Note 9 - 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 of options to purchase shares in Xcede’s common stock to officers, directors, employees and consultants. The options granted generally vest over a three 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 Company 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 nine months ended June 30, 2017 and 2016 is as follows:

	Three Months Ended		Three Months Ended
Stock Compensation Expense	June 30, 2017		June 30, 2016
Stock grants	$	60,000	$	74,000
Restricted stock grants		13,000		13,000
Option grants		12,000		12,000
Employee stock purchase plan		1,000		1,000
Subsidiary stock grants		-		210,000
Subsidiary option grants		30,000		19,000
Total	$	116,000	$	329,000

	Nine Months Ended		Nine Months Ended
Stock Compensation Expense	June 30, 2017		June 30, 2016
Stock grants	$	183,000	$	259,000
Restricted stock grants		39,000		33,000
Option grants		37,000		29,000
Employee stock purchase plan		2,000		2,000
Subsidiary stock grants		-		210,000
Subsidiary option grants		82,000		59,000
Total	$	343,000	$	592,000

At June 30, 2017, there was approximately $126,000 in unrecognized stock compensation cost for Dynasil, which is expected to be recognized over a weighted average period of nine months.

Restricted Stock Grants

A summary of restricted stock activity for the nine months ended June 30, 2017 is presented below:

Restricted Stock Activity for the Nine Months ended			Weighted-Average
June 30, 2017	Shares		Grant-Date Fair Value
Nonvested at September 30, 2016		100,000	$	1.73

Granted		-		-
Vested		(30,000)		1.73
Cancelled		-		-
Nonvested at June 30, 2017		70,000	$	1.73

Stock Option Grants

The assumptions used in the Black-Scholes option pricing model for the stock option grant during the nine months ended June 30, 2017 were as follows:

	FY 2017
Expected term in years		3 years
Risk-free interest rate		1.48	%
Expected volatility		69.57	%
Expected dividend yield		0.00	%

A summary of stock option activity for the nine months ended June 30, 2017 is presented below:

			Weighted Average		Weighted Average
	Options		Exercise Price per		Remain Contractual
	Outstanding		Share		Term (in Years)
Balance at September 30, 2016		123,147	$	2.30		1.69
Outstanding and exercisable at September 30, 2016		123,147		2.30		1.69
Granted		95,602		1.80		2.59
Exercised		-		-
Cancelled		(21,980)		3.03
Balance at June 30, 2017		196,769		1.98		1.89
Outstanding and exercisable at June 30, 2017		196,769	$	1.98		1.89

Subsidiary Stock Option Grants

During the nine months ended June 30, 2017, 810,500 Xcede stock options were granted at an exercise price of $1.00 per share. Of the stock options granted, 228,000 options were given to satisfy deferred compensation in the amount of $75,000 and vested immediately. The remaining 582,500 stock options granted during the nine months ended June 30, 2017 vest over the next three years and expire ten years from the grant date. These options were valued using the Black-Scholes option pricing model and the assumptions for that were as follows:

Expected term in years	10 years
Risk-free interest rate	2.42	%
Expected volatility	83.11	%
Expected dividend yield	0.00	%

A summary of Xcede stock option activity for the nine months ended June 30, 2017 is presented below:

			Weighted Average		Weighted Average
	Options		Exercise Price per		Remain Contractual
	Outstanding		Share		Term (in Years)
Balance at September 30, 2016		613,653	$	1.00		8.35
Outstanding and exercisable at September 30, 2016		320,586		1.00		8.01
Granted		810,500		1.00
Exercised		-		-
Cancelled		(48,197)		1.00
Balance at June 30, 2017		1,375,956		1.00		8.96
Outstanding and exercisable at June 30, 2017		827,155	$	1.00		8.47

At June 30, 2017, the Company’s Xcede joint venture had $182,000 of unrecognized stock compensation expense associated with stock options expected to be recognized over a weighted average period of eleven months.