STOCK-BASED COMPENSATION

Stock-based awards were granted under the 2016 Omnibus Incentive Plan (the “2016 Plan”) beginning February 1, 2016 and prior to that were granted under the 2014 Omnibus Incentive Plan (the “2014 Plan”). Upon stockholder approval of the 2016 Plan, we ceased granting awards under any prior plan. The authority to grant options under the 2016 Plan and to set other terms and conditions rests with the Compensation Committee of the Board of Directors.

The 2016 Plan authorizes the issuance of up to 1,500,000 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 2016 Plan typically vest over a four-year period and will expire if unexercised after seven years from the date of grant. Restricted stock unit awards (“RSUs”) that have been granted to directors typically vest in one year. RSUs that have been granted to executives and employees typically vest in November over a four-year period. Awards may be granted under the 2016 Plan

12. STOCK-BASED COMPENSATION (CONTINUED)

until January 31, 2026. Options under the 2016 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.

The 2014 Plan, under which grants ceased upon approval of the 2016 Plan, authorized 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 included our employees, our affiliates, non-employee directors of our Company and any consultant or advisor who is a natural person and provided services to us or our affiliates. Options that were granted under the 2014 Plan typically vested over a four year service period and expire if unexercised after eight years from the date of grant. RSUs that were granted to directors typically vested in one year. RSUs that were granted to executives and employees typically vested in November over a four-year period. Options under the 2014 Plan could be granted as either ISOs or NSOs. The exercise price of options and the grant date price of restricted stock was determined by our Compensation Committee and was not less than the fair market value of our common stock based on the closing price on the date of grant. Upon exercise, we issued new shares of stock.

Our equity plans and corresponding forms of award agreements generally have provisions allowing employees to elect to satisfy tax withholding obligations through the delivery of shares, having us retain a portion of shares issuable under the award or paying cash to us for the withholding. During the nine months ended June 30, 2016, our employees forfeited 47,172 shares in order to satisfy $0.5 million of withholding tax obligations related to stock-based compensation, pursuant to terms of awards under our board and shareholder-approved compensation plans. As of June 30, 2016, there were approximately 1,352,631 shares available for future grants under the 2016 Plan.

Cash received from the exercise of stock options was $6.7 million during the nine months ended June 30, 2016 and $6.3 million during the nine months ended June 30, 2015. There were $0.2 million in excess tax benefits from stock-based compensation for the nine months ended June 30, 2016. There were no excess tax benefits from stock-based compensation during the nine months ended June 30, 2015.

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 $0.7 million during both the nine month periods ended June 30, 2016 and 2015. Pursuant to the Purchase Plan, 80,468 and 97,383 common shares were issued to employees during the nine months ended June 30, 2016 and 2015, respectively. Shares are issued under the Purchase Plan from treasury stock. As of June 30, 2016, 537,063 common shares were available for future issuances under the Purchase Plan.

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



	Three months ended June 30,						Nine months ended June 30,
	2016			2015			2016			2015
Cost of sales	$	54		$	53		$	159		$	166
Sales and marketing	239			272			665			905
Research and development	144			134			439			425
General and administrative	507			474			1,395			1,451
Stock-based compensation before income taxes	944			933			2,658			2,947
Income tax benefit	(308		)	(324		)	(858		)	(1,018		)
Stock-based compensation after income taxes	$	636		$	609		$	1,800		$	1,929

Stock-based compensation cost capitalized as part of inventory was immaterial as of June 30, 2016 and September 30, 2015.

12. STOCK-BASED COMPENSATION (CONTINUED)

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, 2015	4,800		$10.21
Granted	513		11.50
Exercised	(720	)	9.70
Forfeited / Canceled	(606	)	11.03
Balance at June 30, 2016	3,987		$10.34	4.7	$	4,299

Exercisable at June 30, 2016	2,848		$10.50	3.9	$	2,777

(1) The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our closing stock price of $10.73 as of June 30, 2016, 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 nine months ended June 30, 2016 was $1.8 million and during the nine months ended June 30, 2015 was $0.8 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:



	Nine months ended June 30,
	2016	2015
Weighted average per option grant date fair value	$3.92	$2.98
Assumptions used for option grants:
Risk free interest rate	1.41% - 1.85%	1.57% - 1.85%
Expected term	6.00 years	6.00 years
Expected volatility	32% - 33%	32% - 36%
Weighted average volatility	32%	35%
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 model. 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 nine months ended June 30, 2016 was 10.0%. As of June 30, 2016 the total unrecognized compensation cost related to non-vested stock options, net of expected forfeitures, was $3.1 million and the related weighted average period over which it is expected to be recognized is approximately 3.1 years.

12. STOCK-BASED COMPENSATION (CONTINUED)

A summary of our non-vested restricted stock units as of June 30, 2016 and changes during the nine 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, 2015	543		$	8.41
Granted	236		$	10.92
Vested	(179	)	$	8.50
Canceled	(103	)	$	8.12
Nonvested at June 30, 2016	497		$	9.63

As of June 30, 2016, the total unrecognized compensation cost related to non-vested restricted stock units was $3.2 million and the related weighted average period over which it is expected to be recognized is approximately 1.5 years.