STOCK-BASED COMPENSATION

Stock-based awards were granted under the 2014 Omnibus Incentive Plan (the “2014 Plan”) during the three months ended December 31, 2014. During the three months ended December 31, 2013, stock-based awards were granted under the 2013 Omnibus Incentive Plan, which expired during the second quarter of fiscal 2014. Upon stockholder approval of the 2014 Plan, we no longer grant awards under any prior plan. The authority to grant options under the 2014 Plan and set other terms and conditions rests with the Compensation Committee of the Board of Directors.

The 2014 Plan authorizes the issuance of up to 2,250,000 common shares in connection with awards of stock options, stock appreciation rights, restricted stock, restricted stock units, performance-based full value awards or other stock-based awards. Eligible participants include our employees, our affiliates, non-employee directors of our Company and any consultant or advisor who is a natural person and provides services to us or our affiliates. Options that have been granted under the 2014 Plan typically vest over a four year service period and will expire if unexercised after eight years from the date of grant. Restricted stock awards (RSU's) that have been granted to Directors typically vest in one year. RSU's that have been granted to executives and employees typically vest in January over a three-year period. Awards may be granted under the 2014 Plan until January 27, 2024. Options under the 2014 Plan can be granted as either incentive stock options (ISOs) or non-statutory stock options (NSOs). The exercise price of options and the grant date price of restricted stock shall be determined by our Compensation Committee but shall not be less than the fair market value of our common stock based on the closing price on the date of grant. Upon exercise, we issue new shares of stock. Our Omnibus Incentive Plans and corresponding forms of award agreements generally have provisions allowing employees to elect to satisfy withholding obligations through the delivery of shares or having us retain a portion of shares issuable under the award. No employees elected to pay income tax withholding obligations through share reduction during the three months ended December 31, 2014 and 2013. As of December 31, 2014, there were approximately 372,572 shares available for future grants under the 2014 Plan.

Cash received from the exercise of stock options was minimal during the three months ended December 31, 2014 and $2.8 million during the three months ended December 31, 2013. The excess tax benefits from stock-based compensation were minimal during both the three months ended December 31, 2014 and 2013.

We sponsor an Employee Stock Purchase Plan (the Purchase Plan), covering all domestic employees with at least 90 days of continuous service and who are customarily employed at least 20 hours per week. The Purchase Plan allows eligible participants the right to purchase common stock on a quarterly basis at the lower of 85% of the market price at the beginning or end of each three-month offering period. Employee contributions to the Purchase Plan were $0.3 million during both the three months ended December 31, 2014 and 2013, respectively. Pursuant to the Purchase Plan, 40,950 and 35,048 common shares were issued to employees during the three months ended December 31, 2014 and 2013, respectively. Shares are issued under the Purchase Plan from treasury stock. As of December 31, 2014, 700,428 common shares were available for future issuances under the Purchase Plan.

10. STOCK-BASED COMPENSATION (CONTINUED)

Stock-based compensation expense is included in the consolidated results of operations as follows (in thousands):



	Three months ended December 31,
	2014			2013
Cost of sales	$	106		$	68
Sales and marketing	343			286
Research and development	192			206
General and administrative	543			463
Stock-based compensation before income taxes	1,184			1,023
Income tax benefit	(414		)	(348		)
Stock-based compensation after income taxes	$	770		$	675

Stock-based compensation cost capitalized as part of inventory was immaterial as of December 31, 2014 and September 30, 2014.

The following table summarizes our stock option activity (in thousands, except per common share amounts):



	Options Outstanding		Weighted Average Exercised Price	Weighted Average Contractual Term (in years)	Aggregate Intrinsic Value (1)
Balance at September 30, 2014	6,029		$10.61
Granted	704		7.82
Exercised	(1	)	9.20
Forfeited / Cancelled	(587	)	11.55
Balance at December 31, 2014	6,145		$10.20	4.7	$	2,222

Exercisable at December 31, 2014	4,502		$10.59	3.7	$	1,134

(1) The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our closing stock price of $9.29 as of December 31, 2014, which would have been received by the option holders had all option holders exercised their options as of that date. The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price.

The total intrinsic value of all options exercised during the three months ended December 31, 2014 was minimal and during the three months ended December 31, 2013 was $0.4 million.

The table below shows the weighted average fair value, which was determined based upon the fair value of each option on the grant date utilizing the Black-Scholes option-pricing model and the related assumptions:



	Three months ended December 31,
	2014		2013
Fair value of options granted (in thousands)	$	2,046	$	3,943
Weighted average per option grant date fair value	$	2.91	$	4.44
Assumptions used for option grants:
Risk free interest rate	1.77% - 1.85%		1.76%
Expected term	6.00 years		6.00 years
Expected volatility	35% - 36%		40%
Weighted average volatility	35%		40%
Expected dividend yield	0		0

The fair value of each option award granted during the periods presented was estimated using the Black-Scholes option valuation model that uses the assumptions noted in the table above. Expected volatilities are based on the historical volatility of our stock. We use historical data to estimate option exercise and employee termination information within the valuation

10. STOCK-BASED COMPENSATION (CONTINUED)

model; separate groups of grantees that have similar historical exercise behaviors are considered separately for valuation purposes. The expected term of options granted is derived from the vesting period and historical information and represents the period of time that options granted are expected to be outstanding. The risk-free rate used is the zero-coupon U.S. Treasury bond rate in effect at the time of the grant whose maturity equals the expected term of the option.

We use historical data to estimate pre-vesting forfeiture rates. The pre-vesting forfeiture rate used during the three months ended December 31, 2014 was 6.0%. As of December 31, 2014 the total unrecognized compensation cost related to non-vested stock-based compensation arrangements, net of expected forfeitures, was $5.3 million and the related weighted average period over which it is expected to be recognized is approximately 3.2 years.

A summary of our non-vested restricted stock units as of December 31, 2014 and changes during the twelve months then ended is presented below (in thousands, except per common share amounts):



	Number of Awards		Weighted Average Grant Date Fair Value
Nonvested at September 30, 2014	171		$	9.35
Granted	392		$	7.80
Forfeited	(3	)	$	7.40
Nonvested at December 31, 2014	560		$	8.27

As of December 31, 2014, the total unrecognized compensation cost related to non-vested restricted stock units was $3.6 million and the related weighted average period over which it is expected to be recognized is approximately 1.8 years.