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Note 1—Description of Business
Netlist, Inc. together with its wholly owned subsidiaries (hereinafter collectively referred to as the “Company” or “Netlist,” unless the context or the use of the term indicates otherwise), is a leading provider of high-performance modular memory subsystems serving customers in diverse industries that require superior memory performance to empower critical business decisions. The Company has a long history of introducing disruptive new products, such as one of the first load-reduced dual in-line memory module (“LRDIMM”) based on its distributed buffer architecture, which has been adopted by the industry for DDR4 LRDIMM. The Company was also one of the first to bring NAND flash memory (“NAND flash”) to the memory channel with its NVvault® non-volatile dual in-line memory modules (“NVDIMM”) using software-intensive controllers and merging dynamic random access memory integrated circuits (“DRAM ICs” or “DRAM”) and NAND flash to solve data bottleneck and data retention challenges encountered in high-performance computing environments. The Company recently introduced a new generation of storage class memory products called HybriDIMM™ to address the growing need for real-time analytics in Big Data applications and in-memory databases.
Due to the ground-breaking product development of its engineering teams, Netlist has built a robust portfolio of over 100 issued and pending U.S. and foreign patents, many seminal, in the areas of hybrid memory, storage class memory, rank multiplication and load reduction. Since its inception, the Company has dedicated substantial resources to the development and protection of technology innovations essential to its business. The Company’s early pioneering work in these areas has been broadly adopted in industry-standard LRDIMM and in NVDIMM. Netlist’s objective is to continue to innovate in its field and invest further in its intellectual property portfolio, with the goal of monetizing its intellectual property through a combination of product sales and licensing, royalty or other revenue-producing arrangements, which may result from joint development or similar partnerships or defense of our patents through enforcement actions against parties we believe are infringing them.
Netlist was incorporated in June 2000 and is headquartered in Irvine, California. In 2007, the Company established a manufacturing facility in the People’s Republic of China (the “PRC”), which became operational in July 2007 upon the successful qualification of certain key customers.
Liquidity
The Company incurred net losses of $11.2 million and $20.5 million for the years ended December 31, 2016 and January 2, 2016, respectively. The Company has historically financed its operations primarily through issuances of equity and debt securities and revenues generated from operations, including product sales and a non-recurring engineering (“NRE”) fee from its Joint Development and License Agreement (“JDLA”) with Samsung Electronics Co., Ltd. (“Samsung”), discussed below. The Company has also funded its operations with a revolving line of credit and term loans under a bank credit facility and, to a lesser extent, equipment leasing arrangements (see Notes 4 and 5).
On November 12, 2015, the Company entered into the JDLA with Samsung, pursuant to which the Company and Samsung have agreed to work together to jointly develop new storage class memory technologies including a standardized product interface for NVDIMM-P memory modules in order to facilitate broad industry adoption of this new technology. The JDLA also includes comprehensive cross-licenses to the Company’s and Samsung’s patent portfolios for the purpose of developing this product interface, grants Samsung a right of first refusal to acquire the Company’s HybriDIMM technology before it offers the technology to a third party, and grants the Company access to competitively priced DRAM and NAND flash raw materials. The JDLA also provided for an $8.0 million NRE fee that we received from Samsung for the joint development and calls for potential marketing collaboration and for the exchange of potential monetary consideration as progress is made towards commercialization of the Company’s storage class memory product. The Company believes Samsung represents an important strategic partner with a high level of technical capability in memory that can facilitate bringing its HybriDIMM technology to market. In connection with the JDLA, the Company also received gross proceeds of $15.0 million for its issuance of a Senior Secured Convertible Note (“SVIC Note”) and Stock Purchase Warrant (“SVIC Warrant”) to SVIC No. 28 New Technology Business Investment L.L.P., an affiliate of Samsung Venture Investment Co. (“SVIC”) (see Note 5).
On September 23, 2016, the Company completed a registered firm commitment underwritten public offering (the “2016 Offering”), pursuant to which it sold 9,200,000 shares of its common stock at a price to the public of $1.25 per share. The net proceeds to the Company from the 2016 Offering were $10.3 million, after deducting underwriting discounts and commissions and offering expenses paid by the Company.
Inadequate working capital would have a material adverse effect on the Company’s business and operations and could cause the Company to fail to execute its business plan, fail to take advantage of future opportunities or fail to respond to competitive pressures or customer requirements. A lack of sufficient funding may also require the Company to significantly modify its business model and/or reduce or cease our operations, which could include implementing cost-cutting measures or delaying, scaling back or eliminating some or all of its ongoing and planned investments in corporate infrastructure, research and development projects, business development initiatives and sales and marketing activities, among other activities. While the Company’s estimates of its operating revenues and expenses and working capital requirements could be incorrect and the Company may use its cash resources faster than it anticipates, management believes the Company’s existing cash balance, together with cash provided by the Company’s operations and borrowing availability under a bank credit facility (see Note 5), net of cash expected to be used in operations, will be sufficient to meet the Company’s anticipated cash needs for at least the next 12 months.
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Note 2—Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
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 or 53 week fiscal year ending on the Saturday closest to December 31. The 2016 fiscal year ended on December 31, 2016 and consisted of 52 weeks. Fiscal year 2015 ended on January 2, 2016 and consisted of 53 weeks.
Reclassifications
Interest accrued on the SVIC Note has been reclassified in the prior period to conform to the current period presentation. The accrued interest has been combined with the convertible promissory note balance on the consolidated balance sheets and has been shown separately from accrued expenses and other current liabilities on the consolidated statements of cash flows.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP 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 revenues 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, recoverability of long-lived assets, valuation of stock-based transactions, estimates for completion of NRE revenue milestones 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. Actual results may differ materially from these estimates which may result in material adverse effects on the Company’s operating results and financial position.
Revenue Recognition
Net Product Sales
Net product sales primarily consist of sales of high-performance modular memory subsystems to original equipment manufacturers (“OEMs”), hyperscale data center operators and storage vendors.
The Company recognizes revenues in accordance with 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 its 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 net product sales, while all costs incurred by the Company for shipping and handling are classified as cost of sales.
Engineering Services
The Company provides engineering services to its customers. The Company recognizes revenue from these services when all of the following conditions are met: (1) evidence existed of an arrangement with the customer, typically consisting of a purchase order or contract; (2) the Company’s services were performed and risk of loss passed to the customer; (3) the Company completed all of the necessary terms of the contract; (4) the amount of revenue to which the Company was entitled was fixed or determinable; and (5) the Company believed it was probable that it would be able to collect the amount due from the customer. To the extent that one or more of these conditions has not been satisfied, the Company defers recognition of revenue.
Deferred Revenue
From time-to-time the Company receives pre-payments from its customers related to future services. Engineering development fee revenues, including NRE fees, are deferred and recognized ratably over the period the engineering work is completed.
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.
Restricted Cash
Restricted cash generally consists of cash to secure standby letters of credit. Restricted cash was $3.1 million as of December 31, 2016 and related to two standby letters of credits, and restricted cash was $0.4 million as of January 2, 2016 and related to three standby letters of credit.
Fair Value of Financial Instruments
The Company’s financial instruments consist principally of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued expenses and debt instruments. The fair value of the Company’s cash equivalents 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 performs credit evaluations of our customers’ financial condition and limits the amount of credit extended to its customers as deemed necessary, but generally requires no collateral. 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. Generally, the Company’s credit losses have been within expectations and the provisions established. However, the Company cannot guarantee that it will continue to experience credit loss rates similar to those experienced in the past.
