Note 5.

Stock-Based Compensation

Stock-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite service period (generally the vesting period of the grant).

Our net loss for the six month periods ended March 31, 2016 and March 31, 2015 includes $355,000 and $153,000, respectively, of compensation costs related to our stock-based compensation arrangements.

Stock Option awards

The Company measures the compensation cost associated with stock option awards by estimating the fair value of the award as of the grant date using the Black-Scholes pricing model. The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the Company’s stock options and stock awards granted during the six months ended March 31, 2016. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by the employees who receive equity awards.

During the six months ended March 31, 2016, the Company granted a total of 22,686 non-statutory stock options and a total of 54,110 incentive stock options, from available shares under its 2008 Plan, as amended, with exercise prices between of $5.29 and $6.23 and per-share weighted average fair values between $2.87 and $4.52.

During the six months ended March 31, 2015, the Company granted a total of 80,871 non-statutory stock options and a total of 103,955 incentive stock options all with an exercise price of $7.79 and per-share weighted average fair value of $5.85.

In addition to the exercise and grant date prices of the stock option awards, certain weighted average assumptions that were used to estimate the fair value of stock option grants are listed in the following table:

	Fiscal 2016 Incentive Stock Options	Fiscal 2015 Incentive Stock Options	Fiscal 2015 Non-Statutory Stock Options
Expected term (years)	6.5 to 7.5	6.5	6.5
Expected volatility	81.77% to 89.08%	87.40% to 112.11%	87.40%
Risk-free interest rate	1.65% to 2.07%	1.85% to 1.94%	1.85%
Expected dividends	0	0	0

We estimate expected volatility based on historical weekly price changes of our common stock for a period equal to the current expected term of the options. The risk-free interest rate is based on the United States treasury yields in effect at the time of grant corresponding with the expected term of the options. The expected option term is the number of years we estimate that options will be outstanding prior to exercise considering vesting schedules and our historical exercise patterns.

The following table summarizes stock option activity for the six-month period ended March 31, 2016 under all plans:

	Shares			Weighted Average Exercise Price	Weighted Avg. Remaining Contractual Life (Yrs.)
Outstanding-beginning of year		540,444		$5.27
Options granted		76,796		$5.31
Options exercised		(6,864	)	$2.20
Forfeited		(12,991	)	$8.08
Expired		(13,917	)	$17.04
Outstanding March 31, 2016		583,468		$4.97	7.4
Exercisable March 31, 2016		294,533		$4.45	6.1

As of March 31, 2016, the aggregate intrinsic value of the outstanding and exercisable options was $497,000 and $363,000, respectively. Only options whose exercise price is below the current market price of the underlying stock are included in the intrinsic value calculation.

As of March 31, 2016, the total remaining unrecognized compensation cost related to non-vested stock options was $957,000 and is expected to be recognized over a weighted average period of approximately 4.6 years.

There were 6,864 stock options exercised during the six months ended March 31, 2016 with proceeds of $15,000 and 3,891 stock options exercised during the six months ended March 31, 2015 with proceeds of $7,000.

Restricted Stock Grants

During the six months ended March 31, 2016, the Company granted a total of 44,755 shares of restricted stock to certain employees and executive officers from available shares under its 2008 Plan, as amended. The shares were issued with grant date fair market values of $4.18 which is equal to the closing price of the stock on the date of the grants. The restricted stock grants vest over three years following the grant date.

A summary of the status of non-vested restricted stock as of March 31, 2016 is presented below.

	Shares			Grant Date Fair Value Per Share
Non-vested shares at beg of year		148,426		$3.23 to $8.60
Granted		44,755		$4.18
Forfeited		(8,721	)
Vested		0
Non-vested shares at March 31, 2016		184,460

As of March 31, 2016, there was $431,000 of total unrecognized compensation cost related to non-vested restricted stock. This cost is expected to be recognized over a weighted average period of approximately 2.6 years.