Stock-Based Employee Compensation Plans

In May 2010, our shareholders approved the adoption of our 2010 Equity Incentive Plan (the “2010 Incentive Plan”), which authorized and set aside a total of 400,000 shares of our common stock for issuance on the exercise of stock options or the grant of restricted stock or other equity incentives to our officers, and other key employees and directors. An additional 158,211 shares of common stock were also set aside which was equal to the total of the shares that were available for the grant of equity incentives under our shareholder-approved 2008 and 2004 Equity Incentive Plans (the "Previously Approved Plans") at the time of the adoption of the 2010 Incentive Plan. Options to purchase a total of 361,654 shares of our common stock granted under the Previously Approved Plans were outstanding at June 30, 2016. The 2010 Incentive Plan provides that if any of these outstanding options under the Previously Approved Plans expire or are terminated for any reason, then the number of shares that would become available for grants or awards of equity incentives under the 2010 Incentive Plan would be increased by an equivalent number of shares. At the Annual Shareholders meeting held in May 2013, our shareholders approved an additional 800,000 share increase in the maximum number of shares of our common stock that may be issued pursuant to grants or exercises of options or restricted shares or other equity incentives under the 2010 Incentive Plan, of which 154,834 shares of restricted stock, net of shares withheld for taxes, have vested as of June 30, 2016 thereby decreasing the maximum number of shares authorized under the 2010 Incentive Plan. As a result, as of June 30, 2016, the maximum number of shares that were authorized for the grant of options or other equity incentives under the 2010 Incentive Plan totaled 1,565,031 (assuming that all 361,654 shares of our common stock subject to options under the Previously Approved Plans expire or are terminated), or approximately 7% of the shares of our common stock then outstanding.

A stock option entitles the recipient to purchase shares of our common stock at a price per share that may not be less than 100% of the fair market value of the Company’s shares on the date the option is granted. Restricted shares may be granted at such purchase prices and on such other terms, including restrictions and Company repurchase or reacquisition rights, as are fixed by the Compensation Committee at the time rights to purchase such restricted shares are granted. Stock Appreciation Rights ("SARs") entitle the recipient to receive a cash payment in an amount equal to the difference between the fair market value of the Company’s shares on the date of vesting and a “base price” (which, in most cases, will be equal to the fair market value of the Company’s shares on the date the SAR is granted), subject to the right of the Company to make such payment in shares of its common stock at their then fair market value. Options, restricted shares and SARs may vest immediately or in installments over various periods generally ranging up to five years, subject to the recipient’s continued employment or service or the achievement of specified performance goals, as determined by the Compensation Committee at the time it grants or awards the options, the restricted shares or the SARs. Stock options and SARs may be granted for terms of up to 10 years after the date of grant, but will terminate sooner upon or shortly after a termination of service occurring prior to the expiration of the term of the option or SAR. The Company will become entitled to repurchase any unvested restricted shares, at the same price that was paid for the shares by the recipient, or to cancel those shares in the event of a termination of employment or service of the holder of such shares or if any performance goals specified in the award are not satisfied. To date, the Company has not granted any SARs.

Under FASB ASC 718-10, we are required to recognize, in our financial statements, the fair value of the options or any restricted shares that we grant as compensation cost over their respective service periods. The fair values of the options that were outstanding at June 30, 2016 under the 2010 Incentive Plan were estimated as of their respective dates of grant using the Black-Scholes option-pricing model. The Company, under the 2010 Incentive Plan, granted restricted stock for the benefit of its employees and directors. These restricted shares vest over a period of three years for employees and one year for directors. The recipients of restricted shares have the right to vote all shares subject to such grant and receive all dividends with respect to such shares whether or not the shares have vested. The recipients do not pay any cash consideration for the shares.

Stock Options

The table below summarizes the weighted average assumptions used to determine the fair values of the options granted during the following periods:



	Three Months Ended June 30,						Six Months Ended June 30,
Assumptions with respect to:	2016			2015⁽¹⁾			2016			2015
Expected volatility	37		%	—		%	38		%	44		%
Risk-free interest rate	1.34		%	—		%	1.60		%	1.82		%
Expected dividends	—		%	—		%	—		%	—		%
Expected term (years)	6.2			—			6.3			6.0
Weighted average fair value of options granted during period	$	2.67		$	—		$	2.81		$	3.13

(1) No stock options were granted during the three months ended June 30, 2015.

The following table summarizes the stock option activity under the Company’s equity incentive plans during the six months ended June 30, 2016 and 2015, respectively.



