Note 8 – Stockholders’ Equity

Employee Stock Incentive Plan

The Company maintains the 2006 Stock Incentive Plan (the “2006 Plan”) under which it has reserved 1,000,000 shares of the Company’s common stock for issuance pursuant to stock options, restricted stock, stock-appreciation rights (commonly referred to as “SARs”) and stock awards (i.e. performance options to purchase shares and performance units). As of August 31, 2018 and November 30, 2017, there were 380,000 and 457,250 options issued, but not yet exercised, under the 2006 Plan, respectively. As of August 31, 2018, there were 322,429 shares available for future issuance under the 2006 Plan.

The Company also maintains the 2012 Equity Incentive Plan (the “2012 Plan”) which became effective December 1, 2011 as approved by the Board of Directors and approved by the stockholders at the 2012 Annual Meeting on July 10, 2012. The 2012 Plan originally reserved 1,500,000 shares of the Company’s common stock for issuance pursuant to stock options, restricted stock, SARs, and other stock awards (i.e. performance shares and performance units). In May 2012, the Board of Directors approved an amendment to the 2012 Plan to increase the number of shares of the Company’s common stock reserved for issuance to 2,500,000 shares. As of August 31, 2018, there were 621,365 service-based options issued, 129,729 service-based restricted common shares granted, 823,415 performance-based and 116,240 market-based restricted common shares granted under the 2012 Plan. As of August 31, 2018, there were 809,251 shares available for future issuance under the 2012 Plan. In March 2018, the Company received notice that shares of the Company’s common stock issued to certain executive officers pursuant to the Company’s 2012 Stock Incentive Plan had purportedly been issued in excess of the shares reserved for issuance under the Plan. The Company has established an independent committee of the Board of Directors to review this issue.

 

Service-based vesting condition options

The fair value of each option award is estimated on the date of the grant using the Black-Scholes valuation model that uses the assumptions noted in the following table. Expected volatility is based on the historical volatility of the Company’s stock over the most recent period commensurate with the expected life of the Company’s stock options. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected term of options granted to employees is calculated, in accordance with the “simplified method” for “plain vanilla” stock options allowed under GAAP. Expected dividends are based on the historical trend of the Company not issuing dividends.

There were 0 and 51,636 options granted during the three and nine months ended August 31, 2018, respectively.

There were 22,500 options granted during the three and nine months ended August 31, 2017, respectively.

Variables used to determine the fair value of the options granted for the three and nine months ended August 31, 2018 and August 31, 2017, respectively, are as follows:

 

		Three Months Ended				Three Months Ended				Nine Months Ended				Nine Months Ended
		August 31, 2018				August 31, 2017				August 31, 2018				August 31, 2017
Weighted average values:
Expected dividends			—				0	%			0	%			0	%
Expected volatility			—				52.06	%			50.8	%			52.06	%
Risk free interest rate			—				1.82	%			2.67	%			1.82	%
Expected life			—				5 years				5 years				5 years

Stock option activity for options with only service-based vesting conditions for the nine months ended August 31, 2018, was as follows:

 

		Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (Years)				Aggregate Intrinsic Value
Outstanding at November 30, 2017			1,026,979			$	2.50				4.48			$	5,706,107
Granted			51,636				7.85								29,774
Exercised			(63,750	)			2.68								343,935
Expired/forfeited			(13,500	)			2.18								84,435
Outstanding at August 31, 2018			1,001,365			$	2.77				4.22			$	5,664,941
Exercisable at August 31, 2018			961,111			$	2.58				4.17			$	5,619,667

 

The weighted average grant date fair value of options granted during the nine months ended August 31, 2018 and August 31, 2017 was $3.23 and $3.25, respectively.

The aggregate intrinsic value represents the total value of the difference between the Company’s closing stock price on the last trading day of the period and the exercise price of the options, multiplied by the number of in-the-money stock options that would have been received by the option holders had all option holders exercised their options on either August 31, 2018 or November 30, 2017, as applicable. The intrinsic value of the Company’s stock options changes based on the closing price of the Company’s stock.

During the three and nine months ended August 31, 2018, the Company issued 61,500 and 63,750 common shares to option holders who exercised options for $166,005 and $170,925, respectively.

During the three and nine months ended August 31, 2017, the Company issued 0 and 26,781 common shares to option holders who exercised options for $0 and $51,396, respectively.

Significant option groups outstanding and exercisable at August 31, 2018 and related price and contractual life information are as follows:

 

		Outstanding												Exercisable
Range of Exercise Prices		Outstanding				Weighted Average Remaining Contractual Life (Years)				Weighted Average Exercise Price				Outstanding				Weighted Average Exercise Price
$1.01 to $ 2.00			422,500				3.18			$	1.73				422,500			$	1.73
$2.01 to $ 3.00			275,000				2.57				2.70				275,000				2.70
$3.01 to $4.00			227,229				7.42				3.18				223,062				3.18
$6.01 to $7.00			25,000				8.59				6.95				23,334				6.98
$7.01 to $8.00			51,636				5.33				7.85				17,215				7.85
			1,001,365				4.22			$	2.77				961,111			$	2.58

A summary of the status of the Company’s non-vested options as of August 31, 2018, and changes during the nine months ended August 31, 2018, is presented below:

 

		Shares				Weighted Average Grant-Date Fair Value
Non-vested at November 30, 2017			39,168			$	2.41
Granted			51,636				3.23
Vested			(50,550	)			2.73
Forfeited			—				—
Non-vested at August 31, 2018			40,254			$	3.06

As of August 31, 2018, there was approximately $110,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 2006 Plan and the 2012 Plan. The cost is expected to be recognized over a weighted-average period of 1.24 years as of August 31, 2018. The total fair value of shares vested during the nine months ended August 31, 2018 was approximately $138,000.

