NOTE 9 – SHAREHOLDERS’ EQUITY

Preferred Stock

The Company’s non-voting Series B Preferred Stock has a preference in liquidation of $1.00 per share less any dividends previously paid. Additionally, the Series B Preferred Stock is redeemable at the discretion of the Company for $1.00 per share less any dividends previously paid. In the event the proceeds from the sale or disposition of Export Water rights exceed $36.0 million the Series B Preferred Shareholders will receive the next $0.4 million of proceeds in the form of a dividend. The terms of the Series B Preferred Stock prohibit payment of dividends on common stock unless all dividends accrued on the Series B Preferred Stock have been paid. To date, no dividends have been accrued as this contingency has not been met.

Equity Compensation Plan

The Company maintains the 2014 Equity Incentive Plan (2014 Equity Plan), which was approved by shareholders in January 2014 and became effective April 12, 2014. Executives, eligible employees, consultants, and non-employee directors are eligible to receive options and stock grants pursuant to the 2014 Equity Plan. Options to purchase shares of stock and restricted stock awards can be granted with exercise prices, vesting conditions and other performance criteria determined by the Compensation Committee of the Company’s board of directors. The Company has reserved 1.6 million shares of common stock for issuance under the 2014 Equity Plan. As of August 31, 2022, stock awards and awards to purchase 755,500 shares of the Company’s common stock have been made under the 2014 Equity Plan, of which 712,500 remain outstanding. As of August 31, 2022, there were 912,953 shares available for grant under the 2014 Equity Plan. Prior to the effective date of the 2014 Equity Plan, the Company granted stock awards to eligible participants under its 2004 Incentive Plan (2004 Incentive Plan), which expired April 11, 2014. No additional awards may be granted pursuant to the 2004 Incentive Plan; however, 106,500 granted awards are outstanding as of August 31, 2022, which may be exercised in accordance with the terms of the 2004 Incentive Plan.

The Company estimates the fair value of share-based payment awards on the date of grant using the Black-Scholes option-pricing model (Black-Scholes model). Using the Black-Scholes model, the value of the portion of the award that is ultimately expected to vest is recognized as a period expense over the requisite service period in the consolidated statements of operations and comprehensive income. Option forfeitures are to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company does not expect any forfeiture of its options; therefore, the compensation expense has not been reduced for estimated forfeitures. For the years ended August 31, 2022 and 2021, 3,333 options and zero options expired. The Company attributes the value of share-based compensation to expense using the straight-line single option method for all options granted.

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The Company’s determination of the estimated fair value of share-based payment awards on the date of grant is affected by the following variables and assumptions:

For the year ended August 31, 2022, the Company granted 105,000 stock options to executive officers with weighted-average grant-date fair values of $5.16, and three-year vesting terms which expire ten years from the grant date. In addition, the six non-employee Board members were each granted 2,000 unrestricted stock grants. The fair market value of the unrestricted shares for share-based compensation expensing is equal to the closing price of the Company’s common stock on the date of grant of $13.23. Stock-based compensation expense includes $0.2 million of expense related to these unrestricted stock grants. The unrestricted stock grants were fully expensed at the date of the grant because no vesting requirements existed for the unrestricted stock grants.

For the year ended August 31, 2021, the Company granted 85,000 stock options to employees with weighted-average grant-date fair values of $3.93, and five-year vesting terms which expire ten years from the grant date. In addition, the Company granted 30,000 stock options to an executive officer with a weighted-average grant-date fair value of $3.37, a three-year vesting term and an expiration date of ten years from the grant date. Further, the six non-employee Board members were each granted 2,000 unrestricted stock grants. The fair market value of the unrestricted shares for share-based compensation expensing is equal to the closing price of the Company’s common stock on the date of grant of $11.33. Stock-based compensation expense includes $0.1 million of expense related to these unrestricted stock grants. The unrestricted stock grants were fully expensed at the date of the grant because no vesting requirements existed for the unrestricted stock grants.

The assumptions used in the fair value calculations using the Black-Scholes model are as follows:

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During the years ended August 31, 2022 and 2021, 103,667 and 48,535 options were exercised. For the options exercised in 2022, the Company had options exercised for both cash and options exercised using a net settlement, whereby the optionee did not pay cash for the options but instead received the number of shares equal to the difference between the exercise price and the market price on the date of exercise. The Company received less than $0.1 million in cash on the exercise of 6,000 options. The net settlement exercises during the year ended August 31, 2022, resulted in 46,012 shares issued and 51,655 options cancelled in settlement of shares issued. For the options exercised in 2021, the Company had no options exercised for cash and only net settlement exercises of stock options. Net settlement exercises during the year ended August 31, 2021, resulted in 24,035 shares issued and 13,465 options cancelled in settlement of shares issued.

The following table summarizes the combined stock option activity for the 2004 Incentive Plan and 2014 Equity Plan for the year ended August 31, 2022:

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The following table summarizes the activity and value of non-vested options as of and for the year ended August 31, 2022:

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All non-vested options are expected to vest. For the years ended August 31, 2022 and 2021, the total fair value of options that vested during the year was $0.4 million and $0.3 million. For the years ended August 31, 2022 and 2021, the weighted-average grant-date fair value of options granted was $5.16 and $3.78.

For the years ended August 31, 2022 and 2021, share-based compensation expense was $0.6 million and $0.5 million.

As of August 31, 2022, the Company had unrecognized share-based compensation expenses totaling $0.6 million relating to non-vested options that are expected to vest. The weighted average period over which these options are expected to vest is two years. The Company has not recorded any excess tax benefits to additional paid-in capital.

Warrants

As of August 31, 2022, the Company had outstanding warrants to purchase 92 shares of common stock at an exercise price of $1.80 per share. These warrants expire six months from the earlier of:

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No warrants were exercised during fiscal 2022 and 2021.