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EQUITY AND STOCK COMPENSATION PLANS | 12 Months Ended
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Dec. 31, 2019
EQUITY AND STOCK COMPENSATION PLANS |
EQUITY AND STOCK COMPENSATION PLANS | 6. EQUITY AND STOCK COMPENSATION PLANS Fixed Stock Option Plan – We have one active fixed stock option plan which is our 2001 Nonqualified Stock Plan (“2001 Plan”). We are authorized to grant nonqualified stock options, stock appreciation rights and stock awards to our employees and directors for up to 8,000,000 shares of common stock under this plan. As of December 31, 2019, there were 3,976,443 shares available for grant under the 2001 Plan. Options are granted at exercise prices as determined by the Board of Directors and have terms ranging from four to a maximum of ten years. Options generally vest over three to five years. The following table presents stock-based employee compensation expenses included in our consolidated statements of income and comprehensive income (in thousands):
|  | Years ended
|  | December 31,
|  | 2019 |  | 2018
Cost of services |  | $ | 18 |  | $ | 25
Research and development |  |  | 117 |  |  | 101
Selling and marketing |  |  | 57 |  |  | 13
General and administrative |  |  | 500 |  |  | 441
Stock-based compensation expense |  | $ | 692 |  | $ | 580
Stock-based compensation expense in the preceding table includes expenses associated with grants of: i) stock options, ii) unrestricted shares of our common stock; and iii) performance share awards. The methods used to determine stock-based compensation expense for each type of equity grant are described in the following paragraphs. Stock Option Grants. For the years ended December 31, 2019 and 2018, we granted stock options for 435,000 and 0 shares of our common stock, respectively. We estimate the fair value of those stock options using the Black-Scholes valuation model. The Black-Scholes valuation model takes into account the exercise price of the award, as well as a variety of significant assumptions. The assumptions used to estimate the fair value of stock options include the expected term, the expected volatility of our stock over the expected term, the risk-free interest rate over the expected term, and our expected annual dividend yield. We do not estimate our forfeiture rates as the actual forfeiture rate is known at the end of each reporting period due to the timing of our stock option vesting. We believe that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of stock options granted in the year ended December 31, 2019. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards. Specific assumptions used to determine the fair value of options granted during the year ended December 31, 2019, using the Black-Scholes valuation model were:
|  | Year Ended |
|  | December 31, 2019 |
Expected term (1) |  | 6.08-6.18 years |
Expected volatility factor (2) |  | 35-46 | %
Risk-free interest rate (3) |  | 1.51-1.66 | %
Expected annual dividend yield |  | n/a |
| (1) |  | The expected term for each grant was determined based on the simplified method.
| (2) |  | The expected volatility for each grant is estimated based on an average of historical volatility over the expected term of the stock options.
| (3) |  | The risk-free interest rate for each grant is based on the U.S. Treasury yield curve in effect at the time of grant for a period equal to the expected term of the stock option.
