11. Stockholders' Equity

Capital Structure

On March 2, 2010, the Company's board of directors approved an amended and restated certificate of incorporation that increased the authorized common stock to 100 million shares and the authorized preferred stock to 5 million shares effective immediately prior to the completion of the Company's initial public offering on March 26, 2010.

On March 21, 2010, the Company's board of directors approved an amended and restated certificate of incorporation effecting a 2-for-3 reverse stock split of its common stock and all convertible preferred stock. The par value and the authorized shares of the common stock and convertible preferred stock were not adjusted as a result of the reverse stock split. All issued and outstanding common stock, convertible preferred stock, warrants for common stock, warrants for preferred stock, and per share amounts contained in the financial statements have been retroactively adjusted to reflect this reverse stock split for all periods presented. The reverse stock split was effected on March 23, 2010.

On March 26, 2010, the Company completed its initial public offering in which 4,166,666 shares of common stock were sold by the Company and 2,162,266 shares of common stock were sold by existing stockholders at a public offering price of $13.00 per share. Gross proceeds of $54.2 million from the sale of 4,166,666 shares of common stock by the Company were reduced by issuance costs of $4.6 million and underwriters fees of $3.8 million.

On April 8, 2010, the Company issued and sold 949,339 shares of common stock resulting from the exercise of the underwriters' option to purchase common shares associated with the Company's initial public offering. This sale resulted in gross proceeds of $12.3 million based on an initial public offering price of $13.00 per share of common stock. Proceeds to the Company were $11.5 million which were net of underwriters' discount and offering expenses payable by the Company of $0.8 million.

On February 22, 2011, in connection with the acquisition of Occam, the Company issued 6.4 million shares of the Company's common stock, a value of $117.2 million. For more information regarding the acquisition, of Occam see Note 2 "Acquisition of Occam Networks" in the notes to these consolidated financial statements.

Preferred Stock

The board of directors has the authority, without action by its stockholders with the exception of stockholders who hold board positions, to designate and issue up to five million shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. These rights, preferences and privileges could include dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of such series, any or all of which may be greater than the rights of common stock. The issuance of the Company's preferred stock could adversely affect the voting power of holders of common stock and the likelihood that such holders will receive dividend payments and payments upon liquidation. In addition, the issuance of preferred stock could have the effect of delaying, deferring or preventing a change in control of the Company or other corporate action. Subsequent to the Company's initial public offering and the conversion of all preferred stock outstanding at that date, the board of directors has not designated any rights, preference or powers of any preferred stock and no shares of preferred stock have been issued.

Stock Options, Restricted Stock Units and Awards and Employee Stock Purchase Plan

The Company maintains three equity incentive plans, the 2000 Stock Plan, the 2002 Stock Plan and the 2010 Equity Incentive Plan (together, the "Plans"), which allow the Company to grant stock options, restricted stock and restricted stock units to employees, directors and consultants of the Company. Under the terms of the Plans, the Company may grant incentive stock options at a price not less than 100% of the fair market value of the common stock on the date of grant and non-statutory stock options at a price not less than 85%, or, with respect to the 2002 Stock Plan and the 2010 Equity Incentive Plan, 100%, of the fair market value of the common stock on the date of grant. Additionally, options could be granted with the right to exercise those options before vesting. Upon the exercise of an option prior to vesting, the optionee is required to enter into a restricted stock purchase agreement with the Company, which provides that the Company has a right to repurchase any unvested shares at a repurchase price equal to the exercise price during the 90-day period following the termination of an individual's service with the Company for any reason. In addition, the Company has a 30-day right of first refusal if an optionee intends to sell shares acquired pursuant to options. Options granted under both Plans generally vest over four years and expire ten years from the date of grant. Given the absence of a public trading market prior to the Company's IPO, the Company's board of directors considered numerous objective and subjective factors to determine the best estimate of the fair market value of its common stock at each meeting at which stock option grants were approved. These factors included, but were not limited to, the following: contemporaneous valuations of common stock, the rights and preferences of convertible preferred stock relative to common stock, the lack of marketability of common stock, developments in the business, recent issuances of convertible preferred stock and the likelihood of achieving a liquidity event, such as an IPO, or sale of the Company, given prevailing market conditions. These determinations of fair market value were used for purposes of determining the Black-Scholes fair value of the Company's stock option awards and related stock based compensation expense prior to the Company's IPO.

