Stock-Based Compensation

Incentive Plans

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 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 March 31, 2017, there were 5,230,642 shares of common stock reserved under the Amended Plan. As of March 31, 2017, the maximum number of shares available for grant under the Amended Plan was 110,066.

In July 2015, the Board of Directors adopted and our shareholders approved the Company’s 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 March 31, 2017, the maximum number of shares available for grant under the 2015 Plan was 7,507,532.

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 Company’s initial public offering, 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 our initial public offering, 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 during the three month period ended March 31:



	2017
Volatility	30.66		%
Risk-free interest rate	1.93		%
Expected term (years)	5
Dividend yield	—
Grant-date fair value	$	7.00

There were no grants issued during the three month period ended March 31, 2016.

The following table summarizes stock option activity during the year and also presents stock options outstanding and exercisable as of March 31, 2017 (dollars in millions, except for per share data):



	Number of Shares		Weighted Average Exercise Price Per Share
Options outstanding at December 31, 2016	4,248,156		$	7.21
Granted	375,027		$	23.00
Exercised	(252,599	)	$	5.64
Forfeited	(8,323	)	$	19.73
Expired	(7,171	)	$	7.52
Options outstanding at March 31, 2017	4,355,090		$	8.63
Options exercisable at March 31, 2017	2,709,410		$	5.78

During the three months ended March 31, 2017, the Company granted 176,034 ISOs and 198,993 non-qualified stock option grants.

Restricted Stock

The following table summarizes RSA and RSU activity for the three months ended March 31, 2017:



	RSAs				RSUs
	Number of Shares		Weighted Average Grant Date Fair Value		Number of Shares		Weighted Average Grant Date Fair Value
Outstanding at December 31, 2016	—		$	—	61,861		$	25.45
Granted	35,430		$	23.00	103,863		$	23.00
Vested	(35,430	)	$	23.00	—		$	—
Forfeited	—		$	—	(2,304	)	$	25.57
Outstanding at March 31, 2017	—		$	—	163,420		$	23.89

During the three months ended March 31, 2017, members of the Company's Board of Directors received a fully-vested grant of 35,430 RSAs with a three-year holding restriction under the 2015 Plan. The total fair value of these restricted stock awards 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 three months ended March 31, 2017.

During the three months ended March 31, 2017, the Company granted 103,863 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 $2.4 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

Stock-based compensation costs charged to operations (as a component of selling, general, and administrative expenses) during the three months ended March 31, 2017 and 2016 was approximately $1.3 million and $0.4 million, respectively.

Unrecognized stock-based compensation 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 (period from April 1, to December 31, 2017)	$	2,666
2018	3,074
2019	2,061
2020	470
Total	$	8,271