Note 10: Stock-based Compensation

12 Months Ended

Aug. 31, 2013

Notes

Note 10: Stock-based Compensation

Note 10:  Stock-Based Compensation

Our Third Amended and Restated 1998 Stock Incentive Plan (the “Plan”) authorizes the granting of incentive stock options to certain key employees and non-employees who provide services to the Company.  The Plan, as amended, provides for the granting of options for an aggregate of 6,337,300 shares.  The options vest subject to management’s discretion.

Effective February 4, 2009, our Fourth Amended and Restated 1998 Directors Stock Plan  (the “Director Plan”) provides an annual retainer of $60,000 to each non-employee director with the exception of the Audit Committee Chairman who is to receive $65,000.  The cash portion of the compensation of $30,000 ($35,000 for the Audit Committee Chairman) is paid 50% twice each year, with $30,000 of compensation paid in common stock of the Company once each year.  Prior to February 4, 2009, the Director Plan granted each non-employee outside director 30,000 options each year at an exercise price equal to the fair market value of the common stock at the date the option was granted.  The options vest according to a set schedule over a five-year period and expire upon the director’s termination, or after ten years from the date of grant.  The Director Plan, as amended, allows for an aggregate of 1,750,000 shares to be granted.

Stock-based compensation cost is measured at the grant date based on the estimated value of the award granted, using the Black-Scholes option pricing model, and recognized over the period in which the award vests.  For stock awards no longer expected to vest, any previously recognized stock compensation expense is reversed in the period of termination. 

The stock-based compensation expense has been allocated to the various categories of operating costs and expenses in a manner similar to the allocation of payroll expense as follows for the years ended August 31:

	2013	2012	2011
Cost of sales	$           67,119	$           64,090	$           38,273
Research and development	212,569	202,453	185,406
Selling, general and administrative	855,123	939,855	840,860
Total	$      1,134,811	$      1,206,398	$      1,064,539

During the year ended August 31, 2013, we granted a total of 1,368,000 stock options to employees with exercise prices ranging from $1.20 to $2.05 per share and with one third vesting each year for the next three years.  The weighted average estimated grant-date fair value per share of these stock options was $0.81, and our assumptions used in the Black-Scholes valuation model to determine this estimated fair value are shown below: 

Expected volatility	63.89%
Expected dividends	0.00%
Expected term	7.40 Years
Risk-free interest rate	1.79%

The expected volatility rate was estimated based on the historical volatility of our common stock.   The expected term was estimated based on historical experience of stock option exercise and forfeitures.  The risk-free interest rate is the rate provided by the U.S. Treasury for Daily Treasury Yield Curve Rates commonly referred to as “Constant Maturity Treasury” rate in effect at the time of grant with a remaining term equal to the expected option term.

Unrecognized stock-based compensation expense expected to be recognized over the estimated weighted-average amortization period of 1.23 years is approximately $1,581,000 as of August 31, 2013.

A summary of the time-based stock option awards as of August 31, 2013, and changes during the year then ended, is as follows:

	Shares	Weighted- Average Exercise Price		Weighted- Average Remaining Contract Term (Years)	Aggregate Intrinsic Value
Outstanding as of September 1, 2012	3,182,239	$	3.54
Granted	1,368,000		1.46
Exercised	-		-
Forfeited or expired	(337,666)		3.65
Outstanding as of August 31, 2013	4,212,573	$	2.85	6.95	$	111,322
Exercisable as of August 31, 2013	2,201,597	$	3.63	5.14	$	62,989

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock price of $1.52 as of August 31, 2013, which would have been received by the holders of in-the-money options had the option holders exercised their options as of that date.