Note 3. Stock-based Compensation

3 Months Ended

Dec. 31, 2012

Notes

Note 3. Stock-based Compensation

NOTE 3. STOCK-BASED COMPENSATION

Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized over the employee’s requisite service period. The Company recognized $23,235 and $16,068 in stock-based compensation expense during the three months ended December 31, 2012 and 2011, respectively, and recognized $48,047 and $32,329 in stock-based compensation expense during the six months ended December 31, 2012 and 2011, respectively.  These expenses were recorded as selling, general and administrative expenses in the condensed consolidated statements of operations.

Stock Options.  The Company maintains a 2005 Equity Incentive Plan for the benefit of employees.  Incentive and nonqualified stock options, restricted common stock, stock appreciation rights, and other stock-based awards may be granted under the plan.  Awards granted under the plan may be performance-based.  As of December 31, 2012, there were 105,990 shares of common stock authorized and reserved for issuance, but not granted under the terms of the 2005 Equity Incentive Plan, as amended.

The following table summarizes the Company’s stock option activity during the six-month period ended December 31, 2012.

	Number of Options		Weighted-Average Exercise Price
Outstanding at beginning of period	173,089	$	6.48
Granted	1,352		2.70
Exercised	-		-
Cancelled	(7,168)		6.17
Outstanding at end of period	167,273		6.47
Exercisable at end of period	125,946		7.48

The Black-Scholes option-pricing model is used to estimate the fair value of options granted under the Company’s stock option plan. The weighted-average fair values of stock options granted under the plan for the six months ended December 31, 2012 were based on the following assumptions at the date of grant as follows:

	Six Months Ended December 31,
	2012
Expected dividend yield	0%
Expected stock price volatility	69.38%
Risk-free interest rate	1.74%
Expected life of options	10 years
Weighted-average grant date fair value	$ 2.03

There were no options granted during the six months ended December 31, 2011. Expected option lives and volatilities are based on historical data of the Company. The risk-free interest rate is based on the U.S. Treasury Bills rate on the grant date for constant maturities that correspond with the option life. Historically, the Company has not declared dividends and there are no future plans to do so.

As of December 31, 2012, there was $499,065 of unrecognized stock-based compensation cost related to grants under the stock option plan that is expected to be expensed over a weighted-average period of four to ten years. There was $2,198 of intrinsic value for options outstanding as of December 31, 2012.