NETLIST INC, 10-K filed on 2/28/2012
Annual Report
Document And Entity Information (USD $)
In Millions, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2011
Feb. 15, 2012
Jul. 2, 2011
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2011 
 
 
Document Fiscal Year Focus
2011 
 
 
Document Fiscal Period Focus
FY 
 
 
Entity Registrant Name
NETLIST INC 
 
 
Entity Central Index Key
0001282631 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Smaller Reporting Company 
 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Public Float
 
 
$ 41.7 
Entity Common Stock, Shares Outstanding
 
26,986,446 
 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2011
Jan. 1, 2011
ASSETS
 
 
Cash and cash equivalents
$ 10,535 
$ 14,210 
Investments in marketable securities
 
824 
Accounts receivable, net of allowance for doubtful accounts of $47 (2011) and $67 (2010)
11,399 
6,451 
Inventories
6,057 
4,509 
Prepaid expenses and other current assets
806 
1,396 
Total current assets
28,797 
27,390 
Property and equipment, net
2,771 
4,077 
Long-term investments in marketable securities
444 
890 
Other assets
161 
337 
Total assets
32,173 
32,694 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
Accounts payable
6,155 
6,256 
Accrued payroll and related liabilities
1,813 
1,762 
Accrued expenses and other current liabilities
460 
369 
Accrued engineering charges
450 
638 
Current portion of long-term debt
2,144 
674 
Total current liabilities
11,022 
9,699 
Long-term debt, net of current portion
1,118 
1,063 
Other liabilities
94 
85 
Total liabilities
12,234 
10,847 
Commitments and contingencies
   
   
Stockholders' equity:
 
 
Preferred stock, $0.001 par value-10,000 shares authorized; no shares issued and outstanding
   
   
Common stock, $0.001 par value-90,000 shares authorized; 26,390 (2011) and 25,284 (2010) shares issued and outstanding
26 
25 
Additional paid-in capital
92,709 
89,074 
Accumulated deficit
(72,740)
(67,141)
Accumulated other comprehensive loss
(56)
(111)
Total stockholders' equity
19,939 
21,847 
Total liabilities and stockholders' equity
$ 32,173 
$ 32,694 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Per Share data, unless otherwise specified
Dec. 31, 2011
Jan. 1, 2011
Consolidated Balance Sheets [Abstract]
 
 
Accounts receivable, allowance for doubtful accounts
$ 47 
$ 67 
Common stock, par value
$ 0.001 
$ 0.001 
Common stock, shares authorized
90,000 
90,000 
Common stock, shares issued
26,390 
25,284 
Common stock, shares outstanding
26,390 
25,284 
Preferred stock, par value
$ 0.001 
$ 0.001 
Preferred stock, shares authorized
10,000 
10,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Consolidated Statements Of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2011
Jan. 1, 2011
Consolidated Statements Of Operations [Abstract]
 
 
Net sales
$ 60,729 
$ 37,855 
Cost of sales
40,468 1
27,910 1
Gross profit
20,261 
9,945 
Operating expenses:
 
 
Research and development
14,924 1
14,762 1
Selling, general and administrative
10,705 1
11,041 1
Total operating expenses
25,629 
25,803 
Operating loss
(5,368)
(15,858)
Other (expense) income:
 
 
Interest expense, net
(228)
(42)
Other (expense) income, net
(56)
71 
Total other (expense) income, net
(284)
29 
Loss before income tax benefit
(5,652)
(15,829)
Income tax benefit
(53)
(714)
Net loss
$ (5,599)
$ (15,115)
Net loss per common share:
 
 
Basic and diluted
$ (0.22)
$ (0.64)
Weighted-average common shares outstanding:
 
 
Basic and diluted
25,086 
23,779 
Consolidated Statements Of Operations (Parenthetical) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2011
Jan. 1, 2011
Stock-based compensation expense
$ 1,620 
$ 1,482 
Cost Of Sales [Member]
 
 
Stock-based compensation expense
79 
42 
Research And Development [Member]
 
 
Stock-based compensation expense
600 
357 
Selling, General And Administrative [Member]
 
 
Stock-based compensation expense
$ 941 
$ 1,083 
Consolidated Statements Of Stockholders' Equity And Comprehensive Loss (USD $)
In Thousands, unless otherwise specified
Series A Preferred Stock [Member]
Common Stock [Member]
Additional Paid-In Capital [Member]
Accumulated Deficit [Member]
Accumulated Other Comprehensive Loss [Member]
Total
Balance at Jan. 02, 2010
    
$ 20 
$ 71,332 
$ (52,026)
$ (57)
$ 19,269 
Balance, shares at Jan. 02, 2010
   
20,111 
 
 
 
 
Stock-based compensation
   
 
1,482 
 
 
1,482 
Stock-based compensation,shares
 
493 
 
 
 
 
Exercise of stock options
   
 
81 
 
 
81 
Exercise of stock options, shares
 
84 
 
 
 
 
Repurchase of common stock
   
 
(49)
 
 
(49)
Repurchase of common stock, shares
 
(16)
 
 
 
 
Exercise of warrants
   
 
23 
 
 
23 
Exercise of warrants, shares
   
18 
 
 
 
 
Issuance of common stock
   
16,205 
 
 
16,210 
Issuance of common stock, shares
 
4,594 
 
 
 
 
Components of comprehensive loss:
 
 
 
 
 
 
Change in net unrealized loss on investments
   
 
 
 
(54)
(54)
Net loss
   
 
 
(15,115)
 
(15,115)
Comprehensive loss
   
 
 
 
 
(15,169)
Balance at Jan. 01, 2011
   
25 
89,074 
(67,141)
(111)
21,847 
Balance, shares at Jan. 01, 2011
   
25,284 
 
 
 
 
Stock-based compensation
   
 
1,620 
 
 
1,620 
Stock-based compensation,shares
 
11 
 
 
 
 
Exercise of stock options
   
 
203 
 
 
203 
Exercise of stock options, shares
 
435 
 
 
 
 
Repurchase of common stock
   
 
(78)
 
 
(78)
Repurchase of common stock, shares
 
(37)
 
 
 
 
Issuance of common stock
   
1,890 
 
 
1,891 
Issuance of common stock, shares
 
697 
 
 
 
 
Components of comprehensive loss:
 
 
 
 
 
 
Change in net unrealized loss on investments
   
 
 
 
55 
55 
Net loss
   
 
 
(5,599)
 
(5,599)
Comprehensive loss
   
 
 
 
 
(5,544)
Balance at Dec. 31, 2011
    
$ 26 
$ 92,709 
$ (72,740)
$ (56)
$ 19,939 
Balance, shares at Dec. 31, 2011
   
26,390 
 
 
 
 
Consolidated Statements Of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2011
Jan. 1, 2011
Cash flows from operating activities:
 
 
Net loss
$ (5,599)
$ (15,115)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
Depreciation and amortization
2,242 
2,287 
Amortization of deferred gain on sale and leaseback transaction
 
(108)
Realized loss on sale of investments in marketable securities
59 
 
Provision for bad debts
35 
35 
Stock-based compensation
1,620 
1,482 
Changes in operating assets and liabilities:
 
 
Accounts receivable
(4,983)
(2,213)
Inventories
(1,548)
(2,277)
Prepaid expenses and other current assets
759 
(542)
Other assets
129 
(116)
Accounts payable
(102)
1,907 
Accrued payroll and related liabilities
51 
56 
Accured expenses and other current liabilities
101 
(777)
Accrued engineering charges
(188)
(23)
Net cash used in operating activities
(7,424)
(15,404)
Cash flows from investing activities:
 
 
Acquisition of property and equipment
(744)
(942)
Purchase of investments in marketable securities
 
(2,395)
Proceeds from maturities and sales of investments in marketable securities
1,264 
5,517 
Net cash provided by investing activities
520 
2,180 
Cash flows from financing activities:
 
 
Borrowings on lines of credit
500 
4,000 
Payments on lines of credit
(500)
(4,000)
Proceeds of bank term loan
2,934 
1,500 
Payments on debt
(1,724)
(273)
Proceeds from public offering, net
1,891 
16,210 
Proceeds from exercise of equity awards, net of taxes remitted for restricted stock
128 
55 
Net cash provided by financing activities
3,229 
17,492 
Net (decrease) increase in cash and cash equivalents
(3,675)
4,268 
Cash and cash equivalents at beginning of year
14,210 
9,942 
Cash and cash equivalents at end of year
$ 10,535 
$ 14,210 
Description Of Business
Description Of Business

Note 1—Description of Business

        Netlist, Inc. (the "Company" or "Netlist") designs and manufactures a wide variety of high performance, logic-based memory subsystems for the global datacenter and high-performance computing and communications markets. The Company's memory subsystems consist of combinations of dynamic random access memory integrated circuits ("DRAM ICs" or "DRAM"), NAND flash memory ("NAND"), application-specific integrated circuits ("ASICs") and other components assembled on printed circuit boards ("PCBs"). Netlist primarily markets and sells its products to leading original equipment manufacturer ("OEM") customers. The Company's solutions are targeted at applications where memory plays a key role in meeting system performance requirements. The Company leverages a portfolio of proprietary technologies and design techniques, including efficient planar design, alternative packaging techniques and custom semiconductor logic, to deliver memory subsystems with high memory density, small form factor, high signal integrity, attractive thermal characteristics, reduced power consumption and low cost per bit.

