NOTE

—

EQUITY COMPENSATION

The Company’s equity compensation plan is the

2012

Stock Incentive Plan (“the Plan”), was approved by shareholders in

November 2012,

and amended in

November 2016.

The Plan covers all of the Company’s full-time employees, independent directors and certain advisors. The Plan allows for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted and unrestricted stock awards, and other stock-based awards. All stock-based awards are granted at fair market value at the date of grant. The number of shares reserved for issuance under the Plan is

1,967,217

shares all of which are available for future grant or award as of

June 30, 2019.

The Plan contains a fungible share ratio that consumes

2.5

available shares for every full value share awarded by the Company as stock compensation.

The Company has made time-based and performance-based stock option awards. Options generally have a

three

four

year ratable vesting period beginning

one

year after the date of grant. The maximum exercise period of service-based and performance-based stock options granted under the Plan is

ten

years.

Inducement stock option agreements are granted by the Company to attract and retain key executives. Inducement stock options are separately registered securities and are

not

part of the Plan. Some options granted have a

three

-year ratable vesting period whereas other options vest upon specific performance of the Company’s stock. All Inducement stock options have a term of

ten

years only if the employee is employed for

three

years from the date of grant. In fiscal

2019,

550,000

Inducement stock options were granted.

The Company has also granted Restricted Stock Units (RSUs) under the Plan. RSUs ratably vest over a

three

four

year period beginning

one

year after the date of award. The Company has also granted Performance Stock Units (PSUs) that vest if the Company meets certain financial metrics over a

three

year period.

Stock Warrants

The Company has outstanding

200,000

fully exercisable stock warrants with an exercise price of

$9.95

as of

June 30, 2019.

As of

June 30, 2019,

the warrants had a remaining contractual life of

2.7

years. The fair value of the warrants on the date of grant was estimated using the Black-Scholes option pricing model. The below listed weighted average assumptions were used for the warrants. The stock warrants have a fair value of

$2.87.

	February 21,
	2017

Dividend yield		2.01	%
Expected volatility		39	%
Risk-free interest rate		1.80	%
Expected life (in years)		4.5

Stock Options

The fair value of each option on the date of grant was estimated using the Black-Scholes option pricing model. The below listed weighted average assumptions were used for grants in the periods indicated.

	2019			2018

Dividend yield		4.6	%		3.3	%
Expected volatility		42	%		41	%
Risk-free interest rate		2.8	%		1.8	%
Expected life (in years)		4.9			6.0

June 30, 2019,

the

972,900

service-based and Inducement stock options granted during fiscal

2019

to employees had exercise prices ranging from

$3.18

$4.94

per share, fair values ranging from

$0.72

$2.10

per share, and remaining contractual lives of between

years and

years.

June 30, 2018,

the

794,537

options granted during fiscal

2018

to employees had exercise prices ranging from

$5.92

$6.54

per share, fair values ranging from

$1.71

$1.96

per share, and remaining contractual lives of between

years and

years. The performance metric for the

345,560

performance-based stock options granted in fiscal

2018

was

not

achieved; therefore, these stock options were forfeited in fiscal

2018.

The Company calculates stock option expense using the Black-Scholes model. Stock option expense is recorded on a straight-line basis, or sooner if the grantee is retirement eligible as defined in the Plan, with an estimated

14.86%

forfeiture rate effective

April 1, 2019.

Previous estimated forfeiture rates were between

2.00%

and

8.79%

between the periods

January 1, 2013

through

March 31, 2019.

The expected volatility of the Company’s stock was calculated based upon the historic monthly fluctuation in stock price for a period approximating the expected life of option grants. The risk-free interest rate is the rate of a

five

year Treasury security at constant, fixed maturity on the approximate date of the stock option grant. The expected life of outstanding options is determined to be less than the contractual term for a period equal to the aggregate group of option holders’ estimated weighted average time within which options will be exercised. It is the Company’s policy that when stock options are exercised, new common shares shall be issued.