 

During the second fiscal quarter of 2018, the Company entered into Amended and Restated Employment Agreements (“2018 Employment Agreements”) with each of the Company’s Co-CEOs. Per the Employment Agreements, each of the Co-CEOs is to receive base grant equity awards in the form of qualified stock options of the Company’s common stock. As of March 8, 2018, David Portnoy and Mark Portnoy were granted 23,636 and 20,000 stock options of the Company’s common stock, respectively. The options were issued under the Company’s 2012 Stock Plan and will vest 1/3 upon grant, 1/3 on December 1, 2018 and the remaining 1/3 on November 30, 2019. The fair value of the options vested as of August 31, 2018 was approximately $50,000 and is reflected as selling, general and administrative expenses in the accompanying consolidated statement of comprehensive income. As of August 31, 2018, there was approximately $89,000 of total unrecognized compensation cost related to the non-vested options of common stock and these will continue to vest as notated above and per the 2018 Employment Agreements through November 30, 2019.

During the second fiscal quarter of 2018, the Company entered into an Amendment Agreement (“CIO Agreement”) with the Company’s CIO. Per the CIO Agreement, the CIO is to receive a base grant equity award in the form of qualified stock options of the Company’s common stock. As of May 21, 2018, Oleg Mikulinsky was granted 8,000 stock options of the Company’s common stock. The options were issued under the Company’s 2012 Stock Plan and will vest 1/3 upon grant, 1/3 on December 1, 2018 and the remaining 1/3 on November 30, 2019. The fair value of the options vested as of August 31, 2018 was approximately $9,000 and is reflected as selling, general and administrative expenses in the accompanying consolidated statement of comprehensive income. As of August 31, 2018, there was approximately $19,000 of total unrecognized compensation cost related to the non-vested options of common stock and these will continue to vest as notated above and per the CIO Agreement through November 30, 2019.

Performance and market-based vesting condition options

Per the 2018 Employment Agreements, based upon certain performance criteria, the Company shall grant David Portnoy and Mark Portnoy a percentage of up to 47,273 and 40,000, respectively, of qualified stock options of the Company’s common stock. The fair value of these options as of August 31, 2018 was approximately $110,000 and is reflected as selling, general and administrative expenses in the accompanying consolidated statement of comprehensive income (loss). As of August 31, 2018, there was approximately $37,000 of total unrecognized compensation cost related to these options of common stock as notated above and per the 2018 Employment Agreements.

Per the Amendment Agreement, based upon certain performance criteria, the Company shall grant Oleg Mikulinsky a percentage of up to 8,000 of qualified stock options of the Company’s common stock. The fair value of these options as of August 31, 2018 was approximately $10,000 and is reflected as selling, general and administrative expenses in the accompanying consolidated statement of comprehensive income (loss). As of August 31, 2018, there was approximately $3,000 of total unrecognized compensation cost related to these options of common stock as notated above and per the 2018 Employment Agreements.

There were no performance-based or market-based vesting condition options granted during the three and nine months ended August 31, 2017.

 

Restricted common shares

As of April 15, 2016, the Company entered into Amended and Restated Employment Agreements (“Employment Agreements”) with each of the Company’s Co-CEOs. The Employment Agreements provide for the grant of shares of the Company’s common stock based on certain performance measures being attained by each of the Company’s Co-CEOs during fiscal year 2016 and fiscal year 2017. The Employment Agreements state if David Portnoy and Mark Portnoy are employed by the Company on November 30, 2016 and November 30, 2017, then no later than February 28, 2017 and February 28, 2018, respectively, the Company will grant up to 186,487 and 162,163 shares of common stock for each fiscal year. Based upon the performance measures attained as of November 30, 2016, the Company granted 183,145 and 159,257 shares of common stock to David Portnoy and Mark Portnoy, respectively. There was $0 of total unrecognized compensation cost as of August 31, 2018 and August 31, 2017, respectively. Based upon the performance measures being attained as of November 30, 2017, David Portnoy and Mark Portnoy earned a total of 121,801 and 105,915 shares of common stock, respectively. Pursuant to the terms of the Employment Agreements, the Co-CEOs each opted to receive a lump sum cash payment in lieu of 30,000 shares of earned common stock which amounted to approximately $444,000. The Company then granted the remaining earned shares of 91,801 and 75,915 to David Portnoy and Mark Portnoy, respectively. The fair value of the shares granted was approximately $756,000. There was $0 and $181,000 of total unrecognized compensation cost as of August 31, 2018 and August 31, 2017, respectively.

As of April 18, 2016, the Company entered into a second Amendment Agreement (the “Amendment”), with the Company’s CIO Oleg Mikulinsky effective December 1, 2015, amending certain terms of the Amendment Agreement dated May 1, 2013 and Mikulinsky Employment Agreement dated March 5, 2012. The Amendment provides for the grant of shares of the Company’s common stock based on certain performance measures being attained by the Company during fiscal year 2016 and fiscal year 2017. The Amendment states if Executive is employed by the Company on November 30, 2016 and November 30, 2017, then no later than February 28, 2017 and February 28, 2018, respectively, the Company will grant Executive up to 20,000 shares of restricted stock based on performance as set forth in the Amendment per each fiscal year. Based upon performance measures being attained as of November 30, 2016, the Company granted 19,620 shares of common stock to Oleg Mikulinksy. There was $0 of total unrecognized compensation cost as of August 31, 2018 and August 31, 2017, respectively. Based upon performance measures being attained as of November 30, 2017, the Company will grant a total of 14,729 shares of common stock to Oleg Mikulinksy. The fair value of the shares to be granted is approximately $80,000. There was $0 and $80,000 of total unrecognized compensation cost as of August 31, 2018 and August 31, 2017, respectively.