NETLIST INC, 10-Q filed on 11/13/2012
Quarterly Report
Document And Entity Information
9 Months Ended
Sep. 29, 2012
Oct. 31, 2012
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Sep. 29, 2012 
 
Document Fiscal Year Focus
2012 
 
Document Fiscal Period Focus
Q3 
 
Entity Registrant Name
NETLIST INC 
 
Entity Central Index Key
0001282631 
 
Current Fiscal Year End Date
--12-29 
 
Entity Filer Category
Smaller Reporting Company 
 
Entity Common Stock, Shares Outstanding
 
28,412,400 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Sep. 29, 2012
Dec. 31, 2011
ASSETS
 
 
Cash and cash equivalents
$ 10,441 
$ 10,535 
Accounts receivable, net
3,635 
11,399 
Inventories
9,975 
6,057 
Prepaid expenses and other current assets
1,151 
806 
Total current assets
25,202 
28,797 
Property and equipment, net
3,073 
2,771 
Long-term investments in marketable securities
443 
444 
Other assets
129 
161 
Total assets
28,847 
32,173 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
Accounts payable
4,073 
6,155 
Revolving line of credit
2,800 
 
Accrued payroll and related liabilities
1,071 
1,813 
Accrued expenses and other current liabilities
919 
460 
Accrued engineering charges
450 
450 
Current portion of long-term debt
1,115 
2,144 
Total current liabilities
10,428 
11,022 
Long-term debt, net of current portion
2,517 
1,118 
Other liabilities
93 
94 
Total liabilities
13,038 
12,234 
Commitments and contingencies
   
   
Stockholders' equity:
 
 
Common stock, $0.001 par value - 90,000 shares authorized; 28,414 (2012) and 26,390 (2011) shares issued and outstanding
28 
26 
Additional paid-in capital
98,461 
92,709 
Accumulated deficit
(82,623)
(72,740)
Accumulated other comprehensive loss
(57)
(56)
Total stockholders' equity
15,809 
19,939 
Total liabilities and stockholders' equity
$ 28,847 
$ 32,173 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
Sep. 29, 2012
Dec. 31, 2011
Condensed Consolidated Balance Sheets [Abstract]
 
 
Common stock, par value
$ 0.001 
$ 0.001 
Common stock, shares authorized
90,000,000 
90,000,000 
Common stock, shares issued
28,414,000 
26,390,000 
Common stock, shares outstanding
28,414,000 
26,390,000 
Condensed Consolidated Statements Of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 29, 2012
Oct. 1, 2011
Sep. 29, 2012
Oct. 1, 2011
Condensed Consolidated Statements Of Operations [Abstract]
 
 
 
 
Net sales
$ 6,391 
$ 16,347 
$ 30,910 
$ 44,348 
Cost of sales
6,003 1
10,819 1
22,348 1
30,079 1
Gross profit
388 
5,528 
8,562 
14,269 
Operating expenses:
 
 
 
 
Research and development
2,615 1
3,983 1
10,227 1
11,422 1
Selling, general and administrative
2,497 1
2,511 1
7,977 1
8,011 1
Total operating expenses
5,112 
6,494 
18,204 
19,433 
Operating loss
(4,724)
(966)
(9,642)
(5,164)
Other income (expense):
 
 
 
 
Interest expense, net
(98)
(72)
(248)
(147)
Other income (expense), net
12 
(58)
Total other expense, net
(94)
(71)
(236)
(205)
Loss before provision for income taxes
(4,818)
(1,037)
(9,878)
(5,369)
Provision for income taxes
Net loss
$ (4,822)
$ (1,039)
$ (9,883)
$ (5,372)
Net loss per common share:
 
 
 
 
Basic and diluted
$ (0.17)
$ (0.04)
$ (0.36)
$ (0.22)
Weighted-average common shares outstanding:
 
 
 
 
Weighted Average Number of Shares Outstanding, Basic and Diluted
28,199 
25,029 
27,680 
24,966 
Consolidated Statements Of Operations (Parenthetical) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 29, 2012
Oct. 1, 2011
Sep. 29, 2012
Oct. 1, 2011
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
 
 
 
