Stockholder's Equity

9 Months Ended

Sep. 30, 2013

Stockholder's Equity

Stockholder's Equity

Note 7. Stockholder’s Equity

Capitalization

On April 4, 2013, the merger by and among Cinelatino, WAPA and Azteca providing for the combination of Cinelatino, WAPA and Azteca as indirect, wholly-owned subsidiaries of Hemisphere (the “Transaction”) was consummated.

In connection with the Transaction (i) the holders of Cinelatino common stock and the holder of membership interests in WAPA (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”), 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 (in addition to 735,294 shares of Class A common stock already subject to forfeiture under pre-existing agreements) 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.

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.

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.

Equity Incentive Plans

An aggregate of 4,000,000 shares of our Class A common stock were authorized for issuance under the terms of the Hemisphere Media Group, Inc. 2013 Equity Incentive Plan (the “2013 Equity Incentive Plan”).  During the nine months ended September 30, 2013, 1,195,002 shares of restricted Class A common stock and 1,635,000 options to purchase shares of Class A common stock were awarded under the Plan.  As of September 30, 2013, 1,235,547 shares remained available for issuance of stock options or other stock-based awards under our 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 and available for 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 (“Board”) 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; (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 $12.50 or $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 2014 annual shareholder meeting.

Stock-Based Compensation

Stock-based compensation expense related to stock options and restricted stock amounted was $1,610,911 and $4,717,442 for the three and nine months ended September 30, 2013, respectively.  As of September 30, 2013, there was $5.8 million and $7.8 million of total unrecognized compensation cost related to non-vested stock options and restricted stock, respectively, which is expected to be recognized over weighted-average periods of 1.9 years and 1.3 years, respectively.

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% 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.

	Nine Months
	Ended September 30,
Black-Scholes Option Valuation Assumptions	2013	2012
Risk-free interest rates	0.93% - 2.03%	—
Dividend yield	—	—
Volatility	35.8% - 36.7%	—
Weighted-average expected term (years)	6	—

	Nine Months
	Ended September 30,
Monte Carlo Option Valuation Assumptions	2013		2012
Risk-free interest rate	1.78	%	—
Dividend yield	—		—
Volatility	36.7	%	—
Weighted-average expected term (years)	5.4 – 5.8		—

The weighted average grant date fair value of options granted for the nine months ended September 30, 2013 was $4.23 per option. The time-vesting option grants vest over a period of three years. The following table summarizes stock option activity for the nine months ended September 30, 2013:

				Weighted-
		Weighted-		average	Aggregate
	Number	average		contractual	intrinsic
	of shares	exercise price		term	value
Outstanding at January 1, 2013:	—	$	—	—	$	—
Granted	1,635,000	11.24		10.0	1,937,500
Exercised	—	—		—	—
Forfeited	—	—		—	—
Expired	—	—		—	—
Outstanding at September 30, 2013:	1,635,000	$	11.24	10.0	$	1,937,500
Vested at September 30, 2013	275,000	$	10.20	10.0	$	426,250
Exercisable at September 30, 2013	275,000	$	10.20	10.0	$	426,250

Upon the exercise of stock options, the Company will issue new shares of its Class A common stock.  As of September 30, 2013, 300,000 options issued 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.

	Nine Months
	Ended September 30,
Monte Carlo Restricted Stock Valuation Assumptions	2013		2012
Risk-free interest rate	1.78	%	—
Dividend yield	—		—
Volatility	36.7	%	—
Weighted-average expected term (years)	0.6 - 1.3		—

The following table summarizes restricted share activity for the nine months ended September 30, 2013:

			Weighted-
			average
	Number		grant date
	of shares		fair value
Outstanding at January 1, 2013:	—		$	—
Granted	1,195,002		9.81
Vested	(250,000	)	8.41
Forfeited	—		—
Outstanding at September 30, 2013:	945,002		$	10.18

As of September 30, 2013, 150,000 shares of restricted stock issued are unvested, event-based shares.