NOTE 6 – 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 March 31, 2017, a total of 1,824,802 shares had been granted under the plan and not forfeited or are subject to outstanding commitments to issue shares under the plan,  of which 297,500 shares were in the form of stock options and the remainder were in the form of restricted stock or other share grants.



Stock Options



The Company granted 190,000 options at an exercise price of $0.95 to an outside director and an employee under the 2008 Stock Incentive Plan during the six months ended March 31, 2017.  The Company did not grant any options during the three months ended March 31, 2017.  Options issued under this plan expire in 10 years with vesting over a one-year period from the grant date.  The Company did not grant any options during the three and six months ended March 31, 2016.  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 $21,911 and $37,847 for the three and six months ended March 31, 2017, respectively.  No stock compensation expense related to options was recognized for the three and six months ended March 31, 2016.



The following table outlines the weighted average assumptions for options granted during the six months ended March 31, 2017:





During the six months ended March 31, 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. 



There were 90,000 stock options granted under the 1997 Stock Option Plan that expired during the six months ended March 31, 2017.  The 1997 Stock Option Plan expired on December 31, 2006, and no more options are outstanding under the plan.



No stock options were exercised during the three and six months ended March 31, 2017 or 2016.



The following table summarizes the stock options outstanding and exercisable at March 31, 2017:







The aggregate intrinsic value in the table above is before income taxes, based on the closing price of the Company’s common stock of $1.01 per share as of the last business day of the period ended March 31, 2017.  As of March 31, 2017, the Company had unrecognized compensation expense of $49,594 related to unvested stock options.  These expenses will be recognized over approximately 1.58 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 190,000 shares of restricted stock or shares issuable pursuant to promises to issue shares of common stock during the six months ended March 31, 2017. The fair value of the awards granted was approximately $181,000. 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. There were 26,500 shares of restricted stock forfeited during the three and six months ended March 31, 2017. 



On October 31, 2016, vesting was accelerated in connection with the closing of the APP Merger as to 152,717 restricted shares and the right to receive 68,832 shares, or at the holder’s election cash based on the fair market value of the shares, held by employees and directors.  Holders elected to receive 42,332 shares in common stock and the value of 26,500 shares in cash based on the stock price at the time of vesting of $0.95 per share.



The Company granted a total of 83,750 shares of restricted stock or shares issuable pursuant to promises to issue shares of common stock during the six months ended March 31, 2016.  The stock granted during the six months ended March 31, 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 continue employment or service.  The fair value of the awards granted was approximately $122,000. 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 no shares of restricted stock forfeited during the three and six months ended March 31, 2016.    



The Company recognized share-based compensation expense for restricted stock or promises to issue shares of common stock of approximately $48,000 and $303,000 for the three and six months ended March 31, 2017, respectively.  Share-based compensation expense for restricted stock or promises to issue shares of common stock for the three and six months ended March 31, 2016 was approximately $131,000 and $254,000, respectively, of which $63,000 was included in accrued expenses at March 31, 2016.  This compensation expense was included in operating expenses on the accompanying Unaudited Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2017 and 2016.  As of March 31, 2017, there was approximately $122,000, representing approximately 120,000 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 0.62 years.



Common Stock Purchase Warrants



In connection with the closing of the APP Merger, 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 Merger 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 Financial Advisor Warrant expense is included in operating expenses for the six months ended March 31, 2017.



At March 31, 2017, the warrant details were as follows:







Restricted Stock Units



In connection with the closing of the APP Merger, 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. If approval is not received by the vesting date, such awards will be settled in cash based on the fair market value of the Company’s common stock on the vesting date. The restricted stock units will be revalued monthly using the Company’s current stock price on the last business day of the month during the vesting period of two years.  Stock compensation expense related to the restricted stock units was approximately $25,238 and $39,903 for the three and six months ended March 31, 2017, respectively, and is recorded as a component of accrued expenses and other current liabilities.  The fair value of the restricted stock units is approximately $191,900 as of March 31, 2017.



Stock Appreciation Rights



In connection with the closing of the APP Merger, 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.  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 Merger. 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.  If approval is not received by the exercise date, such awards will be settled in cash based on the fair market value of the Company’s common stock on the exercise date. The stock appreciation rights will be measured using the option-pricing model (Black-Scholes) to estimate the fair value.  The fair value will be updated monthly based on current information over the vesting period of two years.  Stock compensation expense related to the stock appreciation rights was approximately $9,697 and $16,687 for the three and six months ended March 31, 2017, respectively, and is recorded as a component of accrued expenses and other current liabilities.  The fair value of the stock appreciation rights is approximately $80,249 as of March 31, 2017.