8.  Stock-Based Compensation

 

The following table summarizes, by statement of operations line item, stock-based compensation expense (in thousands):

 

		Three Months Ended September 30,						Six Months Ended September 30,
		2013			2012			2013			2012
Cost of goods sold		$	8		$	27		$	21		$	53
Research and development		63			73			416			148
Selling, general and administrative		379			258			747			495
Stock-based compensation expense		$	450		$	358		$	1,184		$	696

 

Stock Plans

 

1993 Incentive Stock Plan and 2000 Equity Incentive Plan

 

In 1993, the Board of Directors adopted and the stockholders approved the 1993 Incentive Stock Plan (“1993 Plan”). A total of 7,800,000 shares of common stock were initially reserved for issuance under the 1993 Plan. In June 2000, the Company adopted the 2000 Equity Incentive Plan (“2000 Plan”) as a successor plan to the 1993 Plan. The 2000 Plan provides for awards of up to 11,180,000 shares of common stock plus 7,800,000 shares previously authorized under the 1993 Plan for a total maximum aggregate number of shares which may be issued of 18,980,000 shares.

 

As of September 30, 2013, the Company had outstanding 3,550,000 non-qualified common stock options issued outside of the 2000 Plan. The Company granted 250,000 of these stock options during the second quarter of Fiscal 2013, 250,000 of these stock options during the first quarter of Fiscal 2012 and 3,050,000 of the options prior to Fiscal 2008 as inducement grants to new officers and employees of the Company, with exercise prices equal to the fair market value of the Company’s common stock on the grant date. Included in the 3,550,000 options were 2,000,000 options granted to the Company’s President and Chief Executive Officer, 850,000 options granted to the Company’s Executive Vice President of Sales and Marketing, 250,000 options granted to the Company’s Senior Vice President of Program Management, 250,000 options granted to the Company’s Senior Vice President of Customer Service and 200,000 options granted to the Company’s Senior Vice President of Human Resources. Additionally, as of September 30, 2013, the Company had outstanding 46,875 restricted stock units issued outside of the 2000 Plan. These restricted stock units were issued during the second quarter of Fiscal 2013 as an inducement grant to the Company’s Senior Vice President of Customer Service. Although the options and restricted stock units were not granted under the 2000 Plan, they are governed by terms and conditions identical to those under the 2000 Plan. All options are subject to the following vesting provisions: one-fourth vest one year after the issuance date and 1/48th vest on the first day of each full month thereafter, so that all options will be vested on the first day of the 48th month after the grant date. All outstanding options have a contractual term of ten years. The restricted stock units vest in equal installments over a period of four years.

 

Information relating to all outstanding stock options, except for rights associated with the Amended and Restated 2000 Employee Stock Purchase Plan, is as follows:

 

		Shares		Weighted Average Exercise Price			Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Options outstanding at March 31, 2013		11,791,765		$	1.33
Granted		1,665,200		0.93
Exercised		—		—
Forfeited, cancelled or expired		(100,848	)	1.10
Options outstanding at September 30, 2013		13,356,117		$	1.29		5.62		$	1,744,683
Options fully vested at September 30, 2013 and those expected to vest beyond September 30, 2013		13,074,488		$	1.29		5.54		$	1,686,707
Options exercisable at September 30, 2013		9,877,196		$	1.37		4.44		$	1,118,477

 

The weighted average per share grant date fair value of options granted during the three months ended September 30, 2013 and 2012 was $1.10 and $1.01, respectively. The weighted average per share grant date fair value of options granted during the six months ended September 30, 2013 and 2012 was $0.93 and $1.01, respectively. There were no options exercised during the three or six months ended September 30, 2013 or 2012. The Company recorded expense of approximately $0.3 million and $0.2 million associated with its stock options during the three months ended September 30, 2013 and 2012, respectively. The Company recorded expense of approximately $0.7 million and $0.4 million associated with its stock options during the six months ended September 30, 2013 and 2012, respectively. As of September 30, 2013, there was approximately $1.9 million of total compensation cost related to unvested stock option awards that is expected to be recognized as expense over a weighted average period of 2.9 years.

 

The Company calculated the estimated fair value of each stock option granted during the three and six months ended September 30, 2013 on the date of grant using the Black-Scholes option-pricing model and the following weighted-average assumptions:

 

		Three Months Ended September 30,				Six Months Ended September 30,
		2013		2012		2013		2012
Risk-free interest rates		1.9	%	0.8	%	0.9	%	0.8	%
Expected lives (in years)		5.7		5.7		5.7		5.7
Dividend yield		—	%	—	%	—	%	—	%
Expected volatility		76.0	%	79.8	%	77.3	%	79.8	%

 

The Company’s computation of expected volatility for the three and six months ended September 30, 2013 and 2012 was based on historical volatility. The expected life, or term, of options granted is derived from historical exercise behavior and represents the period of time that stock option awards are expected to be outstanding. Management has selected a risk-free rate based on the implied yield available on U.S. Treasury Securities with a maturity equivalent to the options’ expected terms. Stock-based compensation expense is based on awards that are ultimately expected to vest and accordingly, stock-based compensation recognized in the three and six months ended September 30, 2013 and 2012 has been reduced by estimated forfeitures.