 
Stock-based compensation expense
 
 
$ 1,520 
$ 1,223 
Cost Of Sales [Member]
 
 
 
 
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
 
 
 
 
Stock-based compensation expense
28 
21 
105 
51 
Research And Development [Member]
 
 
 
 
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
 
 
 
 
Stock-based compensation expense
193 
178 
538 
466 
Selling, General And Administrative [Member]
 
 
 
 
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
 
 
 
 
Stock-based compensation expense
$ 294 
$ 265 
$ 877 
$ 706 
Condensed Consolidated Statements Of Comprehensive Loss (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 29, 2012
Oct. 1, 2011
Sep. 29, 2012
Oct. 1, 2011
Condensed Consolidated Statements Of Comprehensive Loss [Abstract]
 
 
 
 
Net loss
$ (4,822)
$ (1,039)
$ (9,883)
$ (5,372)
Other comprehensive loss:
 
 
 
 
Unrealized loss transferred from other comprehensive loss to earnings
 
 
 
59 
Net unrealized loss on investments in marketable securities, net of tax
(2)
(7)
(1)
 
Total comprehensive loss
$ (4,824)
$ (1,046)
$ (9,884)
$ (5,313)
Condensed Consolidated Statements Of Cash Flows (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 29, 2012
Oct. 1, 2011
Cash flows from operating activities:
 
 
Net loss
$ (9,883)
$ (5,372)
Adjustments to reconcile net loss to net cash used in operatng activities:
 
 
Depreciation and amortization
1,541 
1,717 
Stock-based compensation
1,520 
1,223 
Realized loss on sale of investments in marketable securities
 
59 
Changes in operating assets and liabilities:
 
 
Accounts receivable
7,764 
(341)
Inventories
(3,918)
(4,368)
Prepaid expenses and other current assets
(165)
228 
Other assets
32 
137 
Accounts payable
(2,257)
31 
Accrued payroll and related liabilities
(742)
(15)
Accured expenses and other current liabilities
458 
65 
Accrued engineering charges
 
98 
Net cash used in operating activities
(5,650)
(6,538)
Cash flows from investing activities:
 
 
Acquisition of property and equipment
(1,648)
(570)
Proceeds from maturities and sales of investments in marketable securities
 
1,264 
Net cash (used in) provided by investing activities
(1,648)
694 
Cash flows from financing activities:
 
 
Borrowings on lines of credit
3,200 
500 
Payments on lines of credit
(400)
(500)
Proceeds of bank term loan, net of issuance costs
1,319 
2,934 
Payments on debt
(1,149)
(1,187)
Proceeds from public offering, net
3,613 
 
Proceeds from exercise of equity awards, net of taxes remitted for restricted stock
621 
(11)
Net cash provided by financing activities
7,204 
1,736 
Decrease in cash and cash equivalents
(94)
(4,108)
Cash and cash equivalents at beginning of period
10,535 
14,210 
Cash and cash equivalents at end of period
$ 10,441 
$ 10,102 
Description Of Business
Description Of Business

Note 1—Description of Business

 

Netlist, Inc. (the “Company”, “Netlist” or “our”) 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.

Summary Of Significant Accounting Policies
Summary Of Significant Accounting Policies

Note 2—Summary of Significant Accounting Policies 

 

Basis of Presentation 

 

The interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (the “U.S.”) for interim financial information and with the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article 8 of SEC Regulation S-X. These condensed consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2011, included in the Company’s Annual Report on Form 10-K filed with the SEC on February 28, 2012. 

 

The condensed consolidated financial statements included herein as of September 29, 2012 are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of the Company’s management, are necessary to present fairly the condensed consolidated financial position of the Company and its wholly-owned subsidiaries as of September 29, 2012, the condensed consolidated results of its operations and comprehensive loss for the three and nine months ended September 29, 2012 and October 1, 2011, and the condensed consolidated cash flows for the nine months ended September 29, 2012 and October 1, 2011.  The results of operations for the nine months ended September 29, 2012 are not necessarily indicative of the results to be expected for the full year or any future interim periods. 

