6. Stock-Based Compensation

On November 16, 2012 our shareholders approved a new equity compensation plan, the Urologix, Inc. 2012 Stock Incentive Plan (the “2012 Plan”). The 2012 Plan replaced our Amended and Restated 1991 Stock Option Plan (the “1991 Plan”) and provides stock incentive awards in the form of options (incentive and non-qualified), stock appreciation rights, restricted stock, restricted stock units, performance stock, performance units, and other awards in stock and/or cash. As of December 31, 2012, we had reserved 1,600,000 shares of common stock under the 2012 Plan, and all 1,600,000 shares were available for future grants. The number of shares available under the 2012 Plan will be increased by an amount equal to the number of shares subject to awards or options granted under the 1991 Plan, which would have become available for additional awards under the 1991 Plan by reason of the forfeiture, cancellation, expiration or termination of those awards. Options expire 10 years from the date of grant and typically vest 25 percent after the first year of service with the remaining vesting 1/36th each month thereafter.

Under the terms of the previous 1991 Plan, persons serving as non-employee directors at the date of the annual shareholder meeting receive an option grant to purchase 10,000 shares of common stock at a price equal to fair market value on the date of grant. Generally, such options are immediately exercisable on the date of grant, and expire 10 years from the date of grant, subject to earlier termination one year after the person ceases to be a director of the Company. For the 10,000 share option award granted to each of our four non-employee directors in connection with the 2012 Annual Meeting of Shareholders, our previous equity compensation plan, the 1991 Plan, was used.

The Company uses the fair value recognition provisions of the revised authoritative guidance for equity-based compensation and applies the modified prospective method in determining stock option expense. The Company’s results of operations reflect compensation expense for new stock options granted and vested under the 1991 Plan and the unvested portion of previous stock option grants and restricted stock which vest during the year. As previously mentioned, as of December 31, 2012, no options had been granted from the new 2012 Plan.

Amounts recognized in the financial statements for the three and six-months ended December 31, 2012 and 2011 related to stock-based compensation were as follows (in thousands):



	Three months ended				Six months ended
	December 31,				December 31,
	2012		2011		2012		2011
Cost of goods sold	$	5	$	7	$	11	$	15
Sales and marketing		11		24		23		47
General and administrative		70		70		103		117
Research and development		7		11		14		20
Total cost of stock-based compensation		93		112		151		199
Tax benefit of options issued		-		-		-		-
Total stock-based compensation, net of tax	$	93	$	112	$	151	$	199

Except as stated above, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. We use historical data to estimate expected volatility, the period of time that option grants are expected to be outstanding, as well as employee termination behavior. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option. The following assumptions were used to estimate the fair value of options granted during the six-months ended December 31, 2012 and 2011 using the Black-Scholes option-pricing model:



	2012		2011
Volatility	71.91	%	79.39	%
Risk-free interest rate	0.38	%	0.42	%
Expected option life	3.4	years	3.3	years
Stock dividend yield	-		-

A summary of our option activity for the six-months ended December 31, 2012 is as follows:



	Number of Options		Weighted-avg. Exercise Price Per Option	Weighted-avg. Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at July 1, 2012	1,621,095	$	1.50		$	1,504
Options granted	229,500		0.83
Options forfeited	(9,972)		1.04
Options expired	(28,753)		2.13
Options exercised	-		-
Outstanding at December 31, 2012	1,811,870	$	1.41	6.94	$	2,060
Exercisable at December 31, 2012	1,285,081	$	1.60	6.23	$	2,060

The aggregate intrinsic value in the table above is based on the Company’s closing stock price of $0.69 and $0.77 on December 31, 2012 and June 29, 2012, the last trading day prior to June 30, 2012, which would have been received by the optionees had all in-the-money options been exercised on that date.

On August 9, 2012, the Company’s Compensation Committee recommended, and the Board of Directors approved, an award of restricted stock to each non-employee director serving as a member of the Company’s Board of Directors immediately following the 2012 Annual Meeting of Shareholders to be held on November 16, 2012 with the number of shares of restricted stock equal to $17,500 divided by the closing price of the Company’s common stock on the date of the Annual Meeting, rounded up to the next whole share. A total of 106,064 shares of restricted stock were granted under the previous 1991 Plan to the Company’s non-employee directors on the date of the Annual Meeting or 26,516 shares of restricted stock to each of the Company’s four non-employee directors. The restrictions on the restricted stock lapse on the first business day immediately prior to the date of the Company’s 2013 Annual Meeting of Shareholders if the director is serving on the board as of such date. The restricted stock award was in addition to the 10,000 share stock option granted to each non-employee director annually under the 1991 Plan.

A summary of restricted stock award activity for the six-month period ended December 31, 2012 is as follows:



	Number of Restricted Stock Awards		Weighted-avg. Grant-Date Fair Value
Non-vested at June 30, 2012	83,576	$	0.98
Awards granted	106,064		0.66
Awards forfeited	-		-
Awards vested	(72,168)		0.97
Non-vested at December 31, 2012	117,472		0.70

As of December 31, 2012, total unrecognized compensation cost related to non-vested stock options and restricted stock awards granted under the Plan was $220,000 and $69,000, respectively. That cost is expected to be recognized over a weighted-average period of 2.3 years for non-vested stock options and 1.0 years for restricted stock awards.