NOTE 7 - Stock Options

The Company follows ASC 718 (“Share-Based Payment”), which requires that all share based payments to employees, including stock options, be recognized as compensation expense in the consolidated financial statements based on their fair values and over the requisite service period. For the years ended June 30, 2014 and 2013, the Company recorded non-cash compensation expense of $76,000 ($.00 per basic and diluted share) and $0 ($.00 per basic and diluted share), respectively, relating to stock-based compensation. There were no options granted during the fiscal year ended June 30, 2013.

The fair value for options granted during the fiscal year ended June 30, 2014 was determined at the date of grant using a Black-Scholes valuation model and the straight-line attribution approach using the following weighted average assumptions:

Risk-free interest rate	2.7	%
Dividend yield	0	%
Volatility factor	57	%
Weighted average expected life	10 years

The risk-free interest rate used in the Black-Scholes valuation method is based on the implied yield currently available in U.S. Treasury securities at maturity with an equivalent term. The Company has not recently declared or paid any dividends and does not currently expect to do so in the future. Expected volatility is based on the annualized daily historical volatility of the Company’s stock over a representative period. The weighted-average expected life represents the period over which stock-based awards are expected to be outstanding and was determined based on a number of factors, including historical weighted average and projected holding periods for the remaining unexercised shares, the contractual terms of the Company’s stock-based awards, vesting schedules and expectations of future employee behavior.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

In December 2012, the stockholders approved the 2012 Employee Stock Option Plan (the 2012 Employee Plan). The 2012 Employee Plan authorizes the granting of awards, the exercise of which would allow up to an aggregate of 950,000 shares of the Company's common stock to be acquired by the holders of such awards. Under this plan, the Company may grant stock options, which are intended to qualify as incentive stock options (ISOs), to valued employees. Any plan participant who is granted ISOs and possesses more than 10% of the voting rights of the Company's outstanding common stock must be granted an option with a price of at least 110% of the fair market value on the date of grant.

Under the 2012 Employee Plan, stock options may be granted to valued employees with a term of up to 10 years at an exercise price equal to or greater than the fair market value on the date of grant and are exercisable, in whole or in part, at 20% per year beginning on the date of grant. An option granted under this plan shall vest in full upon a “change in control” as defined in the plan. At June 30, 2014, 78,500 stock options were granted, 15,700 stock options were exercisable and 871,500 stock options were available for grant under this plan.

The following table reflects activity under the 2012 Plan for the year ended June 30, 2014:

	Options		Weighted average exercise price
Outstanding, beginning of year		—	$	—
Granted		78,500		5.73
Terminated		—		—
Exercised		—		—
Outstanding, end of period		78,500	$	5.73
Exercisable, end of period		15,700	$	5.73
Weighted average fair value at grant date of options granted	$	3.84
Total intrinsic value of options exercised		n/a
Total intrinsic value of options outstanding	$	14,000
Total intrinsic value of options exercisable	$	3,000

There was no activity under this Plan for the year ended June 30, 2013.

The following table summarizes information about stock options outstanding under the 2012 Employee Plan at June 30, 2014:

		Options outstanding						Options exercisable
Range of exercise prices		Number outstanding		Weighted average remaining contractual life		Weighted average exercise price		Number exercisable		Weighted average exercise price
$	4.88 - $ 6.31		78,500		9.3	$	5.73		15,700	$	5.73
			78,500		9.3	$	5.73		15,700	$	5.73

As of June 30, 2014, there was $282,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2012 Employee Plan. $60,000 of compensation expense was recorded during the year ended June 30, 2014 for stock options granted under the 2012 Employee Plan. There were 78,500 options granted during the year ended June 30, 2014. The total fair value of the options vesting during the years ended June 30, 2014 and 2013 under this plan was $60,000 and $0, respectively.

In December 2012, the stockholders approved the 2012 Non-Employee Stock Option Plan (the 2012 Non-Employee Plan). This plan authorizes the granting of awards, the exercise of which would allow up to an aggregate of 50,000 shares of the Company's common stock to be acquired by the holders of such awards. Under this plan, the Company may grant stock options to non-employee directors and consultants to the Company and its subsidiaries.

Under the 2012 Non-Employee Plan, stock options may be granted with a term of up to 10 years at an exercise price equal to or greater than the fair market value on the date of grant and are exercisable in whole or in part at 20% per year beginning on the date of grant. An option granted under this plan shall vest in full upon a “change in control” as defined in the plan. At June 30, 2014, 25,000 stock options were granted, 5,000 stock options were exercisable and 25,000 stock options were available for grant under this plan.

The following table reflects activity under the 2012 Non-Employee Plan for the year ended June 30, 2014:

	Options		Weighted average exercise price
Outstanding, beginning of year		—	$	—
Granted		25,000		4.88
Terminated		—		—
Exercised		—		—
Outstanding, end of period		25,000	$	4.88
Exercisable, end of period		5,000	$	4.88
Weighted average fair value at grant date of options granted	$	3.30
Total intrinsic value of options exercised		n/a
Total intrinsic value of options outstanding	$	14,000
Total intrinsic value of options exercisable	$	3,000

There was no activity under this Plan for the year ended June 30, 2013.

