Stock-Based Compensation

Stock-Based Benefit Plans

The Company grants stock-based compensation awards under its 2007 Incentive Compensation Plan (the “2007 Plan”). The Company has outstanding grants under prior option plans, though no further grants can be made under these prior plans. At September 30, 2013, the total number of shares subject to options and awards outstanding under all plans was 5,621,000. At September 30, 2013, 2,255,000 shares were available for future grant under the 2007 Plan of which 35,000 shares were available for the grant of RSUs. Options generally vest ratably over a four-year period with a 6-month or 1-year cliff vest and then vesting ratably over the remaining period. Options granted prior to October 1, 2005 expire ten years after the date of grant; options granted after October 1, 2005 expire seven years after the date of the grant. RSUs generally vest annually over periods ranging from two years to four years based upon continued employment with the Company.

2007 Incentive Compensation Plan

On July 30, 2007, the Company’s stockholders approved, upon recommendation of the Company’s board of directors, the adoption of the 2007 Plan. The 2007 Plan is the successor to each of the 1998 Stock Plan, 1996 Nonstatutory Stock Plan and 1995 Director Stock Option Plan (the “Predecessor Plans”), and no further grants can be made under the Predecessor Plans.

The 2007 Plan permits the grant of stock options, stock appreciation rights, restricted stock awards, RSUs, performance shares and performance units. The Compensation Committee of the Company’s board of directors has the authority to determine the type of incentive award, as well as the terms and conditions of the award, under the 2007 Plan.

3,000,000 shares of the Company’s common stock were initially reserved for issuance under the 2007 Plan. To the extent any options outstanding under the Predecessor Plans subsequently terminate unexercised or any unvested shares outstanding under the Predecessor Plans are subsequently forfeited or repurchased by ISSI, the number of shares of common stock subject to those terminated options, together with the forfeited shares, are added to the share reserve available for issuance under the 2007 Plan, up to an additional 4,000,000 shares. On July 20, 2011, the Company's stockholders approved, upon a recommendation of the Company's board of directors, an amendment and restatement of the Company's 2007 Incentive Compensation Plan to increase the number of shares available for issuance thereunder by 2,000,000 shares, limit the number of awards other than options or stock appreciation rights that may be granted thereunder on or after the date of the special meeting to an aggregate of 263,100 and make certain other changes as set forth therein. On February 8, 2013, the Company's stockholders approved, upon a recommendation of the Company's board of directors, an amendment of the Company's 2007 Incentive Compensation Plan to increase the shares available for issuance thereunder by 2,000,000 shares.

2012 Inducement Option Plan

On July 26, 2012, the Company's board of directors authorized and approved the 2012 Inducement Option Plan (the "Inducement Plan") which was adopted and approved by the compensation committee of the board of directors on September 17, 2012. The purpose of the Inducement Plan was to provide awards of stock options to persons employed by Chingis as a material inducement to such individuals entering into employment with the Company or its subsidiaries upon the acquisition of Chingis by the Company. In this regard, on September 17, 2012, the Company made stock option grants under the Inducement Plan for an aggregate of 439,500 shares of the Company's common stock. The grants under the Inducement Plan were non-qualified stock options to purchase shares of the Company’s common stock and have the following terms: (i) an exercise price equal to $10.42 per share which was the fair market value of the Company’s common stock on the grant date of September 17, 2012, (ii) a term of seven years from the date of grant, and (iii) vesting as to 12.5% of the shares on the six (6) month anniversary of the employment start date, and as to 1/48th of the total shares each month thereafter until the option is fully vested subject to continued employment with the Company.

Other Stock Plans

The Company has outstanding grants under its 1998 Stock Plan, 1996 Nonstatutory Stock Plan and 1995 Director Stock Option Plan. Options generally vest ratably over a four-year period with a 6-month or 1-year cliff vest and then vesting ratably over the remaining period, except for options granted under the 1995 Director Stock Option Plan, which generally vest over 12 months. Options granted prior to October 1, 2005 expire ten years after the date of grant and options granted after October 1, 2005 expire seven years after the date of the grant.