        Netlist was incorporated in June 2000 and is headquartered in Irvine, California. In 2007, the Company established a manufacturing facility in the People's Republic of China (the "PRC"), which became operational in July 2007 upon the successful qualification of certain key customers.

Summary Of Significant Accounting Policies
Summary Of Significant Accounting Policies

Note 2—Summary of Significant Accounting Policies

Basis of Presentation

        The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S.").

Principles of Consolidation

        The consolidated financial statements include the accounts of Netlist, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Fiscal Year

        The Company operates under a 52/53-week fiscal year ending on the Saturday closest to December 31. The 2011 and 2010 fiscal years ended on December 31, 2011 and January 1, 2011, respectively. Fiscal years 2011 and 2010 each consisted of 52 weeks.

Reclassifications

        Certain amounts in the 2010 consolidated financial statements have been reclassified to conform to the current year presentation.

Use of Estimates

        The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of net sales and expenses during the reporting period. By their nature, these estimates and assumptions are subject to an inherent degree of uncertainty.

Significant estimates made by management include, among others, provisions for uncollectible receivables and sales returns, warranty liabilities, valuation of inventories, fair value of financial instruments, impairment of long-lived assets, stock-based compensation expense and realization of deferred tax assets. The Company bases its estimates on historical experience, knowledge of current conditions and our belief of what could occur in the future considering available information. The Company reviews its estimates on an on-going basis. The actual results experienced by the Company may differ materially and adversely from its estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

Revenue Recognition

        The Company's revenues primarily consist of product sales of high performance memory subsystems to original equipment manufacturers ("OEMs"). Revenues also include sales of excess inventories to distributors and other users of memory integrated circuits ("ICs"), totaling less than 1% of net revenues in 2011 and 2010.

        The Company recognizes revenues in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 605. Accordingly, the Company recognizes revenues when there is persuasive evidence that an arrangement exists, product delivery and acceptance have occurred, the sales price is fixed or determinable, and collectibility of the resulting receivable is reasonably assured.

        The Company generally uses customer purchase orders and/or contracts as evidence of an arrangement. Delivery occurs when goods are shipped for customers with shipping point terms and upon receipt for customers with destination terms, at which time title and risk of loss transfer to the customer. Shipping documents are used to verify delivery and customer acceptance. The Company assesses whether the sales price is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund. Customers are generally allowed limited rights of return for up to 30 days, except for sales of excess component inventories, which contain no right-of-return privileges. Estimated returns are provided for at the time of sale based on historical experience or specific identification of an event necessitating a reserve. The Company offers a standard product warranty to our customers and has no other post-shipment obligations. The Company assesses collectibility based on the creditworthiness of the customer as determined by credit checks and evaluations, as well as the customer's payment history.

        All amounts billed to customers related to shipping and handling are classified as revenues, while all costs incurred by the Company for shipping and handling are classified as cost of sales.

Cash and Cash Equivalents

        Cash and cash equivalents consist of cash and short-term investments with original maturities of three months or less, other than short-term investments in securities that lack an active market.

Investments in Marketable Securities

        The Company accounts for its investments in marketable securities in accordance with ASC Topic 320. The Company determines the appropriate classification of its investments at the time of purchase and reevaluates such designation at each balance sheet date. The Company's investments in marketable securities have been classified and accounted for as available-for-sale based on management's investment intentions relating to these securities. Available-for-sale securities are stated at fair value, generally based on market quotes, to the extent they are available. Unrealized gains and losses, net of applicable deferred taxes, are recorded as a component of other comprehensive income (loss). Realized gains and losses and declines in value judged to be other than temporary are determined based on the specific identification method and are reported in other income, net in the consolidated statements of operations.

        The Company generally invests its excess cash in domestic bank-issued certificates of deposit which carry federal deposit insurance, money market funds and highly liquid debt instruments of U.S. municipalities, corporations and the U.S. government and its agencies. All highly liquid investments with stated maturities of three months or less from the date of purchase are classified as cash equivalents; all investments with stated maturities of greater than three months are classified as investments in marketable securities.

Fair Value of Financial Instruments

        The Company's financial instruments consist principally of cash and cash equivalents, investments in marketable securities, accounts receivable, accounts payable, accrued expenses and debt instruments. Other than for certain investments in auction rate securities and short-term corporate bonds (see Note 4), the fair value of the Company's cash equivalents and investments in marketable securities is determined based on quoted prices in active markets for identical assets or Level 1 inputs. Because of their short-term nature, short-term corporate bonds are not frequently traded. Although there are observable quotes for these securities, the markets are not considered active. Accordingly, the fair values of these investments are based on Level 2 inputs. The Company recognizes transfers between Levels 1 through 3 of the fair value hierarchy at the beginning of the reporting period. The Company believes that the carrying values of all other financial instruments approximate their current fair values due to their nature and respective durations.

Allowance for Doubtful Accounts

        The Company evaluates the collectibility of accounts receivable based on a combination of factors. In cases where the Company is aware of circumstances that may impair a specific customer's ability to meet its financial obligations subsequent to the original sale, the Company will record an allowance against amounts due, and thereby reduce the net recognized receivable to the amount the Company reasonably believes will be collected. For all other customers, the Company records allowances for doubtful accounts based primarily on the length of time the receivables are past due based on the terms of the originating transaction, the current business environment and its historical experience. Uncollectible accounts are charged against the allowance for doubtful accounts when all cost effective commercial means of collection have been exhausted.

Concentration of Credit Risk

        Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, investments in marketable securities, and accounts receivable.

        The Company invests its cash equivalents primarily in money market mutual funds. Cash equivalents are maintained with high quality institutions, the composition and maturities of which are regularly monitored by management. The Company had $0.5 million of FDIC insured cash and cash equivalents at December 31, 2011. Investments in marketable securities are generally in high-credit quality debt instruments. Such investments are made only in instruments issued or enhanced by high-quality institutions. The Company has not realized any credit losses related to these investments.

        The Company's trade accounts receivable are primarily derived from sales to OEMs in the computer industry (see Note 12). The Company performs credit evaluations of its customers' financial condition and limits the amount of credit extended when deemed necessary, but generally requires no collateral. Credit quality is monitored by evaluation of credit scores and collection history. The Company believes that the concentration of credit risk in its trade receivables is moderated by its credit evaluation process, relatively short collection terms, the high level of credit worthiness of its customers, foreign credit insurance and letters of credit issued on the Company's behalf. Reserves are maintained for potential credit losses, and such losses historically have not been significant and have been within management's expectations. Potential credit losses are limited to the gross value of accounts receivable.

Inventories

        Inventories are valued at the lower of actual cost to purchase or manufacture the inventory or the net realizable value of the inventory. Cost is determined on an average cost basis which approximates actual cost on a first-in, first-out basis and includes raw materials, labor and manufacturing overhead. At each balance sheet date, the Company evaluates its ending inventory quantities on hand and on order and records a provision for excess quantities and obsolescence. Among other factors, the Company considers historical demand and forecasted demand in relation to the inventory on hand, competitiveness of product offerings, market conditions and product life cycles when determining obsolescence and net realizable value. In addition, the Company considers changes in the market value of components in determining the net realizable value of its inventory. Provisions are made to reduce excess or obsolete inventories to their estimated net realizable values. Once established, write-downs are considered permanent adjustments to the cost basis of the excess or obsolete inventories.

Property and Equipment

        Property and equipment are recorded at cost and depreciated on a straight-line basis over their estimated useful lives, which generally range from three to seven years. Leasehold improvements are recorded at cost and amortized on a straight-line basis over the shorter of their estimated useful lives or the remaining lease term.

        The Company evaluates the recoverability of the carrying value of long-lived assets held and used by the Company for impairment on at least an annual basis or whenever events or changes in circumstances indicate that their carrying value may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future net cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. If the carrying value is determined not to be recoverable from future operating cash flows, the asset is deemed impaired and an impairment loss is recognized to the extent the carrying value exceeds the estimated fair value of the asset. The fair value of the asset or asset group is based on market value when available, or when unavailable, on discounted expected cash flows. The Company's management believes there is no impairment of long-lived assets as of December 31, 2011. There can be no assurance, however, that market conditions will not change or demand for the Company's products will continue, which could result in future impairment of long-lived assets.

Warranty Reserve

        The Company offers product warranties generally ranging from one to three years, depending on the product and negotiated terms of any purchase agreements with customers. Such warranties require the Company to repair or replace defective product returned to the Company during such warranty period at no cost to the customer. Warranties are not offered on sales of excess component inventory. The Company records an estimate for warranty-related costs at the time of sale based on its historical and estimated product return rates and expected repair or replacement costs (see Note 3). Such costs have historically been within management's expectations and the provisions established.

Stock-Based Compensation

        The Company accounts for equity issuances to non-employees in accordance with ASC Topic 505. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the third-party performance is complete or the date on which it is probable that performance will occur.

        In accordance with ASC Topic 718, employee and director stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest during the period. Given that stock-based compensation expense recognized in the consolidated statements of operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. ASC Topic 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company's estimated average forfeiture rates are based on historical forfeiture experience and estimated future forfeitures.

