Note 7.Stock-Based Compensation

Overview

The Company has an equity incentive plan (the “Plan”) for employees, non-employee directors and other service providers from which the Company may grant stock options, restricted shares, stock appreciation rights (“SARs”) and other equity awards. The total number of shares of common stock authorized for issuance under the Plan is 6.1 million. As of December 31, 2017, 1.1 million shares of common stock were available for future grants. Stock options granted under the Plan expire no later than ten years from the date of grant and the exercise price shall not be less than the fair market value of the shares on the date of grant. Vesting periods are assigned to stock options and restricted shares on a grant by grant basis at the discretion of the Board. The Company issues new shares of common stock upon exercise of stock options and vesting of restricted shares.

The Company also maintains the Lumber Liquidators Holdings, Inc. Outside Directors Deferral Plan under which each of the Company’s non-employee directors has the opportunity to elect annually to defer certain fees until departure from the Board. A non-employee director may elect to defer up to 100% of his or her fees and have such fees invested in deferred stock units. Deferred stock units must be settled in common stock upon the director’s departure from the Board. There were 122,007 and 131,506 deferred stock units outstanding at December 31, 2017 and 2016, respectively.

Stock Options

The following table summarizes activity related to stock options:



	Shares		Weighted Average Exercise Price	Remaining Average Contractual Term (Years)	Aggregate Intrinsic Value

Balance, December 31, 2014	652,808	$	42.81	6.9	$	18,113
Granted	410,164		25.34
Exercised	-		0.00
Forfeited	(370,196)		44.71
Balance, December 31, 2015	692,776	$	31.45	7.7	$	1,283
Granted	443,147		13.51
Exercised	(60,781)		9.37
Forfeited	(239,528)		27.16
Balance, December 31, 2016	835,614	$	24.86	7.5	$	1,167
Granted	127,984		22.09
Exercised	(87,955)		15.31
Forfeited	(185,975)		25.62
Balance, December 31, 2017	689,668	$	25.31	7.7	$	8,530

Exercisable at December 31, 2017	264,916	$	33.70		$	2,575
Vested and expected to vest December 31, 2017	689,668	$	25.31		$	8,530

The aggregate intrinsic value is the difference between the exercise price and the closing price of the Company’s common stock on December 31. The intrinsic value of the stock options exercised during 2017, 2016 and 2015 was $828, $343 and zero, respectively.

As of December 31, 2017, total unrecognized compensation cost related to unvested options was approximately $2,729, net of estimated forfeitures, which is expected to be recognized over a weighted average period of approximately 2.5 years.

The fair value of each stock option award is estimated by management on the date of the grant using the Black-Scholes-Merton option pricing model. The weighted average fair value of options granted during 2017, 2016 and 2015 was $11.20, $6.75 and $11.87, respectively.

The following are the ranges of assumptions for the periods noted:



	Year Ended December 31,
	2017		2016		2015

Expected dividend rate	0	%	0	%	0	%
Expected stock price volatility	55	%	55	%	50	%
Risk-free interest rate	1.7	%	1.3	%	1.7	%
Expected term of options	5.5 years		5.5 years		5.5 years

The expected stock price volatility is based on the historical volatility of the Company’s stock price. The volatilities are estimated for a period of time equal to the expected term of the related option. The risk-free interest rate is based on the implied yield of U.S. Treasury zero-coupon issues with an equivalent remaining term. The expected term of the options represents the estimated period of time until exercise and is determined by considering the contractual terms, vesting schedule and expectations of future employee behavior.

Restricted Shares

The following table summarizes activity related to restricted shares:



	Shares		Weighted Average Grant Date Fair Value

Nonvested, December 31, 2014	157,089	$	49.98
Granted	386,517		18.30
Released	(27,187)		55.59
Forfeited	(54,748)		45.93
Nonvested, December 31, 2015	461,671	$	23.61
Granted	343,517		12.41
Released	(130,523)		24.23
Forfeited	(88,478)		18.29
Nonvested, December 31, 2016	586,187	$	17.71
Granted	207,196		19.56
Released	(205,349)		18.31
Forfeited	(108,288)		15.68
Nonvested, December 31, 2017	479,746	$	18.71

The fair value of restricted shares released during 2017, 2016 and 2015 was $5,151, $1,617 and $941, respectively. As of December 31, 2017, total unrecognized compensation cost related to unvested restricted shares was approximately $3,947, net of estimated forfeitures, which is expected to be recognized over a weighted average period of approximately 2.2 years.

Stock Appreciation Rights

The following table summarizes activity related to SARs:



	Shares		Weighted Average Exercise Price	Remaining Average Contractual Term (Years)	Aggregate Intrinsic Value

Balance, December 31, 2014	16,227	$	42.81	6.9	$	389
Granted	-		0.00
Forfeited	(170)		93.68
Balance, December 31, 2015	16,057	$	47.58	6.8	$	-
Granted	13,071		15.31
Forfeited	(460)		62.87
Balance, December 31, 2016	28,668	$	32.63	7.5	$	6
Granted	2,899		17.39
Exercised	(165)		24.35
Forfeited	(14,852)		45.93
Balance, December 31, 2017	16,550	$	18.10	8.6	$	251

Exercisable at December 31, 2017	3,847	$	25.73	8.1	$	53

The fair value method, estimated by management using the Black-Scholes-Merton option pricing model, is used to recognize compensation cost associated with SARs.