 

Liquidity

 

The Company incurred net losses of approximately $9.9 million and $5.4 million for the nine months ended September 29, 2012 and October 1, 2011, respectively, and had an accumulated deficit of approximately $82.6 million at September 29, 2012. In addition, the Company used cash in operating activities of approximately $5.7 million and $6.5 million for the nine months ended September 29, 2012 and October 1, 2011, respectively.  As a result, the  Company anticipates that it is likely that it will violate one or more of the debt covenants contained in its credit agreement in the near future.    Management has initiated discussions with Silicon Valley Bank, the Company’s lender under its credit facility, to resolve the expected violations or amend the credit agreement; however, in the event of a violation of the debt covenants, the bank may declare an event of default and seek remedies available under the terms of the credit agreement, including the acceleration of the term debt, the discontinuance of the line of credit, and modifications to the terms of letters of credit that support its trade accounts with vendors. 

 

In addition to renegotiating the credit agreement with Silicon Valley Bank, the Company’s management is evaluating potential financing opportunities and alliances or other partnership agreements with entities interested in the Company’s technologies.  The Company is also planning to reduce its expenses and continue its efforts to qualify new and enhanced products with its OEM customers. 

 

 

The Company raised net proceeds of approximately $3.6 million in the nine months ended September 29, 2012 and approximately $1.9 million in the year ended December 31, 2011 under a sales agreement with Ascendiant Capital Markets LLC ("Ascendiant") (see note 10), and may raise additional funds through the Company’s agreement with Ascendiant or through other sources.  The Company may be limited in its ability to benefit from the agreement with Ascendiant if the volume of its shares traded in the market or the market price of its shares is low. 

 

If adequate working capital is not available when needed, the Company may be required to significantly modify its business model and operations to reduce spending to a sustainable level. It could cause the Company to be unable to execute its business plan, take advantage of future opportunities, or respond to competitive pressures or customer requirements. It may also cause the Company to delay, scale back or eliminate some or all of its research and development programs, or to reduce or cease operations.  While there is no assurance that the Company can meet its revenue forecasts or successfully negotiate the terms of the credit agreement with Silicon Valley Bank, management anticipates that it can successfully execute its plans and continue operations for at least the next twelve months.

 

 

Principles of Consolidation 

 

The condensed 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.  For fiscal 2012, the Company’s fiscal year is scheduled to end on December 29, 2012 and will consist of 52 weeks. Each of the Company’s first three quarters in a fiscal year is comprised of 13 weeks. 

 

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 condensed 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 beliefs 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 OEMs. Revenues also include sales of excess component inventories to distributors and other users of memory integrated circuits (“ICs”).  Such sales amounted to less than $0.1 million for each of the three and nine month periods ended September 29, 2012 and October 1, 2011. 

 

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 of an arrangement, product delivery and acceptance have occurred, the sales price is fixed or determinable, and collectability 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 FOB Shipping Point terms and upon receipt for customers with FOB 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 its 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 unaudited condensed 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 (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.  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 collectability 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 $5.2 million of Federal Deposit Insurance Corporation and Securities Investor Protection Corporation insured cash and cash equivalents at September 29, 2012.  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 incurred any credit losses related to these investments. 

The Company’s trade accounts receivable are primarily derived from sales to OEMs in the computer industry. 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. 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 (see Note 3), 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. 

 

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. Once established, lower of cost or market write‑downs are considered permanent adjustments to the cost basis of the excess or obsolete inventories.  Provisions are made to reduce excess or obsolete inventories to their estimated net realizable values.  

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. 

Impairment of Long-Lived Assets 

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 September 29, 2012. 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. 

Warranties 

 

The Company offers warranties generally ranging from one to three years, depending on the product and negotiated terms of the purchase agreements with customers.  Such warranties require the Company to repair or replace defective product returned to the Company during the 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 consistent between periods and 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 condensed 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 

 

Under ASC Topic 270, the Company is required to adjust its effective tax rate each quarter to be consistent with the estimated annual effective tax rate. The Company is also required to record the tax impact of certain discrete items, unusual or infrequently occurring, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur. In addition, jurisdictions with a projected loss for the year or a year-to-date loss where no tax benefit can be recognized are excluded from the estimated annual effective tax rate. The impact of such an exclusion could result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings versus annual projections. 

