9. Stockholders’ Equity

On August 11, 2017, the Company issued 947,870 shares of the Company’s common stock in a private placement to several investors, including certain of the Company’s directors, officers and large stockholders, to effect certain equity financings required by the Cerberus Credit Amendment as described in Note 7. The shares were issued for $4.22 per share and resulted in net cash proceeds to the Company of approximately $3.9 million. In connection with this private placement, the Company issued warrants to these investors to purchase shares of its common stock, as further described under “Stock Warrants” below.

On December 2, 2016, the Company closed an underwritten public offering of 4,237,750 shares of its common stock at an offering price of $9.50 per share, resulting in net proceeds to the Company of $37.0 million after deducting the underwriting discount and offering expenses paid by the Company. The net proceeds of the offering were used to fund a portion of the purchase price of the Hi-Tec Acquisition.

In June 2016, the Company repurchased and retired 60,082 shares of its common stock in open market transactions at a weighted average purchase price of $12.24 and for an aggregate purchase price of approximately $0.7 million.

Stock Warrants

In connection with the purchase of junior participation interests in the Cerberus Credit Facility term loan as further described in Note 7, the Company issued warrants on December 7, 2017 to purchase 511,111 shares its common stock at an exercise price of $2.25 per share. Each warrant was exercisable on issuance and has a seven-year life. The warrants can be exercised in cash or on a “cashless” basis, and are subject to customary adjustments in the event of stock dividends, stock splits, mergers, reclassifications or similar transactions. The fair value of these warrants was $0.6 million on their grant date as determined using a Black Scholes option pricing model and was charged to operating expenses during Fiscal 2018. The following table shows the investors, their relationship to the Company, the amount of their participation interests in the Cerberus Credit Facility and the number of stock warrants issued to such investors:


(Dollars in thousands)	Participation Interest in Term Loan		Stock Warrant Shares
Cove Street Capital, LLC, large stockholder	$	7,000	311,111
Jess Ravich, Director and large stockholder		4,400	195,556
Henry Stupp, Chief Executive Officer and Director		100	4,444
	$	11,500	511,111

In connection with the private placement described above, the Company’s issued warrants on August 17, 2017 to purchase 326,695 shares of its common stock at an exercise price of $4.22 per share. These warrants are exercisable from March 5, 2018 to August 17, 2024. The warrants can be exercised in cash or on a “cashless” basis, and are subject to customary adjustments in the event of stock dividends, stock splits, mergers, reclassifications or similar transactions. The fair value of these warrants was $0.7 million on their grant date as determined using a Black Scholes option pricing model and was charged to operating expenses during Fiscal 2018. The following table shows the investors, their relationship to the Company, the amount and number of shares purchased by them in the private place and the number of stock warrant shares issued to such investors:


		Purchase Price		Stock
	Shares	of Shares		Warrant
(Dollars in thousands)	Purchased	Purchased		Shares
Jess Ravich, Director and large stockholder	473,934	$	2,000	237,834
Robert Galvin, Chairman of the Board	23,697		100	5,924
Howard Siegel, President, Chief Operating Officer	23,697		100	—
Cove Street Capital, LLC, large stockholder	236,967		1,000	59,241
Other Investors	189,575		800	23,696
	947,870		4,000	326,695

The Company issued a warrant to purchase 120,000 shares of its common stock in connection with the Hi-Tec Acquisition and related license agreement with Carolina. (See Note 2.) The warrant vests in five tranches of 20,000 shares over the five-year initial term of the license agreement, plus a 6th tranche that vests only if the license agreement is renewed for a subsequent five year period. The 6th tranche is assigned no value until the related contingency is resolved. The fair value of the first five tranches of the stock warrant was $0.6 million on issuance during Fiscal 2017. Contra-revenue and additional paid-in capital of $60,000 was recognized in Fiscal 2018, along with an immaterial amount in Fiscal 2017. As of February 3, 2018, total unrecognized expense related to the first five tranches of the stock warrant was approximately $0.5 million, which is being recognized over the remaining 4-year life of the related license agreement.