The Company’s accounts receivable are highly concentrated among a small number of customers, and a significant change in the liquidity or financial position of one of these customers could have a material adverse effect on the collectability of the Company’s accounts receivable, liquidity and future operating results.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, 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. At times, deposits held with financial institutions may exceed the amount of insurance provided by the Federal Deposit Insurance Corporation and the Securities Investor Protection Corporation.
The Company’s trade accounts receivable are primarily derived from sales to OEMs in the server, high-performance computing and communications markets, as well as from sales to storage customers, appliance customers, system builders and cloud and datacenter customers. 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 10), foreign credit insurance, and letters of credit issued in its favor. 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.
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. Expenditures for repairs and maintenance are expensed as incurred. Upon retirement or sale, the cost and related accumulated depreciation and amortization of disposed assets are removed from the accounts and any resulting gain or loss is included in other expense, net.
Deferred Financing Costs, Debt Discount and Detachable Debt-Related Warrants
Costs incurred to issue debt are deferred and recorded as a reduction to the debt balance in the accompanying consolidated balance sheets. The Company amortizes debt issuance costs over the expected term of the related debt using the effective interest method. Debt discounts relate to the relative fair value of any warrants issued in conjunction with the debt are also recorded as a reduction to the debt balance and accreted over the expected term of the debt to interest expense using the effective interest method.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of the carrying value of long-lived assets held and used by the Company in its operations 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. These projected future cash flows may vary significantly over time as a result of increased competition, changes in technology, fluctuations in demand, consolidation of the Company’s customers and reductions in average selling prices. If the carrying value is determined not to be recoverable from future operating cash flows, the asset is deemed impaired and an impairment loss is recognized to the extent the carrying value exceeds the estimated fair value of the asset. The fair value of the asset or asset group is based on market value when available, or when unavailable, on discounted expected cash flows. The Company’s management believes there is no impairment of long-lived assets as of December 31, 2016. However, market conditions could change or demand for the Company’s products could decrease, which could result in future impairment of long-lived assets.
Warranty Liability
The Company offers product warranties generally ranging from one to three years, depending on the product and negotiated terms of any purchase agreements with its 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 future product return rates and expected repair or replacement costs (see Note 3). While such costs have historically been within management’s expectations and the provisions established, unexpected changes in failure rates could have a material adverse impact on the Company, requiring additional warranty reserves and could adversely affect the Company’s gross profit and gross margins.
Stock-Based Compensation
The Company accounts for equity issuances to non-employees in accordance with FASB 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 estimated 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 FASB 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 accompanying consolidated statements of operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. FASB 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 estimated 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 Securities and Exchange Commission (“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 the Company’s common stock on the grant date and the purchase price of the restricted stock award, if any, reduced by expected forfeitures.
If there are any modifications or cancellations of the underlying vested or unvested stock-based awards, the Company may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense, or record additional expense for vested stock-based awards. Future stock-based compensation expense and unearned stock- based compensation may increase to the extent that the Company grants additional common stock options or other stock-based awards.
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.
The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations may change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings. Therefore, the actual liability for U.S. or foreign taxes may be materially different from the Company’s estimates, which could require the Company to record additional tax liabilities or to reduce previously recorded tax liabilities, as applicable.
Research and Development Expenses
Research and development expenditures are expensed in the period incurred.
Interest Expense
Interest expense consists primarily of interest associated with our issued debt, including fees related to the term loans, accretion of debt discounts and amortization of debt issuance costs. The Company recognizes the accretion of debt discounts and the amortization of interest costs using the effective interest method.
Risks and Uncertainties
The Company is subject to a number of risks and uncertainties, including its ability to obtain profitable operations due to the Company’s history of losses and accumulated deficits, the Company’s dependence on a small number of customers for a substantial portion of its net product sales, risks related to intellectual property matters, market acceptance of and demand for the Company’s products, and the risks described below. These risks could have a material adverse effect on the Company’s consolidated financial position, results of operations and cash flows.
The Company has dedicated substantial resources to the development and protection of technology innovations essential to its business, and the Company expects these activities to continue for the foreseeable future. The Company also intends to aggressively pursue monetization avenues for its intellectual property portfolio, potentially including licensing, royalty or other revenue-producing arrangements. However, the Company’s revenues are currently generated by its product sales and a NRE fee received from Samsung in connection with the JDLA, and it may never be successful in generating a revenue stream from its intellectual property, in which case the Company’s investments of time, capital and other resources into its intellectual property portfolio may not provide adequate, or any, returns.
The Company also dedicates substantial resources to protecting its intellectual property, including its pending patent infringement litigation and U.S. International Trade Commission (“ITC”) proceedings against SK hynix Inc., a South Korean memory semiconductor supplier (“SK hynix”), and its efforts to defend its patents against challenges made by way of reexamination and review proceedings at the U.S. Patent and Trademark Office (“USPTO”) and Patent Trial and Appeal Board (“PTAB”) (see Note 7). The Company expects these activities to continue for the foreseeable future, without any guarantee that any ongoing or future patent protection or litigation activities will be successful. The Company is also subject to litigation based on claims that it has infringed the intellectual property rights of others, against which the Company intends to defend itself vigorously. Moreover, any litigation, regardless of its outcome, would involve a significant dedication of resources, including time and costs, would divert management’s time and attention and could negatively impact the Company’s results of operations. As a result, any current or future infringement claims by or against third parties could materially adversely affect the Company’s business, financial condition or results of operations.
The Company has also invested significant research and development time and costs into the design of application-specific integrated circuit (“ASIC”) and hybrid devices, including its NVvault family of products and most recently its next-generation HybriDIMM memory subsystem. The Company believes that market acceptance of these products or derivative products that incorporate its core memory subsystem technology is critical to its success. However, these products are subject to increased risks as compared to the Company’s legacy products. For example, the Company is dependent on a limited number of suppliers for the DRAM and ASIC devices that are essential to the functionality of these products and in the past it has experienced supply chain disruptions and shortages of DRAM and NAND flash required to create its NVvault family of products, and the Company’s products are generally subject to a product approval and qualification process with customers before purchases are made and the Company has experienced a longer qualification cycle than anticipated with some of these products, including its HyperCloud memory subsystems. These and other risks attendant to the production of the Company’s memory subsystem products could impair its ability to obtain customer or market acceptance of these products or obtain such acceptance in a timely manner, which would reduce the Company’s achievable revenues from these products and limit the Company’s ability to recoup its investments in the products.
The Company’s manufacturing operations in the PRC are subject to various political, geographic and economic risks and uncertainties inherent to conducting business in the PRC. These include, among others, (i) volatility and other potential changes in economic conditions in the region, (ii) managing a local workforce and overcoming other practical barriers, such as language and cultural differences, that may subject the Company to uncertainties or unfamiliar practices or regulatory policies, (iii) risks imposed by the geographic distance between the Company’s headquarters and its PRC operations, including difficulties maintaining the desired amount of control over production capacity and timing, inventory levels, product quality, delivery schedules, manufacturing yields and costs, (iv) the Company’s limited experience creating and overseeing foreign operations generally, (v) changes in the laws and policies of the Chinese government that affect business practices generally or restrict local operations by foreign companies, and (vi) 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, which may be more uncertain following the results of the 2016 U.S. presidential election. Additionally, the Chinese government controls the procedures by which its local currency, the Chinese Renminbi (“RMB”), is converted into other currencies, which generally requires government consent, and imposes legal and regulatory restrictions on the movement of funds outside of the PRC. As a result, RMB may not be freely convertible into other currencies at all times and the Company may need to comply with regulatory procedures to repatriate funds from its Chinese operations. Any changes to currency conversion requirements or any failure by the Company to comply with repatriation procedures and regulations could adversely affect its operating results, liquidity and financial condition. In addition, fluctuations in the exchange rate between RMB and U.S. dollars may adversely affect the Company’s expenses and results of operations, the value of its assets and liabilities and the comparability of its period-to-period results. The liabilities of the Company’s subsidiary in the PRC exceeded its assets as of December 31, 2016 and January 2, 2016.
