14. Equity

Stock Incentive Plans

Amended and Restated 2004 Stock Incentive Plan

In 2004, the Board of Directors adopted, and the Company’s shareholders approved the Stock Incentive Plan. In October 2011, the Board of Directors adopted, and the Company’s shareholders approved, the Amended and Restated 2004 Stock Incentive Plan (the “Amended and Restated Plan”) to update the 2004 Stock Incentive Plan with respect to certain provisions and changes in the tax code since its original adoption. Under the Amended and Restated Plan, the number of shares authorized for issuance was 227,500 shares of common stock after giving effect to the Reverse Stock Split.

2016 Stock Incentive Plan

On October 5, 2016 the Board of Directors adopted the Differential Brands Group Inc. 2016 Stock Incentive Compensation Plan (the “2016 Stock Incentive Plan”) which was approved by the Company’s shareholders on November 7, 2016. Under the 2016 Stock Incentive Plan, 3,529,109 shares of common stock have been reserved for issuance in connection with grants of nonqualified stock options, incentive stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units (“RSUs”), performance-based compensation awards, other stock-based awards, dividend equivalents and cash-based awards. The maximum number of shares with respect to which awards may be granted to any participant in any calendar year may not exceed 500,000 shares; provided, however, that the Chief Executive Officer, Michael Buckley, may receive up to 433,764 RSUs and 347,011 PSUs pursuant to his employment agreement.

In 2016, the Company granted RSUs, stock options and performance share units (“PSUs”) to its officers, non-employee directors, employees and consultants pursuant to the 2016 Plan. The RSUs and PSUs represent the right to receive one share of common stock for each unit on the vesting date provided that the individual meets the applicable vesting criteria. The exercise price of stock options granted under the 2016 Stock Incentive Plan will be determined by the Compensation and Stock Option Committee (the “Compensation Committee”) of the Board of Directors or by any other committee designated by the Board of Directors, but may not be less than the fair market value of the Company’s shares of common stock on the date the option is granted. In general, unvested stock options are forfeited when a participant terminates employment or service with the Company or its affiliates.

Shares underlying awards that are forfeited, cancelled, terminated or expire unexercised, or settled in cash in lieu of issuance of shares, shall be available for issuance pursuant to future awards to the extent that such shares are forfeited, repurchased or not issued under any such award. Any shares tendered to pay the exercise price of an option or other purchase price of an award, or withholding tax obligations with respect to an award, shall be available for issuance pursuant to future awards. In addition, if any shares subject to an award are not delivered to a participant because (i) such shares are withheld to pay the exercise price or other purchase price of such award, or withholding tax obligations with respect to such award (or other award), or (ii) a payment upon exercise of an SAR is made in shares, the number of shares subject to the exercised or purchased portion of any such award that are not delivered to the participant shall be available for issuance pursuant to future awards.

As of December 31, 2016, shares reserved for future issuance under the incentive plans include: (i) 444 shares of common stock issuable upon the exercise of stock options granted under the Amended and Restated Plan; and (ii) 3,223,742 shares of common stock issuable under the 2016 Stock Incentive Plan. As of December 31, 2016, no shares remained available for grant under the Amended and Restated Plan.

There were no stock options, RSUs or stock-based compensation awards granted, expired, forfeited or outstanding during the year ended December 31, 2015, although in connection with the RG Merger the Company assumed certain stock options granted by Joe’s which were outstanding during the year ended December 31, 2015.

Stock Options

The following table summarizes stock option activity by incentive plan for the year ended December 31, 2016 (in actual amounts):


	Total Number	2004 Stock	Amended and	2016 Stock
	of Shares	Incentive Plan	Restated Plan	Incentive Plan
Outstanding at January 1, 2016	—	—	—	—
Legacy Joe's stock options assumed	2,944	2,500	444	—
Granted	150,000	—	—	150,000
Exercised	—	—	—	—
Forfeited / Expired	(2,500)	(2,500)	—	—
Outstanding at December 31, 2016	150,444	—	444	150,000

The following table summarizes stock option activity for all incentive plans for the year ended December 31, 2016 (in actual amounts):


