Note 9 – 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 January 1^st of each year 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. The annual increase on January 1, 2017 was 889,259 shares. 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. As of December 31, 2017, a total of 109,263 shares of the Company’s common stock remained available for grants of awards under the 2015 Plan.

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.

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. As of December 31, 2017, no shares of the Company’s common stock remained available for grants of awards under the 2007 Plan.

In connection with the Special Dividend discussed in Note 3, Merger and Acquisitions, and in accordance with the Company’s equity incentive plans approved by the Company’s shareholders, equitable anti-dilutive adjustments were made to the exercise prices of outstanding stock options to purchase shares of Company common stock, in order to preserve the value of such stock options following the Special Dividend. Accordingly, effective as of the close of business on July 14, 2016, the exercise price of each outstanding stock option granted prior to the Record Date under the 2015 Plan, the 2007 Plan and the 1998 Stock Option and Compensation Plan (collectively, the “Adjusted Options”) was reduced by $1.71 per share. The weighted-average exercise price of the Adjusted Options presented in the table below have been adjusted accordingly. The Adjusted Options had a weighted-average exercise price of $7.04 per share after giving effect to such anti-dilutive adjustments. The Adjusted Options have varying remaining terms, which were not affected by the adjustments. The Company measured the incremental compensation cost as the excess of the fair value of the Adjusted Options immediately following such anti-dilutive adjustments over the fair value of the Adjusted Options immediately prior to such anti-dilutive adjustments. Of the 2,337,643 Adjusted Options, 1,908,070 were unvested and 429,573 were vested at the time of the adjustment. The incremental fair value related to the unvested Adjusted Options resulting from the anti-dilutive adjustments was estimated to be $1.7 million, which will be recorded over the remaining vesting period of such Adjusted Options. The incremental fair value related to the vested Adjusted Options resulting from the anti-dilutive adjustments, determined using the Black-Scholes option pricing model, was $0.7 million and was recorded as share-based compensation expense during the third quarter of 2016.

Stock Options

The following table summarizes stock option activity:

				Weighted-
				Average				Aggregate
	Stock			Remaining		Weighted-		Intrinsic
	Options			Term		Average		Value
	Outstanding			(in years)		Exercise Price		(in thousands)
Outstanding at January 1, 2017		3,402,481			7.9	$	9.02
Granted		1,124,542				$	15.88
Exercised		(22,989	)			$	7.36
Cancelled		(128,105	)			$	11.36
Outstanding at December 31, 2017		4,375,929			7.4	$	10.73	$	95,937
Vested at December 31, 2017		1,851,799			6.5	$	7.99	$	45,705
Exercisable at December 31, 2017		388,040			0.8	$	4.33	$	10,989

The total intrinsic value of stock options exercised during the years ended December 31, 2017, 2016 and 2015 was $0.1 million, $1.8 million and $0.1 million, respectively. The weighted-average grant-date fair value of stock options granted during the years ended December 31, 2017, 2016 and 2015 was $7.30, $4.80 and $3.72 per share, respectively.

The total amount of cash received from stock options exercised during the year ended December 31, 2017 was $0.2 million.

The Company issues new shares of common stock upon exercise of 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 the consideration of historical employee exercise behavior data and the use of a number of assumptions including volatility of the Company’s stock price, the weighted-average risk-free interest rate and the weighted-average expected life of the options. The Company’s determination of fair value of share-based option awards on the date of grant using the Black-Scholes 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, with the exception of the Special Dividend, the dividend rate variable used 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 the Company’s experience as to the average historical term of option grants that were exercised, canceled or forfeited. 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 actual volatility of the Company’s stock. Management concluded there were no factors identified which were unusual and which would distort the volatility figure if used to estimate future volatility. Future volatility may be substantially less or greater than expected volatility.

The following assumptions were used to estimate the fair value of stock options granted:

	Year Ended December 31,
	2017		2016		2015
Expected dividend yield		—		—		—
Risk-free interest rate	2.21 – 2.47%		1.43 – 2.40%		2.18 – 2.36%
Expected term (in years)		10		10		10
Expected volatility	29.07 – 34.43%		24.03 – 26.95%		27.24 – 27.60%

Restricted Stock Units

The following table summarizes RSU activity:

						Total
	Restricted			Weighted		Fair Value
	Stock			Average		of Shares
	Units			Grant Date		Vested
	Outstanding			Fair Value		(in thousands)
Outstanding at January 1, 2016		—			—
Granted		141,296		$	12.57
Outstanding at December 31, 2016		141,296		$	12.57
Granted		62,791		$	27.87
Vested		(111,660	)	$	12.57	$	2,556
Cancelled		(29,636	)	$	12.57
Outstanding at December 31, 2017		62,791		$	27.87

There was no RSU activity during the year ended December 31, 2015.

Share-Based Compensation

The following table summarizes share-based compensation costs by award type:

	Year Ended December 31,
(In thousands)	2017		2016		2015
Stock options	$	5,135	$	3,717	$	809
Restricted stock units		3,619		161		—
Total share-based compensation costs	$	8,754	$	3,878	$	809

For the year ended December 31, 2017, management has evaluated all applicable positive and negative evidence and believes that the positive evidence is strong enough to warrant a full release of the valuation allowance associated with the share-based compensation deferred tax asset. The deferred tax asset associated with share-based compensation was $2.5 million as of December 31, 2017

For the years ended December 31, 2016 and 2015, 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.

As of December 31, 2017, the Company’s unrecognized share-based compensation expense related to stock options was approximately $13.0 million, which is expected to be recognized over a weighted-average period of 2.7 years.

As of December 31, 2017, there was $1.7 million of unamortized compensation related to unvested RSUs which is expected to be recognized over a weighted-average period of 3.9 years.