Note 8 - Stock-based compensation and equity transactions

The Company’s current stock incentive plan provides for the granting of qualified and nonqualified options to the Company’s officers, directors and employees. Incentive stock options granted to the Company’s employees during the six months ended April 30, 2015 vest and are exercisable equally over three years and expire in five years from date of grant. During the three and six months ended April 30, 2015, the Company granted a total of zero and 127,558 incentive stock options, respectively, to Company employees. The Company satisfies the exercise of options by issuing previously unissued common shares. No options were granted to Company employees during the three and six months ended April 30, 2016.

The weighted average fair value of employee and non-employee directors’ stock options granted by the Company during the six months ended April 30, 2016 and 2015 was estimated to be $0.63 and $1.00 per share, respectively, using the Black-Scholes option pricing model with the following assumptions:

	2016			2015
Risk-free interest rate		0.56	%		0.89	%
Dividend yield		2.23	%		6.38	%
Expected life of the option		2.1 years			3.5 years
Volatility factor		25.3	%		47.3	%

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 six months ended April 30, 2015, the Company issued 252,381 shares of common stock valued at approximately $1,060,000 to the former owner of Comnet as part of the purchase price of the Comnet acquisition. The Comnet acquisition is 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, 2015. A summary of the status of the options granted under the Company’s stock option plans as of April 30, 2016 and the changes in options outstanding during the six months then ended is presented in the table that follows:

			Weighted
			Average
	Shares		Exercise Price
Outstanding at November 1, 2015		1,240,100	$	3.64
Options granted		84,936	$	3.58
Options exercised		(180,067)	$	0.27
Options canceled or expired		(37,320)	$	4.29
Options outstanding at April 30, 2016		1,107,649	$	4.17
Options exercisable at April 30, 2016		620,469	$	3.89
Options vested and expected to vest at April 30, 2016		1,101,580	$	4.16

Weighted average remaining contractual life of options outstanding as of April 30, 2016: 5.09 years

Weighted average remaining contractual life of options exercisable as of April 30, 2016: 3.4 years

Weighted average remaining contractual life of options vested and expected to vest as of April 30, 2016: 5.09 years

Aggregate intrinsic value of options outstanding at April 30, 2016: $0.2 million

Aggregate intrinsic value of options exercisable at April 30, 2016: $0.2 million

Aggregate intrinsic value of options vested and expected to vest at April 30, 2016: $0.2 million

As of April 30, 2016, $602,000 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 5.2 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, 2016, the Company granted each of its then three non-employee directors 51,192 options. 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 ($0.87 per share). These options vest ratably over fiscal year 2016.

On April 6, 2016, Howard Hill, the Company’s Chief Operating Officer, retired from the Company. On becoming non-employee member of the Board on April 7, 2016, Mr. Hill was granted 33,744 options, representing the director compensation payable to him for his services for the remainder of the current year. The number of stock options granted was determined by dividing his pro-rata portion of his stock-based compensation for serving on the Board of $8,750 by the fair value of a stock option grant using the Black-Scholes model ($0.26). These options vest ratably over fiscal 2016.

Stock option expense

During the six months ended April 30, 2016 and 2015, stock-based compensation expense totaled $102,000 and $101,000, respectively. During the three months ended April 30, 2016 and 2015, stock-based compensation expense totaled $51,000 and $51,000, respectively. For the six months ended April 30, 2016 and 2015, stock-based compensation classified in cost of sales amounted to $17,000 and $29,000, respectively, and stock-based compensation classified in selling and general expense amounted to $85,000 and $72,000, respectively.