5.Stock-Based Compensation

On November 16, 2012, our shareholders approved a new equity compensation plan, the Urologix, Inc. 2012 Stock Incentive Plan (the “2012 Plan”). The 2012 Plan replaced our Amended and Restated 1991 Stock Option Plan (the “1991 Plan”) and provides stock incentive awards in the form of options (incentive and non-qualified), stock appreciation rights, restricted stock, restricted stock units, performance stock, performance units, and other awards in stock and/or cash. As of September 30, 2013, we had reserved 1,751,940 shares of common stock under the 2012 Plan, which includes 151,940 expired and forfeited shares from the 1991 Plan and 1,338,466 shares were available for future grants. The number of shares available under the 2012 Plan will be increased by an amount equal to the number of shares subject to awards or options granted under the 1991 Plan which would have become available for additional awards under the 1991 Plan by reason of forfeiture, cancellation, expiration or termination of those awards. 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 terms of the previous 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. For the 10,000 share option award granted to each of our four non-employee directors in connection with the 2012 Annual Meeting of Shareholders, our previous equity compensation plan, the 1991 Plan, was used.

Amounts recognized in the financial statements for the three-months ended September 30, 2013 and 2012 related to stock-based compensation were as follows (in thousands):



	Three months ended
	September 30,
	2013		2012
Cost of goods sold	$	3	$	6
Sales and marketing		13		11
General and administrative		45		33
Research and development		7		8
Total stock-based compensation, net of tax	$	68	$	58

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-months ended September 30, 2013 and 2012 using the Black-Scholes option-pricing model:



	2013		2012
Volatility	83.66	%	70.53	%
Risk-free interest rate	0.67	%	0.36	%
Expected option life	3.1	years	3.2	years
Stock dividend yield	-		-

A summary of our option activity for the three-months ended September 30, 2013 is as follows:



	Number of Options		Weighted-avg. Exercise Price Per Option	Weighted-avg. Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at July 1, 2013	1,711,430	$	1.43		$	-
Options granted	191,500		0.38
Options forfeited	(6,775)		0.89
Options expired	(46,225)		1.95
Options exercised	-		-
Outstanding at September 30, 2013	1,849,930	$	1.31	5.63	$	-
Exercisable at September 30, 2013	1,362,327	$	1.53	4.47	$	-

There is no intrinsic value in the table above as our closing stock price of $0.34 and $0.17 on September 30, 2013 and June 28, 2013, the last trading day prior to June 30, 2013, was lower than all options outstanding and exercisable as of that date.

On August 9, 2012, the Company’s 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 2012 Annual Meeting of Shareholders held on November 16, 2012 with the number of shares of restricted stock equal to $17,500 divided by the closing price of the Company’s common stock on the date of the Annual Meeting, rounded up to the next whole share. A total of 106,064 shares of restricted stock were granted under the previous 1991 Plan to the Company’s non-employee directors on the date of the Annual Meeting or 26,516 shares of restricted stock to each of the Company’s four non-employee directors. The restrictions on the restricted stock lapsed on November 6, 2013, the first business day immediately prior to the date of the Company’s 2013 Annual Meeting of Shareholders. In addition, on August 14, 2013, the 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 Board immediately after the 2013 Annual Meeting, with the number of shares of restricted stock equal to $22,500 divided by the closing price of our common stock on the date of the Annual Meeting, rounded up to the next whole share, subject to a maximum of 50,000 shares per non-employee director. A total of 200,000 restricted stock awards were granted under the 2012 Plan on the date of the Annual Meeting or 50,000 shares of restricted stock to each of the Company’s four non-employee directors. The restrictions on the restricted stock will lapse on the first business day immediately prior to the date of the 2014 Annual Meeting of Shareholders if the director is serving as a director as of such date.

On August 14, 2013, the Company’s Board of Directors approved a grant of restricted stock to employees totaling 177,500 shares. The restrictions on the restricted stock lapse on the one year anniversary of the grant date. In addition, as part of our fiscal year 2014 corporate bonus plan, the Company’s Board of Directors approved a plan in which bonus eligible employees will receive performance shares of the Company’s common stock rather than cash compensation if certain revenue objectives are achieved. If the Company met 100 percent of our fiscal year 2014 revenue performance target, approximately 382,000 shares of the Company’s common stock would be paid out as compensation. None of these shares are currently included in outstanding stock as of September 30, 2013 as the revenue performance objectives have not been achieved and therefore no shares have been issued.

A summary of restricted stock award activity for the three-month period ended September 30, 2013 is as follows:



	Number of Restricted Stock Awards		Weighted-avg. Grant-Date Fair Value
Non-vested at June 30, 2013	113,667	$	0.68
Awards granted	177,500		0.38
Awards forfeited	-		-
Awards vested	-		-
Non-vested at September 30, 2013	291,167		0.50

As of September 30, 2013, total unrecognized compensation cost related to non-vested stock options and restricted stock awards granted under the Plan was $144,000 and $72,000, respectively. That cost is expected to be recognized over a weighted-average period of 2.2 years for non-vested stock options and 3.2 years for restricted stock awards.