AETI American Electric Technologies Inc

PROPOSAL NO. 5

TO APPROVE THE ISSUANCE OF ALL SHARES OF COMMON STOCK UPON CONVERSION OF AND PAYMENT OF DIVIDENDS ON OUR SERIES A CONVERTIBLE PREFERRED STOCK AND EXERCISE OF OUR SERIES A AND SERIES B COMMON STOCK PURCHASE WARRANTS

Introduction

On May 2, 2012 the Company sold to JCH Crenshaw Holdings, LLC (the “Investor”), in a private placement, $5,000,000 of Series A Convertible Preferred Stock (the “Series A Preferred Stock”), initially convertible into 1,000,000 shares of common stock at a conversion price of $5.00 per share, and Common Stock Purchase Warrants (the “Warrants”), exercisable until May 2, 2020, for 125,000 shares of common stock at an exercise price of $6.00 per share (the “Series A Purchase Warrants”) and 200,000 shares of common stock at an exercise price of $7.00 per share (the “Series B Purchase Warrants”). The Series A Preferred Stock and Common Stock Purchase Warrants were sold to the Investor pursuant to a securities purchase agreement (the “Securities Purchase Agreement”) dated April 13, 2012.

Pursuant to the terms of the Securities Purchase Agreement, Casey Crenshaw, the beneficial owner of the Investor, became a member of the Company’s Board of Directors on May 2, 2012 as the Preferred Director, and continues to serve as a director of the Company.

As previously disclosed in the Company’s Current Report on Form 8-K filed March 27, 2017, the Company and the Investor entered into an agreement restricting payment of cash dividends on and redemption of the Series A Preferred Stock to facilitate the sale of the Company’s senior secured Term Note in March 2017 (the “Standstill Agreement”). In consideration for the Investor’s agreement to the foregoing restrictions on cash dividends on and redemption of the Series A Preferred Stock the Company and the Investor agreed, pursuant to an agreement dated August 1, 2017 (the “Repricing Agreement”), to an adjustment to the initial conversion price of the Common Stock upon conversion of the Series A Preferred Stock and the initial exercise price of the Series A and B Purchase Warrants to reflect the current market value of the Company’s common stock.

Pursuant to the Repricing Agreement, the 1,000,000 outstanding shares of Series A Preferred Stock is convertible into 2,212,389 shares of common stock at an initial conversion price of $2.26 per share. If the Investor were to convert the shares of Series A Preferred Stock into our common stock, it would receive an amount of shares which is 25.3% of our outstanding common stock as of March 15, 2018. The Series A Purchase Warrants are exercisable for 125,000 shares of common stock at an initial exercise price of $2.72 per share and the Series B Purchase Warrants are exercisable for 200,000 shares of common stock at an initial exercise price of $3.17 per share. If the Investor were to purchase the 325,000 shares pursuant to the Warrants it would receive an amount of shares which is 3.7% of our outstanding shares as of March 15, 2018 and the Company would receive the purchase price of $974,000; however the Warrants have a cashless exercise provision. Until Proposal 5 is approved, the Series A Preferred Stock and the Warrants cannot be converted or exercised into more than 19.99% of our total outstanding common stock and shall not be entitled to more than 19.99% of the total voting power of all our equity securities prior to such issuance or conversion.

Why the Company Needs Stockholder Approval

The Company’s common stock is listed on the NASDAQ Stock Market and we must comply with certain rules of The NASDAQ Stock Market (the “NASDAQ Stock Market Rules”) in order to retain the NASDAQ listing of our common stock. The Company is required to seek stockholder approval for the common stock issuances described in Proposal 5 in order to ensure compliance with Rule 5635 of the NASDAQ Rules and the limitations set forth therein (“NASDAQ Rule 5635”).

NASDAQ Stock Market Rule 5635(d) requires stockholder approval prior to the issuance of securities in connection with a transaction, other than a public offering, which may result in the issuance or potential issuance

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of common stock (or securities convertible into or exercisable for common stock) equal to 20% or more of the common stock or 20% or more of the voting power outstanding prior to the issuance for less than the greater of book or market value. Because of the anti-dilution provisions of the Series A Preferred Stock and the Warrants, as well as our ability to pay dividends on the Series A Preferred Stock by issuance of our common stock, we cannot currently determine the total number of shares of our common stock or voting power that will be issued to the Investor pursuant to a conversion of the Series A Preferred Stock into common stock, exercise of the Warrants and payment of dividends on the Series A Preferred Stock by issuance of our common stock. Due to these uncertainties, the Series A Preferred Stock and the Warrants have the potential to provide for the issuance of securities equal to 20% or more of the Company’s common stock or 20% or more of its voting power for less than the greater of book or market value of the stock.

