NETLIST INC, 10-K filed on 3/29/2013
Annual Report
Document And Entity Information (USD $)
In Millions, except Share data, unless otherwise specified
12 Months Ended
Dec. 29, 2012
Jun. 29, 2013
Mar. 25, 2013
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 29, 2012 
 
 
Document Fiscal Year Focus
2012 
 
 
Document Fiscal Period Focus
FY 
 
 
Entity Registrant Name
NETLIST INC 
 
 
Entity Central Index Key
0001282631 
 
 
Current Fiscal Year End Date
--12-29 
 
 
Entity Filer Category
Smaller Reporting Company 
 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Public Float
 
$ 52.2 
 
Entity Common Stock, Shares Outstanding
 
 
30,366,553 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 29, 2012
Dec. 31, 2011
ASSETS
 
 
Cash and cash equivalents
$ 7,755 
$ 10,535 
Investment in marketable securities
415 
 
Accounts receivable, net of allowance for doubtful accounts of $47 (2012) and $47 (2011)
3,434 
11,399 
Inventories
7,380 
6,057 
Prepaid expenses and other current assets
723 
806 
Total current assets
19,707 
28,797 
Property and equipment, net
2,560 
2,771 
Long-term investments in marketable securities
 
444 
Other assets
130 
161 
Total assets
22,397 
32,173 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
Accounts payable
3,367 
6,155 
Accrued payroll and related liabilities
784 
1,813 
Accrued expenses and other current liabilities
497 
460 
Accrued engineering charges
450 
450 
Current portion of long-term debt
3,493 
2,144 
Total current liabilities
8,591 
11,022 
Long-term debt, net of current portion
 
1,118 
Other liabilities
94 
94 
Total liabilities
8,685 
12,234 
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; 30,348 (2012), and 26,390 (2011) shares issued and outstanding
30 
26 
Additional paid-in capital
100,403 
92,709 
Accumulated deficit
(86,721)
(72,740)
Accumulated other comprehensive loss
 
(56)
Total stockholders' equity
13,712 
19,939 
Total liabilities and stockholders' equity
$ 22,397 
$ 32,173 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Dec. 29, 2012
Dec. 31, 2011
Consolidated Balance Sheets [Abstract]
 
 
Accounts receivable, allowance for doubtful accounts
$ 47 
$ 47 
Preferred stock, par value
$ 0.001 
$ 0.001 
Preferred stock, shares authorized
10,000,000 
10,000,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value
$ 0.001 
$ 0.001 
Common stock, shares authorized
90,000,000 
90,000,000 
Common stock, shares issued
30,348,000 
26,390,000 
Common stock, shares outstanding
30,348,000 
26,390,000 
Condensed Consolidated Statements Of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 12 Months Ended
Dec. 29, 2012
Sep. 29, 2012
Jun. 30, 2012
Mar. 31, 2012
Dec. 31, 2011
Oct. 1, 2011
Jul. 2, 2011
Apr. 2, 2011
Dec. 29, 2012
Dec. 31, 2011
Condensed Consolidated Statements Of Operations [Abstract]
 
 
 
 
 
 
 
 
 
 
Net sales
$ 5,963 
$ 6,391 
$ 10,552 
$ 13,967 
$ 16,381 
$ 16,347 
$ 16,001 
$ 12,000 
$ 36,873 
$ 60,729 
Cost of sales
5,126 
6,003 
7,814 
8,531 
10,389 
10,819 
11,064 
8,196 
27,474 1
40,468 1
Gross profit
837 
388 
2,738 
5,436 
5,992 
5,528 
4,937 
3,804 
9,399 
20,261 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
Research and development
2,618 
2,615 
3,770 
3,842 
3,502 
3,983 
3,755 
3,684 
12,845 1
14,924 1
Selling, general and administrative
2,098 
2,497 
2,871 
2,609 
2,694 
2,511 
2,583 
2,917 
10,075 1
10,705 1
Total operating expenses
4,716 
5,112 
6,641 
6,451 
6,196 
6,494 
6,338 
6,601 
22,920 
25,629 
Operating loss
(3,879)
(4,724)
(3,903)
(1,015)
(204)
(966)
(1,401)
(2,797)
(13,521)
(5,368)
Other (expense) income:
 
 
 
 
 
 
 
 
 
 
Interest expense, net
(90)
(98)
(79)
(71)
(81)
(72)
(50)
(25)
(338)
(228)
Other expense, net
(146)
(59)
 
