Note 7.       Equity and Share-based Payments



In July 2017, the Company’s shareholders approved the Company's 2017 Equity Incentive Plan.  A total of 4.7 million shares are available for issuance under the 2017 Equity Incentive Plan. As of September 30, 2017, a total of 2,913,305 shares had been granted under the 2017 Equity Incentive Plan and not forfeited or are subject to outstanding commitments to issue shares under the 2017 Equity Incentive Plan, of which 2,533,305 shares were in the form of stock options, 190,000 shares were in the form of stock appreciation rights and 190,000 shares were in the form of restricted stock units.  The 2017 Equity Incentive Plan replaced the Company's 2008 Stock Incentive Plan, and no further awards will be made under the 2008 Stock Incentive Plan.



Stock Options  



The following table outlines the weighted average assumptions for options granted during the year ended September 30, 2017:





During the year ended September 30, 2017, the Company used historical volatility of our common stock over a period equal to the expected life of the options to estimate their fair value.  The dividend yield assumption is based on the Company’s history and expectation of future dividend payouts on the common stock.  The risk-free interest rate is based on the implied yield available on U.S. treasury zero-coupon issues with an equivalent remaining term.



The expected term of the options represents the estimated period of time until exercise and is based on the simplified method.  To value options granted for actual stock-based compensation, the Company used the Black-Scholes option valuation model.  When the measurement date is certain, the fair value of each option grant is estimated on the date of grant and is based on the assumptions used for the expected stock price volatility, expected term, risk-free interest rates and future dividend payments.



Stock Options



The following table summarizes the stock options outstanding and exercisable at September 30, 2017:







No stock options were exercised during the years ended September 30, 2017, September 30, 2016, or 2015.  During the year ended September 30, 2017, stock option holders forfeited 90,000 stock options.



The aggregate intrinsic value in the table above is before income taxes, based on the Company’s closing stock price of $2.65 on the last day of business for the period ended September 30, 2017.  As of September 30, 2017, the Company had unrecognized compensation expense of $1.6 million related to unvested stock options. These expenses will be recognized over approximately 3 years.



Restricted Stock 



The Company issues restricted stock to employees, directors and consultants. Such issuances may have vesting periods that range from one to three years. In addition, the Company has issued stock awards to certain employees and directors that provide for future issuance contingent on continued employment or performance of services for periods that range from one to three years.



A summary of the non-vested stock activity for fiscal years 2017, 2016, and 2015 is summarized in the table below:







The Company granted a total of 190,000,  101,250 and 293,500 shares of restricted stock or shares issuable pursuant to promises to issue shares of common stock during the years ended September 30, 2017, 2016, and 2015, respectively.  The fair value of the awards granted was approximately $181,000, $153,000 and $499,000 for the years ended September 30, 2017, 2016, and 2015, respectively.  All such shares of restricted stock vest and all such shares must be issued pursuant to the vesting period noted, provided the grantee has not voluntarily terminated service or been terminated for cause prior to the vesting or issuance date.  There were 26,500,  27,666 and 58,250 shares of restricted stock forfeited or elected to be taken in cash during the years ended September 30, 2017, 2016, and 2015, respectively. 



The Company recognized the fair value of the restricted stock or promises to issue shares of common stock that vested during the fiscal year as share-based compensation expense of approximately $209,000, $495,000 and $437,000 for the years ended September 30, 2017, 2016, and 2015, respectively, $0, $29,000 and $23,000 of which was included in accrued expenses at year end related to shares that had not yet been issued at September 30, 2017, 2016, and 2015, respectively.  The share-based compensation expense was included in selling, general and administrative expenses for the respective periods.   The Company recorded a tax benefit for stock-based compensation expenses of approximately $115,000,  $114,000, and $204,000 for the years ended September 30, 2017, 2016, and 2015, respectively.  The Company realized the tax benefit for stock-based compensation expenses, for the shares which vested, of approximately $141,000,  $190,000 and $0 for the years ended September 30, 2017, 2016, and 2015, respectively.  As of September 30, 2017, there was approximately $23,000 of total unrecognized compensation cost related to non-vested restricted stock compensation arrangements granted under the incentive plans. This unrecognized cost will be recognized over the weighted average period of the next 0.50 years.



