NOTE 16—STOCK-BASED COMPENSATION

The Company estimates the value of equity grants based upon an option-pricing model and recognizes this estimated value as compensation expense over the vesting periods. The Company recognizes expense associated with performance-based awards when it becomes probable that the performance condition will be met. Once it becomes probable that an award will vest, the Company recognizes compensation expense equal to the number of shares which are probable to vest multiplied by the fair value of the related shares measured at the grant date.

Stock-based compensation expense is included in selling, general and administrative expenses on the consolidated statements of income. The Company recorded stock-based compensation expense of $29.2 million, $24.2 million and $17.1 million in fiscal 2016, fiscal 2015 and fiscal 2014, respectively. No stock-based compensation cost has been capitalized in the accompanying consolidated financial statements.

2012 Stock Incentive Plan and 2012 Stock Option Plan

The Restoration Hardware 2012 Stock Incentive Plan (the “Stock Incentive Plan”) was adopted on November 1, 2012. The Stock Incentive Plan provides for the grant of incentive stock options to the Company’s employees, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, cash-based awards and any combination thereof to the Company’s employees, directors and consultants and the Company’s parent and subsidiary corporations’ employees, directors and consultants.

The Restoration Hardware 2012 Stock Option Plan (the “Option Plan”) was adopted on November 1, 2012 and on such date 6,829,041 fully vested options were granted under this plan to certain of the Company’s employees and advisors. Aside from these options granted on November 1, 2012, no other awards will be granted under the Option Plan.

As of January 30, 2016, there were a total of 2,151,580 shares issuable under the Stock Incentive Plan. On February 1, 2016, an additional 811,666 shares became issuable under the Stock Incentive Plan in accordance with the Stock Incentive Plan evergreen provision, increasing the total number of shares issuable under the Stock Incentive Plan to 2,963,246. Awards under the plans reduce the number of shares available for future issuance. Cancellations and forfeitures of awards previously granted under the Stock Incentive Plan increase the number of shares available for future issuance. Cancellations and forfeitures of awards previously granted under the Option Plan are immediately retired and are no longer available for future issuance. The number of shares available for future issuance under the Stock Incentive Plan as of January 28, 2017 was 415,530. Shares issued as a result of award exercises under the Stock Incentive Plan and Option Plan and will be funded with the issuance of new shares.

On January 30, 2017, an additional 816,573 shares became issuable under the Stock Incentive Plan in accordance with the Stock Incentive Plan evergreen provision.

2012 Stock Incentive Plan and 2012 Stock Option Plan—Stock Options

A summary of stock option activity under the Option Plan and the Stock Incentive Plan for fiscal 2016 is as follows:

	Options			Weighted-Average Exercise Price
Outstanding—January 30, 2016		6,535,573		$	55.71
Granted		3,062,234			35.82
Exercised		(175,585	)		28.61
Cancelled		(948,563	)		56.47
Outstanding—January 28, 2017		8,473,659		$	49.00

The fair value of stock options issued was estimated on the date of grant using the following assumptions:

	Year Ended
	January 28,			January 30,			January 31,
	2017			2016			2015
Expected volatility		44.9	%		37.7	%		39.7	%
Expected life (years)		6.5			6.5			6.5
Risk-free interest rate		1.4	%		1.8	%		2.0	%
Dividend yield		—			—			—

A summary of additional information about stock options is as follows:

	Year Ended
	January 28,		January 30,		January 31,
	2017		2016		2015
Weighted-average fair value per share of stock options granted	$	15.88	$	36.43	$	26.92
Aggregate intrinsic value of stock options exercised (in thousands)	$	1,238	$	32,590	$	62,015
Fair value of stock options vested (in thousands)	$	13,726	$	8,611	$	2,246

Information about stock options outstanding, vested or expected to vest, and exercisable as of January 28, 2017 is as follows:

	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number of Options		Weighted- Average Remaining Contractual Life (in years)		Weighted- Average Exercise Price		Number of Options		Weighted- Average Exercise Price
$24.00 - $25.39		924,715		8.74	$	25.13		170,215	$	24.00
$25.88 - $39.42		1,449,833		8.13		32.48		760,083		31.09
$44.52 - $46.50		3,885,426		6.57		46.04		2,976,826		46.50
$56.27 - $69.64		637,415		7.15		61.60		221,710		61.78
$75.43 - $101.84		1,576,270		7.03		80.38		1,141,359		76.89
Total		8,473,659		7.20	$	49.00		5,270,193	$	50.77
Vested or expected to vest		7,950,844		7.08	$	49.37

The aggregate intrinsic value of options outstanding, options vested or expected to vest, and options exercisable as of January 28, 2017 was $0.9 million, $0.8 million, and $0.4 million, respectively. Stock options exercisable as of January 28, 2017 had a weighted-average remaining contractual life of 6.17 years.

