EMPLOYEE BENEFIT PLANS AND STOCK-BASED COMPENSATION

Equity Award Plans

1995 Stock Plan

The 1995 Stock Plan provides for the grant of incentive stock options, non-statutory stock options and RSUs. Incentive stock options may be granted only to employees. All other awards may be granted to employees and consultants. Under the terms of the 1995 Stock Plan, incentive stock options may be granted at prices not less than 100% of the fair value of the Company’s common stock on the date of grant and non-statutory stock options may be granted at prices not less than 85% of the fair value of the Company’s common stock on the date of grant. RSUs have no exercise price. Both options and RSUs vest over a period of time as determined by the Company’s Board of Directors (the “Board”), generally two to four years, and expire seven years from date of grant. Grants of RSUs and any non-statutory stock options issued at prices less than the fair market value on the date of grant decrease the plan reserve 1.5 shares for every unit or share granted and any forfeitures of these awards due to their not vesting would increase the plan reserve by 1.5 shares for every unit or share forfeited. The Company’s stockholders approved an amendment to the 1995 Stock Plan at the Company’s 2017 annual meeting of stockholders (“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. As of December 31, 2017, an aggregate of 14,858,418 shares of common stock were reserved for issuance under the 1995 Stock Plan, of which 8,381,707 shares remained available for grant.

2002 Director Plan

The 2002 Director Plan provides for the grant of non-statutory stock options and RSUs to non-employee directors of the Company. Under the terms of the 2002 Director Plan, non-statutory stock options may be granted at prices not less than 100% of the fair value of the Company’s common stock on the date of grant. RSUs have no exercise price. Both options and RSUs vest over a period of time as determined by the Board, generally three years for the initial grant and one year for subsequent grants to a non-employee director, and expire seven years from date of grant. Grants of RSUs decrease the plan reserve 1.5 shares for every unit granted and any forfeiture of these awards due to their not vesting would increase the plan reserve by 1.5 shares for every unit forfeited. The Company’s stockholders 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. As of December 31, 2017, an aggregate of 837,174 shares of common stock were reserved for issuance under the 2002 Director Plan, of which 623,034 shares remained available for grant.

Employee Stock Purchase Plan

The 2002 Employee Stock Purchase Plan (“ESPP”) provides for the issuance of share purchase rights to employees of the Company. The ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. The ESPP enables employees to purchase shares at 85% of the fair market value of the Common Stock at the beginning or end of the offering period, whichever is lower. Offering periods generally begin on the first trading day on or after January 1 and July 1 of each year. Employees may participate through payroll deductions of 1% to 10% of their earnings. 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. Under the ESPP, 1,291,875, 1,265,458 and 888,152 shares were issued during fiscal 2017, 2016 and 2015, respectively, representing $4.4 million, $3.7 million and $5.2 million in contributions. As of December 31, 2017, 1,114,796 shares were reserved for future purchases by eligible employees.

Stock Option and RSU activities

The following table summarizes the Company’s stock option and RSU activities during the year ended December 31, 2017 (in thousands, except per share amounts):



			Stock Options Outstanding				Restricted Stock Units 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	(5,351	)	30		5.10		3,546		5.12
Options exercised	—		(106	)	2.97		—
Shares released	—		—		—		(3,184	)	4.10
Forfeited or canceled	3,043		(1,063	)	6.18		(1,322	)	5.14
Balance at December 31, 2017	9,004		3,880		$	6.04	2,904		$	5.09

The following table summarizes information about stock options outstanding as of December 31, 2017 (in thousands, except per share amounts and term):



	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Vested and expected to vest	3,845	$	6.06	2.8	$	946
Exercisable	3,367	6.21		2.6	664

The intrinsic value of options vested and expected to vest and exercisable as of December 31, 2017 is calculated based on the difference between the exercise price and the fair value of the Company’s common stock as of December 31, 2017. The intrinsic value of options exercised during the years ended December 31, 2017, 2016 and 2015 was $0.3 million, $0.1 million and $1.7 million, respectively, and 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 following table summarizes information about RSUs outstanding as of December 31, 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	2,402	0.6	$	10,088

The fair value of RSUs vested and expected to vest as of December 31, 2017 is calculated based on the fair value of the Company’s common stock as of December 31, 2017.

Performance- and Market-based awards

Starting 2015, the Company began to fund a portion of its incentive bonus payment to its eligible employees issuing performance-based RSU (“PRSU”) awards from the 1995 Stock Plan. The Company granted 1,165,685, 898,533 and 395,760 shares of PRSUs to its employees during the years ended December 31, 2017, 2016 and 2015, respectively, of which 1,165,685, 610,579 and 239,744 shares of PRSUs vested during the years December 31, 2017, 2016 and 2015, respectively. No PRSUs awards were outstanding as of December 31, 2017. The vesting of the PRSUs awards is based on the achievement of certain financial and non-financial operating goals of the Company. The stock-based compensation recognized for PRSUs were $3.2 million, $2.8 million and $0.6 million, for the years ended December 31, 2017, 2016 and 2015, respectively.

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. The vesting conditions of these awards are tied to the market value of the Company's common stock. None of the MRSUs vested during the year ended December 31, 2017. The fair value of these shares was estimated using a Monte-Carlo simulation and the stock-based compensation recognized in 2017 for these MRSUs was $0.9 million. The unrecognized stock-based compensation at December 31, 2017 was $0.2 million for the MRSU and is expected to be fully recognized in 2018.

TVN Employee Equity Benefit Plan

In connection with the TVN acquisition, the Company assumed two of TVN’s existing employee equity benefit plans, which were fully vested and settled in 2016 for $2.9 million.

