Note 7. Stock-Based Awards

3 Months Ended

Jun. 30, 2011

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

Note 7.  Stock-Based Awards

Stock Option Plans

We maintain the following equity incentive plans:

· The 2000 Stock Incentive Plan (the “2000 Plan”), approved by stockholders in August 2000, authorized the issuance of up to 4,500,000 shares of common stock covering several different types of awards, including stock options, restricted shares, stock appreciation rights, and performance shares.

· The 2007 Stock Incentive Plan (the “2007 Plan”), approved by stockholders in August 2007, authorized the issuance of up to 4,000,000 shares of common stock covering several different types of awards, including stock options, restricted shares, stock appreciation rights, and other stock-based awards. On July 12, 2010, our Board and on September 2, 2010, our stockholders approved an amendment to the 2007 Plan to increase the authorized shares issuable under the plan to 5,000,000 shares of common stock.

· The 2003 Director Option Plan (the “2003 Plan”), approved by stockholders in July 2003 and amended in August 2008, authorized the issuance of up to 450,000 shares of common stock covering the annual automatic grant of 10,000 stock options per outside director per year. The 2003 Plan also provides for granting newly elected or appointed outside directors a one-time grant of 10,000 stock options.

The stock option plans provide that options may be granted at an exercise price of 100% of fair market value of our common stock on the date of grant, may be exercised in full or in installments, at the discretion of our Board of Directors or its Compensation Committee, and must be exercised within ten years from date of grant. We recognize stock-based compensation expense on a straight-line basis over the requisite service period based on fair values, generally four years. We use historical data to estimate expected employee behaviors related to option exercises and forfeitures and included these expected forfeitures as a part of the estimate of stock-based compensation expense as of the grant date.

Stock-Based Compensation Expense

We account for stock-based awards issued to employees in accordance with the provisions of ASC 718 (Topic 718, Compensation – Stock Compensation). We recognize stock-based compensation expense on a straight-line uniform basis over the service period of the award, which is generally four years for employees. Stock-based awards issued to consultants are accounted for in accordance with the provisions of ASC 718 and ASC 505-50 (Subtopic 50 “Equity-Based Payments to Non-Employees” of Topic 505, Equity). Options granted to consultants are periodically revalued as the options vest, and are recognized as an expense over the related period of service or the vesting period, whichever is longer. Under the provisions of ASC 718, members of the Board are considered employees for calculation of stock-based compensation expense.

We estimated the fair value of the stock options granted on the date of grant using a Black-Scholes valuation model that used the weighted average assumptions noted in the following table. The risk-free interest rate assumption we use is based upon United States Treasury interest rates appropriate for the expected life of the awards. The expected life (estimated period of time that we expect employees, consultants and directors to hold their stock options) was estimated based on historical rates for two group classifications, (i) employees and consultants and (ii) outside directors. Expected volatility was based on historical volatility of our stock price for a period equal to the stock option’s expected life and calculated on a daily basis. The expected dividend rate is zero since we do not currently pay cash dividends on our common stock and do not anticipate doing so in the foreseeable future.

	Three Months Ended
	June 30,
	2011	2010
Risk-free interest rate	2.02%	3.08%
Expected life (in years)	7.07	6.58
Expected volatility	85%	83%
Expected dividend yield	--	--

Stock-based compensation expense for the three months ended June 30, 2011 and 2010 was recorded in our condensed consolidated statement of operations as follows:

	Three Months Ended
	June 30,
	2011		2010
Cost of sales	$	40	$	76
Selling, general, and administrative expenses		418		286
Research and development expenses		16		30
Total stock-based compensation expense	$	474	$	392

The following table summarizes stock options activity for the three months ended June 30, 2011:

					Weighted
				Weighted	Average
		Number	Exercise	Average	Remaining
		of Shares	Price Range	Exercise Price	Contractual Life
Outstanding at March 31, 2011		6,558,701	$0.79 – $5.10	$1.91	5.3
	Granted	435,450	$2.46 – $2.78	2.55
	Exercised	(159,370)	$0.85 – $2.05	1.30
	Canceled	(57,976)	$0.85 – $5.10	2.65
Outstanding at June 30,  2011		6,776,805	$0.79 – $5.10	$1.90	5.3
Vested and expected to vest at June 30, 2011		6,198,787	$0.79 – $5.10	$1.83	5.1
Exercisable at June 30, 2011		5,039,480	$0.79 – $5.10	$1.74	4.3

At June 30, 2011, unrecognized stock-based compensation expense related to stock options was approximately $1.6 million and is expected to be recognized over a weighted average period of approximately 2.8 years.

The weighted average fair value of options granted during the three months ended June 30, 2011 and 2010 was $1.94 and $0.72 per share, respectively.

The total intrinsic value (the excess of the market price over the exercise price) was approximately $6.5 million for stock options outstanding, $5.4 million for stock options exercisable, and $6.2 million for stock options vested and expected to vest as of June 30, 2011. The total intrinsic value for stock options exercised during the three months ended June 30, 2011 was approximately $0.2 million. There were no stock options exercised during the three months ended June 30, 2010.

We do not expect to realize any tax benefits from future disqualifying dispositions, if any, because we currently have a full valuation allowance against our deferred tax assets.

Stock Warrants

We had 651,515 stock warrants outstanding with a weighted average exercise price of $1.53 at June 30, 2011. At June 30, 2011, unrecognized debt cost expense related to the Initial and Additional Warrant Shares was approximately $0.2 million, which is expected to be recognized over a weighted average period of approximately 1.4 years.

Restricted Stock

We granted 247,845 shares of restricted stock to management during the three months ended June 30, 2011. The restrictions for these restricted stock awards lapse after certain Company (net sales and operating loss) and individual milestones are met followed by a three-year graded vesting schedule. Irrespective of achieving the Company milestones, management will receive 25% of their restricted stock award if their individual milestones are met.

The following table summarizes restricted stock activity for the three months ended June 30, 2011:

			Weighted
		Number	Average
		of Shares	Grant Price
Nonvested at March 31, 2011		40,000	$2.00
	Granted	247,845	2.76
	Vested	(10,000)	2.00
	Forfeited	-	–
Nonvested at June 30, 2011		277,845	$2.68

We determined stock-based compensation expense for performance based restricted stock based upon the fair value of our common stock at the date of grant and recognized expense based upon the most probable outcome as to whether the performance targets will be achieved and the stock-based compensation being earned. During the three months ended June 30, 2011, we recognized approximately $16 thousand of stock-based compensation expense related to the performance based restricted stock awards. At June 30, 2011, unrecognized stock-based compensation expense related to nonvested awards was approximately $417 thousand, which is expected to be recognized over a weighted average period of approximately 3.4 years.