In addition, NASDAQ Rule 5635(b) requires stockholder approval prior to the issuance of securities when the issuance or potential issuance will result in a “change of control” of the issuer. Generally, NASDAQ interpretations provide that the acquisition of 20% of the shares of an issuer by one person or a group of affiliated persons may be deemed a change of control of such issuer. Conversion of the Series A Preferred Stock and exercise of the Warrants at the initial prices set forth in the Repricing Agreement would result in the issuance of more than 20% of our common stock to the Investor and would result in a change of control under the NASDAQ interpretations of Rule 5635(b).

At the Annual Meeting of Stockholders held June 14, 2012, our stockholders approved the issuance of all shares of common stock upon conversion of the Series A Preferred Stock and exercise of the Warrants issued under the Securities Purchase Agreement. Due to the reduction of the initial conversion price of the Series A Preferred Stock and initial exercise price of the Warrants pursuant to the Repricing Agreement the Company is seeking stockholder approval at the 2018 Annual Meeting to issue of all shares of common stock issuable upon conversion of the Series A Convertible Preferred Stock, exercise of the Common Stock Purchase Warrants and payment of dividends on the Series A Convertible Stock in shares of common stock.

Material Terms of the Series A Preferred Stock

Series A Preferred Stock Ranking

The Series A Preferred Stock ranks senior to the Company’s junior equity securities, including our common stock.

Dividends

The Series A Preferred Stock will accrue cumulative dividends at a rate of 6% per annum whether or not dividends have been declared by the Board of Directors and whether or not there are profits, surplus or other funds available for the payment of such dividends. Such dividends are in preference to all other classes of stock junior in rank to the Series A Preferred Stock, including our common stock. The Company may pay such dividends in shares of the Company’s common stock based on the then current market price of our common stock. The Standstill Agreement currently prohibits the Company from paying cash dividends on the Series A Preferred Stock.

Conversion

Pursuant to the Repricing Agreement, each share of Series A Preferred Stock is initially convertible, at the option of the holder, into one (1) share of common stock at a conversion price of $2.26 per share of common stock, so that the 1,000,000 shares Series A Preferred Stock held by the Investor is initially convertible into an aggregate of 2,212,389 shares of common stock.

Adjustment of Conversion Price

The conversion price of the Series A Preferred Stock is subject to adjustment for specified events, including stock splits, reclassifications and exchanges, issuance of stock dividends, mergers and certain sales of assets and

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certain issuances of common stock or other securities convertible into or exercisable for common stock at prices that are or are deemed to be below the conversion price at the time of such issuance. A decrease in the conversion price due to our issuance of common stock in the future at prices below the then applicable conversion price will result in the holders of the Series A Preferred Stock receiving more than the 2,212,389 shares of our common stock into which the shares are convertible pursuant to the Repricing Agreement.

Mandatory Conversion

The Company has the right to cause all of the outstanding Series A Preferred Stock to be converted into common stock at the then applicable conversion price if the closing price of our common stock has equaled or exceeded 150% of the conversion price then if effect for at least 90 consecutive stock market trading days. The Company must pay all accrued and unpaid dividends on the Series A Preferred Stock prior to exercising its right to cause the conversion of the Series A Preferred Stock.

Redemption Rights

Subject to the restrictions in the Standstill Agreement, the holders of a majority of the outstanding Series A Preferred Stock, may require the Company to redeem all of the then outstanding Series A Preferred Stock for an amount in cash equal to the lesser of (i) 100% of the aggregate Liquidation Preference of the Series A Preferred Stock, currently $5.00 per share, then outstanding or (ii) the fair market value of the Series A Preferred Stock as determined in good faith by the Board of Directors. The holders of a majority of the outstanding Series A Preferred Stock may also require the Company to redeem all of the then outstanding Series A Preferred Stock at any time following a material default by the Company of any of the representations, warranties or covenants of the Company in the Securities Purchase Agreement. The Standstill Agreement currently prohibits the Company from redeeming the Series A Preferred Stock.

