Stock-Based Compensation

Stock-based compensation — Stock-based compensation includes stock option grants, restricted stock unit grants, and other transactions under the Company’s equity plans. Total stock-based compensation expense is included as a component of compensation and benefits and was approximately $3.3 million, $2.0 million and $2.1 million for fiscal years 2019, 2018 and 2017, respectively.

On June 4, 2013, the Company adopted the Kirkland’s, Inc. Amended and Restated 2002 Equity Incentive Plan (the “2002 Plan”), replacing the plan adopted in July 2002. The 2002 Plan provides for the award of restricted stock, restricted stock units (“RSUs”), incentive stock options, non-qualified stock options and stock appreciation rights with respect to shares of common stock to employees, directors, consultants and other individuals who perform services for the Company. The 2002 Plan is authorized to provide awards for up to a maximum of 4,500,000 shares of common stock.

As of February 1, 2020, options to purchase 381,513 shares of common stock were outstanding under the 2002 Plan at exercise prices ranging from $1.65 to $25.52 per share. As of February 1, 2020, there were 433,444 RSUs outstanding under the 2002 Plan with fair value grant prices ranging from $1.65 to $13.38 per share. Shares reserved for future stock-based grants under the 2002 Plan was 2,119,910 at February 1, 2020.

Stock options — The Company allows for the settlement of vested stock options on a net share basis (“net share settled stock options”) or on a gross basis with the holder providing cash to cover the option exercise price and the minimum statutory tax withholdings. With net share settled stock options, the employee does not surrender any cash or shares upon exercise. Rather, the Company withholds the number of shares to cover the option exercise price and the minimum statutory tax withholding obligations from the shares that would otherwise be issued upon exercise. The settlement of vested stock options on a net share basis results in fewer shares issued by the Company. Options issued to employees under the 2002 Plan have maximum contractual terms of 10 years and generally vest ratably over 4 years.

Stock option activity for the fiscal year ended February 1, 2020 was as follows:



	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Balance at February 2, 2019	896,345		$	13.35
Options granted	504,961		6.33
Options exercised	—		—
Options forfeited	(619,112	)	11.51
Options canceled	(337,767	)	9.05
Options expired	(62,914	)	7.76
Balance at February 1, 2020	381,513		$	11.76	6.1	—
Options Exercisable As of:
February 1, 2020	244,395		$	15.51	4.5	—

The aggregate intrinsic values in the table above represent the total difference between the Company’s closing stock price at year-end and the option exercise price, multiplied by the number of in-the-money options at each year-end. As of February 1, 2020, there were no outstanding in-the-money options. The fair value of each option is recorded as compensation expense on a straight-line basis over the applicable vesting period. At February 1, 2020, unrecognized stock compensation expense related to the unvested portion of outstanding stock options was approximately $264,000, which is expected to be recognized over a weighted average period of 2.8 years.

In fiscal 2019, the company entered into stock option cancellation agreements with certain members of its management team pursuant to which such individuals surrendered and canceled certain previously granted stock options in order to make additional shares available under the Company’s 2002 Plan for future equity awards. The surrender and cancellation of the stock options was a settlement for no consideration, and the Company recorded the previously unrecognized compensation cost related to the canceled stock options of approximately $861,000 during the 13 weeks ended February 1, 2020. The canceled options that were surrendered had an exercise price that ranged from $7.14 to $25.52.

