Note 11 - Share-based Compensation

12 Months Ended

Dec. 31, 2024

Notes to Financial Statements

Share-Based Payment Arrangement [Text Block]

11. SHARE-BASED COMPENSATION

The Company’s directors and certain members of management receive a portion of their compensation in shares of the Company’s common stock granted under the Company’s 2017 Equity and Incentive Award Plan, as amended (the “Equity Plan”).

Share-based compensation is awarded annually to certain members of the Company’s management based on their achievement of predefined performance goals and objectives under the Equity Plan. Their share-based compensation is comprised of an annual incentive paid in shares of common stock and a long-term incentive paid in restricted shares of common stock vesting quarterly over a period of three years. Share-based compensation is valued based on the average of the high and low share price on the date of grant. Shares are issued upon execution of agreements reflecting the grantee’s acceptance of the respective shares subject to the terms and conditions of the Equity Plan. Restricted shares issued under the Equity Plan have voting and regular dividend rights but cannot be disposed of until such time as they are vested. All unvested restricted shares are forfeited upon the grantee’s termination of directorship or employment from the Company.

Directors receive both cash and share-based compensation under the Equity Plan. Their share-based compensation is comprised of restricted shares of common stock vesting quarterly over the directors’ annual period of service which are valued based on the average of the high and low share price on the date of grant. Shares are issued upon execution of agreements reflecting the grantee’s acceptance of the respective shares subject to the terms and conditions of the Equity Plan. Restricted shares issued under the Equity Plan have voting and regular dividend rights but cannot be disposed of until such time as they are vested. All unvested restricted shares are forfeited upon the grantee’s termination of directorship or employment from the Company.

Options to purchase shares of the Company’s common stock under the Equity Plan were granted to directors and the Chief Executive Officer in 2024 and 2023. Stock option grants are valued at the commitment date, based on the fair value of the equity instruments, and recognized as share-based compensation expense on a straight-line basis over its respective vesting periods. The option agreements provide for accelerated vesting if there is a change in control in ownership.

The number of common shares subject to options granted in 2023 for annual board service, board committee service, and continued service of the Chairperson of the Board are 250,000 shares, 78,000 shares, and 400,000, respectively. For annual board service and board committee service, the stock options granted have a contractual period of ten years and vest quarterly over one year. The exercise price per share was based on the average of the high and low share price on the date of grant, or $12.11 per share. The fair value of these grants using the Black-Scholes option-pricing model was $3.88 per share based on an expected term of 5.25 years, expected volatility of 28%, and a risk-free rate of 4.16%. During the year ended  December 31, 2024, 215,334 shares underlying the stock options granted to directors in 2023 for annual board and committee service vested. No shares underlying the 2023 stock option grants to directors remain unvested.

For continued board service of the Chairperson, the stock option grant has a contractual period of ten years which vests as follows: 133,334 shares on  June 1, 2024, 133,333 shares on  June 1, 2025, and 133,333 shares on  June 1, 2026. The exercise price per share was based on the average of the high and low share price on the date of grant, or $9.08 per share. The fair value of these grants using the Black-Scholes option-pricing model was $3.94 per share based on an expected term of 6.12 years, expected volatility of 37%, and a risk-free rate of 3.49%. There were 266,666 of unvested share options, or $0.7 million of unrecognized compensation cost, at  December 31, 2024.

An option to purchase 400,000 shares of the Company’s common stock under the Equity Plan was granted to the Chief Executive Officer in January 2024. The stock option grant has a contractual period of ten years and vests annually as follows: 133,334 shares on January 1, 2025, 133,333 shares on  January 1, 2026, and 133,333 shares on  January 1, 2027. The exercise price per share was based on the average of the high and low share price on the date of grant, or $15.75 per share. The stock option grant is valued at the commitment date, based on the fair value, and recognized as share-based compensation expense on a straight-line basis over its vesting period beginning in  January 2024. The fair value of the grant using the Black-Scholes option-pricing model was $6.02 per share at  January 1, 2024 based on an expected term of 6.00 years, expected volatility of 31%, and a risk-free rate of 3.82%. There were 400,000 shares of unvested share options, or $1.6 million of unrecognized compensation cost at  December 31, 2024.

The number of common shares subject to options granted in 2024 for annual board service and board committee service were 312,500 and 87,000, respectively. These option grants have a contractual period of ten years and vest quarterly over one year. The exercise price per share was based on the average of the high and low share price on the date of grant, or $22.25 per share. The fair value of these grants using the Black-Scholes option-pricing model was $8.87 per share based on an expected term of 5.25 years, expected volatility of 32.1%, and a risk-free rate of 4.40%. During the year ended  December 31, 2024, 303,125 shares of stock options granted to directors in 2024 for annual board and committee service vested. There were 96,375 shares of unvested share options, or $0.9 million of unrecognized compensation cost at  December 31, 2024.

The simplified method described in Staff Accounting Bulletin No. 107 was used by management due to the lack of historical option exercise behavior. The Company does not currently issue dividends. There were no forfeitures of stock option grants as of  December 31, 2024. Management does not anticipate future forfeitures to be material.

Share-based compensation expenses totaled $6.3 million and $2.8 million for the years ended  December 31, 2024 and 2023, respectively. Included in these amounts were $0.6 million of restricted common stock vested during the years ended  December 31, 2024 and 2023, and $4.3 million and $1.4 million of stock options vested during the years ended  December 31, 2024 and 2023, respectively.

On  August 5, 2024, R. Scot Sellers, a director and Chairperson of the Board, Steve Case, a director, and Race A. Randle, Chief Executive Officer, voluntarily executed agreements to cancel previously granted stock options and common stock grants. The Equity Plan was amended in  February 2023 to increase the limit on the number of shares to be awarded during a plan year to 400,000 shares. In 2023, Mr. Sellers received options to purchase 63,500 shares and 18,804 shares of restricted common stock that exceeded the 400,000 share limit. In  February 2024, Mr. Randle received 28,511 shares of restricted common stock that exceeded the 400,000 share limit. In addition, although grants to Mr. Case did not exceed the Equity Plan limit, he voluntarily opted to cancel the common stock grants and options issued to him in 2023 amounting to 6,659 shares of restricted common stock and options to purchase 56,000 shares, and options and restricted common stock issued in 2024 amounting to 3,124 shares of restricted common stock and options to purchase 56,000 shares. The cancellation of the options and restricted common stock grants resulted in recognizing the remaining unvested awards of options and restricted common stock grants immediately. In the third quarter of 2024, $631,000 was recognized as expense due to the cancellations, $402,000 due to the cancellation of Mr. Case’s options and restricted common stock grants and $229,000 due to the cancellation of Mr. Randle’s restricted common stock grants.