Unrestricted Stock Grants. Our 2001 Plan permits us to grant shares of unrestricted stock to our directors, officers, and employees. Stock-based compensation expense for stock grants is determined based on the fair market value of our stock on the date of grant; provided the number of shares in the grant is fixed on the grant date. We granted 285,500, and 138,000 shares of unrestricted stock during the years ended December 31, 2019, and 2018, respectively. The accounting treatment of unrestricted stock awards in 2019 and 2018 is described below: Year ended December 31, 2019. In March 2019, we granted 143,000 shares of unrestricted stock to directors, officers and employees. The shares were issued in two equal installments shortly after June 30, 2019 and December 31, 2019. We expensed $547,000 of stock-based compensation expense related to this grant in the year ended December 31, 2019. There was no unamortized stock-based compensation charge associated with this stock grant as of December 31, 2019. We issued shares of common stock related to the March 2019 grant as follows: i) 58,548 net shares of common stock were issued in early July 2019 after employees surrendered 12,952 shares for which we paid $43,000 of withholding taxes on their behalf; and ii) 56,605 net shares of common stock were issued in early January 2020 after employees surrendered 14,895 shares for which we paid $50,000 of withholding taxes on their behalf. In September 2019, we granted 15,000 shares of unrestricted stock to an officer, the shares are to be issued in one installment shortly after December 31, 2019, provided the grantee is serving as a director, officer or employee on that date. The total stock-based compensation expense related to this grant was $41,000 and was expensed in 2019. We issued 15,000 shares of common stock related to this grant in early January 2020. In September 2019, we granted 80,000 shares of unrestricted stock to an officer, the shares are to be issued in four equal installments shortly after September 19, 2020, September 19, 2021, September 19, 2022 and September 19, 2023, provided the grantee is serving as a director, officer or employee on those dates. The total stock-based compensation expense related to this grant is $220,000, of which $16,000 was charged to expense in 2019 and we anticipate the remaining $204,000 will be charged to expense ratably over the next fifteen quarters. In October 2019, we granted 7,500 shares of unrestricted stock to an officer, the shares are to be issued in one installment shortly after December 31, 2019, provided the grantee is serving as a director, officer or employee on that date. The total stock-based compensation expense related to this grant was $22,000 and was expensed in 2019. We issued 7,500 shares of common stock related to this grant in early January 2020. In October 2019, we granted 40,000 shares of unrestricted stock to an officer, the shares are to be issued in four equal installments shortly after October 1, 2020, October 1, 2021, October 1, 2022 and October 1, 2023, provided the grantee is serving as a director, officer or employee on those dates. The total stock-based compensation expense related to this grant is $117,000, of which $7,000 was charged to expense in 2019 and we anticipate the remaining $110,000 will be charged to expense ratably over the next fifteen quarters. Year ended December 31, 2018. In March 2018, we granted 138,000 shares of unrestricted stock to directors, officers and employees. The shares were issued in two equal installments shortly after June 30, 2018 and December 31, 2018. We expensed $580,000 of stock-based compensation expense related to this grant in the year ended December 31, 2018. There was no unamortized stock-based compensation charge associated with this stock grant as of December 31, 2018. We issued shares of common stock related to the March 2018 grant as follows: i) 57,592 net shares of common stock were issued in early July 2018 after employees surrendered 11,408 shares for which we paid $51,000 of withholding taxes on their behalf; and ii) 55,278 net shares of common stock were issued in early January 2019 after employees surrendered 13,722 shares for which we paid $50,000 of withholding taxes on their behalf. Performance Share Awards. In September 2019, we granted 20,000 shares of stock to an officer as a performance share award under our 2001 Nonqualified Stock Plan. The shares were issued in September 2019 and will be forfeitable if the grantee is not serving as a director, officer or employee on March 19, 2020. Stock-based compensation expense for this stock grant was determined based on the fair market value of our stock on the date of grant, as the number of shares in the grant was fixed on the grant date. The total stock-based compensation expense related to this grant is $55,000, of which $31,000 was charged to expense in 2019 and we anticipate the remaining $24,000 will be charged in the first quarter of 2020. In October 2019, we granted 10,000 shares of stock to an officer as a performance share award under our 2001 Nonqualified Stock Plan. The shares were issued in October 2019 and will be forfeitable if the grantee is not serving as a director, officer or employee on April 1, 2020. Stock-based compensation expense for this stock grant was determined based on the fair market value of our stock on the date of grant, as the number of shares in the grant was fixed on the grant date. The total stock-based compensation expense related to this grant is $29,000, of which $15,000 was charged to expense in 2019 and we anticipate the remaining $14,000 will be charged in the first and second quarter of 2020. A summary of stock option transactions for our fixed stock option plan for the years ended December 31, 2019, and 2018 are presented below:
|  | 2019 |  | 2018
|  |  |  | Weighted |  |  |  | Weighted
|  |  |  | Average |  |  |  | Average
|  |  |  | Exercise |  |  |  | Exercise
|  | Shares |  | Price |  | Shares |  | Price
Outstanding at beginning of year |  | 18,000 |  | $ | 2.52 |  | 28,000 |  | $ | 2.97
Granted |  | 435,000 |  | $ | 6.00 |  | — |  |  | —
Exercised |  | 18,000 |  | $ | 2.52 |  | — |  |  | —
Forfeited or cancelled |  | — |  |  | — |  | (10,000) |  |  | 3.77
Outstanding at end of year |  | 435,000 |  | $ | 6.00 |  | 18,000 |  | $ | 2.52
Exercisable at year end |  | 16,248 |  | $ | 6.00 |  | 18,000 |  | $ | 2.52
Total options outstanding at December 31, 2019 were 435,000. 16,248 of those options were vested and had a weighted average exercise price of $6.00. Options to purchase up to 435,000 shares of our common stock were granted in the year ended December 31, 2019. No options were granted in the year ended December 31, 2018. At December 31, 2019, the weighted average remaining contractual term for total options outstanding and total options exercisable was approximately 9.76 and 9.72 years, respectively. At December 31, 2019, the aggregate intrinsic value of options outstanding and options exercisable was zero. The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option. The following table summarizes the stock options outstanding at December 31, 2019:
|  | Options Outstanding |  | Options Exercisable
|  |  |  | Weighted |  | Weighted Average |  |  |  | Weighted
|  |  |  | Average |  | Remaining |  |  |  | Average
Exercise Price |  |  |  | Exercise |  | Contractual |  |  |  | Exercise
Range |  | Number |  | Price |  | Term (in years) |  | Number |  | Price
$4 to $5 |  | 108,750 |  | $ | 4.50 |  | 9.7585 |  | 4,062 |  | $ | 4.50
$5 to $6 |  | 108,750 |  | $ | 5.50 |  | 9.7585 |  | 4,062 |  | $ | 5.50
$6 to $7 |  | 108,750 |  | $ | 6.50 |  | 9.7585 |  | 4,062 |  | $ | 6.50
$7 to $8 |  | 108,750 |  | $ | 7.50 |  | 9.7585 |  | 4,062 |  | $ | 7.50
|  | 435,000 |  | $ | 6.00 |  | 9.7585 |  | 16,248 |  | $ | 6.00
At December 31, 2019, unrecognized compensation expense related to non-vested stock options was approximately $256,000, which is expected to be recognized over a weighted average period of 3.75 years. We issue common stock from previously authorized but unissued shares to satisfy option exercises and purchases under our Employee Stock Purchase Plan. Employee Stock Purchase Plan - In June 1996, we adopted an Employee Stock Purchase Plan (the “ESPP Plan”) under which eligible employees could purchase common stock at a price equal to 85% of the lower of the fair market value of the common stock at the beginning or end of each six-month offering period. On November 29, 2005 we amended the ESPP Plan to provide that eligible employees may purchase common stock at a price equal to 95% of the fair market value of the common stock as of the end of each six-month offering period. There is no stock-based compensation expense related to our Employee Stock Purchase Plan because it is not considered a compensatory plan. The plan does not have a look-back feature, and has a minimal discount of 5% of the fair market value of the common stock as of the end of each six-month offering period. Participation in the ESPP Plan is limited to 6% of an employee’s compensation, may be terminated at any time by the employee and automatically ends on termination of employment. A total of 350,000 shares of common stock have been reserved for issuance. As of December 31, 2019 there were 39,023 shares available for future issuance under the ESPP Plan. We issued 13,699, and 13,667 common shares under the ESPP Plan in 2019, and 2018, respectively. Share Purchases - On April 24, 2018, we announced that our Board of Directors had approved a program authorizing the Company to purchase up to $10 million of our common stock. The shares may be purchased from time to time in the open market or through privately negotiated transactions at management’s discretion, depending upon market conditions and other factors. Shares are retired upon repurchase. The authorization to repurchase our stock expires on December 31, 2019. We repurchased 234,494 shares of common stock under this program for a total cost of $0.8 million during the year ended December 31, 2019. Since the program commenced in April 2018 and concluded in December 2019, we have repurchased 336,699 shares for a total cost of $1.2 million. Dividends – We did not pay dividends in the years ended December 31, 2019 and 2018.

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