NOTE 7. SHARE-BASED COMPENSATION

The Company provides its employees, officers, consultants and directors with stock options, restricted stock units (“RSUs”) and other stock rights for common stock of the Company on a discretionary basis. All option and RSU grants are subject to the terms and conditions determined by the Compensation and Stock Committee of the Board of Directors (the “Committee”), and generally vest over a three-year period and expire either seven or ten years from the date of grant. All awards granted during the year ended September 30, 2016 were granted under the Company’s Second Amended and Restated Equity Compensation and Incentive Plan (the “2011 Plan”). At September 30, 2016, a total of 2,275,392 shares were authorized for issuance under the 2011 Plan and 176,904 shares remained available for future issuance thereunder.

On January 20, 2006, the Company established the Datawatch Corporation 2006 Equity Compensation and Incentive Plan (the “2006 Plan”) which provides for the granting of both incentive stock options and non-qualified options, the award of Company common stock and opportunities to make direct purchases of Company common stock, as determined by the Committee. Options pursuant to this plan were available to be granted through April 26, 2011 and vest as specified by the Committee.

On April 26, 2011, the Company established the 2011 Plan which provides for the granting of both incentive stock options and non-qualified options, the award of restricted stock, RSUs, and any other equity-based interests (collectively, “Stock Rights”), as determined by the Committee. Options pursuant to this plan may be granted through April 25, 2021 and shall vest as specified by the committee.

Under the 2006 Plan and 2011 Plan, stock options are granted at exercise prices not less than the fair market value of the underlying common stock at the date of grant. All of the Company’s share-based awards are accounted for as equity instruments and there have been no liability awards granted. Share-based compensation expense for share-based payment awards, issued to employees and directors, is measured based on the grant-date fair value of the award and recognized on a straight-line basis over the requisite period of the award. Share-based compensation expense for share-based payment awards, issued to non-employees, is revalued each fiscal quarter based on the current fair value of the award and recognized on over the requisite period of the award.

The following table presents share-based compensation expenses included in our audited consolidated statements of operations (in thousands):


	Years Ended
	September 30,
	2016		2015		2014
	(In thousands)
Cost of maintenance and services	$	37	$	63	$	143
Sales and marketing		1,028		3,110		5,243
Engineering and product development		359		417		1,585
General and administrative		1,407		1,143		1,475
Total	$	2,831	$	4,733	$	8,446

Stock Options

The Company estimates the fair value of each share-based award (except RSUs, which are discussed below) using the Black-Scholes option valuation model. The Black-Scholes option valuation model incorporates assumptions as to stock price volatility, the expected life of options, a risk-free interest rate and dividend yield. No options were granted by the Company in the fiscal years 2016 and 2015. The total intrinsic value of options exercised during the years ended September 30, 2016, 2015 and 2014 was $15,000, $0.1 million and $0.7 million, respectively. Total cash received from option exercises during the years ended September 30, 2016, 2015 and 2014 was $0.1 million, $0.1 million and $0.2 million, respectively. There was no tax benefit realized from stock option exercised during the years ended September 30, 2016 and 2015. The tax benefit realized from stock options exercised during the fiscal year 2014 was $24,000. As of September 30, 2016, there was no unrecognized compensation cost related to non-vested stock option arrangements. Many of the assumptions used in the determination of share-based compensation expense are judgmental and highly volatile.

The expected option life is based on historical trends and data. With regard to the expected option life assumption, the Company considers the exercise behavior of past grants and models the pattern of aggregate exercises. Patterns are determined on specific criteria of the aggregate pool of optionees including the reaction to vesting, realizable value and short-time-to-maturity effect. The Company determined the volatility for options granted using the historical volatility of the Company’s common stock. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of the stock options. Dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. Based on the Company’s historical voluntary turnover rates, an annualized estimated forfeiture rate of 10% has been used in calculating the estimated cost. Additional expense will be recorded if the actual forfeiture rate is lower than estimated, and a recovery of prior expense will be recorded if the actual forfeiture rate is higher than estimated.

The following table is a summary of combined stock option activity under the 2006 Plan and the 2011 Plan:



		Weighted-		Weighted-
		Average		Average	Aggregate
		Exercise		Remaining	Intrinsic
	Number of Options	Price Per Share		Life (In years)	Value (In thousands)

Outstanding, September 30, 2013	363,209	$	5.76	4.33	$	8,042
Granted	-		-	-		-
Canceled/Forfeited	-		-	-		-
Exercised	(42,709)		4.18	-		719
Outstanding, September 30, 2014	320,500	$	5.97	3.74	$	1,572
Granted	-		-	-		-
Canceled/Forfeited	-		-	-		-
Exercised	(18,000)		2.91	0.89		71
Outstanding, September 30, 2015	302,500	$	6.15	2.86	$	446
Granted	-		-	-		-
Canceled/Forfeited	(5,000)		3.61	-		7
Exercised	(22,500)		4.73	1.00		15
Outstanding, September 30, 2016	275,000	$	6.31	5.01	$	715
Exercisable, September 30, 2016	275,000	$	6.31	5.01	$	715
Unvested awards expected to vest, September 30, 2016	-	$	-	-	$	-

The following table presents weighted-average price and life information regarding options outstanding and exercisable at September 30, 2016:


Outstanding								Exercisable
				Weighted-						Weighted-
				Average		Weighted-				Average
				Remaining		Average
Exercise		Number of		Contractual		Exercise				Exercise
Prices		Shares		Life (Years)		Price		Shares		Price

	$3.46		150,000		4.37	$	3.46		150,000	$	3.46
	$4.97		50,000		4.57		4.97		50,000		4.97
	$12.92		75,000		6.56		12.92		75,000		12.92

			275,000		5.01	$	6.31		275,000	$	6.31

Restricted Stock Units

The Company periodically grants awards of restricted stock units to its non-employee directors employees on a discretionary basis pursuant to its stock compensation plans. Each RSU entitles the holder to receive, at the end of each vesting period, a specified number of shares of the Company’s common stock. The total number of RSUs unvested at September 30, 2016 was 609,565. Most RSUs vest at the rate of 33.33% on each of the first through third anniversaries of the grant date.

The fair value related to the RSUs was calculated based primarily on the closing stock price of the Company’s common stock on the date of the grant and is being amortized evenly on a pro-rata basis over the vesting period to sales and marketing, engineering and product development, professional services and general and administrative expense. The fair values of the RSUs granted in fiscal years 2016, 2015 and 2014 were $2.7 million (or $5.36 weighted-average fair value per share), $2.0 million (or $7.59 weighted-average fair value per share) and $6.0 million (or $19.98 weighted-average fair value per share), respectively. The Company recorded compensation expense related to RSUs of $2.7 million, $4.5 million and $8.2 million during the years ended September 30, 2016, 2015 and 2014, respectively. These amounts are included in the total share-based compensation expense disclosed above. As of September 30, 2016, there was $3.0 million of total unrecognized compensation cost related to RSUs, which is expected to be recognized over a weighted-average period of 1.91 years.

The following table presents nonvested RSU information for the fiscal years ended September 30, 2016, 2015 and 2014



	Number of
	RSUs
	Outstanding

Nonvested, September 30, 2014		740,011
Granted		444,068
Canceled/Forfeited		(281,516)
Vested		(332,999)

Nonvested, September 30, 2015		569,564
Granted		506,800
Canceled/Forfeited		(191,364)
Vested		(275,435)
Nonvested, September 30, 2016		609,565