STOCK BASED COMPENSATION

Stock Options

We have in effect one stock incentive plan, the 2013 Incentive Plan (the “Plan”) under which non-qualified stock options and restricted stock units have been granted to employees and non-employee directors. Options generally expire 10 years from the date of grant.

The Compensation Committee of the Board of Directors determines the stock-based compensation grants. The exercise price of options is the closing price on the date the options are granted. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model.

Under the Plan, we have 1.9 million shares available for future grant as of September 30, 2014. The Plan permits the grant of stock options, stock appreciation rights, stock awards, performance awards, restricted stock and stock units, and other stock and cash-based awards. The Plan uses a “fungible share” concept, pursuant to which shares that are subject to appreciation awards (such as stock options and stock appreciation rights) are counted against the Plan share limit on a 1-for-1 basis for every such share subject to appreciation awards, and shares that are subject to full value awards (such as awards of stock, restricted stock and restricted stock units) are counted against the Plan share limit at a ratio of 1.5 shares for every share subject to the full value award.

As of September 30, 2014, none of our stock-based awards are classified as liabilities. We did not capitalize any stock-based compensation cost.

Compensation cost related to our Plan and ESPP is as follows:



	September 30,
	2014		2013		2012
	(in thousands)
Cost of revenues	$	823	$	617	$	567
Engineering, research and development	2,248		1,616		1,530
Selling, general and administrative	3,004		2,163		2,345
Total stock-based compensation expense	$	6,075	$	4,396	$	4,442

As of September 30, 2014, there was $6.0 million of unrecognized stock-based compensation expense related to non-vested stock options, restricted stock units, and our ESPP. The weighted average period over which the unearned stock-based compensation for stock options and restricted stock units is expected to be recognized is approximately 1.2 years and 1.6 years, respectively. An estimated forfeiture rate of 4.2% has been applied to all unvested options and restricted stock outstanding as of September 30, 2014. On a quarterly basis, we assess changes to our estimate of expected equity award forfeitures based on our review of recent forfeiture activity and expected future employee attrition. We recognize the effect of adjustments made to the forfeiture rates, if any, in the period that we change the forfeiture estimate. The effect of forfeiture adjustments in fiscal years 2014, 2013, and 2012 was not significant. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that we grant additional equity awards and our stock price increases.

Activity in stock option awards is as follows:



	Shares (in thousands)		Weighted average exercise price		Weighted average remaining contractual life (in years)	Aggregate intrinsic value (in thousands)
Options outstanding, September 30, 2011	1,699		$	29.77	6.37	$	—
Granted	401		2.55
Exercised	(6	)	2.54			3
Cancelled or expired	(281	)	76.87
Options outstanding, September 30, 2012	1,813		16.57		6.61	2
Granted	464		2.12
Exercised	(9	)	2.24			6
Cancelled or expired	(179	)	16.52
Options outstanding, September 30, 2013	2,089		13.43		6.67	591
Granted	1,014		2.53
Exercised	(52	)	2.36			64
Cancelled or expired	(111	)	76.55
Options outstanding, September 30, 2014	2,940		$	7.46	7.00	$	2,059
Options exercisable, September 30, 2014	1,633		$	11.36	5.63	$	668

This intrinsic value represents the excess of the fair market value of our common stock on the date of exercise over the exercise price of such options. The aggregate intrinsic values in the preceding table for the options outstanding represent the total pretax intrinsic value, based on our closing stock price of $3.60, $3.04, and $2.44 as of September 30, 2014, 2013 and 2012, respectively, which would have been received by the option holders had those option holders exercised their in-the-money options as of those dates. There were 0.6 million in-the-money stock options that were exercisable as of September 30, 2014.

The fair value of stock‑based awards is estimated at the date of grant using the Black‑Scholes option valuation model; however, the value calculated using an option pricing model may not be indicative of the fair value observed in a willing buyer/willing seller market transaction, or actually realized by the employee upon exercise. Expected volatility used to estimate the fair value of options granted is based on the historical volatility of our common stock. The risk-free interest rate is based on the United States Treasury constant maturity rate for the expected life of the stock option. The expected life of a stock award is the period of time that the award is expected to be outstanding. Expected lives are estimated in accordance with SAB No. 107, as amended by SAB No. 110, which provides supplemental application guidance based on the views of the SEC.

The per share fair values of stock options granted in connection with stock incentive plans have been estimated using the following weighted average assumptions:



	September 30,
	2014	2013	2012
Expected life (in years)	5.79	5.66	6.61
Expected volatility:
Weighted-average	81.5%	82.0%	86.9%
Range	79.5% - 81.6%	79.8% - 82.1%	82.2% - 87.1%
Expected dividend	—	—	—
Risk-free interest rate	1.7% - 1.9%	0.9% - 1.7%	1.0% - 1.3%

The weighted average fair value at the date of grant of options granted in fiscal years 2014, 2013 and 2012 was $1.75, $1.44 and $1.80, respectively.

