NOTE 7 - Stock Options

The Company follows Accounting Standards Codification (“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. The Company recorded non-cash compensation expense relating to stock-based compensation of $33,000 for each of the three months ended September 30, 2017 and 2016 ($0.00 per basic and diluted share for each period).

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 September 30, 2017, 70,600 stock options were granted, 41,700 stock options were exercisable and 843,900 stock options were available for grant under this plan.

The following table reflects activity under the 2012 Plan for the three months ended September 30,:

	2017				2016
			Weighted average				Weighted average
	Options		exercise price		Options		exercise price
Outstanding, beginning of year		70,600	$	5.84		112,500	$	5.54
Granted		--		--		--		--
Terminated/Lapsed		--		--		--		--
Exercised		(2,000)		6.31		--		--
Outstanding, end of period		68,600	$	5.82		112,500	$	5.54
Exercisable, end of period		41,700	$	5.86		60,700	$	5.55
Weighted average fair value at grant date of options granted		n/a				n/a
Total intrinsic value of options exercised	$	6,000				n/a
Total intrinsic value of options outstanding	$	245,000			$	186,000
Total intrinsic value of options exercisable	$	148,000			$	100,000

2,000 and 0 stock options were exercised during the three months ended September 30, 2017 and 2016, respectively. $13,000 and $0 was received from option exercises during the three months ended September 30, 2017 and 2016, 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 2012 Employee Plan at September 30, 2017:

	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
$4.29-$8.15		68,600		7.0	$	5.82		41,700	$	5.86
		68,600		7.0	$	5.82		41,700	$	5.86

As of September 30, 2017, there was $102,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2012 Employee Plan. No options were granted during either of the three months ended September 30, 2017 or 2016. The total fair value of the options vesting during each of the three months ended September 30, 2017 and 2016 under this plan was $16,000.

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 September 30, 2017, 14,200 stock options were granted, 10,200 stock options were exercisable and 15,000 stock options were available for grant under this plan.

The following table reflects activity under the 2012 Non-Employee Plan for the three months ended September 30,:

	2017				2016
			Weighted average				Weighted average
	Options		exercise price		Options		exercise price
Outstanding, beginning of year		14,200	$	4.69		35,000	$	4.73
Granted		--		--		--		--
Terminated/Lapsed		--		--		--		--
Exercised		--		--		--		--
Outstanding, end of period		14,200	$	4.69		35,000	$	4.73
Exercisable, end of period		10,200	$	4.82		24,000	$	4.80
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	$	67,000			$	86,000
Total intrinsic value of options exercisable	$	47,000			$	57,000

No stock options were exercised during the three months ended September 30, 2017 and 2016, respectively. No cash was received from option exercises during the three months ended September 30, 2017 and 2016 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 2012 Non-Employee Plan at September 30, 2017:

	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
$4.37 - $4.88		14,200		6.6	$	4.69		10,200	$	4.82
		14,200		6.6	$	4.69		10,200	$	4.82

As of September 30, 2017, there was $12,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2012 Non-Employee Plan. No options were granted during the three months ended September 30, 2017. The total fair value of the options vesting during the three months ended September 30, 2017 and 2016 under this plan was $17,000 and $16,000, 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 September 30, 2017, 1,471,480 stock options had been granted and no stock options were exercisable. No further stock options were available for grant under this plan after the plan’s expiration in October 2012.

The following table reflects activity under the 2002 Employee plan for the three months ended September 30,:

	2017				2016
			Weighted average				Weighted average
	Options		exercise price		Options		exercise price
Outstanding, beginning of year		5,000	$	5.35		102,500	$	6.86
Granted		--		--		--		--
Terminated/Lapsed		--		--		--		--
Exercised		(5,000)		5.35		--		--
Outstanding, end of period		--	$	--		102,500	$	6.86
Exercisable, end of period		--	$	--		102,500	$	6.86
Weighted average fair value at grant date of options granted		n/a				n/a
Total intrinsic value of options exercised	$	20,000				n/a
Total intrinsic value of options outstanding		n/a			$	118,000
Total intrinsic value of options exercisable		n/a			$	118,000

5,000 and 0 stock options were exercised during the three months ended September 30, 2017 and 2016, respectively. The 5,000 exercises were settled in cashless exercises by exchanging 2,815 shares of the Company’s common stock which were retired and returned to unissued status. No cash was received from option exercises during either of the three months ended September 30, 2017 and 2016 and the actual tax benefit realized for the tax deductions from option exercises was $0 for each of these periods.