The Company recorded stock-based compensation expense for stock options of $16.3 million, $10.4 million and $6.9 million in fiscal 2016, fiscal 2015 and fiscal 2014, respectively. As of January 28, 2017, the total unrecognized compensation expense related to unvested options was $44.5 million, which is expected to be recognized on a straight-line basis over a weighted-average period of 3.88 years.

2012 Stock Incentive Plan—Restricted Stock Awards

The Company grants restricted stock awards, which include restricted stock and restricted stock units, to its employees and members of its Board of Directors. A summary of restricted stock award activity for fiscal 2016 is as follows:

	Awards			Weighted-Average Grant Date Fair Value		Intrinsic Value
Outstanding—January 30, 2016		805,915		$	73.11
Granted		864,367			40.18
Released		(173,458	)		64.68
Cancelled		(378,805	)		59.65	$	29,169,116
Outstanding—January 28, 2017		1,118,019		$	53.52

A summary of additional information about restricted stock awards is as follows:

	Year Ended
	January 28,		January 30,		January 31,
	2017		2016		2015
Weighted-average fair value per share of awards granted	$	40.18	$	90.14	$	63.59
Grant date fair value of awards released (in thousands)	$	5,170	$	12,223	$	6,172

The Company recorded stock-based compensation expense for restricted stock awards of $12.6 million, $13.8 million and $10.2 million in fiscal 2016, fiscal 2015 and fiscal 2014, respectively. As of fiscal 2016, the total unrecognized compensation expense related to unvested restricted stock awards was $39.4 million, which is expected to be recognized on a straight-line basis over a weighted-average period of 3.69 years.

2012 Stock Incentive Plan Grant to Waterworks Associates

On May 27, 2016, the date of the Company’s acquisition of Waterworks, the Company granted stock options to certain Waterworks associates under the Stock Incentive Plan to purchase 322,784 shares of its common stock, with an exercise price of $33.54 per share, which is equal to the closing price of the Company’s common stock on the date of grant. These options are fully vested as of the date of grant but any shares issued upon exercise of such options will be subject to selling restrictions which are scheduled to lapse in five equal installments on the first, second, third, fourth and fifth anniversaries of the grant date. The fully vested options resulted in a one-time non-cash stock-based compensation charge of $3.7 million in fiscal 2016, which is included in the $16.3 million stock-based compensation expense for stock options recorded in fiscal 2016 discussed above.

Rollover Units

In connection with the acquisition of Waterworks, $1.5 million rollover units in the Waterworks subsidiary (the “Rollover Units”) were recorded as part of the transaction. The Rollover Units are subject to the terms of the Waterworks LLC agreement, including redemption rights at an amount equal to the greater of (i) the $1.5 million remitted as consideration in the business combination or (ii) an amount based on the percentage interest represented in the overall valuation of the Waterworks subsidiary (the “Appreciation Rights”). The Appreciation Rights are measured at fair value and are subject to fair value measurements during the expected life of the Rollover Units, with changes to fair value recorded in the consolidated statements of income. The fair value of the Appreciation Rights is determined based on an option pricing method (“OPM”). The Company did not record any expense related to the Appreciation Rights during fiscal 2016. As of January 28, 2017, the liability associated with the Rollover Units and related Appreciation Rights was $1.5 million, which is included in other non-current obligations on the consolidated balance sheets.

Profit Interests

In connection with the acquisition of Waterworks, profit interests units in the Waterworks subsidiary (the “Profit Interests”) were issued to certain Waterworks associates. The Profit Interests are measured at their grant date fair value and expensed on a straight-line basis over their expected life, or five years. The Profit Interests are subject to fair value measurements during their expected life, with changes to fair value recorded in the consolidated statements of income. The fair value of the Profit Interests is determined based on an OPM. The Company recorded $0.3 million related to the Profit Interests in fiscal 2016, which is included in selling, general and administrative expenses on the consolidated statements of income. As of January 28, 2017, the liability associated with the Profit Interests was $0.3 million, which is included in other non-current obligations on the consolidated balance sheets.