Stock-Based Compensation

Under the provisions of ASC 718, all forms of share-based payment to employees and directors, including stock options, must be treated as compensation and recognized in the statement of operations.

On May 8, 2014, the Board unanimously approved the 2014 Omnibus Incentive Plan (the “Omnibus Plan”), which is an amendment and restatement of our Second Amended and Restated 2002 Long-Term Incentive Plan, as amended (the “2002 Plan”). The Omnibus Plan became effective upon stockholder approval at the Annual Meeting of Stockholders on June 30, 2014. Stock-based compensation awarded after June 30, 2014 is awarded under the Omnibus Plan. Shares issued as a result of stock-based compensation transactions have been funded with the issuance of new shares of the Company’s common stock.

Restricted Stock Units

Beginning in fiscal 2013, certain of our employees have been awarded restricted stock units, pursuant to restricted stock unit agreements. The restricted stock units awarded to employees cliff vest at varying times, most typically following between one and three years of continuous service from the award date. Certain shares awarded may also vest upon a qualified retirement at or following age 65, or upon a qualified early retirement under the provisions adopted in 2012 whereby the awardee completes 10 years of service, attains age 55 and retires. All restricted stock units immediately vest upon a change in control of the Company.

The following table summarizes restricted stock units outstanding as of January 30, 2016:



	Shares		Weighted Average Grant-Date Fair Value
	(In thousands)
Outstanding as of February 1, 2015	398		$	4.60
Granted	795		3.14
Vested	(409	)	4.33
Cancelled	(153	)	3.16
Outstanding as of January 30, 2016	631		$	3.28

Total compensation expense is being amortized over the shorter of the achievement of retirement or early retirement status, or the vesting period. Compensation expense related to restricted units activity was $1.3 million for fiscal 2015, $2.1 million for fiscal 2014 and $1.2 million for fiscal 2013. As of January 30, 2016, there was $1.1 million of unrecognized compensation cost related to restricted stock units that is expected to be recognized over the weighted average period of two years. The total fair value of units vested was $1.8 million during fiscal 2015. The total fair value of units vested was $2.5 million during fiscal 2014.

Additionally, beginning in the first quarter of fiscal 2014, certain of our employees have been awarded cash-settled restricted stock units, pursuant to cash-settled restricted stock unit agreements. The cash-settled restricted stock units awarded to employees cliff vest at varying times up to approximately three years of continuous service. Certain shares awarded may also vest upon a qualified retirement at or following age 65, or upon a qualified early retirement under the provisions adopted in 2012 whereby the awardee completes 10 years of service, attains age 55 and retires. All cash-settled restricted stock units immediately vest upon a change in control of the Company. We may, in our sole discretion, at any time during the term, convert the cash-settled restricted stock units into stock-settled restricted stock units. The cash-settled restricted stock units are treated as liability awards in accordance with ASC 718. During January 2015, we converted 262,000 shares of cash-settled restricted stock units to stock-settled restricted stock units.

The following table summarizes cash-settled restricted stock units outstanding as of January 30, 2016:



	Shares		Weighted Average Grant-Date Fair Value
	(In thousands)
Outstanding as of February 1, 2015	747		$	2.44
Granted	—		—
Vested	(101	)	1.80
Canceled	(178	)	1.42
Outstanding as of January 30, 2016	468		$	0.26

Total compensation expense is being amortized over the shorter of the achievement of retirement or early retirement status, or the vesting period. Compensation expense related to restricted shares activity was a benefit of $0.3 million for fiscal 2015 and expense of $1.4 million for fiscal 2014. As of January 30, 2016, there was less than $0.1 million of unrecognized compensation cost related to cash-settled restricted stock units that is expected to be recognized over the weighted average period of one year. The total fair value of units vested was $0.2 million during fiscal 2015. The total fair value of units vested was zero during fiscal 2014.

Restricted Shares

Certain of our employees and all of our directors have been awarded non-vested stock (restricted shares), pursuant to non-vested stock agreements. The restricted shares awarded to employees generally cliff vest after up to three years of continuous service. Certain shares awarded may also vest upon a qualified retirement at or following age 65, or upon a qualified early retirement under the provisions adopted in 2012 whereby an awardee completes 10 years of service, attains age 55 and retires. All restricted shares immediately vest upon a change in control of the Company. Grants of restricted shares awarded to directors vest in full after one year after the date of the grant.

The following table summarizes non-vested shares of stock outstanding as of January 30, 2016:



	Shares		Weighted Average Grant-Date Fair Value
	(In thousands)
Outstanding as of February 1, 2015	1,451		$	11.61
Granted	446		2.88
Vested	(931	)	10.63
Cancelled	(249	)	10.84
Outstanding as of January 30, 2016	717		$	7.72

Total compensation expense is being amortized over the shorter of the achievement of retirement or early retirement status, or the vesting period. Compensation expense related to restricted shares activity was $3.6 million for fiscal 2015, $7.3 million for fiscal 2014 and $13.0 million for fiscal 2013. As of January 30, 2016, there was $0.5 million of unrecognized compensation cost related to restricted shares awards that is expected to be recognized over the weighted average period of less than one year. The total fair value of shares vested was $9.9 million during fiscal 2015, $10.3 million during fiscal 2014 and $7.9 million during fiscal 2013.