        The fair value of common stock option awards to employees and directors is calculated using the Black-Scholes option pricing model. The Black-Scholes model requires subjective assumptions regarding future stock price volatility and expected time to exercise, along with assumptions about the risk-free interest rate and expected dividends, all of which affect the estimated fair values of the Company's common stock option awards. The expected term of options granted is calculated as the average of the weighted vesting period and the contractual expiration date of the option. This calculation is based on the safe harbor method permitted by the SEC in instances where the vesting and exercise terms of options granted meet certain conditions and where limited historical exercise data is available. The expected volatility is based on the historical volatility of the Company's common stock. The risk-free rate selected to value any particular grant is based on the U.S. Treasury rate that corresponds to the expected term of the grant effective as of the date of the grant. The expected dividend assumption is based on the Company's history and management's expectation regarding dividend payouts. Compensation expense for common stock option awards with graded vesting schedules is recognized on a straight-line basis over the requisite service period for the last separately vesting portion of the award, provided that the accumulated cost recognized as of any date at least equals the value of the vested portion of the award.

        The Company recognizes the fair value of restricted stock awards issued to employees and outside directors as stock-based compensation expense on a straight-line basis over the vesting period for the last separately vesting portion of the awards. Fair value is determined as the difference between the closing price of our common stock on the grant date and the purchase price of the restricted stock award, if any, reduced by expected forfeitures.

Income Taxes

        Deferred tax assets and liabilities are recognized to reflect the estimated future tax effects, calculated at currently effective tax rates, of future deductible or taxable amounts attributable to events that have been recognized on a cumulative basis in the consolidated financial statements. A valuation allowance related to a net deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized.

        ASC Topic 740 prescribes a recognition threshold and measurement requirement for the financial statement recognition of a tax position that has been taken or is expected to be taken on a tax return and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Under ASC Topic 740 the Company may only recognize or continue to recognize tax positions that meet a "more likely than not" threshold.

Research and Development Expenses

        Research and development expenditures are expensed in the period incurred.

Collaborative Agreements

        In 2011, the Company entered into two memory technology Collaboration Agreements. The first agreement is a HyperCloud™ Technology Collaboration Agreement (the "IBM Agreement") with International Business Machines ("IBM"). Under the IBM Agreement, IBM and the Company have agreed to cooperate with respect to the qualification of HyperCloud™ technology for use with IBM servers and to engage in certain joint marketing efforts if qualification is achieved. IBM and the Company have agreed to commit resources and funds in support of these activities. The IBM Agreement is non-exclusive.

        The second agreement is a Collaboration Agreement (the "HP Agreement") with Hewlett-Packard Company ("HP"). Under the HP Agreement, HP and the Company have agreed to cooperate with respect to the qualification of HyperCloud™ technology for use with HP servers and to engage in certain joint marketing efforts if qualification is achieved. HP and the Company have agreed to commit resources and funds in support of these activities. The HP Agreement is exclusive for a period of time. HP and the Company agree to collaborate on the future use of HyperCloud™ load reduction and rank multiplication technologies for next generation server memory for HP.

        In 2011, the Company reimbursed IBM and HP $0.2 million and $0.1 million, respectively, for the cost of certain qualification activities. The payments are included in research and development expense in the accompanying consolidated statement of operations. The Company may be required to make additional payments to both IBM and HP for joint marketing activities if and when the HyperCloud™ technology is qualified. The Company's net sales will be determined after deduction of such customer allowances, in accordance with ASC 605-50.

        There can be no assurance that the efforts undertaken under either of the IBM or HP collaboration agreements will result in any new revenues for the Company.

        Through 2011, the Company maintained a collaborative arrangement with a partner in order to develop products using certain of the Company's proprietary technology. Under the arrangement, the development partner was granted a non-exclusive license to specified intellectual property for exclusive use in the development and production of ASIC chipsets for the Company. Both the Company and the development partner provided engineering project management resources at their own expense. The development partner was entitled to non-recurring engineering fees based upon the achievement of development milestones, and to a minimum portion of the Company's purchasing allocations for the component. Expenses incurred and paid to the development partner, which were insignificant in 2011 and amounted to $0.3 million in 2010, are included in research and development expense in the accompanying consolidated statements of operations. As of December 31, 2011, the operational and financial obligations under the agreement have been fulfilled.

Comprehensive Loss

        ASC Topic 220 establishes standards for reporting and displaying comprehensive income (loss) and its components in the consolidated financial statements. Accumulated other comprehensive loss includes unrealized gains or losses on investments.

Risks and Uncertainties

        The Company has invested and expects to continue to invest a significant portion of its research and development budget into the design of ASIC devices, including the HyperCloud™ memory subsystem. This new design and the products it is incorporated into are subject to increased risks as compared to the Company's existing products. The Company may be unable to achieve customer or market acceptance of the HyperCloud™ memory subsystem or other new products, or achieve such acceptance in a timely manner. The Company has experienced a longer qualification cycle than anticipated with its HyperCloud™ memory subsystems, and as of December 31, 2011 the product has not generated significant revenue relative to the Company's investment in the product. The Company has entered into collaborative agreements with both HP and IBM pursuant to which these OEMs have agreed to cooperate with the Company in efforts to qualify HyperCloud™ for use in their respective products. If qualification is achieved by one or both of these OEMs, the qualifying OEM will engage with the Company in joint marketing and further product development efforts. The Company and each of the OEMs have committed financial and other resources toward the collaboration. There can be no assurance that the efforts undertaken pursuant to either of the collaborative agreements will result in any new revenues for the Company. Further delays or any failure in placing or qualifying this product with HP, IBM or other potential customers would adversely impact the Company's results of operations.

        The Company's operations in the PRC are subject to various political, geographical and economic risks and uncertainties inherent to conducting business in the PRC. These include, but are not limited to, (i) potential changes in economic conditions in the region, (ii) managing a local workforce that may subject the Company to uncertainties or certain regulatory policies, (iii) changes in other policies of the Chinese governmental and regulatory agencies, and (iv) changes in the laws and policies of the U.S. government regarding the conduct of business in foreign countries, generally, or in the PRC, in particular. Additionally, the Chinese government controls the procedures by which its local currency, the Chinese Renminbi ("RMB"), is converted into other currencies and by which dividends may be declared or capital distributed for the purpose of repatriation of earnings and investments. If restrictions in the conversion of RMB or in the repatriation of earnings and investments through dividend and capital distribution restrictions are instituted, the Company's operations and operating results may be negatively impacted. Restricted net assets of our subsidiary in the PRC totaled $0.6 million and $2.0 million at December 31, 2011 and January 1, 2011, respectively.

Foreign Currency Remeasurement

        The functional currency of the Company's foreign subsidiary is the U.S. dollar. Local currency financial statements are remeasured into U.S. dollars at the exchange rate in effect as of the balance sheet date for monetary assets and liabilities and the historical exchange rate for nonmonetary assets and liabilities. Expenses are remeasured using the average exchange rate for the period, except items related to nonmonetary assets and liabilities, which are remeasured using historical exchange rates. All remeasurement gains and losses are included in determining net loss. Transaction gains and losses were not significant in 2011 and 2010.

Net Loss Per Share

        Basic net loss per share is calculated by dividing net loss by the weighted-average common shares outstanding during the year, excluding unvested shares issued pursuant to restricted share awards under the Company's share-based compensation plans. Diluted net loss per share is calculated by dividing the net loss by the weighted-average shares and dilutive potential common shares outstanding during the year. Dilutive potential shares consist of dilutive shares issuable upon the exercise or vesting of outstanding stock options and restricted stock awards, respectively, computed using the treasury stock method. In periods of losses, basic and diluted loss per share are the same, as the effect of stock options and unvested restricted share awards on loss per share is anti-dilutive.

New Accounting Pronouncements

        In May 2011, the FASB issued Accounting Standards Update ("ASU") No. 2011-4, Fair Value Measurement ("ASU 11-4"). ASU 11-4 amends existing guidance to achieve convergence in measurement and disclosure between U.S. Generally Accepted Accounting Standards ("GAAP") and International Financial Reporting Standards ("IFRS"). ASU 11-4 is effective for fiscal year 2012. The Company is currently evaluating the impact that ASU 11-4 will have on its consolidated financial statements.

        In June 2011, the FASB issued ASU No. 2011-5, Comprehensive Income ("ASU 11-5"). ASU 11-5 amends existing guidance to increase the prominence of items reported in other comprehensive income and to facilitate convergence of U.S. GAAP and IFRS. ASU 11-5 is effective for fiscal year 2012. The Company is currently evaluating the impact that ASU 11-4 will have on its consolidated financial statements.

Supplemental Financial Information
Supplemental Financial Information

Note 3—Supplemental Financial Information

Inventories

        Inventories consist of the following (in thousands):

 
  December 31,
2011
  January 1,
2011
 

Raw materials

  $ 4,312   $ 2,631  

Work in process

    237     171  

Finished goods

    1,508     1,707  
           

 

  $ 6,057   $ 4,509  
           

Property and Equipment

        Property and equipment consist of the following (dollars in thousands):

 
  Estimated
Useful
Lives
  December 31,
2011
  January 1,
2011
 

Machinery and equipment

  3-7 yrs.   $ 8,130   $ 7,595  

Leasehold improvements

  *     1,817     1,795  

Furniture and fixtures

  5 yrs.     457     457  

Computer equipment and software

  3-7 yrs.     3,365     3,099  
               

 

        13,769     12,946  

Less accumulated depreciation and amortization

        (10,998 )   (8,869 )
               

 

      $ 2,771   $ 4,077  
               

*

Estimated useful life is generally 7 years, or the remaining lease term, whichever is shorter.

