Note 9. Stock-Based Awards

12 Months Ended

Mar. 31, 2012

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

Note 9. Stock-Based Awards

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 Board approved an amendment to the 2007 Plan to further increase the number of authorized shares issuable under the plan to 7,000,000 shares of common stock, subject to stockholder approval at our fiscal 2012 annual meeting scheduled to be held in July 2012.

· 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 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

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.

	Fiscal Year Ended March 31,
	2012			2011
Risk-free interest rate		1.46	%		2.75	%
Expected life (in years)		6.44			6.99
Expected volatility		85	%		83	%
Expected dividend yield		--			--

The following table summarizes stock-based compensation recorded in our consolidated statements of operations in fiscal years 2012 and 2011:

	Fiscal Year Ended March 31,
	2012		2011
Cost of sales	$	157	$	188
Selling, general, and administrative expenses		1,798		1,414
Research and development expenses		63		76
Total stock-based compensation	$	2,018	$	1,678

At March 31, 2012, unrecognized stock-based compensation expense related to stock options was approximately $2.7 million and is expected to be recognized over a weighted average period of approximately 2.9 years.

Stock Options

The following table summarizes stock option activity for fiscal years 2012 and 2011:

	Fiscal Year Ended March 31,
	2012					2011
	Number of Shares			Weighted Average Exercise Price		Number of Shares			Weighted Average Exercise Price
Outstanding at April 1		6,558,701		$	1.85		6,264,685		$	1.91
Granted		2,042,950			2.23		959,000			1.23
Exercised (Note A)		(2,303,340	)		1.16		(129,270	)		1.14
Canceled		(290,650	)		2.03		(535,714	)		1.64
Outstanding at March 31		6,007,661		$	2.23		6,558,701		$	1.85
Vested and expected to vest at March 31		5,581,205		$	2.19		5,951,510		$	1.77
Exercisable at March 31		3,578,986		$	2.19		4,973,412		$	1.70

Note A: Due to cashless exercises, 706,149 common shares were received from the exercise of 1,954,715 stock options.

At March 31, 2012, there were 1,910,169 shares of common stock reserved for stock options. We generally issue shares for the exercise of stock options from unissued reserved shares.

The weighted average remaining contractual term was approximately 6.9 years for stock options outstanding, approximately 5.7 years for stock options exercisable, and 6.9 years for stock options vested and expected to vest as of March 31, 2012. The weighted average fair value of options granted was $1.63 and $0.99 in fiscal years 2012 and 2011, respectively.

The total intrinsic value (the excess of the market price over the exercise price) was approximately $1.1 million for stock options outstanding, $0.9 million for stock options exercisable, and $1.0 million for stock options vested and expected to vest as of March 31, 2012. The total intrinsic value for stock options exercised was approximately $398 thousand and $46 thousand in fiscal years 2012 and 2011, respectively.

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.

The following table summarizes information concerning outstanding and exercisable stock options at March 31, 2012:

		Stock Options Outstanding						Stock Options Exercisable
Range of Exercise Prices		Number of Shares		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
$	0.79 - $1.16		781,372		6.2	$	0.98		538,872	$	0.98
$	1.17 - $2.32		3,209,489		7.6	$	1.76		1,735,364	$	1.53
$	2.33 - $3.48		730,175		7.1	$	2.75		427,500	$	2.87
$	3.49 - $4.65		1,096,125		5.6	$	3.70		733,375	$	3.74
$	4.66 - $5.81		190,500		6.2	$	4.88		143,875	$	4.88
			6,007,661		6.9	$	2.23		3,578,986	$	2.19

Stock Warrants

The following table summarizes stock warrants activity related to the Loan with the Lender for fiscal years 2012 and 2011:

	Fiscal Year Ended March 31,
	2012					2011
	Number of Shares			Weighted Average Exercise Price		Number of Shares			Weighted Average Exercise Price
Nonvested at April 1		-		$	-		189,394		$	1.65
Granted		1,229,105			2.03		-			-
Vested		(1,229,105	)		2.03		(189,394	)		1.65
Nonvested at March 31		-		$	-		-		$	-
Vested at March 31		1,880,620		$	1.86		651,515		$	1.53

We had 1,880,620 stock warrants related to our line of credit – related party outstanding with a weighted average exercise price of $1.86 at March 31, 2012. At March 31, 2012, unrecognized debt cost expense related to the stock warrants was approximately $1.5 million, which is expected to be recognized over a weighted average period of approximately 2.6 years.

The following table summarizes information concerning outstanding and exercisable stock warrants at March 31, 2012:

Stock Warrants Outstanding and Exercisable
Exercise Price	Number of Shares	Weighted Average Remaining Contractual Life
$ 1.375	272,727	4.5
$ 1.650	378,788	4.5
$ 2.034	1,229,105	4.5
	1,880,620	4.5

Restricted Stock

In fiscal 2012, we granted 366,089 shares and 40,000 shares of restricted stock to management and outside directors of our Board, respectively, under our 2007 Plan. At the time of her appointment, Ms. Ansari was granted 118,244 shares of restricted stock, which is included in the number granted to management during the period. The restrictions on 59,122 shares of restricted stock issued to Ms. Ansari lapse in quarterly installments starting on each of June 30, 2012, September 30, 2012, December 31, 2012, and March 30, 2013. The restrictions on the remainder will lapse consistent with the shares of restricted stock granted to the other management employees. Those restrictions lapse after certain Company (net sales and operating loss) and individual milestones are met followed by a four-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 restrictions for the restricted stock awards granted to outside directors lapse quarterly over a one-year period.

The following table summarizes restricted stock activity for fiscal years 2012 and 2011:

	Fiscal Year Ended March 31,
	2012					2011
	Number of Shares			Weighted Average Exercise Price		Number of Shares			Weighted Average Exercise Price
Nonvested at April 1		40,000		$	2.00		-		$	-
Granted		406,089			2.53		795,127			1.03
Vested		(50,000	)		2.01		-			-
Forfeited		(89,483	)		2.68		(755,127	)		0.97
Nonvested at March 31		306,606		$	2.50		40,000		$	2.00
Vested at March 31		50,000		$	2.01		-		$	-

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.

In fiscal 2012, we recognized approximately $0.3 million of stock-based compensation expense related to performance based restricted stock awards. At March 31, 2012, unrecognized stock-based compensation expense related to nonvested awards was approximately $0.6 million, which is expected to be recognized over a weighted average period of approximately 2.6 years.