On March 2, 2010, the Company's Board of Directors approved the 2010 Equity Incentive Award Plan and the Employee Stock Purchase Plan. A total of 5,666,666 shares of common stock were reserved for future issuance under these plans which became effective upon the completion of the Company's initial public offering of common stock. In addition, shares of common stock previously available for issuance under the Company's Amended and Restated 2002 Stock Plan became available for issuance under the 2010 Plan effective upon completion of the Company's initial public offering of common stock.

Stock Options

The following table summarizes the activity under the Company's stock option plans (in thousands, except per share data):


	Number of Shares			Weighted- Average Exercise Price Per Share		Aggregate Intrinsic Value (1)

Outstanding as of December 31, 2008		3,782		$	13.08	$	3,950
Granted		595			6.15
Exercised		(64	)		0.95
Forfeited or expired		(3,635	)		13.44

Outstanding as of December 31, 2009		678		$	6.15	$	4,240
Granted		293			12.42
Exercised		(164	)		1.47
Forfeited or expired		(72	)		23.92

Outstanding as of December 31, 2010		735		$	7.94	$	7,393
Granted		1,463			18.69
Exercised		(188	)		4.28
Forfeited or expired		(349	)		19.87

Outstanding as of December 31, 2011		1,661		$	15.33	$	1,191

(1)	Amounts represent the difference between the exercise price and the fair market value of common stock at each period end for all in the money options outstanding.

Stock options granted during fiscal 2011 include 536,190 options issued in connection with the Occam acquisition. For more information on the Occam acquisition, see Note 2 "Acquisition of Occam Networks" in the notes to these consolidated financial statements.

Options outstanding that have vested and are expected to vest as of December 31, 2011, are as follows (in thousands, except weighted average contractual term and per share data):


	Number of Shares		Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (1)
Vested		612	$	13.54		4.87	$	1,104
Expected to vest		982		16.43		8.98		82

Total		1,594	$	15.32		7.40	$	1,186

(1)	Amounts represent the difference between the exercise price and the fair market value of common stock as of December 31, 2011 for all in the money options outstanding.

During the years ended December 31, 2011, 2010 and 2009, the total intrinsic value of stock options exercised was $2.7 million, $1.9 million, and $0.4 million, respectively.

The following table summarizes information about stock options outstanding and exercisable at December 31, 2011 (in thousands, except year and per share data):


	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number Outstanding		Weighted Average Remaining Contractual Life (years)		Weighted Average Exercise Price Per Share		Number Exercisable		Weighted Average Exercise Price Per Share
$0.49 - $6.80		443		4.83	$	3.87		304	$	2.90
$7.07 - $14.61		365		8.54		11.19		128		10.71
$15.2 - $19.75		403		8.95		18.79		39		18.59
$21.67 - $22.59		333		9.22		21.94		24		22.04
$25.05 - $4,401.93		117		4.06		40.80		117		40.80

$0.49 - $4,401.93		1,661		7.47	$	15.33		612	$	13.54

The Company had 0.4 million exercisable options as of December 31, 2010.

Restricted stock units

In July 2009, the Company's board of directors approved a proposal to offer current employees and directors the opportunity to exchange eligible stock options for restricted stock units, or RSUs, on a one-for-one basis. Each RSU granted in the option exchange entitled the holder to receive one share of the Company's common stock if and when the RSU vests. The vesting schedule for the RSUs was as follows: 50% of the RSUs vested on the first day the trading window opened for employees that was more than 180 days following the effective date of an initial public offering which was October 26, 2010, or the First Vesting Date, and the remaining 50% of the RSUs vested on the first day the trading window opens for employees that is more than 180 days after the First Vesting Date which was in April 2011, in each case, subject to the employee's or director's continuous service to the Company through the vesting date. However, any unvested RSUs become immediately vested prior to the closing of a change in control, subject to the employee's or director's continuous service to the Company through such date. The offer was made to eligible option holders on August 14, 2009 and terminated on September 14, 2009. Only current employees and directors who were providing services to the Company as of August 14, 2009 and continued to provide services through September 14, 2009 were eligible to participate. Pursuant to the exchange, the Company subsequently canceled options for 3.4 million shares of the Company's common stock and issued an equivalent number of RSUs to eligible holders on September 23, 2009. In connection with the RSU grants, the unrecognized compensation expense related to the exchanged options was expensed over the remaining period of the original vesting period of the options exchanged. The incremental cost due to the exchange was deferred until a liquidity event, which happened with the Company's IPO, and has been recognized in accordance with the vesting periods described above.

