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Note 4 - Stock-Based Compensation Plan

12 Months Ended

Dec. 31, 2019

NOTE 4 — Stock-Based Compensation Plan

Stock-Based Compensation Program

The Company has one share-based compensation plan in effect in the two years presented: the 2004 Equity Incentive Plan (the “2004 Plan”). The 2004 Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock, stock appreciation rights, and performance awards to employees, directors, and consultants of the Company. Upon ratification of the 2004 Plan by the shareholders in June 2004, shares in the 1995 Plan that had been reserved but not issued, as well as any shares issued that would otherwise return to the 1995 Plan as a result of termination of options or repurchase of shares, were added to the shares reserved for issuance under the 2004 Plan. The Company grants incentive stock options and restricted stock at an exercise price per share equal to the fair market value per share of common stock on the date of grant. The vesting and exercise provisions are determined by the Board of Directors, with a maximum term of ten years. The 2004 Plan expires on April 23, 2024.

Stock-Based Compensation Information

The stock-based compensation expense included in the Company’s statements of income for the years ended December 31, 2019 and 2018, consisted of the following:

	Years Ended December 31,
Income Statement Classification	2019		2018
Cost of revenues	$	94,803	$	81,141
Research and development		151,121		128,552
Sales and marketing		121,633		126,312
General and administrative		152,334		151,801
	$	519,891	$	487,806

As of December 31, 2019, the remaining unamortized stock-based compensation expense was $967,893 and is expected to be amortized over a weighted average period of 2.67 years.

Stock Options – Stock option awards have an exercise price equal to the closing price on the date of grant, expire in ten years from the date of grant and vest over a four-year period at 25% per year. The Company calculates the value of each stock option grant, estimated on the date of grant, using binomial lattice option pricing model. The weighted-average estimated fair value of stock options granted during 2019 and 2018 was $1.08 and $1.62, respectively, using the following weighted-average assumptions:

	Years Ended December 31,
	2019			2018
Risk-free interest rate (%)		1.614	%		2.96	%
Dividend yield		—			—
Volatility factor		42.58	%		56.02	%
Expected option life (years)		7.2			6.4

The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant; the dividend yield is calculated as the ratio of dividends paid per share of common stock to the stock price on the date of grant; the expected life is based on historical and expected exercise behavior; and volatility is based on the historical volatility of the Company’s stock price over the expected life of the option.

The table below presents the information related to stock option activity for the years ended December 31, 2019 and 2018:

	Years Ended December 31,
	2019		2018
Total intrinsic value of stock options exercised	$	16,568	$	197,130
Cash received from stock option exercises	$	23,314	$	279,176

Changes in stock options as of and for the years ended December 31, 2019 and 2018 are as follows:

			Outstanding Options
	Shares Available For Grant		Number of Shares			Weighted Average Price Per Share	Remaining Contractual Term (in years)		Intrinsic Value
Balance at December 31, 2017	85,337		2,247,026		$	2.50
Increase in shares authorized	280,445		—
Granted	(281,300	)	281,300		$	2.86
Exercised	—		(121,981	)	$	2.29
Canceled	32,221		(32,221	)	$	3.61
Balance at December 31, 2018	116,703		2,374,124		$	2.54
Increase in shares authorized	235,324		—
Granted	(551,256	)	551,256		$	2.20
Exercised	—		(24,494	)	$	0.95
Canceled	508,100		(508,100	)	$	2.92
Balance at December 31, 2019	308,871		2,392,786		$	2.40	5.58	$	193,170
Exercisable			1,714,299		$	2.34	4.17	$	193,170
Unvested			683,589		$	2.50	9.08		—

The 2004 Plan provides for an annual increase in the number of shares authorized under the plan to be added on the first day of each fiscal year equal to the least amount of 400,000 shares, 4% of the outstanding shares on that date, or an amount as determined by the Board of Directors. On January 1, 2019 and 2018, a total of 235,324 and 280,445 additional shares, respectively, became available for grant from the 2004 Plan.

The following table summarizes information about stock options outstanding and exercisable at December 31, 2019:

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number of Options Outstanding	Weighted Average Remaining Life (Years)		Weighted Average Exercise Price	Number of Options Exercisable		Weighted Average Exercise Price
$0.95 - $1.25	340,380	3.58	$	1.05	340,380	$	1.05
$1.50 - $1.82	141,855	2.08	$	1.73	141,855	$	1.73
$1.89 - $2.27	513,647	6.08	$	2.07	369,493	$	2.07
$2.32 - $2.49	474,860	6.00	$	2.34	135,317	$	2.34
$2.50 - $2.75	318,182	6.17	$	2.69	300,210	$	2.69
$2.82 - $2.93	219,374	8.17	$	2.93	107,459	$	2.93
$3.04 - $3.88	200,880	3.67	$	3.37	194,901	$	3.37
$4.22 - $4.49	183,608	7.42	$	4.24	124,684	$	4.24
$0.95 - $4.49	2,392,786	5.58	$	2.40	1,714,299	$	2.40

Restricted stock - The restricted stocks are issued to employees and consultants and are held in escrow by the Company until the shares vest on the schedule of 15% after year one, 20% after year two, 25% after year three and 40% after year four, subject to the employees and consultants being a continuing service provider on the vesting dates. If the service or employment is terminated, unvested shares revert to the Company. Shares are registered at grant, so share owners may vote at the annual stockholder meeting. Restricted stocks are granted at zero cost basis. Compensation cost of the restricted stocks is recognized on a straight-line basis over the 4-year vesting period.

The following table summarizes information about restricted stocks as of and for the years ended December 31, 2019:

	Number of restricted stock			Weighted average grant- date fair value
Granted		127,871		$	1.94
Vested		—			—
Forfeited / Cancelled		(17,800	)	$	1.90
Restricted stock outstanding at December 31, 2019		110,071		$	1.94