6. Stock-based Compensation Plans

The Company uses the Black-Scholes model to value stock options granted. Volatility is calculated as management’s estimate of future volatility over the expected term of the option based on historical volatility of the Company’s stock. The expected life of options granted represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual term of the options is based on the United States Treasury yields in effect at the time of grant.

Stock options granted to employees under the Company’s stock option plan typically vest 25% on the first anniversary of the grant and 25% on the one-year anniversary of each of the three following years. Stock options granted to non-employee directors under the Company’s stock option plan typically vest 50% on the first anniversary of the grant and 50% on the next one-year anniversary. The Company recognizes stock option expense over the vesting period for each vesting tranche.

As recognizing stock-based compensation expense is based on awards ultimately expected to vest, the amount of recognized expense has been reduced for estimated forfeitures based on the Company’s historical experience. The Company recognized a benefit for stock option compensation $5,000 in the first quarter of fiscal 2017 due to forfeitures, and expense of $24,000 for the quarter ended October 31, 2015. There was approximately $22,000 and $112,000 of total unrecognized compensation costs related to non-vested options granted under the Company’s stock option plans as of October 31, 2016 and 2015, respectively. Total unrecognized compensation cost will be adjusted for any future changes in estimated and actual forfeitures. There were no capitalized stock-based compensation costs during the periods presented.

The following table shows the weighted average assumptions used to estimate the fair value of options granted:


	Three months ended October 31,
	2016
Expected life (years)		n/a
Risk-free interest rate		n/a
Expected volatility		n/a
Expected forfeiture rate		11.1	%
Expected dividend yield		-
Weighted-average estimated fair value per
share of options granted during the year		n/a
Cash received from the exercise
of stock options	$	5,000

2000 Stock Option Plan

The Company’s 2000 Stock Option Plan (the “2000 Plan”) had 1,950,000 shares of common stock authorized for issuance. Each incentive stock option that was granted under the 2000 Plan is exercisable for a period of not more than ten years from the date of grant (five years in the case of a participant who is a 10% shareholder of the Company, unless the stock options are nonqualified), or such shorter period as determined by the Compensation Committee, and shall lapse upon the expiration of said period, or earlier upon termination of the participant’s employment with the Company. The 2000 Plan expired on December 13, 2010, at which time it was terminated except for outstanding options. While options previously granted under the 2000 Plan will continue to be effective through the remainder of their terms or until exercised, no new options may be granted under the 2000 Plan.

Changes in option shares under the 2000 Plan during the three months ended October 31, 2016 were as follows:


	Number of Options	Wtd. Avg. Exercise Price		Wtd. Avg. Remaining Contractual Period (Years)	Aggregate Intrinsic Value
Outstanding at 7/31/2016	384,750	$	1.46	1.89	$	1,408,027
Granted	-		n/a	n/a		n/a
Exercised	-		n/a	n/a		n/a
Forfeited	-		n/a	n/a		n/a
Outstanding at 10/31/2016	384,750	$	1.46	1.64	$	1,350,314
Exercisable at 10/31/2016	384,750	$	1.46	1.64	$	1,350,314

The range of exercise prices for options outstanding under the 2000 Plan was $0.49 to $1.96 at October 31, 2016.

2010 Equity Incentive Plan

The Board of Directors adopted the ARI Network Services, Inc. 2010 Equity Incentive Plan (as amended, the “2010 Plan”) on November 9, 2010. The plan was approved by the Company's shareholders in December 2010, and amendments to the 2010 Plan were approved by the Company’s shareholders in January 2014. The 2010 Plan is the successor to the Company’s 2000 Plan. There are 1,850,000 shares of Company common stock authorized for issuance under the 2010 Plan. Potential awards under the 2010 Plan include incentive stock options and non-statutory stock options, shares of restricted stock or restricted stock units, stock appreciation rights (“SARs), and shares of common stock. Up to 1,525,000 of the shares authorized for issuance under the 2010 Plan may be used for common stock, restricted stock or restricted stock unit awards.

