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 three months ended December 31, 2014 and 2013, the Company recorded non-cash compensation expense of $67,000 ($.00 per basic and diluted share) and $6,000 ($.00 per basic and diluted share), respectively, relating to stock-based compensation. For the six months ended December 31, 2014 and 2013, the Company recorded non-cash compensation expense of $101,000 ($.01 per basic and diluted share) and $7,000 ($.00 per basic and diluted share), respectively, relating to stock-based compensation.

2012 Employee Stock Option Plan

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 December 31, 2014, 112,500 stock options were granted, 27,500 stock options were exercisable and 837,500 stock options were available for grant under this plan.

The fair value of each option granted during fiscal 2014 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

Risk-free interest rates	2.3	%
Expected lives	10 years
Expected volatility	54	%
Expected dividend yields	0	%

The following table reflects activity under the 2012 Plan for the six months ended December 31,:

	2014				2013
			Weighted average				Weighted average
	Options		exercise price		Options		exercise price
Outstanding, beginning of year		78,500	$	5.73		—	$	—
Granted		44,000		4.43		78,500		5.73
Terminated/Lapsed		(10,000)		4.88		—		—
Exercised		—		—		—		—
Outstanding, end of period		112,500	$	5.30		78,500	$	5.73
Exercisable, end of period		27,500	$	5.26		15,700	$	5.73
Weighted average fair value at grant date of options granted	$	2.82			$	3.84
Total intrinsic value of options exercised		n/a				n/a
Total intrinsic value of options outstanding	$	13,000			$	44,000
Total intrinsic value of options exercisable	$	3,000			$	9,000

The following table summarizes information about stock options outstanding under the 2012 Employee Plan at December 31, 2014:

	Options outstanding						Options exercisable
			Weighted average
Range of	Number		remaining		Weighted average		Number		Weighted average
exercise prices	outstanding		contractual life		exercise price		exercisable		exercise price
$ 4.88 - $ 6.31		112,500		9.2	$	5.30		27,500	$	5.26
		112,500		9.2	$	5.30		27,500	$	5.26

As of December 31, 2014, there was $260,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2012 Employee Plan. 44,000 options were granted during the three and six months ended December 31, 2014. The total fair value of the options vesting during the three and six months ended December 31, 2014 and 2013 under this plan was $25,000 and $37,000, respectively and $41,000 and $60,000, respectively.

2012 Non-Employee Stock Option Plan

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 December 31, 2014, 35,000 stock options were granted, 12,000 stock options were exercisable and 15,000 stock options were available for grant under this plan.

The fair value of each option granted during fiscal 2014 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

Risk-free interest rates	2.3	%
Expected lives	10 years
Expected volatility	54	%
Expected dividend yields	0	%

The following table reflects activity under the 2012 Non-Employee Plan for the six months ended December 31,:

	2014				2013
			Weighted average				Weighted average
	Options		exercise price		Options		exercise price
Outstanding, beginning of year		25,000	$	4.88		—	$	—
Granted		10,000		4.37		25,000		4.88
Terminated/Lapsed		—		—		—		—
Exercised		—		—		—		—
Outstanding, end of period		35,000	$	4.73		25,000	$	4.88
Exercisable, end of period		12,000	$	4.80		5,000	$	4.88
Weighted average fair value at grant date of options granted	$	2.86			$	3.30
Total intrinsic value of options exercised		n/a				n/a
Total intrinsic value of options outstanding	$	3,000			$	35,000
Total intrinsic value of options exercisable	$	1,000			$	7,000

The following table summarizes information about stock options outstanding under the 2012 Non-Employee Plan at December 31, 2014:

	Options outstanding						Options exercisable
			Weighted average		Weighted				Weighted
Range of	Number		remaining		average exercise		Number		average exercise
exercise prices	outstanding		contractual life		price		exercisable		price
$4.37 - $ 4.88		35,000		9.0	$	4.73		12,000	$	4.80
		35,000		9.0	$	4.73		12,000	$	4.80

As of December 31, 2014, there was $72,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2012 Non-Employee Plan. 10,000 options were granted during the three and six months ended December 31, 2014. The total fair value of the options vesting during each of the three and six month periods ended December 31, 2014 and 2013 under this plan was $6,000 and $17,000, respectively and $22,000 and $17,000, respectively.

2002 Employee Stock Option Plan

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 December 31, 2014, 1,471,480 stock options had been granted, 264,750 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 six months ended December 31,:

	2014				2013
			Weighted average				Weighted average
	Options		exercise price		Options		exercise price
Outstanding, beginning of year		265,750	$	6.51		651,140	$	4.18
Granted		—		—		—		—
Terminated/Lapsed		(1,000)		6.02		(30,240)		1.74
Exercised		—		—		(326,800)		2.70
Outstanding, end of period		264,750	$	6.51		294,100	$	6.07
Exercisable, end of period		264,750	$	6.51		294,100	$	6.07
Weighted average fair value at grant date of options granted		n/a				n/a
Total intrinsic value of options exercised		n/a			$	854,000
Total intrinsic value of options outstanding	$	—			$	254,000
Total intrinsic value of options exercisable	$	—			$	254,000

0 and 326,800 stock options were exercised during the six months ended December 31, 2014 and 2013, respectively. 324,100 of the 326,800 stock options exercised during the six months ended December 31, 2013 were settled by exchanging 164,859 shares of the Company’s common stock of which 85,170 was retired upon receipt. Cash received from option exercises was $0 and $5,000 for the six months ended December 31, 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, 2014:

	Options outstanding and exercisable
Range of	Number		Weighted average		Weighted average
exercise prices	outstanding		remaining contractual life		exercise price
$ 5.22 - $ 6.62		227,250		1.3	$	5.75
$11.16		37,500		1.2		11.16
		264,750		1.3	$	6.51