The fair value of the RSUs was calculated as follows (in thousands):


Unrecognized expense of exchanged options				$	16,809
Incremental cost:
Fair value of RSUs	$	23,295
Value of old options canceled in exchange		(8,537	)
					14,758

Total fair value of RSUs granted under the exchange				$	31,567

The following table summarizes the Company's restricted stock unit activity (in thousands, except per share data):


	Number of Shares			Weighted- Average Grant Date Fair Value Per Share
Balance at December 31, 2008		—		$	—
Exchanged		3,428			6.80
Granted		1,120			9.54
Vested		—			—
Canceled		(11	)		6.80

Balance at December 31, 2009		4,537		$	7.47
Granted		916			11.12
Vested		(1,967	)		7.19
Canceled		(60	)		7.15

Balance at December 31, 2010		3,426		$	8.61
Granted		691			21.33
Vested		(2,189	)		7.75
Canceled		(153	)		12.72

Balance at December 31, 2011		1,775		$	14.27

Restricted stock units granted during fiscal 2011 include 42,654 units assumed in connection with the Occam acquisition. For more information on the Occam acquisition see Note 2, "Acquisition of Occam Networks", in the notes to these consolidated financial statements.

Restricted stock units granted during 2009 vested in four equal annual installments beginning on December 23, 2010, and were contingent upon the occurrence of an IPO. The unrecognized compensation cost related to this grant of $10.6 million was deferred until the Company's IPO on March 26, 2010 at which time recognition of associated expense began in accordance with the vesting period described above. These units were fully vested, and the related stock-based compensation expense was fully recognized by April 2011.

Upon vesting of certain RSUs during the year ended 2011, the RSUs were net share-settled to cover the required withholding tax and the remaining amount was converted into an equivalent number of shares of common stock. The Company withheld shares with value equivalent to the employees' minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. The total shares withheld were 485,000, which was based on the value of the RSUs on their vesting date as determined by the Company's closing stock price. Total payments for the employees' tax obligations to the taxing authorities were $10.4 million, and these are reflected as a financing activity within the Statements of Cash Flows. These net-share settlements had the effect of share repurchases by the Company as they reduced and retired the number of shares that would have otherwise have been issued as a result of the vesting and did not represent an expense to the Company.

The weighted-average grant date fair value of RSUs granted during the year ended December 31, 2011 was $21.33 per share. As of December 31, 2011, unrecognized stock-based compensation expense related to RSUs of $20.0 million is expected to be recognized over a weighted-average period of 2.9 years.

Restricted Stock Awards

In July 2011, the Company granted 423,000 RSAs to executives. The Company values the RSAs at fair value or the market price of the Company's common stock on the date of grant. The Company recognizes non-cash compensation expense for the fair values of these RSAs on a straight-line basis over the requisite service period of these awards. The weighted-average grant date fair value of RSAs granted during the year was $21.67 per share. As of December 31, 2011, unrecognized stock-based compensation expense related to RSAs of $7.2 million, net of estimated forfeitures, is expected to be recognized over a weighted-average period of 3.6 years.

Employee Stock Purchase Plan

The Company's 2010 Employee Stock Purchase Plan, as amended, (the "Employee Stock Purchase Plan") allows employees to purchase shares of the Company's common stock through payroll deductions of up to 15 percent of their annual compensation subject to certain Internal Revenue Code limitations. The price of common stock purchased under the plan is equal to 85 percent of the lower of the fair market value of the common stock on the commencement date and exercise date of each of the six month offering period. Under this ESPP plan, the Company issued 176,665 shares and 244,739 shares on May 31, 2011 and November 30, 2011, at exercise price of $11.67 and $7.67, respectively.

The Employee Stock Purchase Plan provides for the issuance of a maximum of 1.0 million shares of common stock of which 0.6 million shares were available for issuance as of December 31, 2011. For the year ended December 31, 2011, stock-based compensation expense related to employee stock purchase plan was $1.6 million. As of December 31, 2011, unrecognized stock-based compensation expense related to employee stock purchase plan of $0.6 million was expected to be recognized over a remaining service period of 5 months.