The exercise price for options and SARs under the 2010 Plan cannot be less than 100% of the fair market value of the Company’s common stock on the date of grant, and the exercise prices for options and SARs cannot be repriced without shareholder approval, except to reflect changes to the capital structure of the Company as described in the 2010 Plan. The maximum term of options and SARs under the 2010 Plan is 10 years. The 2010 Plan does not have liberal share counting provisions (such as provisions that would permit shares withheld for payment of taxes or the exercise price of stock options to be re-granted under the plan).

Changes in option shares under the 2010 Plan during the three months ended October 31, 2016 were as follows:


	Number of Options	Wtd. Avg. Exercise Price		Wtd. Avg. Remaining Contractual Period (Years)	Aggregate Intrinsic Value
Outstanding at 7/31/2016	357,626	$	2.52	6.95	$	930,816
Granted	-		n/a	n/a		n/a
Exercised	(1,250)		3.61	n/a		n/a
Forfeited	(13,750)		3.31	n/a		n/a
Outstanding at 10/31/2016	342,626	$	2.48	6.25	$	852,672
Exercisable at 10/31/2016	292,626	$	2.34	6.25	$	768,884

The range of exercise prices for options outstanding under the 2010 Plan was $0.59 to $3.54 at October 31, 2016.

Changes in the 2010 Plan's non-vested option shares included in the outstanding shares above during the three months ended October 31, 2016 were as follows:


	Number of Options	Wtd. Avg. Exercise Price
Non-vested at 7/31/2016	70,000	$	3.29
Granted	-		n/a
Vested	(6,250)		3.20
Forfeited	(13,750)		3.31
Non-vested at 10/31/2016	50,000	$	3.29

The weighted average remaining vesting period was 0.96 years at October 31, 2016.

Employee Stock Purchase Plan

The Company’s 2000 Employee Stock Purchase Plan, as amended, (“ESPP”) has 575,000 shares of common stock reserved for issuance, of which 300,280 and 263,974 of the shares have been issued as of October 31, 2016 and 2015, respectively. All employees with at least six months of service are eligible to participate. Shares may be purchased at the end of a specified period at the lower of 85% of the market value at the beginning or end of the specified period through accumulation of payroll deductions, not to exceed 5,000 shares per employee per year. The Company expensed $13,000 and $20,000 during the three months ended October 31, 2016, and 2015 related to the ESPP discount.

Restricted Stock

Up to 1,525,000 of the shares authorized for issuance under the 2010 Plan may be granted in the form of shares of common stock, restricted stock or restricted stock units. The Company grants restricted stock to its directors as an annual retainer, and from time to time to directors, officers or employees as incentive compensation or as discretionary compensation in place of cash.

The Compensation Committee adopted the Long-Term Executive Bonus Plan (“LTEB”) for eligible executive officers of the Company beginning in fiscal 2013.

In March 2015, the Compensation Committee issued 550,000 shares of restricted stock under the LTEB, which will vest according to the following schedule:

30% when the volume weighted average price of the Company’s common stock for the previous 30-day trading period (the “30-day VWAP”) equals or exceeds $6.00

20% when the 30-day VWAP equals or exceeds $7.00

20% when the 30-day VWAP equals or exceeds $8.00

30% when the 30-day VWAP equals or exceeds $9.00

Under the plan described above, a target price must be reached within a four-year period starting on the date of grant for any restricted stock to vest. All unvested restricted stock will be forfeited when the four-year period expires. The initial value of the common stock granted under the LTEB was approximately $350,000, valued using a Monte Carlo Simulation with a 46% volatility rate and a 1.34% risk-free interest rate, and is expensed over the vesting period.

Restricted stock granted under the 2010 plan during fiscal 2017 was valued using the market price on the date of grant. The Company recognized compensation expense of $142,000 and $73,000 during the three months ended October 31, 2016 and 2015, respectively, related to all restricted stock. The remaining balance of unrecognized compensation expense related to restricted stock was $750,000 and $462,000 at October 31, 2016 and 2015, respectively.

Changes in unvested restricted shares of common stock under the 2010 Plan during the three months ended October 31, 2016 and 2015 were as follows:



	Three months ended October 31
	2016	2015
Beginning balance unvested restricted stock	657,912	671,211
Granted	102,720	-
Vested	(6,474)	(6,474)
Forfeited	(2,534)	(5,460)
Ending balance unvested restricted stock	751,624	659,277