6.	Stock-Based Compensation.

In August 2012, our stockholders approved the 2012 Equity Incentive Plan (the “2012 Plan”), which provides for the grant of equity incentives, consisting of options, stock appreciation rights, restricted stock and restricted stock units to officers, other key employees, directors and consultants. The 2012 Plan initially set aside, for the grant of equity incentives, 300,000 shares of the Company’s common stock, plus an additional 17,666 shares which was equal to the total number of shares that were then available for the grant of new equity incentives under our then existing stockholder approved stock incentive plans (the “Previously Approved Plans”). At the same time, those 17,666 shares ceased to be issuable under the Previously Approved Plans. At September 30, 2012, options to purchase a total of 433,000 shares of our common stock and a total of 317,001 of unvested restricted shares were outstanding under the 2012 and the Previously Approved Plans. As of that same date, 319,333 shares remained available for future equity incentive grants under the 2012 Plan, whereas no shares remained available for future equity incentive grants under the Previously Approved Plans.

The Previously Approved Plans had provided that, if any options outstanding under any of those Plans were to expire or otherwise terminate unexercised, or if any restricted shares outstanding under any of those Plans were to be forfeited or reacquired by the Company, the shares that had been subject to those equity incentives would have become available for the grant of new options or other equity incentives under those Plans. However, the 2012 Plan provides that those shares will, instead, cease to be available for the grant of new equity incentives under the Previously Approved Plans and the number of shares that will be available for future equity grants under the 2012 Plan will be increased by an equal number of shares.

The fair value of each outstanding option is estimated as of the date of grant using a binomial model. This model incorporates certain assumptions including a risk-free market interest rate, expected dividend yield of the underlying common stock, expected option life and expected volatility in the market value of the underlying common stock.

Expected volatilities are based on the historical volatility of the Company’s common stock. The risk free interest rate is based upon market yields for United States Treasury debt securities. The expected dividend yield is based upon the Company’s dividend policy and the fair market value of the Company’s shares at the time of grant. Expected lives are based on several factors, including the average holding period of outstanding options, their remaining terms and the cycle of our long range business plan.

We used the following weighted average assumptions in estimating the fair values of the options granted in the periods indicated below:


	Nine Months Ended September 30,
	2012			2011
Stock Incentive Plans:
Expected volatility		59.0	%		72.0	%
Risk-free interest rate		1.64	%		2.15	%
Expected dividend yields		N/A			N/A
Expected lives		10 years			10 years

The weighted average grant-date fair values of options granted during the nine months ended September 30, 2012 and 2011 were $1.28 and $1.97, respectively.

The following tables summarize stock option activity during the nine month periods ended September 30, 2012 and 2011:


	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Average Intrisic Values
Outstanding at January 1, 2012		546,001		$	4.54
Granted		8,000			1.80
Exercised		(3,334	)		0.90
Forfeited		(117,667	)		7.90

Outstanding at September 30, 2012		433,000		$	3.60		2.3 years	$	174,000

Exercisable at September 30, 2012		425,000		$	3.64		2.4 years	$	172,000

Options vested and expected, as of September 30, 2012, to vest thereafter		433,000		$	3.60		2.3 years	$	174,000

The average intrinsic values set forth in the above table represent the total pre-tax intrinsic values (the average of the differences between the closing stock price of the Company’s common stock on September 30, 2012 and the respective exercise prices of the then outstanding in-the-money options) that would have been received by the option holders if all of the in-the-money options had been exercised on September 30, 2012. The total pre-tax intrinsic values of options exercised during the nine months ended September 30, 2012 and 2011 were $3,500 and $21,007, respectively.

A summary of the status of the Company’s unvested options as of September 30, 2012 and changes during the nine month period ended September 30, 2012 is presented below:


	Shares			Weighted Average Grant Date Fair Value
Nonvested at January 1, 2012		69,200		$	0.73
Granted		8,000			1.28
Vested		(69,200	)		0.73
Forfeited		—			—

Nonvested at September 30, 2012		8,000		$	1.28

Restricted Shares of Common Stock. During the first three months of 2010, we began granting awards of restricted shares of common stock to some of our officers and other key management employees. Restricted shares generally vest in equal annual installments over a three or four year service period, subject to the continued employment of the recipients of these shares. Compensation expense for such awards, which is based on the fair market value of the awards on their respective dates of grant, is recorded over those service periods.

A summary of the status of the Company’s restricted share activity follows:


	Shares			Weighted Average Grant Date Fair Value
Outstanding at January 1, 2012		232,501		$	4.31
Granted		147,500			2.28
Vested		(58,500	)		(4.15	)
Forfeited		(4,500	)		(4.36	)

Nonvested at September 30, 2012		317,001		$	3.39

We recognized stock-based compensation expense of $114,000 and $105,000 for the quarters ended September 30, 2012 and 2011, respectively, and $333,000 and $330,000 for the nine months ended September 30, 2012 and 2011, respectively, as a component of selling, general and administrative expenses in our condensed consolidated statements of operations.

Unrecognized compensation cost related to nonvested options granted under the Company’s 2012 Plan and Previously Approved Plans totaled $9,000 and $24,504 as of September 30, 2012 and 2011, respectively. That cost is expected to be recognized over a weighted average period of 1.0 and 0.5 years in 2012 and 2011. At September 30, 2012 a total of 433,000 shares of our common stock were subject to outstanding stock options that were exercisable or were expected to become exercisable in the future.

Unrecognized compensation cost related to the nonvested service-conditioned restricted shares outstanding totaled approximately $700,000 and $793,000 at September 30, 2012 and 2011, respectively. Those costs are expected to be recognized generally over weighted average periods of 1.7 and 1.6 years measured, respectively, from September 30, 2012 and September 30, 2011. All 317,001 shares of our restricted stock as of September 30, 2012 are expected to vest. The aggregate intrinsic value of these shares of restricted stock, as of September 30, 2012 was $665,700.