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Note 7 - Stock-based Compensation and Equity Transactions

9 Months Ended

Jul. 31, 2021

Share-based Payment Arrangement [Text Block]

Note 7 – Stock-based compensation and equity transactions

On December 6, 2019, one employee was granted 50,000 incentive stock options. These options vested 10,000 on the date of grant, and the balance vests as to 10,000 shares per year thereafter on each of the next four anniversaries of December 6, 2019, and expire ten years from the date of grant.

On January 9, 2020, we granted the following equity awards to our managers and officers:

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Stock grants for a total of 12,075 common shares to three employees. We accounted for these shares as stock-based compensation totaling $77,000;

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A total of 3,241 incentive stock options to two employees, all of which vested immediately on the date of grant; and

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A total of 38,500 shares of restricted stock and 77,000 incentive stock options to five employees. The shares of restricted stock and incentive stock options vest over four years as follows: (i) one-quarter of the restricted shares and options vested on January 9, 2021; and (ii) the remaining restricted shares and options shall vest in twelve equal quarterly installments over the next three years. All incentive stock options expire ten years from the date of grant.

On June 30, 2020, one employee was granted 10,000 incentive stock options. These options vested 2,500 on the date of grant, and the balance vests as to 2,500 shares per year thereafter on each of the next three anniversaries of June 30, 2020, and expire ten years from the date of grant.

On January 12, 2021, we granted a total of 33,500 shares of restricted stock and 67,000 incentive stock options to one manager and three officers. The shares of restricted stock and incentive stock options vest over four years as follows: (i) one-quarter of the restricted shares and options shall vest on January 12, 2022; and (ii) the remaining restricted shares and options shall vest in twelve equal quarterly installments over the next three years. All incentive stock options expire ten years from the date of grant.

On July 16, 2021, our Chief Executive Officer was granted incentive stock options to purchase 50,000 shares. These options immediately vested on the date of grant, and expire ten years from the date of grant.

No other shares or options were granted to Company employees during the three and nine months ended July 31, 2021 and 2020.

The weighted average fair value of employee stock options that were granted during the nine months ended July 31, 2021 and 2020 was estimated to be $3.38 and $3.06, respectively, per share, using the Black-Scholes option pricing model with the following assumptions:

	Nine Months Ended July 31,
	2021			2020
Risk-free interest rate		0.58	%		1.58	%
Dividend yield		0.00	%		0.63	%
Expected life of the option (in years)		7.00			7.01
Volatility factor		52.34	%		52.68	%

Expected volatilities are based on historical volatility of our stock price and other factors. We used the historical method to calculate the expected life of the 2021 and 2020 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.

Company stock option plans

Descriptions of our stock option plans are included in Note 9 of our Annual Report on Form 10-K for the year ended October 31, 2020. A summary of the status of the options granted under our stock option plans as of July 31, 2021 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, 2020		789,179		$	4.66
Options granted		117,000		$	6.57
Options exercised		(180,528	)	$	3.15
Options cancelled		(91,793	)	$	5.88
Options outstanding at July 31, 2021		633,858		$	5.26
Options exercisable at July 31, 2021		323,568		$	5.78
Options vested and expected to vest at July 31, 2021		633,522		$	5.27

Weighted average remaining contractual life of options outstanding as of July 31, 2021: 6.48 years

Weighted average remaining contractual life of options exercisable as of July 31, 2021: 5.59 years

Weighted average remaining contractual life of options vested and expected to vest as of July 31, 2021: 6.48 years

Aggregate intrinsic value of options outstanding at July 31, 2021: $2,729,000

Aggregate intrinsic value of options exercisable at July 31, 2021: $1,221,000

Aggregate intrinsic value of options vested and expected to vest at July 31, 2021: $2,713,000

As of July 31, 2021, $587,000 and $311,000 of expenses with respect to nonvested stock options and restricted shares, respectively, has yet to be recognized but is expected to be recognized over a weighted average period of 2.86 and 1.37 years, respectively.

Non-employee directors receive a compensation package of $50,000 annually, which is paid one-half in cash and one-half through the grant of non-qualified awards. For fiscal 2020, compensation payable to non-employee directors was prorated from November 1, 2019 through August 31, 2020. On November 4, 2019, we granted each of our five non-employee directors 3,270 shares of restricted stock. The number of restricted shares granted to each director was determined by prorating $25,000 for the ten months ended August 31, 2020 and dividing by the 20-day average closing stock price ($6.36). These restricted shares vested ratably through August 31, 2020. As compensation for services to be provided until the 2021 annual meeting of stockholders in September 2021, we granted each of our five non-employee directors 5,757 shares of restricted stock, which number was determined by dividing $25,000 by the 20-day average closing stock price ($4.34). On December 31, 2020, a new director joined the Board of Directors. We granted the new director 3,334 shares of restricted stock as payment for the year ending with the 2021 annual meeting. The number of restricted stock was determined by prorating $25,000 for the 8.5 months of service upon joining the Board of Directors through the 2021 annual meeting and dividing by the 20-day average closing stock price ($5.31).

Non-employee directors who are also a chairperson of a committee of the Board receive additional compensation of $15,000 annually. On June 5, 2020, the Board of Directors revised the committee chair compensation so that all future compensation from July 1, 2020 through the next annual meeting of the stockholders will be payable in shares of common stock rather than cash. Shares issued as compensation will be valued at the closing common stock price on the last day of each quarter. Accordingly, on July 31, 2020, each of the four committee chairpersons was awarded 279 shares at $4.47 per share. We account for these shares as stock-based compensation. On September 15, 2020, each of the four committee chairpersons was awarded 3,454 shares of restricted stock as payment for the $15,000 retainer payable to Chairpersons for the year ending with the 2021 annual meeting of stockholders. The number of restricted shares granted to each chairperson was determined by dividing $15,000 by the 20-day average closing stock price ($4.34).

One director was appointed as a chairperson of a new committee effective March 4, 2021, and was also appointed as the chairperson of another committee effective June 15, 2021. Since directors who service as chairpersons of any of the Board’s committees receive additional compensation, which compensation is payable in shares of restricted stock, for the appointment effective March 4, 2021, the director received 1,344 shares of restricted stock. The number of shares of restricted stock was determined by prorating $15,000 for the 6.5 months of service upon being appointed chairperson and dividing by the 20-day average closing stock price ($6.04). For the appointment effective June 15, 2021, the director received 496 shares of restricted stock. The number of restricted stock was determined by prorating $15,000 for the three months of service upon being appointed chairperson and dividing by the 20-day average closing stock price ($7.56).

Stock option expense

During the three months ended July 31, 2021 and 2020, stock-based compensation expense totaled $374,000 and $166,000, respectively, and was classified in selling and general expenses. During the nine months ended July 31, 2021 and 2020, stock-based compensation expense totaled $634,000 and $449,000, respectively, and was classified in selling and general expenses.