9. EMPLOYEE/DIRECTOR EQUITY INCENTIVE PLANS

9 Months Ended

Mar. 31, 2014

Notes to Financial Statements

EMPLOYEE/DIRECTOR EQUITY INCENTIVE PLANS

NOTE 9 – EMPLOYEE/DIRECTOR EQUITY INCENTIVE PLANS

During the nine months ended March 31, 2014 and 2013, 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 $979,005 and $570,604, based on the amortized grant date fair value of options and RSUs during the nine months ended March 31, 2014 and 2013, 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 March 31, 2014 the Company had a total of 1,073,117 options outstanding, 2,146,813 RSUs outstanding and 401,260 shares available for future grant under the Omnibus Plan and 19,304 shares available for future grant under the 2012 Director Equity 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			1.88
Options forfeited		(205,239	)		5.05
Balance at June 30, 2013		785,284			5.75		5.34
Options granted		299,700			0.80
Options forfeited		(11,867	)		2.61
Balance at March 31, 2014		1,073,117		$	4.61		5.41

During the nine months ended March 31, 2014 options to purchase 299,700 shares were granted to employees exercisable at $0.76 to $1.90 per share based on service based vesting terms from July 2013 through March 2017 and exercisable at various dates through March 2022. During the nine months ended March 31, 2013 options to purchase 142,610 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 March 2015 and exercisable at various dates through March 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 nine months ended March 31, 2014 and 2013 using the Black-Scholes option-pricing model:

	Nine months ended March 31,
	2014	2013
Expected life of option (years)	4	4
Risk-free interest rate	0.95 - 1.20%	0.46 - 0.61%
Assumed volatility	94 - 155%	96 - 104%
Expected dividend rate	0%	0%
Expected forfeiture rate	4.91 - 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 March 31, 2014 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		142,710			1.88
Vested		(158,390	)		4.75
Forfeited		(171,152	)		4.21
Balance at June 30, 2013		262,668			3.44
Granted		299,700			0.80
Vested		(117,887	)		3.57
Forfeited		(3,398	)		2.04
Balance at March 31, 2014		441,083		$	1.62	7.08

Total fair value of options granted in the nine months ended March 31, 2014 and 2013 was $207,789 and $167,167, respectively.  At March 31, 2014, there was $198,391 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 March 31, 2014, 452,850 of the RSUs had vested and there were $245,502 in directors’ fees expense settled with RSUs for the period ended March 31, 2014.

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.  The RSU’s were forfeited on December 31, 2013 resulting in a credit to selling, general and administrative expense of $406,000 during the nine months ended March 31, 2014.  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 cash settled 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 three months ending June 30, 2014 is $1,244,000 for the January 14, 2014 RSU’s.

As of March 31, 2014 there were 1,067,846 unvested RSUs outstanding which will vest through January 15, 2016 and $1,360,663 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		1,460,696			0.88
RSUs forfeited		(400,000	)		1.45
Shares issued		(45,570	)		1.31
Balance at March 31, 2014		2,146,813		$	1.50