 

The following table outlines the restricted stock unit activity:

 

		Shares		Weighted Average Grant-Date Fair Value
Unvested restricted stock units outstanding at March 31, 2013		1,467,096		$	1.10
Granted		1,245,918		1.06
Vested and issued		(625,485	)	1.06
Forfeited		(64,447	)	1.09
Unvested restricted stock units outstanding at September 30, 2013		2,023,082		$	1.10
Restricted stock units expected to vest beyond September 30, 2013		1,810,177		$	1.10

 

The restricted stock units were valued based on the closing price of the Company’s common stock on the date of issuance and compensation cost is recorded on a straight-line basis over the vesting period. The related compensation expense recognized has been reduced by estimated forfeitures. The Company’s estimate of forfeitures is based on historical forfeitures.

 

The weighted average per share grant date fair value of restricted stock granted during the three months ended September 30, 2013 and 2012 was approximately $1.13 and $1.01, respectively. The weighted average per share grant date fair value of restricted stock granted during the six months ended September 30, 2013 and 2012 was approximately $1.06 and $1.01, respectively. The total fair value of restricted stock units vested and issued by the Company during the three months ended September 30, 2013 and 2012 was approximately $0.4 million and $44,800, respectively. The total fair value of restricted stock units vested and issued by the Company during the six months ended September 30, 2013 and 2012 was approximately $0.7 million and $0.3 million, respectively. The Company recorded expense of approximately $0.2 million associated with its restricted stock awards and units during each of the three months ended September 30, 2013 and 2012. The Company recorded expense of approximately $0.5 million and $0.3 million associated with its restricted stock awards and units during the six months ended September 30, 2013 and 2012, respectively. As of September 30, 2013, there was approximately $1.7 million of total compensation cost related to unvested restricted stock units that is expected to be recognized as expense over a weighted average period of 2.8 years.

 

During the three months ended September 30, 2013 and 2012, the Company issued a total of 25,904 and 22,045 shares of stock, respectively, to non-employee directors who elected to take payment of all or any part of the directors’ fees in stock in lieu of cash. During the six months ended September 30, 2013 and 2012, the Company issued a total of 48,162 and 44,207 shares of stock, respectively, to non-employee directors who elected to take payment of all or any part of the directors’ fees in stock in lieu of cash. The weighted average per share grant date fair value of shares of stock issued during the three months ended September 30, 2013 and 2012 was $1.10 and $1.01, respectively. The weighted average per share grant date fair value of shares of stock issued during the six months ended September 30, 2013 and 2012 was $1.18 and $1.00, respectively.

 

Stockholder Rights Plan

 

The Company has entered into a rights agreement (as amended, the “Rights Agreement”) with Computershare, Inc. successor in interest to Mellon Investor Services LLC, as rights agent. In connection with the Rights Agreement, the Company’s board of directors authorized and declared a dividend distribution of one preferred stock purchase right for each authorized and outstanding share of the Company’s common stock. Each right entitles the registered holder to purchase from the Company a unit consisting of one one-hundredth of a share of Series A Junior Participating Preferred Stock, par value $0.001 per share, at a purchase price of $10.00 per unit, subject to adjustment. The description and terms of the rights are set forth in the Rights Agreement. Initially, the rights are attached to all common stock certificates representing shares then outstanding, and no separate rights certificates are distributed. Subject to certain exceptions specified in the Rights Agreement, the rights will separate from the common stock and will be exercisable upon the earlier of (i) 10 days following a public announcement that a person or group of affiliated or associated persons has acquired, or obtained the right to acquire, beneficial ownership of 20% or more of the outstanding shares of common stock, other than as a result of repurchases of stock by the Company or certain inadvertent actions by institutional or certain other stockholders, or (ii) 10 days (or such later date as the Company’s Board of Directors shall determine) following the commencement of a tender offer or exchange offer (other than certain permitted offers described in the Rights Agreement) that would result in a person or group beneficially owning 20% or more of the outstanding shares of the Company’s common stock. On June 9, 2011, the Company’s Board of Directors unanimously approved a second amendment to the Rights Agreement, which was approved by the stockholders in August 2011. The second amendment adds an additional “sunset provision,” which provides that the Rights Agreement will expire on the 30th day after the 2014 annual meeting of stockholders unless continuation of the Rights Agreement is approved by the stockholders at that meeting.  The second amendment also provides for an update to the definition of “Beneficial Owner” to include derivative interests in the calculation of a stockholder’s ownership.  In addition, the second amendment clarifies the manner in which the exchange provision of the Rights Agreement shall be effected.  The rights are intended to protect the Company’s stockholders in the event of an unfair or coercive offer to acquire the Company. Management believes the rights, however, should not affect any prospective offeror willing to make an offer at a fair price and otherwise in the best interests of the Company and its stockholders, as determined by the Board of Directors. Also, management believes the rights should also not interfere with any merger or other business combination approved by the Board of Directors.