(3) Stock-Based Compensation

Stock Option Plans

As of June 30, 2013, we had 1,100,000 shares of common stock authorized and 354 shares of common stock available for future grant to employees, consultants and key suppliers under our 2012 Equity Incentive Plan (“Plan”). The term of the 2012 Plan is ten years. Under the 2012 Plan, the exercise price of each option is set at the fair value of the common stock on the date of grant and the maximum term of the option is ten years from the date of grant. Options granted to employees generally vest ratably over a three-year period. The maximum number of options that may be granted to an employee under the Plan in any calendar year is 500,000 options. Forfeitures under the Plan are available for re-issuance at any time prior to expiration of the Plan in 2022. Options granted under the Plan to employees require the option holder to abide by certain Company policies, which restrict their ability to sell the underlying common stock. Prior to the adoption of the 2012 Plan, we issued stock options under our 2002 Equity Incentive Plan. Forfeitures under the 2002 Equity Incentive Plan may not be re-issued.

Non-Employee Director Stock Option Plan

In February 1994, our Board of Directors ratified a Stock Option Plan for Non-Employee Directors (“Directors Plan”) pursuant to which Directors may elect to receive stock options in lieu of cash compensation for their services as directors. As of June 30, 2013, we had 1,000,000 shares of common stock authorized and 217,900 shares of common stock available for future grant under the Directors Plan. Option terms range from three to ten years from the date of grant. Option exercise prices are equal to the fair value of the common shares on the date of grant. Options granted under the plan generally vest immediately. Forfeitures under the Directors Plan are available for re-issuance at a future date.

Stock Purchase Plan

We have established a Stock Purchase Plan under which eligible employees may contribute up to 10 percent of their compensation to purchase shares of our common stock at 85 percent of the fair market value at specified dates. At June 30, 2013, we had 700,000 shares of common stock authorized and 364,659 shares of common stock available for issuance under the Stock Purchase Plan. During the quarters ended June 30, 2013 and 2012, we issued 5,412 and 26,695 shares of common stock, respectively, under the Stock Purchase Plan. Cash received by us upon the purchase of shares under the Stock Purchase Plan for the quarters ended June 30, 2013 and 2012 was $3,572 and $32,301, respectively.

Stock Bonus Plan

We have a Stock Bonus Plan (“Stock Plan”) administered by the Board of Directors. As of June 30, 2013, we had 1,954,994 shares of common stock authorized and there were 484,504 shares of common stock available for future grant under the Stock Plan. Under the Stock Plan, shares of common stock may be granted to employees, key consultants, and directors who are not employees as additional compensation for services rendered. Vesting requirements for grants under the Stock Plan, if any, are determined by the Board of Directors at the time of grant. There were 11,000 and zero shares granted to employees under the Stock Plan during the quarters ended June 30, 2013 and 2012, respectively.

We use the straight-line attribution method to recognize share-based compensation costs over the requisite service period of the award. Options granted by us generally expire ten years from the grant date. Options granted to existing and newly hired employees generally vest over a three-year period from the date of the grant. The exercise price of options is equal to the market price of our common stock (defined as the closing price reported by the NYSE MKT) on the date of grant.

We use the Black-Scholes-Merton option pricing model for estimating the fair value of stock option awards. The table below shows total share-based compensation expense for the quarters ended June 30, 2013 and 2012 and the classification of these expenses:


	Quarter Ended June 30,
	2013		2012
Costs of contract services	$	5,632		5,527
Costs of product sales		10,356		10,747
Research and development		1,582		513
Production engineering		37,223		30,555
Selling, general and administrative		107,931		153,499
	$	162,724		200,841

Share-based compensation capitalized in inventories was insignificant as of June 30, 2013 and March 31, 2013.

We adjust share-based compensation on a quarterly basis for changes to the estimate of expected equity award forfeitures based on actual forfeiture experience. The effect of adjusting the forfeiture rate for all expense amortization is recognized in the period the forfeiture estimate is changed. The effect of forfeiture adjustments in the quarters ended June 30, 2013 and 2012 were insignificant.

All options/shares granted under the Non-Employee Director Stock Option Plan /Director’s Plan are fully vested.

A summary of the status of non-vested shares under the 2012 Equity Incentive Plan and its predecessor plan as of June 30, 2013 and 2012 and changes during the quarters ended June 30, 2013 and 2012 are presented below:


	Quarter Ended June 30, 2013			Quarter Ended June 30, 2012
		Weighted-Average			Weighted-Average
	Shares Under	Grant Date		Shares Under	Grant Date
	Option	Fair Value		Option	Fair Value
Non-vested at April 1	1,152,828	$	0.84	668,722	$	1.69
Granted	14,000	$	0.38	25,000	$	0.71
Vested	(8,333)	$	0.71	-	$	-
Forfeited	-	$	-	(2,518)	$	1.61
Non-vested at June 30	1,158,495	$	0.83	691,204	$	1.65

As of June 30, 2013, there was $528,211 of total unrecognized compensation costs related to stock options granted under the 2012 Equity Incentive Plan and its predecessor plan. The unrecognized compensation cost is expected to be recognized over a weighted-average period of twenty-one months. The total fair value of stock options that vested during the quarters ended June 30, 2013 and 2012 was $5,917 and zero, respectively.