 

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 condensed 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 Arrangement 

 

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 agreed to cooperate with respect to the qualification of HyperCloud® technology for use with IBM servers and to engage in certain joint marketing efforts when qualification is achieved.  IBM and the Company 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 agreed to cooperate with respect to the qualification of HyperCloud® technology for use with HP servers and to engage in certain joint marketing efforts when qualification is achieved.  HP and the Company 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 agreed to collaborate on the future use of HyperCloud® load reduction and rank multiplication technologies for next generation server memory for HP.   

 

In the fourth quarter of 2011, the Company reimbursed HP and IBM $0.1 million and $0.2 million, respectively, for the cost of certain qualification activities.  The Company reimbursed HP an additional $0.5 million and $0.9 million in the three and nine month period ended September 29, 2012, respectively.  The payments are included in research and development expense in the condensed consolidated statements of operations.  During the quarter ended September 29, 2012, the Company made $0.4 of payments to IBM for joint HyperCloud® marketing activities, additional payments of $0.4 million will be paid to IBM in the fourth quarter of 2012. The Company is amortizing the $0.8 million payments made to IBM based on actual unit shipments compared with estimated total shipments over the term of the Collaboration Agreement. The Company’s net sales will be determined after deduction of the amortization of customer allowances for marketing activities, in accordance with ASC Topic 605-50. 

There can be no assurance that the efforts undertaken under either of the IBM or HP collaboration agreements will result in revenues for the Company that are sufficient to cover the cost of the qualification activities, including the payments made to HP and IBM under the collaboration agreements. 

Comprehensive Loss 

 

ASC Topic 220 establishes standards for reporting and displaying comprehensive income (loss) and its components in the condensed 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 September 29, 2012 the product has not generated significant product margins 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 cooperated with the Company to qualify HyperCloud® for use in their respective products.  The qualifying OEMs have engaged and continue to 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 marketing this product with HP, IBM or other potential customers would adversely impact the Company’s results of operations. 

 

The Company’s operations in the People’s Republic of China (“PRC”) are subject to various political, geographical and economic risks and uncertainties inherent to conducting business in China. 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 China, 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 the Company’s subsidiary in the PRC totaled $0.6 million at December 31, 2011.    The liabilities of the Company’s subsidiary in the PRC exceeded its assets as of September 29, 2012. 

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 the three and nine months ended September 29, 2012 or October 1, 2011. 

 

Net Loss Per Share 

 

Basic net loss per share is calculated by dividing net loss by the weighted-average common shares outstanding during the period, 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 period. 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. 

 

 

  

 

Supplemental Financial Information
Supplemental Financial Information

Note 3—Supplemental Financial Information 

 

Inventories 

 

Inventories consist of the following (in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 29,

 

 

December 31,

 

 

2012

 

 

2011

 

 

 

 

 

 

Raw materials

$

5,046 

 

$

4,312 

Work in process

 

381 

 

 

237 

Finished goods

 

4,548 

 

 

1,508 

 

$

9,975 

 

$

6,057 

 

 

 

 

 

 

Warranty Liabilities 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 29,

 

 

October 1,

 

 

2012

 

 

2011

 

 

 

 

 

 

Beginning balance

$

189 

 

$

194 

Estimated cost of warranty claims charged to cost of sales

 

148 

 

 

281 

Cost of actual warranty claims

 

(105)

 

 

(300)

Ending balance

 

232 

 

 

175 

Less current portion

 

(139)

 

 

(87)

Long-term warranty obligations

$

93 

 

$

88 

 

 

 

 

 

 

 

 

            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 condensed 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 condensed consolidated balance sheets. 

