. SHARE-BASED COMPENSATION

Stock Option Plans

March 31, 2020,

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

March 31, 2020,

there were options and restricted stock units outstanding covering

303,014

and

3,103,558

shares of common stock under the

2005

Equity Plan and

2015

Equity Plan, respectively and

602,917

shares of common stock available for grant for a total of

4,009,489

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.

There were

1,133,727

stock options granted during the

six

months ended

March 31, 2020.

There were

stock options granted during fiscal

2019.

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

six

months ended

March 31, 2020

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

Volatility	44.5	%
Risk Free Interest Rate	1.40	%
Forfeiture rate	10.0	%
Dividend Yield	0.0	%
Expected life in years	5.35

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

pay a dividend in fiscal

2019

or in fiscal

2018.

As of

March 31, 2020,

there was approximately

$420,168

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

2.28

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. At the grant date, there were

375,000

performance-based stock options assigned to performance criteria within each of fiscal

2019

and

2020.

Vesting is based upon the achievement of certain performance criteria for each of fiscal

2019

and

2020

including a minimum free cash flow margin and net revenue targets. Additionally, vesting is subject to the executive being employed by the Company at the time the Company achieves such financial targets. As of

September 30, 2019,

187,500

of the options related to the

2019

performance criteria vested. The Company recorded

$151,181

in stock based compensation expense for these options. This agreement was modified in

October 2019,

and

93,750

of the unvested options initially allocated to the performance criteria for

2019

were assigned to fiscal

2020.

October 4, 2019,

the Company awarded a performance-based stock option (PVO) to purchase

800,000

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

2022

and

2023

The Company determined that as of

March 31, 2020,

it is probable that certain performance conditions related to the

2020

performance criteria will be achieved. During the

three

and

six

months ended

March 31, 2020,

the Company recorded

$95,750

in stock based compensation expense related to performance-based stock options. 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

During fiscal

2018,

the Board of Directors granted

93,330

restricted stock units (“RSUs”) 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.

February 7, 2019,

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

30,000

RSUs to each of the Company’s

five

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 were expensed on a straight-line basis through the

March 12, 2020

vest date. Also, during fiscal

2019,

99,300

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

$248,250,

which will be expensed on a straight line basis over the

three

year life of the grants.

March 10, 2020,

each member of the Board of Directors received a grant of

30,000

RSUs that will vest on the

first

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

$424,500,

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

March 10, 2021

vest date. Also, during the quarter,

81,270

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

$257,626,

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

three

-year life of the grants.

During the

six

months ended

March 31, 2020,

the Company retained

13,063

shares of common stock to satisfy tax withholding obligations upon the vesting of RSUs issued to employees. These shares were

not

acquired pursuant to any repurchase plan or program. During the

six

months ended

March 31, 2019,

there were

shares retained to satisfy withholding obligations in connection with the vesting of RSUs issued to employees.

Compensation expense for RSUs was

$167,724

for the

three

months ended

March 31, 2020.

Compensation expense for RSUs was

$294,090

for the

six

months ended

March 31, 2020.

Compensation expense for RSUs was

$140,370

for the

three

months ended

March 31, 2019

and

$219,482

for the

six

months ended

March 31, 2019.

As of

March 31, 2020,

there was approximately

$788,161

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

1.56

years.

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

March 31, 2020

is presented below:

	Number of Shares			Weighted Average Grant Date Fair Value
Outstanding September 30, 2019		274,849		$	2.59
Granted		231,270		$	2.95
Released		(198,106	)	$	2.66
Forfeited/cancelled		(4,999	)	$	2.58
Outstanding March 31, 2020		303,014		$	2.82

Stock Option

Summary Information

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

March 31, 2020

is presented below:

	Number of Shares			Weighted Average Exercise Price
Outstanding September 30, 2019		2,219,268		$	1.94
Granted		1,133,727		$	3.39
Forfeited/expired		(109,233	)	$	2.11
Exercised		(140,204	)	$	1.84
Outstanding March 31, 2020		3,103,558		$	2.48
Exerciseable March 31, 2020		1,495,857		$	1.98

Options outstanding are exercisable at prices ranging from

$1.31

$3.40

and expire over the period from

2020

2026

with an average life of

4.4

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

March 31, 2020

was

$2,603,494

and

$1,931,620,

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

$3.27

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

six

months ended

March 31, 2020

was

$241,715

and proceeds from these exercises were

$258,047.

The total intrinsic value of stock options exercised during the

six

months ended

March 31, 2019

was

$34,903

and proceeds from these exercises were

$45,172.

The following table summarized information about stock options outstanding at

March 31, 2020:

Range of Exercise Prices			Number Outstanding		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$1.31	-	$1.86		673,862		2.80	$	1.69		628,455	$	1.68
$1.99	-	$1.99		1,031,250		3.89	$	1.99		562,500	$	1.99
$2.02	-	$3.17		264,719		1.54	$	2.46		263,187	$	2.46
$3.39	-	$3.40		1,133,727		6.59	$	3.39		41,715	$	3.40
				3,103,558		4.44	$	2.48		1,495,857	$	1.98

The Company recorded

$127,566

and

$31,605

of stock option compensation expense for employees, directors and consultants for the

three

months ended

March 31, 2020,

and

2019,

respectively. The Company recorded

$159,527

and

$86,338

of stock option compensation expense for employees, directors and consultants for the

six

months ended

March 31, 2020,

and

2019,

respectively.

Share-Based Compensation

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

	Three months ended				Six months ended
	March 31				March 31
	2020		2019		2020		2019
Cost of revenues	$	6,909	$	4,201	$	10,551	$	8,499
Selling, general and administrative		283,314		163,932		427,241		284,973
Research and development		5,067		3,842		15,825		12,348
	$	295,290	$	171,975	$	453,617	$	305,820