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 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. As of September 30, 2014, options to purchase a total of 119,000 shares of our common stock and a total of 379,657 unvested restricted shares were outstanding under the 2012 Plan and the Previously Approved Plans. As of that same date, 245,660 shares remained available for future equity incentive grants under the 2012 Plan.

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 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, instead of becoming available for new equity incentive grants under the Previously Approved Plans. Therefore, if any equity incentives that are outstanding under the Previously Approved Plans expire, terminate or, subject to certain limitations, are reacquired by the Company, then a number of shares equal to the number of shares that had been subject to those equity incentives would become available for future grants under the 2012 Plan and those shares would cease to be available for future grants under the Previously Approved Plans.

We recognized non-cash stock-based compensation expense of $71,000 and $63,000 for the three months ended September 30, 2014 and 2013, respectively and $195,000 and $228,000 for the nine months ended September 30, 2014 and 2013, respectively, as a component of selling, general and administrative expenses in our condensed consolidated statements of operations.

Information Regarding Stock Options. 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,
	2014			2013
Stock Incentive Plans:
Expected volatility		56.7	%		66.0	%
Risk-free interest rate		2.39	%		2.64	%
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, 2014 and 2013 were $3.23 and $2.82, respectively.

The following tables summarize stock option activity during the nine month period ended September 30, 2014:


	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Average Intrinsic Value
Outstanding as of January 1, 2014		279,000		$	3.31
Granted		8,000			3.30
Exercised		(140,000	)		1.13
Forfeited		(28,000	)		6.34

Outstanding as of September 30, 2014		119,000		$	5.16		4.2 years	$	22,000

Exercisable as of September 30, 2014		111,000		$	5.29		3.7 years	$	22,000

Options vested and expected (as of September 30, 2014) to vest in the future		119,000		$	5.16		4.2 years	$	22,000

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, 2014 and the 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, 2014. The total pre-tax intrinsic value of the options exercised during the nine months ended September 30, 2014 was $347,000.

A summary of the status of the Company’s unvested options as of September 30, 2014 and changes during the nine month period ended September 30, 2014 is presented below:


	Shares			Weighted Average Grant Date Fair Value
Unvested as of January 1, 2014		10,000		$	2.77
Granted		8,000			3.23
Vested		(10,000	)		2.77
Forfeited		—			—

Unvested as of September 30, 2014		8,000		$	3.23

Unrecognized compensation cost related to unvested options granted under the Company’s 2012 Plan and Previously Approved Plans totaled $13,000 and $18,000 as of September 30, 2014 and 2013, respectively. Those costs were expected to be recognized over weighted average periods of 0.5 years from September 30, 2014 and September 30, 2013, respectively.

Restricted Shares. We began granting “service-contingent” restricted shares of common stock to some of our officers and other key management employees in 2010. The terms of those grants provided for those restricted shares to vest in equal annual installments over a three or four year service period following the respective dates of those awards, subject to the continued service with the Company of the recipients of such shares. In accordance with Accounting Standards Codification (ASC) 718, compensation expense for such awards is based on the fair market value of the awards on their respective dates of grant and is recognized over those service periods. A total of 103,494 of those service-contingent restricted shares remained unvested as of September 30, 2014. Since all of the holders of those remaining unvested restricted shares were still in the Company’s employ as of September 30, 2014, we expect that all of those unvested restricted shares will vest over the remainder of their respective vesting periods.

In 2013 and 2014, the Compensation Committee granted “performance-contingent” restricted shares to our officers and other key management employees. These performance-contingent shares vest in three annual installments, subject to the achievement by the Company of different financial performance goals applicable to those years. Stock-based compensation expense with respect to each one-third of those performance-contingent shares is recognized only if, and when we are able to determine that the Company’s achievement of the performance goal for the particular year has become probable. However, if any stock-based compensation expense were to be recognized based on such a determination, but the performance goal was not ultimately achieved, then that previously recognized stock-based compensation expense would be reversed. As of September 30, 2014, a total of 276,163 unvested performance-contingent restricted shares were outstanding.

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


	Shares			Weighted Average Grant Date Fair Value
Unvested restricted shares outstanding as of January 1, 2014		318,600		$	3.27
Granted		164,500			3.66
Vested		(103,503	)		(3.44	)
Forfeited		—			—

Unvested as of September 30, 2014		379,657		$	3.40

The intrinsic value of the 103,503 restricted shares that vested during the nine months ended September 30, 2014 was approximately $384,500. A total of 34,793 of those restricted shares were cancelled in satisfaction of a total of $129,000 of tax withholding obligations of holders of those restricted shares that arose as a result of the vesting of those shares.

Unrecognized stock-based compensation expense related to the outstanding unvested restricted shares totaled approximately $679,000 as of September 30, 2014. Those costs are expected to be recognized generally over weighted average period of 2.2 years measured from September 30, 2014. Of the 379,657 restricted shares that were unvested as of September 30, 2014, a total of 268,985 are expected to vest. The aggregate intrinsic value of those shares was $887,650 as of September 30, 2014.