Foreign Currency Remeasurement
The functional currency of the Company’s foreign subsidiaries 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 2016 and 2015.
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, warrants and restricted stock awards, respectively, computed using the treasury stock method and shares issuable upon conversion of the SVIC note (see Note 5). 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.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in FASB Topic 605, Revenue Recognition. ASU 2014-9 implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. On July 9, 2015, the FASB approved amendments deferring the effective date of the standard by one year to December 15, 2017 for annual reporting periods beginning after that date and permitting early adoption of the standard, but not before the original effective date or for reporting periods beginning after December 15, 2016. The Company will not early adopt the new standard and therefore the new standard will be effective for the Company in the first quarter of its fiscal 2018. The Company has not yet selected a transition method and is currently assessing the impact the adoption of ASU 2014-9 will have on its consolidated financial statements and disclosures
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern. (“ASU 2014-15”) The amendments in this update provide guidance about management’s responsibilities to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The main provision of the amendments are for an entity’s management, in connection with the preparation of financial statements, to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Management’s evaluation should be based on relevant conditions and events that are known or reasonably knowable at the date the consolidated financial statements are issued. When management identifies conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern, the entity should disclose information that enables users of the consolidated financial statements to understand all of the following: (1) principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans); (2) management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations; and (3) management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern or management’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. The Company adopted ASU 2014-15 in the fourth quarter of 2016. The Company has included a discussion, in Note 1 of these consolidated financial statements, which discusses management’s plan to mitigate conditions that might raise doubt about the Company’s ability to continue as a going concern.
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330) ("ASU 2015-11"). The amendments in ASU 2015-11 require that an entity measure inventory within the scope of the standard at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transaction. The amendments in this update more closely align the measurement of inventory in U.S. GAAP with the measurement of inventory in International Financial Reporting Standards. ASU 2015-11 is effective for annual and interim periods beginning on or after December 15, 2016. The Company will adopt this guidance in the first quarter of 2017 and does not expect a material impact on its consolidated financial statements or disclosures.
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”), which eliminates the current requirement for an entity to separate deferred income tax liabilities and assets into current and non-current amounts in a classified balance sheet. Instead, the ASU requires deferred tax liabilities, deferred tax assets and valuation allowances to be classified as non-current in a classified balance sheet. ASU 2015-17 will be effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted. Additionally, this guidance may be applied either prospectively or retrospectively to all periods presented. The Company will adopt this guidance in the first quarter of 2017 and does not expect a material impact on its consolidated financial statements or disclosures.
In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). Under ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees may not apply a full retrospective transition approach. The Company is currently evaluating the impact of adopting of ASU 2016-02 on its consolidated financial statements and disclosures.
In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718) (“ASU 2016-09”), which simplified certain aspects of the accounting for stock-based payment transactions, including income taxes, classification of awards and classification in the statement of cash flows. ASU 2016-09 will be effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods. The Company will adopt this guidance in the first quarter of 2017 and does not expect a material impact on its consolidated financial statements and disclosures.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), which is intended to reduce the existing diversity in practice in how certain cash receipts and cash payments are classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years with early adoption permitted, provided that all of the amendments are adopted in the same period. The Company is currently evaluating the impact of adopting ASU 2016-15 on its consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory (ASU 2016-16), which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This amends current U.S. GAAP which prohibits recognition of current and deferred income taxes for all types of intra-entity asset transfers until the asset has been sold to an outside party. ASU 2016-16 is effective for fiscal years beginning after December 15, 2017, including interim periods therein with early application permitted. Upon adoption, the Company must apply a modified retrospective transition approach through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact of this new standard on its consolidated financial statements and disclosures, as well as its planned adoption date.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash (“ASU 2016-18”), which enhances and clarifies the guidance on the classification and presentation of restricted cash in the statement of cash flows. ASU 2016-18 is effective for fiscal periods beginning after December 15, 2018, including interim periods therein with early application permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements.
|
|||
Note 3—Supplemental Financial Information
Inventories
Inventories consisted of the following as of the dates presented:
|
|
|
December 31, |
|
January 2, |
|
||
|
|
|
2016 |
|
2016 |
|
||
|
|
|
(in thousands) |
|
||||
|
Raw materials |
|
$ |
884 |
|
$ |
1,174 |
|
|
Work in process |
|
|
47 |
|
|
98 |
|
|
Finished goods |
|
|
2,229 |
|
|
386 |
|
|
|
|
$ |
3,160 |
|
$ |
1,658 |
|
Property and Equipment
Property and equipment consisted of the following as of the dates presented:
|
|
|
Estimated |
|
|
|
|
|
|
|
|
|
|
Useful |
|
December 31, |
|
January 2, |
|
||
|
|
|
Lives |
|
2016 |
|
2016 |
|
||
|
|
|
(dollars in thousands) |
|
||||||
|
Machinery and equipment |
|
3 - 7 yrs. |
|
$ |
8,941 |
|
$ |
8,934 |
|
|
Leasehold improvements |
|
* |
|
|
878 |
|
|
867 |
|
|
Furniture and fixtures |
|
5 yrs. |
|
|
375 |
|
|
368 |
|
|
Computer equipment and software |
|
3 - 7 yrs. |
|
|
4,045 |
|
|
3,788 |
|
|
|
|
|
|
|
14,239 |
|
|
13,957 |
|
|
Less accumulated depreciation and amortization |
|
|
|
|
(13,594) |
|
|
(13,549) |
|
|
|
|
|
|
$ |
645 |
|
$ |
408 |
|
*Estimated useful life is generally seven years, or the remaining lease term, whichever is shorter.