Outstanding stock warrants consist of the following:


	Year Ended
	February 3, 2018			January 28, 2017
	Outstanding	Exercise		Outstanding	Exercise
	Stock Warrant	Price Per		Stock Warrant	Price Per
	Shares	Share		Shares	Share
Unexercisable warrants issued to licensee	100,000	$	10.00	120,000	$	10.00
Exercisable warrants issued to licensee	20,000		10.00	—		—
Warrants issued in private placement	511,111		2.25	—		—
Warrants issued for term loan participation interests	326,695		4.22	—		—
	977,806	$	3.81	120,000	$	10.00

Stock‑Based Compensation

Effective July 16, 2013, the Company’s stockholders approved the Cherokee Inc. 2013 Stock Incentive Plan, which was amended and restated effective June 6, 2016 (the “2013 Plan”), and which generally replaced the Company’s previous stock option plans to provide for the issuance of stock‑based awards to officers, other employees and directors. The 2013 Plan authorizes 1,200,000 shares of common stock to be issued and 447,487 shares of common stock previously reserved but unissued under previous plans.

Stock Options

Stock options issued to employees are granted at the market price on the date of grant, generally vest over a three-year period, and generally expire seven to ten years from the date of grant. The Company has also granted non‑plan stock options to certain executives as a material inducement for employment. The Company estimates the fair value of stock‑based payment awards on the date of grant using the Black-Scholes option‑pricing model. The compensation expense recognized for all stock‑based awards is net of estimated forfeitures over the award’s service period. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service period as a component of operating expenses in the statements of operations, and amounted to $1.2 million, $1.0 million and $1.1 million for Fiscal 2018, Fiscal 2017 and Fiscal 2016 respectively.

The estimated fair value of stock options granted was estimated using the following assumptions:


	Year Ended
	February 3, 2018					January 28, 2017					January 30, 2016
Expected dividend yield				—	%				—	%				—	%
Expected volatility	39.8		to	58.9		39.4		to	42.6		29.8		to	29.9
Risk-free interest rate	1.9	%	to	2.3	%	1.0	%	to	1.8	%	1.3	%	to	1.6	%
Expected life (in years)	4.8		to	4.9		3.5		to	4.8		4.6		to	4.9
Estimated forfeiture rate	—	%	to	10.0	%	—	%	to	10.0	%	—	%	to	10.0	%

The expected dividend yield is based on past dividends paid and the current dividend yield at the time of grant, and the expected stock price volatility is based on the historical volatility of the Company’s stock price. The risk‑free interest rate is based on the U.S. Treasury yield in effect at the time of grant with an equivalent remaining term. The expected life of the stock options is based on historical experience of similar options, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior.

Changes in shares under options are summarized as follows:


				Weighted
				Average
				Remaining
		Weighted		Contractual	Aggregate
		Average		Term	Intrinsic
(Dollar amounts in thousands, except per share amounts)	Shares	Price		(in years)	Value
Outstanding, at February 1, 2015	1,185,767	$	15.89	3.5	$	2,910
Granted	335,000	$	22.79
Exercised	(261,097)	$	17.06
Canceled/forfeited	(146,667)	$	17.33
Outstanding, at January 30, 2016	1,113,003	$	17.50	4.1	$	1,339
Granted	142,000	$	11.29
Exercised	—	$	—
Canceled/forfeited	(162,501)	$	18.22
Outstanding, at January 28, 2017	1,092,502	$	16.59	3.7		—
Granted	143,000	$	3.61
Exercised	—	$	—
Canceled/forfeited	(860,168)	$	17.05
Outstanding, at February 3, 2018	375,334	$	10.60	4.2		—
Vested and Exercisable at February 3, 2018	241,666	$	14.23	2.2		—

The weighted-average grant date fair value of stock options granted under the 2013 Plan was $1.51, $3.82 and $6.35 for Fiscal 2018, Fiscal 2017 and Fiscal 2016 respectively. The aggregate intrinsic values shown in the table above represent the difference between the Company’s closing stock price on February 3, 2018 and the exercise price, multiplied by the number of shares subject to in‑the‑money stock options that would have been received by the option holders if all option holders exercised their stock options on February 2, 2018 (the last trading day of Fiscal 2018).