Liquidation Preference

Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary (a “Liquidation”), the holders of the Series A Preferred Stock will be entitled to receive out of the assets of the Company, whether such assets are capital or surplus, for each share of Series A Preferred Stock to the Liquidation Value the Series A Preferred Stock plus any accrued and unpaid dividends thereon before any distribution or payment shall be made to the holders of any junior securities (including, without limitation, the common stock). Certain mergers or consolidations involving the Company or sales of all or substantially all of the capital stock or assets of the Company will be deemed to be a liquidation, dissolution or winding up of the Company unless the holders of a majority of the then outstanding Series A Preferred Stock elect not to treat such transactions as liquidation events.

Voting, Right to Appoint a Director and Approval Rights

The Series A Preferred Stock votes on an as converted basis with the Company’s common stock, subject to certain limitations. The holders of a majority of the outstanding Series A Preferred Stock have the right to appoint one individual to serve as a voting member of the Company’s Board of Directors (the “Preferred Director”). Casey Crenshaw has been the Preferred Director since May 2, 2012.

So long as the shares of Series A Preferred Stock on an as converted to Common Stock basis represent 5% or more of the Corporation’s outstanding capital stock, the Company shall not (by amendment, merger, consolidation or otherwise) without first obtaining the approval of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock:

(a) amend, alter, waive, repeal or modify any provision of its Articles of Incorporation or Bylaws of the Corporation so as to adversely affect or otherwise impair any of the rights, preferences, privileges, qualifications, limitations or restrictions of, or applicable to, the Series A Preferred Stock;

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(b) authorize or issue, or obligate itself to issue, any other equity security, including any security convertible into or exercisable for any equity security, having rights, preferences or privileges senior to or on a parity with the Series A Preferred Stock;

(c) alter or change any rights, preferences or privileges of the Series A Preferred Stock; or

(d) increase or decrease (other than by conversion) the total number of authorized shares of Series A Preferred Stock.

The holders of Series A Preferred Stock may not vote their shares of Series A Preferred Stock or shares acquired on exercise of the Warrants in connection with this Proposal No. 5.

Rights to Participate in Future Financings

At any time while the Series A Preferred Stock owned by the Investor represents on an as converted basis 5% or more of our common stock the Investor shall have a right to participate pro-rata with respect to the issuance by the Company of any future equity or equity-linked securities or debt which is convertible into or exercisable or exchangeable for equity or in which there is an equity component on the same terms and conditions as offered by the Company to the other purchasers of such securities. Such rights do not apply to any issuances made: (a) to employees, officers, directors, consultants and advisors of the Company pursuant to any incentive plan, stock purchase plan, agreement or other arrangement duly adopted by the Company and approved by the compensation committee of the Board; (b) upon exercise of the Warrants; (c) upon issuance or conversion of the Series A Preferred Stock; (c) in connection with a merger, acquisition, asset acquisition, lease, joint venture or similar acquisitive transaction approved by the Board; and (d) for services to financial institutions in connection with investment banking, commercial credit transactions, equipment financing or similar transactions approved by the Board.

Material Terms of the Warrants

Pursuant to the Repricing Agreement, the Warrants are exercisable for 125,000 shares of common stock at an exercise price of $2.72 per share and 200,000 shares at an exercise price of $3.17 per share. The exercise price of the Warrants is subject to adjustment for specified events, including stock splits, reclassifications and exchanges, issuance of stock dividends, mergers and certain sales of assets and certain issuances of common stock or other securities convertible into or exercisable for common stock at prices that are or are deemed to be below the exercise price at the time of such issuance. The holders of the Warrants have the option to exercise the warrants on a “net share” or cashless basis, in which warrant shares are forfeited in lieu of paying the cash exercise price, in which case the Company would receive no additional proceeds upon their exercise, but fewer shares would be issued. The Warrants are exercisable until May 2, 2020.

Certain Consequences if Proposal No. 5 is Approved

If Proposal No. 5 is approved, the Company may issue all shares of common stock upon conversion of the Series A Preferred Stock, exercise of the Warrants and payment of dividends in common stock, even if such shares represent 20% or more of the total number of shares of our common stock outstanding and our existing stockholders will incur dilution to their voting and economic interests and will own a smaller percentage of our outstanding common stock. Additionally, the Investor will be able to exercise as converted full voting power on the Series A Preferred Stock and shares issued on exercise of the Warrants and dividend payments even if this represents 20% or more of the total voting power.

Certain Consequences if Proposal No. 5 is Not Approved

If Proposal No. 5 is not approved, then the Series A Preferred Stock and the Warrants cannot be converted or exercised into more than 19.99% of our total outstanding common stock and shall not be entitled to more than

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19.99% of the total voting power of all our equity securities prior to such issuance or conversion. To the extent the Series A Preferred Stock could not be converted above 19.99%, the unconverted Series A Preferred Stock would remain outstanding and accruing dividends, and the Company could be prohibited from requiring conversion of such Series A Preferred Stock at a time when it is advantageous for the Company to do so.