Warranty Liability
The following table summarizes activity related to warranty liability during the periods presented:
|
|
|
Year Ended |
|
||||
|
|
|
December 31, |
|
January 2, |
|
||
|
|
|
2016 |
|
2016 |
|
||
|
|
|
(in thousands) |
|
||||
|
Beginning balance |
|
$ |
122 |
|
$ |
246 |
|
|
Estimated cost of warranty claims charged to cost of sales |
|
|
49 |
|
|
41 |
|
|
Cost of actual warranty claims |
|
|
(82) |
|
|
(165) |
|
|
Ending balance |
|
|
89 |
|
|
122 |
|
|
Less current portion |
|
|
(53) |
|
|
(73) |
|
|
Long-term warranty liability |
|
$ |
36 |
|
$ |
49 |
|
The allowance for warranty liability 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 liability expected to be incurred after one year is classified as long-term warranty liability 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 numerator and denominator used in the calculation of basic and diluted net loss per share, for the periods presented:
|
|
|
Year Ended |
|
||||
|
|
|
December 31, |
|
January 2, |
|
||
|
|
|
2016 |
|
2016 |
|
||
|
|
|
(in thousands, except per share data) |
|
||||
|
Basic and diluted net loss per share: |
|
|
|
|
|
|
|
|
Numerator: Net loss |
|
$ |
(11,231) |
|
$ |
(20,527) |
|
|
Denominator: Weighted-average common shares |
|
|
|
|
|
|
|
|
outstanding, basic and diluted |
|
|
53,784 |
|
|
48,967 |
|
|
Basic and diluted net loss per share |
|
$ |
(0.21) |
|
$ |
(0.42) |
|
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, and shares issuable upon conversion of the SVIC Note (see Note 5) using the “if converted method”. These potential common shares have been excluded from the diluted net loss per share calculations above as their effect would be anti-dilutive all periods presented:
|
|
|
Year Ended |
|
||||
|
|
|
December 31, |
|
January 2, |
|
||
|
|
|
2016 |
|
2016 |
|
||
|
|
|
(in thousands) |
|
||||
|
Common share equivalents |
|
|
12,883 |
|
|
12,101 |
|
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 for the periods presented:
|
|
|
Year Ended |
|
||||
|
|
|
December 31, |
|
January 2, |
|
||
|
|
|
2016 |
|
2016 |
|
||
|
|
|
(in thousands) |
|
||||
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid (received) during the year for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
131 |
|
$ |
906 |
|
|
Income taxes |
|
$ |
- |
|
$ |
4 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash financing activities: |
|
|
|
|
|
|
|
|
Debt issuance costs associated with February 2015 debt financing |
|
$ |
- |
|
$ |
108 |
|
|
Detachable warrant issued with November 2015 debt financing |
|
$ |
- |
|
$ |
1,165 |
|
|
Acquisition of equipment through capital lease |
|
$ |
179 |
|
$ |
- |
|
|
Debt financing of insurance |
|
$ |
264 |
|
$ |
268 |
|
|
|||
Note 4—Credit Agreements
SVB Credit Agreement
On October 31, 2009, the Company and Silicon Valley Bank (“SVB”) entered into a credit agreement (as amended, the “SVB Credit Agreement”). Pursuant to the terms of the SVB Credit Agreement, the Company is eligible to borrow, in a revolving line of credit, up to the lesser of (i) 80% of its eligible accounts receivable, or (ii) $5.0 million, subject to certain adjustments as set forth in the SVB Credit Agreement. The SVB Credit Agreement requires letters of credit to be secured by cash, which is classified as restricted cash in the accompanying consolidated balance sheets. As of December 31, 2016 and January 2, 2016, (i) letters of credit were outstanding in the amount of $3.1 million and $0.4 million, respectively, (ii) the Company had outstanding borrowings of $0.7 million and $0, respectively, and (iii) availability under the revolving line of credit was $0.8 million and $0.5 million, respectively.
On January 29, 2016, the Company and SVB entered into an amendment to the SVB Credit Agreement (the “2016 SVB Amendment”) to (i) extend the maturity date of advances under the SVB Credit Agreement to January 31, 2017, (ii) adjust the rate at which advances under the SVB Credit Agreement accrue interest to the Wall Street Journal “prime rate” plus 2.75% (prior to the 2016 SVB Amendment, advances accrued interest at a rate equal to SVB’s most recently announced “prime rate” plus 2.75%), and (iii) effective as of December 1, 2015, adjust certain of the Company’s financial covenants under the SVB Credit Agreement, including relaxing the Company’s adjusted quick ratio covenant and removing the Company’s tangible net worth covenant. Additionally, pursuant to the terms of the 2016 SVB Amendment, SVB allowed for the financing and security interests contemplated under the debt instrument issued to SVIC (see Note 5) and released certain patents and related assets relating to the NVvault product line from the collateral subject to SVB’s security interest under the SVB Credit Agreement.
On March 27, 2017, the Company and SVB entered into another amendment to the SVB Credit Agreement (the “2017 SVB Amendment”), to (i) extend the maturity date of advances under the SVB Credit Agreement to April 1, 2018, (ii) modify the Company’s financial covenants under the SVB Credit Agreement to remove all prior financial standards and replace them with a liquidity ratio standard, (iii) remove or amends certain termination, anniversary and unused facility fees payable by the Company under the SVB Credit Agreement, and (iv) make certain other administrative changes.
All obligations under the SVB Credit Agreement are secured by a first priority security interest in the Company’s tangible and intangible assets, other than the patent portfolio, which is subject to a first priority security interest held by SVIC (see Note 5). The SVB Credit Agreement subjects the Company to certain affirmative and negative covenants, including financial covenants with respect to the Company’s liquidity and restrictions on the payment of dividends. As of December 31, 2016, the Company was in compliance with its covenants under the SVB Credit Agreement.
Fortress Credit Opportunities I LP Loan and Security Agreement and Related Agreements
On July 18, 2013, the Company, entered into a loan agreement (“2013 Loan Agreement”) with Fortress Credit Opportunities I LLP (“Fortress”), an affiliate of Fortress Investment Group LLC and successor to DBD Credit Funding, LLC, which provided for up to $10 million in term loans and up to $5 million in revolving loans. The term loans were available in an initial $6 million tranche (the “Initial Term Loan”) with a second tranche in the amount of $4 million becoming available upon achievement of certain performance milestones relating to intellectual property matters (the “IP Monetization Milestones” and such second tranche loan, “IP Milestone Term Loan”). The $5 million in revolving loans were available at Fortress’s discretion and subject to customary conditions precedent. The $6 million Initial Term Loan was fully drawn at closing on July 18, 2013. Proceeds from the Initial Term Loan were used in part to repay the Company’s Consolidated Term Loan with SVB. The remainder of such funds was used to fund the Company’s working capital needs. On February 17, 2015, the 2013 Loan Agreement was amended to accelerate the availability of the term loan and the Company borrowed the remaining $4 million in term loans.
The loans bore interest at a stated fixed rate of 11.0% per annum. Until the last business day of February 2015, the payments on the term loans were interest-only at a cash rate of 7.0% per annum and a payment-in-kind deferred cash interest rate of 4.0%, which payment-in-kind interest was capitalized semi-annually, beginning with December 31, 2013. Beginning with the last business day of February 2015, the term loans were amortized with 65% of the principal amount due in equal monthly installments over the following seventeen (17) months with a balloon payment equal to 35% of the remaining principal amount of the term loans, plus accrued interest, being payable on July 18, 2016 (the "Maturity Date"). Term loan payments, including the $4 million borrowed on February 17, 2015, of approximately $370,000 were due monthly through June 18, 2016, with the remaining amount of approximately $4.3 million due on July 18, 2016.
In November 2015, the Company repaid all amounts owed under the 2013 Loan Agreement with the proceeds from the SVIC Note, as defined and discussed in Note 5, and terminated the 2013 Loan Agreement in full.
Concurrently with the execution of the 2013 Loan Agreement, the Company and Drawbridge Special Opportunities Fund LP (“Drawbridge”) entered into a Monetization Letter Agreement (as amended, the “Letter Agreement”). In connection with an amendment to the 2013 Loan Agreement, the Company also amended the Letter Agreement on February 17, 2015. The Letter Agreement provided, among other things, that Drawbridge may have been entitled to share in certain monetization revenues that we may have derived in the future related to our patent portfolio (the “Patent Portfolio”). The Patent Portfolio did not include certain patents relating to the NVvault™ product line. Monetization revenues subject to this arrangement included revenues recognized during the seven year term of the Letter Agreement from amounts (whether characterized as settlement payments, license fees, royalties, damages, or otherwise) actually paid to the Company or its subsidiaries in connection with any assertion of, agreement not to assert, or license of, the Patent Portfolio (in whole or in part) either (A) in consideration of the grant of a license or covenant not sue, or other immunity with respect to the Patent Portfolio, or (B) as a damages award with respect to such assertion of the Patent Portfolio, less certain legal fees and expenses (subject to a cap on such fees and expenses). Monetization revenues also included the value attributable to the Patent Portfolio in any sale of the Company during the seven year term, subject to a maximum amount payable to Drawbridge. The Letter Agreement also required that the Company use commercially reasonable efforts to pursue opportunities to monetize the Patent Portfolio during the term of the Letter Agreement, provided the Company was under no obligation to pursue any such opportunities that it did not deem to be in its best interest.
