12. Share-Based Compensation

Overview

On August 27, 2015, the Board of Directors of the Company approved the Golden Entertainment, Inc. 2015 Incentive Award Plan (the “2015 Plan”), subject to shareholder approval at the Company’s 2016 annual meeting of shareholders. The 2015 Plan authorizes the issuance of stock options, restricted stock, restricted stock units, dividend equivalents, stock payment awards, stock appreciation rights, performance bonus awards and other incentive awards. The 2015 Plan authorizes the grant of awards to employees, non-employee directors and consultants of the Company and its subsidiaries. Options generally have a ten-year term. Except as provided in any employment agreement between the Company and the employee, if an employee is terminated (voluntarily or involuntarily), any unvested options as of the date of termination will be forfeited. If the 2015 Plan is not approved by the Company’s shareholders at the 2016 annual meeting of shareholders, any awards under the 2015 Plan will be automatically cancelled and become null and void.

The maximum number of shares of the Company’s common stock for which grants may be made under the 2015 Plan is 2.25 million shares, plus an annual increase on each January 1 during the ten-year term of the 2015 Plan equal to the lesser of 1.8 million shares, 4% of the total shares of the Company’s common stock outstanding (on an as-converted basis) and such smaller amount as may be determined by the Board in its sole discretion. In addition, the maximum aggregate number of shares of common stock that may be subject to awards granted to any one participant during a calendar year is 2.0 million shares.

The 2015 Plan provides that no stock option or stock appreciation right (even if vested) may be exercised prior to the earlier of August 1, 2018 or immediately prior to the consummation of a change in control of the Company that would result in an “ownership change” as defined in Section 382 of the Internal Revenue Code of 1986, as amended. There were 1,695,000 stock options outstanding under the 2015 Plan as of December 31, 2015, none of which have vested. As of December 31, 2015, a total of 555,000 shares of the Company’s common stock remained available for grants of awards under the 2015 Plan.

In June 2007, the Company’s shareholders approved the 2007 Lakes Stock Option and Compensation Plan (the “2007 Plan”), which is authorized to grant a total of 1.25 million shares of the Company’s common stock. Vested options are exercisable for ten years from the date of grant; however, if the employee is terminated (voluntarily or involuntarily), any unvested options as of the date of termination will be forfeited. There were 712,029 stock options outstanding under the 2007 Plan as of December 31, 2015, all of which are fully vested. As of December 31, 2015, a total of 282,635 shares of the Company’s common stock remained available for grants of awards under the 2007 Plan.

The Company also has a 1998 Stock Option and Compensation Plan (the “1998 Plan”). There were 12,500 stock options outstanding under this plan as of December 31, 2015. No additional options will be granted under the 1998 Plan.

Share-based compensation expense related to stock options was $0.8 million, $0.3 million and $0.5 million for fiscal years 2015, 2014 and 2013, respectively.

For fiscal years 2015, 2014 and 2013, no income tax benefit was recognized in the Company’s consolidated statements of operations for share-based compensation arrangements. Management assessed the likelihood that the deferred tax assets relating to future tax deductions from share-based compensation will be recovered from future taxable income and determined that a valuation allowance is necessary to the extent that management currently believes it is more likely than not that tax benefits will not be realized. Management’s determination is based primarily on historical losses and earnings volatility.

Stock Options

The following table summarizes stock option activity for fiscal years 2015, 2014 and 2013:

	Number of Common Shares								Weighted-
	Options					Available			Average
	Outstanding			Exercisable		for Grant			Exercise Price
2015
Balance at December 28, 2014		755,617			616,792		276,635		$	6.09
Authorized		—					2,250,000			—
Forfeited/cancelled/expired		(6,000	)				6,000			9.19
Exercised		(25,088	)				—			9.62
Granted		1,695,000					(1,695,000	)		9.07
Balance at December 31, 2015		2,419,529			724,529		837,635		$	8.16

2014
Balance at December 29, 2013		798,171			585,769		263,424		$	5.97
Forfeited/cancelled/expired		(25,211	)				24,211			5.19
Exercised		(28,343	)				—			4.73
Granted		11,000					(11,000	)		9.18
Balance at December 28, 2014		755,617			616,792		276,635		$	6.09

2013
Balance at December 30, 2012		764,034			649,412		437,797		$	5.84
Forfeited/cancelled/expired		(53,377	)				53,377			6.25
Exercised		(140,236	)				—			5.52
Granted		227,750					(227,750	)		6.18
Balance at December 29, 2013		798,171			585,769		263,424		$	5.97

The Company’s determination of fair value of share-based option awards on the date of grant using an option-pricing model is affected by the following assumptions regarding complex and subjective variables. Any changes in these assumptions may materially affect the estimated fair value of the share-based award.

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Expected dividend yield — As the Company has not historically paid dividends, the dividend rate variable in the Black-Scholes model is zero.

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Risk-free interest rate — The risk free interest rate assumption is based on the U.S. Treasury yield curve in effect at the time of grant and with maturities consistent with the expected term of options.

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Expected term — The expected term of employee stock options represents the weighted-average period that the stock options are expected to remain outstanding. It is based upon an analysis of the historical behavior of option holders during the period from September 1995 to December 31, 2015. Management believes historical data is reasonably representative of future exercise behavior.

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Expected volatility — The volatility assumption is based on the historical weekly price data of the Company’s stock over a two-year period. Management evaluated whether there were factors during that period which were unusual and which would distort the volatility figure if used to estimate future volatility and concluded that there were no such factors.

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Forfeiture rate — As share-based compensation expense recognized is based on awards ultimately expected to vest, expense for grants is reduced for estimated forfeitures at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company’s management has reviewed the historical forfeitures which have been minimal, and as such presently amortizes the grants to the end of the vesting period and will adjust for forfeitures at the end of the term.

The following assumptions were used to estimate the fair value of stock options granted during fiscal years 2015, 2014 and 2013:

	2015				2014				2013

Expected dividend yield		—				—				—
Risk-free interest rate	2.18	–	2.36	%	2.39	–	2.88	%	1.96	–	2.70	%
Expected term (in years)		10				10				10
Expected volatility	27.24	–	27.60	%	32.87	–	39.35	%	39.32	–	43.78	%

As of December 31, 2015, the options outstanding had a weighted-average remaining contractual life of 7.5 years, weighted-average exercise price of $8.16 and an aggregate intrinsic value of $5.0 million. The options exercisable have a weighted-average exercise price of $6.04, a weighted-average remaining contractual life of 2.3 years and an aggregate intrinsic value of $3.1 million as of December 31, 2015. The total intrinsic value of stock options exercised during fiscal years 2015, 2014 and 2013 was $0.1 million, $0.1 million and $0.4 million, respectively. The weighted-average grant-date fair value of stock options granted during fiscal years 2015, 2014 and 2013 was $3.72, $4.65 and $3.45 per share, respectively.

As of December 31, 2015, the Company’s unrecognized share-based compensation related to stock options was approximately $5.8 million, which is expected to be recognized over a weighted-average period of 3.6 years.

The Company issues new shares of common stock upon exercise of options.

Restricted Stock Units

There was no restricted stock unit activity during the years ended December 31, 2015, December 28, 2014 or December 29, 2013.