NOTE 13 - STOCK BASED COMPENSATION

In 2006, our board of directors adopted, and our stockholders approved, the 2006 long-term incentive plan, or the Plan, covering 1,000,000 shares of common stock. On August 5, 2010, the Plan was amended to increase the maximum number of shares of common stock that may be issued to an aggregate of 3,000,000 shares. On September 15, 2011, the directors adopted and the shareholders approved an amendment to increase the maximum number of shares of common stock that may be issued to an aggregate of 3,300,000 shares. The Plan provides for the grant of incentive and non-qualified options, stock grants, stock appreciation rights and other equity-based incentives to employees, including officers, and consultants. The Plan is to be administered by a committee of not less than two directors each of whom is to be an independent director. In the absence of a committee, the Plan is administered by our board of directors. Independent directors are not eligible for discretionary options.

Pursuant to the Plan, each newly elected independent director receives at the time of election, a five-year option to purchase 50,000 shares of common stock at the market price on the date of his or her election. In addition, the Plan provides for the annual grant of an option to purchase 10,000 shares of common stock on July 1st of each year following the third anniversary of the date of his or her first election.

On April 26, 2012, we granted employee stock options for 50,000 shares of common stock at an exercise price of $0.70 per share, the fair market value on the date of grant. The options will vest in equal amounts over three years on the anniversary of the grant date.

On July 2, 2012, we granted stock options to two directors to purchase 10,000 shares of common stock each at an exercise price of $0.61 per share, the fair market value on the date of grant, pursuant to the plan provision following the third anniversary date of each director’s first election to the board. Fifty percent of the shares will vest in six months and 50% in eighteen months from the grant date, respectively.

On December 5, 2012, we granted stock options to a new member of our board of directors to purchase 50,000 shares of common stock each at an exercise price of $1.02 per share, the fair market value on the date of grant. Thirty thousand shares will vest immediately, with the remaining options vesting in equal amounts on the second and third year anniversary of the grant date.

On June 13, 2013, we granted stock options to our Executive Chairman to purchase 100,000 shares of common stock each at an exercise price of $0.67 per share, the fair market value on the date of grant. One third of the share grant will vest immediately, with the remaining options vesting in equal amounts on the second and third year anniversary of the grant date.

On June 13, 2013, we granted stock options to our senior management team to purchase 300,000 shares of common stock at an exercise price of $0.67 per share, the fair market value on the date of grant. The options will vest in equal amounts over three years on the anniversary of the grant date.

On March 19, 2014, the Board approved 180,000 restricted common stock grants to the CFO and other members of the Company’s finance team in recognition of their service to the Company. Assuming the employees remain employed by the Company at the time of each vesting event, vesting shall occur upon the timely completion of a new financing that provides adequate liquidity to the Company for one year; upon timely filing of the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2014 with no material weaknesses; and upon one year from the date of grant.

The fair value was estimated using the Black-Scholes option-pricing model based on the closing stock prices at the grant date and the weighted average assumptions specific to the underlying options. Expected volatility assumptions are based on the historical volatility of our common stock. The risk-free interest rate was selected based upon yields of five-year U.S. Treasury issues. We use the simplified method for all grants to estimate the expected term of the option. We assume that stock options will be exercised evenly over the period from vesting until the awards expire. As such, the assumed period for each vesting tranche is computed separately and then averaged together to determine the expected term for the award. Because of our limited stock exercise activity we did not rely on our historical exercise data. The assumptions utilized for option grants during the periods presented ranged from 100.7% to 116.2% for volatility, a risk free interest rate of 0.061% to 1.750%, and expected term of approximately six years. At March 31, 2014, 1,547,006 shares of common stock were available for grant under the Plan.

The following table summarizes information about options for the most recent annual income statements presented:

	Number Of Options		Weighted Average Exercise Price		Aggregate Intrinsic Value		Weighted Average Remaining Contractual Life (in years)
Outstanding at 3/31/2012	2,415,666		$	1.040	$	107,375	7.71
Granted	120,000		$	0.820
Forfeited	(51,666	)	$	1.150
Exercised	—		—
Outstanding at 3/31/2013	2,484,000		$	1.027	$	776,475	9.07
Granted	580,000		$	0.670
Forfeited	(1,708,500	)	$	0.952
Outstanding at 3/31/2014	1,355,500		$	1.014	$	329,025	7.32
Vested or expected to vest 3/31/2014	1,355,500		$	1.014	$	329,025	7.32
Exercisable at 3/31/2014	734,167		$	1.055	$	189,525	5.98

At March 31, 2014 there was $340,731 of total unrecognized compensation cost related to stock options. These costs are expected to be recognized over the next three years. The total fair value of shares vested during the year was $244,655.

The following table summarizes the status of our stock options outstanding but not vested for the year ended March 31, 2014:

	Number of Options		Weighted Average
Outstanding at 3/31/2012	1,489,000		$	1.205
Granted	120,000		$	0.820
Forfeited	(51,666	)	$	1.150
Vested	(703,000	)	$	1.090
Outstanding at 3/31/2013	854,334		$	1.249
Granted	580,000		$	0.670
Forfeited	(607,667	)	$	1.191
Vested	(205,334	)	$	1.783
Outstanding at 3/31/2014	621,333		$	0.967

We made a discretionary grant outside of the Plan on June 13, 2013 of 200,000 options at an exercise price of $0.67 per share, the fair market value on the date of grant, to our non-employee directors in recognition of their additional services while we seek a permanent chief executive officer. The options have a term of ten years and will vest in three equal installment amounts on each of the grant date and first anniversaries of the grants and are subject to continuous service as members of the board through the second anniversary of the grant date. Although the grants were made outside of the Plan, the terms of the options are the same as those issued under the Plan.