Concurrently with the termination of the 2013 Loan Agreement in November 2015, the Company also terminated the Letter Agreement in full, as discussed further in Note 5.
Concurrently with the execution of the 2013 Loan Agreement, the Company issued to Drawbridge a seven-year warrant (the “Drawbridge Warrant”) to purchase an aggregate of 1,648,351 shares of the Company’s common stock at an exercise price of $1.00 per share. In connection with an amendment to the 2013 Loan Agreement, on February 17, 2015, the Company cancelled the Drawbridge Warrant and issued a replacement warrant in substantially the same form except for the removal of the restrictions upon exercise contained in the original Drawbridge Warrant with respect to an aggregate of 659,340 shares of the Company’s common stock thereunder relating to the achievement of the Company of the IP Monetization Milestones and the borrowing by the Company of amounts under the IP Milestone Term Loan. As used herein, the term “Drawbridge Warrant” refers to the originally issued warrant and the replacement warrant, as the context dictates.
The Company accounted for the Drawbridge Warrant as a debt discount and has valued it based on the relative fair value to the debt instrument, at approximately $1,215,000, to be amortized over the term of the debt instrument, or three years, using the effective interest method. For the year ended January 2, 2016, the Company amortized approximately $524,000 as interest expense in the consolidated statements of operations.
In connection with the SVIC Purchase Agreement, as further described in Note 5, the Company amended the Drawbridge Warrant to reduce the exercise price per share to $0.47. The Drawbridge Warrant was exercised in full during the year ended December 31, 2016 and has been cancelled. See Note 5 and Note 8 for further information.
Also in connection with the 2013 Loan Agreement, the Company agreed to pay to a consultant a consulting fee equal to (i) $300,000 in connection with the Company’s receipt of the Initial Term Loan and (ii) 5% of any additional principal amount loaned to the Company as an IP Milestone Term Loan. The $300,000 and $485,925 of additional debt financing costs were recorded as debt issuance cost to be amortized over the term of the debt instrument, or three years, using the effective interest method.
In connection with an amendment to the 2013 Loan Agreement, on February 17, 2015, the Company modified its agreement with the consultant and agreed to pay a consulting fee of 3.5% of $4,000,000 of additional principal loaned to the Company under the 2013 Loan Agreement. The amended consulting fee was equal to $140,000. The amended consulting fee and $132,899 of additional debt financing costs has been recorded as debt issuance cost to be amortized over the term of the debt instrument, or seventeen months, using the effective interest method. During the year ended January 2, 2016 the Company amortized approximately $607,000 as interest expense in the consolidated statements of operations.
In connection with the repayment of all amounts owed under the 2013 Loan Agreement in November 2015, the debt issuance costs and debt discount costs were expensed in their entirety as interest expense.
|
|||
Note 5— Debt
The Company’s debt consisted of the following as of the dates presented:
|
|
|
|
|
December 31, |
|
January 2, |
||
|
|
|
|
|
2016 |
|
2016 |
||
|
|
|
|
|
(in thousands) |
||||
|
Convertible promissory note, SVIC, net of debt discount of $1,084 and $1,301 in 2016 and 2015, respectively |
|
|
|
$ |
13,916 |
|
$ |
13,699 |
|
Accrued interest on convertible promissory note with SVIC |
|
|
|
|
335 |
|
|
36 |
|
Notes payable and capital lease obligation |
|
|
|
|
151 |
|
|
13 |
|
|
|
|
|
$ |
14,402 |
|
$ |
13,748 |
|
Less current portion |
|
|
|
|
(151) |
|
|
(13) |
|
|
|
|
|
$ |
14,251 |
|
$ |
13,735 |
On November 18, 2015, the Company sold to SVIC the SVIC Note and the SVIC Warrant. The SVIC Note has an original principal amount of $15.0 million, accrues interest at a rate of 2.0% per year, is due and payable in full on December 31, 2021, and is convertible into shares of the Company’s common stock at a conversion price of $1.25 per share, subject to certain adjustments, on the maturity date of the SVIC Note. Upon a change of control of the Company prior to the maturity date of the SVIC Note, the SVIC Note may, at the Company’s option, be assumed by the surviving entity or be redeemed upon the consummation of such change of control for the principal and accrued but unpaid interest as of the redemption date. The SVIC Warrant grants SVIC a right to purchase 2,000,000 shares of the Company’s common stock at an exercise price of $0.30 per share, subject to certain adjustments, is only exercisable in the event the Company exercises its right to redeem the SVIC Note prior to its maturity date, and expires on December 31, 2025.
The SVIC Warrant was valued at $1,165,000, based on its relative fair value, and was recorded as a debt discount. The Company also recorded $154,000 as a debt discount for professional services rendered in connection with the transaction. These amounts will be amortized over the term of the SVIC Note using the effective interest method. For the fiscal years ended December 31, 2016 and January 2, 2016, the Company amortized $217,000 and $18,000 respectively, to interest expense in the accompanying consolidated statements of operations.
In connection with the SVIC Note, SVIC was granted a first priority security interest in the Company’s patent portfolio and a second priority security interest in all of the Company’s other assets. The Company, SVB and SVIC have entered into an Intercreditor Agreement pursuant to which SVB and SVIC agreed to their relative security interests in the Company’s assets. Additionally, in connection with the SVIC Note and the SVIC Warrant, the Company and SVIC have entered into a Registration Rights Agreement pursuant to which the Company is obligated to register with the SEC, upon demand by SVIC, the shares of the Company’s common stock issuable upon conversion of the SVIC Note or upon exercise of the SVIC Warrant.
On August 26, 2016, SVIC agreed to waive the Company’s compliance with its covenant to maintain sufficient authorized and unissued shares of its common stock for the full conversion of the principal and interest under the SVIC Note at its maturity date, and the Company agreed to take certain actions to increase the number of its authorized shares of common stock to an amount sufficient to comply with this covenant. The waiver terminates on December 31, 2017.
As described in Note 4, on November 19, 2015, pursuant to the terms of the Payoff Letter, the Company used the net proceeds it received from the SVIC Note to repay all amounts owed under the 2013 Loan Agreement with Fortress. Concurrently, the Company and Drawbridge terminated the Letter Agreement. Pursuant to the Payoff Letter, the Company made a lump sum payment of $1.0 million to Fortress as an early termination fee, which was included in other expense in the accompanying consolidated statement of operations for the year ended January 2, 2016. The Company also agreed (i) to amend the Drawbridge Warrant to reduce its exercise price from $1.00 per share to $0.47 per share (see Note 4 and Note 8), and (ii) to issue to an affiliate of Fortress a new ten-year warrant to purchase up to 1,000,000 shares of the Company’s common stock at an exercise price of $0.47 per share (the “Fortress Warrant”) (see Note 8). The estimated fair value of the Fortress Warrant and the estimated incremental fair value of the amended Drawbridge Warrant totaled $753,000, which was included in other expense in the accompanying consolidated statement of operations for the year ended January 2, 2016. The Drawbridge Warrant and the Fortress Warrant were both exercised in full during the year ended December 31, 2016 and have been cancelled.