		Weighted		Weighted Average	Aggregate
		Average		Remaining Contractual	Intrinsic
	Options	Exercise Price		Life (Years)	Value
Outstanding at January 1, 2016	—	$	—
Legacy Joe's stock options assumed	2,944		27.70
Granted	150,000		4.02
Exercised	—		—
Expired	—		—
Forfeited	(2,500)		30.60
Outstanding at December 31, 2016	150,444	$	4.04	7.4	$	—
Exercisable at December 31, 2016	444	$	11.40	8.0	$	—

Exercise prices for options outstanding as of December 31, 2016 were as follows (in actual amounts):


		Options Outstanding and Exercisable
Exercise Price		Number of Shares	Weighted-Average Remaining Contractual Life (Years)
$	4.02	150,000	7.4
$	11.40	444	8.0
		150,444

There were no options exercised during the year ended December 31, 2016.

For all stock compensation awards that contain graded vesting with time‑based service conditions, the Company has elected to apply a straight‑line recognition method to account for these awards. A total of $26 thousand of stock based compensation expense related to stock options was recognized during the year ended December 31, 2016.

The stock option awards were measured at fair value on the grant date using the Black-Scholes option valuation model. Stock options granted to non-employees are revalued at each reporting period. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, expected volatility over the option’s expected term, the risk-free interest rate over the option’s expected term and the expected annual dividend yield, if any. The Company estimate’s forfeitures based on an analysis of the award recipients’ positions and the vesting period of the awards. Shares of common stock will be issued when the options are exercised.

The fair values of stock options granted in fiscal years 2016 were estimated on the grant dates using the following assumptions: average fair value per option granted of $0.87, expected option term of 6.45 years, expected volatility of 60 percent, risk free interest rate of 2.09 percent, and an expected annual dividend yield of zero.

As of December 31, 2016, there was $105 thousand of total unrecognized compensation cost related to unvested stock options granted under the 2016 Stock Incentive Plan. The unrecognized compensation cost is expected to be recognized over a weighted‑average of 2.4 years.

Restricted Stock Units

The following table summarizes RSU activity for the year ended December 31, 2016 (in actual amounts):


	Restricted Stock Units
	Number Of Units		Weighted Average Grant Date Fair Value
Outstanding at January 1, 2016	—	$	—
Granted	1,063,570		4.95
Vested	(262,727)		5.86
Forfeited	—		—
Outstanding at December 31, 2016	800,843	$	4.65

A total of $2.0 million of stock based compensation expense was recognized related to Restricted Stock Units during the year ended December 31, 2016.

As of December 31, 2016, there was $3.2 million of total unrecognized compensation cost related to unvested Restricted Stock Units. The unrecognized compensation cost is expected to be recognized over a weighted‑average of 2.2 years.

Performance Share Units

The Company granted 513,678 performance share units during 2016 which vest over 3 years if the performance target set by the Compensation Committee is met. If less than 80 percent of the performance target is reached, zero percent of the performance share units will vest. Unvested performance share units in any completed year will be eligible for vesting in subsequent years if the subsequent year performance target is exceeded and the excess is sufficient to make up for the prior year shortfall. As of December 31, 2016, the performance targets were not met, none of the shares have vested, and no expense has been recognized.

Warrants

The Company issued warrants in conjunction with the acquisition and financing of SWIMS (see “Note 3 – Acquisition of SWIMS”) that are currently exercisable.

The warrant issued to Tengram has an estimated fair value of $465 thousand. The fair value of the warrant at the date of grant was determined using the Black-Scholes option pricing model based on the market value of the underlying common stock, an exercise price of $3.00 per share, an expected life (term) of 5 years, a volatility rate of 50%, based upon the expected volatility in market traded stock over the same period as the remaining term of the warrant, zero dividends, and a risk free interest rate of 1.14%. In addition, a 20% discount for lack of marketability was applied based upon the Rule 144 one year restriction period.

The warrant issued to the SWIMS Seller has an estimated fair value of $45 thousand. The fair value of the warrant at the date of grant was determined using the Black-Scholes option pricing model based on the market value of the underlying common stock, an exercise price of $5.47 per share, an expected life (term) of 3 years, a volatility rate of 45%, based upon the expected volatility in market traded stock over the same period as the remaining term of the warrant, zero dividends, and a risk free interest rate of 0.85% In addition, a 10% discount for lack of marketability was applied based upon the Rule 144 six-month restriction period.