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 grants of new equity incentives under our stockholder-approved stock incentive plans that were in effect immediately prior to the approval of the 2012 Plan (the “Previously Approved Plans”). At the same time, those 17,666 shares ceased to be issuable under the Previously Approved Plans. At September 30, 2013, options to purchase a total of 284,000 shares of our common stock and a total of 374,497 of unvested restricted shares were outstanding under the 2012 Plan and the

Previously Approved Plans. As of that same date, 299,530 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 become available for the grant of new options or other equity incentives under those Previously Approved 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 incentives under the 2012 Plan will be increased by an equal number of shares.

The fair value of each outstanding option is estimated as of its 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,
	2013			2012
Stock Incentive Plans:
Expected volatility		66.0	%		59.0	%
Risk-free interest rate		2.64	%		1.64	%
Expected dividend yields		N/A			N/A
Expected lives		10 years			10 years

The weighted averaged grant-date fair values of options granted during the nine months ended September 30, 2013 and 2012 were $2.82 and $1.28, respectively.

The following table summarizes stock option activity during the nine month period ended September 30, 2013:


	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Average Intrinsic Value
Outstanding at January 1, 2013		433,000		$	3.60
Granted		8,000			3.87
Exercised		(25,500	)		0.95
Forfeited		(131,500	)		4.83

Outstanding at September 30, 2013		284,000		$	3.28		2.4 years	$	433,900

Exercisable at September 30, 2013		276,000		$	3.27		2.2 years	$	433,900
Options vested and expected, as of September 30, 2013, to vest thereafter		284,000		$	3.28		2.4 years	$	433,900

The average intrinsic value set forth in the above table represents the total pre-tax intrinsic value (the average of the differences between the closing stock price of the Company’s common stock on September 30, 2013 and the exercise prices of the then outstanding in-the-money options) that would have been realized by the option holders if all of the in-the-money options had been exercised on September 30, 2013.

A summary of the status of the Company’s unvested options as of September 30, 2013 and changes during the nine month period ended September 30, 2013 is presented below:


	Shares			Weighted Average Grant Date Fair Value
Unvested at January 1, 2013		8,000		$	1.28
Granted		8,000			2.82
Vested		(8,000	)		1.28
Forfeited		—			—

Unvested at September 30, 2013		8,000		$	2.82

Unrecognized compensation cost related to unvested options granted under the Company’s 2012 Plan and Previously Approved Plans totaled $18,000 and $9,000 as of September 30, 2013 and 2012, respectively. That cost is expected to be recognized over a weighted average periods of 0.5 years and 1.0 years from September 30, 2013 and September 30, 2012, respectively. At September 30, 2013 a total of 284,000 shares of our common stock were subject to outstanding stock options that were exercisable or were expected to become exercisable in the future.

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 increments over a three or four year service period. 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.

During the nine months ended September 30, 2013, the Compensation Committee granted, under our 2012 Equity Incentive Plan, a total of 167,500 performance contingent restricted shares to our officers and other key management employees. One third of these performance contingent shares will vest, in each of 2013, 2014 and 2015, only if the Company achieves a specified annual financial performance goal for such year. Stock based compensation expense with respect to each one-third of these shares will be recognized only if, and when, a determination is made that the Company’s achievement of the performance goal for any of those years has become probable. However, if any compensation expense were to be recognized based on a determination that achievement of a performance goal had become probable, but the performance goal is not ultimately achieved (due, for example, to the occurrence of subsequent changes in market or economic conditions or other circumstances that adversely affect the Company’s financial performance during the remainder of the year), then, the previously recognized stock-based compensation expense would be reversed. As of September 30, 2013, achievement of the fiscal 2013 performance goal had not become probable. As a result, no stock-based compensation expense was recorded for any of the performance-contingent restricted shares in either the quarter or nine months ended September 30, 2013.

Under our Equity Incentive Plans, employees who hold restricted shares may, with the approval of the Compensation Committee, elect to satisfy their tax withholding obligations which arise upon the vesting of restricted shares, by instructing the Company to cancel a number of those shares with a fair market value, measured as of the vesting date, equal to the amount of the withholding obligations.

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


	Shares			Weighted Average Grant Date Fair Values
Outstanding at January 1, 2013		312,501		$	3.39
Granted		167,500			2.96
Vested		(105,504	)		(3.29	)
Forfeited		—			—

Unvested at September 30, 2013		374,497		$	3.23

Unrecognized compensation cost related to the unvested service-contingent restricted shares totaled approximately $495,800 and $700,000 at September 30, 2013 and 2012, respectively. This cost is expected to be recognized generally over weighted average periods of 2.4 years and 1.7 years measured, respectively, from September 30, 2013 and September 30, 2012. All 374,497 shares of our unvested service contingent restricted stock outstanding at September 30, 2013 are expected to vest. The aggregate intrinsic value of these shares was $1,438,070 as of September 30, 2013.

We recognized stock-based compensation expense of $63,000 and $114,000 for the quarters ended September 30, 2013 and 2012, respectively, and $228,000 and $333,000 for the nine months ended September 30, 2013 and 2012, respectively, as a component of selling, general and administrative expenses in our condensed consolidated statements of operations.