Note 6. Stockholders’ Equity

Stock Options

In December 2007, we established the 2007 Equity Compensation Plan (the “Plan”). The Plan was approved by our board of directors and stockholders. The purpose of the Plan is to grant stock and options to purchase our common stock to our employees, directors and key consultants. On November 21, 2014, the maximum number of shares of common stock that may be issued pursuant to awards granted under the Plan (including issuance of restricted common stock) increased from 3,000,000 to 5,000,000, as approved by our board of directors and stockholders. Cancelled and forfeited stock options and stock awards may again become available for grant under the Plan. There were 843,786 shares available for grant under the Plan as of June 30, 2016. All stock option grants are made under the 2007 Equity Compensation Plan.

The majority of awards issued under the Plan vest immediately or over three years, with a one year cliff vesting period, and have a term of ten years. Stock-based compensation cost is measured at the grant date, based on the fair value of the awards that are ultimately expected to vest, and recognized on a straight-line basis over the requisite service period, which is generally the vesting period.

The following table summarizes vested and unvested stock option activity:

	All Options				Vested Options				Unvested Options
			Weighted				Weighted				Weighted
			Average				Average				Average
			Exercise				Exercise				Exercise
	Shares		Price		Shares		Price		Shares		Price
Outstanding at July 1, 2014		1,888,851	$	1.27		1,526,130	$	1.21		362,721	$	1.53
Granted		577,985		1.04		495,000		1.07		82,985		0.86
Options vesting		-		-		235,124		1.51		(235,124)		1.51
Exercised		-		-		-		-		-		-
Forfeited/Cancelled		-		-		-		-		-		-
Outstanding at June 30, 2015		2,466,836		1.22		2,256,254		1.21		210,582		1.29
Granted		520,982		0.83		299,750		0.77		221,232		0.68
Options vesting		-		-		226,798		0.87		(226,798)		0.87
Exercised		-		-		-		-		-		-
Forfeited/Cancelled		(270,625)		1.04		(265,469)		1.03		(5,156)		1.80
Outstanding at June 30, 2016		2,717,193	$	1.16		2,517,333	$	1.17		199,860	$	1.06

The following table presents the assumptions used to estimate the fair values based upon a Black-Scholes option pricing model of the stock options granted during the years ended June 30, 2016 and 2015.

	Years Ended June 30,
	2016			2015
Expected dividend yield		0	%		0	%
Risk-free interest rate		1.17% - 1.87	%		1.54% - 1.86	%
Expected life (in years)		5 - 6			5 - 6
Expected volatility		80% - 84	%		80% - 89	%

The weighted average remaining contractual life of all options outstanding as of June 30, 2016 was 5.98 years. The remaining contractual life for options vested and exercisable at June 30, 2016 was 5.72 years. Furthermore, the aggregate intrinsic value of options outstanding as of June 30, 2016 was $172,767, and the aggregate intrinsic value of options vested and exercisable at June 30, 2016 was $157,649, in each case based on the fair value of the Company’s common stock on June 30, 2016.

During the year ended June 30, 2016, the Company granted 520,982 options to employees and directors with a fair value of $256,256. The fair value was calculated using a Black-Scholes option pricing model with the following assumptions: (i) volatility rate of between 80% and 84%, (ii) discount rate between 1.17% and 1.87%, (iii) zero expected dividend yield, and (iv) expected term between 5 and 6 years based upon the average of the term of the option and the vesting period. The total fair value of options that vested during the year ended June 30, 2016 was $305,734 and is included in selling, general and administrative expenses in the accompanying statement of operations. As of June 30, 2016, the amount of unvested compensation related to these options was $111,744 which will be recorded as an expense in future periods as the options vest.

On December 4, 2015, options originally issued to former directors to purchase an aggregate of 250,000 shares of the Company’s common stock were modified to extend the exercise period from three months to two years. Stock-based compensation cost of $29,815 was recorded during the year ended June 30, 2016 as a result of the modification.

Additional information regarding stock options outstanding and exercisable as of June 30, 2016 is as follows:

Option				Remaining
Exercise		Options		Contractual		Options
Price		Outstanding		Life (in years)		Exercisable
$	0.59		8,150		9.66		-
	0.60		5,000		9.62		-
	0.65		6,150		8.36		3,588
	0.70		225,000		9.44		225,000
	0.77		59,500		8.14		44,667
	0.80		16,000		9.15		16,000
	0.90		25,667		9.10		15,000
	1.00		370,890		2.72		358,942
	1.02		287,000		4.08		287,000
	1.05		108,445		8.90		103,519
	1.07		53,898		6.30		53,898
	1.09		166,165		9.90		43,750
	1.10		255,000		9.01		255,000
	1.15		228,000		6.61		228,000
	1.20		31,414		7.89		23,561
	1.25		32,000		6.63		32,000
	1.30		263,000		4.68		263,000
	1.50		380,000		1.56		380,000
	1.75		1,067		7.58		800
	1.80		169,425		7.23		158,423
	1.85		24,000		6.89		24,000
	1.97		1,422		7.40		1,185
Total			2,717,193				2,517,333

Warrants

The following table summarizes warrant activity:

			Weighted
			Average
	Number of		Exercise
	Warrants		Price
Outstanding, June 30, 2014		904,998	$	1.73
Granted		-		-
Exercised		-		-
Expired/Cancelled		(599,998)		1.26
Outstanding, June 30, 2015		305,000		1.26
Granted		1,785,000		1.25
Exercised		-		-
Expired/Cancelled		(100,000)		1.22
Outstanding, June 30, 2016		1,990,000	$	1.25
Exercisable, June 30, 2015		305,000	$	1.26
Exercisable, June 30, 2016		1,990,000	$	1.25

There was no intrinsic value for all warrants outstanding as of June 30, 2016, based on the fair value of the Company’s common stock on June 30, 2016.

