Note 10 - Stock Based Compensation

The fair value of the stock options granted is estimated at the date of grant using the Black-Scholes option pricing model.

The expected volatility was determined with reference to the historical volatility of the Company's stock. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted represents the period of time that the options granted are expected to be outstanding. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury rate in effect at the time of grant. The dividend yield is expected to be zero because historically the Company has not paid dividends on common stock.

The Company’s Xcede joint venture adopted an Equity Incentive Plan in 2013 which provides for, among other incentives, the granting to officers, directors, employees and consultants options to purchase shares in Xcede’s common stock. The options granted generally vest over a 3 year period. The fair value of the stock options granted is estimated at the date of grant using the Black-Scholes option pricing model using assumptions generally consistent with those used for the Company’s stock options. Because Xcede is not publicly traded, the expected volatility is estimated with reference to the average historical volatility of a group of publicly traded companies that are believed to have similar characteristics to Xcede.

Stock compensation expense for the three and six months ended March 31, 2016 and 2015 is as follows:

	Three Months Ended		Three Months Ended
Stock Compensation Expense	March 31, 2016		March 31, 2015
Stock Grants	$	102,000	$	80,000
Restricted Stock Grants		11,000		7,000
Option Grants		10,000		4,000
Employee Stock Purchase Plan		1,000		1,000
Subsidiary Option Grants		19,000		-
Total	$	143,000	$	92,000

	Six Months Ended		Six Months Ended
Stock Compensation Expense	March 31, 2016		March 31, 2015
Stock Grants		185,000	$	137,000
Restricted Stock Grants		19,000		14,000
Option Grants		17,000		4,000
Employee Stock Purchase Plan		1,000		2,000
Subsidiary Option Grants		40,000		-
Total	$	262,000	$	157,000

At March 31, 2016 there was approximately $216,000 in unrecognized stock compensation cost for Dynasil, which is expected to be recognized over a weighted average period of fifteen months.

Restricted Stock Grants

A summary of restricted stock activity for the six months ended March 31, 2016 is presented below:

Restricted Stock Activity for the Six Months ended March 31, 2016	Shares		Weighted-Average Grant-Date Fair Value
Nonvested at September 30, 2015		27,000	$	1.04

Granted		100,000		1.73
Vested		(27,000)		1.04
Cancelled		-		-
Nonvested at March 31, 2016		100,000	$	1.73

Stock Option Grants

The weighted average assumptions used in the Black-Scholes option pricing model for the stock option grant during the six months ended March 31, 2016 were as follows:

	Six Months Ended March 31, 2016
Expected term in years		3 years
Risk-free interest rate		1.05	%
Expected volatility		78.53	%
Expected dividend yield		0.00	%

A summary of stock option activity for the six months ended March 31, 2016 is presented below:

	Options Outstanding		Weighted Average Exercise Price per Share		Weighted Average Remain Contractual Term (in Years)
Balance at September 30, 2015		58,212	$	2.28		1.96
Outstanding and exercisable at September 30, 2015		58,212	$	2.28		1.96
Granted		64,935		2.33		2.84
Exercised		-		-
Cancelled		-		-
Balance at March 31, 2016		123,147	$	2.30		2.19
Outstanding and exercisable at March 31, 2016		123,147	$	2.30		2.19

Subsidiary Stock Option Grants

During the six months ended March 31, 2016, 102,587 Xcede stock options were granted at an exercise price of $1.00 per share. These options vest over the next three years and expire ten years from the grant date. The weighted average assumptions for grants during the six months ended March 31, 2016 used in the Black-Scholes option pricing model were as follows:

Expected term in years	10 years
Risk-free interest rate	2.02	%
Expected volatility	82.96	%
Expected dividend yield	0.00	%

A summary of Xcede stock option activity for the six months ended March 31, 2016 is presented below:

	Options Outstanding		Weighted Average Exercise Price per Share		Weighted Average Remain Contractual Term (in Years)
Balance at September 30, 2015		780,258	$	1.00		8.85
Outstanding and exercisable at September 30, 2015		180,293	$	1.00		8.50
Granted		102,587	$	1.00
Exercised		-		-
Cancelled		(315,024)	$	1.00
Balance at March 31, 2016		567,821	$	1.00		8.74
Outstanding and exercisable at March 31, 2016		227,773	$	1.00		8.07

At March 31, 2016, the Company’s Xcede joint venture had $150,000 of unrecognized stock compensation expense associated with stock options expected to be recognized over a weighted average period of fifteen months and $13,500 of unrecognized stock compensation expense that begin to vest upon the attainment of specific capital raising targets.