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 fiscal years ended June 30, 2018 and 2017, the Company recorded non-cash compensation expense of $146,000 ($0.01 per basic and diluted share) and $102,000 ($0.01 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 June 30, 2018, 57,200 stock options were granted, 30,400 stock options were exercisable and 821,900 stock options were available for grant under this plan.

The fair value of each option granted during fiscal 2018 and 2017 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

	2018			2017
Risk-free interest rates		2.4	%		2.4	%
Expected lives		10 years			10 years
Expected volatility		52	%		52	%
Expected dividend yields		0	%		0	%

The Company uses a weighted-average expected stock-price volatility assumption that is a combination of both current and historical implied volatilities of the underlying stock. The implied volatilities were obtained from publicly available data sources. For the weighted-average expected option life assumption, the Company considers the exercise behavior of past grants. The average risk-free interest rate is based on the U.S. Treasury Bond rate for the expected term of the options and the average dividend yield is based on historical experience.

The following table reflects activity under the 2012 Plan for the fiscal years ended June 30,:

	2018					2017
	Options			Weighted average exercise price		Options			Weighted average exercise price
Outstanding, beginning of year		70,600		$	5.84		112,500		$	5.54
Granted		25,000			9.01		5,000			8.15
Terminated		(4,000	)		9.15		(11,400	)		6.10
Exercised		(34,400	)		5.68		(35,500	)		5.13
Outstanding, end of year		57,200		$	7.09		70,600		$	5.84
Exercisable, end of year		30,400		$	6.55		38,700		$	5.98

Weighted average fair value at grant date of options granted	$	5.61				$	5.22
Total intrinsic value of options exercised	$	187,000				$	152,000
Total intrinsic value of options outstanding	$	324,000				$	252,000
Total intrinsic value of options exercisable	$	246,000				$	132,000

The following table summarizes information about stock options outstanding under the 2012 Employee Plan at June 30, 2018:

	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
$4.29-$9.63		57,200		7.4	$	7.09		30,400	$	6.55
		57,200		7.4	$	7.09		30,400	$	6.55

As of June 30, 2018, there was $129,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2012 Employee Plan. 25,000 and 5,000 options were granted during the fiscal years ended June 30, 2018 and 2017, respectively. 18,000 of the 34,400 stock options exercised during the fiscal year ended June 30, 2018 were settled by exchanging 7,940 shares of the Company’s common stock which were retired and returned to unissued status upon receipt. The total fair value of the options vesting during the fiscal years ended June 30, 2018 and 2017 under this plan was $86,000 and $79,000, respectively. $106,000 and $10,000 was received from option exercises for the fiscal years ended June 30, 2018 and 2017, respectively, and the actual tax benefit realized for the tax deductions from option exercises was $0 for each of these periods.

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 June 30, 2018, 27,800 stock options were granted, 13,800 stock options were exercisable and no further stock options were available for grant under this plan.

The fair value of each option granted during fiscal 2018 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

	2018
Risk-free interest rates		2.4	%
Expected lives		10 years
Expected volatility		52	%
Expected dividend yields		0	%

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

	2018					2017
	Options			Weighted average exercise price		Options			Weighted average exercise price
Outstanding, beginning of year		14,200		$	4.69		35,000		$	4.73
Granted		15,000			8.70		—			—
Terminated		—			—		—			—
Exercised		(1,400	)		4.73		(20,800	)		4.76
Outstanding, end of year		27,800		$	6.85		14,200		$	4.69
Exercisable, end of year		13,800		$	5.61		5,200		$	4.76

Weighted average fair value at grant date of options granted	$	5.55					n/a
Total intrinsic value of options exercised	$	14,000				$	96,000
Total intrinsic value of options outstanding	$	217,000				$	67,000
Total intrinsic value of options exercisable	$	125,000				$	24,000

The following table summarizes information about stock options outstanding under the 2012 Non-Employee Plan at June 30, 2018:

	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
$4.37 - $8.70		27,800		7.7	$	6.85		13,800	$	5.61
		27,800		7.7	$	6.85		13,800	$	5.61

As of June 30, 2018, there was $72,000 of unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2012 Non-Employee Plan. 15,000 and 0 options were granted during the fiscal years ended June 30, 2018 and 2017, respectively. The 1,400 stock options exercised during the fiscal year ended June 30, 2018 were settled by exchanging 452 shares of the Company’s common stock which were retired and returned to unissued status upon receipt. The total fair value of the options vesting during each of the fiscal years ended June 30, 2018 and 2017 under this plan was $39,000 and $22,000, 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 June 30, 2018, no stock options were granted or 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 fiscal years ended June 30,:

	2018					2017
	Options			Weighted average exercise price		Options			Weighted average exercise price
Outstanding, beginning of year		5,000		$	5.35		102,500		$	6.04
Granted		—			—		—			—
Terminated/Lapsed		—			—		(10,500	)		6.02
Exercised		(5,000	)		5.35		(87,000	)		6.08
Outstanding, end of period		—		$	—		5,000		$	5.35
Exercisable, end of period		—		$	—		5,000		$	5.35

Weighted average fair value at grant date of options granted		n/a					n/a
Total intrinsic value of options exercised	$	47,000				$	289,000
Total intrinsic value of options outstanding		n/a				$	20,000
Total intrinsic value of options exercisable		n/a				$	20,000

As of June 30, 2018, there was no unearned stock-based compensation cost related to share-based compensation arrangements granted under the 2002 Non-Employee Plan. 5,000 and 87,000 stock options were exercised during the fiscal years ended June 30, 2018 and 2017, respectively. The 5,000 stock options exercised during the fiscal year ended June 30, 2018 were settled by exchanging 2,815 shares of the Company’s common stock which were retired and returned to unissued status upon receipt. 80,500 of the 87,000 stock options exercised during the fiscal year ended June 30, 2017 were settled by exchanging 59,418 shares of the Company’s common stock which was included in Treasury Stock upon receipt. $0 was received from option exercises for each of the fiscal years ended June 30, 2018 and 2017, respectively, and the actual tax benefit realized for the tax deductions from option exercises was $0 for each of these periods.