STOCK-BASED COMPENSATION

12 Months Ended

Dec. 31, 2016

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

STOCK-BASED COMPENSATION

9. STOCK BASED COMPENSATION

The Company accounts for compensation expense associated with stock options and restricted stock units (“RSUs”) based on the fair value of the options and units on the date of grant.

The Company used the modified transition method to establish the beginning balance of the additional paid-in capital pool related to the tax effects of employee stock based compensation, which is available to absorb tax deficiencies recognized subsequent to the adoption of the fair value method.

The Company’s net income (loss) for the years ended December 31, 2016, 2015 and 2014, includes approximately $688,000, $524,000 and $468,000 of stock based compensation expense, respectively, for the grant of stock options and RSUs.

On January 1, 2016, the Company granted 53,882 RSUs to its board of directors as partial compensation for the 2016 year.

On August 2, 2016, the Company granted a total of 98,645 shares of common stock to various employees. In the event that any of these employees voluntarily terminates their employment prior to certain dates, portions of the shares may be forfeited. In addition, if certain Company performance criterion are not achieved, portions of these shares may be forfeited. These shares will be expensed at various periods through March 2019 based upon the service and performance thresholds. For the year ended December 31, 2016, approximately $135,100 of compensation expense is included in selling, general and administrative expenses and approximately $28,400 of compensation expense is included in cost of sales for this grant. 

The Company recorded reductions in income tax payable of approximately $325,000 and $513,000 for the years ended December 31, 2015 and 2014, respectively, as a result of the tax benefit upon exercise of options. The compensation expense related to the Company’s stock based compensation arrangements is recorded as a component of selling, general and administrative expenses. Cash flows resulting from tax deductions in excess of the cumulative compensation cost recognized from options exercised (excess tax benefits) are classified as cash inflows from financing activities and cash inflows from operating activities.

In 2000, the Company adopted the Performance Equity Plan 2000 (the “2000 Plan”). The 2000 Plan, as amended, reserved 1,230,000 common shares for issuance. The 2000 Plan provides for the issuance of either incentive stock options or nonqualified stock options to employees, consultants or others who provide services to the Company. The options’ exercise price is equal to the closing price of the Company’s shares on the day of issuance, except for incentive stock options granted to the Company’s president, which are exercisable at 110% of the closing price of the Company’s shares on the date of issuance.

In 2009, the Company adopted the Performance Equity Plan 2009 (the “2009 Plan”). The 2009 Plan reserved 500,000 common shares for issuance. The 2009 Plan provides for the issuance of either incentive stock options or nonqualified stock options to employees, consultants or others who provide services to the Company. The options’ exercise price is equal to the closing price of the Company’s shares on the day of issuance, except for incentive stock options granted to any person possessing more than 10% of the total combined voting power of all classes of Company stock, which are exercisable at 110% of the closing price of the Company’s shares on the date of issuance.

The Company has 128,481 options available for grant under the 2009 Plan.

In 2016, the Company adopted the 2016 Long Term Incentive Plan (the “2016 Plan”). The 2016 Plan reserved 600,000 common shares for issuance, provided that no more than 200,000 common shares be granted as incentive stock options. Awards may be made or granted to employees, officers, directors and consultants in the form of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards.

The Company has 452,033 shares available for grant under the 2016 Plan.

The estimated fair value of each option award granted was determined on the date of grant using the Black-Scholes option valuation model. The following weighted average assumptions were used for option grants during the year ended December 31, 2014:

	2014
Risk-free interest rate		1.45	%
Expected volatility		102.0	%
Dividend yield		0	%
Expected option term in years		5

The Company did not grant any stock options in 2016 or 2015. The risk free interest rate for the year ended December 31, 2014 is based on the five year U.S. Treasury note rate on the day of grant. The expected volatility computation for the year ended December 31, 2014 is based on the average of the volatility over the most recent five year period, which represents the Company’s estimate of expected volatility over the expected option term. The Company has never paid a dividend, and is not expected to pay a dividend in the foreseeable future, therefore the dividend yield is assumed to be zero. The Company assumes zero forfeitures of options.

A summary of the status of the Company’s stock option plans is as follows: 

Fixed Options	Options			Weighted Average Exercise Price		Average remaining contractual term (in years)		Aggregate Intrinsic Value
Outstanding at January 1, 2014		461,919		$	9.80		2.28
Granted during period		43,064			14.67
Exercised		(155,000	)		8.52
Outstanding at December 31, 2014		349,983			10.97		2.20
Granted during period		—			—
Exercised		(55,000	)		8.00
Forfeited/Expired		(25,000	)		14.08
Outstanding at December 31, 2015		269,983			11.29		1.71
Granted during period		—			—
Exercised		(25,000	)		6.75
Forfeited/Expired		(95,517	)		13.83
Outstanding at December 31, 2016		149,466		$	10.43		1.58	$	151,500
Vested at December 31, 2016		149,466		$	10.43		1.58	$	151,500

The weighted-average fair value of each option granted during the years ended December 31, 2014, estimated as of the grant date using the Black-Scholes option valuation model was $10.86.

The Company’s stock options granted to non-employee directors vest immediately upon grant and have a maximum contractual term of five years. Stock options granted to employees vest over three years and have a maximum contractual term of ten years. The expected option term is calculated utilizing historical data of option exercises.

During the year ended December 31, 2016, no stock options were exercised for cash. During the same period, 25,000 options were exercised, pursuant to provisions of the stock option plan, where the Company received no cash and 21,552 shares of its common stock in exchange for the 25,000 shares issued in the exercise. The 21,552 shares that the Company received were valued at $168,750, the fair market value of the shares on the dates of exercise.

During the years ended December 31, 2015 and 2014, the Company recognized a tax benefit of $33,000 and $86,000, respectively, from the exercise of stock options.

The intrinsic value of stock options exercised during the years ended December 31, 2016, 2015 and 2014 was approximately $27,000, $230,500 and $679,000, respectively.

The fair value of all options vested during the years ended December 31, 2016, 2015 and 2014 was approximately $151,000, $221,000 and $387,000, respectively.