; and (iv) immediately prior to the consummation of the Transaction, Azteca Acquisition Holdings, LLC and certain existing shareholders of Azteca contributed 250,000 shares of Azteca common stock to Azteca for cancellation and agreed to subject an additional 250,000 shares of Class A common stock to certain forfeiture provisions (a total of 503,788 shares of Class A common stock is subject to forfeiture) if the market price of shares of Hemisphere Class A common stock does not reach certain levels. Following the consummation of the Transaction, there were 10,991,100 shares of Class A stock outstanding and 33,000,000 shares of Hemisphere Class B stock outstanding. Subsequent to the Transaction, an additional 250,000 shares of Class A restricted stock were issued. From time to time the Company has issued Class A common stock to certain members of management and board of directors as equity compensation, subject to time and performance vesting conditions, as discussed below.

As of December 31, 2016, the Company had 21,900,160 shares of Class A common stock (including shares subject to forfeiture), and 20,800,998 shares of Class B common stock (including shares subject to forfeiture), issued and outstanding.

Pursuant to the Equity Restructuring and Warrant Purchase Agreement, dated as of January 22, 2013, by and among Azteca Acquisition Holdings, LLC and the Company and the other parties identified therein, certain initial stockholders of Azteca Acquisition Corporation (which merged with the Company in connection with its initial public offering), agreed to subject 378,788 shares of Class A common stock to certain forfeiture provisions if the market price of shares of Hemisphere Class A common stock did not equal or exceed $15.00 per share for any 20 trading days within at least one 30-trading day period within 36 months of April 4, 2013. Effective the close of trading on April 4, 2016, such holders forfeited 378,788 shares of Class A common stock back to the Company as a result.

In the event the last sale price of the Class A common stock does not equal or exceed $15.00 per share (as adjusted for stock splits, share dividends, reorganizations, recapitalizations and the like) for any 20 trading days within at least one 30-trading day period before April 4, 2018, 125,000 shares of Class A common stock and 1.5 million shares of Class B Common Shares will be forfeited.

On June 8, 2016, the Company completed a privately negotiated stock repurchase of 2.8 million shares of Class A common stock at a price of $10.50 per share for $29.4 million. On March 16, 2016, the Company completed a repurchase of 100,000 shares of Class A common stock at a price of $13.35 per share for $1.3 million. The repurchased shares were placed into treasury to be used for general corporate purposes.

On October 21, 2016, an aggregate of 9.2 million shares of Class B common stock held by InterMedia Partners VII, L.P. and its affiliates ("IM") were distributed to limited partners of IM. A beneficial owner of shares of Class B common stock may transfer, directly or indirectly, shares of Class B common stock, whether by sale, assignment, gift or otherwise, only to a Class B Permitted Transferee (as defined in the Company's amended an and restated certificate of incorporation) and no Class B stockholder may otherwise transfer beneficial ownership (as hereinafter defined) of any shares of Class B common stock. As such, shares of Class B common stock held by IM were converted to shares of Class A common stock, including an aggregate of 419,383 shares of Class B common stock that are subject to forfeiture and distribution as elected by IM's limited partners were converted into shares of Class A common stock.

Warrants

The Company has issued 14.7 million warrants, which qualify as equity instruments. Each warrant entitles the holder to purchase one-half of the number of shares of our Class A common stock at a price of $6.00 per half share. At December 31, 2016, 12.3 million warrants were issued and outstanding, which are exercisable into 6.1 million shares of our Class A common stock. Warrants 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). Thus, a holder must exercise at least two warrants, at an effective exercise price of $12.00 per warrant. At the option of the Company, 8.7 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 twenty trading days within the thirty-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 year ended December 31, 2016, we repurchased 1.0 million warrants for $1.0 million, and we issued 35,000 shares of Class A common stock upon the exercise of 70,000 warrants for total exercise proceeds of $0.4 million.

Voting

Class B common stock votes on a 10 to 1 basis with the Class A common stock, which means that each share of Class B common stock will have 10 votes and each share of Class A common stock will have 1 vote. The Class B common stock shall be convertible in whole or in part at any time at the option of the holder or holders thereof, into an equal number of Class A common stock. Warrants are not entitled to vote, unless converted into shares of the Company's Class A common stock.

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 by 3.2 million shares, provide limits on non-employee director awards and additional provisions as set forth therein (a copy of the 2013 Equity Incentive Plan is provided in the Company's 2016 annual proxy statement). An aggregate of 7.2 million shares of our Class A common stock were authorized for issuance under the terms of the Equity Incentive Plan. At December 31, 2016, 2.8 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 either 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 shareholder meeting.

Stock-Based Compensation

Stock-based compensation expense related to stock options and restricted stock was $4.7 million, $5.6 million and $5.9 million for the years ended December 31, 2016, 2015, and 2014, respectively. At December 31, 2016, there was $3.5 million of total unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over a weighted-average period of 2.2 years. At December 31, 2016, there was $3.3 million of total unrecognized compensation cost related to non-vested restricted stock, which is expected to be recognized over a weighted-average period of 2.0 years.

Stock Options

The fair value of stock options granted is estimated at the date of grant using the Black-Scholes 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 to management for which the Company expects lower turnover, and has assumed no dividend yield, as dividends have never been paid to stock or option holders and will not be paid for the foreseeable future.

Black-Scholes Option Valuation Assumptions	2016	2015	2014
Risk-free interest rate	1.60% - 2.44%	1.76% - 2.12%	1.76% - 1.92%
Dividend yield	—	—	—
Volatility	26.4% - 32.4%	25.8% - 29.5%	28.4% - 30.9%
Weighted-average expected term (years)	6.2	6.3	6.0 - 6.3

The following table summarizes stock option activity for the years ended December 31, 2016, 2015 and 2014 (shares and intrinsic values in thousands):

	Number of shares			Weighted- average exercise price		Weighted- average remaining contractual term		Aggregate intrinsic value
Outstanding at December 31, 2013		1,730		$	11.20		9.3	$	2,208
Granted		140		$	11.56		9.7		—
Exercised		—			—		—		—
Forfeited or expired		—			—		—		—

Outstanding at December 31, 2014		1,870		$	11.23		8.4	$	4,721
Granted		215		$	13.61		6.2		—
Exercised		(15	)		10.60		—		—
Forfeited or expired		(27	)		10.60		—		—

Outstanding at December 31, 2015		2,043		$	11.49		7.6	$	6,740


Granted		890		$	11.97		6.2		—
Exercised		(13	)		10.60		—		—
Forfeited or expired		—			—		—		—

Outstanding at December 31, 2016		2,920		$	11.64		7.6	$	1,274


Vested at December 31, 2016		1,533		$	11.55		6.5	$	974


Exercisable at December 31, 2016		1,533		$	11.55		6.5	$	974

The weighted average grant date fair value of options granted for the years ended December 31, 2016, 2015 and 2014 was $3.71, $4.13 and $3.75. At December 31, 2016, 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 years ended December 31, 2016, 2015 and 2014 (shares in thousands):

	Number of shares			Weighted-average grant date fair value
Outstanding at December 31, 2013		945		$	10.18
Granted		79			11.34
Vested		(305	)		11.33
Forfeited		—			—

Outstanding at December 31, 2014		719		$	9.82
Granted		99		$	12.42
Vested		(324	)		10.65
Forfeited		—			—

Outstanding at December 31, 2015		494		$	9.79
Granted		395			11.82
Vested		(328	)		10.88
Forfeited		—			—

Outstanding at December 31, 2016		561		$	10.58

At December 31, 2016, 0.2 million shares of restricted stock issued are unvested, event-based shares.