The Company recorded

$876,333

and

$2,147,423

of expense related to stock options in fiscal years

2019

and

2018,

respectively.

Information related to all stock options for the years ended

June 30, 2019

and

June 30, 2018

is shown in the following tables:

	June 30, 201 9
						Weighted
				Weighted		Average
				Average		Remaining	Aggregate
				Exercise		Contractual Term	Intrinsic
	Shares			Price		(in years)	Value

Outstanding at 6/30/18		3,298,677		$	8.06	7.0	$	8,037

Granted		972,900		$	4.57
Exercised		--		$	--
Forfeited		(1,406,548	)	$	7.21
Expired		(115,403	)	$	9.12

Outstanding at 6/30/19		2,749,626		$	7.23	6.8	$	23,500

Exercisable at 6/30/19		1,733,471		$	8.33	5.6	$	--

	Ended June 30, 2018
						Weighted
				Weighted		Average
				Average		Remaining	Aggregate
				Exercise		Contractual Term	Intrinsic
	Shares			Price		(in years)	Value

Outstanding at 6/30/17		3,119,688		$	9.12	7.4	$	2,332,324

Granted		794,537		$	5.98
Exercised		(42,939	)	$	6.66
Forfeited		(467,609	)	$	9.11
Expired		(105,000	)	$	19.62

Outstanding at 6/30/18		3,298,677		$	8.06	7.0	$	8,037

Exercisable at 6/30/18		1,824,552		$	8.22	5.8	$	39,011

The following table presents information related to unvested stock options:

				Weighted-Average
				Grant Date
	Shares			Fair Value

Unvested at June 30, 2018		1,474,125		$	2.65
Granted		972,900		$	1.48
Vested		(786,536	)	$	2.91
Forfeited		(644,334	)	$	1.93
Unvested at June 30, 2019		1,016,155		$	1.79

The weighted average grant date fair value of options granted during fiscal years

2019

and

2018

was

$1.48

per share and

$1.73

per share, respectively. The aggregate intrinsic value of options exercised during the years ended

June 30, 2019

and

June 30, 2018

and

$39,011,

respectively. The aggregate grant date fair value of options that vested during fiscal

2019

and

2018

was

$2,287,386

and

$3,192,672,

respectively. There were

exercises of stock options in fiscal

2019.

The Company received

$285,875

of cash from employees who exercised options in fiscal year

2018.

For fiscal year

2019,

the Company recognized a current income tax benefit of

$116,785

for tax deductions related to equity compensation. A discrete tax expense of

$282,785

was recognized to reduce deferred tax assets for cancelled awards and detriments in excess of the tax deductions.

For fiscal year

2018,

exercised options resulted in an income tax benefit of

$116,602.

Pursuant to the implementation of ASU

2016

09,

the Company recognized a discrete tax expense of

$292,000

to reduce deferred tax assets for cancelled awards and for detriments compared to the current year tax deduction. A discrete tax benefit of

$10,767

was recognized for disqualifying dispositions of incentive stock options.

Restricted Stock Units

There were

Restricted Stock Options (RSUs) awarded to employees during fiscal

2019.

A total of

91,490

RSUs with a weighted average fair value of

$5.92

per share were awarded to employees during the

twelve

months ended

June 30, 2018.

The service-based RSUs awarded during fiscal

2017

and in prior fiscal years have a

four

year ratable vesting period beginning

one

year after the date of award. RSUs awarded during fiscal

2018

have a

three

year ratable vesting period. The Company determined the fair value of the awards based on the closing price of the Company stock on the date the RSUs were awarded. The RSUs are non-voting, but accrue cash dividends at the same per share rate as those cash dividends declared and paid on LSI’s common stock. Dividends on RSUs in the amount of

$16,848

and

$50,621

were accrued as of

June 30, 2019

and

2018,

respectively. Accrued dividends are paid to the holder upon vesting of the RSUs and issuance of shares.