Further Information

The terms of the Series A Preferred Stock, the Warrants, the Standstill Agreement and the Repricing Agreement are complex and only briefly summarized above. For further information on the Series A Preferred Stock, the Warrants and the rights of the Investor, please refer to the Company’s Current Report on Form 8-K filed with the SEC on April 19, 2012. For further information on the Standstill Agreement, please refer to the Company’s Current Report on Form 8-K filed with the SEC on March 27, 2017. For further information on the Repricing Agreement, please refer to the Company’s Current Report on Form 8-K filed with the SEC on August 3, 2017. Each of these Current Reports on Form 8-K may be viewed on our website, www.aeti.com, or the SEC’s website at www.sec.gov. We will furnish a copy of such Current Reports and exhibits without charge to any stockholder upon request made to William Brod, Corporate Secretary and Chief Financial Officer, American Electric Technologies, Inc., 1250 Wood Branch Park Drive, Suite 600, Houston, Texas 77079.

Vote Required

The affirmative vote of a majority of the shares of common stock present at the Special Meeting and voting on the proposal is required to approve Proposal 5. Abstentions and broker non-votes will have no effect since only shares voting on the transaction will be counted.

Recommendation of Special Conflicts Committee

A Special Conflicts Committee of the Company’s Board of Directors, comprised of three independent directors, has unanimously determined that the repricing of the initial conversion price of the Series A Preferred Stock and the initial exercise price of the Warrants is desirable and in the best interests of the Company.

Recommendation of the Board of Directors

THE COMPANY’S BOARD OF DIRECTORS HAS DETERMINED THAT PROPOSAL NO. 5 IS DESIRABLE AND IN THE BEST INTERESTS OF THE COMPANY AND RECOMMENDS APPROVAL OF PROPOSAL NO. 5. PROXIES WILL BE VOTED “FOR” PROPOSAL NO. 5 UNLESS OTHERWISE SPECIFIED.

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PROPOSAL NO. 6

TO APPROVE AMENDMENT OF THE 2007 EMPLOYEE STOCK INCENTIVE PLAN TO AUTHORIZE THE ISSUANCE OF AN ADDITIONAL 500,000 SHARES OF COMMON STOCK UNDER THE PLAN AND TO MAKE NON-EMPLOYEE DIRECTORS ELIGIBLE TO RECEIVE AWARDS UNDER THE PLAN.

General

The Board of Directors is seeking approval of amendments to the 2007 Employee Stock Incentive Plan (the “Plan”) to authorize the issuance of an additional 500,000 shares of common stock under the Plan and to make non-employee directors eligible to receive awards under the Plan. Currently, 1,700,000 shares of common stock are authorized for issuance under the Plan and awards under the Plan may be granted only to employees (including employees who may be directors who are also officers), independent contractors and consultants of the Company and its subsidiaries.

The Board of Directors believes that the Plan has proven to be an important long-term incentive that is critical to enable the Company to attract and retain qualified personnel and encourage participants to focus on the long-term growth of stockholder value as well as promoting a closer identity of interest between participants and stockholders of the Company. The Board of Directors believes that the Company would receive similar benefits if the Plan were to be extended to non-employee directors. For further information, see the “Executive Compensation” and “Director Compensation” discussion contained in this Proxy Statement.

As of March 29, 2018 there were outstanding awards issued under the Plan covering 605,000 shares of common stock and 562,018 shares were available for future awards under the Plan, including shares which have become available as a result of termination of prior awards under the Plan.

If the stockholders do not approve the amendment, the Plan will be limited to the current 1,700,000 shares authorized, the Company will not be able to make the additional 500,000 shares available for issuance under the Plan and our non-employee directors will continue to be ineligible to receive awards under the Plan.

The Plan, as originally approved by the stockholders on November 7, 2007, authorized the issuance of up to 300,000 shares. The stockholders approved an additional 500,000 for issuance under the Plan at the 2010 Annual Meeting, an additional 300,000 shares were approved for issuance under the Plan at the 2012 Annual Meeting and an additional 600,000 shares were approved for issuance at the 2014 Annual Meeting.

Description of the 2007 Employee Stock Incentive Plan

The following is a description of the material features of the 2007 Employee Stock Incentive Plan, as amended.

