NETLIST INC, 10-Q filed on 5/15/2012
Quarterly Report
Document And Entity Information
3 Months Ended
Mar. 31, 2012
Apr. 30, 2012
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Mar. 31, 2012 
 
Document Fiscal Year Focus
2012 
 
Document Fiscal Period Focus
Q1 
 
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
 
28,332,724 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Mar. 31, 2012
Dec. 31, 2011
Current assets:
 
 
Cash and cash equivalents
$ 13,874 
$ 10,535 
Accounts receivable, net
10,333 
11,399 
Inventories
7,704 
6,057 
Prepaid expenses and other current assets
1,806 
806 
Total current assets
33,717 
28,797 
Property and equipment, net
2,563 
2,771 
Long-term investments in marketable securities
451 
444 
Other assets
128 
161 
Total assets
36,859 
32,173 
Current liabilities:
 
 
Accounts payable
7,225 
6,155 
Accrued payroll and related liabilities
1,625 
1,813 
Accrued expenses and other current liabilities
1,191 
460 
Accrued engineering charges
450 
450 
Current portion of long-term debt
995 
2,144 
Total current liabilities
11,486 
11,022 
Long-term debt, net of current portion
1,850 
1,118 
Other liabilities
80 
94 
Total liabilities
13,416 
12,234 
Commitments and contingencies
   
   
Stockholders' equity:
 
 
Common stock, $0.001 par value - 90,000 shares authorized; 28,275 (2012) and 26,390 (2011) shares issued and outstanding
28 
26 
Additional paid-in capital
97,285 
92,709 
Accumulated deficit
(73,821)
(72,740)
Accumulated other comprehensive loss
(49)
(56)
Total stockholders' equity
23,443 
19,939 
Total liabilities and stockholders' equity
$ 36,859 
$ 32,173 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Per Share data, unless otherwise specified
Mar. 31, 2012
Dec. 31, 2011
Condensed Consolidated Balance Sheets [Abstract]
 
 
Common stock, par value
$ 0.001 
$ 0.001 
Common stock, shares authorized
90,000 
90,000 
Common stock, shares issued
28,275 
26,390 
Common stock, shares outstanding
28,275 
26,390 
Condensed Consolidated Statements Of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended
Mar. 31, 2012
Apr. 2, 2011
Condensed Consolidated Statements Of Operations [Abstract]
 
 
Net sales
$ 13,967 
$ 12,000 
Cost of sales
8,531 1
8,196 1
Gross profit
5,436 
3,804 
Operating expenses:
 
 
Research and development
3,842 1
3,684 1
Selling, general and administrative
2,609 1
2,917 1
Total operating expenses
6,451 
6,601 
Operating loss
(1,015)
(2,797)
Other (expense) income:
 
 
Interest expense, net
(71)
(25)
Other income, net
 
Total other expense, net
(66)
(25)
Loss before provision for income taxes
(1,081)
(2,822)
Provision for income taxes
   
   
Net loss
$ (1,081)
$ (2,822)
Net loss per common share:
 
 
Basic and diluted
$ (0.04)
$ (0.11)
Weighted-average common shares outstanding:
 
 
Basic and diluted
26,729 
24,881 
Condensed Consolidated Statements Of Operations (Parenthetical) (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2012
Apr. 2, 2011
Stock-based compensation
$ 523 
$ 353 
Cost Of Sales [Member]
 
 
Stock-based compensation
35 
13 
Research And Development [Member]
 
 
Stock-based compensation
192 
142 
Selling, General And Administrative [Member]
 
 
Stock-based compensation
$ 296 
$ 198 
Condensed Consolidated Statements Of Comprehensive Loss (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2012
Apr. 2, 2011
Condensed Consolidated Statements Of Comprehensive Loss [Abstract]
 
 
Net loss
$ (1,081)
$ (2,822)
Other comprehensive loss:
 
 
Net unrealized gain on investments in marketable securities, net of tax
Total comprehensive loss
$ (1,074)
$ (2,814)
Condensed Consolidated Statements Of Cash Flows (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2012
Apr. 2, 2011
Cash flows from operating activities:
 