Capital Lease and Notes Payable
The Company has purchased computer equipment through a capital lease. As of December 31, 2016, the lease requires monthly payments of approximately $12,000 and matures in December 2017.
The Company finances certain of its insurance policies. As of December 31, 2016, payments are required of approximately $29,000 per month and mature at various dates through September 2017.
As of December 31, 2016, maturities of debt, including amortization of debt discount and debt issuance costs, and accrued interest were as follows:
|
Fiscal Year |
|
|
|
(in thousands) |
|
|
2017 |
|
|
|
$ |
151 |
|
2018 |
|
|
|
|
- |
|
2018 |
|
|
|
|
- |
|
2019 |
|
|
|
|
- |
|
2020 |
|
|
|
|
- |
|
Thereafter |
|
|
|
|
15,335 |
|
Total payments on long-term debt |
|
|
|
|
15,486 |
|
Less current portion (including debt discount and debt issuance costs) |
|
|
|
|
(1,235) |
|
Long-term debt |
|
|
|
$ |
14,251 |
Interest expense, including amortization of debt discounts and debt issuance costs, net of interest income, was as follows during the periods presented:
|
|
|
|
|
Year Ended |
||||
|
|
|
|
|
December 31, |
|
January 2, |
||
|
|
|
|
|
2016 |
|
2016 |
||
|
Interest expense: |
|
|
|
(in thousands) |
||||
|
SVB |
|
|
|
$ |
48 |
|
$ |
71 |
|
Fortress Credit Opportunities I LP (repaid in fiscal 2015) |
|
|
|
|
- |
|
|
1,940 |
|
SVIC |
|
|
|
|
523 |
|
|
54 |
|
Others |
|
|
|
|
23 |
|
|
4 |
|
|
|
|
|
|
594 |
|
|
2,069 |
|
Interest income |
|
|
|
|
(16) |
|
|
(5) |
|
|
|
|
|
$ |
578 |
|
$ |
2,064 |
|
|||
Note 6—Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows:
Year Ended
|
|
|
December 31, |
|
January 2, |
|
||
|
|
|
2016 |
|
2016 |
|
||
|
Deferred tax assets: |
|
(in thousands) |
|
||||
|
Reserves and allowances |
|
$ |
1,570 |
|
$ |
1,548 |
|
|
State taxes, net of federal income tax benefit |
|
|
1 |
|
|
2 |
|
|
Depreciation and amortization |
|
|
146 |
|
|
543 |
|
|
Other accruals |
|
|
226 |
|
|
394 |
|
|
Compensatory stock options and rights |
|
|
1,996 |
|
|
2,598 |
|
|
Other |
|
|
51 |
|
|
28 |
|
|
Tax credit carryforwards |
|
|
3,906 |
|
|
3,302 |
|
|
Operating loss carryforward |
|
|
35,424 |
|
|
30,315 |
|
|
Foreign operating loss carryforward |
|
|
1,192 |
|
|
1,480 |
|
|
Total deferred tax assets |
|
|
44,512 |
|
|
40,210 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Prepaid expenses |
|
|
(76) |
|
|
(63) |
|
|
Basis difference in warrant value |
|
|
(73) |
|
|
(452) |
|
|
Total deferred tax liabilities |
|
|
(149) |
|
|
(515) |
|
|
Subtotal |
|
|
44,363 |
|
|
39,695 |
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance |
|
|
(44,363) |
|
|
(39,695) |
|
|
|
|
$ |
- |
|
$ |
- |
|
The Company evaluates whether a valuation allowance should be established against its deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. In making such judgments, significant weight is given to evidence that can be objectively verified. As of December 31, 2016 and January 2, 2016, a valuation allowance of $44.4 million and $39.7 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 $4.7 million and $6.7 million during the years ended December 31, 2016 and January 2, 2016, respectively, primarily related to the increase in the Company’s net operating loss carryforward.
As of December 31, 2016, the Company had (i) $92.6 million of federal net operating loss carryforwards, which will begin to expire in 2029, (ii) $56.9 million of state net operating loss carryforwards, which will begin to expire in 2017, (iii) federal tax credit carryforwards of $1.8 million, which begin to expire in 2026, and (iv) state tax credit carryforwards of $2.0 million, which do not expire. In addition, as of December 31, 2016, the Company had $4.7 million of operating loss carryforwards in the PRC and Taiwan, and during the year ended December 31, 2016, $1.3 million of the Company’s net operating loss carryforwards in the PRC and Taiwan expired. Utilization of the net operating loss and tax credit carryforwards is subject to an annual limitation due to the ownership percentage change limitations provided by Section 382 of the Internal Revenue Code and similar state and foreign law provisions. These annual limitation may result in the expiration of the net operating loss and tax credit carryforwards before utilization. As of December 31, 2016, the Company had not completed the determination of the amount subject to these annual limitations.
The Company’s deferred tax assets as of December 31, 2016 do not include any excess tax benefits from employee stock option exercises, which are a component of the federal and state net operating loss carryforwards. The Company’s stockholders’ deficit balance will be increased if and when such excess tax benefits are ultimately realized.
For financial reporting purposes, the Company’s loss before provision for income taxes included the following components for the periods presented:
|
|
|
Year Ended |
|
||||
|
|
|
December 31, |
|
January 2, |
|
||
|
|
|
2016 |
|
2016 |
|
||
|
|
|
(in thousands) |
|
||||
|
United States |
|
$ |
(10,606) |
|
$ |
(19,737) |
|
|
Foreign |
|
|
(620) |
|
|
(789) |
|
|
|
|
$ |
(11,226) |
|
$ |
(20,526) |
|
The Company’s income tax provision consisted of the following for the periods presented:
|
|
|
Year Ended |
|
||||
|
|
|
December 31, |
|
January 2, |
|
||
|
|
|
2016 |
|
2016 |
|
||
|
|
|
(in thousands) |
|
||||
|
Current: |
|
|
|
|
|
|
|
|
Federal |
|
$ |
- |
|
$ |
- |
|
|
State |
|
|
5 |
|
|
1 |
|
|
Total current |
|
|
5 |
|
|
1 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
Federal |
|
|
(3,349) |
|
|
(6,093) |
|
|
State |
|
|
(1,607) |
|
|
(684) |
|
|
Foreign |
|
|
288 |
|
|
344 |
|
|
Change in valuation allowance |
|
|
4,668 |
|
|
6,433 |
|
|
Total deferred |
|
|
- |
|
|
- |
|
|
Income tax provision |
|
$ |
5 |
|
$ |
1 |
|
A reconciliation of income taxes computed by applying the statutory U.S. income tax rate to the Company’s loss before income taxes to the income tax provision is as follows:
|
|
|
Year Ended |
|||||
|
|
|
December 31, |
|
January 2, |
|
||
|
|
|
2016 |
|
2016 |
|
||
|
|
|
|
|
||||
|
U.S. federal statutory tax |
|
|
34 |
% |
|
35 |
% |
|
Valuation allowance |
|
|
(29) |
|
|
(32) |
|
|
Loss from foreign subsidiary |
|
|
(2) |
|
|
(2) |
|
|
Other |
|
|
(3) |
|
|
(1) |
|
|
Effective income tax provision rate |
|
|
0 |
% |
|
0 |
% |
The Company files tax returns with federal, state and foreign jurisdictions. The Company is no longer subject to Internal Revenue Service (“IRS”) or state examinations for periods prior to 2011, although certain carryforward attributes that were generated prior to 2011 may still be adjusted by the IRS.