The Company has shares of common stock reserved for future issuance under its 1995 Employee Stock Purchase Plan (ESPP). Offering periods prior to August 1, 2010 under the ESPP had a duration of six months and the purchase price was equal to 85% of the fair value of the common stock on the purchase date. As approved by the Board of Directors, effective August 1, 2010, shares under the ESPP will be purchased at a price equal to 85% of the lesser of the fair market value of the Company’s common stock as of the first day or the last day of each six-month purchase period. The offering periods under the 1995 Employee Stock Purchase Plan commence on approximately February 1 and August 1 of each year. During the fiscal years ended September 30, 2013, 2012 and 2011, 237,000 shares, 181,000 shares, and 167,000 shares were issued under the plan, respectively. As of September 30, 2013, 581,000 shares were available under the plan for future issuance.

Accounting for Stock-Based Compensation

Stock-based compensation cost is calculated by the Company on the date of grant using the fair value of the option as determined using the Black-Scholes option pricing model. The compensation cost is then amortized ratably over the vesting period of the individual option grants. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company estimates forfeitures based on its historical forfeiture rates as it believes these rates to be the most indicative of the Company’s expected forfeiture rate.

As of September 30, 2013, there was approximately $10.4 million of total unrecognized stock-based compensation expense under the Company’s stock option plans that will be recognized over a weighted-average period of approximately 2.47 years. Future stock option grants will add to this total whereas quarterly amortization and the vesting of the existing stock option grants will reduce this total. In addition, as of September 30, 2013, there was approximately $0.2 million of total unrecognized stock-based compensation expense under the Company’s ESPP that will be recognized over a weighted-average period of approximately 4 months.

Cash flows from tax benefits resulting from the exercise of stock options are classified as financing cash flows in the statement of cash flows. As the Company has a valuation allowance for certain of its deferred tax assets, a tax benefit associated with stock option exercises has not been realized or recognized.

The Company issues new shares of common stock upon exercise of stock options and upon vesting of RSUs. The total intrinsic value (market value on date of exercise less exercise price) of options exercised and RSUs vested during the fiscal years ended September 30, 2013, 2012 and 2011, was $7.0 million, $5.7 million and $3.5 million, respectively.

The table below outlines the effects of total stock-based compensation.



	Years Ended September 30,
	2013			2012		2011
	(in thousands)
Stock-based compensation
Cost of sales	$	179		$	135	$	157
Research and development	2,310			1,461		1,078
Selling, general and administrative	3,452			3,435		2,807
Total stock-based compensation	5,941			5,031		4,042
Tax effect on stock-based compensation	(1,089		)	—		—
Net effect on net income (loss)	$	4,852		$	5,031	$	4,042

Valuation Assumptions

The Company uses the Black-Scholes option pricing model to estimate the fair value of the options granted. The Company estimates the expected term of options granted based upon historical exercise data. Estimated volatilities are based on historical stock price volatilities of the period immediately preceding the option grant that is equal in length to the option’s expected term. The Company believes that historical volatility is the best estimate of future volatility. The Company bases the risk- free interest rate on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term. The Company has never paid dividends and does not anticipate doing so over the expected life of the options and therefore used 0% for dividend yield. For offering periods prior to August 1, 2010 under the ESPP, the Company recorded compensation expense for the difference between the purchase price and the fair market value on the day of purchase. For offering periods subsequent to August 1, 2010, the Company uses the Black-Scholes option pricing model to estimate the fair value of stock purchase rights under its ESPP.