Eligibility

Awards under the Plan may be granted to employees (including employees who may be directors and officers), independent contractors and consultants of the Company and its subsidiaries. Upon approval of Proposal No. 5 at the Annual Meeting our non-employee directors would also be eligible to receive awards under the Plan. Approximately 75% of our employees are eligible to participate in the Plan.

Shares Subject to the Plan

The Plan currently authorizes the issuance of up to 1,700,000 shares of the Company’s common stock. Upon approval of Proposal No. 5 at the Annual Meeting an additional 500,000 shares would be authorized for issuance

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pursuant to awards under the Plan. In the event of certain changes in the Company’s common stock such as recapitalization, reclassification, stock split, combination or exchange of shares, stock dividends or the like, appropriate adjustment will be made in the number and kind of shares available for issuance under the Plan and the purchase price, if any, per share. The closing price of our common stock on the NASDAQ Stock Market on March 29, 2018 was $1.50 per share.

Administration

The Plan is administered by the Compensation Committee (the “Committee”) of the Board of Directors of the Company. The Committee has the full and exclusive power to construe, interpret and administer the Plan, including, but not limited to, the authority to designate which eligible participants are to be granted awards and to determine the type of award and the number of shares to be subject thereto and the terms and conditions thereof, consistent with the terms of the Plan. The Committee is also authorized to adopt, amend and revoke rules relating to the administration of the Plan.

Awards Under the Plan

The Plan provides that the Committee may grant or issue stock options, stock appreciation rights, restricted stock, restricted units, performance shares, performance units and stock-based awards pursuant to a written agreement and may contain such terms as the Committee determines. Subject to the provisions of the Plan, the Committee has the sole and complete authority to determine the eligible recipients of awards under the Plan. All awards shall be subject to such terms, conditions and restrictions determined by the Compensation Committee and included in the award agreement. Such terms, conditions and restrictions may include provisions related to vesting of awards, and the effect of a participant’s termination of employment and change of control of the Company on outstanding awards under the Plan. No participant may receive a grant covering more than 200,000 shares in any year.

Share Counting Rules

When the Committee grants an award under the Plan, the full number of shares subject to the award is charged against the number of shares that remain available for delivery pursuant to awards. After grant, the number of shares subject to any portion of an award that is canceled or that expires without having been settled in shares, or that is settled through the delivery of consideration other than shares, will be available for new awards. If shares are tendered or withheld to pay the exercise price of an award or to satisfy a tax withholding obligation, those tendered or withheld shares will be available for new awards.

Stock Options

Stock Options provide for the right to purchase shares of Company common stock at a specified price as determined by the Committee, provided that the exercise price per share of common stock option may not be less than 100% of the fair market value of a share as of the date the option is granted. Stock options granted under the Plan may be incentive stock options (“ISOs”) that are designed to comply with the provisions of Section 422 of the Internal Revenue Code (the “Code”) and will be subject to restrictions contained in the Code or nonqualified stock options (“NQSOs”). The maximum number of shares of Company common stock that may be issued upon the exercise of ISOs may not exceed the total number of shares available for grant under the Plan as set forth above under “Shares Subject to the Plan”. Stock options may be granted for a term specified by the Committee, provided that no option may be exercisable after ten years from the date of grant. The Committee may accelerate the exercisability of any option or portion thereof at any time. The Committee may provide in the option agreement that all or a part of the shares received by an optionee upon the exercise of a NQSO shall be restricted shares subject to any or all of the restrictions or conditions described below.

Exercise Price. The exercise price for each Option will be determined by the Committee, but will not be less than 100% of the fair market value of a share of common stock on the date of grant. If an ISO is granted to a ten

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percent stockholder of the Company (as defined in the Plan), the exercise price will be at least 110% of the fair market value of a share on the date of grant.

Exercise of Options. The Committee determines when Options become exercisable and in its discretion may accelerate the vesting of any outstanding Option or extend the term of a NQSO option set to expire prior to ten years from the date of issuance. The means of payment for shares issued upon exercise of an Option are specified in each option agreement. The Plan permits payment to be made by cash, check, wire transfer, other shares of Company common stock and Options issued under the Plan. All payment methods other than payment of cash, check and wire transfer will be subject to such restrictions as may be established by the Committee or applicable law or the rules of any applicable stock exchange. The participant must pay any required tax withholding in cash at the time of exercise or the Company may make other arrangements for the payment of such withholding tax obligations, including withholding compensation otherwise due the participant or utilizing Company Stock due under the award.

