. SHARE-BASED COMPENSATION

Stock Option Plans

September 30, 2018,

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, 2018,

there were options outstanding covering

1,467,283

and

2,145,905

shares of common stock under the

2005

Equity Plan and

2015

Equity Plan, respectively, and

2,119,025

shares of common stock available for grant for a total of

5,732,213

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

September

30,

2018

and

2017

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

	2018		2017
Volatility		45.4%	42.6%	-	53.7%
Risk free interest rate		2.18%	1.73%	-	2.01%
Forfeiture rate		10.0%		10.0%
Dividend yield		0.0%		0.0%
Expected life in years		4.6	3.8	-	4.6
Weighted average FV		$0.89		$0.71

The Company did

not

pay a dividend in fiscal

2018

or in fiscal

2017.

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,

2018,

there was approximately

$566,512

of total unrecognized compensation costs related to outstanding employee stock options. This amount is expected to be recognized over a weighted average period of

1.5

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 as of

September 30, 2018,

it is probable that some but

not

all of the performance condition will be achieved. 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, 2018.

Restricted

Stock

Units

During the quarter ended

December 31, 2016,

the Board of Directors approved the grant of

25,000

restricted stock units (“RSUs”) to each of the Company’s non-employee directors, 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 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 vest date.

March 14, 2017,

the Board of Directors approved an additional grant of

25,000

RSUs to each of the Company’s non-employee directors that will vest on the

first

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

$197,500,

which was expensed on a straight line basis through the

March 14, 2018

vest date.

March 20, 2018,

the Board of Directors approved an additional grant of

25,000

RSUs to each of the Company’s non-employee directors that will vest on the

first

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

$278,750,

which have been and will be expensed on a straight line basis through the

March 20, 2019

vest date. Also, during fiscal

2018,

93,330

RSUs were granted to employees that will vest equally over

three

years on each of the

first

three

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

$210,176,

which will be expensed on a straight line basis over the

three

year life of the grants.

Restricted Stock Unit

Summary Information

A summary of the activity of restricted stock units of the Company as of

September 30, 2018

is presented below:

	Number of Shares
Outstanding October 1, 2017		125,000
Granted		218,330
Released		(125,000	)
Forfeited/cancelled		-
Outstanding September 30, 2018		218,330

Stock Option Summary Information

A summary of the activity in options to purchase the capital stock of the Company as of

September

30,

2018

is presented below:

	Number of Shares			Weighted Average Exercise Price
Outstanding October 1, 2017		4,663,502		$	2.18
Granted		3,500		$	2.21
Forfeited/expired		(92,688	)	$	2.74
Exercised		(1,179,456	)	$	2.06
Outstanding September 30, 2018		3,394,858		$	2.21
Exerciseable September 30, 2018		2,384,576		$	2.27

The aggregate intrinsic value for options outstanding and options exercisable at

September

30,

2018

was

$2,404,380

and

$1,890,891,

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

$3.06

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, 2018

was

$752,729

and proceeds from these exercises was

$2,434,888.

The total intrinsic value of stock options exercised during the year ended

September 30, 2017

was

$72,709

and cash received from these exercises was

$373,288.

The Company recognized

$752,729

and

$72,709

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

September 30, 2018

and

2017,

respectively.

The following table summarizes information about stock options outstanding at

September

30,

2018:

Range of Exercise Prices			Number Outstanding		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$0.93	-	$1.76		912,966		5.28		1.63		783,059		1.62
$1.77	-	$1.99		1,346,642		5.15		1.97		471,642		1.93
$2.00	-	$2.85		364,000		3.08		2.55		360,500		2.55
$2.86	-	$3.17		771,250		0.33		3.00		769,375		3.00
$0.93	-	$3.17		3,394,858						2,384,576

The Company recorded

$584,873

and

$1,116,400

of stock compensation expense for employees, directors and consultants for the years ended

September 30, 2018,

and

2017,

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

Year ended September 30,	2018		2017
Cost of revenues	$	21,388	$	24,151
Selling, general and administrative		479,165		998,540
Research and development		84,320		93,709
	$	584,873	$	1,116,400