A summary of the non-vested shares under the Stock Bonus Plan as of June 30, 2013 and 2012 and changes during the quarters ended June 30, 2013 and 2012 are presented below:


	Quarter Ended June 30, 2013			Quarter Ended June 30, 2012
		Weighted-Average			Weighted-Average
	Shares Under	Grant Date		Shares Under	Grant Date
	Contract	Fair Value		Contract	Fair Value
Non-vested at April 1	358,855	$	1.22	167,680	$	2.44
Granted	11,000	$	0.69	-	$	-
Vested	-	$	-	(47,004)	$	2.49
Forfeited	-	$	-	-	$	-
Non-vested at June 30	369,855	$	1.21	120,676	$	2.42

As of June 30, 2013, there was $253,150 of total unrecognized compensation costs related to common stock granted under our Stock Bonus Plan. The unrecognized compensation cost at June 30, 2013 is expected to be recognized over a weighted-average period of twenty-two months.

Expected volatility is based on historical volatility. The expected life of options granted is based on historical experience.

Additional information with respect to stock option activity during the quarter ended June 30, 2013 under our 2012 Equity Incentive Plan and its predecessor plan is as follows:


				Weighted-
		Weighted-		Average
	Shares	Average		Remaining		Aggregate
	Under	Exercise		Contractual		Intrinsic
	Option	Price		Life		Value
Outstanding at April 1, 2013	3,569,118	$	2.21		5.0 years	$	-
Granted	14,000	$	0.69
Exercised	-	$	-			$	-
Forfeited	(361,552)	$	2.81

Outstanding at June 30, 2013	3,221,566	$	2.14		5.1 years	$	340,190

Exercisable at June 30, 2013	2,063,072	$	2.66		3.1 years	$	58,791

Vested and expected to vest at June 30, 2013	3,163,936	$	2.16		5.0 years	$	325,408

Additional information with respect to stock option activity during the quarter ended June 30, 2012 under our 2002 Equity Incentive Plan is as follows:


				Weighted-
		Weighted-		Average
	Shares	Average		Remaining		Aggregate
	Under	Exercise		Contractual		Intrinsic
	Option	Price		Life		Value
Outstanding at April 1, 2012	2,782,456	$	2.81		4.0 years	$	-
Granted	25,000	$	1.03
Exercised	-	$	-			$	-
Forfeited	(2,518)	$	2.40

Outstanding at June 30, 2012	2,804,938	$	2.80		3.8 years	$	-

Exercisable at June 30, 2012	2,113,734	$	2.87		2.5 years	$	-

Vested and expected to vest at June 30, 2012	2,779,518	$	2.80		3.7 years	$	-

Additional information with respect to stock option activity during the quarter ended June 30, 2013 under our Director’s Plan is as follows:


				Weighted-
		Weighted-		Average
	Shares	Average		Remaining		Aggregate
	Under	Exercise		Contractual		Intrinsic
	Option	Price		Life		Value
Outstanding at April 1, 2013	682,577	$	1.76		3.2 years	$	-
Granted	-	$	-
Exercised	-	$	-			$	-
Forfeited	-	$	-

Outstanding at June 30, 2013	682,577	$	1.76		3.0 years	$	127,398

Exercisable at June 30, 2013	682,577	$	1.76		3.0 years	$	127,398

Vested and expected to vest at June 30, 2013	682,577	$	1.76		3.0 years	$	127,398

Additional information with respect to stock option activity during the quarter ended June 30, 2012 under our Director’s Plan is as follows:


				Weighted-
		Weighted-		Average
	Shares	Average		Remaining		Aggregate
	Under	Exercise		Contractual		Intrinsic
	Option	Price		Life		Value
Outstanding at April 1, 2012	445,754	$	2.59		3.3 years	$	-
Granted	-	$	-
Exercised	-	$	-			$	-
Forfeited	-	$	-

Outstanding at June 30, 2012	445,754	$	2.59		3.1 years	$	-

Exercisable at June 30, 2012	445,754	$	2.59		3.1 years	$	-

Vested and expected to vest at June 30, 2012	445,754	$	2.59		3.1 years	$	-

Cash received by us upon the exercise of stock options was zero for the quarters ended June 30, 2013 and June 30, 2012. The source of shares of common stock issuable upon the exercise of stock options is from authorized and previously unissued common shares.