        Included in property and equipment are assets under capital leases with a cost of approximately $0.5 million and $0.6 million and accumulated amortization of approximately $0.1 million and $0.1 million at December 31, 2011 and January 1, 2011, respectively. Amortization of assets recorded under capital leases is included as a component of depreciation and amortization expense.

Warranty Liability

        The following table summarizes the activity related to the warranty liability (in thousands):

 
  Year Ended  
 
  December 31,
2011
  January 1,
2011
 

Beginning balance

  $ 194   $ 240  

Estimated cost of warranty claims charged to cost of sales

    342     271  

Cost of actual warranty claims

    (347 )   (317 )
           

Ending balance

  $ 189   $ 194  

Less current portion

    (94 )   (109 )
           

Long-term warranty obligations

  $ 95   $ 85  
           

        The allowance for warranty liabilities expected to be incurred within one year is included as a component of accrued expenses and other current liabilities in the accompanying consolidated balance sheets. The allowance for warranty liabilities expected to be incurred after one year is included as a component of other liabilities in the accompanying consolidated balance sheets.

Facility Relocation Costs

        In accordance with ASC Topic 420, the Company recorded accruals related to the 2007 sublet of its former domestic headquarters facility and the 2009 sublet of a portion of its current headquarters facility. The master lease on the former facility and both subleases reached the conclusion of their terms in 2010. The Company determined that its estimates regarding the net payments due under the subleases exceeded its actual liability. As a result, the Company reversed approximately $61,000 of its accrual for facility relocation costs. The reversal of the accrual is included as a component of selling, general and administrative expense in the accompanying consolidated statement of operations for 2010.

        The following table summarizes the activity and liability balance related to the facility relocation costs (in thousands):

Liability balance, January 2, 2010

  $ 84  

Charged to costs and expenses

    (61 )

Net payments

    (23 )
       

Liability balance, January 1, 2011

  $  
       

Comprehensive Loss

        The components of comprehensive loss, net of taxes, consist of the following (in thousands):

 
  Year Ended  
 
  December 31,
2011
  January 1,
2011
 

Net loss

  $ (5,599 ) $ (15,115 )

Other comprehensive loss:

             

Change in net unrealized loss on investments

             

Unrealized loss transferred from other comprehensive loss to earnings

    59      

Net unrealized loss on investments, net of tax

    (4 )   (54 )
           

Total comprehensive loss

  $ (5,544 ) $ (15,169 )
           

        Accumulated other comprehensive loss reflected on the consolidated balance sheets at December 31, 2011 and January 1, 2011 represents accumulated net unrealized losses on investments in marketable securities.

Computation of Net Loss Per Share

        The following table sets forth the computation of basic and diluted net loss per share, including the reconciliation of the numerator and denominator used in the calculation of basic and diluted net loss per share (in thousands, except per share data):

 
  Year Ended  
 
  December 31,
2011
  January 1,
2011
 

Basic and diluted net loss per share:

             

Numerator: Net loss

  $ (5,599 ) $ (15,115 )
           

Denominator: Weighted-average common shares
outstanding, basic and diluted

    25,086     23,779  
           

Basic and diluted net loss per share

  $ (0.22 ) $ (0.64 )
           

        The following table sets forth potentially dilutive common share equivalents, consisting of shares issuable upon the exercise or vesting of outstanding stock options and restricted stock awards, respectively, and the exercise of warrants, computed using the treasury stock method. These potential common shares have been excluded from the diluted net loss per share calculations above as their effect would be anti-dilutive for the years then ended (in thousands):

 
  Year Ended  
 
  December 31,
2011
  January 2,
2011
 

Common share equivalents

    1,455     1,948  

        The above common share equivalents would have been included in the calculation of diluted earnings per share had the Company reported net income for the years then ended.

Cash Flow Information

        The following table sets forth supplemental disclosures of cash flow information and non-cash investing and financing activities (in thousands):

 
  Year Ended  
 
  December 31,
2011
  January 1,
2011
 

Supplemental disclosure of cash flow information:

             

Cash paid (received) during the year for:

             

Interest

  $ 227   $ 96  
           

Income taxes

  $ 4   $ (715 )
           

Supplemental disclosure of non-cash investing and financing acitivies:

             

Purchase of equipment through capitalized lease obligations

  $ 117   $ 351  
           

Debt financed acquisition of assets

  $ 169   $ 199  
           

Purchase of equipment not paid for at the end of the year

  $ 2   $ 292  
           

Unrealized losses from investments in marketable securities

  $ 4   $ 54  
           
Fair Value Measurements
Fair Value Measurements

Note 4—Fair Value Measurements

        The following tables detail the fair value measurements within the fair value hierarchy of the Company's investments in marketable securities (in thousands):

 
   
  Fair Value Measurements at December 31, 2011 Using  
 
  Fair Value at
December 31,
2011
  Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  Significant Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
 

Money market mutual funds

  $ 5,600   $ 5,600   $   $  

Auction and variable floating rate notes

    444             444  
                   

Total

  $ 6,044   $ 5,600   $   $ 444  
                   


 
   
  Fair Value Measurements at January 1, 2011 Using  
 
  Fair Value at
January 1,
2011
  Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  Significant Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
 

Money market mutual funds

  $ 12,654   $ 12,654   $   $  

Corporate notes and bonds

    824         824      

Auction and variable floating rate notes

    890             890  
                   

Total

  $ 14,368   $ 12,654   $ 824   $ 890  
                   

        The following tables summarize the Company's assets measured at fair value on a recurring basis as presented in the Company's consolidated balance sheets at December 31, 2011 and January 1, 2011:

 
   
  Fair Value Measurements at December 31, 2011 Using  
 
  Fair Value at
December 31,
2011
  Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  Significant Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
 

Cash equivalents

  $ 5,600   $ 5,600   $   $  

Long-term marketable securities

    444             444  
                   

Total assets measured at fair value

  $ 6,044   $ 5,600   $   $ 444  
                   


 
   
  Fair Value Measurements at January 1, 2011 Using  
 
  Fair Value at
January 1,
2011
  Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  Significant Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
 

Cash equivalents

  $ 12,654   $ 12,654   $   $  

Short-term marketable securities

    824         824      

Long-term marketable securities

    890             890  
                   

Total assets measured at fair value

  $ 14,368   $ 12,654   $ 824   $ 890  
                   

        Fair value measurements using Level 3 inputs in the table above relate to the Company's investments in auction rate securities. The disruptions in the credit market continue to adversely affect the liquidity and overall market for auction rate securities. The Company has estimated the fair value of these investments using a discounted cash flow model which included assumptions about the credit quality and expected duration of the investments, along with discount rates affected for the general lack of liquidity. These assumptions reflect the Company's estimates about the reasonable assumptions market participants would likely use in valuing the investments, including assumptions about risk, developed based on the best information available in the circumstances.

        The following table provides a reconciliation of the beginning and ending balances for the Company's assets measured at fair value using Level 3 inputs (in thousands):

 
  Year Ended  
 
  December 31,
2011
  January 1,
2011
 

Beginning balance

  $ 890   $ 941  

Sales of available-for-sale marketable securities

    (441 )    

Realized loss included in other income (expense), net

    (59 )    

Unrealized loss transferred from other comprehensive loss to earnings

    59      

Unrealized loss included in accumulated other comprehensive loss

    (4 )   (50 )

Accrued interest

    (1 )   (1 )
           

Ending balance

  $ 444   $ 890  
           
Investments In Marketable Securities
Investments In Marketable Securities

Note 5—Investments in Marketable Securities

        Investments in marketable securities consist of the following at December 31, 2011 and January 1, 2011 (in thousands):

 
  December 31, 2011  
 
  Amortized
Cost
  Net
Unrealized
Gain (Loss)
  Fair
Value
 

Auction and variable floating rate notes

  $ 500   $ (56 ) $ 444  
               


 
  January 1, 2011  
 
  Amortized
Cost
  Net
Unrealized
Gain (Loss)
  Fair
Value
 

Corporate notes and bonds

  $ 824   $   $ 824  

Auction and variable floating rate notes

    1,001     (111 )   890  
               

 

  $ 1,825   $ (111 ) $ 1,714  
               

        Realized gains and losses on the sale of investments in marketable securities are determined using the specific identification method. Other than the sale of one of the Company's auction rate securities, described below, there were no sales of available-for-sale securities prior to maturity in 2011 or 2010.

        The following table provides the breakdown of investments in marketable securities with unrealized losses at December 31, 2011 and January 1, 2011 (in thousands):

 
  December 31, 2011  
 
  Continuous Unrealized Loss  
 
  Less than
12 months
  12 months
or greater
 
 
  Fair
Value
  Unrealized
Loss
  Fair
Value
  Unrealized
Loss
 

Auction and variable floating rate notes

  $   $   $ 444   $ (56 )
                   


 
  January 1, 2011  
 
  Continuous Unrealized Loss  
 
  Less than
12 months
  12 months
or greater
 
 
  Fair
Value
  Unrealized
Loss
  Fair
Value
  Unrealized
Loss
 

Auction and variable floating rate notes

  $   $   $ 890   $ (111 )
                   

        As of December 31, 2011 and January 1, 2011, the Company held one and two investments, respectively, that were in an unrealized loss position. Excluding its auction rate securities, there were no gross unrealized gains or losses on the marketable securities held at January 1, 2011.