The total intrinsic value of stock options exercised for Fiscal 2016 was $1.7 million. There were no stock option exercises in Fiscal 2018 or Fiscal 2017.

As of February 3, 2018, total unrecognized stock‑based compensation expense related to nonvested stock options was approximately $0.1 million, which is expected to be recognized over a weighted-average period of approximately 2.4 years. The total fair value of all stock options that vested was approximately $0.3 million, $1.3 million and $0.7 million, during Fiscal 2018, Fiscal 2017 and Fiscal 2016, respectively.

Performance Stock Units and Restricted Stock Units

In April 2016, the Compensation Committee of the Company’s Board of Directors granted certain performance‑based equity awards, or performance stock units, to executives under the 2013 Plan. The performance metric applicable to such awards is compound stock price growth, using the closing price of the Company’s common stock on April 5, 2016, or $16.89, as the benchmark. The target growth rate is 10% annually, which results in an average share price target of (i) $18.58 for Fiscal 2017, (ii) $20.44 for Fiscal 2018 and (iii) $22.48 for Fiscal 2019. The average share price is calculated as the average of all market closing prices during the January preceding the applicable fiscal year end. If a target is met at the end of a fiscal year, one third of the shares subject to the award will vest. If the stock price target is not met at the end of a fiscal year, the relevant portion of the shares subject to the award will not vest but will roll over to the following fiscal year. The executive must continue to be employed by the Company through the relevant vesting dates to be eligible for vesting. The target average share price was not achieved for Fiscal 2018 or 2017. Since the vesting of these performance‑based equity awards is subject to market-based performance conditions, the fair value of these awards was measured on the date of grant using the Monte Carlo simulation model for each vesting tranche. The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the performance conditions stipulated in the award and calculates the fair market value for the performance stock units granted. The Monte Carlo simulation model also uses stock price volatility and other variables to estimate the probability of satisfying the performance conditions and the resulting fair value of the award.

In June 2015, the Compensation Committee of the Board of Directors granted restricted stock units and stock options to each member of the Board of Directors and to each of the Company’s executive officers under the 2013 Plan. All of these equity awards vest in equal annual installments over three years, such that all shares subject to each award will be vested on the third anniversary of the grant date. The fair value of the restricted stock unit awards was measured on the effective date of grant using the price of the Company’s common stock.

In August 2014, the Compensation Committee of the Board of Directors granted a performance-based equity award to an employee under the 2013 Plan, which vests in five increments dependent upon achievement of certain annual sales targets. The fair value of this award was measured on the effective date of grant using the price of the Company’s common stock.

Stock-based compensation expense for performance stock units and restricted stock units is reported as a component of operating expenses and was approximately $1.3 million, $1.4 million and $1.1 million for Fiscal 2018, Fiscal 2017 and Fiscal 2016, respectively.

Changes in performance stock units and restricted stock units are summarized as follows:


		Weighted
		Average
	Number of	Grant-Date
	Shares	Fair Value
Unvested stock at February 1, 2015	76,936	$	13.02
Granted	166,000		22.71
Vested	(27,435)		15.74
Forfeited	(19,001)		4.27
Unvested stock at January 30, 2016	196,500	$	21.67
Granted	31,500		10.08
Vested	(65,831)		21.10
Forfeited	(5,000)		17.81
Unvested stock at January 28, 2017	157,169	$	19.71
Granted	185,951		2.23
Vested	(101,468)		13.69
Forfeited	(28,667)		17.31
Unvested stock at February 3, 2018	212,985	$	7.63

As of February 3, 2018, total unrecognized stock‑based compensation expense related to performance stock units and restricted stock units was approximately $0.7 million, which is expected to be recognized over a weighted-average period of approximately 1.5 years.