NOTE

–

STOCK INCENTIVE PLANS AND

HARE-

BASED COMPENSATION

Share-Based Compensation

Share-based compensation expense associated with outstanding stock options during the

three

months ended

September 30, 2017

was

$413,000.

During the

three

months ended

September 30, 2016,

the Company did

not

incur any share based compensation expenses. Sh

are-based compensation expense for the

nine

months ended

September 30, 2017

and

2016

was

$413,000

and

$2,000,

respectively.

income tax benefit was recognized in the statements of comprehensive loss for share-based arrangements in any period presented.

Stock Option Plan

The Company has t

hree share-based compensation plans as described below.

Qualstar

adopted the

1998

Stock Incentive Plan, (the

“1998

Plan”) under which incentive and nonqualified stock options and restricted stock could be granted for shares of common stock. The

1998

Plan expired in

2008

and

additional options

may

be granted under that plan. However,

3,333

options that were previously granted under the

1998

Plan will continue under their terms.

Qualstar adopted the

2008

Stock Incentive Plan (the “

2008

Plan”) under which incentive and nonqualified stock options and restricted stock

may

be granted for shares of common stock.

The

2008

Plan expires in

2018

and

additional options

may

be granted under that plan. However,

20,000

options that were previously granted under the

2008

Plan will continue under their terms.

The

2017

Stock Incentive Plan (the “

2017

Plan”) was approved by Qualstar shareholders on

June 13, 2017.

The

2017

Plan, permits the award of stock options (both incentive and non-qualified options), stock appreciation rights, restricted stock, restricted stock units, unrestricted stock, performance shares, dividend equivalent rights and cash-based awards to employees (including executive officers), directors and consultants of the Company and its subsidiaries. The

2017

Plan authorizes the issuance of an aggregate of

200,000

shares of common stock and the plan is administered by the Compensation Committee of the Company’s Board of Directors.

With respect to options, the fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions, such as volatility, expected term and risk-free interest rate. Expected volatilities a

re based on the historical volatility of the Company’s stock. The Company uses historical data to estimate option exercise and employee termination in determining forfeiture rates. The expected term of options granted is estimated based on the vesting term of the award, historical employee exercise behavior, expected volatility of the Company’s stock and an employee’s average length of service. The risk-free interest rate used in this model correlates to a U.S. constant rate Treasury security with a contractual life that approximates the expected term of the option award.

e following table summarizes stock option activity; the amounts shown have been retrospectively restated for the

one

-for-

six

reverse stock split, effective

June 14, 2016:

Options	Shares		Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
Outstanding at December 31, 2016		23,333	$	9.49		6.43		—
Granted		165,300		7.08		9.85		—
Exercised		—		—		—		—
Forfeited, canceled or expired		—		—		—		—
Outstanding at September 30, 2017		188,633		7.38		9.33		—

Exercisable at September 30, 2017		188,633	$	7.38		9.33	$	—