(4)	Stock-based compensation plans

Under the Company’s 1996 Equity Incentive Plan (the “Plan”) there were 326,567 shares reserved and available for grant at December 31, 2016. During 2016 an additional 250,000 shares were authorized for issuance under the Plan. There have been no options exercised in 2017.

The Plan, which is shareholder-approved, permits the grant of restricted stock, restricted stock units, stock options and stock appreciation rights (“SARs”).SARs may be awarded either separately, or in relation to options granted, and for the grant of bonus shares. Options granted are exercisable at a price not less than fair market value on the date of grant.

Stock options

The Company estimated the fair values of its stock options using the Black-Scholes-Merton option-pricing model, which was developed for use in estimating the fair values of stock options. Option valuation models, including the Black-Scholes-Merton option-pricing model, require the input of assumptions, including stock price volatility. Changes in the input assumptions can materially affect the fair value estimates and ultimately how much the Company recognizes as stock-based compensation expense. The fair values of the Company’s stock options were estimated at the grant dates. The weighted average input assumptions used and resulting fair values of stock options at December 31, 2016, were as follows:

	December 31, 2016

Executive and management options:

Expected life (in years)		4.0
Risk-free interest rate		1.55	%
Volatility		61.43	%
Dividend yield		0.00	%
Weighted-average fair value per share	$	4.81
Executive chairman options:

Expected life (in years)		4.0
Risk-free interest rate		1.01% - 1.93	%
Volatility		60.45% - 64.40	%
Dividend yield		0.00	%
Weighted-average fair value per share	$	3.56 - $3.80

Expected Life

The expected term represents the period of time that options are expected to be outstanding. As the Company does not have sufficient historical evidence for determining the expected term of the stock option awards granted, the expected life assumption has been determined using the simplified method, which is an average of the contractual term of the option and its ordinary vesting period.

Risk-free Interest Rate

The Company bases the risk-free interest rate assumption on zero-coupon U.S. treasury instruments appropriate for the expected term of the stock option grants.

Expected Volatility

The expected stock price volatility for the Company’s common stock is estimated based on the historic volatility of the Company’s common stock for a period equivalent to the expected term of the stock option grants.

Expected Dividend Yield

The Company bases the expected dividend yield assumption on the fact that there is no present intention to pay cash dividends. Therefore an expected dividend yield of zero has been used.

Performance based awards

Stock options:

In December 2015, the Compensation Committee awarded performance-based equity compensation to nine executives and managers, including the principal executive officer and principal financial officer, consisting of 38,460 shares in the form of stock options. The performance options have an exercise price of $9.94 per share, representing the average of the highest intraday bid and ask quotes for the Company’s common stock on the date of grant, December 16, 2015, and the preceding four trading days. The performance options will vest subject to the Company meeting an earnings per share target applicable to fiscal year 2018 set by the Compensation Committee so long as the employee is then employed by the Company. The Company estimated the fair values of its stock options using the Black-Scholes-Merton option-pricing model. The estimated fair value of the stock options on the date of the grant was $185,000. The unvested compensation is being expensed over three years. The expense for these employee stock option grants was $14,424 and $2,658 for the three month periods ended December 31, 2016 and January 2, 2016, respectively.

A summary of performance based option activity under the share option plan as of December 31, 2016, and changes during the three months then ended is presented below:

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding as of September 30, 2016		38,460	$	9.94		4.21		-
Granted – Executives and management		-		-		-		-
Exercised		-		-		-		-
Forfeited or Expired		-		-		-		-
Outstanding at December 31, 2016		38,460	$	9.94		3.96	$	-
Exercisable		-		-		-		-
Vested and expected to vest		35,451	$	9.94		3.96	$	-

Restricted stock:

In December 2015, the Company granted 11,540 shares of restricted stock to four employees which will vest subject to the Company meeting the same earnings per share target applicable to fiscal year 2018 as for the stock options disclosed above, so long as the employee is then employed by the Company. The estimated fair value of the stock on the date of the grant was $116,000 based on the fair market value of stock on the date of issue. The unvested compensation is being expensed over three years.

Management has assessed the performance criteria relating to these grants and concluded they are likely to be met. Accordingly the relevant portion of the expense has been recorded through December 31, 2016. The expense for these employee stock option grants was $9,038 and $1,665 for the three month periods ended December 31, 2016 and January 2, 2016, respectively.

Time-based awards

Stock options:

In August 2016, the Board of Directors awarded the Executive Chairman equity compensation consisting of stock options to purchase 56,700 shares. The options were granted in two tranches. The first tranche, consisting of 36,496 options with an exercise price of $10.93 per share, would vest in twelve substantially equal monthly installments beginning September 2016, and the second tranche, consisting of 20,204 options with an exercise price of $12.35 per share, would vest in twelve substantially equal monthly installments beginning September 2017, in each case so long as the director is in the position of Executive Chairman. The Company estimated the fair values of its stock options using the Black-Scholes-Merton option-pricing model. The estimated fair value of the stock options on the date of the grant was $211,000. The Executive Chairman position was terminated on December 6, 2016, as a result of which 12,165 vested options are exercisable for three months, and all unvested options expired. The expense for these restricted stock option grants was $30,584 and $0 for the three months ended December 31, 2016 and January 2, 2016, respectively.

A summary of time based option activity under the share option plan as of December 31, 2016, and changes during the three months then ended is presented below:

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding as of September 30, 2016		12,165	$	10.93		4.08		-
Granted		-		-		-		-
Exercised		-		-		-		-
Forfeited or Expired		-		-		-		-
Outstanding at December 31, 2016		12,165	$	10.93		3.67	$	-
Exercisable		-		-		-		-
Vested		12,165	$	10.93		3.67	$	-

Restricted stock:

In February 2016, the Company granted 29,700 shares of restricted stock to nine non-employee directors, which will vest on the day before the 2017 annual general meeting providing that the grantee remains a director of the Company, or as otherwise determined by the Compensation Committee. The aggregate fair value of the stock measured on the date of the grant was $292,000 based on the closing sale price of the stock on the date of grant. Subsequent to the February 2016 grant, 3,300 of these granted shares of restricted stock were cancelled and returned to the Plan following the resignation of a director. Compensation expense is being expensed on a straight line basis over the twelve month period during which the forfeiture conditions lapse. The expense for these restricted stock grants was $64,812 and $0 for the three month periods ended December 31, 2016 and January 2, 2016, respectively.

For the purposes of calculating average issued shares for basic earnings per share, these shares are only considered to be outstanding when the forfeiture conditions lapse and the shares vest.

A summary of restricted stock and stock option activity, including both performance based awards and time-based awards, for the three month period ended December 31, 2016, is as follows:

	Number of shares of Restricted Stock			Weighted Average Grant-Date Fair Value
Non-vested balance as of September 30, 2016		138,940		$	6.50
Vested		(60,000	)	$	6.39
Non-vested balance as of December 31, 2016		78,940		$	6.58

	Number of shares of Stock Options		Weighted Average Grant-Date Fair Value
Non-vested balance as of September 30, 2016		50,625	$	4.6 7
Non-vested balance as of December 31, 2016		50,625	$	4.67

Stock-based compensation expense was $242,000 and $152,000 for the three month periods ended December 31, 2016 and January 2, 2016, respectively. At December 31, 2016, there was $327,348 of unrecognized compensation expense related to restricted stock and stock options granted under the Plan. The Company expects to recognize that cost over a weighted average period of 2 years.