Note 8 - Stock-based Compensation Expense

12 Months Ended

Dec. 31, 2022

Notes to Financial Statements

Share-Based Payment Arrangement [Text Block]

NOTE 8 – STOCK-BASED COMPENSATION EXPENSE

Incentive Compensation Plan

In  June 2021, the Company’s shareholders approved an amendment and restatement of the Company’s Incentive Compensation Plan (the “Plan”), that among other things, increases the number of shares of the Company’s common stock reserved for issuance under the Plan to 2,580,000 and extends the term of the Plan by five years to  February 22, 2027. The Plan provides that the shares reserved under the Plan are available for issuance to officers of the Company, other key employees, non-employee directors, and advisors. No further grants or share issuances will be made under the previous plans. As of December 31, 2022, approximately 1,219,000 shares remain available for grant under the Plan.

Under the Plan, a total of 752,000 restricted stock units have been granted, consisting of 53,000 of annual automatic grants to non-employee directors, 328,000 of deferred retainer fees to non-employee members of the Board, 31,000 grants issued in lieu of commission or bonus to employees of the Company, and 340,000 restricted stock units issued to the CEO, see further discussion below. Of the total restricted stock units granted under the Plan 123,000 of them are fully vested but not yet deemed issued and outstanding, 624,000 are fully vested and outstanding, and 6,000 are outstanding as of December 31, 2022.

Changes in restricted stock units, consisting primarily of annual automatic grants, deferred compensation to non-employee directors, and restricted stock units awards to the CEO, under the Incentive Compensation Plans during 2022 and 2021 are as follows:

	Restricted Stock Units			Grant Date Weighted- Average Fair Value
Outstanding at January 1, 2021		13,000		$	1.97
Granted		165,000		$	2.61
Vested		(168,000	)	$	2.57
Outstanding at December 31, 2021		10,000		$	2.57
Granted		131,000		$	2.40
Vested		(132,000	)	$	2.40
Forfeited		(3,000	)	$	2.92
Outstanding at December 31, 2022		6,000		$	2.33

For the year ended December 31, 2022, total compensation expense recorded in the consolidated statements of income for annual restricted stock units awarded was $6,000, with an offsetting tax benefit of $1,500, as this expense is deductible for income tax purposes. As of December 31, 2022, there was $11,000 of total unrecognized compensation cost related to annual restricted stock units which is expected to be recognized over a period of three years.  For the year ended  December 31, 2021, 38,000 of the vested restricted stock units were deferred for issuance.

Certain Executive Equity Awards

Effective May 4, 2020, the Company appointed Raymond C. Stachowiak as Interim President and Chief Executive Officer. Pursuant to his Offer Letter, Mr. Stachowiak was granted 50,000 restricted stock awards that vested in full on August 3, 2020. He was granted additional restricted stock awards totaling 10,000 common shares per month, which vest in full at the end of each 30-day period following issuance. On October 1, 2020, Mr. Stachowiak was appointed as the CEO. For the year ended December 31, 2021, 120,000 restricted stock awards were issued to the CEO and became fully vested. Total compensation expense recorded for the year ended December 31, 2021 in the consolidated financial statements of income related to executive equity awards was $331,000.  For the year ended December 31, 2022, 120,000 restricted stock awards were issued to Mr. Stachowiak and became fully vested.  Total compensation expense recorded for the year ended December 31, 2022 in the consolidated financial statements of income related to the executive equity awards was $288,000.

For the year ended  December 31, 2022, stock compensation expense recorded in the consolidated financial statements is summarized as follows:

			Stock-Based
	Awards Issued		Compensation
	and Vested		Expense
Options		—	$	10,000
Options Exercised		3,000		—
Management Bonus Program - vested and issued		11,000		—
Management Bonus Program		—		92,000
Annual RSU Awards		1,000		6,000
Board RSU Awards - other		—		3,000
Executive Compensation		120,000		288,000
		135,000	$	399,000

Total stock-based compensation expense before income tax effect for the Company’s options and restricted stock awards in the amount of $399,000 and $420,000 for the years ended  December 31, 2022 and 2021, is reflected in selling and administrative expense in the consolidated statements of income, respectively.

