ACCOUNTING FOR STOCK-BASED COMPENSATION:

All equity-based payments to employees, including grants of employee stock options and restricted stock units, are recognized as an expense in our consolidated statement of operations based on the grant date fair value of the award. We utilize the straight-line method of expense recognition over the award’s service period for our graded vesting options. The fair value of stock options granted has been determined using the Black-Scholes model. The compensation expense recognized for all equity based awards is net of estimated forfeitures, which are based on historical data. We have classified equity based compensation within our statement of operations in the same manner as our cash based employee compensation costs.

Equity based compensation expense in the three months ended September 30, 2014 totaled $117,000 and includes $74,000 for stock option awards, $15,000 for our employee stock purchase plan and $28,000 for unvested restricted stock units. Equity based compensation expense in the nine months ended September 30, 2014 totaled $378,000 and includes $224,000 for stock option awards, $33,000 for our employee stock purchase plan, $89,000 for unvested restricted stock units and $32,000 for shares issued to our non-employee directors upon their re-election to our board in May 2014.

Equity based compensation expense in the three months ended September 30, 2013 totaled $97,000 and includes $62,000 for stock option awards, $10,000 for our employee stock purchase plan, and $25,000 for unvested restricted stock units. Equity based compensation in the nine months ended September 30, 2013 totaled $330,000 and includes $192,000 for stock option awards, $34,000 for our employee stock purchase plan, $74,000 for unvested restricted stock units and $30,000 for shares issued to our non-employee directors upon their re-election to our board.

At September 30, 2014 the total unrecognized compensation cost related to non-vested equity based compensation arrangements was $1,105,000 and the related weighted average period over which it is expected to be recognized is 2.44 years.

For stock options granted during the nine months ended September 30, 2014, we utilized the fair value of our common stock on the date of grant and employed the following key assumptions in computing fair value using the Black-Scholes option-pricing model:



	2014
Risk-free interest rates	1.55% - 1.65%
Expected life in years	5.30 - 5.48
Expected volatility	46.57% - 46.90%
Dividend yield	—%
Weighted average fair value on grant date	$3.39

Stock Options

We have two stock incentive plans that are administered under the supervision of the Compensation Committee of the Board of Directors. As of September 30, 2014, there are 892,123 shares of common stock reserved in the aggregate for issuance of options and other stock based benefits under these plans, including restricted stock units and share grants to employees, officers and others. Reserved shares underlying canceled options are available for future grant under our active plan. Options are granted at an option price per share equal to or greater than the market value of our common stock on the date of grant. Generally, options granted to employees vest over a four-year period and expire seven years after the date of grant. The plans allow for option holders to tender shares of our common stock as consideration for the option price, provided that the tendered shares have been held by the option holder at least six months. As of September 30, 2014, there were 297,555 shares of common stock available under our active plan for future issuance to employees, officers and others.

The following is a summary of stock option activity for the nine months ended September 30, 2014:



	Options Outstanding		Weighted Average Exercise Price Per Share
Outstanding, December 31, 2013	586,483		$	8.07
Granted	170,000		7.73
Exercised	(107,243	)	5.85
Expired	(43,851	)	14.80
Forfeited	(63,123	)	7.18
Outstanding, September 30, 2014	542,266		$	7.96

Exercisable, September 30, 2014	225,311		$	9.13

The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price. At September 30, 2014, the weighted average remaining contractual term of all outstanding options was 4.46 years and their aggregate intrinsic value was $1,862,788. At September 30, 2014, the weighted average remaining contractual term of options that were exercisable was 2.39 years and their aggregate intrinsic value was $564,253. We received proceeds of $628,000 from the exercise of stock options in the nine months ended September 30, 2014. We received proceeds of $25,000 from the exercise of stock options in the nine months ended September 30, 2013.

Restricted Stock Units

Our 1998 Stock Incentive Plan also permits our Compensation Committee to grant other stock-based benefits, including restricted stock units. Restricted stock units are valued at a price equal to the fair market value of our common stock on the date of grant, vest over a four year period provided the employee is still working for the company and entitle the holders to one share of our common stock for each restricted stock unit. The aggregate fair value of outstanding restricted stock units based on the closing share price of our common stock on September 30, 2014 was $587,000. The aggregate fair value of restricted stock units that vested in the nine months ended September 30, 2014, based on the closing share price of our common stock on the vesting date, was $34,796.

A summary of activity in non-vested restricted stock units for the nine months ended September 30, 2014 is as follows:



Non-vested restricted stock units	Shares		Weighted Average Grant Date Fair Value
Non-vested at December 31, 2013	46,943		$	6.82
Granted	20,000		6.97
Vested	(5,433	)	7.31
Forfeited	(9,208	)	7.56
Non-vested at September 30, 2014	52,302		$	6.69

Employee Stock Purchase Plan

We have an Employee Stock Purchase Plan available to eligible U.S. employees. Under terms of the plan, eligible employees may designate from 1% to 10% of their compensation to be withheld through payroll deductions, up to a maximum of $6,500 in each plan year, for the purchase of common stock at 85% of the lower of the market price on the first or last day of the offering period. There were 22,324 shares issued under this plan in the nine months ended September 30, 2014 and 12,656 shares issued under this plan in the nine months ended September 30, 2013. As of September 30, 2014, 131,602 shares remain available for future issuance under this plan.

Stock Grant Plan for Non-Employee Directors

Our stock grant plan for non-employee directors provides for automatic grants of 1,000 shares of our common stock to each of our non-employee directors upon their re-election to the Board of Directors. The plan allows for the issuance of up to 60,000 shares of our common stock, including an additional 30,000 shares authorized in May 2014, and will expire on May 19, 2018. We issued a total of 4,000 shares of common stock under this plan in connection with our annual meeting in May 2014, resulting in $32,000 of stock compensation expense in the nine months ended September 30, 2014. As of September 30, 2014, 32,000 shares of common stock are reserved in the aggregate for future issuance under this plan.