Applied Solar, Inc. (fka APSOQ)

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Stock options

On September 23, 2008, the Company granted options to purchase 40,573,640 shares of the Company’s common stock with performance based vesting to executives and other key employees. Vesting of the performance based awards is contingent upon achievement of various strategic, company-wide milestones, including execution of licensing agreements for the Company’s technology, financing milestones relative to the Solar Communities initiative, and certain marketing objectives.

The performance based options were granted at-the-money, contingently vest over the estimated performance period depending on the nature of the performance milestone (over 90 or 180 days), and have contractual lives of 10 years. The fair value of each performance based option grant was estimated on the date of grant using the same option valuation model used for time based options granted under the 2006 Plan, assuming that performance goals will be achieved. If such goals are not met, no compensation cost is recognized and any recognized compensation cost is reversed. The inputs for expected volatility, expected dividends, and risk-free rate used in estimating those options' fair value are the same as those noted in the table related to options issued under the “Time-Based Vesting Options”.

During the three months ended November 30, 2008, three 90-day milestones, representing options to purchase 15,215,111 shares of the Company’s common stock, out of a total of eight milestones were deemed probable of achievement resulting in recognition of compensation expense of $702,000, which was included in general and administrative expense. The remaining five milestones were not deemed probable of achievement and therefore no related compensation cost has been recognized to date. As of November 30, 2008, there was $1.7 million of total unrecognized compensation cost related to non-vested performance based compensation arrangements; the majority of which cost is expected to be recognized over the applicable requisite service period once achievement is deemed probable.


At November 30, 2008, the Company had performance based options to purchase 40,573,640 shares of the Company’s common stock outstanding, none of which were vested. Weighted average fair value of performance based options (measured using the stock price at the date of grant) granted during the three and six months ended November 30, 2008 was $0.0602. There were no performance based options exercised during the three and six months ended November 30, 2008.

http://sec.gov/Archives/edgar/data/1176193/000101968709000232/oegyob_10q-113008.htm