(134)
(56)
Total other (expense) income, net
(236)
(94)
(76)
(66)
(79)
(71)
(109)
(25)
(472)
(284)
Loss before income tax benefit
(4,115)
(4,818)
(3,979)
(1,081)
(283)
(1,037)
(1,510)
(2,822)
(13,993)
(5,652)
Income tax benefit
(17)
 
(56)
 
(12)
(53)
Net loss
$ (4,098)
$ (4,822)
$ (3,980)
$ (1,081)
$ (227)
$ (1,039)
$ (1,511)
$ (2,822)
$ (13,981)
$ (5,599)
Net loss per common share:
 
 
 
 
 
 
 
 
 
 
Basic and diluted
$ (0.14)
$ (0.17)
$ (0.14)
$ (0.04)
$ (0.01)
$ (0.04)
$ (0.06)
$ (0.11)
$ (0.50)
$ (0.22)
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
 
 
 
Weighted Average Number of Shares Outstanding, Basic and Diluted
28,279 
28,199 
28,111 
26,729 
28,306 
25,029 
24,988 
24,881 
27,853 
25,086 
Consolidated Statements Of Operations (Parenthetical) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 29, 2012
Dec. 31, 2011
Stock-based compensation expense
$ 1,891 
$ 1,620 
Cost Of Sales [Member]
 
 
Stock-based compensation expense
114 
79 
Research And Development [Member]
 
 
Stock-based compensation expense
667 
600 
Selling, General And Administrative [Member]
 
 
Stock-based compensation expense
$ 1,110 
$ 941 
Condensed Consolidated Statements Of Comprehensive Loss (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 29, 2012
Dec. 31, 2011
Statement of Other Comprehensive Income [Abstract]
 
 
Net loss
$ (13,981)
$ (5,599)
Net loss
(13,981)
(5,599)
Other comprehensive loss:
 
 
Unrealized loss transferred from other comprehensive loss to earnings
56 
59 
Net unrealized loss on investments, net of tax
 
(4)
Comprehensive loss
$ (13,925)
$ (5,544)
Condensed Consolidated Statements Of Stockholders' Equity (USD $)
In Thousands, except Share data, unless otherwise specified
Common Stock [Member]
Additional Paid-In Capital [Member]
Accumulated Deficit [Member]
Accumulated Other Comprehensive Loss [Member]
Total
Balance at Jan. 01, 2011
$ 25 
$ 89,074 
$ (67,141)
$ (111)
$ 21,847 
Balance, shares at Jan. 01, 2011
25,284,000 
 
 
 
 
Stock-based compensation
 
1,620 
 
 
1,620 
Stock-based compensation,shares
11,000 
 
 
 
 
Exercise of stock options
 
203 
 
 
203 
Exercise of stock options, shares
435,000 
 
 
 
435,000 
Repurchase of common stock
 
(78)
 
 
(78)
Repurchase of common stock, shares
(37,000)
 
 
 
 
Issuance of common stock
1,890 
 
 
1,891 
Issuance of common stock, shares
697,000 
 
 
 
 
Components of comprehensive loss:
 
 
 
 
 
Change in net unrealized loss on investments
 
 
 
55 
55 
Net loss
 
 
(5,599)
 
(5,599)
Balance at Dec. 31, 2011
26 
92,709 
(72,740)
(56)
19,939 
Balance, shares at Dec. 31, 2011
26,390,000 
 
 
 
 
Stock-based compensation
 
1,891 
 
 
1,891 
Stock-based compensation,shares
(48,000)
 
 
 
 
Exercise of stock options
687 
 
 
688 
Exercise of stock options, shares
1,032,000 
 
 
 
1,032,000 
Repurchase of common stock
 
(64)
 
 
(64)
Repurchase of common stock, shares
(24,000)
 
 
 
 
Issuance of common stock
5,180 
 
 
5,183 
Issuance of common stock, shares
2,998,000 
 
 
 
 
Components of comprehensive loss:
 
 
 
 
 
Change in net unrealized loss on investments
 
 
 
56 
56 
Net loss
 
 
(13,981)
 
(13,981)
Balance at Dec. 29, 2012
$ 30 
$ 100,403 
$ (86,721)
 
$ 13,712 
Balance, shares at Dec. 29, 2012
30,348,000 
 
 
 
 
Condensed Consolidated Statements Of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 29, 2012
Dec. 31, 2011
Cash flows from operating activities:
 
 
Net loss
$ (13,981)
$ (5,599)
Adjustments to reconcile net loss to net cash used in operatng activities:
 
 
Depreciation and amortization
1,987 
2,242 
Realized loss on sale of investments in marketable securities
85 
59 
Realized loss on sale of equipment
53 
 
