Stock-Based Compensation

Under the Company’s 2012 Blue Buffalo Pet Products, Inc. Stock Purchase and Option Plan (the “Plan”), the Board of Directors is authorized to award incentive stock options (ISOs) and non-qualified, stock appreciation rights (SARs), restricted stock, performance units, performance-based stock awards, dividend equivalent rights, and other stock-based grants. Participation in the Plan is limited to key employees, officers, and directors.

On March 4, 2013, the Plan was amended to increase the maximum number of shares of stock available under the Plan by 210,000 shares to 14,242,061 shares (the “Amended Plan”). As of December 31, 2016, there were 5,230,642 shares of common stock reserved under the Amended Plan. As of December 31, 2016, the maximum number of shares available for grant under the Amended Plan was 98,275.

In July 2015, the Board of Directors adopted and our shareholders approved the Blue Buffalo Pet Products, Inc. 2015 Omnibus Incentive Plan (“2015 Plan”). The 2015 Plan provides that the total number of shares of common stock that may be issued under our 2015 Plan is 8,400,000. The 2015 Plan provides for the grant of stock options (ISOs and non-qualified), SARs, restricted stock awards (RSAs), restricted stock units (RSUs), performance units, performance-based stock awards, dividend equivalent rights and other stock-based incentive awards. As of December 31, 2016, the Company has granted 78,621 RSAs, 61,861 RSUs, and 243,673 stock options under the 2015 Plan. As of December 31, 2016, the maximum number of shares available for grant under the 2015 Plan was 8,015,845.

Stock Options

The Company uses the Black-Scholes option-pricing model to determine the fair value of stock options on the date of grant. Stock options granted under the 2012 plan are subject to pro-rata vesting and grants under the 2015 Plan are subject to cliff vesting. The fair value of stock options is expensed on a straight-line basis over the vesting period.

Prior to the IPO, the Company used a third party valuation specialist to assist it in the estimation of the fair value of its common stock. The Company believed these valuations to be appropriate; however, the valuation of the equity of any private company involves various estimates and assumptions that may differ from actual values. Effective with the IPO, the Company bases its common stock value on quoted market prices. The expected volatility assumption is based on the combination of the Company's historical volatility and selected companies from its peer group. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury implied yield at the date of grant. The weighted-average expected term is determined with reference to historical exercise and post-vesting cancellation experience, and the vesting period and contractual term of the awards.

The following are the weighted-average assumptions used for grants issued:



	For the years ended
	December 31, 2016			December 31, 2015			December 31, 2014

Volatility	32.58		%	23.85		%	32.84		%
Risk-free interest rate	1.23		%	1.88		%	2.16		%
Expected term (years)	5			6.5			6.5
Dividend yield	—			—			—
Grant-date fair value	$	7.81		$	5.74		$	5.15

The following table summarizes stock option activity during the year and also presents stock options outstanding and exercisable as of December 31, 2016 (dollars in millions, except for per share data):



	Number of Shares		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Life (In Years)	Aggregate Intrinsic Value

Outstanding, December 31, 2015	4,366,297		$	6.24
Granted	396,688		$	25.47
Exercised	(275,543	)	$	6.55
Forfeited	(227,720	)	$	21.20
Expired	(11,566	)	$	6.97
Outstanding, December 31, 2016	4,248,156		$	7.21	6.24	$	72.3
Exercisable, December 31, 2016	2,881,820		$	5.74	5.98	$	53.0

During 2016, the Company granted 130,208 ISOs and 266,480 nonqualified stock options. The intrinsic value of options exercised during 2016, 2015, and 2014, was $4.6 million, $5.5 million, and $0.3 million, respectively. In accordance with the early adoption of ASU 2016-09, the Company recorded $1.5 million of excess tax benefits from the exercise of stock options to our provision for income taxes during 2016. Under the previous guidance, the Company recorded $1.5 million of excess tax benefits from the exercise of stock options to additional paid-in capital during the year ended December 31, 2015.

Restricted Stock

The following table summarizes RSA and RSU activity for the year ended December 31, 2016:



	RSAs				RSUs
	Number of Shares		Weighted Average Grant Date Fair Value		Number of Shares		Weighted Average Grant Date Fair Value
Outstanding at December 31, 2015	—		$	—	—		$	—
Granted	31,871		$	25.57	87,203		$	25.48
Vested	(31,871	)	$	25.57	—		$	—
Forfeited	—		$	—	(25,342	)	$	25.57
Outstanding at December 31, 2016	—		$	—	61,861		$	25.45

During the year ended December 31, 2016, members of the Company's Board of Directors received a fully-vested grant of 31,871 RSAs with a three-year holding restriction under the 2015 Plan. The total fair value of these RSAs on the date of grant was $0.8 million, of which the full amount was recognized as a component of stock-based compensation expense during the year ended December 31, 2016.

During the year ended December 31, 2016, the Company granted 87,203 RSUs under the 2015 Plan to its employees. The stock-based compensation cost for RSUs is measured based on the closing fair market value of the Company's common stock on the date of grant. RSUs have a three-year cliff vesting term. The total fair value of these restricted stock units on the date of grant was $2.2 million, which will be recognized as a component of stock-based compensation expense and amortized on a straight-line basis over the three-year vesting term.

Stock-based Compensation Expense

Unrecognized stock-based compensation expense related to outstanding unvested stock options is expected to be recognized in the Company’s statements of income as follows (by fiscal year):



(dollars in thousands)
2017	$	1,912
2018	1,440
2019	405
2020	56
Total	$	3,813