ACCOUNTING FOR STOCK-BASED COMPENSATION:

We have four stock-based compensation plans that are administered by the Compensation Committee of the Board of Directors. We have an Employee Stock Incentive Plan for officers, other employees, consultants and independent contractors under which we have granted options and restricted stock units to officers and other employees, an Employee Stock Purchase Plan under which shares of our common stock may be acquired by employees at discounted prices, and a Non-Employee Director Stock Plan that provides for automatic grants of stock options and shares of our common stock to non-employee directors. We also have another stock incentive plan for non-employee directors, but no further awards are made under this plan. New shares are issued for all option exercises, upon vesting of restricted stock units, for share issuances to board members and for issuances under the Employee Stock Purchase Plan.

Employee Stock Incentive Plan

As of June 30, 2016, there are 1,036,157 shares of common stock reserved in the aggregate for issuance pursuant to outstanding or future awards under our Employee Stock Incentive Plan. Although our Compensation Committee has authority to issue options, restricted stock, restricted stock units, share grants and other share based benefits under our Employee Stock Incentive Plan, to date only restricted stock units and stock options have been granted under the plan. Options have been granted at an option price per share equal to the market value of our common stock on the date of grant, vest over a four-year period and expire seven years after the date of grant. Restricted stock units vest over a four year period and entitle the holders to one share of our common stock for each restricted stock unit.

As of June 30, 2016, there were 475,439 shares of common stock available for future awards under our Employee Stock Incentive Plan, including an additional 350,000 shares authorized in May 2016. Reserved shares underlying outstanding awards, including options and restricted shares, that are forfeited are available under the Employee Stock Incentive Plan for future grant.

Non-Employee Director Stock Plan

At our annual meeting on May 20, 2016, our shareholders, upon recommendation of the Board of Directors, approved a new Non-Employee Director Stock Plan. A total of 100,000 shares of common stock were authorized for issuance pursuant to the plan. Under the terms of the new plan, each non-employee director will automatically be granted, on the date of each annual meeting at which such director is elected to serve on the board (beginning with our May 2016 annual meeting), 2,000 shares of our common stock and a stock option to acquire 4,000 shares of our common stock. Shares granted under the plan are not subject to vesting restrictions. Each stock option granted under this plan will be fully exercisable, have an exercise price equal to the closing price of our common stock on the date of grant and have a term of 10 years.

Pursuant to the plan, on the date of our 2016 annual meeting, we issued a total of 8,000 shares of our common stock and stock options to acquire 16,000 shares of our common stock to our non-employee directors. The shares had a total fair market value on the date of grant equal to $136,000 (grant date fair value of $16.97 per share) and the options had a total fair market value on the date of grant using the Black-Scholes model equal to $139,000 (grant date fair value of $8.71 per option to acquire one share of our common stock). As of June 30, 2016, there were 76,000 shares of common stock available for future awards under the Non-Employee Director Stock Plan.

Stock Option Activity

The following is a summary of stock option activity for all of our plans in the six months ended June 30, 2016:



	Options Outstanding		Weighted Average Exercise Price Per Share
Outstanding, December 31, 2015	570,500		$	8.00
Granted	21,000		15.19
Exercised	(49,000	)	9.06
Expired	—		—
Forfeited	—		—
Outstanding, June 30, 2016	542,500		$	8.19

Exercisable, June 30, 2016	190,335		$	8.15

The intrinsic value of an option is the amount by which the market price of the underlying stock exceeds the option's exercise price. For options outstanding at June 30, 2016, the weighted average remaining contractual term of all outstanding options was 5.03 years and their aggregate intrinsic value was $3.7 million. At June 30, 2016, the weighted average remaining contractual term of options that were exercisable was 4.51 years and their aggregate intrinsic value was $1.3 million. The aggregate intrinsic value of stock options exercised was $375,000 in the six months ended June 30, 2016. We received proceeds from stock option exercises of $258,000 in the six months ended June 30, 2016 and $294,000 in the six months ended June 30, 2015. No tax benefit was realized from the exercise of these stock options, and no amounts were credited to additional paid-in capital. The total fair value of options that vested in the six months ended June 30, 2016 was $274,000.