Other information related to option activity during fiscal 2019, 2018 and 2017 is as follows:



	52 Weeks Ended February 1, 2020		52 Weeks Ended February 2, 2019		53 Weeks Ended February 3, 2018
Weighted average grant date fair value of options granted (per share)	$	3.28	$	6.18	$	4.23
Total fair value of stock options vested (in thousands)	$	543	$	834	$	1,160
Intrinsic value of stock options exercised (in thousands)	$	—	$	684	$	58

The Company has estimated the fair value of all stock option awards as of the date of the grant by applying the Black-Scholes option pricing model. The application of this valuation model involves assumptions that are judgmental and highly subjective in the determination of compensation expense. The weighted averages for key assumptions used in determining the fair value of options granted in fiscal years 2019, 2018 and 2017 and a summary of the methodology applied to develop each assumption are as follows:



	52 Weeks Ended February 1, 2020		52 Weeks Ended February 2, 2019		53 Weeks Ended February 3, 2018
Expected price volatility	53	%	47	%	46	%
Risk-free interest rate	2.24	%	2.79	%	1.96	%
Expected life	6.3 years		6.3 years		6.3 years
Dividend yield	0	%	0	%	0	%

Expected price volatility — The expected price volatility is a measure of the amount by which the stock price has fluctuated or is expected to fluctuate. The Company uses actual historical changes in the market value of its stock to calculate the volatility assumption as it is management’s belief that this is the best indicator of future volatility. The Company calculates daily market value changes using the historical volatility of returns for the six years prior to the grant. An increase in the expected volatility will increase compensation expense.

Risk-free interest rate — The risk-free interest rate is the U.S. Treasury rate for the week of the grant having a term equal to the expected life of the option. An increase in the risk-free interest rate will increase compensation expense.

Expected life — The expected life is the period of time over which the options granted are expected to remain outstanding. The Company uses the “simplified” method found in the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107 to estimate the expected life of stock option grants. Options granted have a maximum term of ten years. An increase in the expected life will increase compensation expense.

Forfeiture rate — The forfeiture rate is the percentage of options granted that were forfeited or canceled before becoming fully vested. The Company accounts for forfeitures of share-based awards as they occur. An increase in the forfeiture rate will decrease compensation expense.

Restricted stock units — The Company grants restricted stock units for a fixed number of shares to various employees and directors. The RSUs granted to directors become 100% vested on the first anniversary of the grant date. The RSUs granted to employees typically vest 25% annually on the anniversary of the grant date over 4 years. The fair values of the RSUs are equal to the closing price of the Company’s common stock on the date of the grant. Compensation expense related to RSUs is recognized ratably over the requisite service period. As of February 1, 2020, there was approximately $1.3 million of unrecognized compensation expense related to RSUs which is expected to be recognized over a weighted average period of 2.4 years.

RSU activity for the fiscal year ended February 1, 2020, was as follows:



	Shares		Weighted Average Grant Date Fair Value
Non-Vested at February 2, 2019	314,284		$	10.71
Granted	501,141		4.32
Vested	(197,090	)	10.34
Forfeited	(184,891	)	7.95
Non-Vested at February 1, 2020	433,444		$	4.67

Other information related to RSU activity during fiscal 2019, 2018 and 2017 is as follows:



	52 Weeks Ended February 1, 2020		52 Weeks Ended February 2, 2019		53 Weeks Ended February 3, 2018
Weighted average grant date fair value of RSUs (per share)	$	4.32	$	10.83	$	9.01
Total fair value of restricted stock units vested (in thousands)	$	465	$	1,387	$	970

Employee stock purchase plan — In July 2002, the Company adopted an Employee Stock Purchase Plan (“ESPP”) which was amended in 2006, 2008 and 2016. Under the ESPP, full-time employees who have completed twelve consecutive months of service are allowed to purchase shares of the Company’s common stock, subject to certain limitations, through payroll deduction, at a 15% discount from fair market value. The Company’s ESPP was originally authorized to issue up to 500,000 shares of common stock. In June 2016, the shareholders ratified the amendment to the Company’s ESPP to increase the number of shares of common stock authorized to be issued under the ESPP by 125,000 shares with an optional annual increase thereafter each January 1 commencing on January 1, 2017 by up to an additional 35,000 shares. During fiscal 2019, 2018 and 2017, there were 104,160, 37,128 and 34,963 shares of common stock, respectively, issued to participants under the ESPP. As of February 1, 2020, the amount authorized under the ESPP was 730,000 with 35,038 shares remaining under the authorization.