 

 

 

Computation of Net Loss Per Share 

 

The following table sets forth the computation of 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): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 29,

 

 

October 1,

 

 

September 29,

 

 

October 1,

 

 

2012

 

 

2011

 

 

2012

 

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share:

 

 

 

 

 

 

 

 

 

 

 

Numerator: Net loss

$

(4,822)

 

$

(1,039)

 

$

(9,883)

 

$

(5,372)

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

 

28,199 

 

 

25,029 

 

 

27,680 

 

 

24,966 

Basic and diluted net loss per share

$

(0.17)

 

$

(0.04)

 

$

(0.36)

 

$

(0.22)

 

 

 

 

 

 

 

 

 

 

 

 

 

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 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 periods then ended (in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 29,

 

 

October 1,

 

 

September 29,

 

 

October 1,

 

 

2012

 

 

2011

 

 

2012

 

 

2011

Common share equivalents

 

424 

 

 

1,336 

 

 

764 

 

 

1,485 

 

 

 

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 periods then ended. 

 

 

Major Customers 

 

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: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 29,

 

October 1,

 

 

September 29,

 

October 1,

 

 

2012

 

2011

 

 

2012

 

2011

 

Customer:

 

 

 

 

 

 

 

 

 

Customer A

32 

%

67 

%

 

65 

%

67 

%

Customer B

28 

%

*

%

 

12 

%

*

%

 

The Company’s accounts receivable are concentrated with two customers at September 29, 2012 representing approximately 52% and 14% of aggregate gross receivables. At December 31, 2011, one customer represented approximately 80% 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 mitigates risk associated with foreign receivables by purchasing comprehensive foreign credit insurance. 

 

Cash Flow Information 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

September 29,

 

 

October 1,

 

 

 

 

2012

 

 

2011

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

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

 

$

175 

 

$

Debt financed acquisition of assets

 

$

180 

 

$

169 

Change in unrealized gain (loss) from investments in marketable securities

 

$

 -

 

$

59 

 

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 assets (in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at September 29, 2012 Using

 

 

 

 

 

 

Quoted Prices

 

 

Significant

 

 

 

 

 

 

 

 

 

in Active

 

 

Other

 

 

Significant

 

 

 

Fair Value at

 

 

Markets for

 

 

Observable

 

 

Unobservable

 

 

 

September 29,

 

 

Identical Assets

 

 

Inputs

 

 

Inputs

 

 

 

2012

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds

$

4,455 

 

$

4,455 

 

$

 -

 

$

 -

 

Auction and variable floating rate notes

 

443 

 

 

 -

 

 

 -

 

 

443 

 

    Total

$

4,898 

 

$

4,455 

 

$

 -

 

$

443 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2011 Using

 

 

 

 

 

 

Quoted Prices

 

 

Significant

 

 

 

 

 

 

 

 

 

in Active

 

 

Other

 

 

Significant

 

 

 

Fair Value at

 

 

Markets for

 

 

Observable

 

 

Unobservable

 

 

 

December 31,

 

 

Identical Assets

 

 

Inputs

 

 

Inputs

 

 

 

2011

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds

$

5,600 

 

$

5,600 

 

$

 -

 

$

 -

 

Auction and variable floating rate notes

 

444 

 

 

 -

 

 

 -

 

 

444 

 

    Total

$

6,044 

 

$

5,600 

 

$

 -

 

$

444 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following tables summarize the Company’s assets measured at fair value on a recurring basis as presented in the Company’s condensed consolidated balance sheets at September 29, 2012 and December 31, 2011: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at September 29, 2012 Using

 

 

 

 

 

 

Quoted Prices in

 

 

Significant Other

 

 

Significant

 

 

 

Fair Value at

 

 

Active Markets for

 

 

Observable

 

 

Unobservable

 

 

 

September 29,

 

 

Identical Assets

 

 

Inputs

 

 

Inputs

 

 

 

2012

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

$

4,455 

 

$

4,455 

 

$

 -

 

$

 -

Long-term marketable securities

 

443 

 

 

 -

 

 

 -

 

 

443 

    Total assets measured at fair value

$

4,898 

 

$

4,455 

 

$

 -

 

$

443 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2011 Using

 

 

 

 

 

 

Quoted Prices in

 

 

Significant Other

 

 

Significant

 

 

 

Fair Value at

 

 

Active Markets for

 

 

Observable

 

 

Unobservable

 

 

 

December 31,

 

 

Identical Assets

 

 

Inputs

 

 

Inputs

 

 

 

2011

 

 

(Level 1)

 

 

(Level 2)

 

 

(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 using Level 3 inputs in the table above relate to the Company’s investments in auction rate securities. Level 3 inputs are unobservable inputs used to estimate the fair value of assets or liabilities and are utilized to the extent that observable inputs are not available (see Note 5). 

