Note 11. Employee Benefit Plans and Stock-based Compensation

Stock Option Plans and Equity Incentive Plans

In July 1997, our board of directors approved the 1997 Stock Option Plan (“1997 Plan”), which provides for the grant of incentive and non-qualified stock options to our employees, consultants and directors. Under the 1997 Plan, 5,423,583 shares of common stock have been authorized for issuance. Options granted under the 1997 Plan are generally for periods not to exceed ten years (five years if the option is granted to a 10% stockholder) and are granted at the fair market value of the stock at the date of grant as determined by the board of directors. Options granted under the 1997 Plan generally vest 25% at the end of one year and 2.1% each month thereafter, with full vesting after four years.

In May 2007, our shareholders approved our 2007 Equity Incentive Plan (the “2007 Plan”). The 2007 Plan is a restatement of the 1997 Plan which expired in 2007. The 1,928,994 share reserve of the 1997 Plan became the reserve of the 2007 Plan, together with 1,300,000 additional shares approved for issuance under the 2007 Plan. In May 2013, the shareholders approved an additional 2,000,000 shares to be issued under the 2007 plan. Awards may be made under the 2007 Plan are stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, deferred compensation awards and other stock-based awards. Stock options and stock appreciation rights awarded under the 2007 Plan may not be repriced without stockholder approval. Stock options and stock appreciation rights may not be granted below fair market value. Stock options or stock appreciation rights generally shall not be fully vested over a period of less than three years from the date of grant and cannot be exercised more than 10 years from the date of grant. Restricted stock, restricted stock units, and performance awards generally shall not vest faster than over a three-year period (or a twelve-month period if vesting is based on a performance measure). In December 2008, the 2007 Plan was amended to comply with the applicable requirements under Section 409A of the Internal Revenue Code. As of December 31, 2014, approximately 1,003,000 shares were available for grant under the 2007 Plan.

Stock Options

The following summarizes our stock option activity under the 2007 Plan, and the related weighted average exercise price within each category for each of the years ended December 31, 2012, 2013 and 2014 (in thousands, except per share data):

Stock Options	Number of Options Outstanding			Weighted- average Exercise Price		Weighted- average Remaining Contractual Life		Aggregate Intrinsic Value
						(in years)
Balance as of January 1, 2012		2,380		$	3.25		6.25	$	3,456
Granted		592			3.32
Exercised		(136	)		2.17
Canceled and expired		(109	)		4.25
Balance as of December 31, 2012		2,727			3.28		6.71	$	1,353
Granted		488			2.38
Exercised		(331	)		1.62
Canceled and expired		(213	)		3.60
Balance as of December 31, 2013		2,671		$	3.29		6.71	$	893
Granted		712			2.40
Exercised		(111	)		1.21
Canceled and expired		(74	)		5.18
Balance as of December 31, 2014		3,198		$	3.12		6.95	$	1,247
Options vested and expected to vest as of December 31, 2014		3,198		$	3.12		6.95	$	1,247
Options exercisable as of December 31, 2014		1,859		$	3.46		5.48	$	821

The options outstanding and exercisable as of December 31, 2014 were in the following exercise price ranges (in thousands, except per share data):

	Options Outstanding as of December 31, 2014						Options Vested and Exercisable as of December 31, 2014
Range of Exercise Price	Shares		Weighted-average Exercise Price		Weighted-average Remaining Contractual Life		Shares		Weighted-Average Exercise Price
$1.33 - $1.59		401	$	1.52		3.33		401	$	1.52
$1.91 - $1.91		4	$	1.91		0.87		4	$	1.91
$2.04 - $2.04		333	$	2.04		4.82		333	$	2.04
$2.14 - $2.29		252	$	2.26		9.40		0	$	0.00
$2.36 - $2.36		428	$	2.36		8.84		116	$	2.36
$2.47 - $2.47		460	$	2.47		9.84		0	$	0.00
$2.91 - $2.91		444	$	2.91		7.85		231	$	2.91
$3.18 - $4.09		29	$	3.85		6.31		20	$	3.84
$4.79 - $4.79		330	$	4.79		6.82		262	$	4.79
$4.81 - $7.82		517	$	5.79		5.17		492	$	5.80
		3,198	$	3.12		6.95		1,859	$	3.46

There were 111,000, 331,000 and 136,000 options exercised in the years ended December 31, 2014, 2013 and 2012, respectively. The total intrinsic value of options exercised for the years ended December 31, 2014, 2013 and 2012 was $105,000, $331,000 and $392,000, respectively.