The fair value of stock options granted to our employees and non-employee directors was estimated on the date of grant using the Black-Scholes model. The Black-Scholes valuation model incorporates ranges of assumptions that are disclosed in the table below. The risk-free interest rate is based on the United States Treasury yield curve at the time of grant with a remaining term equal to the expected life of the awards. We used historical experience to estimate the expected term, representing the length of time in years, that the options are expected to be outstanding. Expected volatility was computed based on historical fluctuations in the daily price of our common stock.

For stock options granted in the six months ended June 30, 2016, 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:



	2016
Risk-free interest rates	1.24% - 1.85%
Expected life in years	5.10 - 7.50
Expected volatility	42.22% - 46.67%
Dividend yield	—%
Weighted average fair value on grant date	$3.68 - $8.71

Restricted Stock Units

Restricted stock units are granted under our Employee Stock Incentive Plan. There were no restricted stock units granted in the three or six months ended June 30, 2016. The aggregate fair value of outstanding restricted stock units based on the closing share price of our common stock on June 30, 2016 was $715,000. The aggregate fair value of restricted stock units that vested, based on the closing share price of our common stock on the vesting date, was $190,000 in the six months ended June 30, 2016.

A summary of activity for non-vested restricted stock units in the six months ended June 30, 2016 is as follows:



Non-vested restricted stock units	Shares		Weighted Average Grant Date Fair Value
Non-vested at December 31, 2015	54,315		$	7.43
Granted	—		—
Vested	(6,597	)	7.05
Forfeited	—		—
Non-vested at June 30, 2016	47,718		$	7.48

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 no shares issued under this plan in either the six months ended June 30, 2016 or the six months ended June 30, 2015. As of June 30, 2016, 95,757 shares remain available for future issuance under this plan.

Stock Grant Plan for Non-Employee Directors

Previously, we had a stock grant plan for non-employee directors that provided 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. This plan was terminated and our non-employee directors did not receive any share grants under this plan on the date of our 2016 annual meeting at which our shareholders approved the new Non-Employee Director Stock Plan. In the three months ended June 30, 2015, a total of 4,000 shares were issued to non-employee directors under this plan. The shares issued in the three months ended June 30, 2015 had a fair market value on the date of grant equal to $41,000 (grant date fair value of $10.36 per share).

Stock Based Compensation Information

All equity-based compensation awarded to our employees and non-employee directors, representing grants of shares, 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 vesting period for our options subject to time-based vesting restrictions. 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 compensation costs.

Equity-based compensation expense in the three months ended June 30, 2016 totaled $409,000, and includes $226,000 for stock option awards, $16,000 for our Employee Stock Purchase Plan, $31,000 for unvested restricted stock units and $136,000 for shares issued to our non-employee directors. Equity-based compensation expense in the six months ended June 30, 2016, totaled $552,000, and includes $321,000 for stock option awards, $32,000 for our Employee Stock Purchase Plan, $63,000 for unvested restricted stock units and $136,000 for shares issued to our non-employee directors.

Equity-based compensation expense in the three months ended June 30, 2015 totaled $159,000, and includes $74,000 for stock option awards, $16,000 for our Employee Stock Purchase Plan, $28,000 for unvested restricted stock units and $41,000 for shares issued to our non-employee directors. Equity based compensation expense in the six months ended June 30, 2015 totaled $276,000, and includes $148,000 for stock option awards, $31,000 for our Employee Stock Purchase Plan, $56,000 for unvested restricted stock units and $41,000 for shares issued to our non-employee directors.

At June 30, 2016, the total unrecognized compensation cost related to non-vested equity based compensation arrangements was $1.2 million, and the related weighted average period over which it is expected to be recognized is 2.12 years.