Note 3 - Stock-Based Compensation; Changes in Equity

The Company has adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718 which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the condensed consolidated financial statements based on their grant-date fair values.

The Company has applied the Black-Scholes model to value stock-based awards and issued warrants related to notes payable. That model incorporates various assumptions in the valuation of stock-based awards relating to the risk-free rate of interest to be applied, the estimated dividend yield and expected volatility of our common stock. The risk-free rate of interest is the related U.S. Treasury yield curve for periods within the expected term of the option at the time of grant. The dividend yield on our common stock is estimated to be 0%, as the Company did not issue dividends during 2017 and 2016. The expected volatility is based on historical volatility of the Company’s common stock.

The Company’s net loss for the three months ended June 30, 2017 and 2016 includes approximately $5,000 and $11,000, respectively, of compensation costs related to share based payments. The Company’s net loss for the six months ended June 30, 2017 and 2016 includes approximately $10,000 and $23,000, respectively, of compensation costs related to share based payments. As of June 30, 2017, there is $16,000 of unrecognized compensation expense related to non-vested stock option grants and stock grants. We expect approximately $5,000 of additional stock-based compensation expense to be recognized over the remainder of 2017, $7,000 to be recognized during 2018, $3,000 to be recognized during 2019 and $1,000 to be recognized during 2020.

As of June 30, 2017, the Company had three stock-based compensation plans pursuant to which stock options were, or may be, granted. The Plans provide for the award of options, which may either be incentive stock options (“ISOs”) within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended (the “Code”) or non-qualified options (“NQOs”) which are not subject to special tax treatment under the Code, as well as for stock grants.

On April 10, 2009, the Board of Directors approved for adoption, and on June 5, 2009, the shareholders of the Corporation approved, a 2009 Stock Incentive Plan (“2009 Plan”). The 2009 Plan authorizes the issuance of up to 250,000 shares of stock or options to purchase stock of the Company (including cancelled shares reissued under the plan.) As of June 30, 2017, options for 250,000 shares had been granted and options for 143,094 shares remain outstanding.

A summary of the Company’s stock option activity and related information is as follows:

					Weighted
			Weighted		Average
	Shares		Average		Remaining		Aggregate
	under		Exercise		Contractual		Intrinsic
	Option		Price		Life		Value
Balance at December 31, 2016		143,094	$	5.22		2.9	$	89,494
Granted		-		-		-		-
Cancelled/Expired		-		-		-		-
Exercised		-		-		-		-
Outstanding at June 30, 2017		143,094	$	5.22		1.5	$	65,518

Exercisable at June 30, 2017		113,238	$	5.21		1.0	$	53,748

On July 17, 2012, the Company entered into a Note and Warrant Purchase Agreement with BMO Private Equity (U.S.), Inc. (“BMO Equity”) pursuant to which (i) BMO Equity advanced to the Company the sum of $5 million and (ii) the Company issued to BMO Equity a warrant to purchase up to Four Percent (4%) of the outstanding shares of common stock of the Company on a fully-diluted basis (140,048 shares of common stock of the Company) at the price of One Cent ($0.01) per share. The term of the loan provided for in this Agreement is five and a half years. Interest is payable on the outstanding balance of the loan at the rate of 11.5% per annum. As of June 30, 2017, the Company was in compliance with all of the financial covenants under the Note and Warrant Purchase Agreement.

On July 29, 2016, the Company and certain accredited investors entered into a Securities Purchase Agreement wherein the investors purchased 152,850 shares of common stock of the Company at a price of $6.00 per share. As additional consideration for the purchases of the shares in the offering, each investor received, with each share of common stock purchased, one-half of a warrant, with one warrant entitling the investor to purchase one share of the Company’s common stock at the price of $7.00. The warrants are exercisable between six months and three years from the investment date. As a result of the completion of the sale under the Purchase Agreement, warrants to purchase 76,675 shares of common stock at $7.00 per share were issued.

In addition to the Purchase Agreement, the Company and each of the investors entered into a Registration Rights Agreement pursuant to which the Company agreed to file a Registration Statement with the SEC to register the common stock sold to the investors.

A summary of the Company’s stock warrant activity and related information is as follows:

					Weighted
			Weighted		Average
	Shares		Average		Remaining		Aggregate
	under		Exercise		Contractual		Intrinsic
	Warrant		Price		Life		Value
Balance at December 31, 2016		216,723	$	2.48		4.49	$	817,880
Granted		-		-		-		-
Cancelled		-		-		-		-
Exercised		-		-		-		-
Outstanding at June 30, 2017		216,723	$	2.48		4.00	$	794,072

Exercisable at June 30, 2017		76,675	$	7.00		2.08		-

A summary of the Company’s stock option activity by grant date as of June 30, 2017 is as follows:

	Options Outstanding								Options Vested
			Weighted		Remain.		Intrinsic				Weighted		Remain.
Options by Grant Date	Shares		Avg.		Life		Val		Shares		Avg.		Life		Intrinsic Val
Dec 2005		-		-		-		-		-		-		-		-
Dec 2010		-		-		-		-		-		-		-		-
Jan 2011		-		-		-		-		-		-		-		-
Nov 2012		90,000	$	5.17		0.4	$	45,900		90,000	$	5.17		0.4	$	45,900
Nov 2013		5,000	$	5.75		1.4	$	0		4,000	$	5.75		1.4	$	0
Dec 2015		48,094	$	5.27		3.5	$	19,618		19,238	$	5.27		3.5	$	7,848
TOTAL		143,094	$	5.22		1.5	$	65,518		113,238	$	5.21		1.0	$	53,748

The aggregate intrinsic value in the tables above represents the total pre-tax intrinsic value (the difference between the closing price of the Company’s common stock on the last trading day of the quarter ended June 30, 2017 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all the holders exercised their options on June 30, 2017.