12.

STOCK-BASED COMPENSATION

The Company had

two

stock-based compensation plans at

December

31,

2016.

The shares outstanding are for grants under the Company’s

1997

Stock Option Plan (the

“1997

Plan”) and the

2008

Equity Incentive Plan (the

“2008

Plan”), (collectively, the “Plans”). The

1997

Plan matured on

April

2008

and no additional options

may

be granted under the

1997

Plan. At

December

31,

2016,

the

1997

Plan had

18,250

granted unexercised stock option shares. At

December

31,

2016,

the

2008

Plan includes

129,500

granted unexercised stock option shares,

11,750

granted nonvested restricted stock award shares and

803,350

shares available to be granted.

Stock Option Grants

Options granted under the

2008

Plan are granted at the closing price of the Company’s common stock on the NASDAQ Stock Market on the date of grant. Stock options expire

ten

years from the date of grant and vest over service periods ranging from

one

year to

five

years. The Company settles stock option exercises with authorized unissued shares. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model. The risk-free interest rate is based on the U.S. Treasury rate for the expected life at the time of grant. Volatility is based on the average volatility of the Company based upon previous trading history. The expected life and forfeiture assumptions are based on historical data. Dividend yield is based on the yield at the time of the option grant.

A summary of option activity under the Plans as of

December

31,

2016

and

2015,

and changes during the years then ended is presented below:

	Shares Available			Options Outstanding			Price		Aggregate Intrinsic Value
Outstanding at December 31, 2014		812,850			169,500		$	11.38	$	194,020
Options granted		(14,000	)		14,000			8.01
Forfeited		7,250			(7,250	)		7.15
Expired		-			(10,500	)		19.54
Exercised		-			-			.00
Outstanding at December 31, 2015		806,100			165,750		$	10.76	$	234,380
Options granted		-			-			.00
Forfeited		2,050			(5,050	)		19.66
Expired		-			(6,500	)		28.27
Exercised		-			(6,450	)		5.84
Restricted stock awards		(5,200	)		-			8.15
Restricted stock forfeited		400			-			8.15
Outstanding at December 31, 2016		803,350			147,750		$	9.91	$	559,555

The fair value of option grants is estimated on the grant date using the Black-Scholes option-pricing model, with the following weighted-average assumptions used for grants during the year ended

December

31,

2015.

There were no grants awarded during the year ended

December

31,

2016.

Year Ended:	December 31, 2015
Dividend growth rate		1.00%
Expected volatility		96.89%
Average risk-free interest rates		1.49%
Expected lives ( years)		7.0

The following table summarizes additional information about the Company’s outstanding options and exercisable options as of

December

31,

2016,

including weighted-average remaining contractual term expressed in years ("Life") and weighted average exercise price (“Price”):

			Outstanding						Exercisable
Range of Exercise Price			Shares		Life		Price		Shares		Price
$4.00	–	10.00		91,500		5.96	$	6.15		59,350	$	5.63
$10.01	–	17.00		27,000		2.69		11.01		27,000		11.01
$17.01	–	26.00		29,250		1.25		20.65		29,250		20.65
				147,750		4.43		9.91		115,600		10.69

Following is a summary of nonvested option vesting changes during the years ended

December

31,

2016

and

2015:

Year Ended:	December 31, 2016					December 31, 2015
	Shares			Price		Shares			Price
Nonvested at beginning of year		53,300		$	6.67		62,700		$	6.14
Granted		-			.00		14,000			8.01
Forfeited		(1,250	)		8.36		(5,250	)		7.22
Vested		(19,900	)		5.94		(18,150	)		5.71
Nonvested at end of year		32,150			7.09		53,300			6.67

Restricted Stock Awards

The Company measures the fair value of restricted shares based on the price of its common stock on the grant date and compensation expense is recorded over the vesting period. During the year ended

December

31,

2016,

3,000

restricted stock awards were granted with a

four

year vesting period and

2,200

restricted stock awards were granted with a

five

year vesting period. No restricted shares were issued in the year ended

December

31,

2015.

Following is a summary of nonvested restricted stock awards at

December

31,

2016

and

2015,

and vesting changes during the respective periods:

	Shares			Price
Nonvested at December 31, 2014		13,900		$	8.36
Granted		-			-
Vested		(3,475	)		8.36
Forfeited		-			-
Nonvested at December 31, 2015		10,425			8.36
Granted		5,200			8.15
Vested		(3,475	)		8.36
Forfeited		(400	)		8.15
Nonvested at December 31, 2016		11,750		$	8.27

For the years ended

December

31,

2016,

2015

and

2014,

net compensation expense charged to income for the Plans was

$81,889,

$68,705

and

$59,798,

respectively. Total unrecognized compensation cost on granted unexercised option shares was

$89,168

December

31,

2016,

compared to

$137,812

December

31,

2015.

That cost is expected to be recognized over the next

3.25

years. Total unrecognized compensation cost on nonvested restricted stock awards granted under the

2008

Plan was

$62,299

December

31,

2016,

compared to

$60,522

December

31,

2015.

That cost is expected to be recognized over the next

4.25

years.

The following table reflects the impact of stock based compensation by increasing or reducing income before income taxes, net income, basic earnings per share and diluted earnings per share for the years ended

December

31,

2016

and

2015:

	Year Ended December 31,
	2016			2015
Reduced net income before income taxes	$	(81,889	)	$	(68,705	)
Reduced net income		(70,653	)		(68,705	)
Reduced basic earnings per share		0.01			0.01
Reduced diluted earnings per share		0.01			0.01