 

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): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

September 29,

 

 

October 1,

 

 

 

 

 

 

 

 

 

2012

 

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

 

 

$

444 

 

$

890 

Proceeds from sales of available-for-sale marketable securities

 

 

 -

 

 

(440)

Realized loss included in other income (expense), net

 

 

 -

 

 

(59)

Unrealized loss transferred from other comprehensive loss to earnings

 

 

 -

 

 

59 

Unrealized loss included in other comprehensive loss

 

 

(1)

 

 

 -

Ending balance

 

 

 

 

$

443 

 

$

450 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments In Marketable Securities
Investments In Marketable Securities

Note 5—Investments in Marketable Securities 

 

Investments in marketable securities consist of the following (in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 29, 2012

 

 

 

 

 

 

 

 

Net

 

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Fair

 

 

 

 

 

Cost

 

 

Loss

 

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction and variable floating rate notes

 

 

$

500 

 

$

(57)

 

$

443 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011

 

 

 

 

 

 

 

 

Net

 

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Fair

 

 

 

 

 

Cost

 

 

Loss

 

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction and variable floating rate notes

 

 

$

500 

 

$

(56)

 

$

444 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 in the second fiscal quarter of 2011, there were no sales of available-for-sale securities prior to maturity in 2012 or 2011.  Net realized gains and losses recorded were not significant in any of the periods reported upon. 

 

The following table provides the breakdown of investments in marketable securities with unrealized losses (in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 29, 2012

 

 

 

 

Continuous Unrealized Loss

 

 

 

 

Less than 12 months

 

 

12 months or greater

 

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

 

 

Value

 

 

Loss

 

 

Value

 

 

Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction and variable floating rate notes

 

 

$

 -

 

$

 -

 

$

443 

 

$

(57)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011

 

 

 

 

Continuous Unrealized Loss

 

 

 

 

Less than 12 months

 

 

12 months or greater

 

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

 

 

Value

 

 

Loss

 

 

Value

 

 

Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction and variable floating rate notes

 

 

$

 -

 

$

 -

 

$

444 

 

$

(56)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 29, 2012 and December 31, 2011, the Company held one investment that was in an unrealized loss position.  

 

Auction Rate Securities 

Disruptions in the credit market continue to adversely affect the liquidity and overall market for auction rate securities. As of September 29, 2012 and December 31, 2011, the Company held one investment in a Baa1 rated auction rate debt security 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 disposed of in June 2011 for a realized loss of approximately $59,000.   

 

The Company does not believe that the current illiquidity of its auction rate security investment 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 auction rate security investment has been classified as long-term in the accompanying condensed consolidated balance sheets. To estimate their fair value the Company used a discounted cash flow model based on estimated interest rates, timing and amount of cash flows, the credit quality of the underlying security, and illiquidity consideration. The Company has concluded that the estimated gross unrealized loss on this investment, which totaled approximately $57,000 and $56,000 at September 29, 2012 and December 31, 2011, respectively, is temporary because (i) the Company believes that the liquidity limitations that have occurred are due to general market conditions, (ii) the 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. 

 

 

Other Investments in Marketable Securities 

 

 

The Company maintains an investment portfolio of various holdings, types and maturities. The Company invests in instruments that meet high quality credit standards, as specified in its investment policy guidelines. These guidelines generally limit the amount of credit exposure to any one issue, issuer or type of instrument.  Excluding its auction rate security, there were no unrealized gains or losses at September 29, 2012 or December 31, 2011.  

 

The following table presents the amortized cost and fair value of the Company’s investments in marketable securities classified as available-for-sale at September 29, 2012 by contractual maturity (in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 29, 2012

 

 

 

 

Amortized

 

 

Fair

 

 

 

 

Cost

 

 

Value

 

 

 

 

 

 

 

 

Maturity

 

 

 

 

 

 

 

Greater than two years*

 

 

$

500 

 

$

443 

 

 

 

 

 

 

 

 

 


 

 

 

 

*

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

 

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 August 10, 2011 and May 14, 2012 (as amended, the “Credit Agreement”).  Currently, the Credit Agreement provides that 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, 2014, subject to the conditions of the Credit Agreement.  

