Stockholder's Equity

6 Months Ended

Jun. 30, 2014

Stockholder's Equity

Stockholder's Equity

Note 7. Stockholders’ Equity

Equity Incentive Plans

An aggregate of 4.0 million shares of our Class A common stock were authorized for issuance under the terms of the Hemisphere Media Group, Inc. 2013 Equity Incentive Plan (our “2013 Equity Incentive Plan”).  As of June 30, 2014, 1.3 million shares of restricted Class A common stock and 1.8 million options to purchase shares of our Class A common stock were awarded under our 2013 Equity Incentive Plan. At June 30, 2014, 1.1 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 us 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.  Our board of directors 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.

Our 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 us. Our event-based restricted stock awards and option awards generally vest upon our 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 us. Other event-based restricted stock awards granted to certain members of our board of directors vest on the day preceding our 2015 annual shareholder meeting.

Stock-Based Compensation

Stock-based compensation expense related to stock options and restricted stock was $1.7 million and $3.1 for the three months ended June 30, 2014 and 2013, respectively, and $3.2 million and $4.0 for the six months ended June 30, 2014 and 2013, respectively. At June 30, 2014, there was $4.2 million of total unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over weighted-average period of 2.6 years. At June 30, 2014, there was $5.4 million of total unrecognized compensation cost related to non-vested restricted stock, which is expected to be recognized over a weighted-average period of 1.7 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 our competitors given our 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. We have estimated forfeitures of 1.5% and have 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	Six Months Ended June 30, 2014	2013
Risk-free interest rate	1.76%-1.81%	.93%-2.03%
Dividend yield	—	—
Volatility	28.4%	34.4%-36.7%
Weighted-average expected term (years)	6.0-6.3	6.0

Monte Carlo Option Valuation Assumptions	Six Months Ended June 30, 2014	2013
Risk-free intererst rate	—	1.78%
Dividend yield	—	—
Volatility	—	36.7%
Weighted-average expected term (years)	—	5.4-5.8

The following table summarizes stock option activity for the six months ended June 30, 2014 (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, 2013	1,730	$	11.20	9.3	$	2,208
Granted	80	11.51		9.9	—
Exercised	—	—		—	—
Forfeited	—	—		—	—
Expired	—	—		—	—
Outstanding at June 30, 2014	1,810	$	11.21	8.9	$	3,228
Vested at June 30, 2014	608	$	11.05	8.8	$	1,180
Exercisable at June 30, 2014	608	$	11.05	8.8	$	1,180

At June 30, 2014, 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.

Monte Carlo Option Valuation Assumptions	Six Months Ended June 30, 2014	2013
Risk-free interest rate	—	0.52%
Dividend yield	—	—
Volatility	—	36.7%
Weighted-average expected term (years)	—	0.6-1.3

The following table summarizes restricted share activity for the six months ended June 30, 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	(285	)	11.25
Forfeited	—		—
Outstanding at June 30, 2014	739		$	9.89

At June 30, 2014, 0.2 million shares of restricted stock issued are unvested, event-based shares.

Warrants

In connection with our capitalization noted above, we have issued 14.7 million warrants, which qualify as equity instruments. 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. At December 31, 2013, 14.7 million warrants were issued and outstanding, which are exercisable into 7.3 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). As a result, a holder must exercise a least two warrants, at an effective exercise price of $12.00 per share. At our option, 10.0 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 six months ended June 30, 2014, we issued 50 shares of our Class A common stock upon the exercise of warrants, for total exercise proceeds of $600.