Limits on Exercisability . No Option will be exercisable after the expiration of ten years from the date an Option is granted (five years with respect to an ISO held by an Optionee who is a ten percent stockholder of the Company). Options will be exercisable at such times as determined by the Committee. Unless otherwise specified at the time of grant of the Option, an Option will become exercisable as to one-third of the shares in the first year after grant, an additional one-third on the first anniversary of the date of grant and fully exercisable on the second anniversary of the date of grant. An option granted under the Plan will generally expire on the first to occur of: (i) conviction of a felony against the Company (ii) three (3) months after the date of a termination of employment or retention for any reason other than death or (ii) six (6) months after death of the optionee; provided that the Committee may specify in the document governing the option that an Option may be exercisable during a longer period. ISOs held by a participant under the Plan and any other plans of the Company may not become exercisable for the first time during any calendar year in excess of $100,000.

Stock Appreciation Rights

A stock appreciation right may be granted by the Compensation Committee in its discretion. The grant price for each stock appreciation right shall be determined by the Compensation Committee and shall be specified in the Award agreement, but in no event shall the grant price be less than the fair market value of the shares of common stock of the company on the date the stock appreciation right is granted. The term of the stock appreciation right shall be determined by the Compensation Committee and specified in the Award agreement, which relates to the stock appreciation right. No stock appreciation right will be exercised after the tenth anniversary from the date of its grant. Stock appreciation rights may be exercised subject to the terms and conditions the Compensation Committee imposes. Upon the exercise of a Stock Appreciation Right the participant is entitled to receive Company common stock valued at the time of exercise in the amount of the difference between the grant price of the exercised stock appreciation right and the fair market value of the shares at the time the stock appreciation right is exercised.

Restricted Stock

Shares of common stock may be granted by the Compensation Committee to an eligible participant and made subject to restrictions on sale, pledge or other transfer by the participant for a certain period (the restricted period). All shares of restricted stock will be subject to such restrictions as the Compensation Committee may provide in an Award agreement with the participant, including provisions obligating the participant to forfeit or resell the shares to us in the event of termination of employment or service. Participant’s rights with respect to such shares shall be subject to the restrictions provided in the Award agreement and the Plan.

Restricted Stock Units

A restricted stock unit represents the right to receive from us, on the respective scheduled vesting or payment date for such restricted stock unit, one share of common stock. An award of restricted stock units may

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be subject to forfeiture provisions and such other terms and conditions as the Compensation Committee may determine, subject to the provisions of the Plan.

Performance Shares and Performance Units

Shares of common stock may be granted by the Compensation Committee to an eligible participant and made subject to the achievement of pre-established performance goals for a specified period following the grant which, depending on the extent to which such performance criteria are met in such performance period, will determine, in the manner set forth in the Award Agreement, the value and/or number of each Performance Share or Performance Unit that will be paid to the Participant. The pre-established performance goals will be based on any or a combination of the following business criteria applied to the Company as a whole, a Company division or a subsidiary: (i) the attainment of certain target levels of, or a specified percentage increase in, revenues, income before income taxes and extraordinary items, net income, earnings before income tax, earnings before interest, taxes, depreciation and amortization, or a combination of any or all of the foregoing; (ii) the attainment of certain target levels of, or a percentage increase in, after-tax or pre-tax profits including, without limitation, that attributable to continuing and/or other operations; (iii) the attainment of certain target levels of, or a specified increase in, operational cash flow; (iv) the achievement of a certain level of, reduction of, or other specified objectives with regard to limiting the level of increase in, all or a portion of, the Company’s bank debt or other long-term or short-term public or private debt or other similar financial obligations of the Company, which may be calculated net of such cash balances and/or other offsets and adjustments as may be established by the Committee; (v) the attainment of a specified percentage increase in earnings per share or earnings per share from continuing operations; (vi) the attainment of certain target levels of, or a specified increase in return on capital employed or return on invested capital; (vii) the attainment of certain target levels of, or a percentage increase in, after-tax or pre-tax return on stockholders’ equity; (viii) the attainment of certain target levels of, or a specified increase in, economic value added targets based on a cash flow return on investment formula; (ix) the attainment of certain target levels in the fair market value of the shares of the Company’s common stock; (x) the growth in the value of an investment in the Company’s common stock assuming the reinvestment of dividends; and (xi) reducing costs of the Company, as evidenced by meeting or reducing budgeted expenses established by the Company. For purposes of item (i) above, extraordinary items shall mean all items of gain, loss or expense for the fiscal year determined to be extraordinary or unusual in nature or infrequent in occurrence or related to a corporate transaction (including, without limitation, a disposition or acquisition) or related to a change in accounting principle.