In connection with the GoJane acquisition, we granted restricted shares based on the stock price on the date granted to the two individual stockholders of GoJane, with compensation expense recognized over the three year cliff vesting period. If the aggregate dollar value of the restricted shares on the vesting date is less than $8.0 million, then we shall pay to the two individual stockholders an amount in cash equal to the difference between $8.0 million and the fair market value of the restricted shares on the vesting date. As of January 30, 2016 and during fiscal 2015, we recorded additional compensation expense of $2.8 million and have a corresponding liability of $7.6 million in accrued expenses and other current liabilities. As of January 31, 2015 and during fiscal 2014, we recorded additional compensation expense of $3.3 million and have a corresponding liability of $4.8 million. Subsequently, the payment of $7.6 million was made during the first quarter of 2016.

On October 31, 2013, we entered into Restricted Stock Award Rescission Agreements with certain executives to rescind 229,760 aggregate shares of restricted stock granted on March 29, 2013 under the Aéropostale, Inc. 2002 Long-Term Incentive Plan. The rescission did not have a material impact on the consolidated financial statements for any period presented and we recorded $1.0 million of compensation cost during fiscal 2013 as a result of rescinding such restricted stock awards.

Performance Shares

Certain of our executives have been awarded performance shares, pursuant to performance share agreements. The performance shares cliff vest at the end of three years of continuous service with us. The shares awarded are contingent upon meeting various separate performance conditions based upon consolidated earnings targets or market conditions based upon total shareholder return targets. All performance shares immediately vest upon a change in control of the Company (as communicated to the executives awarded performance shares). Compensation cost for the performance shares with performance conditions related to consolidated earnings targets is periodically reviewed and adjusted based upon the probability of achieving certain performance targets. If the probability of achieving targets changes, compensation cost will be adjusted in the period that the probability of achievement changes. The fair value of performance based awards is based upon the fair value of the Company's common stock on the date of grant. For market based awards that vest based upon total shareholder return targets, the effect of the market conditions is reflected in the fair value of the awards on the date of grant using a Monte-Carlo simulation model. A Monte-Carlo simulation model estimates the fair value of the market based award based upon the expected term, risk-free interest rate, expected dividend yield and expected volatility measure for the Company and its peer group. Compensation expense for market based awards is recognized over the vesting period regardless of whether the market conditions are expected to be achieved.

The following table summarizes performance shares of stock outstanding as of January 30, 2016:



	Performance-based			Market-based
	Performance Shares			Performance Shares
	Shares	Weighted Average Grant-Date Fair Value		Shares		Weighted Average Grant-Date Fair Value
	(In thousands)			(In thousands)
Outstanding as of February 1, 2015	—	$	—	489		$	10.25
Granted	—	—		—		—
Vested	—	—		—		—
Cancelled	—	—		(269	)	10.74
Outstanding as of January 30, 2016	—	$	—	220		$	9.65

Total compensation expense is being amortized over the vesting period. Compensation expense related to the market-based performance shares which we granted was a benefit of $0.7 million for fiscal 2015, expense of $2.4 million for fiscal 2014 and expense of $2.1 million for fiscal 2013. We did not recognize compensation expense related to performance-based performance shares during fiscal 2015, fiscal 2014 or fiscal 2013 based on our determination of the likelihood of achieving the performance conditions associated with the respective shares. As a result of the departure of Mr. Johnson, our former CEO, after the end of the second quarter of 2014, we recognized a benefit of $2.0 million during fiscal 2014 resulting from the reversal of the related stock-based compensation expense.

The following table summarizes unrecognized compensation cost and the weighted-average years expected to recognize related to performance share awards outstanding as of January 30, 2016:



	Performance-based		Market-based
	Performance Shares		Performance Shares
Total unrecognized compensation (in thousands)	$	—	$	380
Weighted-average years expected to recognize compensation cost (years)	0		1

Cash-Settled Stock Appreciation Rights ("CSARs")

In conjunction with the execution of the employment agreement with Mr. Johnson on May 3, 2013, we granted him an award of CSARs, with an award date value of $5.6 million. The number of CSARs granted was determined in accordance with the agreement by dividing $5.6 million by the Black Scholes value using the closing price of a share of the Company's common stock on the award date. The CSARs were treated as a liability based award. The CSARs have a term of seven years and will vest in equal 1/3 increments over three years. Additionally, we may, in our sole discretion, at any time during the term, exchange a CSAR for another form of equity which is of equal value to the CSAR at the time of the exchange. During fiscal 2015, we recognized no compensation cost or benefit. During fiscal 2014, we recorded $0.3 million of benefit related to this incentive award. During fiscal 2013, we recorded $0.3 million of expense related to this incentive award. As of January 30, 2016, there was no unrecognized compensation cost related to CSARs. As a result of the departure of Mr. Johnson after the end of the second quarter of 2014, 2/3 of these CSARs were forfeited. The remaining vested shares expired on August 29, 2015.

