8.Shareholders’ Equity.

Stock-Based Compensation. The Company’s stock-based compensation plans are administered by the Compensation Committee of the Board of Directors, which selects persons to receive awards and determines the number of shares subject to each award and the terms, conditions, performance measures and other provisions of the award.

The following table summarizes the stock-based compensation expense that was recognized in the Company’s statements of comprehensive income for the years ended December 31, 2014 and 2013:

	2014		2013
Cost of sales	$	6,000	$	22,000
Selling	87,000		176,000
Marketing	12,000		16,000
General and administrative	298,000		319,000
	$	403,000	$	533,000

The Company uses the Black-Scholes option-pricing model to estimate fair value of stock-based awards with the following weighted average assumptions:

	2014		2013
Stock Options:
Expected life (years)	3.6		3.9
Expected volatility	50	%	52	%
Dividend yield	0	%	0	%
Risk-free interest rate	1.0	%	1.2	%

	2014		2013
Stock Purchase Plan Options:
Expected life (years)	1.0		1.0
Expected volatility	50	%	51	%
Dividend yield	0	%	0	%
Risk-free interest rate	0.1	%	0.2	%

The Company uses the straight-line attribution method to recognize expense for unvested options and restricted stock units. The amount of stock-based compensation recognized during a period is based on the value of the awards that are ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company re-evaluates the forfeiture rate annually and adjusts it as necessary.

As of December 31, 2014, there was approximately $323,000 of total unrecognized compensation costs related to the outstanding stock options, which is expected to be recognized over a weighted average period of 2.2 years.

As of December 31, 2014, there was approximately $46,000 of total unrecognized compensation costs related to restricted stock units, which is expected to be recognized over a weighted average period of 2.4 years.

Stock Options, Restricted Stock Units, and Other Stock-Based Compensation Awards. Prior to 2013, the Company had granted equity awards under the 2003 Incentive Stock Option Plan (the “2003 Plan”) for its employees and directors. Primarily because substantially all of the shares reserved for issuance under the 2003 Plan had been issued or were subject to outstanding awards, our Board of Directors approved the 2013 Omnibus Stock and Incentive Plan (the “2013 Plan”), which replaced the 2003 Plan upon its ratification by shareholders in May 2013. Options granted under the 2003 Plan will remain in effect until they are exercised or expire according to their terms. All current option grants are made under the 2013 Plan.

Our Board of Directors subsequently approved an amendment to the 2013 Plan to increase the total number of shares available under the 2013 Plan to a total of 900,000 shares, which amendment took effect upon its ratification by shareholders in May 2014. Under the terms of the 2013 Plan, as amended, the Company may grant up to 900,000 awards in a variety of instruments including incentive or non-qualified stock options and restricted stock units to employees, consultants and directors generally at an exercise price at or above 100% of fair market value at the close of business on the date of grant. Stock options expire 10 years after the date of grant and generally vest over three years. The Company issues new shares of common stock when stock options are exercised.

The following table summarizes activity under the option plans:

	Plan Shares Available for Grant		Plan Options Outstanding		Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value
Balance at January 1, 2013	99,685		1,469,673		$	3.03
Reserved	250,000		—
Stock awards granted	(39,032	)	—
Granted	(115,000	)	115,000		2.49
Exercised	—		(38,165	)	1.84		$	20,810
Cancelled or forfeited - 2003 Plan	(99,685	)	(263,666	)	3.64
Cancelled or forfeited - 1990 Plan	—		(31,400	)	10.37

Balance at December 31, 2013	95,968		1,251,442		2.72

Reserved	650,000		—
Stock awards granted	(29,701	)	—
Restricted stock units granted	(25,000	)	—
Granted	(426,000	)	426,000		3.02
Exercised	—		(155,407	)	1.94		$	217,694
Cancelled or forfeited - 2013 Plan	42,500		(42,500	)	3.03
Cancelled or forfeited - 2003 Plan	—		(224,458	)	2.95

Balance at December 31, 2014	307,767		1,255,077		2.86

The number of options exercisable under the option plans was:

December 31, 2013		686,998
December 31, 2014		710,598

The following table summarizes information about the stock options outstanding at December 31, 2014:

	Options Outstanding				Options Exercisable
Ranges of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price Per Share		Number Exercisable	Weighted Average Exercise Price Per Share
$1.61 - $2.46	532,831	7.40 years	$	1.85	351,852	$	1.80
$2.79 - $4.22	621,246	7.76 years	3.30		257,746	3.69
$5.49	101,000	3.87 years	5.49		101,000	5.49
	1,255,077	7.29 years	$	2.86	710,598	$	3.01

Options outstanding under the option plans expire at various dates during the period from January 2015 through December 2024. Options outstanding at December 31, 2014 had an aggregate intrinsic value of $1,186,000. Options exercisable at December 31, 2014 had a weighted average remaining life of 6.01 years and an aggregate intrinsic value of $685,000. The weighted average grant-date fair value of options granted during the years ended December 31, 2014 and 2013 were $1.13 and $1.01, respectively.

In May 2014 and December 2013, equity grants were made by the Company to the Board of Directors, pursuant to the 2013 Plan in the form of shares of common stock. The total number of shares granted to the Board of Directors was 29,701 and 39,032 during the years ended December 31, 2014 and 2013, respectively. The shares were issued at $3.03 per share in 2014 and $2.69 per share in 2013, based on the stock price on the date of grant, for a total value of $90,000 in 2014 and $105,000 in 2013, which is included in stock-based compensation.

In May 2014, the Company awarded key employees restricted stock units that vest over three years. Total restricted stock units granted during the year ended December 31, 2014 was 25,000 and had a grant date fair value of $3.03. None of the restricted stock units were vested as of December 31, 2014.

Employee Stock Purchase Plan. The Company has an Employee Stock Purchase Plan (the “Plan”) that enables employees to contribute up to 10% of their base compensation toward the purchase of the Company’s common stock at 85% of its market value on the first or last day of the year. During the years ended December 31, 2014 and 2013, employees purchased 27,000 and 56,000 shares under the Plan. At December 31, 2014, 152,000 shares are reserved for future employee purchases of common stock under the Plan. For the years ended December 31, 2014 and 2013, the Company recognized $26,000 and $34,000, respectively, of stock-based compensation expense related to the Plan.

Stock Repurchase Plans. On July 18, 2013, the Company commenced a “modified Dutch auction” tender offer (“Tender Offer”) to purchase up to $12 million of its common stock. Under the terms of the Tender Offer, the Company’s shareholders had the opportunity to tender some or all of their shares at a price within the range of $2.15 to $2.35 per share. The Tender Offer expired on August 15, 2013. The Tender Offer resulted in the purchase of 929,051 shares at $2.35 per share, for an aggregate cost to the Company of approximately $2.2 million, excluding fees and expenses related to the Tender Offer.

On December 3, 2013, the Board of Directors authorized the repurchase of up to $5,000,000 of the Company’s common stock on or before December 3, 2015. The Plan allows the repurchases to be made in open market or privately negotiated transactions. For the year ended December 31, 2014, the Company repurchased approximately 787,000 shares at a total cost of $2,450,000.