Annual report pursuant to Section 13 and 15(d)

Note 6 - Capital Stock, Stock Plans, Warrants, and Stock Based Compensation

Note 6 - Capital Stock, Stock Plans, Warrants, and Stock Based Compensation

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

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

NOTE

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

Stock Option Plans

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

July

29,

2003.

Options granted under the

2003

Plan generally have a vesting period of

six

months from the date of grant and a term of

years, with an exercise price equal to the closing trade price on the date prior to grant date. The

2003

Plan also provides for the issuance to each outside director a number of shares of Common Stock in lieu of

65%

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 (“Board”). The number of shares issued is determined at

75%

of the market value as defined in the plan. The

2003

Plan, as amended, also provides for the grant of an option to purchase up to

6,000

shares of Common Stock for each outside director upon initial election to the Board, and the grant of an option to purchase

2,400

shares of Common Stock upon each re-election. The number of shares of the Company’s Common Stock authorized under the

2003

Plan is

800,000,

pursuant to the

2003

Plan, as amended.

April

28,

2010,

the Company adopted the

2010

Stock Option Plan

(“2010

Plan”), which was approved by our stockholders at the Company’s Annual Meeting of Stockholders on

September

29,

2010.

The

2010

Plan authorizes an aggregate grant of

200,000

Non-Qualified Stock Options (“NQSOs”) and Incentive Stock Options (“ISOs”) to officers and employees of the Company for the purchase of up to

200,000

shares of the Company’s Common Stock. The term of each stock option granted shall be fixed by the Compensation and Stock Option Committee (“Compensation Committee”), but no stock options 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 ISO granted under the

2010

Plan to an individual who is not a

10%

stockholder at the time of the grant shall 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 shall not be less than the fair market value of the shares at the time of grant.

employees exercised options during

2016

and

2015.

During

2015,

the Company issued a total of

3,423

shares of our Common Stock upon exercise of

3,423

NQSOs by an outside director from the

2003

Plan, at an exercise price of

$2.79

per share which resulted in total proceeds of approximately

$10,000.

The summary of the Company’s total plans as of

December

31,

2016

and

2015,

and changes during the period then ended are presented as follows:

	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		4.3	$	20,940
Options exercisable at December 31, 2016 (1)		181,867		$	7.61		3.7	$	20,940
Options vested and expected to be vested at December 31, 2016		239,750		$	6.78		4.3	$	20,940

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (2)
Options outstanding January 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		4.8	$	14,676
Options exercisable at December 31, 2015 (1)		169,533		$	8.47		4.5	$	14,676
Options vested and expected to be vested at December 31, 2015		212,333		$	7.72		4.8	$	14,676

(1)

Options with exercise prices ranging from

$2.79

$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 summary of the Company’s nonvested options as of

December

31,

2016

and changes during the period then ended are presented as follows:

	Shares			Weighted Average Grant-Date Fair Value
Non-vested options January 1, 2016		48,667		$	2.87
Granted		62,000			2.19
Vested		(30,334	)		2.87
Forfeited		(15,000	)		2.88
Non-vested options at December 31, 2016		65,333		$	2.23

Capital Stock Issued for Services

The Company issued a total of

55,793

and

71,324

shares of our Common Stock in

2016

and

2015,

respectively, under our

2003

Plan to our outside directors as compensation for serving on our Board. As a member of the Board, each director elects to receive either

65%

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. The Company recorded approximately

$233,000

and

$269,000

in compensation expense for the

twelve

months ended

December

31,

2016

and

2015,

respectively, for the portion of director fees earned in the Company’s Common Stock.

Preferred Share Rights Plan

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

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 the Company is 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 as defined in plan.

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

2018.

Warrants

and Capital Stock Issuance for Debt

As of

December

31,

2016,

the Company has

Warrant outstanding. On

August

2016,

the Company issued an aggregate of

70,000

shares of the Company Common Stock resulting from the exercise of

two

Warrants, at an exercise price of

$2.23,

issued to

two

lenders in connection with a

$3,000,000

loan dated

August

2013

received by the Company (See Note

– “Long-Term Debt – Promissory Note” for further information on the exercise of the Warrants and the loan).

Shares Reserved

December

31,

2016,

the Company has reserved approximately

247,200

shares of Common Stock for future issuance under all of the option arrangements.

Stock Based Compensation

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 generally have a

six

year contractual term with

one

third

yearly vesting over a

three

year period. Stock options granted to outside directors generally have a

ten

year contractual term with vesting period of

six

months.

May

15,

2016,

the Company granted

50,000

ISOs from the Company’s

2010

Stock Option Plan to our newly named Executive Vice President (“EVP”). 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.

July

28,

2016,

the Company granted an aggregate of

12,000

NQSOs from the Company’s

2003

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

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

Plan.

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

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

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 fiscal years

2016

and

2015.

	Year Ended
	2016		2015
Employee Stock Options	$	53,000	$	53,000
Director Stock Options		45,000		39,000
Total	$	98,000	$	92,000

As of

December

31,

2016,

the Company has approximately

$74,000

of total unrecognized compensation cost related to unvested options, of which

$43,000

is expected to be recognized in

2017,

$30,000

2018,

with the remaining

$1,000

2019.

- 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.

+ References + Details