NOTE 9—STOCK OPTIONS – STOCK COMPENSATION

The Company’s stockholders approved the P&F Industries, Inc. 2012 Stock Incentive Plan (the “2012 Plan”). The 2012 Plan authorizes the issuance to employees, consultants and non-employee directors of nonqualified stock options, stock appreciation rights, restricted stock, performance shares, performance units, and other stock-based awards. In addition, employees are eligible to be granted incentive stock options under the 2012 Plan. The 2012 Plan is currently administered by the compensation committee of the Company’s Board of Directors (the “Committee”). The aggregate number of shares of the Company’s Class A Common Stock (“Common Stock”) that may be issued under the 2012 Plan may not exceed 325,000 shares; provided, however, that any shares of Common Stock that are subject to a stock option, stock appreciation right or other stock-based award that is based on the appreciation in value of a share of Common Stock in excess of an amount equal to at least the fair market value of the Common Stock on the date such other stock-based award is granted (each an “Appreciation Award”) will be counted against this limit as one share for every share granted. Any shares of restricted stock or shares of Common Stock that are subject to any other award other than Appreciation Award will be counted against this limit as 1.5 shares for every share granted.

The maximum number of shares of Common Stock with respect to which any award of stock options, stock appreciation rights or other Appreciation Award that may be granted under the 2012 Plan during any fiscal year to any eligible employee or consultant will be 100,000 shares per type of award. The maximum number of shares of Common Stock subject to any award of performance shares for any performance period, other stock-based awards that are not Appreciation Awards or shares of restricted stock for which the grant of such award or the lapse of the relevant restriction period is subject to the attainment of specified performance goals that may be granted under the 2012 Plan during any fiscal year to any eligible employee or consultant will be 65,000 shares per type of award. The maximum number of shares of Common Stock for all such types of awards to any eligible employee or consultant will be 165,000 shares during any fiscal year. There are no annual limits on the number of shares of Common Stock with respect to an award of restricted stock that is not subject to the attainment of specified performance goals to eligible employees or consultants. The maximum value at grant of performance units which may be granted under the 2012 Plan during any fiscal year will be $1,000,000. The maximum number of shares of Common Stock subject to any award which may be granted under the 2012 Plan during any fiscal year of the Company to any non-employee director will be 35,000 shares.

With respect to stock options, the Committee determines the number of shares of Common Stock subject to each option, the term of each option, which may not exceed ten years (or five years in the case of an incentive stock option granted to a 10% stockholder), the exercise price, the vesting schedule (if any), and the other material terms of each option. No stock option may have an exercise price less than the fair market value of the Common Stock at the time of grant (or, in the case of an incentive stock option granted to a 10% stockholder, 110% of fair market value). With respect to all other permissible grants under the 2012 Plan, the Committee will determine their terms and conditions, subject to the terms and conditions of the 2012 Plan.

The 2012 Plan, which terminates in May 2022, is the successor to the Company’s 2002 Stock Incentive Plan (“Previous Plan”) – see below. Stock option awards made under the Previous Plan will continue in effect and remain governed by the provisions of that plan.

The Company’s Previous Plan authorized the issuance to employees and directors of options to purchase a maximum of 1,100,000 shares of Common Stock. These options had to be issued within ten years of the effective date of the Previous Plan and are exercisable for a ten-year period from the date of grant, at prices not less than 100% of the closing market value of the Common Stock on the date the option is granted. In the event options granted contained a vesting schedule over a period of years, the Company recognized compensation cost for these awards ratably over the service period.

The Company generally estimates the fair value of its Common Stock options using the following factors:

Risk-free interest rate

Expected term

Volatility

Dividend yield

The Company did not issue any options to purchase shares of its Common Stock during 2020.

