Note 7 – Stock Incentive Plans and 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”), which was approved by the Company’s shareholders at the Company’s 2016 annual meeting. The 2015 Plan authorizes the issuance of stock options, restricted stock, restricted stock units (“RSUs”), 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.

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 annual increase on January 1, 2017 was 889,259 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 3,583,282 stock options outstanding under the 2015 Plan as of September 30, 2017, of which 1,223,611 had vested. As of September 30, 2017, a total of 289,390 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 645,675 stock options outstanding under the 2007 Plan as of September 30, 2017, 388,040 of which had vested. As of September 30, 2017, no shares of the Company’s common stock remained available for grants of awards under the 2007 Plan.

Stock Options

The Company uses the Black-Scholes option pricing model to estimate the fair value and compensation cost associated with employee incentive stock options, which requires considerable judgment, including estimating stock price volatility, expected option life and forfeiture rates. The Company develops estimates based on historical data and market information, which can change significantly over time. There were no options granted in the three months ended September 30, 2017 and 977,570 options granted in the nine months ended September 30, 2017, respectively. The weighted-average grant date fair value in the nine months ended September 30, 2017 was $6.36 per share. There were 905,000 and 1,128,070 stock options granted in the three and nine months ended September 30, 2016, respectively, with weighted-average grant date fair values of $4.80 and $4.83 per share, respectively.

Share-based compensation expense related to stock options was $1.4 million and $1.7 million for the three months ended September 30, 2017 and 2016, respectively, and $3.6 million and $2.5 million for the nine months ended September 30, 2017 and 2016, respectively.

The following table summarizes the Company’s stock option activity during the nine months ended September 30, 2017 and 2016:

	Number of Common Shares								Weighted-
	Options					Available			Average
	Outstanding			Exercisable		for Grant			Exercise Price
2017
Balance at December 31, 2016		3,402,481			411,029		274,596		$	9.02
Authorized		—					889,259			—
Granted		977,570					(977,570	)		14.25
Exercised		(22,989	)				—			7.36
Cancelled		(128,105	)				103,105			11.36
Balance at September 30, 2017		4,228,957			388,040		289,390		$	10.17

2016
Balance at December 31, 2015		2,419,529			724,529		837,635		$	8.16
Authorized		—					874,709			—
Granted		1,128,070					(1,128,070	)		11.89
Options Subject to Anti-Dilutive Adjustments		(2,337,643	)				—			8.75
Options Subject to Anti-Dilutive Adjustments		2,337,643					—			7.04
Exercised		(310,656	)				—			5.73
Cancelled		(10,000	)				10,000			9.33
Balance at September 30, 2016		3,226,943			413,873		594,274		$	8.57

As of September 30, 2017, the outstanding stock options had a weighted-average remaining contractual life of 7.6 years, weighted-average exercise price of $10.17 per share and an aggregate intrinsic value of $60.1 million. As of September 30, 2017, the outstanding exercisable stock options had a weighted-average remaining contractual life of 1.0 years, weighted-average exercise price of $4.33 per share and an aggregate intrinsic value of $7.8 million.

There were 3,000 options exercised during the three months ended September 30, 2017. During the three months ended September 30, 2016, there were 15,700 options exercised. There were 22,989 and 310,656 options exercised during the nine months ended September 30, 2017 and 2016, respectively. The total intrinsic value of options exercised was $0.1 million during each of the three months ended September 30, 2017 and 2016, respectively. The total intrinsic value of options exercised was $0.1 million and $1.7 million for the nine months ended September 30, 2017 and 2016, respectively. The Company’s unrecognized share-based compensation expense related to stock options was approximately $12.5 million as of September 30, 2017, which is expected to be recognized over a weighted-average period of 2.7 years.

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

Restricted Stock Units

There were 70,648 RSUs outstanding under the 2015 Plan as of September 30, 2017, none of which had vested. Share-based compensation expense related to RSUs was $0.2 million and $1.5 million for the three and nine months ended September 30, 2017, respectively. There was no RSU activity during the nine months ended September 30, 2016. As of September 30, 2017, there was approximately $0.1 million of total unrecognized share-based compensation expense related to unvested RSUs, all of which is expected to be recognized in 2017.