Stock Based Compensation

BMHC long-term incentive plans

In March 2013, BMHC's Board of Directors approved the 2013 long-term incentive plan ("BMHC 2013 Incentive Plan") as subsequently approved by BMHC's shareholders in May 2013. The BMHC 2013 Incentive Plan provided for grants of stock options, restricted stock and other stock-based awards. There were 1.6 million common shares reserved for issuance under the plan. The awards granted under this plan vest immediately for directors and over a three year period for key employees.

In March 2010, BMHC's Board of Directors approved the 2010 long-term incentive plan ("BMHC 2010 Incentive Plan") as approved by BMHC's reorganization plan. The BMHC 2010 Incentive Plan provided for grants of restricted stock. There were 5.2 million common shares reserved for issuance under the plan. The awards granted under this plan vest over a two year period for directors and a three year period for key employees.

SBS long-term incentive plan

In connection with its IPO in August 2013, SBS adopted the Stock Building Supply Holdings, Inc. 2013 Incentive Compensation Plan ("SBS 2013 Incentive Plan"). The SBS 2013 Incentive Plan provides for grants of stock options, stock appreciation rights, restricted stock, other stock-based awards, other cash-based compensation and performance awards. In general, if awards under the SBS 2013 Incentive Plan are for any reason canceled, or expire or terminate unexercised, the shares covered by such awards may again be available for the grant of awards under the SBS 2013 Incentive Plan. Awards granted under the SBS 2013 Incentive Plan generally vest over a period of three or four years. Stock options granted under the SBS 2013 Incentive Plan have a maximum contractual term of 10 years from the date of grant. Shares awarded that revert to the Company as a result of forfeiture or termination, expiration or cancellation of an award or that are used to exercise an award or for tax withholding, will be again available for issuance.

Effect of the Merger on stock based awards

The SBS 2013 Incentive Plan remained in effect upon consummation of the Merger. In connection with the Merger, the Company amended the SBS 2013 Incentive Plan in order to increase the number of shares of common stock authorized for issuance from 1.8 million to 5.6 million. As of December 31, 2016, approximately 3.6 million common shares were available for issuance under the SBS 2013 Incentive Plan.

Upon consummation of the Merger, the Company assumed all obligations of BMHC under the BMHC 2010 Incentive Plan and BMHC 2013 Incentive Plan, including BMHC's time-vesting restricted stock and performance-vesting restricted stock. At the effective time of the Merger, (i) each BMHC time-vesting restricted share outstanding immediately prior to such time was converted, on the same terms and conditions as were applicable to such BMHC time-vesting restricted share at such time, into a restricted share with respect to the number of shares of BMC common stock determined by multiplying each BMHC time-vesting restricted share by the exchange ratio, rounded up to the nearest whole share. The performance goals of each award of BMHC performance-vesting restricted stock outstanding immediately prior to the Merger was deemed satisfied at maximum and was converted, on the same terms and conditions (other than the terms and conditions relating to achievement of performance goals), into a restricted share with respect to that number of shares of BMC common stock determined by multiplying each BMHC performance-vesting restricted share by the exchange ratio, rounded up to the nearest whole share, provided that the vesting criteria applicable to such conversion will provide for vesting based solely on the holder's continuation of service through the time of vesting.

Under the SBS 2013 Incentive Plan, the merger constituted a "change in control" of SBS. In connection with a "change in control," as defined in the SBS 2013 Incentive Plan, the vesting of outstanding awards under the SBS 2013 Incentive Plan was accelerated, with the exception of 0.2 million outstanding stock options and 0.3 million outstanding restricted stock units awarded to certain Legacy SBS employees during November 2015. The fair value of the vested awards on the Merger date of $8.3 million and the fair value of the non-vested awards on the closing date of the Merger related to pre-Merger service rendered of $0.2 million were included in the calculation of consideration transferred.

Performance-based restricted stock units

During the year ended December 31, 2016, the Company granted performance-based restricted stock units that vest on March 15, 2019. The grant date fair value of the performance-based restricted stock units was $16.35. The number of performance-based restricted stock units that are issued on the vesting date could range from zero to a maximum of 206,250, based upon the Company's cumulative Adjusted EBITDA over the three year period from January 1, 2016 through December 31, 2018. As of December 31, 2016, the Company expects that 109,676 of the performance-based restricted stock units will vest. Compensation cost for the performance-based restricted stock units is recorded based on the expected number of units that will vest and is adjusted, as appropriate, throughout the performance period.

