. SHARE-BASED COMPENSATION

Equity Incentive

Plans

June 30, 2019,

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 Plan was approved in

2015

and authorizes for issuance 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

June 30, 2019,

there were options and restricted stock units outstanding covering

691,383

and

2,174,708

shares of common stock under the

2005

Equity Plan and

2015

Equity Plan, respectively, and

1,873,059

shares of common stock available for grant for a total of

4,739,150

currently available under the

two

equity plans.

Stock Option

Information

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

June 30, 2019

is presented below:

	Number of Shares			Weighted Average Exercise Price
Outstanding September 30, 2018		3,394,858		$	2.18
Granted		-		$	-
Forfeited/expired		(768,334	)	$	2.99
Exercised		(35,282	)	$	1.55
Outstanding June 30, 2019		2,591,242		$	1.94
Exerciseable June 30, 2019		1,736,114		$	1.93

Options outstanding are exercisable at prices ranging from

$1.31

$3.17

and expire over the period from

2020

2024

with an average life of

3.22

years. The aggregate intrinsic value of options outstanding and exercisable at

June 30, 2019

was

$3,495,052

and

$2,364,061,

respectively. The aggregate intrinsic value represents the difference between the Company’s closing stock price on the last day of trading for the quarter, which was

$3.29

per share, and the exercise price multiplied by the number of applicable options. The total intrinsic value of stock options exercised during the

nine

months ended

June 30, 2019

was

$97,609

and proceeds from these exercises were

$54,621.

The following table summarized information about stock options outstanding and exercisable at

June 30, 2019:

					Weighted Average		Weighted Average				Weighted Average
Range of			Number		Remaining		Exercise		Number		Exercise
Exercise Prices			Outstanding		Contractual Life		Price		Exercisable		Price
$1.31	-	$1.69		572,266		2.91	$	1.57		557,639	$	1.57
$1.71	-	$1.86		523,726		2.58	$	1.80		466,663	$	1.81
$1.99	-	$1.99		1,125,000		4.09	$	1.99		343,750	$	1.99
$2.02	-	$3.13		360,250		1.98	$	2.55		358,062	$	2.55
$3.17	-	$3.17		10,000		2.39	$	3.17		10,000	$	3.17
				2,591,242						1,736,114

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 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

June 30, 2019,

it is probable that some of the performance conditions will be achieved and recorded

$101,447

in share-based compensation expense related to these options for the

three

months ended

June 30, 2019.

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.

Restricted Stock Units

March 14, 2017,

the Board of Directors approved a 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 and will vest on the

first

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

$278,750,

which were expensed on a straight-line basis through the

March 20, 2019

vest date.

During the quarter ended

March 31, 2019,

93,330

RSUs were granted to employees that will vest over

three

years on the anniversary date 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.

February 7, 2019,

the Board of Directors approved non-employee director compensation to include an annual grant of

30,000

RSU’s 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

$412,500,

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

March 12, 2020

vest date.

Compensation expense for RSUs was

$124,991

for the

three

months ended

June 30, 2019

and

$344,473

for the

nine

months ended

June 30, 2019.

Compensation expense for RSUs was

$78,252

for the

three

months ended

June 30, 2018

and

$197,325

for the

nine

months ended

June 30, 2018.

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

June 30, 2019

is presented below:

	Number of Shares
Outstanding September 30, 2018		218,330
Granted		249,300
Released		(156,115	)
Forfeited/cancelled		(36,666	)
Outstanding June 30, 2019		274,849

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.

There were

stock options granted during the

nine

months ended

June 30, 2019.

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

nine

months ended

June 30, 2018

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

	Nine months ended
	June 30, 2018
Volatility		45.4%
Risk free interest rate		2.2%
Forfeiture rate		10.0%
Dividend yield		0.0%
Expected life in years		4.6%

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. The Company did

not

declare a dividend for the

nine

-month periods ended

June 30, 2019

or in fiscal year

2018.

As of

June 30, 2019,

there was approximately

$575,955

of unrecognized compensation costs related to outstanding non-performance-based employee stock options and restricted stock units. This amount is expected to be recognized over a weighted average period of

1.05

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.

The Company recorded share-based compensation expense and classified it in the condensed consolidated statements of operations as follows:

	Three months ended				Nine months ended
	June 30,				June 30,
	2019		2018		2019		2018
Cost of revenues	$	3,627	$	5,111	$	12,126	$	16,367
Selling, general and administrative		242,660		123,311		508,761		352,766
Research and development		11,279		20,391		42,499		63,930
	$	257,566	$	148,813	$	563,386	$	433,063