        The following tables present the amortized cost and fair value of the Company's investments in marketable securities classified as available-for-sale at December 31, 2011 and January 1, 2011 by contractual maturity (in thousands):

 
  December 31, 2011  
 
  Amortized
Cost
  Fair
Value
 

Maturity

             

Greater than two years*

  $ 500   $ 444  
           


 
  January 1, 2011  
 
  Amortized
Cost
  Fair
Value
 

Maturity

             

Less than one year

  $ 824   $ 824  

Greater than two years*

    1,001     890  
           

 

  $ 1,825   $ 1,714  
           

*

Comprised of auction rate securities which generally have interest rate reset dates of 90 days or less but final contractual maturity dates in excess of 15 years.

Auction Rate Securities

        Disruptions in the credit market continue to adversely affect the liquidity and overall market for auction rate securities. As of December 31, 2011, the Company held one investment in a Baa1 rated auction rate debt securities of a municipality with a total purchase cost of $0.5 million. An additional A3 rated debt obligation backed by pools of student loans guaranteed by the U.S. Department of Education with a total purchase cost of $0.5 million was owned at January 1, 2011, and disposed of in June 2011 for a realized loss of $59,000.

        The Company does not believe that the current illiquidity of its remaining investment in auction rate securities will materially impact its ability to fund its working capital needs, capital expenditures or other business requirements. The Company, however, remains uncertain as to when full liquidity will return to the auction rate markets, whether other secondary markets will become available or when the underlying security may be called by the issuer. Given these and other uncertainties, the Company's investments in auction rate securities have been classified as long-term in the accompanying consolidated balance sheets. The Company has concluded that the estimated gross unrealized losses on these investments, which totaled approximately $56,000 and $111,000 at December 31, 2011 and January 1, 2011, respectively, are temporary because (i) the Company believes that the liquidity limitations that have occurred are due to general market conditions, (ii) the remaining auction rate security continues to be of a high credit quality and interest is paid as due and (iii) the Company has the intent and ability to hold this investment until a recovery in the market occurs.

Credit Agreement
Credit Agreement

Note 6—Credit Agreement

        On October 31, 2009, the Company entered into a credit agreement with Silicon Valley Bank, which was amended on March 24, 2010, June 30, 2010, September 30, 2010, May 11, 2011 and August 10, 2011 (the "Credit Agreement"). Currently, the Credit Agreement provides for a line of credit pursuant to which the Company can borrow up to the lesser of (i) 80% of eligible accounts receivable, or (ii) $10.0 million. The Company has the option to increase credit availability to $15.0 million at any time through the maturity date of September 30, 2013, subject to the conditions of the Credit Agreement.

        The Credit Agreement contains an overall sublimit of $10.0 million to collateralize the Company's contingent obligations under letters of credit, foreign exchange contracts and cash management services. Amounts outstanding under the overall sublimit reduce the amount available pursuant to the Credit Agreement. At December 31, 2011, letters of credit in the amount of $2.0 million with expiration dates through October 31, 2012 were outstanding.

        Interest on the line of credit provided by the Credit Agreement is payable monthly at either (i) prime (4.00% at December 31, 2011) plus 1.25%, as long as the Company maintains $8.5 million in revolving credit availability plus unrestricted cash on deposit with the bank, or (ii) prime plus 2.25%. Additionally, the Credit Agreement requires payments for an unused line, as well as anniversary and early termination fees, as applicable.

        The following table presents details of interest expense related to borrowings on the lines of credit, along with certain other applicable information (in thousands):

 
  Year Ended  
 
  December 31,
2011
  January 1,
2011
 

Interest expense

  $ 35   $ 39  
           


 
  December 31,
2011
  January 1,
2011
 

Availability under the revolving line of credit

  $ 7,797   $ 5,100  

Outstanding borrowings on the revolving line of credit

         

Amounts reserved under credit sublimits

    (2,022 )   (2,900 )
           

Unutilized borrowing availability under the revolving line of credit

  $ 5,775   $ 2,200  
           

        In connection with the September 30, 2010 amendment to the Credit Agreement, Silicon Valley Bank extended a $1.5 million term loan under the Credit Agreement, which bears interest at a rate of prime plus 2.00% ("Term Loan I"). The Company is required to make monthly principal payments of $41,666 of over the 36 month term of the loan, or $0.5 million annually. Term Loan I matures in September 2013. In May 2011, Silicon Valley Bank extended an additional $3.0 million term loan ("Term Loan II"), and extended the term of the existing credit facility through September 2013. The Term Loan II bears interest at a rate of prime plus 2.75%, and is payable in equal installments of $125,000 over the 24 month term of the loan, or $1.5 million annually. Term Loan II matures in May 2013.

        The term loans are classified in long-term debt in the accompanying consolidated balance sheets.

        All obligations under the Credit Agreement are secured by a first priority lien on the Company's tangible and intangible assets. The Credit Agreement subjects the Company to certain affirmative and negative covenants, including financial covenants with respect to the Company's liquidity and tangible net worth and restrictions on the payment of dividends. As of December 31, 2011, the Company was in compliance with its financial covenants.

Long-Term Debt
Long-Term Debt

Note 7—Long-Term Debt

        Long-term debt consists of the following (in thousands):

 
  December 31,
2011
  January 1,
2011
 

Obligations under capital leases (see Note 9)

  $ 300   $ 362  

Term Loan I (see Note 6)

    875     1,375  

Term Loan II, net of issuance cost of $38 (see Note 6)

    2,087      
           

 

    3,262     1,737  

Less current portion

    (2,144 )   (674 )
           

 

  $ 1,118   $ 1,063  
           

        The Company has purchased manufacturing and computer equipment through the use of various capital leases that mature at various dates through October 2013 (see Note 9). The interest rates on these leases vary between 6.0% and 6.8%.

        As of December 31, 2011, maturities of long-term debt were as follows (in thousands):

Fiscal Year

       

2012

  $ 2,182  

2013

    1,118  
       

Total payments on long-term debt

    3,300  

Debt discount

    (38 )
       

Long-term debt

  $ 3,262  
       

        Interest expense related to the Company's long-term debt is presented in the following table (in thousands):

 
  Year Ended  
 
  December 31,
2011
  January 1,
2011
 

Interest expense

  $ 202   $ 56  
           
Income Taxes
Income Taxes

Note 8—Income Taxes

        Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands):

 

               

  December 31,
2011
  January 1,
2011
 

Deferred tax assets:

             

Reserves and allowances

  $ 1,995   $ 1,844  

State taxes, net of federal income tax benefit

        1  

Depreciation and amortization

    682     375  

Other accruals

    331     316  

Compensatory stock options and rights

    2,150     1,949  

Other

    25     48  

Tax credit carryforwards

    1,949     1,296  

Operating loss carryforward

    12,306     11,513  

Foreign operating loss carryforward

    1,031     878  
           

Total deferred tax assets

    20,469     18,220  
           

Deferred tax liabilities:

             

Prepaid expenses

    (199 )   (203 )
           

Total deferred tax liabilities

    (199 )   (203 )
           

Subtotal

    20,270     18,017  
           

Valuation allowance

    (20,270 )   (18,017 )
           

 

  $   $  
           

        The Company evaluates whether a valuation allowance should be established against its deferred tax assets based on the consideration of all available evidence using a "more likely than not" standard. In making such judgments, significant weight is given to evidence that can be objectively verified. As of December 31, 2011 and January 1, 2011, a valuation allowance of $20.3 million and $18.0 million, respectively, has been provided based on the Company's assessment that it is more likely than not, that sufficient taxable income will not be generated to realize the tax benefits of the temporary differences. The valuation allowance increased by approximately $2.3 million and $5.9 million during the years ended December 31, 2011 and January 1, 2011, respectively, primarily related to the increase in the net operating loss carryforward.

        At December 31, 2011, the Company has approximately $32.3 million of federal net operating loss ("NOL") carryforwards which begin to expire in year 2029, and approximately $24.2 million of state net operating loss carryforwards which begin to expire in year 2017, and Federal and state tax credit carryforwards of approximately $0.9 million and $1.0 million, respectively at December 31, 2011. Federal tax credit carryforwards begin to expire in 2026 and state tax credits carry forward indefinitely. In addition, the Company has approximately $7.6 million of operating loss carryforwards in the PRC that begin to expire in 2012.

        The deferred tax asset at December 31, 2011 does not include approximately $1.4 million and $1.6 million of excess tax benefits from employee stock option exercises that are a component of the federal and state net operating loss carryover, respectively. The Company's stockholders' equity balance will be increased if and when such excess tax benefits are ultimately realized.

