STOCK-BASED COMPENSATION

Stock-based awards were granted under the 2017 Omnibus Incentive Plan (the “2017 Plan”) beginning January 30, 2017 and, prior to that, were granted under the 2016 Omnibus Incentive Plan (the “2016 Plan”). Upon stockholder approval of the 2017 Plan, we ceased granting awards under any prior plan. Shares remaining in the 2016 Plan were moved into the 2017 Plan. The authority to grant options under the 2017 Plan and to set other terms and conditions rests with the Compensation Committee of the Board of Directors.

The 2017 Plan authorizes the issuance of up to 1,500,000 common shares in connection with awards of stock options, stock appreciation rights, restricted stock, restricted stock units, performance-based full value awards or other stock-based awards. Eligible participants include our employees, our affiliates, non-employee directors of our Company and any consultant or advisor who is a natural person and provides services to us or our affiliates. Options that have been granted under the 2017 Plan typically vest over a four-year period and will expire if unexercised after seven years from the date of grant. Restricted stock unit awards (“RSUs”) that have been granted to directors typically vest in one year. RSUs that have been granted to executives and employees typically vest in January over a four-year period. Awards may be granted under the 2017 Plan until January 29, 2027. Options under the 2017 Plan can be granted as either incentive stock options (“ISOs”) or non-statutory stock options (“NSOs”). The exercise price of options and the grant date price of restricted stock units shall be determined by our Compensation Committee but shall not be less than the fair market value of our common stock based on the closing price on the date of grant. Upon exercise, we issue new shares of stock. As of March 31, 2017, there were approximately 1,465,545 shares available for future grants under the 2017 Plan.

The 2016 Plan, under which grants ceased upon approval of the 2017 Plan, initially authorized the issuance of up to 1,500,000 common shares in connection with awards of stock options, stock appreciation rights, restricted stock, restricted stock units, performance-based full value awards or other stock-based awards. Eligible participants included our employees, our affiliates, non-employee directors of our Company and any consultant or advisor who is a natural person and provides services to us or our affiliates. Options that were granted under the 2016 Plan typically vested over a four-year period and expired if unexercised after seven years from the date of grant. RSUs that were granted to directors typically vested in one year. RSUs that were granted to executives and employees typically vested in November or January over a four-year period. Options under the 2016 Plan could be granted as either ISOs or NSOs. The exercise price of options and the grant date price of restricted stock was determined by our Compensation Committee but were not less than the fair market value of our common stock based on the closing price on the date of grant. Upon exercise, we issued new shares of stock.

Our equity plans and corresponding forms of award agreements generally have provisions allowing employees to elect to satisfy tax withholding obligations through the delivery of shares, having us retain a portion of shares issuable under the award or paying cash to us for the withholding. During the six months ended March 31, 2017 and 2016, our employees forfeited 43,160 shares and 42,427 shares, respectively in order to satisfy $0.6 million and $0.5 million, respectively of withholding tax obligations related to stock-based compensation, pursuant to terms of awards under our board and shareholder-approved compensation plans for each respective period.

Cash received from the exercise of stock options was $3.2 million and $6.3 million during the six months ended March 31, 2017 and 2016, respectively. There were $0.3 million and $0.2 million in excess tax benefits from stock-based compensation for the six months ended March 31, 2017 and 2016, respectively.

We sponsor an Employee Stock Purchase Plan (the “Purchase Plan”), covering all domestic employees with at least 90 days of continuous service and who are customarily employed at least 20 hours per week. The Purchase Plan allows eligible participants the right to purchase common stock on a quarterly basis at the lower of 85% of the market price at the beginning or end of each three-month offering period. Employee contributions to the Purchase Plan were $0.5 million during both six

12. STOCK-BASED COMPENSATION (CONTINUED)

month periods ended March 31, 2017 and 2016. Pursuant to the Purchase Plan, 48,299 and 55,343 common shares were issued to employees during the six months ended March 31, 2017 and 2016, respectively. Shares are issued under the Purchase Plan from treasury stock. As of March 31, 2017, 465,317 common shares were available for future issuances under the Purchase Plan.

Stock-based compensation expense is included in the consolidated results of operations as follows (in thousands):



	Three months ended March 31,						Six months ended March 31,
	2017			2016			2017			2016
Cost of sales	$	54		$	51		$	116		$	105
Sales and marketing	345			227			685			426
Research and development	155			147			337			295
General and administrative	601			478			1,190			888
Stock-based compensation before income taxes	1,155			903			2,328			1,714
Income tax benefit	(382		)	(293		)	(757		)	(550		)
Stock-based compensation after income taxes	$	773		$	610		$	1,571		$	1,164

Stock-based compensation cost capitalized as part of inventory was immaterial as of March 31, 2017 and September 30, 2016.

The following table summarizes our stock option activity (in thousands, except per common share amounts):



	Options Outstanding		Weighted Average Exercised Price	Weighted Average Contractual Term (in years)	Aggregate Intrinsic Value (1)
Balance at September 30, 2016	3,963		$10.36
Granted	598		12.87
Exercised	(305	)	10.64
Forfeited / Canceled	(223	)	13.30
Balance at March 31, 2017	4,033		$10.55	4.7	$	7,283

Exercisable at March 31, 2017	2,676		$10.19	3.9	$	5,459

(1) The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our closing stock price of $11.90 as of March 31, 2017, which would have been received by the option holders had all option holders exercised their options as of that date. The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price.

The total intrinsic value of all options exercised during the six months ended March 31, 2017 was $0.9 million and during the six months ended March 31, 2016 was $1.7 million.

The table below shows the weighted average fair value, which was determined based upon the fair value of each option on the grant date utilizing the Black-Scholes option-pricing model and the related assumptions:



	Six months ended March 31,
	2017	2016
Weighted average per option grant date fair value	$4.64	$3.92
Assumptions used for option grants:
Risk free interest rate	1.46% - 1.96%	1.61% - 1.85%
Expected term	6.00 years	6.00 years
Expected volatility	33% - 34%	32%
Weighted average volatility	34%	32%
Expected dividend yield	0	0

12. STOCK-BASED COMPENSATION (CONTINUED)

The fair value of each option award granted during the periods presented was estimated using the Black-Scholes option valuation model that uses the assumptions noted in the table above. Expected volatilities are based on the historical volatility of our stock. We use historical data to estimate option exercise and employee termination information within the valuation model. The expected term of options granted is derived from the vesting period and historical information and represents the period of time that options granted are expected to be outstanding. The risk-free rate used is the zero-coupon U.S. Treasury bond rate in effect at the time of the grant whose maturity equals the expected term of the option.

We use historical data to estimate pre-vesting forfeiture rates. The pre-vesting forfeiture rate used during the six months ended March 31, 2017 was 10.0%. As of March 31, 2017 the total unrecognized compensation cost related to non-vested stock options, net of expected forfeitures, was $4.3 million and the related weighted average period over which it is expected to be recognized is approximately 3.4 years.

A summary of our non-vested restricted stock units as of March 31, 2017 and changes during the six months then ended is presented below (in thousands, except per common share amounts):



	Number of Awards		Weighted Average Grant Date Fair Value
Nonvested at September 30, 2016	505		$	9.67
Granted	283		$	12.78
Vested	(178	)	$	9.31
Canceled	(3	)	$	10.89
Nonvested at March 31, 2017	607		$	11.22

As of March 31, 2017, the total unrecognized compensation cost related to non-vested restricted stock units was $4.9 million, and the related weighted average period over which it is expected to be recognized is approximately 1.7 years.