Stock Awards

Each stock award under the Plan will contain provisions regarding (1) the number of shares subject to such stock award or a formula for determining such number, (2) the purchase price of the shares, if any, and the means of payment for the shares, (3) the performance criteria, if any, and level of achievement versus these criteria that will determine the number of shares granted, issued, retainable and vested, as applicable, (4) such terms and conditions on the grant, issuance, vesting and forfeiture of the shares, as applicable, as may be determined from time to time by the Committee, (5) restrictions on the transferability of the stock award, and (6) such further terms and conditions, in each case not inconsistent with the Plan, as may be determined from time to time by the Committee. Such awards may be granted or sold in respect of past services and other valid consideration, or in lieu of, or in addition to, any cash compensation due to such participant.

New Plan Benefits

On August 22, 2017 Neal M. Dikeman, a non-employee director, was issued 200,000 Restricted Stock Units subject to vesting upon achievement of certain contingencies. Based on the closing price of the Company’s common stock on December 31, 2017 of $1.50, the value of the RSU grant to Mr. Dikeman will be $300,000 assuming all 200,000 RSU’s will vest and convert to 200,000 shares of common stock. In the event the amendment of the Plan to extend eligibility to non-employee directors is not approved at the Annual Meeting, the

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RSU grant to Mr. Dikeman will be void, in which event the Company will pay him the monetary value of such award upon achievement of the contingencies.

The Company has agreed to issue future awards under the Plan as follows:

Pursuant to William Brod’s employment agreement, Mr. Brod is entitled to receive an annual award of performance-based restricted stock units valued at $70,000 in common stock at time of issuance. The restricted stock units are subject to vesting upon achievement of individual and Company performance objectives for the year of issuance. Vested restricted stock units convert into common stock on a one-to-one basis in four equal annual installments from the original grant date, subject to a continuing employment requirement. Based on the closing price of the Company’s common stock on December 31, 2017 of $1.50 per share, Mr. Brod would receive an annual grant of 46,667 restricted stock units and the value of the annual future grants to Mr. Brod would be $70,000 assuming all RSU’s will vest and convert to shares of common stock.

All other future grants of awards under the Plan, if any, that will be made to eligible participants are subject to the discretion of the Compensation Committee and, therefore, it is not possible to determine the awards under the Plan that will be received by our executive officers and other participants if the amendment to the Plan is approved by the stockholders.

Amendment, Suspension and Termination

The Plan may be amended, suspended, or terminated at any time or from time to time by the Compensation Committee, provided that (i) no such amendment or modification may, without written consent of the participant, alter or impair any rights or obligations under any outstanding awards under the Plan; and (ii) no amendment will be effective unless approved by the affirmative vote of the holders of a majority of shares of the Company present, or represented, and entitled to vote at a meeting of stockholders of the Company duly held within twelve months of the date of adoption where such amendment will: (a) increase the total number of shares reserved for the issuance under the Plan; or (b) materially change the standards of eligibility under the Plan; (c) materially increase the benefits which may accrue to participants under the Plan; or (d) result in the adoption of a new plan or require the approval of the stockholders under any applicable tax, regulatory or stock market requirement.

Subject to the foregoing, the Compensation Committee may amend, extend, modify or terminate any outstanding award with the participant’s written consent at any time prior to payment or exercise in any manner not inconsistent with the terms of the Plan.

Transfer Restrictions

Except as otherwise determined by the Compensation Committee, no award shall be assignable or transferable except by will or the laws of descent and distribution, and no right or interest of any participant shall be subject to any lien, obligation or liability of the participant.

Securities Law Compliance

In the event that the shares to be acquired pursuant to the Plan are not covered by a then current registration statement under the Securities Act of 1933 (the “Securities Act”), and is not otherwise exempt, such shares will be restricted against transfer to the extent required by the Securities Act and the Compensation Committee may require any participant to represent in writing an intention to invest, rather than distribute, the shares.

Miscellaneous Provisions

The adoption of the Plan will not affect any other compensation or incentive plans in effect for the Company or any subsidiary. Nothing in the Plan guarantees continued employment for any participating employee. The Company and its subsidiaries reserve the right to remove, terminate or discharge any employee at any time and for any reason.

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Federal Income Tax Consequences of Stock Options

The following is a brief summary of certain of the federal income tax consequences of certain transactions under the Plan based on federal income tax laws in effect on the date hereof. This summary is not intended to be exhaustive and does not describe state, local or foreign tax consequences.

