NOTE 5 – Share-Based Payments



In March 2008, the Company’s shareholders approved the 2008 Stock Incentive Plan which is utilized to provide equity opportunities and performance–based incentives to attract, retain and motivate those persons who make (or are expected to make) important contributions to the Company.  A total of 2 million shares are available for issuance under this plan. As of June 30, 2016, a total of 1,498,968 shares had been granted under the plan and not forfeited or are subject to outstanding commitments to issue shares under the plan,  of which 167,500 shares were in the form of stock options and the remainder were in the form of restricted stock or other share grants.



Stock Options



Under the Company’s previous share based long-term incentive compensation plan, the 1997 Stock Option Plan, the Company granted non-qualified stock options to employees, directors and consultants.  There are no shares available for grant under this plan which expired on December 31, 2006.  Options issued under this plan expire 10 years after the date of grant and generally vested 1/36 per month, with full vesting after three years. Under the Company’s 2008 Stock Incentive Plan, options issued in May 2009 expire 10 years after the date of grant and vest 1/36 per month, with full vesting after three years.  



The Company granted 17,500 options to certain employees under the 2008 Stock Incentive Plan during the three and nine months ended June 30, 2016.  Options issued under this plan expire in 10 years with vesting over a two-year period with one-half vesting in one-year of the grant date and one-half vesting in two years of the grant date.  The Company did not grant any options during the three and nine months ended June 30, 2015.  Based on the Company’s history of prior forfeitures and future expectations it was determined that there would be no forfeiture rate used.



Compensation expense is recognized only for share-based payments expected to vest. Stock compensation expense related to options was approximately $2,000 for the three and nine months ended June 30, 2016.  No stock compensation expense related to options was recognized for the three and nine months ended June 30, 2015.



The following table outlines the weighted average assumptions for options granted during the three and nine months ended June 30, 2016:





During the three and nine months ended June 30, 2016, 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. 



No stock options were exercised during the three and nine months ended June 30, 2016 or 2015.



The following table summarizes the stock options outstanding and exercisable at June 30, 2016:







The aggregate intrinsic value in the table above is before income taxes, based on the closing price of the Company’s common stock of $1.26 per share as of the last business day of the period ended June 30, 2016.  As of June 30, 2016, the Company had unrecognized compensation expense of $11,182 related to unvested stock options.  These expenses will be recognized over approximately 1.75 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 that provide for future issuance contingent on continued employment for periods that range from one to three years.

The Company granted a total of 101,250 shares of restricted stock or shares issuable pursuant to promises to issue shares of common stock during the nine months ended June 30, 2016. The stock granted during the nine months ended June 30, 2016 includes rights to receive a total of 13,498 shares, or at a holder’s election cash based on the fair market value of the shares, contingent on continued employment or service.  The fair value of the awards granted was approximately $153,000. All such shares of restricted stock vest and all such shares must be issued at the end of the applicable period, provided the grantee’s service has not terminated prior to the end of such period under circumstances requiring forfeiture of the award pursuant to the terms of the grant. There were no shares of restricted stock forfeited during the three and nine months ended June 30, 2016. 



The Company granted a total of 43,500 shares of restricted stock or shares issuable pursuant to promises to issue shares of common stock during the nine months ended June 30, 2015. The fair value of the awards granted was approximately $144,000. All such shares of restricted stock vest and all such shares must be issued at the end of the applicable period, provided the grantee has not voluntarily terminated service or been terminated for cause prior to the vesting or issuance date.  There were 5,000 and 8,250 shares of restricted stock forfeited during the three and nine months ended June 30, 2015, respectively.    



The Company recognized share-based compensation expense for restricted stock or promises to issue shares of common stock of approximately $107,000 and $362,000 for three and nine months ended June 30, 2016, respectively, $81,000 of which was included in accrued expenses at the nine months then ended since the related shares had not yet been issued at June 30, 2016.  Share-based compensation expense for restricted stock or promises to issue shares of common stock for the three and nine months ended June 30, 2015 was approximately $163,000 and $543,000, respectively, of which $127,000 was included in accrued expenses at June 30, 2015.  This compensation expense was included in operating expenses on the accompanying Unaudited Condensed Consolidated Statements of Income for the three and nine months ended June 30, 2016 and 2015. As of June 30, 2016, there was approximately $420,000, representing approximately 252,000 unvested shares, of total unrecognized compensation cost related to non-vested restricted stock compensation arrangements granted under the Company’s equity compensation plans. This unrecognized cost will be recognized over the weighted average period of the next 2.02 years.