Valuation of stock based awards

Prior to the Merger, the fair value of BMHC equity awards was calculated using the enterprise value per share. The enterprise value was derived using a blend of the market approach, the income approach and prior sales of BMHC shares. Weights were assigned to each approach to calculate a weighted average enterprise value. The value of these awards was discounted for a lack of marketability and non-operating assets and liabilities. Due to the uncertainties inherent in the assumptions used in these various valuation approaches, it is possible that actual share-based compensation realized by the participant may vary from the estimate of the fair value of these restricted stock units.

The fair value of stock options granted during the year ended December 31, 2016 and November 2015 was estimated using the Black-Scholes option pricing model, with the following assumptions:



	2016		2015
Expected dividend yield	0	%	0	%
Expected volatility factor (a)	44	%	44	%
Risk-free interest rate (b)	1	%	2	%
Expected term (in years) (c)	6.0		6.0

(a) The volatility factor was based on the average volatilities of similar public entities.

(b) The risk-free interest rate was based on the U.S. Treasury yield at the time of grant.


(c)	The expected term was derived utilizing the "simplified method" in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 110, which uses the mid-point between the vesting date and the expiration date of the award. We believe use of this approach is appropriate given the lack of prior history of option exercises upon which to base an expected term.

Stock based compensation is included in selling, general and administrative expenses on the consolidated statements of operations. The following table highlights stock based compensation for the years ended December 31, 2016, 2015 and 2014:



(in thousands)	2016		2015		2014
Stock options	$	1,050	$	42	$	—
Restricted stock	1,559		2,607		3,410
Restricted stock units	4,185		100		—
Performance-based restricted stock units	458		—		—
Stock based compensation	$	7,252	$	2,749	$	3,410

Stock based award activity

The following is a summary of restricted stock and restricted stock unit activity, excluding performance-based restricted stock units:



	Restricted Stock				Restricted Stock Units
	Number of Shares Outstanding (in thousands)		Weighted Average Grant Date Fair Value		Number of Units Outstanding (in thousands)		Weighted Average Grant Date Fair Value
December 31, 2013	893		$	7.25	—		$	—
Granted	264		11.66		—		—
Vested	(408	)	4.95		—		—
Forfeited	(43	)	8.97		—		—
December 31, 2014	706		10.15		—		—
Legacy SBS restricted stock units assumed	—		—		318		16.99
Granted	206		17.15		—		—
Vested	(279	)	9.07		—		—
Forfeited	(178	)	11.37		(36	)	16.99
December 31, 2015	455		13.51		282		16.99
Granted	—		—		166		17.65
Vested	(301	)	11.95		(123	)	16.86
Forfeited	(37	)	13.69		(27	)	17.16
December 31, 2016	117		$	17.42	298		$	17.39

The following is a summary of stock option award activity. No stock options were granted by BMHC during any periods prior to the Merger.



	Number of Options (in thousands)		Weighted Average Exercise Price		Contractual Term (in years)	Intrinsic Value (in thousands)
Outstanding at December 31, 2014	—		$	—
Legacy SBS stock options assumed	1,229		14.18
Granted	—		—
Exercised	—		—
Forfeited	(1	)	17.04
Expired	—		—
Outstanding at December 31, 2015	1,228		$	14.17
Granted	3		17.04
Exercised	(175	)	7.90
Forfeited	(10	)	17.04
Expired	(22	)	17.53
Outstanding at December 31, 2016	1,024		$	15.15	7.2	$	4,728

Exercisable at December 31, 2016	884		$	14.85	6.9	$	4,382

Vested and expected to vest at December 31, 2016	1,024		$	15.15	7.2	$	4,728

The grant date fair value of Legacy SBS unvested stock options assumed in the Merger was $7.48. The weighted average grant date fair value of stock options granted during the year ended December 31, 2016 was $9.70.

During the year ended December 31, 2016, the aggregate intrinsic value of the stock options exercised was $1.9 million.

The following table summarizes the Company’s total unrecognized compensation cost related to equity based compensation as of December 31, 2016:



(in thousands, except period data)	Unrecognized Compensation Cost		Weighted Average Remaining Period of Expense Recognition (in years)
Stock options	$	550	1.4
Restricted stock	673		1.1
Restricted stock units	2,771		1.4
Performance-based restricted stock units	1,335		2.2
	$	5,329