EMPLOYEE BENEFIT PLANS AND STOCK-BASED COMPENSATION

Equity Award Plans

The Company’s stock benefit plans include the 2002 Employee Stock Purchase Plan (“ESPP”) and current active stock plans adopted in 1995 and 2002. See Note 12, “Employee Benefit Plans and Stock-based Compensation” of Notes to Consolidated Financial Statements in the 2017 Form 10-K for details pertaining to each plan.

The Company’s stockholders approved an amendment to the ESPP at the 2018 annual meeting of stockholders (the “2018 Annual Meeting”) to increase the number of shares of common stock reserved for issuance under the ESPP by 1,300,000 shares. The Company’s stockholders also approved an amendment to the 2002 Director Stock Plan at the 2018 Annual Meeting to increase the number of shares of common stock reserved for issuance thereunder by 400,000 shares. As of June 29, 2018, there were 5.3 million and 1.8 million shares of common stock reserved for future grants under the Company’s ESPP and active stock plans, respectively.

Stock Option Activities

The following table summarizes the Company’s stock option activities and related information during the six months ended June 29, 2018 (in thousands, except per share amounts and terms):



	Stock Options Outstanding
	Number of Shares		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Balance at December 31, 2017	3,880		$	6.04
Granted	—		—
Exercised	(87	)	2.94
Forfeited	(35	)	4.76
Canceled or expired	(538	)	8.75
Balance at June 29, 2018	3,220		5.69		2.8	$	866.8
As of June 29, 2018
Vested and expected to vest	3,208		5.69		2.8	$	859.3
Exercisable	2,958		5.77		2.7	$	696.1

The aggregate intrinsic value disclosed above represents the difference between the exercise price of the options and the fair value of the Company’s common stock. There were no employee stock options granted in the six months ended June 29, 2018.

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 29, 2018 and June 30, 2017, respectively.

Restricted Stock Units (“RSUs”) Activities

The following table summarizes the Company’s RSUs activities and related information during the six months ended June 29, 2018 (in thousands, except per share amounts and terms):



	Restricted Stock Units Outstanding
	Number of Shares		Weighted Average Grant Date Fair Value Per Share
Balance at December 31, 2017	2,904		5.09
Granted	3,293		3.74
Vested	(2,220	)	4.75
Forfeited	(183	)	5.09
Balance at June 29, 2018	3,794		4.12

Performance- and Market-based awards

Starting in 2015, the Company began to settle a portion of its incentive bonus payments to eligible employees by issuing performance-based RSU awards (“PRSUs”) from the 1995 Stock Plan. The Company granted 969,598 PRSUs to certain employees for the six months ended June 29, 2018, of which 869,598 shares of PRSUs were fully vested at the time of grant for purposes of settling amounts earned under the Company’s 2017 incentive bonus plans. The vesting of the remaining PRSUs will be based on the achievement of certain financial and non-financial operating goals of the Company. The stock-based compensation recognized for PRSUs was $0.1 million and $3.4 million for the three and six months ended June 29, 2018, respectively. The unrecognized stock-based compensation of PRSUs as of June 29, 2018 was $0.3 million.

In 2017, the Company granted 344,500 market-based RSUs (“MRSUs”) under the 1995 Stock Plan to its key executives and certain eligible employees that may vest during a three-year period as part of its long-term incentive program. In the second quarter of 2018, the Company granted 40,000 MRSUs that may vest during an eighteen-month period from the date of grant. The vesting conditions of these awards are based on the market value of the Company's common stock. The aggregate grant-date fair value of these shares was estimated to be $1.3 million using a Monte-Carlo simulation. The stock-based compensation recognized for MRSUs for the three and six months ended June 29, 2018 was $0.1 million and $0.2 million, respectively. The unrecognized stock-based compensation of the MRSUs as of June 29, 2018 was $0.1 million. No MRSUs had vested as of June 29, 2018.

French Retirement Benefit Plan

The Company assumed obligations under a defined benefit pension plan in connection with the acquisition of TVN in 2016. The plan is unfunded and there are no contributions required by laws or funding regulations, discretionary contributions or non-cash contributions expected to be made. The table below presents the components of net periodic benefit costs (in thousands):



	Three months ended				Six months ended
	June 29, 2018		June 30, 2017		June 29, 2018		June 30, 2017
Service cost	$	63	$	55	$	126	$	110
Interest cost	19		16		38		32
Recognized net actuarial loss	—		2		—		3
Net periodic benefit cost	$	82	$	73	$	164	$	145

The present value of the Company’s pension obligation as of June 29, 2018 was $5.0 million, of which $0.1 million was reported as a component of “Accrued and other current liabilities” and $4.9 million was reported as a component of “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, 2017 was $5.0 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 29, 2018 and June 30, 2017 were $214,000 and $285,000, respectively.

Stock-based Compensation

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



	Three months ended				Six months ended
	June 29, 2018		June 30, 2017		June 29, 2018		June 30, 2017
Stock-based compensation in:
Cost of revenue	$	448	$	700	$	963	$	1,145
Research and development expense	818		1,337		2,622		2,314
Selling, general and administrative expense	1,746		2,099		5,184		3,928
Total stock-based compensation in operating expense	2,564		3,436		7,806		6,242
Total stock-based compensation	$	3,012	$	4,136	$	8,769	$	7,387

As of June 29, 2018, total unrecognized stock-based compensation cost related to unvested stock options and RSUs was $13.3 million and is expected to be recognized over a weighted-average period of approximately 1.8 years.

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 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 as of January 1, 2017 (which increased the accumulated deficit).

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:



	Stock Options
	Three and six months ended
	June 30, 2017
Expected term (years)	4.3
Volatility	43%
Risk-free interest rate	1.7%
Expected dividends	0.0%



	ESPP Purchase Period Ending
	July 2, 2018		July 3, 2017
Expected term (years)	0.5		0.5
Volatility	60	%	41	%
Risk-free interest rate	1.7	%	1.0	%
Expected dividends	0.0	%	0.0	%
Estimated weighted average fair value per share at purchase date	$1.34		$1.40

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 assumption is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term. The Company has not paid and does not plan to pay any cash dividends in the foreseeable future.