Stock-based compensation, equity grants, and warrants

Stock-based compensation expense

All grants of equity are presently made under the 2006 Long Term Incentive Plan. As of September 30, 2014, 0.9 million shares remained available for grant under the Plan. Options issued under the Plan are designated as either an incentive stock or a non-statutory stock option. No option may be granted with a term of more than 10 years from the date of grant. Option awards may depend on achievement of certain performance measures determined by the Compensation Committee of our Board. Shares issued upon option exercise are newly issued shares.

Stock-based compensation expense, shown in the table below, is recorded in general and administrative expenses included in our statement of operations:



		(in thousands)
		Year Ended
	Ref	September 30,
		2014		2013
DLH employees		$	363	$	140
Non-employee directors	(a)	109		54
Warrants to consultants	(b)	—		12
Total compensation expense		$	472	$	206

Ref (a): Equity grants of restricted stock to non-employee directors, in accordance with DLH compensation policy for non-employee directors. The shares vested immediately and stock expense was recognized accordingly.

Ref (b): Warrants may be issued from time-to-time to non-employee third parties in order to induce them to enter into certain transactions with the Company. The Company recognizes non-cash expense related to such activity over the estimated period of performance.

Unrecognized stock-based compensation expense



		(in thousands)
		Period Ended
		September 30,
	Ref	2014		2013
Unrecognized expense for DLH employees	(a)	$	346	$	92
Unrecognized expense for non-employee directors	(b)	125		150
Total unrecognized expense		$	471	$	242

Ref (a): Compensation expense for the portion of equity awards for which the requisite service has not been rendered is recognized as the requisite service is rendered. The compensation expense for that portion of awards has been based on the grant-date fair value of those awards as calculated for recognition purposes under applicable guidance. For options that vest based on the Company’s common stock achieving and maintaining defined market prices, the Company values the awards with a binomial model that utilizes various probability factors and other criterion in establishing fair value of the grant. The related compensation expense is recognized over the derived service period determined in the valuation. This expense is expected to be recognized over the next 2.8 years, with a weighted average life of 1.2 years.

Ref (b): Unrecognized stock expense related to prior years equity grants of restricted stock to non-employee directors, based on performance criteria, in accordance with DLH compensation policy for non-employee directors. The shares will vest and expense will be recorded upon future satisfaction of specified performance.

Stock option activity for the year ended September 30, 2014:

The aggregate intrinsic value in the table below represents the total pretax intrinsic value (i.e., the difference between the Company’s closing stock price on the last trading day of the period and the exercise price, times the number of shares) that would have been received by the option holders had all option holders exercised their in the money options on those dates. This amount will change based on the fair market value of the Company’s stock.



					(in years)
					Weighted
				Weighted	Average	(in thousands)
		(in thousands)		Average	Remaining	Aggregate
		Number of		Exercise	Contractual	Intrinsic
	Ref	Shares		Price	Term	Value
Options outstanding, September 30, 2012		1,363		$1.19	8.6	$	140
Granted		250		$0.95
Cancelled
Options outstanding, September 30, 2013		1,613		$1.15	7.9	$	388
Granted	(a)	830		$1.52
Cancelled		(63	)	$1.40
Options outstanding, September 30, 2014		2,380		$1.40	7.8	$	1,589

Ref (a): Option grants to DLH employees were valued using a binomial model, under the following criteria:


•	average risk free interest rates of 2.55% and 0.69% for 2014 and 2013, respectively;


•	expected volatility of 65.8% and 70.2% for 2014 and 2013, respectively;


•	contractual lives and expected lives were 10 years for both periods; and


•	no dividend yield was contemplated for either period.

The resulting average fair values were $0.76 and $0.22 for 2014 and 2013, respectively.

Stock options shares outstanding, vested and unvested for the period ended:



		(in thousands)
		Number of Shares
		September 30,
	Ref	2014	2013
Vested and exercisable	(a)	896	413
Unvested	(b)	1,484	1,200
Options outstanding		2,380	1,613

Ref (a): Weighted average exercise price of vested and exercisable shares was $1.41 and $1.61 at September 30, 2014 and 2013, respectively. Aggregate intrinsic value was $570 thousand and $49 thousand at September 30, 2014 and 2013, respectively. Weighted average contractual term was 8.0 years and 7.9 years at September 30, 2014 and 2013, respectively.

Ref (b): Certain awards vest upon satisfaction of certain performance criteria.