NOTE 6

CAPITAL STOCK, STOCK PLANS, WARRANTS, AND STOCK BASED COMPENSATION

Stock Option Plans

Effective July 29, 2003, the Company adopted the 2003 Outside Directors Stock Plan (the “2003 Plan”), which was approved by our stockholders at the Annual Meeting of Stockholders on such date. The plan provides for the grant of an option to purchase up to 30,000 shares of Common Stock for each outside director upon initial election to the Board of Directors, and the grant of an option to purchase up to 12,000 shares of Common Stock upon each re-election. The options granted generally have a vesting period of six months from the date of grant, with an exercise price equal to the closing trade price on the date prior to grant date. The plan also provides for the issuance to each outside director a number of shares of Common Stock in lieu of 65% or 100% (based on option elected by each director) of the fee payable to the eligible director for services rendered as a member of the Board of Directors. The number of shares issued is determined at 75% of the market value as defined in the plan. At the Company’s Annual Meeting of Stockholders held on September 18, 2014, the Company’s stockholders approved the Third Amendment to the 2003 Outside Directors Stock Plan which increased the number of shares of our Common Stock authorized for issuance under the 2003 Plan from 600,000 to 800,000; (b) reduced proportionately the number of shares of Common Stock subject to the automatic option grant made to each eligible director upon initial election from 30,000 to 6,000 and the number of shares of Common Stock subject to automatic option grant made to each eligible director upon re-election from 12,000 to 2,400; and (c) allowed for such shares to be adjusted proportionally upon future stock splits or other share adjustment applicable to our Common Stock. On October 15, 2013, the Company effected a reverse stock split at a ratio of 1-for-5 of the Company’s then outstanding Common Stock and shares of Common Stock issuable upon exercise of the then outstanding stock options and warrants; however, pursuant the terms of the 2003 Plan, the number of shares of Common Stock which each Eligible Director can purchase under the automatic option granted upon initial election or re-election was not adjusted proportionately to give effect to the reverse stock split.

Effective July 28, 2004, the Company adopted the 2004 Stock Option Plan, which was approved by our stockholders at the Annual Meeting of Stockholders on such date. The plan provides for the grants of options to selected officers and employees, including any employee who is also a member of the Board of Directors of the Company. A maximum of 400,000 (as automatically adjusted to the reverse stock split on October 15, 2013, pursuant to the plan) shares of our Common Stock are authorized for issuance under this plan in the form of either Incentive or Non-Qualified Stock Options (“ISOs” or “NQSOs”, respectively). The option grants under the plan are exercisable for a period of up to 10 years from the date of grant at an exercise price of not less than market price of the Common Stock at grant date. On July 28, 2014, the plan expired. No new options will be issued under this plan, but the options issued under this plan prior to the expiration date will remain in effect until their respectively maturity dates (which will be February 26, 2015).

On April 28, 2010, the Company adopted the 2010 Stock Option Plan, which was approved by our stockholders at the Company’s Annual Meeting of Stockholders on September 29, 2010. The Plan authorizes an aggregate grant of 200,000 NQSOs and ISOs to officers and employees of the Company for the purchase of up to 200,000 shares of the Company’s Common Stock (as automatically adjusted to the reverse stock split on October 15, 2013, pursuant to the plan). The term of each stock option granted will be fixed by the Compensation Committee, but no stock option will be exercisable more than ten years after the grant date, or in the case of an incentive stock option granted to a 10% stockholder, five years after the grant date. The exercise price of any incentive stock option granted under the Plan to an individual who is not a 10% stockholder at the time of the grant will not be less than the fair market value of the shares at the time of the grant, and the exercise price of any incentive stock option granted to a 10% stockholder shall not be less than 110% of the fair market value at the time of grant. The exercise price of any NQSOs granted under the Plan will not be less than the fair market value of the shares at the time of grant.

No employees exercised options during 2014 and 2013. During 2014, we issued a total of 2,577 shares of our Common Stock upon exercise of 2,577 NQSOs by an outside director from the 2003 Outside Director Stock Plan, at exercise price of $2.79 per share which resulted in total proceeds of approximately $7,200.

We issued a total of 67,335 and 69,041 shares of our Common Stock in 2014 and 2013, respectively, under our 2003 Outside Directors Stock Plan to our outside directors as compensation for serving on our Board of Directors (“Board”). As a member of the Board, each director elects to receive either 65% or 100% of the director’s fee in shares of our Common Stock. The number of shares received is calculated based on 75% of the fair market value of our Common Stock determined on the business day immediately preceding the date that the quarterly fee is due. The balance of each director’s fee, if any, is payable in cash.

Summary of the status of options under the Company’s Stock Option Plans as of December 31, 2014 and 2013, and changes during the years ending on those dates is presented below:

The summary of the Company’s total Plans (as noted above) as of December 31, 2014, and changes during the period then ended are presented as follows:

⁽¹⁾ Options with exercise prices ranging from $2.79 to $14.75

The summary of the Company’s nonvested shares as of December 31, 2014, and changes during the period then ended are presented as follows:

Preferred Share Rights Plan

In May 2008, the Company adopted a preferred share rights plan (the “Rights Plan”), designed to ensure that all of our stockholders receive fair and equal treatment in the event of a proposed takeover or abusive tender offer.