Tax Consequences to Participants

With respect to a non-qualified stock option (NQSO), in general: (i) no income will be recognized by an optionee at the time an NQSO is granted; (ii) at the time of exercise of an NQSO, ordinary income will be recognized by the optionee in an amount equal to the difference between the option price paid for the shares and the fair market value of the shares if they are nonrestricted on the date of exercise; and (iii) at the time of sale of shares acquired pursuant to the exercise of an NQSO, any appreciation (or depreciation) in the value of the shares after the date of exercise will be treated as either short-term or long-term capital gain (or loss) depending on how long the shares have been held.

With respect to an incentive stock option (ISO), no income generally will be recognized by an optionee upon the grant or exercise of an ISO. However, any excess of the fair market value of the shares at the time of exercise over the option price will be subject to the alternative minimum tax. If no disposition of shares issued to an optionee is made within two years after the date of grant or within one year after the transfer of the shares to the optionee, then upon the sale of the shares any amount realized in excess of the option price will be taxed to the optionee as long-term capital gain and any loss sustained will be a long-term capital loss.

If shares acquired upon the exercise of an ISO are disposed of prior to the expiration of either holding period described above, the optionee generally will recognize ordinary income in the year of disposition in an amount equal to any excess of the fair market value of the shares at the time of exercise (or, if less, the amount realized on the disposition of the shares if a sale or exchange) over the option price paid for the shares. Any further gain (or loss) realized by the optionee generally will be taxed as short-term or long-term capital gain (or loss) depending on the holding period.

Stock Awards

Stock awards will generally be taxed as ordinary income when the participant receives the unrestricted right to the shares in the award. In the event the shares in the award are subject to a “substantial risk of forfeiture” within the meaning of Section 83 of the Code, the participant will not recognize ordinary income at the time of grant of the award. Instead, the participant will recognize ordinary income on the dates when the stock is no longer subject to a substantial risk of forfeiture, or when the stock becomes transferable, if earlier. The participant’s ordinary income is measured as the difference between the amount paid for the stock, if any, and the fair market value of the stock on the date the stock is no longer subject to forfeiture or becomes transferable. Upon a disposition of such shares by the participant, any difference between the sale price and the amount recognized as taxable income as provided above, is treated as long-term or short-term capital gain or loss, depending on the holding period.

The participant may accelerate his or her recognition of ordinary income, if any, and begin his or her capital gains holding period by timely filing (i.e., within thirty days of the award) an election pursuant to Section 83(b) of the Code. In such event, the ordinary income recognized, if any, is measured as the difference between the amount paid for the stock, if any, and the fair market value of the stock on the date of award, and the capital gain holding period commences on such date. The ordinary income recognized by an employee will be subject to tax withholding by the Company.

Payment of Withholding Taxes

We may withhold from any stock issuances under the Plan, or collect as a condition of payment, any taxes required by law to be withheld. With the Compensation Committee’s approval a participant may be allowed to

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satisfy his or her withholding tax obligation by electing to deliver currently owned shares of common stock or to have us withhold, from the shares the participant would otherwise receive, shares of common stock, in each case having a value equal to the minimum amount required to be withheld.

Tax Consequences to the Company

To the extent that a participant recognizes ordinary income in the circumstances described above, the Company or the subsidiary for which the participant performs services will be entitled to a corresponding deduction provided that, among other things, the income meets the tests of reasonableness, is an ordinary and necessary business expense, is not an “excess parachute payment” under the Code and is not disallowed by Section 162(m) of the Code.

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Vote Required

The affirmative vote of a majority of the shares of voting stock present at the Annual Meeting and voting on the proposal is required to approve the amendment to the 2007 Employee Stock Incentive Plan making non-employee directors eligible to receive awards under the Plan. Abstentions and broker non-votes will have no effect since only shares voting on the proposal will be counted.

A full copy of the Plan, including the proposed amendment, is attached to this proxy statement as

Annex A.

Members of our Board of Directors and our named executive officers have an interest in this proposal because they are eligible to receive awards under the Plan, as proposed to be amended.

Recommendation of the Board of Directors

THE COMPANY’S BOARD OF DIRECTORS HAS DETERMINED THAT PROPOSAL NO. 6 IS DESIRABLE AND IN THE BEST INTERESTS OF THE COMPANY AND RECOMMENDS APPROVAL OF PROPOSAL NO. 6. PROXIES WILL BE VOTED “FOR” PROPOSAL NO. 6 UNLESS OTHERWISE SPECIFIED.

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