Provision for bad debts
 
35 
Stock-based compensation
1,891 
1,620 
Changes in operating assets and liabilities:
 
 
Accounts receivable
7,965 
(4,983)
Inventories
(1,323)
(1,548)
Prepaid expenses and other current assets
263 
759 
Other assets
31 
129 
Accounts payable
(2,938)
(102)
Accrued payroll and related liabilities
(1,029)
51 
Accured expenses and other current liabilities
37 
101 
Accrued engineering charges
 
(188)
Net cash used in operating activities
(6,959)
(7,424)
Cash flows from investing activities:
 
 
Acquisition of property and equipment
(1,698)
(744)
Proceeds from sale of equipment
43 
 
Proceeds from maturities and sales of investments in marketable securities
 
1,264 
Net cash (used in) provided by investing activities
(1,655)
520 
Cash flows from financing activities:
 
 
Borrowings on lines of credit
3,200 
500 
Payments on lines of credit
(3,200)
(500)
Proceeds of bank term loan
1,319 
2,934 
Payments on debt
(1,292)
(1,724)
Proceeds from public offering, net
5,183 
1,891 
Proceeds from exercise of equity awards, net of taxes remitted for restricted stock
624 
128 
Net cash provided by financing activities
5,834 
3,229 
Net decrease in cash and cash equivalents
(2,780)
(3,675)
Cash and cash equivalents at beginning of period
10,535 
14,210 
Cash and cash equivalents at end of period
$ 7,755 
$ 10,535 
Description Of Business
Description Of Business

Note 1Description 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 Companys 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. Our NVvault™ product is the first to offer both DRAM and NAND in a standard form factor memory subsystem as a persistent DIMM in mission critical applications.

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

Liquidity

 

The Company incurred net losses of approximately $14.0 million and $5.6 million for the year ended December 29, 2012 and December 31, 2011, respectively, and had an accumulated deficit of approximately $86.7 million at December 29, 2012. In addition, the Company used cash in operating activities of approximately $7.0 million and $7.4 million for the year ended December 29, 2012 and December 31, 2011, respectively.  As a result of continuing losses, the Company was out of compliance with the tangible net worth debt covenant during the fourth quarter of 2012.

 

On January 23, 2013, we entered into a forbearance agreement with Silicon Valley Bank (the “Forbearance Agreement”), pursuant to which Silicon Valley Bank agreed to forbear from filing any legal action or instituting or enforcing any rights and remedies it may have against us as a result of our violation of the financial covenants until February 28, 2013.  On March 27, 2013, the effectiveness of the Forbearance Agreement was extended until April 30, 2013, or an earlier date under certain conditions, such as the occurrence of an event of default or our breach of the Forbearance Agreement.  The Company is currently working with Silicon Valley Bank to obtain a waiver of our non-compliance with the financial covenants contained in the credit agreement.  However, we may be unable to obtain such a waiver.  If we are unable to obtain a waiver, additional forbearance or a modification to the required liquidity levels, the lender could accelerate all of our outstanding obligations under the credit agreement.  In addition, we could lose vendor credit should the letters of credit issued under the credit agreement become unavailable. If that were to occur, we may be unable to quickly obtain equivalent or suitable replacement financing. If we were not able to secure alternative sources of funding, such acceleration would have a material adverse impact on our financial condition.

 

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 $3.9 million in the year ended December 29, 2012 and approximately $1.9 million in the year ended December 31, 2011 under a sales agreement with Ascendiant Capital Markets LLC ("Ascendiant").  In addition, on December 20, 2012, the Company raised net proceeds of approximately $1.3 million in a registered public offering (“Offering”) of its securities (see note 10). The Company  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.

 

Summary Of Significant Accounting Policies
Summary Of Significant Accounting Policies

Note 2Summary 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 2012 and 2011 fiscal years ended on December 29, 2012 and December 31, 2011, respectively. Fiscal years 2012 and 2011 each consisted of 52 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 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 the Company’s 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 Companys 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 2012 and 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 that an arrangement exists, 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 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 collectability 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 Companys investments in marketable securities have been classified and accounted for as available-for-sale based on managements 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 collectability of accounts receivable based on a combination of factors. In cases where the Company is aware of circumstances that may impair a specific customers 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 $5.3 million of FDIC insured cash and cash equivalents at December 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 realized any credit losses related to these investments.

The Companys 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 managements 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.

