Earnings per Share and Stock-Based Compensation

The Company reports basic and diluted earnings per share (“EPS”). Basic EPS is based on the weighted average number of shares outstanding during the period, while diluted EPS additionally includes the dilutive effect of the Company’s outstanding stock options, warrants and shares of restricted stock computed using the treasury stock method.

The table below sets forth the reconciliation of the denominator of each net loss/income per share calculation for the third quarter and nine months ended July 31, 2014 and 2013:



	Three Months Ended July 31,		Nine Months Ended July 31,
In thousands	2014	2013	2014	2013
Shares used in computing basic net loss/income per share	170,794	167,624	170,337	166,735
Dilutive effect of stock options and restricted stock(1)	—	4,200	—	—
Dilutive effect of stock warrants(1)	—	18,744	—	—
Shares used in computing diluted net loss/income per share	170,794	190,568	170,337	166,735

(1)

For the third quarter of fiscal 2014, the shares used in computing diluted net loss per share do not include 1,572,000 of dilutive stock options and shares of restricted stock, nor 14,950,000 of dilutive warrant shares, as the effect is anti-dilutive given the Company’s net loss from continuing operations. For the third quarter of fiscal 2014 and 2013, additional stock options outstanding of 5,710,000 and 5,763,000, respectively, and additional warrant shares outstanding of 10,704,000 and 6,910,000, respectively, were excluded from the calculation of diluted EPS, as their effect would have been anti-dilutive based on the application of the treasury stock method. For the nine months ended July 31, 2014 and 2013, the shares used in computing diluted net loss per share do not include 2,922,000 and 4,016,000, respectively, of dilutive stock options and shares of restricted stock, nor 18,490,000 and 17,596,000, respectively, of dilutive warrant shares, as the effect is anti-dilutive given the Company’s net loss from continuing operations. For the nine months ended July 31, 2014 and 2013, additional stock options outstanding of 4,364,000 and 6,286,000, respectively, and additional warrant shares outstanding of 7,164,000 and 8,058,000, respectively, were excluded from the calculation of diluted EPS, as their effect would have been anti-dilutive based on the application of the treasury stock method.

The Company accounts for stock-based compensation under the fair value recognition provisions of Accounting Standards Codification ("ASC") 718, “Compensation – Stock Compensation.” Stock-based compensation expense is included in selling, general and administrative expense (“SG&A”).

The Company has previously granted performance-based stock options and performance-based restricted stock units to certain key employees and executives. Vesting of these awards is contingent upon a required service period and the Company’s achievement of specified common stock price thresholds. In addition, the vesting of a portion of the performance-based stock options can be accelerated based upon the Company’s achievement of specified annual performance targets. The Company believes that the granting of these awards serves to further align the interests of its employees and executives with those of its stockholders. Based on the vesting contingencies of the awards, the Company used a Monte-Carlo simulation in order to determine the grant date fair values of the awards. For the nine months ended July 31, 2014 and 2013, the assumptions used in the Monte-Carlo simulations for the performance-based restricted stock units granted included a risk-free interest rate of 0.6% to 0.7% and 0.4 % to 0.8%, respectively; volatility of 52% to 63% and 59% to 89%, respectively; and a zero dividend yield. The weighted average fair value of the performance-based restricted stock units granted in the nine months ended July 31, 2014 and 2013 was $5.16 and $4.19, respectively. There were no performance-based stock options granted in the first nine months of fiscal 2014 or 2013.

Activity related to these performance-based equity instruments for the nine months ended July 31, 2014 was as follows:



	Performance Options		Performance Restricted Stock Units
Outstanding, October 31, 2013	688,000		11,675,782
Granted	—		300,000
Exercised	(12,000	)	—
Canceled	(36,000	)	(30,937	)
Outstanding, July 31, 2014	640,000		11,944,845

As of July 31, 2014, 82,000 of the 640,000 outstanding performance-based stock options were exercisable and none of the performance-based restricted stock units were exercisable. As of July 31, 2014, the Company had unrecognized compensation expense, net of estimated forfeitures, of approximately $0.5 million related to the performance-based stock options and approximately $0.9 million related to the performance-based restricted stock units. This unrecognized compensation expense is expected to be recognized over a weighted average period of approximately 1.6 years and 0.4 years, respectively.

For non-performance-based stock options, the Company uses the Black-Scholes option-pricing model to value compensation expense. Forfeitures are estimated at the date of grant based on historical rates and reduce the compensation expense recognized. The expected term of stock options granted is derived from historical data on employee exercises. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant. Expected volatility is based on the historical volatility of the Company’s stock. For the first nine months of fiscal 2014 and 2013, non-performance based options granted were valued assuming a risk-free interest rate of 2.2% and 1.6%, respectively, volatility of 81% and 78%, respectively, zero dividend yield, and an expected life of 6.7 years and 7.1 years, respectively. The weighted average fair value of the grants was $5.82 and $4.77 for the first nine months of fiscal 2014 and 2013, respectively. The Company records stock-based compensation expense using the graded vested method over the vesting period, which is generally three years. As of July 31, 2014, the Company had approximately $2.3 million of unrecognized compensation expense for non-performance-based stock options expected to be recognized over a weighted average period of approximately 1.8 years.

Changes in shares underlying stock options, excluding performance-based stock options, for the nine months ended July 31, 2014 were as follows:



Dollar amounts in thousands, except per share amounts	Shares		Weighted Average Price		Weighted Average Life	Aggregate Intrinsic Value
Outstanding, October 31, 2013	8,829,618		$	4.83
Granted	275,000		8.05
Exercised	(1,024,166	)	4.34			$	3,928
Canceled	(975,250	)	8.06
Outstanding, July 31, 2014	7,105,202		$	4.57	5.3	$	2,061
Options exercisable, July 31, 2014	5,802,200		$	4.24	4.7	$	2,061

Changes in non-vested shares underlying stock options, excluding performance-based stock options, for the nine months ended July 31, 2014 were as follows:



	Shares		Weighted Average Grant Date Fair Value
Non-vested, October 31, 2013	2,784,826		$	2.95
Granted	275,000		5.82
Vested	(1,651,824	)	2.24
Canceled	(105,000	)	4.71
Non-vested, July 31, 2014	1,303,002		$	4.28

The Company also grants restricted stock and restricted stock units under its 2013 Performance Incentive Plan. Restricted stock issued under this plan generally vests in three years while restricted stock units issued under this plan generally vest upon the Company’s achievement of a specified common stock price threshold. Changes in restricted stock for the nine months ended July 31, 2014 were as follows:



	Shares
Outstanding, October 31, 2013	195,000
Granted	105,000
Vested	(95,000	)
Forfeited	(30,000	)
Outstanding, July 31, 2014	175,000

Compensation expense for restricted stock is determined using the intrinsic value method and forfeitures are estimated at the date of grant based on historical rates and reduce the compensation expense recognized. The Company monitors the probability of meeting the restricted stock performance criteria, if any, and adjusts the amortization period as appropriate. As of July 31, 2014, there had been no acceleration of amortization periods and the Company had approximately $0.7 million of unrecognized compensation expense expected to be recognized over a weighted average period of approximately 1.6 years.