Note 4. Stock-Based Compensation

The Company recorded $213,361 and $541,884 of compensation expense related to current and past restricted stock grants, non-qualified stock options and the Company’s Employee Stock Purchase Plan (“ESPP”) for the three and nine months ended June 30, 2020, respectively. For the three months ended June 30, 2020, $207,653 of this expense is included in selling, general and administrative expense, and $5,708 is included in cost of sales. For the nine months ended June 30, 2020, $526,580 of this expense is included in selling, general and administrative expense, and $15,304 is included in cost of sales. The Company recorded $433,438 and $1,535,628 of compensation expense related to current and past stock option grants, restricted stock grants and the Company’s ESPP for the three and nine months ended June 30, 2019, respectively. For the three months ended June 30, 2019, $410,784 of this expense is included in selling, general and administrative expense, and $22,654 is included in cost of sales. For the nine months ended June 30, 2019, $1,450,489 of this expense is included in selling, general and administrative expense, and $85,139 is included in cost of sales. As of June 30, 2020, $ 2,147,356 of total unrecognized compensation expense related to non-vested restricted stock awards and stock options is expected to be recognized over a period of approximately 4.2 years.

Stock Options

The Company uses the Black-Scholes option pricing model to determine the fair value of options granted. During the nine months ended June 30, 2020, the Company granted employees non-qualified stock options to purchase an aggregate of 121,350 shares of common stock with a weighted average contractual term of 5.71 years, a 4.71 year weighted average vesting term, and an exercise price of $12.43. During the nine months ended June 30, 2019, the Company granted employees non-qualified stock options to purchase an aggregate of 172,000 shares of common stock with a weighted average contractual term of four years, a three year vesting term, and a weighted average exercise price of $12.17.

This fair value of awards during the nine months ended June 30, 2020 was estimated as of the grant date using the range of assumptions listed below:

The expected stock price volatility is based on the historical volatility of the Company’s stock for a period approximating the expected life. The expected life represents the period of time that options are expected to be outstanding after their grant date. The risk-free interest rate reflects the interest rate as of the grant date on zero-coupon U.S. governmental bonds having a remaining life similar to the expected option term.

Options are granted at fair market values determined on the date of grant, and vesting normally occurs over a three to five-year period. Shares issued upon exercise of a stock option are issued from the Company’s authorized but unissued shares.

The following is a summary of stock option activity during the nine months ended June 30, 2020:

The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price. As of June 30, 2020, the weighted average remaining contractual term for all outstanding and exercisable stock options was 2.31 years and their aggregate intrinsic value was $278,995. During the nine months ended June 30, 2020, the Company received proceeds of $10,968 from the exercise of stock options. During the nine months ended June 30, 2019, the Company received proceeds of $24 from the exercise of stock options.

Restricted Stock

The Company’s 2007 Stock Compensation Plan permits its Compensation Committee to grant stock-based awards, including stock options and restricted stock, to key employees and non-employee directors. The Company has made restricted stock grants that vest over one to ten years.

During the nine months ended June 30, 2020, the Company granted non-employee directors elected at the Company’s 2020 Annual Meeting of Shareholders restricted stock awards totaling 5,830 shares of common stock, with a vesting term of approximately one year and a fair value of $10.72 per share. In February, the Company granted 5,000 shares of restricted stock, with a vesting term of approximately one year and a fair value of $11.01 per share. The Company also granted 8,625 performance stock units entitling the participant to receive the same number of shares of the Company’s common stock, upon achievement of a fiscal year 2020 performance goal. The shares issued to the participant in settlement of the performance stock unit, if any, will be restricted stock subject to forfeiture that will vest one year following the settlement date of the performance stock unit. The Company has determined the fair value per underlying share of the performance stock unit awards to be $11.86 as of the grant date. These performance stock unit awards were forfeited during the nine months ended June 30, 2020.

During the nine months ended June 30, 2019, the Company granted non-employee directors restricted stock awards totaling 4,340 shares of common stock, with a vesting term of approximately one year and a fair value of $14.40 per share.

Restricted stock transactions during the nine months ended June 30, 2020 are summarized as follows:

Employee Stock Purchase Plan

Clearfield, Inc.’s ESPP allows participating employees to purchase shares of the Company’s common stock at a discount through payroll deductions. The ESPP is available to all employees subject to certain eligibility requirements. Terms of the ESPP provide that participating employees may purchase the Company’s common stock on a voluntary after-tax basis. Employees may purchase the Company’s common stock at a price that is no less than the lower of 85% of the fair market value of one share of common stock at the beginning or end of each stock purchase period or phase. The ESPP is carried out in six-month phases, with phases beginning on January 1 and July 1 of each calendar year. For the phases that ended on June 30, 2020 and December 31, 2019, employees purchased 15,116 and 15,107 shares at a price of $11.85 and $11.23 per share, respectively. In February 2020, the shareholders of Clearfield approved an increase of 200,000 in the shares authorized for issuance under the ESPP. As a result, as of June 30, 2020, the Company has 219,623 shares of common stock available for future purchases under the ESPP.