 
Net loss
$ (1,081)
$ (2,822)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
Depreciation and amortization
535 
581 
Stock-based compensation
523 
353 
Changes in operating assets and liabilities:
 
 
Accounts receivable
1,066 
(2,171)
Inventories
(1,647)
(2,793)
Prepaid expenses and other current assets
(20)
825 
Other assets
33 
90 
Accounts payable
1,070 
2,090 
Accrued payroll and related liabilities
(188)
108 
Accrued expenses and other current liabilities
(83)
(19)
Accrued engineering charges
 
463 
Net cash provided by (used in) operating activities
208 
(3,295)
Cash flows from investing activities:
 
 
Acquisition of property and equipment
(317)
(110)
Proceeds from maturities and sales of investments in marketable securities
 
825 
Net cash (used in) provided by investing activities
(317)
715 
Cash flows from financing activities:
 
 
Borrowings on line of credit
 
500 
Payments on line of credit
 
(500)
Payments on debt
(607)
(263)
Proceeds from public offering, net
3,573 
 
Proceeds from exercise of equity awards, net of taxes remitted for restricted stock
482 
(6)
Net cash provided by (used in) financing activities
3,448 
(269)
Increase (decrease) in cash and cash equivalents
3,339 
(2,849)
Cash and cash equivalents at beginning of period
10,535 
14,210 
Cash and cash equivalents at end of period
$ 13,874 
$ 11,361 
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 March 31, 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 March 31, 2012, and the condensed consolidated results of its operations, comprehensive loss, and cash flows for the three months ended March 31, 2012 and April 2, 2011.  The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results to be expected for the full year or any future interim periods.

 

 

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 month periods ended March 31, 2012 and April 2, 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 $4.4 million of Federal Deposit Insurance Corporation and Securities Investor Protection Corporation insured cash and cash equivalents at March 31, 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 March 31, 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 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 the fourth quarter of 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 $0.4 million in the quarter ended March 31, 2012.  The payments are included in research and development expense in the condensed consolidated statements of operations.  The Company expects to make additional payments of $0.8 million and $0.5 million to IBM and HP, respectively for joint HyperCloud™ marketing activities.  The $0.8 million payment to IBM is included in prepaid expenses and other accrued liabilities in the March 31, 2012 unaudited condensed consolidated balance sheet, as milestones that trigger the payment were achieved in March 2012.  The Company will amortize payments made to its OEM customers based on the greater of actual unit shipments to the OEM compared with estimated total shipments over the term of the Collaboration Agreement, or straight-line amortization over the term of the agreement.  The Company’s net sales will be determined after deduction of the amortization of customer allowances for marketing activities, in accordance with ASC 605-50.

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

Comprehensive Loss

 

ASC Topic 220 establishes standards for reporting and displaying comprehensive income 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 March 31, 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 agreed to cooperate with the Company in efforts to qualify HyperCloud™ for use in their respective products.  After qualification is achieved by one or both of these OEMs, the qualifying OEM will engage with the Company in joint marketing and further product development efforts.  The Company and each of the OEMs have committed financial and other resources toward the collaboration.  There can be no assurance that the efforts undertaken pursuant to either of the collaborative agreements will result in any new revenues for the Company.  Further delays or any failure in placing or qualifying this product with HP, IBM or other potential customers would adversely impact the Company’s results of operations.

 

The Company’s operations in the 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 $0.1 million and $0.6 million at March 31, 2012 and December 31, 2011, respectively.

Foreign Currency Remeasurement

 

The functional currency of the Company’s foreign subsidiary is the U.S. dollar. Local currency financial statements are remeasured into U.S. dollars at the exchange rate in effect as of the balance sheet date for monetary assets and liabilities and the historical exchange rate for nonmonetary assets and liabilities. Expenses are remeasured using the average exchange rate for the period, except items related to nonmonetary assets and liabilities, which are remeasured using historical exchange rates. All remeasurement gains and losses are included in determining net loss.  Transaction gains and losses were not significant in the three months ended March 31, 2012 or April 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.

