SHARE-BASED COMPENSATION

Stock Option Plans

December 31, 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

December 31, 2019,

there were options and restricted stock units outstanding covering

461,494

and

2,093,285

shares of common stock under the

2005

Equity Plan and

2015

Equity Plan, respectively and

1,727,937

shares of common stock available for grant for a total of

4,282,716

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

333,727

stock options granted during the

three

months ended

December 31, 2019.

There were

stock options granted during fiscal

2019.

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

three

months ended

December 31, 2019

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

		Three months ended
		December 31, 2019
Volatility		40.2%
Risk-free interest rate		1.5%
Forfeiture rate		10.0%
Dividend yield		0.0%
Expected life in years		5.0

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

December 31, 2019,

there was approximately

$341,456

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

2.9

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. As of

December 31, 2019,

187,500

of the options related to the

2019

targets vested.

The Company determined that as of

December 31, 2019,

it is

not

probable that the performance conditions related to the

2020

options 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 PVO’s during the

three

months ended

December 31, 2019.

Restricted

Stock

Units

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.

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 will be 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. There were

RSU’s granted during the

three

months ended

December 31, 2019.

Compensation expense for RSU’s was

$126,367

for the

three

months ended

December 31, 2019.

Compensation expense for RSU’s was

$79,112

for the

three

months ended

December 31, 2018.

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

December 31, 2019

is presented below:

	Number of Shares			Weighted Average Grant Date Fair Value
Outstanding September 30, 2019		274,849		$	2.59
Granted		-		$	-
Released		-		$	-
Forfeited/cancelled		(2,222	)	$	2.50
Outstanding December 31, 2019		272,627		$	2.60

Stock Option

Summary Information

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

December 31, 2019

is presented below:

	Number of Shares			Weighted Average Exercise Price
Outstanding September 30, 2019		2,219,268		$	1.94
Granted		333,727		$	3.40
Forfeited/expired		(187,500	)	$	1.99
Exercised		(83,343	)	$	1.73
Outstanding December 31, 2019		2,282,152		$	2.17
Exerciseable December 31, 2019		1,539,220		$	1.97

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

3.6

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

December 31, 2019

was

$2,562,099

and

$1,997,716,

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

three

months ended

December 31, 2019

was

$128,318

and proceeds from these exercises were

$144,214.

The total intrinsic value of stock options exercised during the

three

months ended

December 31, 2018

was

$1,504

and proceeds from these exercises were

$2,528.

The following table summarized information about stock options outstanding at

December 31, 2019:

					Weighted Average	Weighted Average				Weighted Average
Range of			Number		Remaining	Exercise		Number		Exercise
Exercise Prices			Outstanding		Contractual Life	Price		Exercisable		Price
$1.31	-	$1.76		584,533	2.91	$	1.65		531,220	$	1.65
$1.86	-	$1.86		130,142	2.96	$	1.86		130,142	$	1.86
$1.99	-	$1.99		937,500	3.58	$	1.99		562,500	$	1.99
$2.02	-	$3.40		629,977	4.35	$	2.97		315,358	$	2.97
				2,282,152	3.59	$	2.17		1,539,220	$	1.97

The Company recorded

$31,960

and

$54,733

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

three

months ended

December 31, 2019,

and

2018,

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
	December 31,
	2019		2018
Cost of revenues	$	3,642	$	4,298
Selling, general, and administrative		143,927		111,851
Research and development		10,758		17,696
	$	158,327	$	133,845