3.	Stock-Based Compensation

The Company maintains a stock option plan under which the Company

may

grant incentive stock options and non-qualified stock options to employees and non-employee directors. Stock options have been granted with exercise prices at or above the fair market value of the underlying shares of common stock on the date of grant. Options vest and expire according to terms established at the grant date.

The Company records compensation expense for the fair value of stock-based awards determined as of the grant date, including employee stock options.

For the

six

months ended

June 30, 2017,

stock options were granted under the Company’s option plan. For the

six

months ended

June 30, 2016,

810,000

stock options were granted under the Company’s option plan. The Company recognized

$163,000

and

$34,000

in stock-based compensation expense for the

six

months ended

June 30, 2017

and

2016,

respectively, related to the vesting of previously issued options.

Stock options to purchase

1,005,000

shares of common stock were outstanding as of

June 30, 2017,

and stock options to purchase

1,065,000

shares of common stock were outstanding as of

December 31, 2016.

The Company uses the Black-Scholes option-pricing model to value the options. The Company uses historical data to estimate the life of the options. The risk-free interest rate for periods within the contractual life of the award is based on the US Treasury yield curve in effect at the time of grant. The estimated volatility is based on historical volatility and management’s expectations of future volatility. The Company uses an estimated dividend payout of zero, as the Company has

not

paid dividends in the past and, at this time, does

not

expect to do so in the future.

The following table summarizes stock option activity for the

six

months ended

June 30, 2017:

				Weighted
				Average
				Exercise Price
	Shares			Per Option

Options outstanding, December 31, 2016		1,065,000		$	2.19
Granted to employees and non-employee directors		-
Exercised		(40,000	)		1.53
Canceled/expired/forfeited		(20,000	)		1.58
Options outstanding, June 30, 2017		1,005,000			2.09
Options exercisable, June 30, 2017		357,300			1.97

As of

June 30, 2017,

$640,000

of total unrecognized compensation cost related to stock options was expected to be recognized over a weighted average period of

1.92

years.

As a result of the Company adopting Accounting Standards Update

No.

2016

09,

Compensation - Stock Compensation (Topic

718

): Improvements to Employee Share-Based Payment Accounting

, during the quarter ended

March 31, 2017,

the Company recorded a

one

-time

866,000

cumulative-effect adjustment to reduce additional paid-in capital and increase retained earnings for excess tax benefits from stock option exercises that had previously been recorded to additional paid-in capital.