Shareholders' Equity

3 Months Ended

May 05, 2018

Warrants

As of May 5, 2018, the Company had outstanding warrants to purchase 3,849,365 shares of the Company’s common stock ("Warrants"). The Warrants are fully exercisable and expire five years from the date of grant. The Warrants were issued in connection with private placement securities purchase agreements ("Purchase Agreements"), including the related option exercises, which the Company entered into with certain accredited investors on September 14, 2016. The following table summarizes information regarding Warrants outstanding at May 5, 2018:



Grant Date	Shares of common stock purchasable	Exercise Price (Per Share)	Expiration Date
September 19, 2016	2,976,190	$2.90	September 19, 2021
November 10, 2016	333,873	$3.00	November 10, 2021
January 23, 2017	489,302	$1.76	January 23, 2022
March 16, 2017	50,000	$1.92	March 16, 2022

Stock-Based Compensation - Stock Options

Compensation is recognized for all stock-based compensation arrangements by the Company. Stock-based compensation expense for the first quarters of fiscal 2018 and fiscal 2017 related to stock option awards was $305,000 and $203,000. The Company has not recorded any income tax benefit from the exercise of stock options due to the uncertainty of realizing income tax benefits in the future.

As of May 5, 2018, the Company had one omnibus stock plan for which stock awards can be currently granted: the 2011 Omnibus Incentive Plan that provides for the issuance of up to 9,500,000 shares of the Company's stock. The 2004 Omnibus Stock Plan expired on June 22, 2014. No further awards may be made under the 2004 Omnibus Plan, but any award granted under the 2004 Omnibus Plan and outstanding on June 22, 2014 will remain outstanding in accordance with its terms. The 2011 plan is administered by the human resources and compensation committee of the board of directors and provides for awards for employees, directors and consultants. All employees and directors of the Company and its affiliates are eligible to receive awards under the plan. The types of awards that may be granted under this plan include restricted and unrestricted stock, restricted stock units, incentive and nonstatutory stock options, stock appreciation rights, performance units, and other stock-based awards. Incentive stock options may be granted to employees at such exercise prices as the human resources and compensation committee may determine but not less than 100% of the fair market value of the underlying stock as of the date of grant. No incentive stock option may be granted more than 10 years after the effective date of the respective plan's inception or be exercisable more than 10 years after the date of grant. Options granted to outside directors are nonstatutory stock options with an exercise price equal to 100% of the fair market value of the underlying stock as of the date of grant. With the exception of market-based options, options granted generally vest over three years in the case of employee stock options and vest immediately on the date of grant in the case of director options, and have contractual terms of 10 years from the date of grant.

The fair value of each time-based vesting option award is estimated on the date of grant using the Black-Scholes option pricing model that uses assumptions noted in the following table, and a Monte Carlo valuation model is used for market-based vesting awards. Expected volatilities are based on the historical volatility of the Company's stock. Expected term is calculated using the simplified method taking into consideration the option's contractual life and vesting terms. The Company uses the simplified method in estimating its expected option term because it believes that historical exercise data cannot be accurately relied upon at this time to provide a reasonable basis for estimating an expected term due to the extreme volatility of its stock price and the resulting unpredictability of its stock option exercises. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected dividend yields were not used in the fair value computations as the Company has never declared or paid dividends on its common stock and currently intends to retain earnings for use in operations.



	Fiscal 2018	Fiscal 2017
Expected volatility:	72%	81%
Expected term (in years):	6 years	6 years
Risk-free interest rate:	2.8%	2.2%

A summary of the status of the Company’s stock option activity as of May 5, 2018 and changes during the three months then ended is as follows:



	2011 Incentive Stock Option Plan		Weighted Average Exercise Price		2004 Incentive Stock Option Plan		Weighted Average Exercise Price
Balance outstanding, February 3, 2018	3,384,000		$	1.64	112,000		$	4.86
Granted	953,000		$	0.99	—		$	—
Exercised	—		$	—	—		$	—
Forfeited or canceled	(25,000	)	$	3.08	(5,000	)	$	4.62
Balance outstanding, May 5, 2018	4,312,000		$	1.49	107,000		$	4.87
Options exercisable at May 5, 2018	1,553,000		$	1.94	107,000		$	4.87

The following table summarizes information regarding stock options outstanding at May 5, 2018:



	Options Outstanding						Options Vested or Expected to Vest
Option Type	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value		Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
2011 Incentive:	4,312,000	$	1.49	8.6	$	255,000	3,929,000	$	1.52	8.5	$	215,000
2004 Incentive:	107,000	$	4.87	5.5	$	—	107,000	$	4.87	5.5	$	—

The weighted average grant-date fair value of options granted in the first three-months of fiscal 2018 and fiscal 2017 was $0.65 and $0.93. The total intrinsic value of options exercised during the first three-months of fiscal 2018 and fiscal 2017 was $0 and $9,000. As of May 5, 2018, total unrecognized compensation cost related to stock options was $1,745,000 and is expected to be recognized over a weighted average period of approximately 2.0 years.

