Note

– Stock-Based Compensation

Plan Information

The

2015

Incentive Stock Plan (the “Plan”) provides for awards of stock options and restricted stock to officers, directors, key employees and consultants. Under the Plan, option prices will be set by the Compensation Committee and

may

not be less than the fair market value of the stock on the grant date.

March

31,

2017,

1,100,415

shares of common stock were reserved for stock award grants under the Plan. Of these reserved shares,

296,202

shares were available for future grants.

Stock Options

All share-based payments to employees, including grants of employee stock options, are recognized in the financial statements based on their grant date fair value over the requisite service period. Compensation expense for share-based awards is included in the operating, selling, general and administrative expense section of the Company’s consolidated condensed statements of income.

Stock options are valued at the date of the award, which does not precede the approval date, and compensation cost is recognized on a straight-line basis over the vesting period. Stock options granted to employees generally become exercisable over a

three,

four

five

-year period from the date of grant and generally expire

ten

years after the date of grant. Stock options granted to the Board of Directors generally become exercisable on the date of grant and generally expire

ten

years after the grant.

A summary of the status of the Company's stock options at

March

31,

2017

and changes during the

six

months then ended is presented below:

	Shares			Wtd. Avg. Ex. Price
Outstanding at September 30, 2016		570,000		$	2.73
Granted		90,000			1.81
Exercised		–			–
Expired		(10,000	)		3.45
Forfeited		–			–
Outstanding at March 31, 2017		650,000		$	2.59

Exercisable at March 31, 2017		393,334		$	2.79

The Company granted nonqualified stock options of

90,000

shares for the

six

months ended

March

31,

2017.

The Company estimates the fair value of the options granted using the Black-Scholes option valuation model. The Company estimates the expected term of options granted based on the historical grants and exercises of the Company’s options. The Company estimates the volatility of its common stock at the date of the grant based on both the historical volatility as well as the implied volatility on its common stock. The Company bases the risk-free rate that is used in the Black-Scholes option valuation model on the implied yield in effect at the time of the option grant on U.S. Treasury

zero

-coupon issues with equivalent expected term. The Company has never paid cash dividends on its common stock and does not anticipate paying cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of

zero

in the Black-Scholes option valuation model. The Company amortizes the resulting fair value of the options ratably over the vesting period of the awards. The Company uses historical data to estimate the pre-vesting option forfeitures and records share-based expense only for those awards that are expected to vest.

The estimated fair value at date of grant for stock options utilizing the Black-Scholes option valuation model and the assumptions that were used in the Black-Scholes option valuation model for the

six

months ended

March

31,

2017

are as follows:

	Six Months Ended March 31, 2017
Estimated fair value of options at grant date		$63,540
Black-Scholes model assumptions:
Average expected life (years)		6
Average expected volatility factor		36%
Average risk-free interest rate		2.46%
Average expected dividends yield		–

Compensation expense related to unvested stock options recorded for the

six

months ended

March

31,

2017

is as follows:

	Six Months Ended March 31, 2017
Fiscal year 2012 grant	$	5,359
Fiscal year 2014 grant	$	13,575
Fiscal year 2016 grant	$	8,111
Fiscal year 2017 grant	$	3,235

The Company records compensation expense over the vesting term of the related options. At

March

31,

2017,

compensation costs related to these unvested stock options not yet recognized in the consolidated condensed statements of income was

$77,798.

Restricted Stock

The Company granted restricted stock in

March

2017

to its Board of Directors and a Company officer totaling

58,009

shares, which were valued at market value on the date of grant. The shares are being held by the Company for

months and will be delivered to the directors at the end of the

month holding period. The fair value of these shares at issuance totaled

$105,000,

which is being amortized over the

month holding period as compensation expense. The Company granted restricted stock in

April

2014

to certain employees totaling

23,676

shares, which were valued at market value on the date of grant. The shares have a holding restriction, which will expire in equal annual installments of

7,892

shares over

three

years starting in

April

2015.

The fair value of these shares upon issuance totaled

$76,000

and is being amortized over the respective

one,

two

and

three

year holding periods as compensation expense. The unamortized portion of the restricted stock is included in prepaid expenses on the Company’s consolidated condensed balance sheets.