The following table presents information related to RSUs:

				Weighted-Average
				Grant Date
	Shares			Fair Value

Unvested at June 30, 2018		169,397		$	8.03
Granted		--		$	--
Vested		(113,523	)	$	8.14
Forfeited		(22,832	)	$	7.91
Unvested at June 30, 2019		33,042		$	7.72

The Company recorded

$40,893

of expense related to RSUs during fiscal year

2019.

As of

June 30, 2019,

the

33,042

RSUs outstanding have a weighted average remaining contractual life of

3.5

years. Of the

33,042

RSUs outstanding as of

June 30, 2019,

32,429

RSUs are vested or expected to vest in the future. The approximate unvested stock compensation expense that will be recorded as expense in future periods for RSU’s is

$45,683.

The weighted average time over which this expense will be recorded is approximately

months. An estimated forfeiture rate of

8.3%

was used in the calculation of expense related to the RSUs.

Performance

Stock Units

A total of

134,350

Performance Stock Units (PSUs) with a weighted average fair value of

$4.94

per share were awarded to employees during fiscal

2019

and

PSUs were awarded to employees during the

twelve

months ended

June 30, 2018.

The Company determined the fair value of the awards based on the closing price of the Company stock on the date the PSUs were awarded. The PSUs are non-voting, but accrue cash dividends at the same per share rate as those cash dividends declared and paid on LSI’s common stock. Dividends on PSUs in the amount of

$11,310

and

were accrued as of

June 30, 2019

and

2018,

respectively. Accrued dividends are paid to the holder upon vesting of the PSUs and issuance of shares.

The following table presents information related to PSUs:

				Weighted-Average
				Grant Date
	Shares			Fair Value

Unvested at June 30, 2018		--		$	--
Granted		134,350		$	4.94
Vested		--		$	--
Forfeited		(77,800	)	$	4.94
Unvested at June 30, 2019		56,550		$	4.94

The Company recorded

$62,474

of expense related to PSUs during fiscal year

2019.

As of

June 30, 2019,

the

56,550

PSUs outstanding have a weighted average remaining contractual life of

2.1

years. Of the

56,550

PSUs outstanding as of

June 30, 2019,

43,451

PSUs are vested or expected to vest in the future. The approximate unvested stock compensation expense that will be recorded as expense in future periods for PSU’s is

$152,172.

The weighted average time over which this expense will be recorded is approximately

months. An estimated forfeiture rate of

11.7%

was used in the calculation of expense related to the PSUs.

Director and Employee Stock Compensation Awards

The Company awarded a total of

104,020

and

41,388

common shares as stock compensation awards in fiscal years

2019

and

2018,

respectively. These common shares were valued at their approximate

$374,000

and

$312,000

fair market values based on their stock price at dates of issuance multiplied by the number of common shares awarded, respectively, pursuant to the compensation programs for non-employee directors who receive a portion of their compensation as an award of Company stock and for employees who received a nominal recognition award in the form of Company stock. Stock compensation awards are made in the form of newly issued common shares of the Company.

Deferred Compensation Plan

The Company has a non-qualified deferred compensation plan providing for both Company contributions and participant deferrals of compensation. This plan is fully funded in a Rabbi Trust. All plan investments are in common shares of the Company. As of

June 30, 2019,

there were

participants, all with fully vested account balances. A total of

208,965

common shares with a cost of

$1,468,161,

and

241,996

common shares with a cost of

$2,110,248

were held in the plan as of

June

30,

2019

and

2018,

respectively, and, accordingly, have been recorded as treasury shares.

The change in the number of shares held by this plan is the net result of purchases of shares on the open stock market or newly issued shares as compensation deferred into the plan offset by distributions to terminated employees. The Company issued

74,721

and

67,138

new common shares for purposes of the non-qualified deferred compensation plan during fiscal

2019

and during fiscal

2018,

respectively. The Company used

$106,537

to purchase

15,225

common shares of the Company in the open stock market during fiscal year

2018.

The Company’s non-qualified deferred compensation is

longer funded by purchases in the open market of LSI stock as of

September 30, 2017.

This plan is now solely funded by newly issued shares that are authorized from the Plan.