Common Stock Purchase Warrants



In connection with the closing of the APP Acquisition, the Company issued a warrant to purchase up to 2,585,379 shares of the Company's common stock to Torreya Capital, the Company's financial advisor (the Financial Advisor Warrant).  The Financial Advisor Warrant has a five-year term, a cashless exercise feature and a strike price equal to $1.93 per share, the average price of the Company's common stock for the ten-day period preceding the original announcement of the APP Acquisition on April 6, 2016. The fair value of the Financial Advisor Warrant is based on the closing price of the Company's common stock on October 31, 2016 of $0.95. The fair value of the Financial Advisor Warrant of $542,930 was estimated at the date of grant using the Black-Scholes option pricing model assuming expected volatility of 47.2 percent, risk-free interest rate of 1.31 percent, expected life of five years, and no dividend yield. The Financial Advisor Warrant vested upon issuance. Half of the shares subject to the Financial Advisor Warrant, or 1,292,690 shares, are locked-up for a period of 18 months from the issuance date. The Financial Advisor Warrant is recorded as a component of additional paid-in-capital and the related expense is included in operating expenses for the year ended September 30, 2017.



Restricted Stock Units



In connection with the closing of the APP Acquisition, the Company issued 50,000 and 140,000 restricted stock units to an employee and an outside director, respectively, that vest on October 31, 2018. The restricted stock units will be settled in the Company’s common stock if, prior to the vesting date, the Company receives shareholder approval under NASDAQ Rule 5635(c) to increase the number of authorized shares under the 2008 Stock Incentive Plan sufficient to issue such shares or adopt a new plan under which such shares would be issued. With the approval of the 2017 Equity Incentive Plan by shareholders on July 28, 2017, such restricted stock units will be settled in common stock issued under the 2017 Equity Incentive Plan. The restricted stock units were revalued using the Company’s current stock price on July 28, 2017 and reclassified to the equity section of the balance sheet.



Stock Appreciation Rights



In connection with the closing of the APP Acquisition, the Company issued stock appreciation rights based on 50,000 and 140,000 shares of the Company’s common stock to an employee and an outside director, respectively, that vest on October 31, 2018. The stock appreciations rights have a ten-year term and an exercise price per share was $0.95, which was the closing price of a share of the Company’s common stock as quoted on NASDAQ on the trading day immediately preceding the date of the completion of the APP Acquisition. The stock appreciation rights will be settled in the Company’s common stock if, prior to the exercise date, the Company receives shareholder approval under NASDAQ Rule 5635(c) to increase the number of authorized shares under the 2008 Stock Incentive Plan sufficient to issue such shares or adopt a new plan under which such shares would be issued. With the approval of the 2017 Equity Incentive Plan by shareholders on July 28, 2017, such stock appreciation rights will be settled in common stock issued under the 2017 Equity Incentive Plan. The stock appreciation rights were measured using the option-pricing model (Black-Scholes) to estimate the fair value on July 28, 2017 and reclassified to the equity section of the balance sheet.



Preferred Stock



The Company has 5,000,000 shares designated as Class A Preferred Stock with a par value of $.01 per share. There are 1,040,000 shares of Class A Preferred Stock - Series 1 authorized; 1,500,000 shares of Class A Preferred Stock- Series 2 authorized; 700,000 shares of Class A Preferred Stock - Series 3 authorized; and 548,000 shares of Class A Preferred Stock- Series 4 authorized. In connection with the completion of the APP Acquisition (see Note 2, APP Acquisition), a total of 546,756 shares of Series 4 Preferred Stock were issued to the former APP stockholders as of October 31, 2016, and all of the outstanding shares of Series 4 Preferred automatically converted into shares of the Company’s common stock effective July 31, 2017.  There were no other shares of Class A Preferred Stock of any series issued and outstanding in fiscal 2017 or 2016.  The Company has 15,000 shares designated as Class B Preferred Stock with a par value of $0.50 per share. There were no shares of Class B Preferred Stock issued and outstanding in fiscal 2017 or 2016.