Stock-based compensation expense

Stock-based compensation expense associated with stock options, restricted stock units ("RSUs"), restricted stock awards ("RSAs") and ESPP is measured at the grant date, based on the fair value of the award, and is recognized as expense over the remaining requisite service period. Total stock-based compensation of $21.6 million, $25.6 million and $9.2 million was recorded during the years ended December 31, 2011, 2010 and 2009, respectively.

The Company estimates the fair value of stock options in accordance with ASC Topic 718 using the Black-Scholes option-pricing model. This model requires the use of the following assumptions: (i) expected volatility of the Company's common stock, which is based on the Company's peer group in the industry in which the Company does business; (ii) expected life of the option award, which is calculates using the "simplified" method provided in the SEC's Staff Accounting Bulletin No. 110 and takes into consideration the grant's contractual life and vesting periods; (iii) expected dividend yield, which is assumed to be 0%, as the Company has not paid and does not anticipate paying dividends on its common stock; and (iv) the risk-free interest rate, which is based on the U.S. Treasury yield curve in effect at the time of grant with maturities equal to the grant's expected life. In addition, ASC Topic 718 requires the Company to estimate the number of options that are expected to vest. Thus, the Company applies an estimated forfeiture rate based on an analysis of its actual forfeitures and will continue to evaluate the adequacy of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover behavior, and other factors. Further, to the extent the Company's actual forfeiture rate is different from management's estimate, stock-based compensation is adjusted accordingly. In valuing share-based awards under ASC Topic 718, significant judgment is required in determining the expected volatility of the Company's common stock and the Company's forfeiture rate. The Company values RSUs and RSAs at fair value or the market price of the Company's common stock on the date of grant. The Company recognizes stock-based compensation expense associated with stock options, RSUs and RSAs on a straight-line basis over the requisite service period of each of these awards.

On February 22, 2011, in connection with the acquisition of Occam (see Note 2 "Acquisition of Occam Networks" in the notes to these consolidated financial statements), the Company issued 536,190 stock options and 42,654 RSUs to certain Occam employees. The grants were in exchange for certain options and RSUs that were held by Occam employees prior to the acquisition which retained the original vesting schedule of the initial Occam grants, except for certain equity awards held by Occam executives that were accelerated in association with their severance agreements. The Company estimated the fair value of $5.9 million of the options and RSUs in accordance with ASC Topic 718. In accordance with ASC Topic 805 the Company allocated the value of $1.4 million of certain options and RSUs to consideration in the business combination with the remaining value of $4.5 million allocated to post-combination expense to be recognized over the remaining service period of the grants.

The following table presents the weighted average assumptions used to estimate the fair values of the stock options granted in the periods presented:


	Years Ended
				December 31,
	2011			2010			2009

Expected volatility		52	%		53	%		62	%
Expected life (years)		6.25			6.25			6.25
Expected dividend yield		—			—			—
Risk free interest rate		2.11	%		2.03	%		2.38	%

The weighted average per share fair value of options granted was $9.77, $6.50 and $3.65 for the years ended December 31, 2011, 2010 and 2009, respectively. As of December 31, 2011 there was $8.1 million of total unrecognized stock-based compensation cost related to stock options, net of estimated forfeitures. This cost is expected to be recognized over a weighted average service period of 2.9 years. To the extent the actual forfeiture rate is different than what the Company has anticipated, stock-based compensation related to these awards will be different from its expectations.

Common Stock Warrants

Warrants to purchase convertible preferred stock that did not expire at the close of the Company's initial public offering, in March 2010, converted to the warrants to purchase common stock at the applicable conversion rate for the related preferred stock. As of December 31, 2011, the following warrants to purchase common stock were outstanding:


Expiration Date	Exercise Price	As of December 31, 2011
Various dates between July, 2012 and August, 2014	$9.00 – $10.26		7,928
Various dates between January, 2012 and September, 2017	$19.56 – $66.75		15,534

			23,462

Shares Reserved for Future Issuance

The Company had common shares reserved for future issuance as follows (in thousands):


	As of December 31,
	2011		2010		2009
Stock options		1,661		735		678
Restricted stock units		1,775		3,426		4,537
Employee stock purchase plan		579		1,000		—
Common stock warrants		23		65		11
Convertible preferred stock		—		—		28,044
Convertible preferred stock warrants		—		—		58