        For financial reporting purposes, loss before benefit of income taxes includes the following components (in thousands):

 

               

  Year Ended  

  December 31,
2011
  January 1,
2011
 

United States

  $ (4,207 ) $ (13,827 )

Foreign

    (1,445 )   (2,002 )
           

 

  $ (5,652 ) $ (15,829 )
           

        The Company's income tax benefit consists of the following (in thousands):

 

               

  Year Ended  

  December 31,
2011
  January 1,
2011
 

Current:

             

Federal

  $ (55 ) $ (728 )

State

    2     14  
           

Total current

    (53 )   (714 )
           

Deferred:

             

Federal

    (1,516 )   (4,209 )

State

    (582 )   (894 )

Foreign

    (157 )   (801 )

Change in valuation allowance

    2,255     5,904  
           

Total deferred

         
           

Income tax benefit

  $ (53 ) $ (714 )
           

        During 2010, the Company carried back approximately $1.7 million of gross net operating losses under the Worker, Homeownership, and Business Act and received a federal income tax refund of approximately $0.7 million. During 2011, the Company reduced its unrecognized tax benefits by approximately $0.1 million as a result of a lapse in a federal statute of limitations.

        A reconciliation of income taxes computed by applying the statutory U.S. income tax rate to the Company's loss before income taxes to the income tax benefit is as follows:

 

               

  Year Ended  

  December 31,
2011
  January 1,
2011
 

U.S. federal statutory tax

    35 %   35 %

Valuation allowance

    (25 )   (26 )

Loss from foreign subsidiary

    (9 )   (4 )
           

Effective income tax benefit rate

    1 %   5 %
           

Unrecognized Tax Benefits

        The following table summarizes the activity related to the Company's unrecognized tax benefits (in thousands):

 

         

Balance at January 2, 2010

  $ 77  

Reversal of liability for expiration of statute of limitations

     

Accrual of potential interest related to unrecognized tax benefits

     
       

Balance at January 1, 2011

    77  

Reversal of liability for expiration of statute of limitations

    (55 )

Accrual of potential interest related to unrecognized tax benefits

     
       

Balance at December 31, 2011

  $ 22  
       

        Unrecognized tax benefits of tax positions, if recognized, would affect the Company's annual effective tax rate.

        The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of tax expense. Interest and penalty accruals were insignificant at December 31 and January 1, 2011.

        The Company files tax returns with federal, state and foreign jurisdictions. The Company is no longer subject to IRS or state examinations for periods prior to 2007 although certain carryforward attributes that were generated prior to 2007 may still be adjusted by the IRS.

Tax Holidays

        In 2008, the Company began operating under tax holidays in the PRC, which are effective from January 2008 through December 2012. Since the Company operated at a loss in the PRC in 2011 and 2010, it did not realize any benefit to its consolidated results of operations attributable to the tax holidays.

Commitments And Contingencies
Commitments And Contingencies

Note 9—Commitments and Contingencies

Leases

        The Company leases certain of its facilities and equipment under non-cancelable operating leases that expire at various dates through 2015. Rental expense, net of amortization of deferred gain and sublease income, is presented in the following table (in thousands):

 
  Year Ended  
 
  December 31,
2011
  January 1,
2011
 

Rental expense

  $ 1,065   $ 895  
           

        The Company also has acquired certain equipment through the use of various capital leases, some of which contain bargain purchase options.

        In December 2005, the Company sold the building containing its manufacturing facility and the related land in Irvine, California to an unrelated third party for gross proceeds of approximately $1.9 million. Concurrent with the sale, the Company entered into an agreement to lease the property back. The Company accounted for the lease as an operating lease. In connection with the sale, the Company recognized a gain of approximately $0.6 million which was deferred and amortized into income ratably over the term of the lease-back which expired in 2010. The Company amortized approximately $108,000 of the gain in 2010, which is recorded as a reduction of rent expense in the accompanying consolidated statement of operations.

        A summary of future minimum payments under both capital and operating lease commitments as of December 31, 2011 is as follows (in thousands):

Fiscal Year
  Capital
Leases
  Operating
Leases
 

2012

  $ 196   $ 562  

2013

    122     444  

2014

        243  

2015

        213  

2016

        207  

Thereafter

        34  
           

Total minimum lease payments

    318   $ 1,703  
             

Less amount representing interest

    (18 )      
             

Present value of future minimum lease payments (see Note 7)

  $ 300        
             

Litigation and Patent Reexaminations

        The Company owns numerous patents and intends to vigorously protect its rights through litigation against parties that infringe and through defense of challenges made by way of reexamination requests with the United States Patent and Trademark Office ("USPTO"). The Company spends substantial resources protecting its intellectual property, and these activities may continue for the foreseeable future. There can be no assurance that any ongoing or future litigation or patent protection activities will be successful. The outcome of pending litigation and patent reexaminations, as well as any delay in their resolution, could affect the Company's ability to protect against competition in the current and expected markets for its products and to license its intellectual property in the future.

Google Litigation

        In May 2008, the Company initiated discussions with Google, Inc. ("Google") regarding the Company's claim that Google has infringed on a U.S. patent owned by the Company, U.S. Patent No. 7,289,386 ("the '386 patent"), which relates generally to rank multiplication in memory modules. Preemptively, Google filed a declaratory judgment lawsuit against the Company in the U.S. District Court for the Northern District of California (the "Northern District Court"), seeking a declaration that Google did not infringe the '386 patent and that the '386 patent is invalid. The Company filed a counterclaim for infringement of the '386 patent by Google. Claim construction proceedings were held in November 2009, and the Company prevailed on every disputed claim construction issue. In June 2010, the Company filed motions for summary judgment of patent infringement and dismissal of Google's affirmative defenses. In May 2010, Google requested and was later granted an Inter Partes Reexamination of the '386 patent by the USPTO. The reexamination proceedings are described below. Pending the conclusion of the reexamination, the Northern District Court granted Google's request to stay the litigation, and has therefore not ruled on the Company's motions for summary judgement.

        In December 2009, the Company filed a patent infringement lawsuit against Google in the Northern District Court, seeking damages and injunctive relief based on Google's infringement of U.S. Patent No. 7,619,912 ("the '912 patent"), which is related to the '386 patent and relates generally to rank multiplication. In February 2010, Google answered the Company's complaint and asserted counterclaims against the Company seeking a declaration that the patent is invalid and not infringed, and claiming that the Company committed fraud, negligent misrepresentation and breach of contract based on Netlist's activities in the JEDEC standard-setting organization. The counterclaim seeks unspecified compensatory damages. Accruals have not been recorded for loss contingencies related to Google's counterclaim because it is not probable that a loss has been incurred and the amount of any such loss cannot be reasonably estimated. In October 2010, Google requested and was later granted an Inter Partes Reexamination of the '912 patent by the USPTO. The reexamination proceedings are described below. In connection with the reexamination request, the Northern District Court granted the Company and Google's joint request to stay the '912 patent infringement lawsuit against Google until the completion of the reexamination proceedings.

Inphi Litigation

        In September 2009, the Company filed a patent infringement lawsuit against Inphi Corporation ("Inphi") in the U.S. District Court for the Central District of California (the "Central District Court"). The complaint, as amended, alleges that Inphi is contributorily infringing and actively inducing the infringement of U.S. patents owned by the Company, including the '912 patent, U.S. Patent No. 7,532,537 ("the '537 patent"), which relates generally to memory modules with load isolation and memory domain translation capabilities, and U.S. Patent No. 7,636,274 ("the '274 patent"), which is related to the '537 patent and relates generally to load isolation and memory domain translation technologies. The Company is seeking damages and injunctive relief based on Inphi's use of its patented technology. Inphi has denied infringement and has asserted to the court that the three patents are invalid. In April 2010, Inphi requested and was later denied an Inter Partes Reexaminations of the '912, '537 and '274 patents by the USPTO. In June 2010, Inphi submitted new requests and was later granted an Inter Partes Reexaminations of the '912, '537 and '274 patents by the USPTO. The reexamination proceedings are described below. In connection with the reexamination requests, Inphi filed a motion to stay proceedings with the Central District Court, which was granted and later extended through at least February 2012. The Central District Court has requested that the Company notify it within one week of any action taken by the USPTO in connection with the reexamination proceedings, at which time the Central District Court could decide to maintain or lift the stay.

        In November 2009, Inphi filed a patent infringement lawsuit against the Company alleging infringement of two Inphi patents generally related to memory module output buffers. In April 2011 the court dismissed the entire case without prejudice pursuant to a joint stipulation filed by Inphi and the Company under which each party agreed to bear its own costs and attorney's fees. The case is now closed.

'386 Patent Reexamination

        As noted previously, in May 2010, Google requested and was later granted an Inter Partes Reexamination of the '386 patent by the USPTO. In October 2010, Smart Modular, Inc. ("SMOD") requested and was later granted an Inter Partes Reexamination of the '386 patent. The reexaminations requested by Google and SMOD were merged by the USPTO into a single proceeding. In April 2011, a Non-Final Action was issued by the USPTO, rejecting all claims in the patent. In July 2011, the Company responded by amending or canceling some of the claims, adding new claims, and making arguments as to the validity of the rejected claims in view of cited references. Both Google and SMOD filed their comments to the Company's response in October 2011. The reexamination of the '386 patent remains open and will continue in accordance with established procedures for merged reexamination proceedings.