Stock Options

Changes in stock options outstanding under the Incentive Compensation Plans during 2022 and 2021 are as follows:

Options	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Balance at December 31, 2020		417,000		$	2.79		1.61	$	2,000
Granted		6,000		$	2.92		7.00	$	—
Exercised		(22,000	)	$	2.65		—	$	—
Forfeited		(334,000	)	$	2.81		—	$	—
Balance at December 31, 2021		67,000		$	2.72		3.33	$	—
Granted		50,000		$	2.72		7.00	$	—
Exercised		(4,000	)	$	2.29		—	$	—
Forfeited		(18,000	)	$	2.64		—	$	—
Balance at December 31, 2022		95,000		$	2.76		4.83	$	25,000
Exercisable at December 31, 2021		58,000		$	2.72		2.96	$	—
Exercisable at December 31, 2022		38,000		$	2.79		2.38	$	—

The weighted average grant-date fair value of the options granted during the years 2022 and 2021 was $1.49 and $1.10, respectively. There were 4,000 options exercised which resulted in 3,000 shares issued, due to cashless exercises, during the year ended  December 31, 2022. There were 22,000 options exercised which resulted in 5,000 shares issued, due to cashless exercises, during the year ended  December 31, 2021. Total stock-based compensation expense recognized for stock options for the years ended December 2022 and 2021 was $10,000 and $2,000, respectively.

The Company received approximately $5,000 from the exercise of 2,000 options under the share-based arrangements in each of the years ended December 31, 2022 and 2021. The remaining options exercised during 2022 and 2021 were cashless exercises. 

At December 31, 2022, there was approximately $80,000 of unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan. This cost is expected to be recognized over a period of approximately four years.

The Company’s stock-based awards to employees are calculated using the Black-Scholes options valuation model. The Black-Scholes model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, the Black-Scholes model requires the input of highly subjective assumptions including the expected stock price volatility. The Company’s stock-based awards have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the present value estimates. For these reasons, management believes that the existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards to employees.

The fair value of the Company’s option grants issued during 2022 and 2021 were estimated using assumptions for expected life, volatility, dividend yield, forfeiture rate, and risk-free interest rate which are specific to each award as summarized in the following table. The estimated fair value of the Company’s options is amortized over the period during which the optionee is required to provide service in exchange for the award, usually the vesting period.

The fair value of the Company’s option grants under the Plan in 2022 and 2021 was estimated using the following assumptions:

	2022			2021
Expected life (years)		7.0			7.0
Expected forfeiture rate		0.0	%		0.0	%
Expected volatility		50	%		40	%
Dividend yield		0	%		0	%
Risk-free interest rate		3.3	%		1.2	%

The following summarizes the assumption inputs used for the Company’s Black-Scholes calculation:

Expected life (years): The expected term represents the weighted average period that the Company’s stock options are expected to be outstanding.  

Expected forfeiture rate: Forfeitures are recognized as they occur.   

Expected volatility: The expected volatility was derived from the Company’s historical stock volatility. 

Dividend yield: The expected dividend yield was assumed to be zero, as the Company has not previously paid dividends on common stock and has no current plans to do so.  

Risk-free interest rate:  The risk-free interest rate is based on the interest yield in effect at the date of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the option’s expected term.

Repurchase of Common Stock, Common Stock Warrants and Stock Options

In 1999 and 2001, the Board of Directors approved resolutions authorizing the Company to repurchase up to a total of 1,000,000 shares of its own stock on the open market, which the Board reaffirmed in 2008. There were no shares of the Company repurchased during 2022 or 2021. There are approximately 72,000 shares remaining under this repurchase authorization.