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 three months ended January 31, 2015 and 2014:



	Three Months Ended January 31,
In thousands	2015	2014
Shares used in computing basic net loss/income per share	171,039	169,747
Dilutive effect of stock options and restricted stock⁽¹⁾	—	—
Dilutive effect of stock warrants⁽¹⁾	—	—
Shares used in computing diluted net loss/income per share	171,039	169,747

(1)

For the first quarter of fiscal 2015 and 2014, the shares used in computing diluted net loss per share do not include 234,000 and 3,974,000, respectively, of dilutive stock options and shares of restricted stock, nor 1,982,000 and 19,913,000, respectively, of dilutive warrant shares, as the effect is anti-dilutive given the Company’s net loss from continuing operations. For the first quarter of fiscal 2015 and 2014, additional stock options outstanding of 6,492,000 and 3,856,000, respectively, and additional warrant shares outstanding of 23,672,000 and 5,741,000, 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 ASC 718, “Compensation – Stock Compensation.” Stock-based compensation expense is included in selling, general and administrative expense ("SG&A").

The Company grants performance-based 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 or performance goals. 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. The weighted average fair value of the performance-based restricted stock units granted in the first quarter ended January 31, 2015 was $1.85. There were no performance-based restricted stock units granted in the first quarter of fiscal 2014. There were no performance options granted in the first quarter of fiscal 2015 or 2014.

Activity related to these performance-based options and performance-based restricted stock units for the three months ended January 31, 2015 was as follows:



	Performance Options	Performance Restricted Stock Units
Outstanding, October 31, 2014	640,000	10,218,508
Granted	—	1,486,000
Exercised	—	—
Canceled	—	(16,000	)
Outstanding, January 31, 2015	640,000	11,688,508

As of January 31, 2015, 164,000 of the 640,000 outstanding performance-based stock options were exercisable and none of the performance-based restricted stock units were exercisable. As of January 31, 2015, the Company had unrecognized compensation expense, net of estimated forfeitures, of approximately $0.3 million related to the performance-based stock options and approximately $1.9 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 1.3 years and 1.8 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 quarter of fiscal 2015 and 2014, there were no options granted. The Company records stock-based compensation expense using the graded vested method over the vesting period, which is generally three years. As of January 31, 2015, the Company had approximately $1.1 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 three months ended January 31, 2015 were as follows:



Dollar amounts in thousands, except per share amounts	Shares		Weighted Average Price		Weighted Average Life	Aggregate Intrinsic Value
Outstanding, October 31, 2014	6,817,609		$	4.52
Granted	—		—
Exercised	—		—
Canceled	(270,833	)	6.16
Outstanding, January 31, 2015	6,546,776		$	4.46	4.8	$	33
Options exercisable, January 31, 2015	5,930,441		$	4.24	4.5	$	33

Changes in non-vested shares underlying stock options, excluding performance-based stock options, for the three months ended January 31, 2015 were as follows:



	Shares		Weighted Average Grant Date Fair Value
Non-vested, October 31, 2014	1,121,336		$	4.18
Granted	—		—
Vested	(505,001	)	3.59
Canceled	—		—
Non-vested, January 31, 2015	616,335		$	4.67

The Company may also grant 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 or performance goals. Restricted stock unit awards granted to our chief executive officer in lieu of a cash annual salary in the first quarter of fiscal 2015 vest in one year. Changes in restricted stock and restricted stock units for the three months ended January 31, 2015 were as follows:



	Restricted Stock	Restricted Stock Units
Outstanding, October 31, 2014	175,000	—
Granted	—	675,676
Vested	—	—
Forfeited	—	—
Outstanding, January 31, 2015	175,000	675,676

Compensation expense for restricted stock is determined using the intrinsic value method. 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 January 31, 2015, there had been no acceleration of amortization periods and the Company had approximately $1.3 million of unrecognized compensation expense expected to be recognized over a weighted average period of approximately 0.9 years.