On May 22, 2015, warrants originally issued to directors on November 5, 2010 to purchase an aggregate of 150,000 shares of the Company’s common stock were modified to extend the term from five years to ten years. Stock-based compensation cost of $53,632 was recorded during the year ended June 30, 2015 as a result of the modification.

Additional information regarding warrants outstanding and exercisable as of June 30, 2016 is as follows:

			Remaining
Warrant	Warrants		Contractual		Warrants
Exercise Price	Outstanding		Life (in years)		Exercisable
$1.19		100,000		5.48		100,000
1.25		1,885,000		4.95		1,885,000
3.50		2,500		-		2,500
4.00		2,500		-		2,500
Total		1,990,000				1,990,000

Restricted Common Stock

Prior to July 1, 2015, the Company issued 889,321 shares of restricted common stock to employees valued at $971,897, of which $405,504 had been recognized as an expense.

During the year ended June 30, 2016, the Company issued an additional 414,366 shares of restricted stock to employees. These shares vest over a three year period, with a one year cliff vesting period, and remain subject to forfeiture if vesting conditions are not met. The aggregate fair value of the stock awards was $314,577 based on the market price of our common stock ranging from $0.59 to $1.09 per share on the date of grant, which will be amortized over the three-year vesting period. Restricted common stock grants are made under the 2007 Equity Compensation Plan.

The total fair value of restricted common stock vested during the year ended June 30, 2016 was $378,341 and is included in selling, general and administrative expenses in the accompanying statements of operations. As of June 30, 2016, the amount of unvested compensation related to issuances of restricted common stock was $502,990, which will be recognized as an expense in future periods as the shares vest. When calculating basic net income (loss) per share, these shares are included in weighted average common shares outstanding from the time they vest. When calculating diluted net income per share, these shares are included in weighted average common shares outstanding as of their grant date.

The following table summarizes restricted common stock activity:

			Weighted
			Average
	Number of		Grant Date
	Shares		Fair Value
Non-vested, June 30, 2014		227,827		1.72
Granted		647,353		0.86
Vested		(138,433)		1.75
Forfeited		-		-
Non-vested, June 30, 2015		736,747		0.96
Granted		414,366		0.76
Vested		(444,471)		0.99
Forfeited		-		-
Non-vested, June 30, 2016		706,642	$	0.82

Issuance of Common Stock

On May 22, 2015, the Company issued 50,000 shares of common stock valued at $52,500 to directors for services rendered.

On June 23, 2016, we entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with an institutional investor, each member of our board of directors and certain of our executive officers (collectively, the “Investors”) pursuant to which we sold to the Investors, on June 24, 2016, an aggregate of 5,200,000 units (the “Units”) at $1.00 per Unit (the “Purchase Price”) for gross proceeds of $5,200,000. Each Unit consists of one share of our common stock (the “Shares”), and one warrant having a term of five years to purchase three-tenths of one share of our common stock at an exercise price of $1.25 per share (the “Warrants”). Net proceeds to the Company was $4,783,830 after payment of broker fees and other direct costs of the offering.

In connection with the financing we entered into a Registration Rights Agreement with the Investors (the “Registration Rights Agreement”) on June 24, 2016, pursuant to which we agreed to register for resale by the Investors the Shares, the shares of common stock issuable upon exercise of the Warrants and the shares of common stock issuable upon exercise of the Placement Agent Warrants (as defined below). We committed to file the registration statement no later than July 24, 2016 and to cause the registration statement to become effective no later than October 22, 2016. The Registration Rights Agreement provides for liquidated damages upon the occurrence of certain events, including our failure to file the registration statement on or before July 24, 2016 or cause it to become effective on or before October 22, 2016. The amount of liquidated damages payable to an Investor would be 1.0% of the aggregate amount invested by such Investor for each 30-day period, or pro rata portion thereof, during which the default continues, up to a maximum amount of 10% of the aggregate amount invested by such Investor. On July 22, 2016, we filed a registration statement with the SEC pursuant to the Registration Rights Agreement, but the registration statement has yet to be declared effective.

Common Stock Repurchase and Retirement

On November 7, 2014 the Company’s Board of Directors authorized the repurchase of up to $250,000 of the Company’s outstanding shares of common stock. During the year ended June 30, 2016, there were no repurchases of shares of common stock under the repurchase program. As of December 31, 2015, the authorization to repurchase the Company’s outstanding common stock had expired.

During the year ended June 30, 2016, there were no repurchases of shares of common stock under the repurchase program. As of December 31, 2015, the authorization to repurchase the Company’s outstanding common stock has expired. In addition, during the year ended June 30, 2016, the Company repurchased 46,898 shares of common stock from employees at an average market price of approximately $0.80 per share for an aggregate amount of $37,747.

During the year ended June 30, 2015, we repurchased 53,300 shares of our common stock under the repurchase program at an average price of approximately $0.93 per share for an aggregate amount of approximately $49,482.

Shares repurchased are retired and deducted from common stock for par value and from additional paid in capital for the excess over par value. Direct costs incurred to acquire the shares are included in the total cost of the shares. Purchases may be made from time to time in open market or privately negotiated transactions as determined by the Company’s management. The actual timing, number and value of shares repurchased will be determined by the Company’s management at its discretion, and will depend on management's evaluation of market conditions and other factors. The Company has no obligation to repurchase any shares under this authorization, and the repurchase program may be suspended, discontinued or modified at any time, for any reason and without notice.