3.	Stock-Based Compensation

All share-based payments, including grants of employee stock options and restricted stock, are recognized as an expense in the Consolidated Statement of Operations based on their fair values and vesting periods. The fair value of stock options is determined using the Black-Scholes valuation model and requires the input of subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (the “expected term”), the estimated volatility of the Company’s common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements (“forfeitures”). The Company reviews its valuation assumptions at each grant date and, as a result, is likely to change its valuation assumptions used to value employee stock-based awards granted in future periods. The values derived from using the Black-Scholes model are recognized as an expense over the vesting period, net of estimated forfeitures. The estimation of stock-based awards that will ultimately vest requires significant judgment. Actual results, and future changes in estimates, may differ from the Company’s current estimates.

2013-2016 LTIP

During the second quarter of fiscal 2013, the 2013-2016 Destination XL Group, Inc. Long-Term Incentive Plan (the “2013-2016 LTIP”) was approved and put into place. Pursuant to the terms of the 2013-2016 LTIP, on the date of grant, each participant was granted an unearned and unvested award equal in value to four times his/her annual salary multiplied by the applicable long-term incentive program percentage, which is 100% for the Company’s Chief Executive Officer, 70% for its senior executives and 50% for other participants in the plan, which the Company refers to as the “Projected Benefit Amount.” Each participant was granted 50% of the Projected Benefit Amount in shares of restricted stock, 25% in stock options and the remaining 25% in cash. All shares were granted from the Company’s 2006 Incentive Compensation Plan.

Of the total Projected Benefit Amount, 50% is subject to time-based vesting and 50% is subject to performance-based vesting. The time-vested portion of the award (half of the shares of restricted stock, options and cash) vests in three installments with 20% of the time-vested portion vesting at the end of fiscal 2014, 40% at the end of fiscal 2015 and the remaining 40% vesting at the end of fiscal 2016.

For the performance-based portion of the award to vest, the Company must achieve, during any rolling four fiscal quarter period that ends on or before the end of fiscal 2015, revenue of at least $550 million and an operating margin of not less than 8.0%. In the event that the Company achieves its target of $550 million in revenue with an operating margin of not less than 8.0% during any rolling fiscal four quarters prior to fiscal 2016, then the total Projected Benefit Amount vests in full.

If the targets for vesting of the performance-based portion of the award are not met by the end of fiscal 2015, then the performance-based target can still be met in fiscal 2016. In fiscal 2016, the Company must achieve revenue of at least $600 million and an operating margin of not less than 8.0% for participants to receive 100% vesting of the performance-based portion of the Projected Benefit Amount. If the Company does not meet the performance target at the end of fiscal 2016, but the Company is able to achieve revenue equal to or greater than $510 million at the end of fiscal 2016 and the operating margin is not less than 8.0%, then the participants will receive a pro-rata portion of the performance-based award based on minimum sales of $510 million (50% payout) and $600 million (100% payout).

Assuming the Company achieves the performance target and 100% of the Projected Benefit Amount vests, excluding estimated forfeitures, the total potential value of all awards over this four-year period, as of August 2, 2014, would be approximately $19.5 million. Approximately half of the compensation expense relates to the time-vested awards, which is being expensed over forty-four months, based on the respective vesting dates. As the performance targets were not deemed probable at August 2, 2014, no expense for the performance-based awards has been recognized through the first six months of fiscal 2014. However, as a result of two terminations during the first six months of fiscal 2014, the Company did recognize additional stock compensation expense of approximately $77,000 related to the partial pro-rata vesting of the performance awards that each former employee was entitled to pursuant to the terms of the 2013-2016 LTIP. In total, 10,200 shares of performance-related restricted stock vested and performance-related options to purchase 12,418 shares of common stock vested.

2006 Plan—Stock Option and Restricted Share Award Activity

Pursuant to the Company’s 2006 Incentive Compensation Plan, as amended (the “2006 Plan”), the Company has 7,250,000 shares authorized for issuance, of which 4,250,000 shares may be subject to the granting of awards other than stock options and stock appreciation rights.