The Company classifies accrued interest and penalties as part of the accrued tax liability in its provision for income taxes. For the years ended December 31, 2016 and January 2, 2016, the Company did not recognize any interest or penalties related to unrecognized tax benefits.
The Company’s recognizes interest and/or penalties related to income tax matters in income tax expense. As of December 31, 2016 and January 2, 2016, the Company had no accrued interest and penalties related to uncertain tax matters.
As of December 31, 2016, the Company had no uncertain tax positions that would be reduced as a result of a lapse of the applicable statute of limitations.
|
|||
Note 7—Commitments and Contingencies
Leases
The Company leases certain of its facilities and equipment under non‑cancelable operating leases that expire at various dates through 2017. The following table shows rental expense, net of amortization of deferred gain and sublease income, for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
||||
|
|
|
December 31 |
|
January 2, |
|
||
|
|
|
2016 |
|
2016 |
|
||
|
|
|
|
|
|
|
|
|
|
Rental expense, net |
|
$ |
482 |
|
$ |
526 |
|
A summary of future minimum payments under operating lease commitments as of December 31, 2016 is as follows (in thousands):
|
|
|
|
|
|
Operating |
|
|
Fiscal Year |
|
|
|
|
Leases |
|
|
2017 |
|
|
|
|
$ |
201 |
Litigation and Patent Reexaminations
The Company owns numerous patents and continues to seek to grow and strengthen its patent portfolio, which covers different aspects of the Company’s technology innovations with various claim scopes. The Company plans to pursue avenues to monetize its intellectual property portfolio, in which it would generate revenue by selling or licensing its technology, and it intends to vigorously enforce its patent rights against alleged infringers of such rights. The Company dedicates substantial resources to protecting its intellectual property, including its efforts to defend its patents against challenges made by way of reexamination proceedings at the PTAB or USPTO. These activities are likely to continue for the foreseeable future, without any guarantee that any ongoing or future patent protection and litigation activities will be successful, or that the Company will be able to monetize its intellectual property portfolio. 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 itself 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. Thus, because of the nature and inherent uncertainties of litigation, even if the outcome of any proceeding is favorable, 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 related patent reexaminations, as well as any delay in their resolution, could affect the Company’s ability to continue to sell its products, protect against competition in the current and expected markets for its products or license its intellectual property in the future.
Google Litigation
On December 4, 2009, the Company filed a patent infringement lawsuit against Google, Inc. (“Google”) in the U.S. District Court for the Northern District of California (the “Northern District Court”), seeking damages and injunctive relief based on Google’s alleged infringement of the Company’s U.S. Patent No. 7,619,912 (the “‘912 patent”), which 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 the Company’s activities in the Joint Electron Device Engineering Council (“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’s and Google’s joint request to stay the ‘912 patent infringement lawsuit against Google until the completion of the reexamination proceedings.
Inphi Litigation
On September 22, 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 June 2010, Inphi requested and was later granted Inter Partes Reexaminations of the ‘912, ‘537 and ‘274 patents by the USPTO. The reexamination proceedings are described below (except for the reexamination proceeding related to the ‘537 patent, which have concluded with the confirmation of all of the claims of such patent). In connection with the reexamination requests, Inphi filed a motion to stay the patent infringement lawsuit with the Central District Court until completion of the reexamination proceedings, which was granted.
‘912 Patent Reexamination
As noted above, in April 2010, June 2010 and October 2010, Google and Inphi submitted requests for an Inter Partes Reexamination of the ‘912 patent by the USPTO, claiming that the ‘912 patent is invalid and requesting that the USPTO reject the patent’s claims and cancel the patent. Additionally, in October 2010, Smart Modular, Inc. (“Smart Modular”) submitted another such reexamination request. On January 18, 2011, the USPTO granted such reexamination requests, and in February 2011, the USPTO merged the Inphi, Google and Smart Modular ‘912 patent reexaminations into a single proceeding. On March 21, 2014, the USPTO issued an Action Closing Prosecution (“ACP”), an office action that states the USPTO examiner’s position on patentability and closes further prosecution, and on June 18, 2014 the USPTO issued a Right of Appeal Notice (“RAN”), a notice that triggers the rights of the involved parties to file a notice of appeal to the ACP, each of which confirmed the patentability of 92 of the ‘912 patent’s claims and rejected the patent’s 11 other claims. The parties involved filed various notices of appeal, responses and requests, and on November 24, 2015, the PTAB held a hearing on such appeals. On May 31, 2016, the PTAB issued a decision affirming certain of the examiner’s decisions and reversing others. On February 9, 2017, the PTAB granted the Company’s request to reopen prosecution before the USPTO examiner and remanded the consolidated proceeding to the Examiner to consider the patentability of certain of the pending claims in view of the PTAB’s May 31, 2016 decision and comments from the parties. The Examiner will next issue a determination as to the patentability of the claims, at which point the proceeding will return to the PTAB for reconsideration and issuance of a new decision. Accruals have not been recorded for loss contingencies related to the ‘912 patent reexamination proceedings because it is not probable that a loss has been incurred and the amount of any such loss cannot be reasonably estimated.
‘627 Patent Reexamination
In September 2011, Smart Modular submitted a request for an Inter Partes Reexamination by the USPTO of the Company’s U.S. Patent No. 7,864,627 (the “‘627 patent”), related to the ‘912 patent, claiming that the ‘627 patent is invalid and requesting that the USPTO reject the patent’s claims and cancel the patent. On November 16, 2011, the request was granted. On March 27, 2014 and June 27, 2014, the USPTO issued an ACP and a RAN, respectively, each of which rejected all of the ‘627 patent’s claims. The parties involved filed various notices of appeal, responses and requests, and on November 24, 2015, the PTAB held a hearing on such appeals. On May 31, 2016, the PTAB issued a decision affirming the decisions of the examiner. On February 9, 2017, the PTAB granted the Company’s request to reopen prosecution before the USPTO examiner and remanded the proceeding to the examiner to consider the patentability of certain of the pending claims in view of the PTAB’s May 31, 2016 decision and comments from the parties. The examiner will next issue a determination as to the patentability of the claims, at which point the proceeding will return to the PTAB for reconsideration and issuance of a new decision. Accruals have not been recorded for loss contingencies related to the ‘627 patent reexamination proceedings because it is not probable that a loss has been incurred and the amount of any such loss cannot be reasonably estimated.
‘274 Patent Reexamination
As noted above, in April 2010 and June 2010, Inphi submitted requests for an Inter Partes Reexamination of the ‘274 patent by the USPTO. On August 27, 2010, the request was granted. In March 2012 and June 2012, the USPTO issued an ACP and a RAN, respectively, each of which confirmed the patentability of many of the ‘274 patent’s claims. The parties involved filed various notices of appeal, responses and requests, and on November 20, 2013, the PTAB held a hearing on such appeals. On January 16, 2014, the PTAB issued a decision affirming the examiner in part, but reversing the examiner on new grounds and rejecting all of the patent’s claims. On September 11, 2015, the USPTA examiner issued a determination rejecting the amended claims. On January 23, 2017, the USPTO granted-in-part the Company’s petition to enter comments in support of its positions in the proceeding. Inphi will next have an opportunity to respond to the Company’s comments, and the examiner will then issue a new determination. Accruals have not been recorded for loss contingencies related to the ‘274 patent reexamination proceedings because it is not probable that a loss has been incurred and the amount of any such loss cannot be reasonably estimated.
