EMPLOYEE BENEFIT PLANS AND STOCK-BASED COMPENSATION

Equity Award Plans

The Company’s stock benefit plans include the employee stock purchase plan and current active stock plans adopted in 1995 and 2002 as well as one stock plan in connection with an acquisition in 2010. See Note 13, “Employee Benefit Plans and Stock-based Compensation” of Notes to Consolidated Financial Statements in the 2016 Form 10-K for details pertaining to each plan.

The Company’s stockholders approved an amendment to the 1995 Stock Plan at the Company’s 2017 annual meeting of stockholders (the “2017 Annual Meeting”) which increased the number of shares of common stock reserved for issuance under the 1995 Stock Plan by 7,000,000 shares. The Company’s stockholders also approved an amendment to the 2002 Director Stock Plan at the 2017 Annual Meeting which increased the number of shares of common stock reserved for issuance under the 2002 Director Stock Plan by 400,000 shares.

The following table summarizes the Company’s stock option, restricted stock units (“RSUs”), performance-based stock awards (“PRSUs”) and market-based awards activities during the six months ended June 30, 2017 (in thousands, except per share amounts):



			Stock Options Outstanding				RSUs Outstanding*
	Shares Available for Grant		Number of Shares		Weighted Average Exercise Price		Number of Units		Weighted Average Grant Date Fair Value
Balance at December 31, 2016	3,912		5,019		$	6.01	3,864		$	4.26
Authorized	7,400		—		—		—		—
Granted	(4,008	)	30		5.10		2,651		5.46
Options exercised	—		(94	)	3.06		—
Shares released	—		—		—		(1,883	)	3.92
Forfeited	1,584		(469	)	6.13		(744	)	4.96
Balance at June 30, 2017	8,888		4,486		$	6.06	3,888		$	5.11

* The preceding table includes PRSUs and market-based award activities during the six months ended June 30, 2017.

Performance-based awards (PRSUs)

In August 2016, the Company granted 898,533 shares of PRSUs to fund a portion of its 2016 incentive bonus payment obligations to its key executives and other eligible employees. From March 2017 through April 2017, the Company granted another 582,806 PRSUs to fund its first half 2017 incentive bonus payment obligations. The vesting of the PRSUs is based on the achievement of certain financial and non-financial operating goals of the Company and vesting occurs within three to six months from the grant date. Each quarterly period, the Company estimates the probability of the achievement of these performance goals and recognizes any related stock-based compensation expense. If the achievement of such performance goals is not probable, no compensation expense is recognized.

Market-based awards

In the six months ended June 30, 2017, the Company granted 344,500 RSUs to its key executives and certain eligible employees that may vest during a three-year period as part of its long-term incentive program. The vesting conditions of these awards are tied to the market value of the Company's common stock. The fair value of these shares was estimated using a Monte-Carlo simulation.

The following table summarizes information about stock options outstanding as of June 30, 2017 (in thousands, except per share amounts and terms):



	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Vested and expected to vest	4,389	$	6.08	3.2	$	2,045
Exercisable	3,497	6.33		2.7	1,079

The intrinsic value of options vested and expected to vest and exercisable as of June 30, 2017 is calculated based on the difference between the exercise price and the fair value of the Company’s common stock as of June 30, 2017. The intrinsic value of options exercised is calculated based on the difference between the exercise price and the fair value of the Company’s common stock as of the exercise date. The intrinsic value of options exercised during the three and six months ended June 30, 2017 was $24,000 and $0.2 million, respectively. The intrinsic value of options exercised during the three months and six months ended July 1, 2016 was minimal.

The following table summarizes information about RSUs and PRSUs outstanding as of June 30, 2017 (in thousands, except term):



	Number of Shares Underlying Restricted Stock Units	Weighted Average Remaining Vesting Period (Years)	Aggregate Fair Value
Vested and expected to vest	2,893	0.9	$	15,190

The fair value of RSUs and PRSUs vested and expected to vest as of June 30, 2017 is calculated based on the fair value of the Company’s common stock as of June 30, 2017.

Employee Stock Purchase Plan (“ESPP”)

The Company’s stockholders approved an amendment to the 2002 Employee Stock Purchase Plan (the “ESPP”) at the 2017 Annual Meeting which increased the number of shares of common stock reserved for issuance under the ESPP by 1,500,000 shares. As of June 30, 2017, the number of shares of common stock available for issuance under the ESPP was 1,693,295. In the event that there are insufficient shares in the plan to fully fund the issuance, the available shares will be allocated across all participants based on their contributions relative to the total contributions received for the offering period.

Retirement Benefit Plan

As part of the TVN acquisition the Company assumed obligations under a defined benefit pension plan. The plan is unfunded and there are no contributions to the plan required by any laws or funding regulations, discretionary contributions or non-cash contributions expected to be made. The table below shows the components of net periodic benefit costs (in thousands):



	Three months ended				Six months ended
	June 30, 2017		July 1, 2016		June 30, 2017		July 1, 2016
Service cost	$	55	$	71	$	110	$	94
Interest cost	16		29		32		39
Recognized net actuarial loss	2		—		3		—
Net periodic benefit cost included in operating loss	$	73	$	100	$	145	$	133

The present value of the Company’s pension obligation as of June 30, 2017 was $4.8 million, of which $45,000 was reported under “Accrued and other liabilities” and $4.7 million was reported under “Other non-current liabilities” on the Company’s Condensed Consolidated Balance Sheets. The present value of the Company’s pension obligation as of December 31, 2016 was $4.3 million.