Stock-Based Compensation - Restricted Stock Units

Compensation expense recorded for the first quarters of fiscal 2018 and fiscal 2017 relating to restricted stock unit grants was $515,000 and $318,000. As of May 5, 2018, there was $1,799,000 of total unrecognized compensation cost related to non-vested restricted stock unit grants. That cost is expected to be recognized over a weighted average expected life of 1.9 years. The total fair value of restricted stock units vested during the first three months of fiscal 2018 and fiscal 2017 was $410,000 and $98,000. The estimated fair value of restricted stock units is based on the grant date closing price of the Company's stock for time-based vesting awards and a Monte Carlo valuation model for market-based vesting awards.

During the first quarters of fiscal 2018 and fiscal 2017, the Company granted a total of 140,000 and 317,219 time-based restricted stock units to certain key employees as part of the Company's long-term incentive program. The restricted stock units vest in three equal annual installments beginning one year from the grant date. The aggregate market value of the restricted stock units at the date of grant was $145,000 and $422,000 for the first quarters of fiscal 2018 and fiscal 2017. The grants are being amortized as compensation expense over the three-year vesting period. During the first quarter of fiscal 2017, the Company also granted a total of 327,738 time-based restricted stock units to employees as part of the Company's annual merit process. The restricted stock units vested one year after the date of the grant on April 24, 2018. The aggregate market value of the restricted stock units at the date of the award was $446,000 and was amortized as compensation expense over the one-year vesting period.

During the first quarters of fiscal 2018 and fiscal 2017, the Company also granted a total of 14,930 and 7,096 restricted stock units to newly appointed board members as part of the Company's annual director compensation program. Each restricted stock unit grant vests or vested on the day immediately preceding the next annual meeting of shareholders following the date of grant. The aggregate market value of the restricted stock units at the date of the award was $15,000 and $9,000 for the first quarters of fiscal 2018 and fiscal 2017. The grants are amortized as director compensation expense over the vesting period.

During the first quarters of fiscal 2018 and fiscal 2017, the Company granted a total of 488,960 and 561,981 market-based restricted stock performance units to certain executives as part of the Company's long-term incentive program. The number of restricted stock units earned is based on the Company's total shareholder return ("TSR") relative to a group of industry peers over a three-year performance measurement period. Grant date fair values were determined using a Monte Carlo valuation model based on assumptions as follows:



	Fiscal 2018	Fiscal 2017
Total grant date fair value	$523,000	$860,000
Total grant date fair value per share	$1.07	$1.53
Expected volatility	73%	75%
Weighted average expected life (in years)	3 years	3 years
Risk-free interest rate	2.4%	1.5%

The percent of the target market-based performance vested restricted stock unit award that will be earned based on the Company's TSR relative to the peer group is as follows:



Percentile Rank		Percentage of Units Vested
< 33%		0%
33%		50%
50%		100%
100%		150%

A summary of the status of the Company’s non-vested restricted stock unit activity as of May 5, 2018 and changes during the three-month period then ended is as follows:



	Shares		Weighted Average Grant Date Fair Value
Non-vested outstanding, February 3, 2018	2,829,000		$1.40
Granted	644,000		$1.06
Vested	(393,000	)	$1.40
Forfeited	(11,000	)	$1.36
Non-vested outstanding, May 5, 2018	3,069,000		$1.33

Stock Awards Contingent on Shareholder Approval

On March 26, 2018, the human resources and compensation committee of the board of directors approved certain equity awards under the 2011 Plan which are subject to shareholder approval of the proposed increase in authorized shares under the 2011 Plan. If the shareholders do not approve the increase in authorized shares under the 2011 Plan, these awards will be canceled with no further force or effect. The shareholders of the Company vote on this proposal at the 2018 Annual Meeting of Shareholders on June 13, 2018. The following table summarizes information regarding the contingent stock awards outstanding at May 5, 2018:



	Number of Awards
Stock options (a)	1,125,652
Restricted stock units (b)	527,938
Market-based restricted stock performance units (c)	258,606

________________


(a)	The stock options will have an exercise price of $1.00 per share.


(b)	The restricted stock units will vest in three equal annual installments beginning on March 26, 2019.


(c)	The number of restricted stock units earned will be based on the Company's TSR relative to a group of industry peers over a three-year performance measurement period.

Shareholders' Equity