'912 Patent Reexamination

        As noted previously, in April 2010, Inphi requested and was later denied an Inter Partes Reexamination of the '912 patent by the USPTO. In June 2010, Inphi submitted a new request and was later granted an Inter Partes Reexamination of the '912 patent by the USPTO. In September 2010, the USPTO confirmed the patentability of all fifty-one claims of the '912 patent. However, in October 2010, Google and SMOD each filed and were later granted requests for reexamination of the '912 patent. In February 2011, the USPTO merged the Inphi, Google and SMOD '912 reexamination requests into a single proceeding. In an April 2011 Non-Final Action in the merged reexamination proceeding, the USPTO rejected claims 1-20 and 22-51 and confirmed the patentability of claim 21 of the '912 patent. In July 2011, the Company responded by amending or canceling some of the claims, adding new claims, and making arguments as to the validity of the rejected claims in view of cited references. Inphi, Google, and SMOD filed their comments on the Company's response in August 2011. In October 2011, the USPTO mailed a second Non-Final Action confirming the patentability of twenty claims of the '912 patent, including claims that were added in the reexamination process. In January 2012, the Company responded by amending or canceling some of the claims, adding new claims, and making arguments as to the validity of the rejected claims in view of cited references. The reexamination of the '912 patent remains open and will continue in accordance with established procedures for merged reexamination proceedings.

'627 Patent Reexamination

        In September 2011, SMOD filed a request for reexamination of U.S. Pat. No. 7,864,627 ("the '627 patent") issued to the Company on January 4, 2011. The '627 patent is related to the '912 patent. In November 2011, the USPTO granted SMOD's request for reexamination of the '627 patent and concurrently issued a Non-Final Action confirming the patentability of three claims. In February 2012, the Company responded by amending or canceling some of the claims, adding new claims, and making arguments as to the validity of the rejected claims in view of cited references. The reexamination of the '627 patent remains open and will continue in accordance with established Inter Partes Reexamination procedures.

'537 Patent Reexamination

        As noted previously, in April 2010, Inphi requested and was later denied an Inter Partes Reexamination of the '537 patent by the USPTO. In June 2010, Inphi submitted a new request and was later granted an Inter Partes Reexamination of the '537 patent by the USPTO. In September 2010, the USPTO issued a Non-Final Action confirming the patentability of four claims. In October 2010, the Company responded by amending or canceling some of the claims, adding new claims, and making arguments as to the validity of the rejected claims in view of cited references. Inphi filed its comments on the Company's response in January 2011. In June 2011, the USPTO issued an Action Closing Prosecution ("ACP") which reconfirmed the patentability of the four claims. In August 2010, the Company responded by amending some of the claims and making arguments as to the validity of the rejected claims in view of cited references. Inphi filed its comments on the Company's response in September 2011. The USPTO issued a Right of Appeal Notice in February 2012, in which the claims rejection has been withdrawn, thus confirming the patentability of all sixty (60) claims in view of all the previously submitted comments by both Inphi and the Company. Either party has one month to file a notice of appeal with the USPTO. However, in accordance with established Inter Partes Reexamination procedures, if no party files a timely notice of appeal, then the reexamination of the '537 patent will be concluded and the Director of the USPTO will proceed to issue and publish a certificate under 37 CFR 1.997.

'274 Patent Reexamination

        As noted previously, in April 2010, Inphi requested and was later denied an Inter Partes Reexamination of the '274 patent by the USPTO. In June 2010, Inphi submitted a new request and was later granted an Inter Partes Reexamination of the '274 patent by the USPTO. In September 2011, the USPTO issued a Non-Final Action, confirming the patentability of six claims. The Company has responded by amending or canceling some of the claims, adding new claims, and making arguments as to the validity of the rejected claims in view of cited references. Inphi filed its comments on the Company's response in November 2011. The reexamination of the '274 patent remains open and will continue in accordance with established Inter Partes Reexamination procedures.

Other Concluded Litigation

        In March 2010, Ring Technologies Enterprises filed a patent infringement lawsuit against Dell and its forty-two of its suppliers. In July 2011 the court dismissed all claims in this action against the Company, without prejudice, with each party to bear its own costs, expenses and attorney's fees. The case against the Company is now closed.

Other Contingent Obligations

        During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These include (i) intellectual property indemnities to the Company's customers and licensees in connection with the use, sales and/or license of Company products; (ii) indemnities to vendors and service providers pertaining to claims based on the Company's negligence or willful misconduct; (iii) indemnities involving the accuracy of representations and warranties in certain contracts; (iv) indemnities to directors and officers of the Company to the maximum extent permitted under the laws of the State of Delaware; and (v) certain real estate leases, under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Company's use of the applicable premises. The duration of these indemnities, commitments and guarantees varies and, in certain cases, may be indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential for future payments the Company could be obligated to make. Historically, the Company has not been obligated to make significant payments for these obligations, and no liabilities have been recorded for these indemnities, commitments and guarantees in the accompanying consolidated balance sheets.

Stockholders' Equity
Stockholders' Equity

Note 10—Stockholders' Equity

Serial Preferred Stock

        The Company's authorized capital includes 10,000,000 shares of Serial Preferred Stock, with a par value of $0.001 per share. No shares were outstanding at December 31, 2011 or January 1, 2011.

Common Stock

        On March 24, 2010, the Company sold 4,594,250 shares of common stock in a registered public offering. The shares were sold to the public at a price of $3.85 per share. The Company received net proceeds of $16.2 million, after underwriting discounts and commissions, and estimated expenses payable by the Company.

        In November 2011, the Company entered into a sales agreement with Ascendiant Capital Markets LLC ("Ascendiant"), whereby shares with a total value of up to $10.0 million may be released for sale to the public at the discretion of management at a price equal to the current market price in an "at-the-market" offering as defined in Rule 415 under the Securities Act of 1933. In December 2011, the Company received net proceeds of approximately $1.9 million raised through the sale of 697,470 shares. The sales agreement with Ascendiant expires in November 2014.

Stock-Based Compensation

        During 2011 and 2010, the Company cancelled 37,422 and 16,329 shares of common stock, respectively, valued at approximately $78,000 and $49,000, respectively, in connection with its obligation to holders of restricted stock to withhold the number of shares required to satisfy the holders' tax liabilities in connection with the vesting of such shares.

        The Company is incorporated in the state of Delaware, and as such, is subject to various state laws which may restrict the payment of dividends or purchase of treasury shares.

        The Company has stock-based compensation awards outstanding pursuant to the Amended and Restated 2000 Equity Incentive Plan (the "2000 Plan") and the Amended and Restated 2006 Equity Incentive Plan (the "2006 Plan"), under which a variety of option and direct stock-based awards may be granted to employees and nonemployees of the Company. Further grants under the 2000 Plan were suspended upon the adoption of the 2006 Plan. In addition to awards made pursuant to the 2006 Plan, the Company periodically issues inducement grants outside the 2006 Plan to certain new hires.

        Subject to certain adjustments, as of December 31, 2011, the Company was authorized to issue a maximum of 4,205,566 shares of common stock pursuant to awards under the 2006 Plan. That maximum number will automatically increase on the first day of each subsequent calendar year by the lesser of (i) 5.0% of the number of shares of common stock that are issued and outstanding as of the first day of the calendar year, and (ii) 1,200,000 shares of common stock, subject to adjustment for certain corporate actions. At December 31, 2011, the Company had 149,590 shares available for grant under the 2006 Plan. At December 31, 2011, an additional 170,000 shares were reserved for issuance upon exercise of inducement grants. Options granted under the 2000 Plan, the 2006 Plan and outside the equity incentive plans primarily vest at a rate of at least 25% per year over four years and expire 10 years from the date of grant. Restricted stock awards vest in eight equal increments at intervals of approximately six months from the date of grant.

        A summary of the Company's common stock option activity is presented below (shares in thousands):

 
  Options Outstanding  
 
  Number of
Shares
(in thousands)
  Weighted-
Average
Exercise
Price
  Weighted-
Average
Remaining
Contractual
Life
(in years)
  Aggregate
Intrinsic
Value
(in thousands)
 

Options outstanding—January 2, 2010

    4,298   $ 2.41              

Options granted

    868     3.12              

Options exercised

    (84 )   0.96              

Options cancelled

    (448 )   2.48              
                         

Options outstanding—January 1, 2011

    4,634     2.57              

Options granted

   
1,455
   
2.21
             

Options exercised

    (435 )   0.47              

Options cancelled

    (286 )   2.89              
                         

Options outstanding—December 31, 2011

    5,368   $ 2.62     6.1     4,031  
                   

Options exercisable—December 31, 2011

    3,570   $ 2.89     4.7     3,052  
                   

Options exercisable and expected to vest—December 31, 2011

    5,117   $ 2.65     5.9     3,924  
                   

        The following table summarizes information about stock options outstanding and exercisable at December 31, 2011:

 
  Options Outstanding   Options Exercisable  
Exercise Price Range
  Number of
shares
(in thousands)
  Weighted
Average
Remaining
Contractual
Life
(in years)
  Weighted
Average
Exercise
Price
  Number of
shares
(in thousands)
  Weighted
Average
Remaining
Contractual
Life
(in years)
  Weighted
Average
Exercise
Price
 