Stock Options

We have an Omnibus Incentive Plan under which we may grant qualified and non-qualified stock options to purchase shares of our common stock to executives, consultants, directors, or other key employees. Stock options may not be granted at less than the fair market value at the date of grant. Stock options generally vest over four years on a pro-rata basis and expire after eight years. Compensation expense is recognized on a straight-line basis over the term. All outstanding stock options immediately vest upon (i) a change in control of the company (as defined in the plan) and (ii) termination of the employee within one year of such change of control.

The fair value of options granted is estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes model requires certain assumptions, including estimating the length of time employees will retain their vested stock options before exercising them (“expected term”), the estimated volatility of our common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements (“forfeitures”). During fiscal 2015, our expected volatility was 64.4%, expected term was 4.16 years, risk-free interest rate was 1.32% and expected forfeiture rate was 0%. Changes in the subjective assumptions can materially affect the estimate of fair value of stock-based compensation and consequently, the related amount recognized in the consolidated statements of operations.

The effects of applying the provisions of ASC 718 and the results obtained through the use of the Black-Scholes option-pricing model are not necessarily indicative of future values.

The following table summarizes stock option transactions for common stock during fiscal 2015:



	Number of Shares		Weighted Average Exercise Price		Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value
	(In thousands)				(In years)	(In millions)
Outstanding as of February 1, 2015	2,247		$	4.62
Granted	1,510		3.16
Exercised	—		—
Cancelled¹	(1,203	)	5.51
Outstanding as of January 30, 2016	2,554		$	3.34	5.81	$	—
Options vested as of January 30, 2016 and expected to vest²	2,554		$	3.34	5.81	$	—
Exercisable as of January 30, 2016	1,193		$	3.48	5.74	$	—

¹ The number of options cancelled includes approximately 195,000 expired shares.

²The number of options expected to vest takes into consideration estimated expected forfeitures.

In accordance with his employment agreement, Mr. Geiger was granted an award of options to purchase 1.5 million shares of our common stock during fiscal 2015. These stock options have a strike price of $3.17 per share, vest over two years on a pro-rata basis, and have a seven year life. During fiscal 2014, and also in accordance with his employment agreement, Mr. Geiger was granted an award of options to purchase 2.0 million shares, that had a strike price of $3.24 per share, vest over three years on a pro-rata basis, and have a seven year life.

We recognized $3.7 million in compensation expense related to stock options during fiscal 2015 which includes a charge of $1.5 million related to the voluntary relinquishment of 1.0 million stock options previously granted to the Chief Executive Officer. Compensation expense was less than $0.5 million during fiscal 2014 and less than $0.1 million during fiscal 2013. For fiscal 2015, fiscal 2014 and fiscal 2013, there was no intrinsic value for options exercised.

The following table summarizes information regarding non-vested outstanding stock options as of January 30, 2016:



	Shares		Weighted Average Grant-Date Fair Value
	(In thousands)
Non-vested as of February 1, 2015	2,035		$	1.52
Granted	1,510		1.61
Vested	(1,177	)	1.57
Cancelled	(1,008	)	1.55
Non-vested as of January 30, 2016	1,360		$	1.57

As of January 30, 2016, there was $1.3 million of total unrecognized compensation cost related to non-vested options that we expect will be recognized over the remaining weighted-average vesting period of six years.

Performance Based Bonus

The Employment Agreement with Julian R. Geiger, our Chief Executive Officer, provides for a special performance based bonus. If, during any consecutive 90 calendar day period during the third year of the term of the Employment Agreement the average closing price per share of the Company’s common stock is $15.93 or higher, Mr. Geiger will be entitled to a performance-based cash bonus equal to 2% of the amount, if any, by which the Company’s average market capitalization during the period with the highest 90 day average stock price during the third year of the term of the Employment Agreement exceeds $255,360,600 (the “Effective Date Market Cap”). If prior to the achievement of such performance metric (but not during the first 90 days of the term of the agreement), Mr. Geiger’s employment is terminated by the Company without Cause, by Mr. Geiger for Good Reason, upon Mr. Geiger’s death or by the Company due to his Disability, or there is a Change of Control (each a “Qualifying Event”), and as of the date of such Qualifying Event the common stock price exceeds $3.24, then, the amount of the performance-based cash bonus will instead be 2% of the amount, if any, by which the Company’s average market capitalization over the 30 calendar day period immediately preceding the Qualifying Event exceeds the Effective Date Market Cap.

We have recorded a liability for this award that was immaterial to the financial statements as of January 30, 2016.