Note 7. Stock-based Compensation

6 Months Ended

Feb. 28, 2014

Notes

Note 7. Stock-based Compensation

Note 7.  Stock-Based Compensation

We have both an employee and director stock incentive plan, which are described more fully in Note 10 to the financial statements in our 2013 Annual Report on Form 10-K, as amended.  As of February 28, 2014, we had approximately 1,800,000 shares of common stock reserved for future issuance under the stock incentive plans.

Stock-based compensation cost is measured at the grant date based on the 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:

	Three Months Ended		Six Months Ended
	February 28, 2014	February 28, 2013	February 28, 2014	February 28, 2013
Cost of sales	$   15,337	$   16,022	$   30,987	$   32,045
Research and development	45,641	50,285	92,089	100,570
Selling, general and administrative	141,364	220,113	295,495	443,717
Total	$ 202,342	$ 286,420	$ 418,571	$ 576,332

During the six months ended February 28, 2014, we granted employees a total of 120,000 stock options at exercise prices ranging from $1.17 to $1.34 generally with one third vesting each year for the next three years.  The estimated weighted average grant date fair value per share of these stock options was $0.62, and our weighted average assumptions used in the Black-Scholes valuation model to determine this estimated fair value are as follows:

Expected volatility	64.34%
Expected dividends	0%
Expected term	7.35 Years
Risk-free interest rate	2.20%

Unrecognized stock-based compensation expense expected to be recognized over the estimated weighted-average amortization period of .89 years is approximately $1,188,000 as of February 28, 2014.

A summary of the time-based stock option awards as of February 28, 2014, and changes during the six months then ended, is as follows:

	Shares	Weighted- Average Exercise Price		Weighted- Average Remaining Contract Term (Years)	Aggregate Intrinsic Value
Outstanding as of August 31, 2013	4,212,573	$	2.85
Granted	120,000		1.20
Exercised	-		-
Forfeited or expired	(270,334)		2.89
Outstanding as of February 28, 2014	4,062,239	$	2.80	6.30	$	0
Exercisable as of February 28, 2014	2,205,263	$	3.79	4.69	$	0

The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on our closing stock price of $1.14 as of February 28, 2014.  There were no outstanding, in-the-money options as of that date.