The following table summarizes information about stock options outstanding under the 2012 Non-Employee Plan at June 30, 2014:

		Options outstanding						Options exercisable
Range of exercise prices		Number outstanding		Weighted average remaining contractual life		Weighted average exercise price		Number exercisable		Weighted average exercise price
$	4.88		25,000		9.2	$	4.88		5,000	$	4.88
			25,000		9.2	$	4.88		5,000	$	4.88

As of June 30, 2014, there was $76,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2012 Non-Employee Plan. $16,000 of compensation expense was recorded during the year ended June 30, 2014 for stock options granted under the 2012 Non-Employee Plan. There were 25,000 options granted during the year ended June 30, 2014. The total fair value of the options vesting during each of the years ended June 30, 2014 and 2013 under this plan was $17,000.

In December 2002, the stockholders approved the 2002 Employee Stock Option Plan (the 2002 Employee Plan). This plan expired in October 2012. This plan authorized the granting of awards, the exercise of which would allow up to an aggregate of 1,836,000 shares of the Company's common stock to be acquired by the holders of such awards. Under this plan, the Company may have granted stock options, which were intended to qualify as incentive stock options (ISOs), to key employees. Any plan participant who was granted ISOs and possessed more than 10% of the voting rights of the Company's outstanding common stock must have been granted an option with a price of at least 110% of the fair market value on the date of grant.

Under the 2002 Employee Plan, stock options have been granted to key employees with a term of 10 years at an exercise price equal to the fair market value on the date of grant and are exercisable in whole or in part at 20% per year from the date of grant. At June 30, 2014, 1,471,480 stock options had been granted, 265,750 stock options were exercisable and no further stock options were available for grant under this plan after the plans expiration in October 2012.

The following table reflects activity under the 2002 Employee plan for the year ended June 30,:

	2014				2013
	Options		Weighted average exercise price		Options		Weighted average exercise price
Outstanding, beginning of year		651,140	$	4.18		1,380,140	$	2.95
Granted		—		—		—		—
Terminated/Lapsed		(47,790)		1.74		—		—
Exercised		(337,600)		2.70		(729,000)		1.85
Outstanding, end of period		265,750	$	6.07		651,140	$	4.18
Exercisable, end of period		265,750	$	6.07		651,140	$	4.18
Weighted average fair value at grant date of options granted		n/a				n/a
Total intrinsic value of options exercised	$	1,399,000			$	1,301,000
Total intrinsic value of options outstanding	$	13,000			$	854,000
Total intrinsic value of options exercisable	$	13,000			$	854,000

337,600 and 729,000 stock options were exercised during the year ended June 30, 2014 and 2013, respectively. 324,100 of the 337,600 stock options exercised were settled by exchanging 164,859 shares of the Company’s common stock of which 85,170 was retired upon receipt. The 27,000 exercise was settled by exchanging 13,807 shares of the Company’s common stock, which was retired upon receipt. Cash received from option exercises was $25,650 and $0 for the year ended June 30, 2014 and 2013, respectively, and the actual tax benefit realized for the tax deductions from option exercises was $0 for each of these periods.

The following table summarizes information about stock options outstanding under the 2002 Employee Plan at December 31, 2013:

	Options outstanding and exercisable
Range of exercise prices	Number outstanding		Weighted average remaining contractual life		Weighted average exercise price
$5.22 - $ 6.62		228,250		1.8		5.75
$11.16		37,500		1.7		11.16
		265,750		1.8	$	6.51

In September 2000, the stockholders approved a 10 year extension of the already existing 1990 non-employee stock option plan (the 2000 Non-employee Plan) to encourage non-employee directors and consultants of the Company to invest in the Company's stock. This plan expired in September 2010. No further options may be granted under this plan. This plan provided for the granting of non-qualified stock options, the exercise of which would allow up to an aggregate of 270,000 shares of the Company's common stock to be acquired by the holders of the stock options. This plan provided that the option price will not be less than 100% of the fair market value of the stock at the date of grant. Outstanding options are exercisable at 20% per year and expire five years after the date of grant. Compensation cost was recognized for the fair value of the options granted to non-employee directors and consultants as of the date of grant.

The following table reflects activity under the 2000 Non-employee Plan for the year ended June 30,

	2014				2013
	Options		Weighted average exercise price		Options		Weighted average exercise price
Outstanding, beginning of period		30,000	$	5.03		30,000	$	5.03
Granted		—		—		—		—
Terminated/Lapsed		(30,000)		5.03		—		—
Exercised		—		—		—		—
Outstanding, end of period		—	$	—		30,000	$	5.03
Exercisable, end of period		—	$	—		30,000	$	5.03
Weighted average fair value at grant date of options granted		n/a				n/a
Total intrinsic value of options exercised		n/a				n/a
Total intrinsic value of options outstanding	$	0			$	0
Total intrinsic value of options exercisable	$	0			$	0