STOCK BASED COMPENSATION

Stock Options

We have in effect one stock incentive plan, the 2013 Incentive Plan (the “Plan”), under which non-qualified stock options and restricted stock units have been granted to employees and non-employee directors. Under the Plan, we have 1.8 million shares available for future grant as of June 30, 2014.

Compensation cost related to our Plan and ESPP is as follows:



	Three Months Ended June 30,				Nine Months Ended June 30,
	2014		2013		2014		2013
	(in thousands)
Cost of revenues	$	210	$	161	$	619	$	459
Engineering, research and development	573		428		1,643		1,193
Selling, general and administrative	803		567		2,204		1,653
Total stock-based compensation expense	$	1,586	$	1,156	$	4,466	$	3,305

As of June 30, 2014, there was $7.2 million of unrecognized stock-based compensation expense related to non-vested stock options, restricted stock units and our ESPP. The weighted average period over which the unearned stock-based compensation for stock options and restricted stock units expected to be recognized is approximately 1.4 years and 1.9 years, respectively. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that we grant additional equity awards and our stock price increases.

Activity in stock option awards is as follows:



	Shares (in thousands)		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value (in thousands)
Options outstanding, September 30, 2013	2,089		$	13.43	6.67	$	591
Granted	1,014		2.53
Exercised	(49	)	2.35
Cancelled or expired	(90	)	86.22
Options outstanding, June 30, 2014	2,964		7.64		7.23	1,792
Options exercisable, June 30, 2014	1,649		$	11.67	5.85	$	578

This intrinsic value represents the excess of the fair market value of our common stock on the date of exercise over the exercise price of such options. The aggregate intrinsic values in the preceding table for the options outstanding represent the total pretax intrinsic value, based on our closing stock price of $3.45 as of June 30, 2014, which would have been received by the option holders had those option holders exercised their in-the-money options as of those dates. There were 0.6 million in-the-money stock options that were exercisable as of June 30, 2014.

The per share fair values of time-based stock options granted in connection with stock incentive plans have been estimated using the following weighted average assumptions:



	Nine Months Ended June 30,
	2014	2013
Expected life (in years)	5.79	5.65
Expected volatility:
Weighted-average	81.5%	82.0%
Range	79.5% - 81.6%	79.8% - 82.1%
Expected dividend	—	—
Risk-free interest rate	1.7% - 1.9%	.9% - 1.0%

The weighted average fair value at the date of grant of time-based options granted in the nine months ended June 30, 2014 and 2013 was $1.75 and $1.43, respectively.

On December 10, 2013, we granted 500,000 market-based stock options at an exercise price of $2.53 to executive officers. The market-based options vest if either of the following conditions is met prior to December 10, 2018: (i) the closing price of our common stock equals or exceeds twice the exercise price of $2.53 for 30 consecutive trading days; or (ii) a change in control occurs where the Company’s stockholders receive in consideration of their shares of common stock cash or other consideration with a value at least equal to twice the exercise price of $2.53. We evaluate stock awards with market conditions as to the probability that the market conditions will be met and estimate the date at which the market conditions will be met in order to properly recognize stock-based compensation expense over the requisite service period. We used the following assumptions to estimate the fair value of the options: expected life of 1.3 years, expected volatility of 80.0%, a zero dividend rate, and a risk-free rate of 2.79%. The market-based options had a grant date per share fair value of $1.86.

The following table provides additional information in regards to options outstanding as of June 30, 2014:



	Options Outstanding				Options Exercisable
Range of Exercise Price	Number Outstanding (in thousands)	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Number Exercisable (in thousands)	Weighted Average Exercise Price
$2.10 - $2.26	424	8.68	$	2.11	194	$	2.10
2.53	987	9.45	2.53		116	2.53
2.54 - 4.36	750	7.03	3.45		542	3.50
4.60 - 41.20	594	5.08	7.89		588	7.91
42.00 - 145.40	209	0.67	57.39		209	57.39
$2.10 - $145.40	2,964	7.23	$	7.64	1,649	$	11.67

Restricted Stock Units

Activity for our restricted stock award units is as follows:



	Restricted Stock Units (in thousands)		Weighted Average Grant-Date Fair Value per Share		Weighted Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value (in thousands)
Restricted stock units, September 30, 2013	2,021		$	2.65	1.13	$	6,143
Awarded	1,600		2.62
Released	(1,179	)	2.69
Forfeited	(65	)	2.42
Restricted stock units, June 30, 2014	2,377		$	2.62	1.21	$	8,200

We issue restricted stock units as part of our equity incentive plans. For the majority of restricted stock units granted, the number of shares issued on the date the restricted stock units vest is net of the minimum statutory withholding requirements that we pay in cash to the appropriate taxing authorities on behalf of our employees. The impact of such withholding totaled $1.3 million and $0.6 million for the nine months ended June 30, 2014 and 2013, respectively, and was recorded as settlement on restricted stock tax withholding in the accompanying unaudited consolidated statements of stockholders’ equity. Although shares withheld are not issued, they are treated as common stock repurchases in our unaudited consolidated financial statements, as they reduce the number of shares that would have been issued upon vesting.

Employee Stock Purchase Plan

Pursuant to our ESPP, eligible employees may authorize payroll deductions of up to 15% of their regular base salary subject to certain limits to purchase shares at the lower of 85% of the fair market value of the common stock on the date of the commencement of the offering or on the last day of the 6-month offering period. On January 31, 2014, 0.4 million shares were issued at a price per share of $2.46, a 15% discount to the share price on August 1, 2013, the commencement date for the purchase period that ended January 31, 2014. On July 31, 2014, 0.4 million shares were issued at a price per share of $2.55, a 15% discount to the share price on July 31 2014, the last date of the purchase period. We recognized $0.5 million and $0.4 million of stock compensation expense under the ESPP during the nine months ended June 30, 2014 and 2013, respectively. We determine the fair value of the ESPP awards using the Black-Scholes pricing model. Underlying assumptions used were as follows:



	Nine Months Ended June 30,
	2014	2013
Expected life (in years)	0.5	0.5
Expected volatility	37.1% - 50.3%	47.6% - 49.8%
Expected dividend	—	—
Risk-free interest rate	0.07% - 0.08%	0.11% - 0.14%