Stockholders’ Equity, Equity Incentive Plans and Warrants

Stock Incentive Plans

2009 EIP. Our stockholders approved the 2009 Equity Incentive Plan, or the 2009 EIP, at our annual meeting of stockholders held on June 15, 2009. The 2009 EIP authorizes the issuance or grant of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights, performance awards, performance cash awards and other stock awards to our employees, directors and consultants and is intended as the successor to and continuation of our 2000 EIP. Following the approval of the 2009 EIP by our stockholders, no additional stock awards may be granted under the 2000 Amended and Restated Equity Incentive Plan, or the 2000 EIP. All outstanding stock awards granted under the 2000 EIP will remain subject to the terms of the 2000 EIP provided, however, that any shares subject to outstanding stock awards granted under the 2000 EIP that expire or terminate for any reason prior to exercise or settlement shall become available for issuance pursuant to awards granted under the 2009 EIP. Awards granted under the 2000 EIP expire 10 years from the date of grant. Awards granted under the 2009 EIP expire seven years from the date of grant. As of June 15, 2009, the total number of shares of our common stock reserved for issuance under the 2009 EIP consisted of 4,500,000 shares plus 7,112,217 shares that are subject to outstanding stock awards under the 2000 EIP that may become available for grant under the 2009 EIP if they expire or terminate for any reason prior to exercise or settlement under the 2000 EIP. On May 2, 2011 shareholders approved our Amended 2009 Equity Incentive Plan, primarily to increase the share reserve by 8,000,000 shares. On May 5, 2014, shareholders approved an amendment to the Amended 2009 Equity Incentive Plan, primarily to increase the share reserve by 7,000,000 shares. Unless sooner terminated by our Board of Directors, the 2009 EIP shall automatically terminate on April 26, 2019, the day before the tenth anniversary of the date the 2009 EIP was adopted by the Board. The Board of Directors may also amend the 2009 EIP at any time subject to applicable laws and regulations, including the rules and regulations of The NASDAQ Stock Market LLC. In general, no amendment or termination of the 2009 EIP may adversely affect any rights under awards already granted to a participant unless agreed to by the affected participant.

During 2012, 2013 and 2014, we granted restricted stock and options to purchase common stock with various vesting as approved by the Compensation Committee of the Board and/or the Chief Executive Officer and Chief Financial Officer, as appropriate, upon each grant. As of December 31, 2014, 55,900 shares of restricted stock were outstanding under the 2009 EIP, of which none were performance-based restricted stock awards. Additionally, no shares of restricted stock were outstanding under the 2000 EIP. As of December 31, 2014, options to purchase 7,124,198 and 2,178,746 shares of common stock were outstanding under the 2009 EIP and 2000 EIP, respectively. 7,814,281 shares of common stock remained available for grant under the 2009 EIP.

2000 NEDSOP. Under our 2000 Non-Employee Directors Stock Option Plan, or 2000 NEDSOP, non-qualified stock options to purchase common stock are automatically granted to our non-employee directors upon appointment to our Board of Directors (initial grants) and upon each of our annual meeting of stockholders (annual grants). Options granted under the 2000 NEDSOP expire 10 years from the date of the grant. Initial grants vest over four years, with 25% of the shares subject to the option vesting one year from the date of grant and the remaining shares subject to the option vesting ratably thereafter on a monthly basis. Annual grants are fully vested on the date of grant. 1,000,000 shares of common stock are reserved for issuance under the 2000 NEDSOP. As of December 31, 2014, options to purchase 650,000 shares of common stock were outstanding under the 2000 NEDSOP and options to purchase 243,124 shares of common stock remained available for grant under the 2000 NEDSOP.

ESPP. Our stockholders approved our Amended and Restated Employee Stock Purchase Plan, or 2000 ESPP, at our annual meeting of stockholders held on June 15, 2009, primarily to increase the share reserve under the 2000 ESPP by 4,000,000 shares. The 2000 ESPP qualified under the provisions of Section 423 of the Internal Revenue Code, or IRC, and provided our eligible employees, as defined in the 2000 ESPP, with an opportunity to purchase shares of our common stock at 85% of fair market value. There were 808,761 and 195,857 shares issued under the 2000 ESPP for the years ended December 31, 2013 and 2014, respectively. The 2000 ESPP was terminated after the last purchase on January 31, 2014. On January 21, 2014, the Board of Directors adopted the Dot Hill Systems Corp. 2014 Employee Stock Purchase Plan, or the 2014 ESPP, which was approved by our stockholders on May 5, 2014. There are 4,000,000 shares of common stock reserved for issuance under the 2014 ESPP. The 2014 ESPP qualifies under the provisions of Section 423 of the IRC, and provides our eligible employees, as defined in the 2014 ESPP, with an opportunity to purchase shares of our common stock at 85% of fair market value. There were 196,481 shares issued under the 2014 ESPP for the year ended December 31, 2014. As of December 31, 2014, the 2014 ESPP had a total of 3,803,519 shares available for purchase.

As of December 31, 2014, total unrecognized share-based compensation cost related to unvested stock options, restricted stock awards, management stock incentive plan and our 2014 ESPP was $5.2 million, which is expected to be recognized over a weighted-average period of approximately 2.5 years.