401(k) Plan

The Company has a retirement/savings plan for its U.S. employees, which qualifies as a thrift plan under Section 401(k) of the Internal Revenue Code. This plan allows participants to contribute up to the applicable Internal Revenue Code limitations under the plan. The Company has made discretionary contributions to the plan of 25% of the first 4% contributed by eligible participants, up to a maximum contribution per participant of $1,000 per year. The contributions for the six months ended June 30, 2017 and July 1, 2016 were $285,000 and $241,000, respectively.

Stock-based Compensation

The following table summarizes stock-based compensation expense for all plans (in thousands):



	Three months ended				Six months ended
	June 30, 2017		July 1, 2016		June 30, 2017		July 1, 2016
Stock-based compensation in:
Cost of revenue	$	700	$	424	$	1,145	$	651
Research and development expense	1,337		841		2,314		1,810
Selling, general and administrative expense	2,099		1,503		3,928		3,401
Total stock-based compensation in operating expense	3,436		2,344		6,242		5,211
Total stock-based compensation	$	4,136	$	2,768	$	7,387	$	5,862

As of June 30, 2017, the Company had approximately $16.5 million of unrecognized stock-based compensation expense related to unvested stock options and awards that are expected to be recognized over a weighted-average period of approximately 1.6 years.

Valuation Assumptions

The Company estimates the fair value of employee stock options and stock purchase rights under the ESPP using a Black-Scholes option valuation model. The value of the stock purchase rights under the ESPP consists of: (1) the 15% discount on the purchase of the stock; (2) 85% of the fair value of the call option; and (3) 15% of the fair value of the put option. The call option and put option were valued using the Black-Scholes option pricing model. At the date of grant, the Company estimated the fair value of each stock option grant and stock purchase right granted under the ESPP using the following weighted average assumptions:



	Employee Stock Options
	Three months ended				Six months ended
	June 30, 2017		July 1, 2016		June 30, 2017		July 1, 2016
Expected term (years)	4.30		4.30		4.30		4.30
Volatility	43	%	36	%	43	%	36	%
Risk-free interest rate	1.7	%	1.1	%	1.7	%	1.4	%
Expected dividends	0.0	%	0.0	%	0.0	%	0.0	%



	ESPP Purchase Period Ending
	July 3, 2017		June 30, 2016
Expected term (years)	0.49		0.5
Volatility	41	%	54	%
Risk-free interest rate	1.0	%	0.4	%
Expected dividends	0.0	%	0.0	%
Estimated weighted average fair value per share at purchase date	$1.40		$1.19

The expected term of the employee stock options represents the weighted-average period that the stock options are expected to remain outstanding. The computation of the expected term was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. The expected term of the stock purchase rights under the ESPP represents the period of time from the beginning of the offering period to the purchase date. The Company uses its historical volatility for a period equivalent to the expected term of the options to estimate the expected volatility. The risk-free interest rate that the Company uses in the Black-Scholes option valuation model is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term. The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation model.

Prior to January 1, 2017, stock-based compensation expense was recorded net of estimated forfeitures in the Company’s condensed consolidated statements of operations and, accordingly, was recorded for only those stock-based awards that the Company expected to vest. Upon the adoption of the accounting standard update (ASU 2016-09, “Improvements to Employee Share-Based payments”) issued by FASB, effective January 1, 2017, the Company changed its accounting policy to account for forfeitures as they occur. The change was applied on a modified retrospective approach with a cumulative effect adjustment of $69,000 to retained earnings as of January 1, 2017 (which increased the accumulated deficit).

The Company estimated the fair value of the market-based awards granted in March 2017 on the date of grant using a Monte Carlo simulation with the following assumptions: volatility 46.7%, risk-free interest rate 1.57% and dividend yield of 0%.

Total compensation cost recognized related to these market-based awards was approximately $368,000 and $415,000 for the three and six months ended June 30, 2017, respectively. As of June 30, 2017, $0.9 million of total unrecognized compensation cost related to these awards is expected to be recognized over a weighted-average period of approximately 0.71 years.

The weighted-average fair value per share of options granted was $1.85 and $1.07 for the three months ended June 30, 2017 and July 1, 2016, respectively. The weighted-average fair value per share of options granted was $1.85 and $0.97 for the six months ended June 30, 2017 and July 1, 2016, respectively.

The fair value of all stock options vested during the three months ended June 30, 2017 and July 1, 2016 was $0.4 million for each period. The fair value of all stock options vested during the six months ended June 30, 2017 and July 1, 2016 was $1.1 million and $1.4 million, respectively.

There were no realized tax benefits attributable to stock options exercised in jurisdictions where this expense is deductible for tax purposes for the three and six months ended June 30, 2017 and July 1, 2016, respectively.

The aggregate fair value of RSUs and PRSUs released during the three months ended June 30, 2017 and July 1, 2016 was $0.8 million and $0.5 million, respectively. The aggregate fair value of all RSUs and PRSUs released during the six months ended June 30, 2017 and July 1, 2016 was $7.4 million and $7.1 million, respectively.