NOTE 7—STOCK OPTIONS – STOCK COMPENSATION

At the Annual Meeting of Stockholders held May 23, 2012 (the “Annual Meeting”), 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 will determine 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.

There were no Common Stock options granted in 2014.

The Company estimated the fair value of its common stock options using the following assumptions:

	For the year ended
	December 31, 2013

Risk-free interest rate		1.82	%
Expected term		10 years
Volatility		81.27	%
Dividend yield		0	%
Weighted-average fair value of options granted	$	6.72

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

	Number				Aggregate
	of		Weighted Average Exercise Price per		Intrinsic
	Shares		share		Value
Outstanding, January 1, 2013		584,688	$	6.48
Granted		71,500		8.21
Exercised		(22,000)		3.80
Expired		(1,000)		11.20
Outstanding, December 31, 2013		633,188		6.76
Granted		—		—
Exercised		(97,688)		7.69
Expired		(30,500)		7.99
Outstanding, December 31, 2014		505,000	$	6.51	$	1,232,000
Vested, December 31, 2014		443,994	$	6.38	$	1,192,000

All options that expired in 2014 and 2013 were issued under the Previous Plan.

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

	December 31,
	2014				2013
			Weighted Average				Weighted Average
	Option		Grant-Date		Option		Grant-Date
	Shares		Fair Value		Shares		Fair Value
Non-vested shares, beginning of year		121,500	$	5.38		141,000	$	2.94
Granted		—		—		71,500		6.72
Vested		(60,494)		4.62		(91,000)		2.64
Forfeited		—		—		—		—
Non-vested shares, end of year		61,006	$	6.14		121,500	$	5.38

Stock-based compensation expense recognized for the years ended December 31, 2014 and 2013 was approximately $220,000 and $338,000, 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.

The following table summarizes information about stock options outstanding and exercisable at December 31, 2014:

	Range of Exercise Prices	Number outstanding		Options Outstanding Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Number exercisable		Options Exercisable Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price
$	14.44 - $16.68		24,500		0.5	$	16.50		24,500		0.5	$	16.50
$	11.20		85,500		2.5	$	11.20		85,500		2.5	$	11.20
$	4.16		170,000		3.5	$	4.16		170,000		3.5	$	4.16
$	3.05		55,000		6.0	$	3.05		55,000		6.0	$	3.05
$	4.48 - $4.95		98,500		6.9	$	4.72		85,167		6.8	$	4.68
$	8.21		71,500		8.3	$	8.21		23,827		8.3	$	8.21
			505,000		4.8	$	6.51		443,994		4.3	$	6.38

Other Information

As of December 31, 2014, the Company had approximately $101,000 of total unrecognized compensation cost related to non-vested awards granted under its share-based plans, which it expects to recognize over a weighted-average period of one year.

At December 31, 2014 and 2013, there were 194,517 and 199,512 shares available for issuance under the 2012 Plan. At December 31, 2014, there were outstanding 113,500 options issued under the 2012 Plan and 391,500 options outstanding issued under the Previous Plan.

Restricted Stock

Pursuant to the 2012 Plan, the Company, in May 2014, granted 666 restricted shares of its common stock to each non-employee member of its Board of Directors, totaling 3,330 restricted shares. The Company determined that the fair value of these shares was $7.43, 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. As such, the Company is ratably amortizing the total non-cash compensation expense of approximately $25,000 in its selling, general and administrative expenses through May 2015.

Pursuant to the 2012 Plan, the Company, in May 2013, granted 666 restricted shares of its common stock to each non-employee member of its Board of Directors, totaling 3,330 restricted shares. The Company determined that the fair value of these shares was $8.95, 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. As such, the Company ratably amortized the total non-cash compensation expense of approximately $30,000 in its selling, general and administrative expenses through May 2014.

Treasury Stock

On October 14, 2014, the Company acquired 208,325 shares of the Company’s Class A Common Stock from Timothy J. Stabosz in a privately negotiated transaction pursuant to a purchase agreement, at a purchase price of $7.60 per share, which was at a discount to the then market price of the Company’s Common Stock, with an aggregate purchase price of approximately $1,583,000. The purchase agreement contains certain covenants, including standstill restrictions imposed on Mr. Stabosz with respect to shares of Common Stock for a three-year period.