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 Companys management believes there is no impairment of long-lived assets as of December 29, 2012. There can be no assurance, however, that market conditions will not change or demand for the Companys 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 managements 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 Company reimbursed HP an additional $0.9 million in the year ended December 29, 2012. The payments are included in research and development expense in the accompanying consolidated statement of operations.  In addition, the Company made $0.8 million of payments to IBM for joint HyperCloud® marketing activities.  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 AgreementThe 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 revenues for the Company that are sufficient to cover the cost of qualification activities, including payments made to HP and IBM under the collaboration agreements.

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 were insignificant in 2011.  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 is subject to certain risks and uncertainties and management believes that significant changes in their ability to obtain profitable operations due to the history of losses and accumulated deficits, the Company’s dependence on a few customers for a significant portion of revenues, risks related to intellectual property matters, market development of and demand for the Company’s products, and the length of the sales cycle could have a material adverse effect on the Company’s financial position, results of operations or cash flows.

 

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 29, 2012 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 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 placing or qualifying this product with HP, IBM or other potential customers would adversely impact the Company’s results of operations.

 

The Companys 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 at December 31, 2011.  The liabilities of the Company’s subsidiaries in the PRC exceeded its assets as of December 29, 2012.

Foreign Currency Remeasurement

The functional currency of the Companys 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 2012 and 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 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 June 2011, the FASB issued new guidance on the presentation of comprehensive income.  The new guidance eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity and requires an entity to present either one continuous statement of net income and other comprehensive income or two separate, but consecutive statements.   The guidance relates only to presentation.  The Company adopted this guidance in the first quarter of the year ended December 29, 2012.  In February 2013, the FASB issued new guidance on reporting reclassifications out of accumulated other comprehensive income.  This new guidance will be effective for the Company for the first quarter of the fiscal year ended December 28, 2013.  Other than requiring additional disclosures, the Company does not expect this new guidance to impact the Company’s consolidated financial statements.

Supplemental Financial Information
Supplemental Financial Information

Note 3Supplemental Financial Information

Inventories

Inventories consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 29,

 

December 31,

 

2012

 

2011

 

 

 

 

 

 

Raw materials

$

4,544 

 

$

4,312 

Work in process

 

70 

 

 

237 

Finished goods

 

2,766 

 

 

1,508 

 

$

7,380 

 

$

6,057 

Property and Equipment

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

 

 

 

 

 

 

Useful

 

 

December 29,

 

 

December 31,

 

Lives

 

2012

 

2011

 

 

 

 

 

 

 

 

Machinery and equipment

3 - 7 yrs.

 

$

9,060 

 

$

8,130 

Leasehold improvements

*

 

 

1,851 

 

 

1,817 

Furniture and fixtures

5 yrs.

 

 

457 

 

 

457 

Computer equipment and software

3 - 7 yrs.

 

 

3,903 

 

 

3,365 

 

 

 

 

15,271 

 

 

13,769 

Less accumulated depreciation and amortization

 

 

 

(12,711)

 

 

(10,998)

 

 

 

$

2,560 

 

$

2,771 

*          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 $0.5 million and accumulated amortization of approximately $0.2 million and $0.1 million at December 29, 2012 and December 31, 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 29,

 

 

December 31,

 

2012

 

2011

 

 

 

 

 

 

Beginning balance

$

189 

 

$

194 

Estimated cost of warranty claims charged to cost of sales

 

164 

 

 

342 

Cost of actual warranty claims

 

(118)

 

 

(347)

Ending balance

 

235 

 

 

189 

Less current portion

 

(141)

 

 

(95)

Long-term warranty obligations

$

94 

 

$

94 

 

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.

 

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 29,

 

December 31,

 

2012

 

2011

 

 

 

 

 

 

Basic and diluted net loss per share:

 

 

 

 

 

Numerator: Net loss

$

(13,981)

 

$

(5,599)

Denominator: Weighted-average common shares

 

 

 

 

 

outstanding, basic and diluted

 

27,853 

 

 

25,086 

Basic and diluted net loss per share

$

(0.50)

 

$

(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, 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 29,

 

December 31,

 

2012

 

2011

 

 

 

 

 

 

Common share equivalents

 

622 

 

 

1,455 

 

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 29,

 

December 31,

 

2012

 

2011

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

Interest

$

332 

 

$

227 

Income taxes

$

 

$

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

Purchase of equipment through capitalized lease obligations

$

 -

 

$

117 

Debt financed acquisition of assets

$

180 

 

$

169 

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

$

150 

 

$

Unrealized losses from investments in marketable securities

$

 -

 

$

Reversal of unrealized loss charged to other comprehensive income

$

56 

 

$

 -

 

