Note 7 - 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. On July 17, 2017, the Company granted 100,000 incentive stock options to its newly hired President and Chief Executive Officer. These options, which expire in ten years from the date of grant, vested as to 10,000 shares on the date of grant and thereafter as to 10,000 shares per annum over the remaining nine years of the grant. These were the only options granted to employees during the three and nine months ended July 31, 2017. During the three and nine months ended July 31, 2016, the Company granted 20,000 incentive stock options to an employee. These options are exercisable equally over three years and expire in five years from date of grant.

The weighted average fair value of employee and non-employee directors’ stock options granted by the Company during the nine months ended July 31, 2017 and 2016 was estimated to be $1.60 and $3.36, respectively, per share, using the Black-Scholes option pricing model with the following assumptions:

	2017			2016
Risk-free interest rate		1.20	%		0.70	%
Dividend yield		5.00	%		2.38	%
Expected life of the option		4.31 years			3.0 years
Volatility factor		43.3	%		28.7	%

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 2017 and 2016 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.

The Company satisfies the exercise of options by issuing previously unissued common shares.

Company stock option plans

Descriptions of the Company’s stock option plans are included in Note 10 of the Company’s Annual Report on Form 10-K for the year ended October 31, 2016. A summary of the status of the options granted under the Company’s stock option plans as of July 31, 2017 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, 2016		1,007,851	$	4.07
Options granted		434,068	$	1.60
Options exercised		(16,763)	$	1.50
Options canceled or expired		(170,653)	$	3.84
Options outstanding at July 31, 2017		1,254,503	$	3.28
Options exercisable at July 31, 2017		900,419	$	3.33
Options vested and expected to vest at July 31, 2017		1,253,107	$	3.28

Weighted average remaining contractual life of options outstanding as of July 31, 2017: 4.32 years

Weighted average remaining contractual life of options exercisable as of July 31, 2017: 3.31 years

Weighted average remaining contractual life of options vested and expected to vest as of July 31, 2017: 4.32 years

Aggregate intrinsic value of options outstanding at July 31, 2017: $224,000

Aggregate intrinsic value of options exercisable at July 31, 2017: $194,000

Aggregate intrinsic value of options vested and expected to vest at July 31, 2017: $224,000

As of July 31, 2017, $319,000 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 5.11 years.

Effective for the fiscal year ending October 31, 2017, non-employee directors receive $50,000 annually, which 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. Previously, for the fiscal year ended October 31, 2016, non-employee directors received $30,000 annually. During the quarter ended January 31, 2017, the Company granted each of its four non-employee directors 77,339 options. The number of stock options granted to each director was determined by dividing $25,000 by the fair value of a stock option grant using the Black-Scholes model ($0.32 per share). These options vest ratably over fiscal year 2017. On June 9, 2017, the Company’s Board of Directors appointed Gerald Garland to serve as a director. Mr. Garland received a prorated portion of the compensation paid by the Company. The number of stock options granted to Mr. Garland was determined by dividing $9,863 (the portion of his director fee for the year ending October 31, 2017) by the fair value of a stock option grant using the Black-Scholes model ($0.40 per share). These options vest ratably over the remaining portion of fiscal year 2017.

Stock option expense

During the nine months ended July 31, 2017 and 2016, stock-based compensation expense totaled $161,000 and $156,000, respectively. During the three months ended July 31, 2017 and 2016, stock-based compensation expense totaled $62,000 and $54,000, respectively. For the nine months ended July 31, 2017 and 2016, stock-based compensation classified in cost of sales amounted to $9,000 and $26,000, respectively, and stock-based compensation classified in selling and general expense amounted to $152,000 and $130,000, respectively.