. SHARE-BASED COMPENSATION

Stock Option Plans

September 30,

201

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 Amended and Restated

2015

Equity Incentive Plan (

“2015

Equity Plan”) was approved by the Company’s Board of Directors on

December 6, 2016

and by the Company’s stockholders on

March 14, 2017.

The amendment to the Equity Incentive Plan was approved in

2015

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, 2017,

there were options outstanding covering

2,377,502

and

2,411,000

shares of common stock under the

2005

Equity Plan and

2015

Equity Plan, respectively, and

2,330,667

shares of common stock available for grant for a total of

7,119,169

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

$1,116,400

and

$605,426

of stock compensation expense for the years ended

September

30,

2017

and

2016,

respectively. The weighted average estimated fair value of employee stock options granted during the year ended

September

30,

2017

and

2016

was calculated using the Black-Scholes option-pricing model with the following weighted average assumptions (annualized percentages):

	2017				2016
Volatility		42.6%	-	53.7%		49.0%	-	52.0%
Risk-free interest rate		1.73%	-	2.01%		1.0%	-	1.7%
Forfeiture rate			10.0%				10.0%
Dividend yield			0.0%			2.2%	-	2.7%
Expected life in years		3.8	-	4.6		3.2	-	4.6
Weighted average fair value of options granted during the period			$0.71				$0.70

The Company

did

not

pay a dividend in fiscal

2017

but did pay 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,

2017,

there was approximately

$683,000

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

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

$42,363

and

$4,774

for the years ended

September 30, 2017

and

2016

respectively. 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, 2017.

Restricted

Stock

Units

the quarter ended

December 31, 2016,

the Board of Directors approved an amendment to the Company’s compensation program for non-employee directors that provides for the grant of

25,000

restricted stock units (“RSUs”) to each of the Company’s non-employee directors at each annual meeting of the Company’s stockholders, subject to stockholder approval of the

Amended and Restated

2015

Equity Incentive Plan at the

2017

Annual Meeting of Stockholders. These RSUs were granted as replacements for

20,000

stock options that would have been granted on the date of the

2016

Annual Meeting of Stockholders and would have vested on the

first

anniversary of the

2016

Annual Meeting of Stockholders, which was

May 17, 2017.

As a result of the stockholders approval of the Amended and Restated

2015

Equity Incentive Plan at the

2017

Annual Meeting of Stockholders on

March 14, 2017,

the RSUs previously granted were made effective at a market value of

$197,500

and were expensed on a straight line basis through the

May 17, 2017

vest date.

March 14, 2017,

non-employee directors of the Company received

25,000

RSUs that will vest on the

first

anniversary of the grant date. These were also issued at a market value of

$197,500,

which will be expensed on a straight line basis through the

March 14, 2018

vest date.

A summary of activity of the Company

’s restricted stock plan as of

September 30, 2017

and

2016

is presented below:

	Number
	of Shares
Balance, September 30, 2016		-
Granted		250,000
Released		(125,000	)
Forfeited/cancelled		-
Balance, September 30, 2017		125,000

Stock Option Summary Information

A summary of activity for the Company

’s stock option plans as of

September

30,

2017

and

2016

is presented below:

	Number			Weighted Average
	of Shares			Exercise Price
Outstanding October 1, 2016		4,404,002		$	2.18
Granted		574,500		$	2.09
Forfeited/expired		(81,667	)	$	2.51
Exercised		(233,333	)	$	1.60
Outstanding September 30, 2017		4,663,502		$	2.16
Exercisable September 30, 2017		3,329,437		$	2.25

The aggregate intrinsic value for options outstanding and options exercisable at

September

30,

2017

was

$869,955

and

$673,225,

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

$2.13

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, 2017

was

$72,709

and proceeds from these exercises was

$373,228.

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 Company recognized

$72,709

and

$288

as a tax benefit in the income tax provision for the years ended

September 30, 2017

and

2016,

respectively.

The following table summarizes information about stock options outstanding at

September

30,

2017:

					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		1,332,752		4.35	$	1.65		1,036,036	$	1.63
$1.77	-	$1.99		1,654,500		4.63	$	1.93		626,526	$	1.89
$2.00	-	$2.85		905,000		2.31	$	2.57		902,500	$	2.57
$2.86	-	$3.13		761,250		1.29	$	3.00		757,500	$	3.00
$3.14	-	$3.17		10,000		4.14	$	3.17		6,875	$	3.17
$0.93	-	$3.17		4,663,502		3.41	$	2.18		3,329,437	$	2.25

The Company recorded non-cash share-based compensation expense for employees, directors and consultants for

the fiscal years ended

September

30,

2017

and

2016.

The amounts of share-based compensation expense are classified in the Consolidated Statements of Operations as follows:

Years Ended September 30,	2017		2016
Cost of revenues	$	24,151	$	24,092
Selling, general and administrative		998,540		478,695
Research and development		93,709		102,639
Total	$	1,116,400	$	605,426