The following table summarizes share-based compensation expense, (in thousands):



	Year Ended December 31,
	2012		2013		2014
Cost of goods sold	$	617	$	334	$	350
Sales and marketing	419		274		353
Research and development	1,705		1,054		1,304
General and administrative	1,024		1,028		1,138
Share-based compensation expense before taxes	3,765		2,690		3,145
Related deferred income tax benefits	—		—		—
Share-based compensation expense	$	3,765	$	2,690	$	3,145
Share-based compensation expense is derived from:
Stock options	$	1,508	$	1,924	$	2,642
Restricted stock awards	1,958		489		181
2014 and 2000 ESPP	299		277		322
Total	$	3,765	$	2,690	$	3,145

We estimate forfeitures at the time of grant and revise, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We have historically and continue to estimate the fair value of share-based awards using the Black-Scholes pricing model.

A summary of stock option activity for 2014 is as follows:



	Number of shares		Weighted average exercise price		Weighted average remaining contractual term (in years)	Aggregate intrinsic value
Outstanding at January 1, 2014	9,850,498		$	2.58
Granted	2,370,500		4.04
Exercised	(1,184,829	)	2.20
Forfeited	(554,079	)	2.53
Expired	(529,146	)	8.89
Outstanding at December 31, 2014	9,952,944		$	2.64	4.34	$	18,369,137
Vested and expected to vest at December 31, 2014	9,578,949		$	2.61	4.27	$	17,994,450
Exercisable at December 31, 2014	6,141,839		$	2.48	3.52	$	12,604,603

A summary of restricted stock award activity for 2014 is as follows:



	Number of shares		Weighted average grant date fair value
Outstanding at January 1, 2014	92,811		$	1.73
Granted	80,000		4.32
Vested	(116,661	)	2.25
Forfeited	(250	)	2.90
Outstanding and unvested at December 31, 2014	55,900		$	4.33

The weighted average grant-date fair values of options granted during the years ended December 31, 2012, 2013 and 2014 were $0.89 per share, $1.05 per share, and $2.35 per share, respectively. The total intrinsic value of options exercised during the years ended December 31, 2012, 2013 and 2014 were $0.0 million, $0.2 million, and $2.6 million, respectively.

The weighted average grant-date fair values of restricted stock awards granted during the years ended December 31, 2012, 2013 and 2014 were $1.23, $1.74 and $4.32 per share, respectively. The fair value of restricted stock awards that vested during the years ended December 31, 2012, 2013 and 2014 was $3.3 million, $1.3 million and $0.3 million, respectively.

Cash generated from options exercised under all share-based compensation arrangements for the years ended December 31, 2012, 2013 and 2014 were $0.0 million, $0.3 million and $2.6 million, respectively. Cash generated from the purchase of shares through the 2000 ESPP for the years ended December 31, 2012, and 2013 and through the 2000 ESPP and 2014 ESPP for the year ended December 31, 2014, was $0.7 million, $0.7 million, and $1.1 million respectively. We issue new shares from the respective plan share reserves upon exercise of options to purchase common stock and for purchases through the 2000 ESPP and 2014 ESPP.

The aggregate intrinsic value in the stock option summary table above is based on our closing stock price of $4.42 per share as of the last business day of the fiscal year ended December 31, 2014, which represents the value that would have been realized by the optionees had all options been exercised on that date. The total fair value of options to purchase common stock that vested during the years ended December 31, 2012, 2013 and 2014 was $2.1 million, $2.2 million, and $2.9 million, respectively.

To estimate compensation expense for the years ended December 31, 2012, 2013, and 2014 we used the Black-Scholes pricing model with the following weighted-average assumptions for equity awards granted:



	EIP and NEDSOP						ESPP
	Year Ended December 31,						Year Ended December 31,
	2012		2013		2014		2012		2013		2014
Risk-free interest rate	1.19	%	1.07	%	1.59	%	0.12	%	0.09	%	0.05	%
Expected dividend yield	—	%	—	%	—	%	—	%	—	%	—	%
Volatility	81	%	82	%	70	%	64	%	63	%	60	%
Expected Term	5.2 years		5.3 years		4.9 years		0.5 years		0.5 years		0.5 years
Forfeiture Rate	0%-10.62%		0%-9.45%		0%-10.05%		—	%	—	%	—	%

The risk-free interest rate is based on the implied yield available on United States Treasury issues with an equivalent remaining term. We have not paid dividends in the past and do not plan to pay any dividends in the future.

The expected volatility is based on historical volatility of our stock for the related vesting period. The expected life of the equity award is based on historical experience.

The forfeiture rate is estimated when awards are granted and updated if information becomes available indicating that actual forfeitures will differ.

Warrants

In January 2008, we amended our Product Purchase Agreement, or Agreement, originally entered into with Hewlett-Packard Company, or HP, in September 2007, to allow for sales to additional divisions within HP. In connection with the Agreement, we issued a warrant to HP to purchase 1,602,489 shares of our common stock (approximately 3.5% of our outstanding shares prior to the issuance of the warrant) at an exercise price of $2.40 per share.

On October 31, 2011, we amended again the Product Purchase Agreement originally entered into with HP on September 10, 2007. In part, this Amendment extends until October 30, 2016 the expiration date of the warrant previously issued to HP to purchase 1,602,489 shares of our common stock at the original exercise price of $2.40 per share.