The following tables summarize the stock option activity and restricted share activity under the 2006 Plan for the first six months of fiscal 2014:


Stock Options	Number of Shares			Weighted-average Exercise price per Option		Weighted-average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding options at beginning of year		2,721,569		$	4.95
Options granted		106,882			5.29
Options canceled		(87,306	)		5.04
Options exercised ⁽¹⁾		(16,224	)		5.04

Outstanding options at end of quarter		2,724,921		$	4.96		8.4 years	$	671,295
Options exercisable at end of quarter		340,069		$	4.50		5.2 years	$	329,714

(1)	The intrinsic value of options exercised was immaterial.


Restricted Shares	Number of Shares			Weighted-average Grant-Date Fair Value ⁽¹⁾
Restricted shares outstanding at beginning of year		2,017,940		$	5.01
Restricted shares granted		74,018			5.33
Deferred shares granted ⁽²⁾		5,448			5.24
Restricted shares vested		(143,203	)		4.31
Restricted shares canceled		(67,974	)		5.00

Restricted and Deferred shares outstanding at end of quarter		1,886,229		$	5.08

(1)	The fair value of a restricted share is equal to the Company’s closing stock price on the date of grant.

(2)

During the first six months of fiscal 2014, the Company granted 5,448 shares of deferred stock, with a fair value of approximately $28,560 to a director as compensation in lieu of cash and in accordance with his irrevocable election. The shares of deferred stock will vest three years from the date of grant. The Company is recognizing compensation expense over the respective vesting periods.

1992 Stock Incentive Plan (the “1992 Plan”)—Stock Option Activity

The following table summarizes stock option activity under the 1992 Plan for the first six months of fiscal 2014:


Stock Options	Number of Shares			Weighted-average Exercise price per Option		Weighted-average Remaining Contractual Term		Aggregate Intrinsic Value ⁽¹⁾
Outstanding at beginning of year		911,775		$	6.82
Options granted		—			—
Options canceled		(440,775	)		7.28
Options exercised		(7,500	)		5.67

Outstanding at end of quarter		463,500		$	6.40		0.4 years		—
Options exercisable at end of quarter		463,500		$	6.40		0.4 years		—

(1)	The intrinsic value of the options outstanding at August 2, 2014 was immaterial.

Share Availability Under the 2006 Plan

At August 2, 2014, the Company had 1,175,472 shares available for future grant under the 2006 Plan, of which 1,035,230 remain available under the sublimit for awards other than options and stock appreciation rights. No further grants can be made under the 1992 Plan.

Non-Employee Director Stock Purchase Plan

The Company granted 20,155 shares of common stock, with a fair value of approximately $105,942, to certain of its non-employee directors as compensation in lieu of cash in the first six months of fiscal 2014.

Valuation Assumptions for Stock Options and Restricted Stock

For the first six months of fiscal 2014, the Company granted 74,018 shares of restricted stock, 5,448 shares of deferred stock and stock options to purchase 106,882 shares of common stock. For the first six months of fiscal 2013, the Company granted stock options to purchase 2,739,187 shares of common stock and 2,229,364 shares of restricted stock. The majority of the stock option and restricted stock grants for both periods is attributable to the Company’s 2013-2016 LTIP and include a combination of time-based and performance-based awards.

The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model. The following assumptions were used for grants for the first six months of fiscal 2014 and fiscal 2013:


	August 2, 2014	August 3, 2013
Expected volatility	46.0%	52.0%
Risk-free interest rate	0.79%	0.34-0.79%
Expected life	3.1 yrs	3.0-4.1 yrs
Dividend rate	—	—

Expected volatilities are based on historical volatilities of the Company’s common stock; the expected life represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and historical exercise patterns; and the risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option.

For the first six months of fiscal 2014 and fiscal 2013, the Company recognized total stock-based compensation expense of $1.5 million and $0.7 million, respectively. The total compensation cost related to time-vested stock options and time-based restricted stock awards not yet recognized as of August 2, 2014 is approximately $4.0 million, net of estimated forfeitures, which will be expensed over a weighted average remaining life of 21 months. At August 2, 2014, the Company had $7.2 million of unrecognized compensation expense, net of estimated forfeitures, related to its performance-based stock options and restricted stock. As discussed above, the Company will begin recognizing compensation if, and when, achievement of the performance targets becomes probable.