Stock-based compensation and equity grants

Stock-based compensation expense

Options issued under equity incentive plans were designated as either an incentive stock or a non-statutory stock option. No option was granted with a term of more than 10 years from the date of grant. Exercisability of 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. As of September 30, 2018, there were 1.7 million shares available for grant under the Company's 2016 Omnibus Equity Incentive Plan.

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



		(in thousands)
		Year Ended
	Ref	September 30,
		2018		2017
DLH employees		$	266	$	166
Non-employee directors	(a)	1,109		496
Total stock option expense		$	1,375	$	662

Ref (a): Equity grants, in accordance with DLH compensation policy for non-employee directors. During the fiscal year ended September 30, 2018, the Company revised its Board compensation policy to provide that equity grants were earned ratably throughout the year rather than retrospectively in the quarter following the completion of the fiscal year. On November 9, 2018 the Company issued 101,667 shares of cliff-vested common stock to non-employee members of the Company's Board of Directors, in accordance with DLH's revised compensation policy for non-employee directors.

Unrecognized stock-based compensation expense



		(in thousands)
		Year Ended
		September 30,
	Ref	2018		2017
Unrecognized expense for DLH employees	(a)	$	876	$	299

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 Monte Carlo 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 within the next 4.25 years.

Stock option activity for the year ended September 30, 2018:

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, 2016		2,226		$1.40	5.8	$	7,581
Granted	(a)	400		$5.94
Exercised or canceled		(632	)	$1.28
Options outstanding, September 30, 2017		1,994		$3.83	6.4	$	8,489
Granted	(b)	217		$6.33
Exercised or canceled		(77	)	$3.70
Options outstanding, September 30, 2018		2,134		$4.31	6.3	$	6,949

Ref (a): Option grants to DLH employees in the fiscal year ended September 30, 2017 were valued using a binomial model, under the following criteria:



	September 30,
	2017
Risk free interest rate	2.46	%
Contractual term	10 years
Dividend yield	—	%
Expected lives	10 years
Expected volatility	144	%
Fair value per option	$0.93 - $1.47

Ref (b): Utilizing a volatility range of 50% along with assumptions of a 10 year term and the aforementioned 10-day stock price threshold results in an indicated range of value of the Options granted during the current fiscal year ended September 30, 2018, as follows using the Monte Carlo Method.



										Volatility
										50%
					Vesting				Expected
	Strike		Stock		Threshold		Risk-Free		Term	Calculated
Grant Date	Price		Price		Price		Rate		(Years)	Fair Value
11/29/2017	$	6.46	$	6.46	$	12.00	2.4	%	10	$	3.98
12/01/2017	$	6.28	$	6.28	$	8.00	2.4	%	10	$	3.87
12/01/2017	$	6.28	$	6.28	$	10.00	2.4	%	10	$	3.82

Notes:
Results based on 100,000 simulations

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



		(in thousands)
		Number of Shares
		September 30,
	Ref	2018	2017
Vested and exercisable	(a)	1,335	1,327
Unvested	(b)	799	667
Options outstanding		2,134	1,994

Ref (a): Weighted average exercise price of vested and exercisable shares was $1.50 and $1.45 at September 30, 2018 and 2017, respectively. Aggregate intrinsic value was $5.7 million and $6.8 million at September 30, 2018 and 2017, respectively. Weighted average contractual term remaining was 4.5 years and 5.0 years at September 30, 2018 and 2017, respectively.

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