16 .	Stockholders ’ Equity

Stock Options

The Compensation Committee administers the stock-based plans. The exercise price for Incentive Stock Options (“ISO”) cannot be less

than the fair value of the stock subject to the option on the grant date (

110%

of such fair value in the case of ISOs granted to a stockholder who owns more than

10%

of the Company’s Common Stock). The exercise price of a Non-Qualified Stock Options (“NQSO”) shall be fixed by the Compensation Committee at whatever price the Committee

may

determine in good faith. Unless the Committee determines otherwise, options beginning with the

2009

Plan generally have a

-year term with a

-year vesting schedule. Unless the Committee provides otherwise, options terminate upon the termination of a participant’s employment, except that the participant

may

exercise an option to the extent it was exercisable on the date of termination and for a period of time after termination. Officers, directors and employees of, and consultants to the Company, or any parent or subsidiary corporation selected by the Committee, are eligible to receive options under the Plan. Subject to certain restrictions, the Committee is authorized to designate the number of shares to be covered by each award, the terms of the award, the date on which and the rates at which options or other awards

may

be exercised, the method of payment, vesting and other terms.

The Company has applied the Black-Scholes model to value stock-based awards. 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 the Company

’s Common Stock. The risk-free rate of interest is the U.S. Treasury yield curve for periods within the expected term of the option at the time of grant. The expected volatility is based on historical volatility of the Company’s Common Stock.

The valuation assumptions we have applied to determine the value of stock-based awards were as follows:

Historical stock price volatility: The Company used the weekly closing price to calculate historical annual volatility.

Risk-free interest rate: The Company bases the risk-free interest rate on the rate payable on US treasury securities in

effect at the time of the grant, which varied between

1.4%

and

2.20%.

Expected life: The expected life of the option represents the period of time options are expected to be outstanding. The Company uses an expected

life of

3.75

years.

Dividend yield:

The estimate for dividend yield is

0%,

as the Company did

not

issue dividends during

2017

and does

not

expect to do so in the foreseeable future.

Estimated forfeitures: When estimating forfeitures, the Company considers historical terminations as well as anticipated retirements.

The Company, at the discretion of the board,

may

issue options in excess of the total available, if options related to that stock plan are cancelled. In some cases,

not

all shares that are available to a stock plan are issued, as the Company is unable to issue options to a previous plan when a new plan is in place.

The Company

’s pre-tax income for the fiscal year ended

December 31, 2017

and

2016

includes approximately

$21,000

and

$34,000,

respectively, of compensation costs related to share-based payments. As of

December 31, 2017,

there is

$364,000

of unrecognized compensation expense related to non-vested stock option grants. We expect approximately

$172,000,

$92,000,

and

$56,000

to be recognized during

2018,

2019,

and

2020

respectively.

April 10, 2009,

the Board of Directors approved for adoption, and on

June 5, 2009,

the shareholders of the Company approved the

2009

Stock Incentive Plan (

“2009

Plan”). The

2009

Plan

authorizes the issuance of up to

510,000

shares of stock or options to purchase stock of the Company (including cancelled shares reissued under the plan.) As of

December 31, 2017,

399,469

were outstanding, of which

26,788

were vested and

372,681

were

not

vested. Vesting is determined at time of grant, with some of the schedules used for the

2009

Plan as follows:

Vesting Schedule A		Vesting Schedule B		Vesting Schedule C		Vesting Schedule D
25%	12 months	33%	24 months	50%	48 months	20 %	6 months
50%	24 months	67%	36 months	100%	57 months	40 %	18 months
75%	36 months	100%	48 months			60 %	30 months
100%	48 months					80 %	42 months
						100 %	54 months

uring the year ended

December 31, 2017,

options were exercised and

4,906

options were exercised during the year ended

December 31, 2016.

The following is a summary of the activity in the Company

’s stock option plans and other options for the years ended

December 31, 2017

and

2016,

respectively:

	December 31, 2017					December 31, 201 6
				Weighted Avg.					Weighted Avg.
	Shares			Exercise Price		Shares			Exercise Price
Exercisable, beginning of period		83,275		$	5.20		63,800		$	5.26
Vested		37,138			5.70		30,381			5.22
Exercised		-			-		4,906			5.15
Cancelled /Expired		(16,950	)		5.17		(6,000	)		5.96
Exercisable at the end of period		103,463		$	5.38		83,275		$	5.20

	December 31, 201 7					December 31, 201 6
				Weighted Avg.					Weighted Avg.
	Shares			Exercise Price		Shares			Exercise Price
Outstanding, beginning of period		143,094		$	5.22		154,000		$	5.25
Granted		350,000			3.52		-			-
Exercised		-			-		4,906			5.15
Cancelled /Expired		(16,950	)		5.17		(6,000	)		5.96
Outstanding at the end of period		476,144		$	3.97		143,094		$	5.22

December 1, 2017,

pursuant to his offer of employment with the Company as President, Mr. Jeffrey Hyland was granted

25,000

shares of restricted stock (vesting over

four

years),

65,000

incentive stock options (vesting over

five

years) and

260,000

non-qualified options (vesting over

five

years).

December 31,

201

there were fewer than

50,000

options available to grant. The above represents instruments broadly referred to as options which include non-qualified stock options, incentive stock options, grants of restricted common stock, and similar instruments.

Warrants

July 17, 2012,

the Company issued detachable warrants in connection with the Note and Warrant Purchase Agreement with BMO Equity (see Note

). The warrants

were exercisable at any time after

July 17, 2012

and until

July 17, 2022,

months after full payment of the related

$5,000,000

note payable, whichever was earlier, for up to

of the outstanding units of the Company (on a fully diluted basis) on the date of exercise. The warrants are exercisable at the purchase price of

$0.01

per unit. At inception, the fair value allocated to the warrants of

$703,000

was separately reflected as a noncurrent liability in the consolidated balance sheet. At the time of the

December 31, 2017

payout, this warrant note had a principle balance of

$831,000.

The fair value of the detachable warrants was estimated on the date of the grant using the Black-Scholes option-pricing model. This model use

d the assumptions listed in the table below as of

July 17, 2012 (

initial valuation date of the warrants). In the valuation of the warrants, it was determined that the warrants were required to be carried as a derivative liability at fair value. Changes in the fair value of the warrants were recognized in the consolidated statement of operations. These warrants were converted into notes and fully repaid during

December 2017.

	Dec 31, 2017		Dec 31, 2016			Dec 31, 2015
Weighted average fair value per warrant		-	$	5.85		$	5.11
Risk-free interest rate		-		1.47	%		1.76	%
Expected lives (yrs.)		-		3.0			4.0
Expected volatility		-		34.03	%		28.99	%