12. SHARE-BASED COMPENSATION

Stock Option Plans

At September 30, 2016, the Company had two equity incentive plans. The 2005 Equity Incentive Plan (“2005 Equity Plan”) was terminated with respect to new grants in March 2015, but remains in effect for grants issued prior to that time. The 2015 Equity Incentive Plan (“2015 Equity Plan”) was approved by the Company’s Board of Directors on January 19, 2015 and by the Company’s stockholders on March 18, 2015. The 2015 Equity Plan authorizes for issuance as stock options, restricted stock, stock appreciation rights, restricted stock units and performance awards, an aggregate of 5,000,000 new shares of common stock to employees, directors, advisors or consultants. At September 30, 2016, there were options outstanding covering 2,480,252 and 1,923,750 shares of common stock under the 2005 Equity Plan and 2015 Equity Plan, respectively, and 2,953,000 shares of common stock available for grant for a total of 7,357,002 currently available under the two equity plans.

Share-Based Compensation

The Company’s employee stock options have various restrictions that reduce option value, including vesting provisions and restrictions on transfer and hedging, among others, and are often exercised prior to their contractual maturity.

The Company recorded $605,426 and $619,201 of stock compensation expense for the years ended September 30, 2016 and 2015, respectively. The weighted average estimated fair value of employee stock options granted during the year ended September 30, 2016 and 2015 was calculated using the Black-Scholes option-pricing model with the following weighted average assumptions (annualized percentages):

	2016				2015
Volatility		49.0%	-	52.0%		51.0%	-	62.0%
Risk-free interest rate		1.0%	-	1.7%		1.0%	-	1.6%
Forfeiture rate			10.0%				10.0%
Dividend yield		2.2%	-	2.7%			0.0%
Expected life in years		3.2	-	4.6		3.2	-	4.6
Weighted average fair value of options granted during the period			$0.70				$1.09

The Company paid a dividend during the year ended September 30, 2016. Expected volatility is based on the historical volatility of the Company’s common stock over the period commensurate with the expected life of the options. The risk-free interest rate is based on rates published by the Federal Reserve Board. The contractual term of the options was seven years. The expected life is based on observed and expected time to post-vesting exercise. The expected forfeiture rate is based on past experience and employee retention data. Forfeitures are estimated at the time of the grant and revised in subsequent periods if actual forfeitures differ from those estimates. Such revision adjustments to expense will be recorded as a cumulative adjustment in the period in which the estimate is changed.

As of September 30, 2016, there was approximately $800,000 of total unrecognized compensation costs related to outstanding employee stock options. This amount is expected to be recognized over a weighted average period of 2.2 years. To the extent the forfeiture rate is different from what the Company anticipated, stock-based compensation related to these awards will be different from the Company’s expectations.

Performance-Based Stock Options

On August 1, 2016, the Company awarded a performance-based stock option (PVO) to purchase 750,000 shares of the Company’s common stock to a key executive, with a contractual term of seven years. Vesting is based upon the achievement of certain performance criteria for each of fiscal 2019 and 2020 (375,000 shares for each year) including a minimum Free Cash Flow margin and Net Revenue targets at four different target levels for each of the years.

Additionally, vesting is subject to the executive being employed by the Company at the time the Company achieves such financial targets.

The Company determined that it is probable that the performance condition will be achieved at the low end of the expected revenue level for each of the years, and therefore assumed that 187,500 shares of the PVO would vest. The weighted average grant date fair value for the PVO was $0.81 per share, which was estimated on the date of grant using the Black-Scholes option pricing model. Non-cash share-based compensation expense related to this award is recognized on a straight line basis and was $4,774 for the year ended September 30, 2016. The Company will continue to review these targets each quarter and will adjust the expected outcome as needed, recognizing compensation expense cumulatively in such period for the difference in expense. The Company did not grant any PVOs in the year ended September 30, 2015.

Stock Option Summary Information

A summary of activity for the Company’s stock option plans as of September 30, 2016 and 2015 is presented below:

	Number			Weighted Average
	of Shares			Exercise Price
Outstanding October 1, 2015		2,852,419		$	2.35
Granted		1,857,000		$	1.93
Forfeited/expired		(304,167	)	$	2.18
Exercised		(1,250	)	$	1.76
Outstanding September 30, 2016		4,404,002		$	2.18
Exercisable September 30, 2016		2,811,617		$	2.30

The aggregate intrinsic value for options outstanding and options exercisable at September 30, 2016 was $279,705 and $232,375, respectively. The aggregate intrinsic value represents the difference between the Company’s closing stock price on the last day of trading during the year, which was $1.87 per share, and the exercise price multiplied by the number of applicable options. The total intrinsic value of stock options exercised during the year ended September 30, 2016 was $288 and cash received from these exercises was $2,200. The total intrinsic value of stock options exercised during the year ended September 30, 2015 was $438,484 and cash received from these exercises was $504,371. The Company recognized $288 and $438,484 as a tax benefit in the income tax provision for the years ended September 30, 2016 and 2015, respectively.

The following table summarizes information about stock options outstanding at September 30, 2016:

					Weighted
					Average		Weighted				Weighted
Range of					Remaining		Average				Average
Exercise			Number		Contractual		Exercise		Number		Exercise
Prices			Outstanding		Life		Price		Exercisable		Price
$0.93	-	$1.76		969,752		5.05	$	1.59		831,063	$	1.59
$1.77	-	$1.99		1,756,750		6.61	$	1.94		365,362	$	1.86
$2.00	-	$2.85		906,250		5.03	$	2.57		855,817	$	2.56
$2.86	-	$3.13		761,250		5.61	$	3.00		755,000	$	3.00
$3.14	-	$3.17		10,000		5.14	$	3.17		4,375	$	3.17
$0.93	-	$3.17		4,404,002		5.76	$	2.18		2,811,617	$	2.30

The Company recorded non-cash share-based compensation expense for employees, directors and consultants for the fiscal years ended September 30, 2016 and 2015. The amounts of share-based compensation expense are classified in the Consolidated Statements of Operations as follows:

Years Ended September 30,	2016		2015
Cost of revenues	$	24,092	$	25,355
Selling, general and administrative		478,695		473,118
Research and development		102,639		120,728
Total	$	605,426	$	619,201