On December 10, 2013, we granted 500,000 market-based stock options at an exercise price of $2.53 to executive officers. The market-based options vest if either of the following conditions is met prior to December 10, 2018: (i) the closing price of our common stock equals or exceeds twice the exercise price of $2.53 for 30 consecutive trading days; or (ii) a change in control occurs where the Company’s stockholders receive in consideration of their shares of common stock cash or other consideration with a value at least equal to twice the exercise price of $2.53. We evaluate stock awards with market conditions as to the probability that the market conditions will be met and estimate the date at which the market conditions will be met in order to properly recognize stock-based compensation expense over the requisite service period. We used the following assumptions to estimate the fair value of the options: expected life of 1.3 years, expected volatility of 80.0%, a zero dividend rate, and a risk-free rate of 2.79%. The market-based options had a grant date per share fair value of $1.86.

The following table provides additional information in regards to options outstanding as of September 30, 2014:



	Options Outstanding				Options Exercisable
Range of Exercise Price	Number Outstanding (in thousands)	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Number Exercisable (in thousands)	Weighted Average Exercise Price
$2.10 - $2.26	424	8.43	$	2.11	194	$	2.10
2.53	987	9.19	2.53		116	2.53
2.54 - 4.36	743	6.74	3.45		542	3.49
4.60 - 47.20	589	4.83	7.84		583	7.87
48.00 - 145.40	197	0.43	57.56		198	57.56
$2.10 - $145.40	2,940	7.00	$	7.46	1,633	$	11.36

Restricted Stock Units

We grant restricted stock units to certain employees and to our non-employee directors. Grants vest over varying terms, to a maximum of four years from the date of the grant. Awards to non-employee directors upon their initial appointment or election to the board vest in installments of 33.3% each over the first three anniversaries of the grant date, and annual awards to non-employee directors vest 100% on the first anniversary of the grant date. Unvested restricted shares are forfeited if the recipient’s employment or board term terminates for any reason other than death, disability, or special circumstances as determined by the Compensation Committee of the Board of Directors.

Activity for our restricted stock award units is as follows:



	Restricted Stock Units (in thousands)		Weighted Average Grant-Date Fair Value per Share		Weighted average remaining contractual life (in years)	Aggregate intrinsic value (in thousands)
Restricted stock units, September 30, 2011	1,296		$	4.66	1.38	$	3,823
Awarded	1,258		2.57
Released	(721	)	3.99
Forfeited	(147	)	3.48
Restricted stock units, September 30, 2012	1,686		3.49		1.09	4,113
Awarded	1,527		2.12
Released	(1,045	)	3.19
Forfeited	(147	)	2.88
Restricted stock units, September 30, 2013	2,021		2.65		1.13	6,143
Awarded	1,600		2.62
Released	(1,183	)	2.69
Forfeited	(110	)	2.60
Restricted stock units, September 30, 2014	2,328		$	2.61	0.96	$	8,380

The aggregate intrinsic values in the preceding table for the restricted stock units outstanding represent the total pretax intrinsic value, based on our closing stock price of $3.60, $3.04, and $2.44 as of September 30, 2014, 2013 and 2012, respectively. We issue restricted stock units as part of our equity incentive plans. For the years ended September 30, 2014, 2013, and 2012, the total grant date fair value of shares vested from restricted stock unit grants was $3.2 million, $3.3 million and $2.9 million, respectively. For the majority of restricted stock units granted, the number of shares issued on the date the restricted stock units vest is net of the minimum statutory withholding requirements that we pay in cash to the appropriate taxing authorities on behalf of our employees. The impact of such withholding totaled $1.3 million, $0.6 million and $0.6 million for each of the years ended September 30, 2014, 2013, and 2012, respectively, and was recorded as settlement on restricted stock tax withholding in the accompanying consolidated statements of stockholders’ equity (deficit). Although shares withheld are not issued, they are treated as common stock repurchases in our consolidated financial statements, as they reduce the number of shares that would have been issued upon vesting.

Employee Stock Purchase Plan

Pursuant to our ESPP, eligible employees may authorize payroll deductions of up to 15% of their regular base salary subject to certain limits to purchase shares at the lower of 85% of the fair market value of the common stock on the date of the commencement of the offering or on the last day of the 6-month offering period. During fiscal years 2014, 2013 and 2012, a total of 721,900, 952,516 and 821,470 shares, respectively, were purchased by and distributed to employees at a weighted average price of $2.50, $1.75 and $2.11 per share, respectively. At fiscal 2014 year-end, we had 3.0 million shares of our common stock reserved for future issuance under the plan. We recognized $0.6 million, $0.6 million and $0.6 million stock compensation expense under the ESPP during the fiscal years ended September 30, 2014, 2013 and 2012, respectively. We determine the fair value of the ESPP awards using the Black-Scholes pricing model. Underlying assumptions used were as follows:



	September 30,
	2014	2013	2012
Expected life (in years)	0.5	0.5	0.5
Expected volatility (range)	37.1% - 50.3%	47.6% - 49.8%	40.4% - 48.4%
Expected dividend	—	—	—
Risk-free interest rate	0.07% - .08%	0.11% - .14%	0.09% - .20%