The following table contains information on the status of the Company’s stock options:


		Weighted
	Number	Average		Aggregate
	of	Exercise Price		Intrinsic
	Shares	per share		Value
Outstanding, January 1, 2019	218,075	$	6.22
Granted	8,000		8.55
Exercised	—		—
Forfeited	—		—
Expired	—		—
Outstanding, December 31, 2019	226,075		6.30
Granted	—		—
Exercised	(6,226)		2.92
Forfeited	(7,998)		6.38
Expired	(10,973)		2.92
Outstanding, December 31, 2020	200,878	$	6.59	$	85,663
Vested, December 31, 2020	195,544	$	6.54	$	85,663

The following is a summary of changes in non-vested shares, all of which are expected to vest:


	December 31,
	2020			2019
		Weighted			Weighted
		Average			Average
	Option	Grant-Date		Option	Grant-Date
	Shares	Fair Value		Shares	Fair Value
Non-vested shares, beginning of year	37,666	$	4.45	59,333	$	4.41
Granted	—		—	8,000		4.60
Vested	(31,250)		4.43	(29,667)		4.41
Forfeited	(1,082)		4.41	—		—
Non-vested shares, end of year	5,334	$	4.60	37,666	$	4.45

Stock-based compensation expense recognized for the years ended December 31, 2020 and 2019 was approximately $41,000 and $106,000, respectively. The Company recognizes stock-based compensation cost over the requisite service period. However, the exercisability of the respective non-vested options, which are at predetermined dates, does not necessarily correspond to the periods in which straight-line amortization of compensation expenses is recorded. As of December 31, 2020, the Company had approximately $6,000 of total unrecognized compensation costs related to non-vested awards granted under its stock-based plans, which it expects to recognize over a weighted average period of 0.7 years.

The following table summarizes information about stock options outstanding and exercisable at December 31, 2020:


	Options Outstanding			Options Exercisable
	Weighted Average	Weighted			Weighted Average
	Remaining	Average			Remaining	Weighted
Number	Contractual	Exercise		Number	Contractual	Average
outstanding	Life (Years)	Price		exercisable	Life (Years)	Exercise Price
16,199	0.4	$	4.37	16,199	0.4	$	4.37
2,090	1.4	$	4.29	2,090	1.4	$	4.29
41,809	1.5	$	4.74	41,809	1.5	$	4.74
47,030	2.3	$	7.86	47,030	2.3	$	7.86
85,750	6.7	$	7.09	85,750	6.7	$	7.09
8,000	8.2	$	8.55	2,666	8.2	$	8.55
200,878	4.1	$	6.59	195,544	4.0	$	6.54

Other Information

At December 31, 2020 and 2019, there were 58,658 and 62,062 shares available for issuance under the 2012 Plan. At December 31, 2020, there were 185,378 options outstanding issued under the 2012 Plan and 15,500 options outstanding issued under the Previous Plan.

Restricted Stock

On May 20, 2020, the Company granted 1,250 restricted shares of its Common Stock to each non-employee member of its Board of Directors, totaling 6,250 restricted shares. The Company determined that the fair value of these shares was $5.14 per share, which was the closing price of the Company's Common Stock on the date of the grant. These shares cannot be traded earlier than the first anniversary of the grant date. The Company will ratably amortize the total non-cash compensation expense of approximately $32,000 to selling, general and administrative expenses through May 2021.

The Company, in May 2019, granted 1,250 restricted shares of its Common Stock to each non-employee member of its Board of Directors, totaling 6,250 restricted shares. The Company determined that the fair value of these shares was $8.31 per share, which was the closing price of the Company’s Common Stock on the date of the grant. These shares could not have been traded earlier than the first anniversary of the grant date. The Company ratably amortized the total non-cash compensation expense of approximately $52,000, which is included in its selling, general and administrative expenses through May 2020.

Treasury Stock

There were no changes to the Company’s Treasury Stock during 2020.

On February 14, 2019, the Company entered into an agreement to repurchase 389,909 shares of its Common Stock from certain funds and accounts advised or sub-advised by Fidelity Management & Research Company or one of its affiliates in a privately negotiated transaction at approximately $7.62 per share for a total purchase price of $2,971,000.On February 15, 2019, the Company completed this transaction. On February 14, 2019, the Company entered into Amendment No. 6 to the Second Amended and Restated Loan and Security Agreement with Capital One, which permitted the Company to complete the above transaction.