	Number of Shares		Weighted- Average Exercise Price Per Share		Number of Shares		Weighted- Average Exercise Price Per Share
	2016				2015
Outstanding – January 1,	838,696		$	6.20	1,257,390		$	6.51
Granted	379,551		6.92		112,828		7.09
Exercised	(83,158	)	4.37		(226,564	)	5.54
Forfeited/Canceled	(57,737	)	8.88		(134,553	)	11.56
Outstanding – June 30,	1,077,352		6.45		1,009,101		6.12
Options Exercisable – June 30,	576,670		$	6.13	529,284		$	5.80
Options Vested – June 30,	576,670		$	6.07	529,284		$	5.80

Options to purchase 41,780 and 22,252 shares of our common stock were exercised during the three months ended June 30, 2016 and 2015, respectively. Options to purchase 83,158 and 226,564 shares of our common stock were exercised during the six months ended June 30, 2016 and 2015, respectively. The aggregate intrinsic value of options exercised during the three months ended June 30, 2016 and 2015 was $110 thousand and $21 thousand, respectively. The aggregate intrinsic value of options exercised during the six months ended June 30, 2016 and 2015 was $239 thousand and $343 thousand, respectively. The fair values of options that vested during the three months ended June 30, 2016 and 2015 was $40 thousand and $96 thousand, respectively. The fair values of options that vested during the six months ended June 30, 2016 and 2015 was $154 thousand and $170 thousand, respectively.

The following table provides additional information regarding the vested and unvested options that were outstanding at June 30, 2016.



Options Outstanding as of June 30, 2016						Options Exercisable as of June 30, 2016⁽¹⁾
	Vested	Unvested	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Shares	Weighted Average Exercise Price
$2.97 – $4.99	95,503	1,000	$	3.62	4.31	95,503	$	3.61
$5.00 – $6.99	442,794	338,855	6.48		7.86	442,794	6.32
$7.00– $10.00	24,573	160,827	7.10		9.23	24,573	7.10
$10.01-$17.31	13,800	—	15.91		0.38	13,800	15.91
	576,670	500,682	$	6.45	7.68	576,670	$	6.13


(1)	The weighted average remaining contractual life of the options that were exercisable as of June 30, 2016 was 6.39 years.

The aggregate intrinsic value of options that were outstanding and exercisable under the 2010 Incentive Plan at June 30, 2016 and December 31, 2015 was $680 thousand and $904 thousand, respectively.

A summary of the status of the unvested options outstanding as of June 30, 2016, and changes in the weighted average grant date fair values of the unvested options during the six months ended June 30, 2016, are set forth in the following table.



	For the six months ended June 30,
	2016				2015
	Number of Shares Subject to Options		Weighted Average Grant Date Fair Value		Number of Shares Subject to Options		Weighted Average Grant Date Fair Value
Unvested at the beginning of the period	215,926		$	2.93	468,504		$	2.68
Granted	379,551		2.76		112,828		3.13
Vested	(52,738	)	2.93		(74,301	)	2.57
Forfeited/Canceled	(42,057	)	2.90		(27,214	)	2.26
Unvested at the end of the period	500,682		2.80		479,817		2.86

At June 30, 2016, the weighted average period over which nonvested awards were expected to be recognized was 2.73 years.

Restricted Stock

The following table summarizes the activity related to restricted stock granted, vested and forfeited under our equity incentive plans during the six months ended June 30, 2016 and 2015.



	For the six months ended June 30,
	2016				2015
	Number of Shares		Average Grant Date Fair Value		Number of Shares		Average Grant Date Fair Value
Outstanding at the beginning of the period	129,283		$	6.75	141,254		$	6.29
Granted	113,975		6.82		98,829		7.10
Vested	(47,764	)	6.83		(15,848	)	6.43
Forfeited	(30,585	)	6.63		(3,638	)	6.18
Outstanding at the end of the period	164,909		$	6.80	220,597		$	6.63

Compensation Expense

We expect that the compensation expense that will be recognized during the periods presented below in respect of stock options and restricted stock outstanding at June 30, 2016, will be as follows:



	Estimated Stock Based Compensation Expense Stock Options		Estimated Stock Based Compensation Expense Restricted Stock		Estimated Stock Based Compensation Expense Total
(Dollars in thousands)
For the years ending December 31,
Remainder of 2016	$	235	$	258	$	493
2017	391		292		683
2018	306		147		453
2019	63		34		97
2020 and beyond	28		16		44
	$	1,023	$	747	$	1,770

The aggregate amounts of stock based compensation expense recognized in our consolidated statements of operations for the three months ended June 30, 2016 and 2015 were $276 thousand and $367 thousand, respectively, in each case net of taxes. The aggregate amounts of stock based compensation expense recognized in our consolidated statements of operations for the six months ended June 30, 2016 and 2015 were $553 thousand and $683 thousand, respectively, in each case net of taxes.