Sprouts Farmers Market 2014 Annual Report Download - page 65

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We believe that of our significant accounting policies, which are described in Note 3 to the audited
consolidated financial statements included in this Annual Report on Form 10-K, the following accounting
policies involve a greater degree of judgment and complexity. Accordingly, we believe these are the most
critical to fully understand and evaluate our financial condition and results of operations.
Equity-Based Compensation
Following the Henry’s Transaction, we adopted the 2011 Option Plan in May 2011. Grants of options
to purchase our shares under this plan have been for equity instruments exchanged for employee services.
We account for equity-based compensation in accordance with Financial Accounting Standards Board
Accounting Standard Codification Topic 718, Compensation—Stock Compensation (referred to as “ASC
718”). Compensation expense associated with equity incentive grants requires management judgment to
calculate the estimated fair value of awards, which typically vest over multi-year periods and for which the
ultimate amount of compensation is not known on the date of grant. Time vested options generally vest
ratably over a period of 12 quarters (three years) and performance-based options vest over a period of
three years based on financial performance targets for each year. In the event of a change in control as
defined in the 2011 Option Plan, all options become immediately vested and exercisable.
Our board of directors has adopted, and our equity holders have approved, the 2013 Incentive Plan.
The 2013 Incentive Plan became effective on July 31, 2013 and replaced the 2011 Option Plan (except
with respect to outstanding options under the 2011 Option Plan). The 2013 Incentive Plan enables us to
formulate and implement a compensation program that will attract, motivate and retain experienced, highly-
qualified team members who will contribute to our financial success, and aligns the interests of our team
members with those of our stockholders through the ability to grant a variety of stock-based and cash-
based awards. The 2013 Incentive Plan serves as the umbrella plan for our stock-based and cash-based
incentive compensation programs for our directors, officers and other team members.
Under the provisions of ASC 718, equity-based compensation expense is measured at the grant date,
based on the fair value of the award. As required under this guidance, we estimate forfeitures for options
granted which are not expected to vest. Changes in these inputs and assumptions can materially affect the
measurement of the estimated fair value of our equity-based compensation expense.
At December 28, 2014, options to acquire 6,884,997 shares were outstanding, and a total of
6,852,340 options were vested or expected to vest. Equity-based compensation expense totaled
$5.4 million, $5.8 million and $4.7 million in 2014, 2013 and 2012, respectively. The weighted average fair
value of options granted to purchase shares was $10.39, $4.27 and $1.99 in 2014, 2013 and 2012,
respectively. Unrecognized compensation cost relating to outstanding awards was $3.7 million at
December 28, 2014, with a weighted average remaining recognition period of 1.3 years.
Valuation. We have used the Black-Scholes option pricing model to calculate the fair value of our
equity-based compensation awards at grant date. For accounting purposes, the fair value of each grant
during 2014, 2013 and 2011 was estimated using the following assumptions:
Fiscal 2014 Fiscal 2013 Fiscal 2012
Dividend yield ............................ 0.00% 0.00% 0.00%
Expected volatility ......................... 31.19% to 32.19% 31.03% to 37.38% 32.36% to 38.59%
Risk-free interest rate ...................... 1.20% to 1.33% 0.56% to 1.36% 0.40% to 0.77%
Expected life (in years) ..................... 4.31 4.00 to 5.00 3.75 to 5.00
The Black-Scholes model requires the use of highly subjective and complex assumptions to determine
the fair value of equity-based compensation awards, including the option’s expected term and the price
volatility of the underlying stock. Refer to Note 23 to our audited consolidated financial statements included
elsewhere in this Annual Report on Form 10-K for further discussion of these inputs.
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