$0.20 - $1.00

    1,395     3.9   $ 0.29     1,127     3.1   $ 0.29  

$1.01 - $3.00

    2,753     7.6   $ 2.19     1,336     5.9   $ 2.19  

$3.01 - $5.00

    275     7.2   $ 3.85     181     6.6   $ 3.87  

$5.01 - $8.45

    945     4.7   $ 6.96     926     4.7   $ 6.97  
                                   

 

    5,368     6.1   $ 2.62     3,570     4.7   $ 2.89  
                                   

        A summary of the Company's restricted stock awards is presented below (shares in thousands):

 
  Restricted Stock
Outstanding
 
 
  Number of
Shares
  Weighted-
Average
Grant-Date
Fair Value
per Share
 

Balance outstanding at January 2, 2010

      $  

Restricted stock granted

    528     3.46  

Restricted stock vested

    (67 )   3.45  

Restricted stock forfeited

    (35 )   3.45  
           

Balance outstanding at January 1, 2011

    426     3.46  

Restricted stock granted

    24     1.51  

Restricted stock vested

    (118 )   3.47  

Restricted stock forfeited

    (13 )   3.31  
           

Balance outstanding at December 31, 2011

    319   $ 3.32  
           

        The following table presents details of the assumptions used to calculate the weighted-average grant date fair value of common stock options granted by the Company:

 
  December 31,
2011
  January 1,
2011
 

Expected term (in years)

    6.0     5.6  

Expected volatility

    135 %   143 %

Risk-free interest rate

    2.12 %   1.95 %

Expected dividends

         
           

Weighted-average grant date fair value per share

  $ 2.01   $ 2.84  
           

Grant date fair value of options vested

  $ 1,269   $ 1,931  
           

Intrinsic value of options exercised (in thousands)

  $ 960   $ 259  
           

        The weighted-average fair value per share of the restricted stock granted in 2011 and 2010 was calculated based on the fair market value of the Company's common stock on the respective grant dates. The grant date fair value of restricted stock vested was $0.2 million in both 2011 and 2010.

        At December 31, 2011, the amount of unearned stock-based compensation currently estimated to be expensed from 2012 through 2015 related to unvested common stock options and restricted stock awards is approximately $3.6 million, net of estimated forfeitures. The weighted-average period over which the unearned stock-based compensation is expected to be recognized is approximately 2.8 years. If there are any modifications or cancellations of the underlying unvested awards, the Company may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense or calculate and record additional expense. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that the Company grants additional common stock options or other stock-based awards.

Warrants

        The Company has issued warrants to purchase shares of its common stock to certain non-employees for services rendered or to be rendered in the future. Such warrants are issued outside of the 2000 Plan and 2006 Plan. A summary of the warrant activity is presented below:

 
  Number of
Shares
(in thousands)
  Weighted-
Average
Exercise
Price
 

Warrants outstanding—January 2, 2010

    18   $ 1.25  

Warrants exercised

    (18 )   1.25  
           

Warrants outstanding—January 1, 2011

      $  
           

        There were no warrants issued, exercised or cancelled in the year ended December 31, 2011. Warrants outstanding at January 2, 2010 were classified as equity. Upon the exercise of warrants in 2010, the Company issued new shares from its authorized shares.

401(k) Plan
401(k) Plan

Note 11—401(k) Plan

        The Company sponsors a 401(k) defined contribution plan. Employees are eligible to participate in this plan provided they are employed full-time and have reached 21 years of age. Participants may make pre-tax contributions to the plan subject to a statutorily prescribed annual limit. Each participant is fully vested in his or her contributions and investment earnings. The Company may make matching contributions on the contributions of a participant on a discretionary basis. No contributions have been made in the years ended December 31, 2011 or January 1, 2011.

Major Customers And Suppliers
Major Customers And Suppliers

Note 12—Major Customers and Suppliers

        The Company's product sales have historically been concentrated in a small number of customers. The following table sets forth sales to customers comprising 10% or more of the Company's net sales as follows:

 
  Year Ended  
 
  December 31,
2011
  January 1,
2011
 

Customer A

    70 %   59 %

Customer B

    *     19 %

*

less than 10% of net sales

        Sales of the Company's NVvault products represented 66% and 54% of net sales in 2011 and 2010, respectively.

        The Company's accounts receivable primarily are concentrated with one customer at December 31, 2011, representing approximately 80%; and two customers at January 1, 2011, representing approximately 75% and 13% of aggregate gross receivables. A significant reduction in sales to, or the inability to collect receivables from, a significant customer could have a material adverse impact on the Company.

        The Company's purchases have historically been concentrated in a small number of suppliers. The following table sets forth purchases from suppliers comprising 10% or more of the Company's total purchases as follows:

 
  Year Ended  
 
  December 31,
2011
  January 1,
2011
 

Supplier A

    24 %   10 %

Supplier B

    *     11 %

Supplier C

    *     10 %

*

less than 10% of total purchases

        While the Company believes alternative suppliers could be utilized, any inability to obtain components or products in the amounts needed on a timely basis or at commercially reasonable prices could result in delays in product introductions, interruption in product shipments or increases in product costs, which could have a material adverse effect on the Company.

Segment And Geographic Information
Segment And Geographic Information

Note 13—Segment and Geographic Information

        The Company operates in one reportable segment: the design and manufacture of high-performance memory subsystems for the server, high-performance computing and communications markets. The Company evaluates financial performance on a company-wide basis.

        To date, a majority of the Company's international sales relate to shipments of products to its U.S. customers' international manufacturing sites or third- party hubs. Net sales derived from shipments to international destinations, primarily to Hong Kong (including foreign subsidiaries of customers that are headquartered in the U.S.), represented approximately 83% and 70% of the Company's net sales in 2011 and 2010, respectively. All of the Company's net sales to date have been denominated in U.S. dollars.

        As of December 31, 2011 and January 1, 2011, approximately $1.5 million and $2.3 million of the Company's long-lived assets, net of depreciation and amortization, respectively, were located outside the U.S., primarily in the PRC. Substantially all other long-lived assets were located in the U.S.

Subsequent Events
Subsequent Events

Note 14—Subsequent Events

        Subsequent events have been evaluated through the date that the consolidated financial statements were issued. There were no reportable subsequent events.

Quarterly Summary
Quarterly Summary

Note 15—Quarterly Summary (Unaudited, in thousands except share and per share data)

 
  Three Months Ended  
 
  December 31,
2011
  October 1,
2011
  July 2,
2011
  April 2,
2011
 

Net sales

  $ 16,381   $ 16,347   $ 16,001   $ 12,000  

Cost of sales(1)

    10,389     10,819     11,064     8,196  
                   

Gross profit

    5,992     5,528     4,937     3,804  

Operating expenses:

                         

Research and development(1)

    3,502     3,983     3,755     3,684  

Selling, general and administrative(1)

    2,694     2,511     2,583     2,917  
                   

Total operating expenses

    6,196     6,494     6,338     6,601  
                   

Operating income (loss)

    (204 )   (966 )   (1,401 )   (2,797 )

Other income (expense):

                         

Interest income (expense), net

    (81 )   (72 )   (50 )   (25 )

Other expense, net

    2     1     (59 )    
                   

Total other income (expense), net

    (79 )   (71 )   (109 )   (25 )
                   

Income (loss) before provision (benefit) for income taxes

    (283 )   (1,037 )   (1,510 )   (2,822 )

Provision (benefit) for income taxes

    (56 )   2     1      
                   

Net income (loss)

  $ (227 ) $ (1,039 ) $ (1,511 ) $ (2,822 )
                   

Net income (loss) per common share:

                         

Basic and diluted

  $ (0.01 ) $ (0.04 ) $ (0.06 ) $ (0.11 )

Weighted-average common shares outstanding:

                         

Basic and diluted

    28,306     25,029     24,988     24,881  

 
  Three Months Ended  
 
  Jaunuary 1,
2011
  October 2,
2010
  July 3,
2010
  April 3,
2010
 

Net sales

  $ 10,096   $ 10,565   $ 9,304   $ 7,890  

Cost of sales(1)

    6,807     7,545     7,486     6,072  
                   

Gross profit

    3,289     3,020     1,818     1,818  

Operating expenses:

                         

Research and development(1)

    3,606     4,958     3,190     3,008  

Selling, general and administrative(1)

    2,878     2,986     2,607     2,570  
                   

Total operating expenses

    6,484     7,944     5,797     5,578  
                   

Operating income (loss)

    (3,195 )   (4,924 )   (3,979 )   (3,760 )

Other income (expense):

                         

Interest income (expense), net

    (43 )   (3 )   3     1  

Other expense, net

            4     67  
                   

Total other income (expense), net

    (43 )   (3 )   7     68  
                   

Income (loss) before provision (benefit) for income taxes

    (3,238 )   (4,927 )   (3,972 )   (3,692 )

Provision (benefit) for income taxes

    (1 )   12     2     (727 )
                   

Net income (loss)

  $ (3,237 ) $ (4,939 ) $ (3,974 ) $ (2,965 )
                   

Net income (loss) per common share:

                         

Basic and diluted

  $ (0.13 ) $ (0.20 ) $ (0.16 ) $ (0.14 )

Weighted-average common shares outstanding:

                         

Basic and diluted

    25,188     24,799     24,780     20,688  

        Each of the Company's quarters in fiscal 2011 and 2010 is comprised of 13 weeks.