Fair Value Measurements
Fair Value Measurements

Note 4Fair Value Measurements

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 29, 2012 Using

 

 

 

 

Quoted Prices in

 

Significant Other

 

Significant

 

Fair Value at

 

Active Markets for

 

Observable

 

Unobservable

 

December 29,

 

Identical Assets

 

Inputs

 

Inputs

 

2012

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Money market mutual funds

$

2,338 

 

$

2,338 

 

$

 -

 

$

 -

    Auction and variable floating rate notes

 

415 

 

 

 -

 

 

 -

 

 

415 

         Total

$

2,753 

 

$

2,338 

 

$

 -

 

$

415 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    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 consolidated balance sheets at December 29, 2012 and December 31, 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 29, 2012 Using

 

 

 

 

Quoted Prices in

 

Significant Other

 

Significant

 

Fair Value at

 

Active Markets for

 

Observable

 

Unobservable

 

December 29,

 

Identical Assets

 

Inputs

 

Inputs

 

2012

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

$

2,338 

 

$

2,338 

 

$

 -

 

$

 -

Marketable securities

 

415 

 

 

 -

 

 

 -

 

 

415 

    Total assets measured at fair value

$

2,753 

 

$

2,338 

 

$

 -

 

$

415 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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. 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 Companys assets measured at fair value using Level 3 inputs (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

December 29,

 

December 31,

 

2012

 

2011

 

 

 

 

 

 

Beginning balance

$

444 

 

$

890 

Sales of available-for-sale marketable securities

 

 -

 

 

(441)

Realized loss included in other expense, net

 

(85)

 

 

(59)

Unrealized loss transferred from other comprehensive loss to earnings

 

56 

 

 

59 

Unrealized loss included in accumulated other comprehensive loss

 

 -

 

 

(4)

Accrued interest

 

 -

 

 

(1)

Ending balance

$

415 

 

$

444 

 

Investments In Marketable Securities
Investments In Marketable Securities

Note 5Investments in Marketable Securities

Investments in marketable securities consist of the following at December 29, 2012 and December 31, 2011 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 29, 2012

 

 

 

 

Net

 

 

 

 

Amortized

 

Unrealized

 

Fair

 

Cost

 

Gain (Loss)

 

Value

 

 

 

 

 

 

 

 

 

Auction and variable floating rate notes

$

415 

 

$

 -

 

$

415 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011

 

 

 

 

Net

 

 

 

 

Amortized

 

Unrealized

 

Fair

 

Cost

 

Gain (Loss)

 

Value

 

 

 

 

 

 

 

 

 

Auction and variable floating rate notes

$

500 

 

$

(56)

 

$

444 

At December 29, 2012, the Level 3 fair value of the Company’s auction rate securities consists of the par value of $500,000 adjusted for a realized loss of $85,000, recorded as other expense, net in the accompanying consolidated statement of operations for the year ended December 29, 2012.

Realized gains and losses on the sale of investments in marketable securities are determined using the specific identification method. Other than the sale of two of the Company’s auction rate securities, described below, there were no sales of available-for-sale securities prior to maturity in 2012 or 2011.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 December 31, 2011, the Company held one investment that was in an unrealized loss position.

The following tables present the amortized cost and fair value of the Companys investments in marketable securities classified as available-for-sale at December 29, 2012 and December 31, 2011 by contractual maturity (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 29, 2012

 

Amortized

 

Fair

 

Cost

 

Value

 

 

 

 

 

 

Maturity

 

 

 

 

 

Greater than two years*

$

415 

 

$

415 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011

 

Amortized

 

Fair

 

Cost

 

Value

 

 

 

 

 

 

Maturity

 

 

 

 

 

Greater than two years*

$

500 

 

$

444 

*          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 29, 2012 and 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. Subsequent to year end, the Company disposed of this auction rate debt security for a realized loss of $85,000 and therefore has recorded the loss at year end as a permanent impairment of this asset. An 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.

 

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.  

 

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.   

 

 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 December 29, 2012, letters of credit in the amount of $2.0 million were outstanding. 

 

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 29,

 

December 31,

 

2012

 

2011

 

 

 

 

 

 

Interest expense

$

112 

 

$

35 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 29,

 

December 31,

 

2012

 

2011

Availability under the revolving line of credit

$

1,486 

 

$

7,797 

Outstanding borrowings on the revolving line of credit

 

 -

 

 

 -

Amounts reserved under credit sublimits

 

 -

 

 

(2,022)

Unutilized borrowing availability under the revolving line of credit

$

1,486 

 

$

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.

