Stock-Based Compensation

3 Months Ended

Sep. 30, 2011

Stock-Based Compensation

Stock-Based Compensation

5.      Stock-Based Compensation

The Company has an equity compensation plan, the 1991 Stock Option Plan (the "1991 Plan"), that provides for the granting of incentive stock options to employees and nonqualified stock options and restricted stock to employees, directors and consultants. As of September 30, 2011, we had reserved 4,450,910 shares of common stock under the 1991 Plan, and 406,403 shares were available for future grants. Options expire 10 years from the date of grant and typically vest 25 percent after the first year of service with the remaining vesting 1/36th each month thereafter. Under the current terms of the 1991 Plan, persons serving as non-employee directors at the date of the annual shareholder meeting receive an option grant to purchase 10,000 shares of common stock at a price equal to fair market value on the date of grant. Generally, such options are immediately exercisable on the date of grant, and expire 10 years from the date of grant, subject to earlier termination one year after the person ceases to be a director of the Company.

Options were granted to a non-employee consultant to purchase a total of 20,000 shares in the first quarter of fiscal year 2011. These options are non-qualified options which expire 10 years from the grant date and become fully vested over 24 months from the date of grant provided the consultant is still providing services to the Company. As these options were granted to a non-employee consultant, the final value of these options will be determined at their vesting dates, rather than the date of grant, using the Black-Scholes option pricing model and marked to market at each reporting date until they become fully vested. The Company uses the fair value recognition provisions of the revised authoritative guidance for equity-based compensation and applies the modified prospective method in determining stock option expense. Our results of operations reflect compensation expense for new stock options granted and vested under the 1991 Plan and the unvested portion of previous stock option grants and restricted stock which vest during the year.

Amounts recognized in the financial statements for the three-month periods ended September 30, 2011 and 2010 related to stock-based compensation were as follows (in thousands):

	Three months ended September 30,
	2011	2010
Cost of goods sold…………………………………..…	$  8	$  12
Selling, general and administrative………………….	70	70
Research and development…………………………..	9	11
Total cost of stock-based compensation…………..	$87	$93
Tax benefit of options issued…………………………	-	-
Total stock-based compensation, net of tax…..……..	$87	$93

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. We use historical data to estimate expected volatility, the period of time that option grants are expected to be outstanding, as well as employee termination behavior. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option. The following assumptions were used to estimate the fair value of options granted during the three-month periods ended September 30, 2011 and 2010 using the Black-Scholes option-pricing model:

	2011	2010
Volatility	79.9%	80.8%
Risk-free interest rate	0.36%	0.97%
Expected option life	3.1 years	3.8 years
Stock dividend yield	-	-

A summary of our option activity for the three-month period ended September 30, 2011 is as follows:

	Number of Options		Weighted-avg. Exercise Price Per Option	Weighted-avg. Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at July 1, 2011		1,737,373	$1.78		$28,237
Options granted		161,500	0.88
Options forfeited		(11,627)	0.99
Options expired		(9,124)	10.46
Options exercised		(66,247)	1.20
Outstanding at September 30, 2011	1,811,875		1.68	7.3	55,437
Exercisable at September 30, 2011	1,045,811		2.06	6.3	22,718

The aggregate intrinsic value in the table above is based on our closing stock price of $0.99 and $0.95 on September 30, 2011 and June 30, 2011, respectively, which would have been received by the optionees had all in-the-money options been exercised on that date.

On August 9, 2011, our Compensation Committee recommended, and the Board of Directors approved, an award of restricted stock to each non-employee director serving as a member of the Company's Board of Directors immediately following the 2011 Annual Meeting of Shareholders held on November 8, 2011 with the number of shares of restricted stock equal to $17,500 divided by the closing price of our common stock on the date of the Annual Meeting, rounded up to the next whole share. A total of 18,042 shares of restricted stock were granted under the 1991 Plan to our non-employee directors on the date of the Annual Meeting or 72,168 shares of restricted stock to each of our four non-employee directors. The restrictions on the restricted stock lapse on the first business day immediately prior to the date of our 2012 Annual Meeting of Shareholders if the director is serving on the board as of such date. The restricted stock award is in addition to the stock option grant under the 1991 Plan.

A summary of restricted stock award activity for the three-month period ended September 30, 2011 is as follows: 

	Number of Shares Underlying Restricted Stock Awards	Weighted-avg. Grant-Date Fair Value
Nonvested at July 1, 2011	126,608	$1.05
Shares granted	-	-
Shares forfeited	-	-
Shares vested	-	-
Nonvested at September 30, 2011	126,608	$1.05

As of September 30, 2011, total unrecognized compensation cost related to non-vested stock options and restricted stock awards granted under our plan was $256,000 and $61,000, respectively.That cost is expected to be recognized over a weighted-average period of 2.8 years for non-vested stock options and 0.5 years for restricted stock awards.