10.

Stock-Based Compensation

2008 Incentive Plan

The pSivida Corp. 2008 Incentive Plan (the “2008 Plan”) permits the issuance of stock-based awards to directors, executives, employees and consultants. Awards may include stock options, stock appreciation rights, restricted and unrestricted stock, deferred stock, performance awards, convertible securities and cash grants. At June 30, 2012, the number of shares reserved for issuance under the 2008 Plan was 4,091,255, of which 807,653 shares were available for grant under the 2008 Plan. The 2008 Plan includes an “evergreen provision” that allows for an annual increase in the number of shares of common stock available for issuance under the 2008 Plan. On the first day of each fiscal year until July 1, 2017, the number of shares reserved for issuance under the 2008 Plan will be increased by the least of (i) 750,000 shares; (ii) 4% of the then outstanding shares of common stock; and (iii) any such lesser amount of shares of common stock as is determined by the Compensation Committee of the Board of Directors. The number of shares reserved for issuance increased by 750,000 shares on July 1, 2012.

Options to purchase a total of 768,350 shares were granted during fiscal 2012 at exercise prices equal to the closing market price of the Company’s common stock on the NASDAQ Global Market (“NASDAQ”) on the respective option grant dates. Of this total, options to purchase 533,350 shares were issued to employees with ratable annual vesting over 4 years, options to purchase 135,000 shares were issued to non-employee directors with 1-year cliff vesting and options to purchase 100,000 shares were issued subject to both performance and service condition vesting. All options have a 10-year life.

The Company measures the fair value of options on their grant date using the Black-Scholes option-pricing model. Based upon limited option exercise history, the Company has generally used the “simplified” method outlined in SEC Staff Accounting Bulletin No. 107 to estimate the expected life of stock option grants. Management believes that the historical volatility of the Company’s stock price on NASDAQ, for which there has been trading history for approximately 7.5 years, best represents the expected volatility over the estimated life of the option. The risk-free interest rate is based upon published U.S. Treasury yield curve rates at the date of grant corresponding to the expected life of the stock option. An assumed dividend yield of zero reflects the fact that the Company has never paid cash dividends and has no intentions to pay dividends in the foreseeable future.

The key assumptions used to apply the option pricing model for options granted under the 2008 Plan during the years ended June 30, 2012, 2011 and 2010 were as follows:


	2012	2011	2010
Option life (in years)	3.50 - 6.25	3.50 - 6.25	5.50 - 6.25
Stock volatility	88% - 97%	95%	95%
Risk-free interest rate	0.53% - 2.02%	1.13% - 2.35%	2.36% - 2.62%
Expected dividends	0.0%	0.0%	0.0%

The Company recognizes compensation expense for only the portion of options that are expected to vest. Based on historical trends, the Company applies estimated forfeiture rates to determine the numbers of awards that are expected to vest. Additional expense is recorded if the actual forfeiture rate for each tranche of option grants is lower than estimated, and a recovery of prior expense is recorded if the actual forfeiture rate is higher than estimated. The Company assesses the forfeiture rate at the end of each reporting period. The Company begins to record stock-based compensation expense for performance-based options at the time it becomes probable that the respective performance conditions will be achieved. The Company will continue to recognize the grant date fair value of performance-based options through the vesting date of the respective awards so long as it remains probable that the related performance conditions will be satisfied. In fiscal 2012, the Company recorded a reversal of $121,000 of expense for performance-based option awards forfeited during fiscal 2012.

The following table summarizes information about stock options for the years ended June 30, 2012, 2011 and 2010:


	2012		2011		2010
Weighted-average grant date fair value, per share	$	2.41	$	3.24	$	3.10
Total cash received from exercise of stock options (in thousands)		114		17		318
Total intrinsic value of stock options exercised (in thousands)		119		12		78

At June 30, 2012, there was approximately $1.2 million of unrecognized stock-based compensation expense related to unvested stock options, which is expected to be recognized as expense over a weighted average period of 1.8 years.

The following table provides a reconciliation of stock option activity under the 2008 Plan for fiscal 2012:


	Number of options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
						(in years)
Outstanding at July 1, 2011		2,605,895		$	2.63
Granted		768,350			4.93
Exercised		(53,950	)		2.12
Forfeited		(266,940	)		4.05

Outstanding at June 30, 2012		3,053,355		$	3.10		7.44	$	915

Outstanding at June 30, 2012—vested or unvested and expected to vest		2,977,909		$	3.08		7.42	$	910

Exercisable at June 30, 2012		1,668,034		$	2.40		6.84	$	781

Employee Share Option Plan

The Company’s Employee Share Option Plan (the “Plan”) provided for the issuance of non-qualified stock options to eligible employees and directors. As of June 30, 2008, no further options could be granted under the Plan. Options outstanding under the Plan, denominated in A$, had vesting periods ranging from immediate vesting to 3-year graded vesting and a contractual life of five years.

The following table provides a reconciliation of stock option activity under the Plan for fiscal 2012:


	Number of options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
				A$		(in years)		A$
Outstanding at July 1, 2011		135,000			6.75
Cancelled		(22,500	)		13.00

Outstanding and exercisable at June 30, 2012		112,500			5.50		0.25		—

At June 30, 2012 the weighted average exercise price of outstanding and exercisable options translated into US$ was $5.59.

Stock-Based Compensation Expense

The Company’s statements of operations included total compensation expense from stock-based payment awards as follows:


	Year ended June 30,
	2012		2011		2010
Compensation expense from:
Stock options	$	1,411	$	2,052	$	1,385
Issuance of fully vested shares		—		—		110

	$	1,411	$	2,052	$	1,495

Compensation expense included in:
Research and development	$	597	$	400	$	306
General and administrative		814		1,652		1,189

	$	1,411	$	2,052	$	1,495