 

 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 29, 2012, the Company was in violation of the tangible net worth covenant but remained in compliance with the quick ratio covenant. 

 

On January 23, 2013, the Company entered into a Forbearance Agreement with Silicon Valley Bank (the “Forbearance Agreement”), pursuant to which Silicon Valley Bank shall forbear from filing any legal action or instituting or enforcing any rights and remedies it may have against the Company as a result of its violation of the financial covenants until February 28. 2013.  On March 27, 2013, the effectiveness of the Forbearance Agreement was extended until April 30, 2013, or an earlier date under certain conditions, such as the occurrence of an event of default or a breach of the Forbearance Agreement.  As a result of the Company’s non-compliance with a loan covenant and in accordance with relevant accounting guidance, the Company reclassified the long-term portion of the Consolidated Term Loan to current portion of long term debt in the accompanying consolidated balance sheet as of December 29, 2012. The Company is currently working with Silicon Valley Bank to obtain a waiver of such non-compliance.

 

Pursuant to the Forbearance Agreement, the principal amount outstanding under the revolving line shall accrue interest at a per annum rate equal to the following (i) at all times that a Streamline Period (as defined) is an effect, 1.75% above the Prime Rate; and (ii) at all times that a Streamline Period (as defined) is not in effect, 2.75% above the Prime Rate; which interest shall be payable monthly. In addition, the reserve on the revolving line increased from $1 million to$2 million thereby limiting the borrowing availability further. The Credit Agreement requires payment of an unused line fee, as well as anniversary and early termination fees, as applicable. 

 

Pursuant to the Forbearance Agreement, the principal amount outstanding under the term loan shall accrue interest at a per annum rate equal to 3.25% above the Prime Rate; which interest shall be payable monthly.

Long-Term Debt
Long-Term Debt

Note 7Long-Term Debt

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 29,

 

December 31,

 

2012

 

2011

 

 

 

 

 

 

Obligations under capital leases (see Note 9)

$

118 

 

$

300 

Consolidated Term Loan, net of issuance cost of $28

 

3,375 

 

 

 -

Term Loan I (see Note 6)

 

 -

 

 

875 

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

 

 -

 

 

2,087 

 

 

3,493 

 

 

3,262 

Less current portion

 

(3,493)

 

 

(2,144)

 

$

 -

 

$

1,118 

 

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%.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

December 29,

 

December 31,

 

2012

 

2011

 

 

 

 

 

 

Interest expense

$

234 

 

$

202 

 

Income Taxes
Income Taxes

Note 8Income 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 Companys deferred tax assets and liabilities are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 29,

 

December 31,

 

2012

 

2011

Deferred tax assets:

 

 

 

 

 

Reserves and allowances

$

1,670 

 

$

1,995 

State taxes, net of federal income tax benefit

 

 

 

 -

Depreciation and amortization

 

591 

 

 

682 

Other accruals

 

413 

 

 

331 

Compensatory stock options and rights

 

1,988 

 

 

2,150 

Other

 

45 

 

 

25 

Tax credit carryforwards

 

2,669 

 

 

1,949 

Operating loss carryforward

 

17,239 

 

 

12,306 

Foreign operating loss carryforward

 

1,193 

 

 

1,031 

Total deferred tax assets

 

25,810 

 

 

20,469 

Deferred tax liabilities:

 

 

 

 

 

Prepaid expenses

 

(205)

 

 

(199)

Total deferred tax liabilities

 

(205)

 

 

(199)

       Subtotal

 

25,605 

 

 

20,270 

 

 

 

 

 

 

       Valuation allowance

 

(25,605)

 

 

(20,270)

 

$

 -

 

$

 -

 

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 29, 2012 and December 31, 2011, a valuation allowance of $25.6 million and $20.3 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 $5.3 million and $2.3 million during the years ended December 29, 2012 and December 31, 2011, respectively, primarily related to the increase in the net operating loss carryforward.

At December 29, 2012, the Company has approximately $43.8 million of federal net operating loss (“NOL”) carryforwards which begin to expire in year 2029, and approximately $29.3 million of state net operating loss carryforwards which begin to expire in year 2017, and Federal and state tax credit carryforwards of approximately $1.3 million and $1.4 million, respectively at December 29, 2012.  Federal tax credit carryforwards begin to expire in 2026 and state tax credits carry forward indefinitely.  In addition, the Company has approximately $9.1 million of operating loss carryforwards in the PRC that began to expire in 2012. 

