9. EMPLOYEE/DIRECTOR EQUITY INCENTIVE PLANS

6 Months Ended

Dec. 31, 2013

Notes to Financial Statements

EMPLOYEE/DIRECTOR EQUITY INCENTIVE PLANS

During the six months ended December 31, 2013 and 2012, the Company’s results of operations include compensation expense for stock options and restricted stock units (“RSUs”) granted under its various equity incentive plans. The amount recognized in the financial statements related to stock-based compensation was $105,796 and $413,610, based on the amortized grant date fair value of options and RSUs during the six months ended December 31, 2013 and 2012, respectively.

At the annual meeting of shareholders held on November 7, 2012 the Company’s shareholders approved an amendment of the 2010 Omnibus Long-Term Incentive Plan (“Omnibus Plan”) which increased the number of shares of the Company’s common stock available for issuance pursuant to awards under the Omnibus Plan by 900,000 shares and the creation of the 2012 Non-employee Director Equity Compensation Plan (“2012 Director Equity Plan”), under which the Company may issue up to 700,000 RSU awards and other equity awards to our non-employee directors pursuant to the Company’s director compensation policy.

In aggregate for all plans, at December 31, 2013 the Company had a total of 1,019,183 options outstanding, 1,169,598 RSUs outstanding and 655,194 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		Average Remaining Contractual Life (in years)
Balance at July 1, 2012		847,813		$	6.25
Options granted		142,710			1.90
Options forfeited		(205,239	)		5.05
Balance at June 30, 2013		785,284			5.75		5.34
Options granted		245,200			0.79
Options forfeited		(11,301	)		2.61
Balance at December 31, 2013		1,019,183		$	4.61		5.53

During the six months ended December 31, 2013 options to purchase 245,200 shares were granted to employees exercisable at $0.78 to $1.90 per share based on service based vesting terms from July 2013 through December 2016 and exercisable at various dates through December 2021. During the six months ended December 31, 2012 options to purchase 661,050 shares were granted to employees exercisable at prices from $1.75 to $1.90 per share based on various service and performance based vesting terms from July 2012 through December 2015 and exercisable at various dates through December 2020.

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 six months ended December 31, 2013 and 2012 using the Black-Scholes option-pricing model:

	Six months ended December 31,
	2013			2012
Expected life of option (years)		4			4
Risk-free interest rate		0.95 - 1.20	%		0.46 - 0.60	%
Assumed volatility		94 - 155	%		100 - 104	%
Expected dividend rate		0	%		0	%
Expected forfeiture rate		5.16 - 5.62	%		4.19 - 6.66	%

Time-vested and performance-based stock awards, including stock options and RSUs 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 December 31, 2013 and June 30, 2013 and changes during the years ended is presented below:

	Number of  Options			Weighted Average Grant Date Fair Value Per Share		Average Remaining Contractual Life (in years)
Balance at July 1, 2012		449,499		$	4.70
Granted		142,699			1.90
Vested		(158,384	)		4.75
Forfeited		(171,147	)		4.20
Balance at June 30, 2013		262,668			3.44
Granted		245,200			0.79
Vested		(66,307	)		2.73
Forfeited		(3,032	)		2.06
Balance at December 31, 2013		438,529		$	2.08	4.40

Total fair value of options granted in the six months ended December 31, 2013 and 2012 was $167,501 and $155,201, respectively.  At December 31, 2013, there was $202,377 in unrecognized compensation cost related to unvested stock options, which is expected to be recognized over the next three years.

The Company compensates its directors with RSUs and cash.  On December 20, 2013, 455,696 RSUs were granted to the Company’s directors in partial payment of directors fees through November 2014 under the 2012 Director Equity Plan.  As of December 31, 2013, 113,925 of the RSUs had vested and there were $90,000 in directors’ fees expense settled with RSU’s for period ended December 31, 2013.

On May 1, 2013, the Company’s President and CEO and Chief Operating Officer were awarded 200,000 RSUs each which would have vested on the satisfaction of certain performance targets as of December 31, 2013.  The RSU’s were forfeited on December 31, 2013 resulting in a credit to selling, general and administrative expense of $406,000 during the three and six months ended December 31, 2013.  On January 14, 2014, the Company’s President and CEO and Chief Operating Officer were awarded 500,000 RSUs each of which 100,000 vested immediately upon grant, and the remaining 400,000 will vest on the satisfaction of certain performance targets as of June 30, 2014.  200,000 of the 400,000 RSUs are classified as liability awards because they provide for cash settlement (although the Company has the ability to convert these RSUs to share settlement at its option).  The RSU award liability is measured at its fair value at the end of each reporting period and, therefore, will fluctuate based on the performance of the Company’s common stock.  The estimated expense for the six months ending June 30, 2014 is $920,000 for the January 14, 2014 RSU’s.

As of December 31, 2013 there were 395,104 unvested RSUs outstanding which will vest through January 15, 2016 and $413,331 in unrecognized compensation cost related to unvested RSUs which are expected to be recognized through January 15, 2016.  Shares of common stock related to vested RSUs are to be issued 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
Balance at July 1, 2012		489,687		$	3.60
RSUs granted		970,000			1.30
RSUs forfeited		(320,000	)		1.30
Shares issued		(8,000	)		1.70
Balance at June 30, 2013		1,131,687			2.30
RSUs granted		460,696			0.79
RSUs forfeited		(400,000	)		1.45
Shares issued		(22,785	)		0.79
Balance at December 31, 2013		1,169,598		$	2.01