French Retirement Benefit Plan

Under French law, the Company’s subsidiaries in France, including the acquired TVN French Subsidiary, are obligated to make certain payments to its employees upon their retirement from the Company. These payments are based on the retiring employee’s salary for a number of months that varies according to the employee’s period of service and position. Salary used in the calculation is the employee’s average monthly salary for the twelve months prior to retirement. The payments are made in one lump-sum at the time of retirement. The French pension 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 company’s defined benefit pension obligations are measured as of December 31. The present value of these lump-sum payments is determined on an actuarial basis and the actuarial valuation takes into account the employees’ age and period of service with the company, projected mortality rates, mobility rates and increases in salaries, and a discount rate.

The table below shows the present value of the Company’s pension obligations as of December 31, 2017 and December 31, 2016 and the changes to the Company’s pension obligations for each of those years (in thousands):



	December 31,
	2017			2016
Projected benefit obligation:
Balance at January 1	$	4,264		$	—
Acquired from TVN acquisition	—			5,907
Service cost	259			217
Interest cost	71			87
Actuarial (gains) losses	(528		)	279
Curtailment ⁽¹⁾	—			(1,955		)
Adjustment for prior year balance	343			—
Foreign currency translation adjustment	624			(271		)
Balance at December 31	$	5,033		$	4,264

Presented on the Consolidated Balance Sheets under:
Current portion (presented under “Accrued and other current liabilities”)	$	34		27
Long-term portion (presented under “Other non-current liabilities”)	$	4,999		4,237

(1) As a result of the TVN VDP, the defined benefit pension plan was remeasured in the fourth quarter of 2016, which resulted in a non-cash curtailment gain of $2.0 million. The curtailment gain was recognized in the Consolidated Statement of Operations during the fourth quarter of 2016 and the Company’s pension liability was reduced by the same amount. Of the $2.0 million pension curtailment gain, $0.6 million is included in product cost of revenue and the remaining $1.4 million is included in operating expenses-restructuring and related charges in the Consolidated Statement of Operations. The remeasurement did not have a material effect on other components of net periodic pension expense for the year ended December 31, 2016.

The table below shows the components of net periodic benefit costs (in thousands):



	Year ended December 31,
	2017		2016
Service cost	$	259	$	217
Interest cost	71		87
Amortization of net actuarial loss (gain) ⁽¹⁾	—		—
Net periodic benefit cost included in operating loss	$	330	$	304

(1) The Company uses the allowable 10% corridor approach to determine the amount of actuarial gains or losses subject to amortization in pension cost. Gains or losses are amortized on a straight-line basis over the average future remaining service period of active plan participants.

The following assumptions were used in determining the Company’s pension obligation:



	December 31,
	2017		2016
Discount rate	1.5	%	1.5	%
Mobility rate	6.0	%	3.0	%
Salary progression rate	2.0	%	2.0	%

The Company evaluates the discount rate assumption annually. The discount rate is determined using the average yields on high-quality fixed-income securities that have maturities consistent with the timing of benefit payments.

The Company also evaluates other assumptions related to demographic factors, such as retirement age, mortality rates and turnover periodically, updating them to reflect experience and expectations for the future. The mortality assumption related to the Company’s defined benefit pension plan used mortality tables published in January 2017, which is the most current, by the French National Institute of Statistics and Economic Studies.

As of December 31, 2017, future benefits expected to be paid in each of the next five years, and in the aggregate for the five year period thereafter are as follows (in thousands):



Years ending December 31,
2018	$	34
2019	53
2020	—
2021	44
2022	143
2023 - 2027	2,858
	$	3,132

401(k) Plan

The Company has a retirement/savings plan 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 can make 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 Company’s contributions to the plan were $0.3 million for fiscal year 2017 and $0.4 million for each of the fiscal years 2016 and 2015.

Stock-based Compensation

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



	Year ended December 31,
	2017		2016		2015
Stock-based compensation in:
Cost of revenue	$	2,370	$	1,554	$	1,862
Research and development expense	5,313		3,711		4,435
Selling, general and administrative expense	8,927		7,795		9,285
Total stock-based compensation in operating expense	14,240		11,506		13,720
Total stock-based compensation recognized in net loss	$	16,610	$	13,060	$	15,582

As of December 31, 2017, total unrecognized stock-based compensation cost, net of estimated forfeitures, related to unvested stock options and RSUs was $9.9 million and is expected to be recognized over a weighted-average period of 1.4 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						ESPP
	2017		2016		2015		2017		2016		2015
Expected term (in years)	4.30		4.30		4.65		0.50		0.50		0.50
Volatility	42	%	36	%	38	%	48	%	70	%	34	%
Risk-free interest rate	1.8	%	1.4	%	1.5	%	1.2	%	0.6	%	0.3	%
Expected dividends	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%

The expected term of the employee stock option represents the weighted-average period that the stock options are expected to remain outstanding. The computation of 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 right under 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 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 weighted-average fair value per share of options granted for the years ended December 31, 2017, 2016 and 2015 was $1.85, $0.99 and $2.51, respectively. The fair value of all stock options vested during the years ended December 31, 2017, 2016 and 2015 was $1.7 million, $2.3 million and $3.0 million, respectively.

The estimated weighted-average fair value per share of stock purchase rights granted for the years ended December 31, 2017, 2016 and 2015 was $1.50, $1.04 and $1.69, respectively.

The Company realized no income tax benefit from stock option exercises for the years ended December 31, 2017, 2016 and 2015 due to recurring losses and valuation allowances.

The estimated fair value of RSUs is based on the market price of the Company’s common stock on the grant date. The fair value of all restricted stock units issued during the years ended December 31, 2017, 2016 and 2015 was $13.0 million, $9.7 million and $11.1 million, respectively.