The deferred tax asset at December 29, 2012 does not include approximately $1.9 million and $2.0 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 29,

 

December 31,

 

2012

 

2011

 

 

 

 

 

 

United States

$

(12,640)

 

$

(4,207)

Foreign

 

(1,353)

 

 

(1,445)

 

$

(13,993)

 

$

(5,652)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

December 29,

 

December 31,

 

 

2012

 

 

2011

 

 

 

 

 

 

Current:

 

 

 

 

 

Federal

$

(22)

 

$

(55)

State

 

10 

 

 

Total current

 

(12)

 

 

(53)

Deferred:

 

 

 

 

 

Federal

 

(4,335)

 

 

(1,516)

State

 

(764)

 

 

(582)

Foreign

 

(160)

 

 

(157)

Change in valuation allowance

 

5,259 

 

 

2,255 

Total deferred

 

 -

 

 

 -

Income tax benefit

$

(12)

 

$

(53)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

December 29,

 

December 31,

 

2012

 

2011

 

 

 

 

 

 

U.S. federal statutory tax

 

  35%

 

 

  35%

Valuation allowance

 

(32)

 

 

(25)

Loss from foreign subsidiary

 

(3)

 

 

 (9)

Effective income tax benefit rate

 

   0%

 

 

   1%

 

Unrecognized Tax Benefits

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

 

 

 

 

 

 

 

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 

Reversal of liability for expiration of statute of limitations

 

 

 

 

(22)

Accrual of potential interest related to unrecognized tax benefits

 

 

 

 

 -

Balance at December 29, 2012

 

 

 

$

 -

 

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 29, 2012 and December 31, 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 2012 and 2011, it did not realize any benefit to its consolidated results of operations attributable to the tax holidays.

Commitments And Contingencies
Commitments And Contingencies

Note 9Commitments and Contingencies

Leases

The Company leases certain of its facilities and equipment under non-cancelable operating leases that expire at various dates through 2017. Rental expense, net of amortization of deferred gain and sublease income, is presented in the following table (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

December 29,

 

December 31,

 

2012

 

2011

 

 

 

 

 

 

Rental expense

$

959 

 

$

1,065 

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

A summary of future minimum payments under both capital and operating lease commitments as of December 29, 2012 is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital

 

Operating

Fiscal Year

Leases

 

Leases

2013

 

121 

 

 

459 

2014

 

 -

 

 

245 

2015

 

 -

 

 

230 

2016

 

 -

 

 

223 

2017

 

 -

 

 

80 

Total minimum lease payments

 

121 

 

$

1,237 

Less amount representing interest

 

(3)

 

 

 

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

$

118 

 

 

 

 

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 attempts to generate revenue by selling or licensing selected patents or patent portfolios, and intends to vigorously enforce its patent rights against infringers who refuse to license. The Company spends substantial resources in various activities to protect its intellectual property, including activities to defend its patents against challenges made by way of reexamination proceedings at the United States Patent and Trademark Office (“USPTO”). These activities may continue for the foreseeable future, without any guarantee 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, against which the Company intends to defend vigorously.   

 

Litigation, whether or not eventually decided in the Company’s favor or settled, is costly and time-consuming and could divert management’s attention and resources. Because of the nature and inherent uncertainties of litigation, should the outcome of any of such 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. 

  

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 six claims 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, setting forth six different combinations of prior art that would render the six asserted claims of the ‘295 patent unpatentable. 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 filed briefs to oppose SMOD’s motions on November 29, 2012 and November 30, 2012.

 

On December 7, 2012, the USPTO granted the Company’s request for the reexamination of the ‘295 patent, and issued an Office Action rejecting all of the six asserted claims over the six different combinations of prior art set forth by the Company in its request. On December 13, 2012, the Company moved to stay litigation pending result of reexamination. The Company’s motion to stay and SMOD’s motion for preliminary injunction and motion to dismiss has been submitted without oral argument.

 

On February 7, 2013, Smart Modular filed a response to the Office Action in the reexamination of the ‘295 patent. Since the response appeared to be defective, Netlist filed a petition to strike the response with the USPTO on February 15, 2013. Smart Modular filed a supplemental response to the same Office Action on February 15, 2013. Netlist filed another petition to strike the supplemental response due to its apparent defects on February 21, 2013. On March 13, 2013, the USPTO issued a Notice of Defective Paper, in which the USPTO found Smart Modular’s responses, both the initial filing and the supplemental filing, to be improper, and both responses were expunged from the record. The USPTO gave Smart Modular 15 days to submit another response. Netlist will have 30 days to file comments after Smart Modular’s corrected response is filed.

