EMPLOYEE/DIRECTOR EQUITY INCENTIVE PLANS

9 Months Ended

Mar. 31, 2012

Notes to Financial Statements

EMPLOYEE/DIRECTOR EQUITY INCENTIVE PLANS

NOTE 10 – EMPLOYEE/DIRECTOR EQUITY INCENTIVE PLANS

During the nine months ended March 31, 2012 and March 31, 2011, the Company’s results of operations include compensation expense for stock options granted and restricted shares vested under its equity incentive plans. The amount recognized in the financial statements related to stock-based compensation was $918,080 and $556,327, based on the amortized grant date fair value of options and vesting of restricted shares during the nine months ended March 31, 2012 and March 31, 2011, respectively. During the three months ended March 31, 2012 and March 31, 2011, the Company recognized $167,940 and $194,765, respectively, related to stock-based compensation.

At the annual meeting of shareholders held on November 10, 2010, the Company’s shareholders approved the Company’s 2010 Omnibus Long-Term Incentive Plan (the “Omnibus Plan”). The Omnibus Plan authorizes the board of directors or a committee thereof, to grant the following types of equity awards under the Omnibus Plan:  Incentive Stock Options (“ISOs”), Non-qualified Stock Options (“NSOs”), Stock Appreciation Rights (“SARs”), Restricted Stock, Restricted Stock Units (“RSUs”), cash- or stock-based Performance awards (as defined in the Omnibus Plan) and other stock-based awards. Four million shares of common stock are reserved for issuance under the Omnibus Plan.  In connection with the adoption of the Omnibus Plan the Company’s Board of Directors froze the Company’s other stock option plans and no further grants may be made under those plans.

On November 10, 2010, (1) a total of 511,143 RSUs were granted to the Company’s directors in payment of directors fees through November 2011 pursuant to the Company’s Director Compensation Policy, (2) a total of 574,242 RSUs previously issued to the Company’s directors pursuant to this policy and which provided for cash settlement were converted to stock settled RSUs, and (3) 115,000 RSUs were granted in total to a consultant and to the Company’s President and CEO.  On November 9, 2011, an additional 548,051 RSUs were granted to the Company’s directors in payment of directors fees through November 2012.  On May 6, 2011 the Company’s Compensation Committee of the Board of Directors awarded 200,000 RSUs to the Company’s President and CEO which will vest annually over a three year period. On March 23, 2012, the Company’s Compensation Committee of the Company’s Board of Directors awarded 500,000 RSUs to the Company’s President and CEO which will vest based on the satisfaction of certain performance targets for the six-month period ending September 30, 2012.  

During the nine months ended March 31, 2012 options to purchase 1,447,500 shares were granted to employees exercisable at prices from $0.59 to $1.16 and exercisable at various dates through March 2020.  As of March 31, 2012, an additional 671,387 shares are available to be issued under the Omnibus Plan.

On January 21, 2011, the Compensation Committee of the Company’s Board of Directors awarded inducement options to purchase a total of 750,000 shares of the Company’s common stock at an exercise price of $1.15 to certain members of management of Tier Electronics LLC.  The options vest as follows: (1) 420,000 will vest in three equal annual installments beginning on December 31, 2011 based on achievement of certain revenue targets, (2) 330,000 vest in three equal annual installments beginning on the one-year anniversary of the grant date.  As of March 31, 2012, 140,000 of the 420,000 shares had vested and 110,000 of the 330,000 shares vested on January 21, 2012.

During March 2011, the expiration date of 75,000 options held by a former director of the Company was extended from March 31, 2011 to April 30, 2011, and the expiration date of 125,000 options was extended from March 31, 2011 to December 31, 2011.  The Company recorded an expense of $45,676 in connection with these extensions.  At March 31, 2012, the remaining 125,000 options had expired.

