Stock-Based Compensation

Hostess Brands, Inc. 2016 Equity Incentive Plan (Successor)

The Hostess Brands, Inc. 2016 Equity Incentive Plan (the “2016 Plan”) provides for the granting of various equity-based incentive awards to directors of the Company, certain members of Company management, and service providers to the Company. The types of equity-based awards that may be granted under the 2016 Plan include: stock options, stock appreciation rights (SARs), restricted stock, restricted stock units (RSUs), and other stock-based awards. There are 7,150,000 registered shares of Class A common stock reserved for issuance under the 2016 Plan. All awards issued under the 2016 Plan may only be settled in shares of Class A common stock. As of December 31, 2017, 5,188,682 shares were available for issuance under the 2016 Plan.

Equity-based compensation expense totaled approximately $7.4 million for the Successor year ended December 31, 2017. There was no equity-based compensation expense for either the Successor or Predecessor periods in 2016 related to the 2016 Plan.

Restricted Stock Units (“RSUs”)

The fair value of RSU awards is calculated based on the closing market price of the Company’s Class A Common Stock on the date of grant. Compensation expense is recognized straight-line over the requisite service period of the awards, ranging from one to three years.

The vesting of certain RSU awards is contingent upon the Company attaining positive earnings per share for the fiscal year ending immediately prior to the vesting date. Management has determined it is probable that these performance conditions will be met.

For certain RSU awards, a portion of the granted units are banked at each annual performance period if the Company achieves certain EBITDA targets. Banked shares continue to be subject to the requisite service period under the terms of the awards. Depending on actual performance during each of the three annual performance periods, award recipients have the opportunity to receive up to 225% of the granted units.

Upon an employee’s termination, all unvested awards will be forfeited and the shares of common stock underlying such award will become available for issuance under the 2016 Plan.

The following table summarizes the activity of the Company’s unvested RSUs for the successor year ended December 31, 2017:



	Restricted Stock Units		Weighted Average Grant Date Fair Value
Unvested units as of December 31, 2016 (Successor)	—		$	—
Total Granted	1,448,736		15.73
Forfeited	(390,038	)	15.78
Vested⁽¹⁾	(142,804	)	15.55
Unvested as of December 31, 2017 (Successor)	915,894		$	15.73

⁽¹⁾Includes 40,223 shares withheld to satisfy $0.4 million employee tax obligations upon vesting.

As of December 31, 2017, there was $6.5 million of total unrecognized compensation cost related to non-vested RSUs granted under the 2016 Plan that are considered probable to vest; that cost is expected to be recognized over a weighted average remaining period of approximately 2.00 years. As of December 31, 2017, the grant date fair value of awards for which no compensation is recognized because it is not probable that the performance conditions will be met is $4.8 million.

For the year ended December 31, 2017 (Successor), $5.4 million of compensation expense related to the RSUs was recognized within general and administrative expenses on the consolidated statement of operations.

Restricted Stock Awards (“RSAs”)

On March 23, 2017, the Company granted 435,000 shares of restricted stock to the Company’s Chief Executive Officer under the 2016 Plan. The fair value of the RSAs is calculated based on the closing market price of the Company’s Class A common stock on the grant date. On October 12, 2017, with the announcement of the Company’s Chief Executive Officer’s retirement, the grant was modified so that the 435,000 unvested shares were forfeited and 75,000 replacement shares would vest on January 1, 2018, provided there was positive earnings per share for the year ended December 31, 2017.

If the vesting requirements of a restricted stock award are not satisfied, or the performance conditions are not attained, the award will be forfeited and the shares of Class A common stock subject to the award shall be returned to the Company.

As of December 31, 2017, there was no unrecognized compensation cost related to the non-vested restricted stock. For the year ended December 31, 2017 (Successor), the Company recognized expense of $1.0 million related to the restricted stock awards within general and administrative expenses on the consolidated statement of operations.

The following table summarizes the activity of the Company’s restricted stock awards for the year ended December 31, 2017:



	Shares of Restricted Stock		Weighted Average Grant Date Fair Value
Unvested units as of December 31, 2016 (Successor)	—		—
Granted	510,000		$	15.73
Forfeited	(435,000	)	15.78
Vested	—		—
Unvested as of December 31, 2017 (Successor)	75,000		$	13.43

Stock Options

During the year ended December 31, 2017, the Company granted 1,202,613 stock options to certain members of management under the Plan. The weighted average grant date fair value was estimated using the Black-Scholes option-pricing model (level 3) with the following assumptions:



	Year Ended December 31, 2017
Expected volatility ⁽¹⁾	0.2746%
Expected dividend yield ⁽²⁾	—%
Expected option term ⁽³⁾	6.24 years
Risk-free rate ⁽⁴⁾	2.09%


(1)	The expected volatility assumption was calculated based on a peer group analysis of stock price volatility with a look back period based on the expected term and ending on the grant date.


(2)	As of December 31, 2017, the Company has not paid any dividends on our common stock. As of the stock option grant date, the Company does not anticipate paying any dividends on common stock over the term of the stock options. Option holders have no right to dividends prior to the exercise of the options.


(3)	The Company utilized the simplified method to determine the expected term of the stock options since the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.


(4)	The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of grant which corresponds to the expected term of the stock options.

The stock options vest in four equal annual installments on varying dates through December 2021. The maximum term under the grant agreement is ten years. As of December 31, 2017, there was $3.1 million of total unrecognized compensation cost related to non-vested stock options outstanding under the 2016 Plan; that cost is expected to be recognized over the vesting periods. For the year ended December 31, 2017 (Successor), there was $1.0 million of expense related to the stock options recognized within general and administrative costs on the consolidated statement of operations.

The following table summarizes the activity of the Company’s unvested stock options for the year ended December 31, 2017 (Successor):



	Number of Options		Weighted Average Remaining Contractual Life (years)	Weighted Average Exercise Price		Weighted Average Grant Date Fair Value
Outstanding as of December 31, 2016 (Successor)	—		—	$	—	$	—
Granted	1,202,613		5.52	15.75		4.99
Exercised	—		—	—		—
Forfeited	(374,993	)	5.47	15.78		5.04
Outstanding as of December 31, 2017 (Successor)	827,620		5.54	$	15.74	$	4.97
Exercisable as of December 31, 2017 (Successor)	241.931		5.47	15.78		5.04

Related Party Stock Awards

See note 15 for information regarding additional equity awards not issued under the 2016 or 2013 Plans.

Hostess Management, LLC Equity Interest Plan (Predecessor)

The Company established a profits interest plan under the 2013 Hostess Management, LLC (“Hostess Management”) Equity Incentive Plan (“2013 Plan”) to allow members of the management team to participate in the success of the Company. The 2013 Plan consisted of an approximate 9% ownership interest in the Company’s subsidiary, New Hostess Holdco, LLC. Hostess Management had three classes of units and required certain returns to ranking classes before other classes participated in subsequent returns of Hostess Management.

The Company recognized unit-based compensation expense of $3.9 million from January 1, 2016 through November 3, 2016, including $3.2 million of expense due to a grant agreement provision which caused the accelerated vesting of units granted prior to January 1, 2016 upon consummation of the Business Combination and the accelerated vesting of units granted in 2016 based on the approval of the board of directors, and $1.4 million for the year ended December 31, 2015, (Predecessor), within general and administrative expense on the consolidated statement of operations. All outstanding units under the 2013 Plan were redeemed and the 2013 Plan was terminated on November 4, 2016.