As of December 31, 2014, the total unamortized stock-based compensation cost related to unvested stock options granted to employees under our stock option plans was approximately $1.6 million, net of estimated forfeitures of $57,000. This cost is being amortized on a straight-line basis over a weighted-average period of approximately 2.8 years and will be adjusted for subsequent changes in estimated forfeitures. We did not capitalize any stock-based compensation to inventory as of December 31, 2014 and 2013, as the amounts are not significant.

Restricted Stock Awards

A summary of activity related to restricted stock awards for the years ended December 31, 2014, 2013 and 2012 is presented below:

Stock Awards	Shares			Weighted-Average Grant Date Fair Value
Non-vested as of January 1, 2012		223,127		$	4.47
Granted		113,768		$	3.18
Vested		(98,172	)	$	3.42
Non-vested as of December 31, 2012		238,723		$	4.27
Granted		103,636		$	2.52
Vested		(85,127	)	$	4.56
Forfeited		(16,000	)	$	4.03
Non-vested as of December 31, 2013		241,232		$	3.44
Granted		121,044		$	2.34
Vested		(100,779	)	$	4.01
Non-vested as of December 31, 2014		261,497		$	2.71

Total grant date fair value of stock awards vested during the years ended December 31, 2014, 2013 and 2012 was $405,000, $389,000 and $336,000, respectively. As of December 31, 2014, we had $596,000 of unrecognized compensation expense related to restricted stock awards, which will be recognized over the weighted average period of 2.5 years.

Common Stock

The following number of shares of common stock were reserved and available for future issuance at December 31, 2014:

Options outstanding		3,197,840
Restricted stock awards outstanding		261,497
Stock available for future grant: 2007 Equity Incentive Plan		1,002,898

Total		4,462,235

Stock-based Compensation

We recorded $1.1 million, $1.3 million and $1.2 million of stock-based compensation in our consolidated statements of operations for the years ended December 31, 2014, 2013 and 2012, respectively. The following table summarizes compensation costs related to our stock-based compensation awards (in thousands, except per share data):

	Years Ended December 31,
	2014			2013			2012
Stock-based compensation in the form of employee stock options and restricted stock, included in:
Cost of revenue	$	18		$	22		$	78
Selling, general and administrative		938			1,091			1,000
Research and development		173			164			137
Total stock-based compensation		1,129			1,277			1,215
Tax effect on stock-based compensation		—			—			—
Net effect on net income	$	1,129		$	1,277		$	1,215
Shares used in computing basic net income per share		32,452			32,700			32,144
Shares used in computing diluted net income per share		32,452			32,700			32,865
Effect on basic net income per share	$	(0.03	)	$	(0.04	)	$	(0.04	)
Effect on diluted net income per share	$	(0.03	)	$	(0.04	)	$	(0.04	)

We estimate the fair value of stock options using a Black-Scholes valuation model. There were 712,000, 488,000 and 592,000 stock options granted with weighted-average grant date fair value of $1.17, $1.09 and $1.79 per share during 2014, 2013 and 2012, respectively. The fair value of options granted was estimated at the date of grant using the following weighted-average assumptions:

	Years Ended December 31,
	2014			2013			2012
Expected term (in years)		4.1			4.0			4.0
Volatility		63.20	%		59.20	%		72.87	%
Expected dividend		0	%		0	%		0	%
Risk-free interest rate		1.85	%		0.98	%		0.57	%

The expected term for stock options is based on the observed historical option exercise behavior and post-vesting forfeitures of options by our employees, and the contractual term, the vesting period and the expected term of the outstanding options. Expected volatility is based on the historical volatility of our Company’s common stock. The dividend yield of zero is based on the fact that we have never paid cash dividends and have no present intention to pay cash dividends. The risk-free interest rates are taken from the Daily Federal Yield Curve Rates as of the grant dates as published by the Federal Reserve and represent the yields on actively traded Treasury securities for terms equal to the expected term of the options.

Retirement Savings Plan

We have a 401(k) Savings Plan (“Savings Plan”) which qualifies as a thrift plan under Section 401(k) of the Internal Revenue Code. All full-time U.S. employees are eligible to participate in the Savings Plan after 90 days from the date of hire. Employees may elect to reduce their current compensation by up to the statutory prescribed annual limit and have the amount of such reduction contributed to the 401(k) Plan. We provide matching to employee contributions up to 4% of the employees’ base pay if employees contribute at least 6% of their base pay. If the contribution rate is less than 6% of the base pay, the matching percentage is prorated. Our contributions to the 401(k) retirement savings plans were $115,000, $110,000 and $900,000 for the years ended December 31, 2014, 2013 and 2012, respectively.