Note 4 – Stockholder’s Equity

Common Stock Issuances

During the nine months ended August 31, 2014, the Company issued 46,246 common shares to option holders who exercised options for $70,902. During the nine months ended August 31, 2013, the Company issued 10,000 common shares to option holders who exercised options for $14,950.

During the three months ended August 31, 2014, the Company issued 13,750 common shares to option holders who exercised options for $22,238. During the three months ended August 31, 2013, the Company issued 2,500 common shares to option holders who exercised options for $3,125.

Employee Stock Incentive Plan

The Company maintains the 2000 Stock Incentive Plan as amended (“the 2000 Plan”) that has reserved 2,250,000 shares of the Company’s common stock for issuance pursuant to stock options or restricted stock. Options issued under the 2000 Plan have a term ranging from five to seven years from the date of grant and have a vesting period ranging from immediately upon issuance to three years from the date of grant. The options are exercisable for a period of 90 days after termination. As of August 31, 2014 and November 30, 2013, there were 2,500 and 12,500 shares outstanding under the 2000 Plan, respectively. No further options will be issued under the 2000 Plan.

The Company also maintains the 2006 Stock Incentive Plan (the “2006 Plan”). The 2006 Plan 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 other stock awards (i.e. performance shares and performance units). As of August 31, 2014 and November 30, 2013, there were 585,597 and 739,760 shares outstanding under the 2006 Plan, respectively. As of August 31, 2014, there were 274,511 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, 2014, there were 400,000 service-based options issued, 129,729 service-based restricted common shares granted, 261,488 performance-based and 87,162 market-based restricted common shares granted under the 2012 plan. As of November 30, 2013, there were 400,000 service-based options issued, 400,000 performance-based and 200,000 market-based options to purchase shares granted under the 2012 plan. As of August 31, 2014, there were 1,621,621 shares available for future issuance under the 2012 Plan.

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 no options granted during the three and nine months ended August 31, 2014.

Variables used to determine the fair value of the options granted for the three and nine months ended August 31, 2013:

The range of expected volatilities for options issued during the nine months ended August 31, 2013 are as follows:

Stock option activity for options with only service-based vesting conditions for the nine months ended August 31, 2014, was as follows:

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 November 30, 2013 or August 31, 2014, as applicable. The intrinsic value of the Company’s stock options changes based on the closing price of the Company’s stock.

During the nine months ended August 31, 2014, the Company issued 46,246 common shares to option holders who exercised options for $70,902.

During the nine months ended August 31, 2013, the Company issued 10,000 common shares to option holders who exercised options for $14,950.

Significant option groups outstanding and exercisable at August 31, 2014 and related price and contractual life information are as follows:

A summary of the status of the Company’s non-vested shares as of August 31, 2014, and changes during the nine months ended August 31, 2014, is presented below:

As of August 31, 2014, there was approximately $5,400 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 2000 Plan, the 2006 Plan and the 2012 Plan. The cost is expected to be recognized over a weighted-average period of .56 years as of August 31, 2014. The total fair value of shares vested during the nine months ended August 31, 2014 was approximately $125,000.

Performance and market-based vesting condition options

There were no performance-based or market-based vesting condition options granted during the three and nine months ended August 31, 2014 and August 31, 2013.

Stock option activity for options with performance-based and market-based vesting conditions for the nine months ended August 31, 2014, was as follows:

As of fiscal year ended November 30, 2013, the Company had 213,334 options outstanding that begin to vest based on the achievement of certain share prices of the Company’s common stock at certain future dates. For market-based vesting condition options, accounting principles do not require that the market condition be met in order for the compensation cost to be recognized. Fair value of these options has been determined using a binomial model and is being recognized over the requisite service period, regardless if the market condition will be met. During fiscal 2014, 213,334 options were forfeited as certain market conditions were not met by the end of the requisite service period. As of August 31, 2014 there was $0 of total unrecognized compensation cost related to the non-vested market-based vesting condition options.

As of fiscal year ended November 30, 2013, the Company had 426,666 options outstanding that require certain performance targets to be met before vesting can occur. During fiscal 2014, 426,666 options were forfeited as certain performance targets were not met by the end of the requisite service period. As of August 31, 2014, there was $0 of total unrecognized compensation cost related to the non-vested performance-based vesting condition options. Since the performance conditions were not achieved by a certain date as specified in each option agreement, no compensation expense associated with these performance based options was recognized.

Restricted common shares

During the first quarter 2014, the Company entered into Amended and Restated Employment Agreements (“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 restricted shares of the Company’s common stock. As of December 1, 2013, David Portnoy and Mark Portnoy were granted 70,270 and 59,459 shares of the Company’s common stock, respectively. The shares shall be issued under the Company’s 2012 Stock Plan and will vest 1/3 upon grant, 1/3 on December 1, 2014 and the remaining 1/3 on December 1, 2015. The fair value of the shares vested as of August 31, 2014 was $80,000 and is reflected as selling, general and administration expenses in the accompanying consolidated statement of operations. These shares are not reflected as outstanding in the accompanying financial statements as they were issued subsequent to the balance sheet date. As of August 31, 2014, there was approximately $100,000 of total unrecognized compensation cost related to the non-vested shares of restricted common stock.

The Employment Agreements also provide for the grant of restricted shares of the Company’s common stock based on certain performance measures being attained by each of the Company’s Co-CEOs. The Employment Agreements state if David Portnoy and Mark Portnoy are employed by the Company on November 30, 2014, then no later than February 15, 2015, the Company will grant up to 186,487 and 162,163 shares of restricted common shares, respectively, based on certain performance thresholds, as defined in the agreements. In addition, if David Portnoy and Mark Portnoy are employed by the Company on November 30, 2015, then no later than February 15, 2016, the Company will grant up to an additional 186,487 and 162,163 shares of restricted common shares, respectively, based on similar performance thresholds, as defined in the agreements. As of August 31, 2014, there was approximately $7,500 of total unrecognized compensation cost related to the non-vested performance-based shares of restricted common stock.