Dave & Buster's Entertainment, Inc. Stock Compensation Disclosure

Note 8: Share-Based Compensation

Prior to October 2014, we issued share-based awards under our 2010 Stock Incentive Plan. Outstanding grants under this plan include fully vested performance-based options and time-based options which vest over a five-year period from the grant date. Share-based awards granted after October 2014 and beyond were issued pursuant to the terms of our 2014 Stock Incentive Plan. We may grant stock options, restricted stock or restricted stock units (“RSU’s”) to executive and management personnel as well as directors. The maximum number of shares of common stock issuable under the 2014 Stock Incentive Plan is 3,100,000 shares. Time-based options granted to employees generally become exercisable ratably over a three-year period from the grant date. Certain time-based options granted to executives at the IPO date vest 50% after a period of three years and 50% after a period of four years. Performance-based RSU’s awarded to employees fully vest after three years, subject to the achievement of performance conditions. Time-based RSU’s have various service periods not exceeding five years.

Options granted under both plans terminate on the ten-year anniversary of the grants. Stock option awards generally provide continued vesting, in the event of termination, for employees that reach age 60 or greater and have at least ten years of service or for employees that reach age 65. Unvested stock options, restricted stock and RSU’s are generally forfeited by employees who terminate prior to vesting.

Each share granted subject to a stock option award or time-based RSU award reduces the number of shares available under our stock incentive plans by one share. Each share granted subject to a performance RSU award reduces the number of shares available under our stock incentive plans by a range of one share if the target performance is achieved, up to a maximum of two shares for performance above target and a minimum of no shares if performance is below a minimum threshold target.

Compensation expense associated with share-based equity awards granted has been calculated as required by current accounting standards related to stock compensation. The valuation of our stock option awards has been determined using the Black-Scholes option valuation model. The Black-Scholes option valuation model uses assumptions of expected volatility, the expected dividend yield of our stock, the expected term of the awards and the risk-free interest rate, as well as an estimated fair value of our common stock. For all stock options granted subsequent to our IPO, we have obtained fair value valuation analyses prepared by an independent third-party valuation firm, and the analyses utilized the market-determined share price. Since our stock had not been publicly traded prior to our IPO, the expected volatility was based on an average of the historical volatility of certain of our competitors’ stocks over the expected term of the share-based awards with the calculation placing more weight on company-specific volatilities each year thereafter. The dividend yield assumption was based on our history. The expected term of share-based awards represented the weighted-average period the share-based award was expected to remain outstanding. The risk-free interest rate was based on the implied yield on U.S. Treasury zero-coupon issues with a remaining term equivalent to the expected term.

The significant assumptions used in determining the underlying fair value of the weighted-average options granted in fiscal 2017, 2016 and 2015 were as follows:

 

		2014 Stock Incentive Plan
		Fiscal 2017				Fiscal 2016				Fiscal 2015
Volatility			32.9	%			34.0	%			37.0	%
Risk free interest rate			2.00	%			1.29	%			1.56	%
Expected dividend yield			0.00	%			0.00	%			0.00	%
Expected term – in years			6.0				5.9				5.9
Weighted average calculated value		$	20.54			$	13.62			$	12.01

Compensation expense related to stock options with only service conditions (time-based) is recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award or to the date on which retirement eligibility is achieved, if shorter. Compensation expense related to stock option plans was $4,875, $3,483 and $2,964 during the fiscal year ended February 4, 2018, January 29, 2017 and January 31, 2016, respectively.

Compensation expense for RSU’s and restricted shares is based on the market price of the shares underlying the awards on the grant date. Compensation expense for RSU’s based on performance reflects the estimated probability that performance conditions at target or above will be met, and time-based RSU’s and restricted shares are expensed ratably over the service period. We recorded compensation expense related to our RSU’s and restricted shares awards of $4,041, $2,345 and $1,145 during the fiscal year ended February 4, 2018, January 29, 2017 and January 31, 2016, respectively.

Forfeitures are estimated at the time of grant and adjusted, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The forfeiture rate is based on historical experience.

Transactions related to stock option awards during fiscal 2017 were as follows:

 

		2014 Stock Incentive Plan								2010 Stock Incentive Plan
		Number of Options				Weighted Average Exercise Price				Number of Options				Weighted Average Exercise Price
Outstanding at January 29, 2017			833,499			$	26.93				1,225,053			$	5.35
Granted			190,379				57.74				—				—
Exercised			(17,287	)			34.71				(515,074	)			4.63
Forfeited			(5,188	)			46.44				—				—
Outstanding at February 4, 2018			1,001,403				32.55				709,979				5.88
Exercisable at February 4, 2018			420,465			$	26.46				664,453			$	5.68

The total intrinsic value of options exercised during fiscal 2017, fiscal 2016 and 2015 was $30,844, $50,403 and $45,090, respectively. The unrecognized expense related to our stock option plan totaled approximately $1,781 as of February 4, 2018 and will be expensed over a weighted average 1.6 years. For options outstanding at February 4, 2018, the weighted average remaining contractual life was 6.0 years and the aggregate intrinsic value was $44,900. For options exercisable at February 4, 2018, the weighted average remaining contractual life was 4.9 years and the aggregate intrinsic value was $36,800.

Transactions related to time-based and performance-based RSU’s and restricted stock during fiscal 2017 were as follows:

 

		Shares				Weighted Avg Fair Value
Outstanding at January 29, 2017			128,088			$	37.19
Granted			70,357				58.78
Vested			(10,485	)			40.68
Forfeited			(3,419	)			51.71
Outstanding at February 4, 2018			184,541			$	44.96

Fair value of our time-based and performance-based RSU’s and restricted stock is based on our closing stock price on the date of grant. The weighted average fair value for RSU’s and restricted stock issued during fiscal 2017, fiscal 2016 and fiscal 2015 was $58.78, $40.71 and $31.75, respectively. The fair value of shares that vested during fiscal 2017 and fiscal 2016 was $426 and $360, respectively, and there were no shares vested during fiscal 2015. The unrecognized expense related to our time-based and performance-based RSU’s and unvested restricted stock was $4,808 as of February 4, 2018 and will be expensed over a weighted average 2.2 years.

We satisfy stock option exercise activity and share unit conversion through both the issuance of new shares and the use of existing treasury shares.