Quarterly report pursuant to Section 13 or 15(d)

Note 5 - Capital Stock, Stock Plans and Stock-based Compensation

Note 5 - Capital Stock, Stock Plans and Stock-based Compensation

9 Months Ended

Sep. 30, 2016

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

5.	Capital Stock, Stock Plans and Stock-Based Compensation

The Company has certain stock option plans under which it awards incentive and non-qualified stock options to employees, officers, and outside directors.

On May 15, 2016, the Company granted 50,000 incentive stock options (“ISOs”) from the Company’s 2010 Stock Option Plan to our newly named Executive Vice President. The ISOs granted were for a contractual term of six years with one-third vesting annually over a three year period. The exercise price of the ISOs was $3.97 per share, which was equal to the fair market value of the Company’s Common Stock on the date of grant.

On July 28, 2016, the Company granted an aggregate of 12,000 non-qualified stock options (“NQSOs”) from the Company’s 2003 Outside Directors Stock Plan (“2003 Stock Plan”) to five of the seven re-elected directors at our Annual Meeting of Stockholders held on July 28, 2016. Two of the directors are not eligible to receive options under the 2003 Stock Plan as they are employees of the Company or its subsidiaries. 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 $4.60 per share, which was equal to the Company’s closing stock price the day preceding the grant date, pursuant to the 2003 Stock Plan.

The summary of the Company’s total Stock Option Plans as of September 30, 2016, and 2015, and changes during the periods then ended, are presented below. The Company’s Plans consist of the 2010 Stock Option Plan and the 2003 Stock Plan:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (2)
Options outstanding January 1, 2016		218,200		$	7.65
Granted		62,000			4.09
Exercised	─			─
Forfeited/expired		(33,000	)		8.14
Options outstanding end of period (1)		247,200		$	6.69		4.6	$	126,267
Options exercisable at September 30, 2016 (1)		181,867		$	7.61		4.0	$	69,516
Options exercisable and expected to be vested at September 30, 2016		239,750		$	6.78		4.6	$	118,542

						Weighted
						Average
				Weighted		Remaining
				Average		Contractual		Aggregate
				Exercise		Term		Intrinsic
	Shares			Price		(years)		Value (2)
Options outstanding Janury 1, 2015		239,023		$	7.81
Granted		12,000		$	4.19
Exercised		(3,423	)		2.79			$	4,298
Forfeited/expired		(29,400	)		8.13
Options outstanding end of period (1)		218,200			7.65		5.1	$	25,464
Options exercisable at September 30, 2015 (1)		169,533		$	8.47		4.8	$	25,464
Options exercisable and expected to be vested at September 30, 2015		212,333		$	7.72		5.1	$	25,464

(1)

Options with exercise prices ranging from $2.79 to $14.75

(2)

The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price

of the option.

The Company estimates the 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 the nine months ended September 30, 2016 and 2015 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 the nine months ended September 30, 2015):

	Employee Stock Option Granted
	May 15, 2016
Weighted-average fair value per share	$	2.00
Risk -free interest rate (1)		1.27%
Expected volatility of stock (2)		53.12%
Dividend yield	None
Expected option life (3) (in years)	6.0

	Outside Director Stock Options Granted
	July 28, 2016		September 17, 2015
Weighted-average fair value per share	$	3.0	$	2.84
Risk -free interest rate (1)		1.52%		2.21%
Expected volatility of stock (2)		55.99%		57.98%
Dividend yield		None		None
Expected option life (3) (in years)		10.0		10.0

(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.

)

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

The following table summarizes stock-based compensation recognized for the three and nine months ended September 30, 2016 and 2015 for our employee and director stock options.

	Three Months Ended				Nine Months Ended
Stock Options	September 30,				September 30,
	2016		2015		2016		2015
Employee Stock Options	$	12,000	$	13,000	$	42,000	$	39,000
Director Stock Options		13,000		2,000		27,000		23,000
Total	$	25,000	$	15,000	$	69,000	$	62,000

As of September 30, 2016, the Company has approximately $103,000 of total unrecognized compensation cost related to unvested options, of which $29,000 is expected to be recognized in remaining 2016, $43,000 in 2017, $30,000 in 2018, with the remaining $1,000 in 2019.

During the nine months ended September 30, 2016, the Company issued a total of 43,172 shares of our Common Stock under the 2003 Stock Plan to our outside directors as compensation for serving on our Board of Directors. The Company has recorded approximately $181,000 in compensation expenses (included in selling, general and administration (“SG&A”) expenses) in connection with the issuance of shares of our Common Stock to our outside directors.

The Company also issued 70,000 shares of our Common Stock on August 2, 2016 resulting from the exercise of two Warrants issued in connection with a loan dated August 2, 2013 (see Note 7 – “Long Term Debt – Promissory Note” for further detail of this transaction and the total proceeds received).

- Definition

The entire disclosure for compensation-related costs for equity-based compensation, which may include disclosure of policies, compensation plan details, allocation of equity compensation, incentive distributions, equity-based arrangements to obtain goods and services, deferred compensation arrangements, employee stock ownership plan details and employee stock purchase plan details.

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