Note 6 - Stock-based compensation and equity transactions

The Company’s current equity incentive plan provides for the granting of qualified and nonqualified options to the Company’s officers, directors and employees. Incentive stock options totaling zero and 127,558 were granted to the Company’s employees during the three and nine months ended July 31, 2015, respectively, vest and are exercisable equally over three years and expire in five years from date of grant. During the three and nine months ended July 31, 2015, the Company also granted a total of 200,000 incentive stock options to Company employees of which 10,000 options vest immediately upon grant and the remaining are exercisable equally over nine years and expire in ten years from date of grant. The Company satisfies the exercise of options by issuing previously unissued common shares.

The weighted average fair value of employee and non-employee directors’ stock options granted by the Company during the nine months ended July 31, 2015 and 2014 was estimated to be $1.08 and $1.99 per share, respectively, using the Black-Scholes option pricing model with the following assumptions:

	2015			2014
Risk-free interest rate		1.15	%		1.11	%
Dividend yield		6.68	%		4.38	%
Expected life of the option		5.3 years			5.0 years
Volatility factor		52.3	%		52.9	%

Expected volatilities are based on historical volatility of the Company’s stock price and other factors. The Company used the historical method to calculate the expected life of the 2015 option grants. The expected life represents the period of time that options granted are expected to be outstanding. The risk-free rate is based on the U.S. Treasury rate with a maturity date corresponding to the options’ expected life. The dividend yield is based upon the historical dividend yield.

Issuances of common stock by the Company

During the nine months ended July 31, 2015, the Company issued 252,381 shares of common stock valued at $1,060,000 to the former owner of Comnet as part of the purchase price of the Comnet acquisition. In addition, the Company issued 50,467 shares of common stock valued at $200,000 to the former owners of Rel-Tech as part of the purchase price of the Rel-Tech acquisition. The Comnet and Rel-Tech acquisitions are more fully described in Note 2 of this report.

Company stock option plans

Descriptions of the Company’s stock option plans are included in Note 8 of the Company’s Annual Report on Form 10-K for the year ended October 31, 2014. A summary of the status of the options granted under the Company’s stock option plans as of July 31, 2015 and the changes in options outstanding during the nine months then ended is presented in the table that follows:

			Weighted
			Average
	Shares		Exercise Price
Outstanding at November 1, 2014		1,044,932	$	3.26
Options granted		381,039	$	4.19
Options exercised		(12,004)	$	2.95
Options canceled or expired		(8,788)	$	4.49
Options outstanding at July 31, 2015		1,405,179	$	3.51
Options exercisable at July 31, 2015		800,319	$	2.56
Options vested and expected to vest at July 31, 2015		1,390,719	$	3.50

Weighted average remaining contractual life of options outstanding as of July 31, 2015: 5.2 years

Weighted average remaining contractual life of options exercisable as of July 31, 2015: 3.9 years

Weighted average remaining contractual life of options vested and expected to vest as of July 31, 2015: 5.2 years

Aggregate intrinsic value of options outstanding at July 31, 2015: $1.6 million

Aggregate intrinsic value of options exercisable at July 31, 2015: $1.6 million

Aggregate intrinsic value of options vested and expected to vest at July 31, 2015: $1.6 million

As of July 31, 2015, $737,000 of expense with respect to nonvested share-based arrangements has yet to be recognized and is expected to be recognized over a weighted average period of 6.0 years.

Non-employee directors receive $30,000 annually, which amount is paid one-half in cash and one-half through the grant of non-qualified stock options to purchase shares of the Company’s common stock. During the quarter ended January 31, 2015, the Company granted each of its three non-employee directors options to purchase 14,916 shares. The number of stock options granted to each director was determined by dividing $15,000 by the fair value of a stock option grant using the Black-Scholes model ($1.01 per share). These options vest ratably over fiscal year 2015.

On April 6, 2015, Howard Hill, the Company’s Chief Operating Officer, took an indefinite medical leave of absence. During the quarter ended April 30, 2015, the Company granted Mr. Hill options to purchase 8,733 shares, representing the pro-rata annual number of options granted to non-executive directors who serve on the Board. The number of stock options granted was determined by dividing $7,500 by the fair value of a stock option grant using the Black-Scholes model ($0.86 per share). These options vest ratably from May 1, 2015 over the remaining fiscal year 2015.

Stock option expense

During the nine months ended July 31, 2015 and 2014, stock-based compensation expense totaled $184,000 and $323,000, respectively. During the three months ended July 31, 2015 and 2014, stock-based compensation expense totaled $83,000 and $52,000, respectively. For the nine months ended July 31, 2015 and 2014, stock-based compensation classified in cost of sales amounted to $45,000 and $48,000, respectively, and stock-based compensation classified in selling and general expense amounted to $139,000 and $275,000, respectively.