In general, under the terms of the Rights Plan, subject to certain limited exceptions, if a person or group acquires 20% or more of our Common Stock or a tender offer or exchange offer for 20% or more of our Common Stock is announced or commenced, our other stockholders may receive upon exercise of the rights (the “Rights”) issued under the Rights Plan the number of shares our Common Stock or of one-one hundredths of a share of our Series A Junior Participating Preferred Stock, par value $.001 per share, having a value equal to two times the purchase price of the Right. In addition, if we are acquired in a merger or other business combination transaction in which we are not the survivor or more than 50% of our assets or earning power is sold or transferred, then each holder of a Right (other than the acquirer) will thereafter have the right to receive, upon exercise, common stock of the acquiring company having a value equal to two times the purchase price of the Right. The initial purchase price of each Right was $13.00, subject to adjustment and adjustment for the reverse stock split.

The Rights will cause substantial dilution to a person or group that attempts to acquire us on terms not approved by our board of directors. The Rights may be redeemed by us at $0.001 per Right at any time before any person or group acquires 20% or more of our outstanding Common Stock. The Rights expire on May 2, 2018. 

Warrants and Capital Stock Issuance for Debt

As of December 31, 2014, we have two Warrants outstanding which provide for the purchase of up to an aggregate of 70,000 shares of the Company’s Common Stock at $2.23 per share. The two Warrants were issued on August 2, 2013, as consideration of a $3,000,000 loan received by the Company from Messrs. William N. Lampson and Robert L. Ferguson (the “Lenders”). Each Warrant provides for the Lender to purchase up to 35,000 shares of the Company’s Common Stock at an exercise price of $2.23 per share. The Warrants are exercisable six months from August 2, 2013 and expire on August 2, 2016. The Company also issued 90,000 shares of the Company’s Common Stock to the Lenders. See Note 9 – “Long-Term Debt – Promissory Note and Installment Agreement” for further information and accounting treatment of the Warrants and Common Stock.

Shares Reserved

At December 31, 2014, we have reserved approximately 309,023 shares of Common Stock for future issuance under all of the option and warrant arrangements.

Stock Based Compensation

We follow ASC 718 to account for stock-based compensation. ASC 718 requires all stock-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their fair values.

As discussed above, the Company has certain stock option plans which it awards NQSOs and ISOs to employees, officers, and outside directors. Stock options granted to employees have a six year contractual term with one-third yearly vesting over a three year period. Stock options granted to outside directors have a ten year contractual term with vesting period of six months.
 

On July 10, 2014, the Company granted an aggregate of 55,000 ISOs from the Company’s 2010 Stock Option Plan to certain employees, of which 45,000 ISOs were granted to the Company’s Chief Operating Officer (who was appointed March 20, 2014). The 55,000 ISOs granted were for a contractual term of six years with one-third yearly vesting over a three year period. The exercise price of the ISOs was $5.00 per share, which was equal to our closing stock price as reported on Nasdaq on the date of grant.

On September 18, 2014, the Company granted an aggregate of 16,800 NQSOs from the Company’s 2003 Outside Directors Stock Plan to our seven re-elected directors at our Annual Meeting of Stockholders held on September 18, 2014. The NQSOs granted were for a contractual term of ten years with a vesting period of six months. The exercise price of the NQSOs was $3.70 per share, which was equal to our closing stock price the day preceding the grant date, pursuant to the 2003 Outside Directors Stock Plan.

As of December 31, 2014, the Company had an aggregate of 70,000 employee stock options outstanding (from the 2004 and 2010 Stock Option Plans), of which 15,000 are vested. The weighted average exercise price of the 15,000 outstanding and fully vested employee stock options is $7.10 with a remaining weighted contractual life of 0.2 years. Additionally, the Company had an aggregate of 169,023 outstanding director stock options (from the 2003 Outside Directors Stock Plans), of which 152,223 are vested. The weighted average exercise price of the 152,223 outstanding and fully vested director stock options is $9.35 with a remaining weighted contractual life of 4.6 years.

The Company estimates fair value of stock options using the Black-Scholes valuation model. Assumptions used to estimate the fair value of stock options granted include the exercise price of the award, the expected term, the expected volatility of the Company’s stock over the option’s expected term, the risk-free interest rate over the option’s expected term, and the expected annual dividend yield. The fair value of the options granted during in 2014 and 2013 and the related assumptions used in the Black-Scholes option model used to value the options granted were as follows (No options were granted to employees during 2013):

⁽¹⁾ The risk-free interest rate is based on the U.S. Treasury yield in effect at the grant date over the expected term of the option.

⁽²⁾ The expected volatility is based on historical volatility from our traded Common Stock over the expected term of the option.

⁽³⁾ The expected option life is based on historical exercises and post-vesting data.

The following table summarizes stock-based compensation recognized for the fiscal year 2014 and 2013.

The Company recognized stock-based compensation expense using a straight-line amortization method over the requisite service period, which is the vesting period of the stock option grant. ASC 718 requires that stock based compensation expense be based on options that are ultimately expected to vest. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company has generally estimated forfeiture rates based on historical trends of actual forfeitures. When actual forfeitures vary from our estimates, the Company recognizes the difference in compensation expense in the period the actual forfeitures occur or when options vest. The total stock-based compensation expense for the twelve months ended December 31, 2014 included a reduction in expense of approximately $54,000 resulting from the forfeiture of options by Mr. Jim Blankenhorn, our previous COO, who voluntarily resigned from the Company effective March 28, 2014. The COO was granted an option from the Company’s 2010 Stock Option Plan on July 25, 2011, which provided for the purchase of up to 60,000 shares of the Company’s Common Stock at $7.85 per share. The options had a six year contractual term with one-third yearly vesting over a three year period. As of December 31, 2014, the Company has approximately $145,000 of total unrecognized compensation cost related to unvested options, of which $73,000 is expected to be recognized in 2015, $53,000 in 2016, with the remaining $19,000 in 2017.