 

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 (“ACP”) rejecting all 60 claims. The Company filed a response to the ACP on December 3, 2012. Thus, the reexamination of the ‘386 patent remains pending and will continue in accordance with established procedures for merged reexamination proceedings. 

  

‘912 Patent Reexamination 

  

As noted previously, in April 2010, Inphi requested but 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. 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 reexaminations 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. Google, Inphi and SMOD filed their comments to the Company’s response in February 2012. The USPTO determined that SMOD’s comments were defective, and issued a notice to SMOD to rectify and refile the comments within 15 days from the mailing date of the notice. SMOD filed corrected comments and a petition for the USPTO to withdraw the notice in March 2012.  The USPTO issued a non-final Office Action on November 13, 2012 maintaining the patentability of many key claims while rejecting some claims that were determined to be patentable previously. The Company filed a response to the Office Action on January 14, 2013.  The requesters filed their comments on February 14, 2013. The reexamination of the ‘912 patent remains pending 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.  SMOD filed its comments to the Company’s response in March 2012. The USPTO determined that SMOD’s comments were defective and issued a notice in April 2012 to SMOD to rectify and refile the comments within 15 days from the mailing date of the notice.  SMOD filed corrected comments and a petition for the USPTO to withdraw the notice in April 2012.  The USPTO posted an Office Action on December 19, 2012, confirming one claim and rejecting the rest of the claims in the ‘627 patent. The Company filed a response to the Office Action on March 19, 2013. The reexamination of the ‘627 patent remains pending 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 (“RAN”) in February 2012, in which the claim rejections were withdrawn, thus confirming the patentability of all sixty (60) claims in view of all the previously submitted comments by both Inphi and the Company.  Inphi filed a notice of appeal in March 2012, and an appeal brief on May 8, 2012. In response, the USPTO issued a Notice of Defective Appeal Brief.  Inphi filed a corrective appeal brief on May 31, 2012, and Netlist filed its reply brief to the corrected Inphi appeal brief on July 2, 2012.  The Examiner now has an opportunity to respond to Inphi’s corrected appeal brief as well as Netlist’s reply brief. If the Examiner maintains his position, the Company and the USPTO examiner will jointly defend the patent in a hearing with the USPTO, in accordance with established procedures for Inter Partes Reexamination. 

  

‘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 USPTO issued an ACP in March 2012, which confirmed the patentability of one hundred and four (104) claims in view of all the previously submitted comments by both Inphi and the Company.  The PTO subsequently issued a Right of Appeal Notice on June 22, 2012.  This Notice triggered Inphi’s right as the losing party to file a Notice of Appeal by July 23, 2012 and file an appeal brief by September 23, 2012, and Inphi filed both on their respective due dates.  The Company responded to Inphi’s appeal brief by filing a reply brief on October 24, 2012. The Examiner now has an opportunity to respond to the appeal brief and the reply brief. If the Examiner maintains his position, the Company and the USPTO examiner will jointly defend the patent in a hearing with the USPTO, in accordance with established procedures for Inter Partes Reexamination. 

  

             Other Contingent Obligations 

  

During its normal course of business, the Company has made certain indemnities, commitments and guarantees pursuant to 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 condensed consolidated balance sheets.

Stockholders' Equity
Stockholders' Equity

Note 10Stockholders 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 29, 2012 or December 31, 2011.

Common Stock

 

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.  During 2012 and 2011, the Company received net proceeds of approximately $3.9 million and $1.9 million, respectively, raised through the sale of 1,312,669 and 697,470 shares of common stock, respectively.   The sales agreement with Ascendiant expires in November 2014.

 

On December 20, 2012, the Company raised gross proceeds of $1.5 million in a registered public offering (“Offering”) of its securities.  The Offering closed on December 26, 2012, and the Company received net proceeds of $1.3 million after deducting commissions and offering costs.  The Offering resulted in the issuance of 1,685,394 shares of common stock and warrants to purchase up to an aggregate of 2,275,282 shares of the Company’s common stock, which represents 135% of the number of shares issued and sold in the Offering.  Each warrant grants the holder the right to purchase one share of the Company’s common stock at an exercise price of $0.89 per share and expires in June 2018.  These warrants become exercisable 181 days following the December 26, 2012 issuance date.

 

During 2012 and 2011, the Company cancelled 23,631 and 37,422 shares of common stock, respectively, valued at approximately $64,000 and $78,000, 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.

 

Stock-Based Compensation

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 29, 2012, the Company was authorized to issue a maximum of 5,405,566 shares of common stock pursuant to awards under the 2006 Plan. That maximum number will automatically increase on the first day of each<