(3)Stock-Based Compensation and Stock Options

The MGC Diagnostics Corporation 2007 Stock Incentive Plan (the “2007 Plan”) provides that incentive stock options and nonqualified stock options to purchase shares of common stock may be granted at prices determined by the Compensation Committee, except that the purchase price of incentive stock options may not be less than the fair market value of the stock at the date of grant. Options under the 2007 Plan are subject to vesting schedules established on the date of grant. In addition, the 2007 Plan allows the granting of restricted stock awards, stock appreciation rights and performance stock.

Total stock-based compensation expense included in the Company’s statements of comprehensive loss was $144,000 and $113,000 for the three months ended January 31, 2016 and 2015, respectively.

Stock Options

A summary of the Company’s stock option activity for the three months ended January 31, 2016 and 2015 is presented in the following table:


				Year ended October 31,
	For the Three Months ended
	January 31, 2016			January 31, 2015
		Weighted			Weighted
		Average			Average
		Exercise			Exercise
	Shares	Price		Shares	Price
Outstanding at beginning of period	177,900	$	6.48	52,650	$	7.01
Granted	25,305		6.62	—		—
Outstanding at end of period	203,205	$	6.50	52,650	$	7.01

The following table summarizes information concerning stock options outstanding as of January 31, 2016:



		Weighted
		Average
		Remaining	Number
	Number	Contractual	Subject to
Exercise Prices	Outstanding	Life	Exercise
$6.07	150,000	6.33	—
6.62	13,305	6.88	—
6.63	12,000	6.85	—
6.76	5,400	6.79	5,400
9.12	22,500	5.34	7,499
Total	203,205	6.30	12,899

The total intrinsic value of options outstanding and exercisable as of January 31, 2016 was $125,000 and $1,000, respectively, which was calculated using the closing stock price at the end of the first quarter less the option price of in-the-money options. The Company issues new shares when stock options are exercised. Unrecognized compensation expense related to outstanding stock options as of January 31, 2016 was $493,000 and is expected to be recognized over a weighted average period of 2.20 years.

Valuation Assumptions

The Company uses the Black-Scholes option-pricing model (“Black-Scholes model”) to determine the fair value of stock options as of the grant date. The fair value of stock options under the Black-Scholes model requires management to make assumptions regarding projected employee stock option exercise behaviors, risk-free interest rates, volatility of the Company’s stock price and expected dividends. The expense recognized for options granted under the 2007 Plan is equal to the fair value of stock options as of the grant date. The following table provides the weighted average fair value of options granted to employees and the related assumptions used in the Black-Scholes model for stock option grants made during the three months ended January 31, 2016:



	Options Granted	Options Granted
	December 16, 2015	December 7, 2015
Weighted average fair value of options granted	$3.35	$3.52
Assumptions used:
Expected life (years)	7.00	7.00
Risk-free interest rate	1.67%	1.67%
Volatility	48.72%	48.75%
Dividend Yield	0.00%	0.00%

Restricted Stock Awards

Restricted stock awards are awards of common stock that are subject to restrictions on transfer and to a risk of forfeiture if the holder leaves the Company before the restrictions lapse. The holder of a restricted stock award is generally entitled at all times on and after the date of issuance of the restricted shares to exercise the rights of a shareholder of the Company, including the right to vote the shares. The value of stock awards that vest over time was established by the market price on the date of its grant. A summary of the Company’s restricted stock activity for the three months ended January 31, 2016 and 2015 is presented in the following table:


				Year ended October 31,
	For the Three Months ended
	January 31, 2016				January 31, 2015
		Weighted				Weighted
		Average				Average
		Grant Date				Grant Date
	Shares	Fair Value			Shares	Fair Value
Unvested at beginning of period	49,993	$	7.61		57,035	$	8.40
Granted	—		—		1,333		6.00
Vested	(666)		5.80		(667)		5.80
Unvested at end of period	49,327	$	7.63		57,701	$	8.38

Unrecognized compensation expense related to outstanding restricted stock awards to employees and directors as of January 31, 2016 was $135,000 and is expected to be recognized over a weighted average period of 1.28 years.

Director Stock Awards in Lieu of Cash Retainer Fees

The Company has a program that allows non-employee Board members to elect and receive shares from the 2007 Plan in lieu of some or all of their quarterly cash retainer fees. During the three months ended January 31, 2016 and 2015, the Company issued 1,703 and 1,665 shares, respectively, under this program. The expense was recognized at the time of share issuance and totaled $11,000 in each of the three-month periods ended January 31, 2016 and 2015.

Non-employee Stock Awards in Lieu of Cash

In fiscal 2016, the Company entered into a consulting arrangement under which it agreed to issue share awards to non-employee consultants in lieu of cash compensation. These awards are an obligation within a consulting arrangement that does not grant any ownership rights until the shares are issued. The number of shares to be issued to non-employees is determined and paid quarterly for fixed monthly dollar values per the agreement. Expense under this agreement for the three months ended January 31, 2016 was $3,000.

Employee Stock Purchase Plan

The MGC Diagnostics Corporation 2003 Employee Stock Purchase Plan, as amended (“Purchase Plan”), allows participating employees to purchase up to 200,000 shares of the Company’s common stock at a discount through payroll deductions. The Purchase Plan is available to all employees subject to eligibility requirements. Under the Purchase Plan, participating employees may purchase the Company’s common stock on a voluntary after-tax basis at a price that is the lower of 85% of the fair market value of one share of common stock at the beginning or end of each stock purchase phase. The Purchase Plan is carried out in six-month phases, with phases beginning on January 1 and July 1 of each calendar year. For the phase that ended on December 31, 2015, employees purchased 11,248 shares at a price of $4.47 per share. As of January 31, 2016, the Company has withheld approximately $8,000 from employees participating in the phase that began on January 1, 2016. As of January 31, 2016, 57,834 shares of common stock were available for future purchase under the Purchase Plan.

The following table presents the classification of pre-tax stock-based compensation expense recognized in the consolidated statements of comprehensive loss for the three months ended January 31, 2016 and 2015:



	Three months ended January 31,
(In thousands)	2016		2015
Cost of revenues	$	1	$	1
Selling and marketing		29		22
General and administrative		112		88
Research and development		2		2
Stock-based compensation expense	$	144	$	113

Tax Impact of Stock-Based Compensation

The Company reports the benefit of tax deductions in excess of recognized stock-based compensation expense on the consolidated statements of cash flows as financing cash flows. For the three months ended January 31, 2016 and 2015, there were no excess tax benefits.