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 and six months ended April 30, 2015 and 2014:



	Three Months Ended April 30,		Six Months Ended April 30,
In thousands	2015	2014	2015	2014
Shares used in computing basic net loss/income per share	171,343	170,475	171,188	170,105
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	171,343	170,475	171,188	170,105

(1)

For the second quarter of fiscal 2015 and 2014, the shares used in computing diluted net loss per share do not include 232,000 and 3,229,000, respectively, of stock options and shares of restricted stock, nor 1,279,000 and 19,113,000, respectively, of warrant shares that would have normally been dilutive if the Company had net income for the periods, as the effect is anti-dilutive given the Company’s net loss from continuing operations. In addition, for the second quarter of fiscal 2015 and 2014, additional stock options outstanding of 5,712,000 and 685,000, respectively, are excluded from the calculation of diluted weighted-average shares outstanding as the exercise prices were greater than the average market price of the Company's common stock for those periods. These securities could potentially dilute earnings per share in the future.

For the first six months of fiscal 2015 and 2014, the shares used in computing diluted net loss per share do not include 233,000 and 3,603,000, respectively, of stock options and shares of restricted stock, nor 1,633,000 and 19,542,000, respectively, of warrant shares that would have been dilutive if the Company had net income for the periods, as the effect is anti-dilutive given the Company’s net loss from continuing operations. In addition, for the first six months of fiscal 2015 and 2014, additional stock options outstanding of 5,880,000 and 595,000, respectively, are excluded from the calculation of diluted weighted-average shares outstanding as the exercise prices were greater than the average market price of the Company's common stock for those periods. These securities could potentially dilute earnings per share in the future.

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 six months ended April 30, 2015 and 2014 was $1.85 and $5.16. There were no performance-based options granted in the six months of fiscal 2015 or 2014.

Activity related to these performance-based options and performance-based restricted stock units for the six months ended April 30, 2015 was as follows:



	Performance Options	Performance Restricted Stock Units
Outstanding, October 31, 2014	640,000	10,218,508
Granted	—	1,824,000
Exercised	—	—
Canceled	—	(2,263,502	)
Outstanding, April 30, 2015	640,000	9,779,006

As of April 30, 2015, 204,000 of the 640,000 outstanding performance-based stock options were exercisable and none of the performance-based restricted stock units were vested. As of April 30, 2015, the Company had unrecognized compensation expense, net of estimated forfeitures, of approximately $0.2 million related to the performance-based stock options and approximately $2.7 million related to the performance-based restricted stock units, which are not expected to vest. The unrecognized compensation expense related to the performance-based stock options is expected to be recognized over a weighted average period of approximately 1 year.

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 six months of fiscal 2015 and 2014, non-performance based options granted were valued assuming a risk free interest rate of 1.81% and 2.2%, respectively, volatility of 86% and 81%, respectively, zero dividend yields and an expected life of 6.6 years and 6.7 years, respectively. The weighted average fair value of the grants was $1.27 and $5.94 for the first six months of fiscal 2015 and 2014, respectively. The Company records stock-based compensation expense using the graded vested method over the vesting period, which is generally three years. As of April 30, 2015, the Company had approximately $0.9 million of unrecognized compensation expense for non-performance-based stock options expected to be recognized over a weighted average period of approximately 1.7 years.

Changes in shares underlying stock options, excluding performance-based stock options, for the six months ended April 30, 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	275,000		1.70
Exercised	—		—
Canceled	(765,667	)	5.87
Outstanding, April 30, 2015	6,326,942		$	4.24	4.6	$	14
Options exercisable, April 30, 2015	5,927,274		$	4.12	4.4	$	14

Changes in non-vested shares underlying stock options, excluding performance-based stock options, for the six months ended April 30, 2015 were as follows:



	Shares		Weighted Average Grant Date Fair Value
Non-vested, October 31, 2014	1,121,336		$	4.18
Granted	275,000		1.27
Vested	(813,334	)	2.89
Canceled	(183,334	)	5.20
Non-vested, April 30, 2015	399,668		$	4.32

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 completion of a requisite service period. Vesting of a prorated portion of restricted stock unit awards granted to our former chief executive officer in lieu of a cash annual salary was accelerated in the second quarter of fiscal 2015 upon his departure. Changes in restricted stock and restricted stock units for the six months ended April 30, 2015 were as follows:



	Restricted Stock		Restricted Stock Units
Outstanding, October 31, 2014	175,000		—
Granted	105,000		675,676
Vested	(70,000	)	(281,532	)
Forfeited	—		(394,144	)
Outstanding, April 30, 2015	210,000		—

The fair value of restricted stock is determined using the intrinsic value method on the grant date. 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 April 30, 2015, there had been no acceleration of amortization periods and the Company had approximately $0.4 million of unrecognized compensation expense expected to be recognized over a weighted average period of approximately 1.5 years.