During 2007 the Company established the 2007 Equity Incentive Plan (the “2007 Plan”) that authorized the Board of Directors or a committee thereof to grant options to purchase up to a maximum of 1,500,000 shares to employees and directors of the Company.  No options were issued under the 2007 Plan during the nine months ended March 31, 2012.  During the nine months ended March 31, 2012, no options were granted or exercised and 134,989 options were forfeited.  During the year ended June 30, 2011, 74,500 options were granted to employees at exercise prices from $0.46 to $0.64 and expiration dates from August 2018 to October 2018, 75,000 options were exercised and 150,189 options were forfeited.  As of March 31, 2012, there were no options available to be issued under the 2007 Plan.

During 2005, the Company established an Employee Stock Option Scheme (the “2005 Plan”) that authorized the board of directors or a committee thereof to grant options to employees and directors of the Company. The maximum number of options available to be granted in aggregate at any time under the 2005 Plan was the number equivalent to 5% of the total number of issued shares of the Company including all shares in underlying options under the Company’s stock option and incentive plans. No options were issued under the 2005 Plan during the nine months March 31, 2012 and March 31, 2011.  At March 31, 2012, options to purchase 50,000 shares with an exercise price of $3.82 and an expiration date of June 20, 2012 were outstanding.  As of March 31, 2012, there were no options available to be issued under the 2005 Plan.

In 2002 the Company established the 2002 Stock Option Plan (the “SOP”) whereby a stock option committee was given the discretion to grant up to 579,107 options to purchase shares to key employees of the Company.  No options were issued under the 2002 Plan during the nine months ended March 31, 2012 and March 31, 2011.  During the year ended June 30, 2011 there were 100,000 options forfeited.   At March 31, 2012 there were 375,000 options outstanding with exercise prices from $0.49 to $3.59 and exercise dates up to June 2018.  As of March 31, 2012, there were no options available to be issued under the SOP.

The Compensation Committee of the Company’s Board of Directors awarded two inducement option grants covering a total of 500,000 shares to the Company’s new President and CEO in January 2010.  The first grant is an option to purchase 400,000 shares of common stock with the following vesting terms: one third of the shares vested on January 7, 2011 and the balance vest in 24 monthly installments beginning on January 31, 2011 and ending on December 31, 2012.  The second grant is an option to purchase 100,000 shares of common stock which  vested in two equal installments on June 30, 2010 and December 31, 2010, respectively, based on the satisfaction of certain performance targets for the six-month periods then ended.  Both options have an exercise price of $1.33 per share which was equal to the closing price of the Company’s common stock on January 7, 2010 and are not exercisable as to any portion of the option after the fifth anniversary of the date on which that portion vests.  The options are subject to other terms and conditions specified in the related option agreements.

The Compensation Committee of the Company’s Board of Directors awarded two inducement option grants covering a total of 500,000 shares to the Company’s new Executive Vice President of Operations in November 2011, with an exercise price of $0.79 per share, which was the closing price of the Company’s common stock on the NYSE Amex on the date of his appointment.  100,000 of these options will vest on September 30, 2012, January 31, 2013, and June 30, 2013 based on the achievement of certain performance targets.  The remaining 400,000 of these options will vest over three years with the first one-third vesting on November 9, 2012 and the remaining two-thirds vesting in 24 equal monthly installments beginning in December 2012.

In aggregate for all plans, at March 31, 2012, the Company has a total of 4,296,480 options outstanding, 2,448,436 RSUs outstanding, and 671,387 shares available for future grant under the Omnibus Plan.

Information with respect to stock option activity under the employee and director plans is as follows:

	Number of Options			Weighted-Average Exercise Price Per Share
Balance at July 1, 2010		2,316,992		$	1.92
Options granted		1,230,500			1.02
Options forfeited		(150,189	)		2.51
Options exercised		(75,000	)		1.09
Balance at June 30, 2011		3,322,303			1.55
Options granted		1,447,500			0.82
Options forfeited		(473,323	)		1.75
Balance at March 31, 2012		4,296,480		$	1.28

The following table summarizes information relating to the stock options outstanding at March 31, 2012:

		Outstanding						Exercisable
Range of Exercise Prices		Number of Options		Average Remaining Contractual Life (in years)		Weighted Average Exercise Price		Number of Options		Weighted Average Exercise Price
$	0.46 to $1.69		3,896,480		6.7	$	1.04		1,475,759	$	1.22
$	3.59 to $3.82		400,000		2.5	$	3.62		400,000	$	3.62
Balance at March 31, 2012			4,296,480		6.3	$	1.28		1,875,759	$	1.73

During the nine months ended March 31, 2012 options to purchase 1,447,500 shares were granted to employees  exercisable at prices from $0.59 to $1.16 per share based on various service and performance based vesting terms from July 2011 through March 2015 and exercisable at various dates through March 2020. During the nine months ended March 31, 2011 options to purchase 1,173,000 shares were granted to employees exercisable at prices from $0.46 to $1.36 per share based on various service and performance based vesting terms from August 2011 through March 2014 and exercisable at various dates through March 2019.

The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing method. The Company uses historical data to estimate the expected price volatility, the expected option life and the expected forfeiture rate. The Company has not made any dividend payments nor does it have plans to pay dividends in the foreseeable future. The following assumptions were used to estimate the fair value of options granted during the nine months ended March 31, using the Black-Scholes option-pricing model:

	2012		2011
Expected life of option (years)		2.5		2.5
Risk-free interest rate		.24 - .55%		.64% - 1.07%
Assumed volatility		103 - 107%		106 - 119%
Expected dividend rate		0		0
Expected forfeiture rate		4.7 - 6.8%		0

Time-vested and performance-based stock awards, including stock options, restricted stock and restricted stock units, are accounted for at fair value at date of grant.  Compensation expense is recognized over the requisite service and performance periods.

A summary of the status of unvested employee stock options as of March 31, 2012 and June 30, 2011 and changes during the nine months and year ended, is presented below:

	Number of  Options			Weighted-Average Grant Date Fair Value Per Share
Balance at July 1, 2010		987,500		$	0.77
Granted		1,230,500			0.58
Vested		(476,526	)		0.49
Forfeited		(6,250	)		0.29
Balance at June 30, 2011		1,735,224			0.62
Granted		1,447,500			0.82
Vested		(546,669	)		1.16
Forfeited		(215,334	)		0.72
Balance at March 31, 2012		2,420,721		$	0.93

Total fair value of options granted in the nine months ended March 31, 2012 and March 31, 2011 was $707,906 and $772,560, respectively.  At March 31, 2012 there was $605,491 in unrecognized compensation cost related to unvested stock options, which is expected to be recognized over the next 3 years.

During the fourth quarter of fiscal 2010 the Company agreed to compensate its directors with restricted stock units (“RSUs”) rather than cash.  As a result included in accrued compensation and benefits at June 30, 2010 was $182,500 related to these awards. The RSUs were classified as liability awards because the RSUs were expected to be paid in cash upon vesting. These RSUs were converted to 574,242 stock settled RSUs in November 2010 and $182,500 was transferred from accrued compensation and benefits to additional paid-in capital.  The cash settled RSUs that were converted to stock settled RSUs were 100% vested upon conversion.  There were also $317,952 in directors’ fees expense and $7,000 in consulting fees expense settled with RSUs for the nine months ended March 31, 2012.   As of March 31, 2012 there were 1,024,023 unvested RSUs outstanding which will vest through May 6, 2014.  At March 31, 2012 there was $821,998 in unrecognized compensation cost related to unvested RSUs, which is expected to be recognized through May 6, 2014.  Vested RSUs are payable six months after the holder’s separation from service with the Company.

The table below summarizes the status of restricted stock unit balances:

	Number of Restricted Stock Units		Weighted-Average Valuation Price Per Unit
Conversion of cash settled RSUs		574,242	$	0.55
RSUs granted		826,143		0.80
RSUs forfeited		-		-
Balance at June 30, 2011		1,400,385		0.70
RSUs granted		1,048,051		0.74
RSUs forfeited		-		-
Balance at March 31, 2012		2,448,436	$	0.72