 

New Accounting Pronouncements

 

In May 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-4, Fair Value Measurement (“ASU 11-4”).  ASU 11-4 amends existing guidance to achieve convergence in measurement and disclosure between U.S. Generally Accepted Accounting Standards (“GAAP”) and International Financial Reporting Standards (“IFRS”).  ASU 11-4 is effective for fiscal year 2012.  The adoption of ASU 11-4 did not impact the Company’s results of operations or its financial position.

 

In June 2011, the FASB issued ASU No. 2011-5, Comprehensive Income (“ASU 11-5”).  ASU 11-5 amends existing guidance to increase the prominence of items reported in other comprehensive income and to facilitate convergence of U.S. GAAP and IFRS.   ASU 11-5 is effective for fiscal year 2012.  The adoption of ASU 11-5 did not impact the Company’s results of operations or its financial position.
Supplemental Financial Information
Supplemental Financial Information

Note 3—Supplemental Financial Information

 

Inventories

 

Inventories consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

 

December 31,

 

 

2012

 

 

2011

 

 

 

 

 

 

Raw materials

$

 5,381

 

$

 4,312

Work in process

 

 951

 

 

 237

Finished goods

 

 1,372

 

 

 1,508

 

$

 7,704

 

$

 6,057

 

 

 

 

 

 

Warranty Liabilities

 

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

 

                                               

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

 

April 2,

 

 

2012

 

 

2011

 

 

 

 

 

 

Beginning balance

$

 189

 

$

 194

Estimated cost of warranty claims charged to cost of sales

 

 54

 

 

 98

Cost of actual warranty claims

 

 (42)

 

 

 (104)

Ending balance

 

 201

 

 

 188

Less current portion

 

 (121)

 

 

 (103)

Long-term warranty obligations

$

 80

 

$

 85

 

 

 

 

 

 

 

 

                       

 

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

 

 

March 31,

 

 

April 2,

 

 

2012

 

 

2011

 

 

 

 

 

 

Basic and diluted net loss per share:

 

 

 

 

 

Numerator: Net loss

$

 (1,081)

 

$

 (2,822)

Denominator: Weighted-average common

 

 

 

 

 

shares outstanding, basic and diluted

 

 26,729

 

 

 24,881

Basic and diluted net loss per share

$

 (0.04)

 

$

 (0.11)

 

 

 

 

 

 

 

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

 

 

March 31,

 

 

April 2,

 

 

2012

 

 

2011

Common share equivalents

 

 1,259

 

 

 1,614

 

 

 

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

 

 

March 31,

 

April 2,

 

 

2012

 

2011

 

Customer:

 

 

 

 

Customer A

 85

%

 70

%

 

 

 

 

 

 

The Company’s accounts receivable are concentrated with one customer at March 31, 2012 and December 31, 2011, representing approximately 91% and 80%, respectively, 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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

 

April 2,

 

 

 

 

2012

 

 

2011

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

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

 

$

 -

 

$

 25

Debt financed acquisition of assets

 

$

 180

 

$

 169

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

 

$

 7

 

$

 8

Contractual marketing funds due to collaboration partners

 

$

 800

 

$

 -

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 March 31, 2012 Using

 

 

 

 

 

 

Quoted Prices

 

 

Significant

 

 

 

 

 

 

 

 

 

in Active

 

 

Other

 

 

Significant

 

 

 

Fair Value at

 

 

Markets for

 

 

Observable

 

 

Unobservable

 

 

 

March 31,

 

 

Identical Assets

 

 

Inputs

 

 

Inputs

 

 

 

2012

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds

$

 5,602

 

$

 5,602

 

$

 -

 

$

 -

 

Auction and variable floating rate notes

 

 451

 

 

 -

 

 

 -

 

 

 451

 

     Total

$

 6,053

 

$

 5,602

 

$

 -

 

$

 451

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 March 31, 2012 and December 31, 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at March 31, 2012 Using

 

 

 

 

 

 

Quoted Prices in

 

 

Significant Other

 

 

Significant

 

 

 

Fair Value at

 

 

Active Markets for

 

 

Observable

 

 

Unobservable

 

 

 

March 31,

 

 

Identical Assets

 

 

Inputs

 

 

Inputs

 

 

 

2012

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

$

 5,602 

 

$

 5,602 

 

$

 -