The estimated values of stock option grants and stock purchase rights, as well as the weighted average assumptions used in calculating these values during the fiscal years ended September 30, 2013, 2012 and 2011, were based on estimates at the date of grant as follows:



	Stock Options									ESPP
	2013			2012			2011			2013			2012			2011
Expected life (years)	4.45			4.40			4.37			0.50			0.50			0.50
Expected volatility	58.00		%	60.00		%	58.00		%	31.00		%	42.00		%	46.00		%
Risk-free interest rate	0.57		%	0.61		%	1.21		%	0.09		%	0.11		%	0.12		%
Dividend yield	—		%	—		%	—		%	—		%	—		%	—		%
Weighted-average fair value of grants	$	4.37		$	4.70		$	3.88		$	2.44		$	2.66		$	2.66

The Company issues RSUs from time to time. The estimated fair value of RSU awards is calculated based on the market price of the Company’s common stock on the date of grant. The weighted average grant date fair value of RSUs granted during the fiscal years ended September 30, 2013 , 2012 and 2011 was $9.14 per share, $9.42 per share and $7.82 per share, respectively.

The following table is a summary of the Company’s stock option activity and related information for the last three fiscal years under the 1989 Stock Plan, 1996 Nonstatutory Stock Plan, 1998 Stock Plan, 1995 Director Stock Option Plan and the 2007 Plan (stock option amounts and aggregate intrinsic value are presented in thousands):



	Outstanding Options
	Number of Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Balance at September 30, 2010	4,275		$	4.77
Options Granted	1,194		$	8.29
Options Exercised	(524	)	$	4.09
Options Cancelled/Expired	(94	)	$	12.01
Balance at September 30, 2011	4,851		$	5.57
Options Granted	1,608		$	9.91
Options Exercised	(857	)	$	5.18
Options Cancelled/Expired	(125	)	$	9.68
Balance at September 30, 2012	5,477		$	6.81
Options Granted	1,106		$	9.31
Options Exercised	(1,116	)	$	5.61
Options Cancelled/Expired	(116	)	$	9.83
Balance at September 30, 2013	5,351		$	7.51	4.17	$	18,127
Exercisable at September 30, 2013	3,173		$	6.25	3.23	$	14,738
Vested and expected to vest after September 30, 2013	5,245		$	7.47	4.14	$	17,985
Options exercisable at:
September 30, 2011	2,868		$	5.31	3.51
September 30, 2012	3,072		$	5.42	3.28
September 30, 2013	3,173		$	6.25	3.23

The following table summarizes information about options outstanding and exercisable at September 30, 2013:



					Options Outstanding				Options Exercisable
Range of Exercise Prices					Number of Options Outstanding (in thousands)	Wtd. Average Remaining Contractual Life (in years)	Wtd. Average Exercise Price		Number of Options Exercisable (in thousands)	Wtd. Average Exercise Price
$	1.50	-	$	4.34	1,246	2.68	$	3.28	1,208	$	3.25
$	4.35	-	7.34		1,155	2.40	$	6.81	989	$	6.73
$	7.35	-	9.14		1,172	5.70	$	8.83	311	$	8.32
$	9.15	-	10.42		1,300	5.43	$	9.77	449	$	9.67
$	10.43	-	16.08		478	5.14	$	10.85	216	$	10.76
$	1.50	-	$	16.08	5,351	4.17	$	7.51	3,173	$	6.25

The following table is a summary of the Company’s RSU activity and related information under the 2007 Plan (RSU amounts and aggregate intrinsic value are presented in thousands):



	Number of Shares		Weighted- Average Grant-Date Fair Value		Aggregate Intrinsic Value
Outstanding awards at September 30, 2010	69		$	7.21
Granted	362		$	7.82
Vested	(49	)	$	6.75	$	492
Forfeited	—		$	8.80
Outstanding awards at September 30, 2011	382		$	7.84
Granted	106		$	9.42
Vested	(165	)	$	7.73	$	1,563
Forfeited	—		$	10.64
Outstanding awards at September 30, 2012	323		$	8.41
Granted	121		$	9.14
Vested	(172	)	$	7.94	$	1,612
Forfeited	(3	)	$	10.64
Outstanding awards at September 30, 2013	269		$	9.02	$	2,934