 

Prior to the May 14, 2012 amendment, the Credit Agreement contained an overall sublimit of $10.0 million to collateralize the Company’s contingent obligations under letters of credit and other financial services.  Amounts outstanding under the overall sublimit reduced the amount available pursuant to the Credit Agreement.  As a result of the May 14, 2012 amendment, letters of credit and other financial services are no longer subject to borrowing base sublimits and do not reduce the amount that may be borrowed under the revolving line of credit. Rather the Company has an additional credit facility for up to $3.0 million in letters of credit through September 30, 2014. At September 29, 2012, letters of credit in the amount of $3.0 million were outstanding. 

 

Interest on the line of credit provided by the Credit Agreement is payable monthly at either (i) prime 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 payment of 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 revolving credit lines, along with certain other applicable information (in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 29,

 

 

October 1,

 

 

September 29,

 

 

October 1,

 

 

2012

 

 

2011

 

 

2012

 

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

$

36 

 

$

10 

 

$

84 

 

$

12 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following table presents details of the Company’s outstanding borrowings and availability under our line of credit (in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 29,

 

 

December 31,

 

 

 

 

 

 

 

 

2012

 

 

2011

Availability under the revolving line of credit

$

731 

 

$

7,797 

Outstanding borrowings on the revolving line of credit

 

(2,800)

 

 

 -

Amounts reserved under credit sublimits

 

 -

 

 

(2,022)

(Over-utilized) unutilized borrowing availability under the revolving line of credit

$

(2,069)

 

$

5,775 

 

 

The Company calculates the borrowing availability under the revolving line of credit in arrears, in accordance with the credit agreement and did not over-utilize the revolving line of credit at the time of borrowing.  In October 2012, the Company repaid the $2.8 million balance of outstanding borrowings on the revolving line of credit in full.

 

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, bearing interest at a rate of prime plus 2.00% (“Term Loan I”).  The Company was required to make monthly principal payments of $41,666 over the 36 month term of the loan, or $0.5 million annually.  In May 2011, Silicon Valley Bank extended an additional $3.0 million term loan (“Term Loan II”), bearing interest at a rate of prime plus 2.75%. The Company was required to make monthly principal payments of $125,000 over the 24 month term of the loan, or $1.5 million annually.  In May 2012, Silicon Valley Bank consolidated both term loans and extended additional credit, resulting in a combined balance of $3.5 million (the “Consolidated Term Loan”).  The Consolidated Term Loan is payable in 36 installments of $97,222, beginning December 2012, and bears interest at a rate of prime plus 2.50%.  Interest is payable monthly from the date of funding through final payoff of the loan.  

 

        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 September 29, 2012, 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): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 29,

 

 

December 31,

 

 

 

 

 

 

 

 

2012

 

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Term Loan, net of unamortized issuance cost of $31 (2012)

 

$

3,469 

 

$

 -

Term Loan I

 

 

 -

 

 

875 

Term Loan II, net of unamortized issuance cost of $38 (2011)

 

 

 -

 

 

2,087 

Obligations under capital leases

 

 

163 

 

 

300 

 

 

 

 

 

 

 

 

3,632 

 

 

3,262 

Less current portion

 

 

 

 

 

 

 

(1,115)

 

 

(2,144)

 

 

 

 

 

 

 

$

2,517 

 

$

1,118 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 29,

 

 

October 1,

 

 

September 29,

 

 

October 1,

 

 

2012

 

 

2011

 

 

2012

 

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

$

63 

 

$

62 

 

$

167 

 

$

144 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Taxes
Income Taxes

Note 8—Income Taxes 

 

The following table sets forth the Company’s provision for income taxes, along with the corresponding effective tax rates (in thousands, except percentages): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 29,

 

 

October 1,

 

 

September 29,

 

 

October 1,

 

 

 

2012

 

 

2011

 

 

2012

 

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

$

 

$

 

$

 

$

 

Effective tax rate

 

 -

%

 

(0.2)

%

 

 -

%

 

 -

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.  Due to uncertainty of future utilization, the Company has provided a full valuation allowance as of September 29, 2012 and December 31, 2011. Accordingly, no benefit has been recognized for net deferred tax assets.   

 

       The Company had unrecognized tax benefits at September 29, 2012 and December 31, 2011 of approximately $0.02 million that, if recognized, would affect the Company’s annual effective tax rate. 

 

Commitments And Contingencies
Commitments And Contingencies

Note 9—Commitments and Contingencies   

 

Litigation and Patent Reexaminations 

  

The Company owns numerous patents and continues to enlarge and strengthen its patent portfolios which cover different aspects of the Company’s technology innovations with various claim scopes. The Company intends to vigorously assert its patent rights against infringers through civil litigation and to defend its patents against challenges made by way of reexamination requests with the United States Patent and Trademark Office (“USPTO”). The Company spends substantial resources in various activities to protect its intellectual property, and these activities may continue for the foreseeable future. There can be no assurance that any ongoing or future patent protection and litigation activities will be successful.  The Company is also subject to litigation claims that it has infringed on the intellectual property of others.  The Company intends to defend such lawsuits vigorously.   

 

Litigation, whether or not determined in the Company’s favor or settled, is costly and time-consuming and could divert management’s attention and resources, which could adversely affect the Company’s business.  The Company is unable to assess the possible outcome of these matters.  However, because of the nature and inherent uncertainties of litigation, should the outcome of these actions be unfavorable, the Company’s business, financial condition, results of operations or cash flows could be materially and adversely affected.  Additionally, the outcome of pending litigation, and the related patent reexaminations, as well as any delay in their resolution, could affect the Company’s ability to license its intellectual property in the future or to protect against competition in the current and expected markets for its products.  

 

Google Litigation 

  

In May 2008, the Company initiated discussions with Google, Inc. (“Google”) based on information and belief that Google had infringed on a U.S. patent owned by the Company, U.S. Patent No. 7,289,386 (“the ‘386 patent”), which relates generally to technologies to implement 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 was 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. The Northern District Court granted Google’s request to stay the litigation pending result of the reexamination, and therefore has not ruled on the Company’s motions for summary judgment. 

  

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 technologies to implement 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 the Company’s patented technology. Inphi denied infringement and claimed that the three patents are invalid. In April 2010, Inphi requested but was later denied Inter Partes Reexaminations of the ‘912, ‘537 and ‘274 patents by the USPTO. In June 2010, Inphi submitted new requests and was later granted 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 the patent infringement lawsuit with the Central District Court, which was granted. 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 may 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. 

 

Smart Modular Litigation 

  

On September 10, 2012, Smart Modular, Inc. (“SMOD”) filed a patent infringement lawsuit against the Company in the U.S. District Court for the Eastern District of California (the “Eastern District Court”). The complaint alleges that the Company willfully infringes and actively induces the infringement of a U.S. patent newly issued to SMOD, U.S. Patent No. 8,250,295 (“the ‘295 patent”), and seeks damages and injunctive relief. SMOD also filed a motion for preliminary injunction and a memorandum in support of the motion on the same day of the complaint.  The Company filed a request for reexamination of the ‘295 patent with the USPTO on September 15, 2012, seeking to invalid the ‘295 patent. The USPTO will make a decision on the acceptance of the request by December 15, 2012.  The Company also filed an answer to SMOD’s complaint with the Eastern District Court on October 11, 2012, in which the Company denies infringement of the ‘295 patent, claims that the ‘295 patent is invalid and unenforceable, and asserts a set of counterclaims against SMOD. SMOD filed motion to dismiss, motion to strike and motion for partial judgment on the pleadings on November 1, 2012. The Company will file briefs to oppose SMOD’s motions by November 30, 2012. Hearing on the motions will be held on December 13, 2012. Accruals have not been recorded for loss contingencies related to the SMOD litigation because it is not probable that a loss has been incurred and the amount of any such loss cannot be reasonably estimated. 

 

‘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, 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. In October 2012, the USPTO issued an Action Closing Prosecution