Smart Modular ‘295 Patent Litigation and Reexamination
In September 13, 2012, Smart Modular, Inc. (“Smart Modular”) 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 certain claims of U.S. Patent No. 8,250,295 (“the ‘295 patent”) issued to Smart Modular and seeks damages and injunctive relief. The Company answered Smart Modular’s complaint in October 2012, denying infringement of the ‘295 patent, asserting that the ‘295 patent is invalid and unenforceable, and asserting counterclaims against Smart Modular.
On December 7, 2012, the USPTO granted the Company’s request for the reexamination of the ‘295 patent. On April 29, 2014, the USPTO examiner issued an ACP confirming some claims and rejecting others, and on August 4, 2015, the examiner issued a RAN confirming all pending claims. On September 4, 2015, the Company appealed to the PTAB. The parties involved filed various notices of appeal, responses and requests, and on September 22, 2016, the PTAB held a hearing on such appeals. On November 14, 2016, the PTAB issued a decision reversing the examiner and rejected all of the pending claims. On January 23, 2017, Smart Modular filed a request to reopen prosecution. The parties will next have the opportunity present evidence and arguments and the examiner will then issue a new determination. The examiner’s determination will then go back to the PTAB for another decision.
On May 30, 2013, the Eastern District Court issued an order granting the Company’s motion to stay pending completion of the reexamination of the ‘295 patent and denied Smart Modular’s motion for preliminary injunction. On May 5, 2016, Smart Modular filed a motion to lift the stay which was granted by the Eastern District Court on September 21, 2016.
Smart Modular and SanDisk Litigation
On July 1 and August 23, 2013, the Company filed complaints against Smart Modular, Smart Storage Systems (“Smart Storage”) (which was subsequently acquired by SanDisk Corporation (“SanDisk”)), Smart Worldwide Holdings (“Smart Worldwide”) and Diablo Technologies (“Diablo”) in the Central District Court, seeking, among other things, damages and other relief for alleged infringement of several of the Company’s patents by the defendants based on the manufacture and sale of the ULLtraDIMM memory module, alleged antitrust violations by Smart Modular and Smart Worldwide, and alleged trade secret misappropriation and trademark infringement by Diablo. The trade secret misappropriation and trademark infringement claims against Diablo were fully adjudicated on August 17, 2016 and are no longer pending.
On August 23, 2013, Smart Modular and Diablo each filed a complaint in the San Francisco Division of the Northern District Court seeking declaratory judgment of non-infringement and invalidity of the patents asserted in the Company’s complaint. Based on various motions filed by the parties, on November 26, 2013, the Central District Court severed and transferred the patent claims related to the ULLtraDIMM memory module to the Northern District Court.
On February 12, 2014, the Northern District Court granted the parties’ joint stipulation dismissing Smart Modular without prejudice. Between June 18, 2014 and August 23, 2014, SanDisk, Diablo, and Smart Modular filed numerous petitions in the USPTO requesting Inter Partes Review of the Company’s asserted patents. All of the reviews associated with U.S. Patent Nos. 8,516,187; 8,301,833; 8,516,185 have been resolved in the Company’s favor and are no longer pending. The reviews associated with U.S. Patent Nos. 8,001,434; 8,359,501; 7,881,150; and 8,081,536 have concluded before the PTAB and the parties have appealed the decisions in these reviews to the Court of Appeals for the Federal Circuit and are awaiting decisions. On April 9, 2015, the Northern District Court stayed the infringement proceedings as to the Company’s patents asserted against the ULLtraDIMM pending resolution of the patent review decisions on appeal.
SK hynix Litigation
On September 1, 2016, the Company filed legal proceedings for patent infringement against SK hynix Inc., a South Korean memory semiconductor supplier (“SK hynix”), in the U.S. International Trade Commission (“ITC”) and the Central District Court. The proceedings are based on the alleged infringement by SK hynix’s registered dual in-line memory module (“RDIMM”) and load reduced dual in-line memory module (“LRDIMM”) enterprise memory products of six of the Company’s U.S. patents. In the ITC proceedings, the Company is seeking an exclusion order that directs U.S. Customs and Border Protection to stop allegedly infringing SK hynix RDIMM and LRDIMM products from entering the United States. In the Central District Court proceedings, the Company is primarily seeking damages.
On October 3, 2016, the ITC instituted an investigation of the trade practices of SK hynix and certain of its subsidiaries related to its importation, sale for importation, and/or sale after importation of RDIMM and LRDIMM enterprise memory products. On November 10, 2016, the ITC set a 16-month target date of February 7, 2018, for the investigation with a final initial determination being filed no later than October 10, 2017. Based on this target date, the ITC scheduled a hearing on the merits of the investigation to begin on May 8, 2017, which is to conclude no later than May 12, 2017. On January 4, 2017, the Central District Court issued a scheduling order setting various dates including a trial date of July 10, 2018.
On October 5, 2016 and October 28, 2016, SK hynix filed motions in the Central District Court and the ITC, respectively, to disqualify the Company’s litigation counsel. The Company opposed both motions. On December 5, 2016, the Central District Court granted SK hynix’s motion to disqualify. On December 8, 2016, the Company’s substitute counsel entered appearances in the ITC and the Central District Court.
Between December 30, 2016 and January 20, 2017, SK hynix filed numerous petitions in the USPTO requesting Inter Partes Review of certain of the Company’s patents, including the patents asserted in the ITC and Central District Court. The Company will file Patent Owner Preliminary Responses in each of these reviews by April 30, 2017. Based on these filings, the PTAB will determine whether or not to institute the requested reviews, likely in July or August 2017.
Morgan Joseph Litigation
On March 31, 2016, Morgan Joseph Triartisan LLC (“Morgan Joseph”) filed a complaint in the Supreme Court of the State of New York against the Company and certain of its officers for breach of contract and related causes of action. The complaint alleges that the Company refused to honor its payment obligations under a written agreement with Morgan Joseph related to the provision of financial advisory and investment banking services. Morgan Joseph is seeking compensatory damages in the amount of $1,012,500, plus punitive damages in an amount not less than $1 million, together with pre-judgment interest, costs, and fees.
On September 15, 2016, the Company filed a motion to dismiss Morgan Joseph’s complaint for failure to state a claim. On February 15, 2017, the court granted the Company’s motion to dismiss as to all causes of action brought by Morgan Joseph.
Other Contingent Obligations
During the normal course of its 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, sale 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; (v) indemnities to SVIC and SVB pertaining to all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with transactions contemplated by the applicable loan documents; and (vi) indemnities or other claims related to certain real estate leases, under which the Company may be required to indemnify property owners for environmental and other liabilities or may face 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 as a result of these obligations, and no liabilities have been recorded for these indemnities, commitments and guarantees in the accompanying consolidated balance sheets.
|
|||
Note 8—Stockholders’ Equity
Serial Preferred Stock
The Company’s authorized capital stock includes 10,000,000 shares of serial preferred stock, with a par value of $0.001 per share. No shares of preferred stock were outstanding as of December 31, 2016 or January 2, 2016.
Common Stock
On February 24, 2015, the Company completed a registered offering of shares of its common stock (the “2015 Offering”). In the 2015 Offering, the Company issued and sold to the underwriter for the offering (“Underwriter”) 8,846,154 shares of common stock pursuant to an underwriting agreement, dated as of February 19, 2015, by and between the Company and the Underwriter, at a price of $1.209 per share, including 1,153,846 shares resulting from the Underwriter’s exercise in full of its option to purchase additional shares of common stock to cover over-allotments. The price per share to the public in the 2015 Offering was $1.30 per share. The net proceeds from the 2015 Offering were approximately $10.5 million, after deducting underwriting discounts and commissions and offering expenses.
On September 23, 2016, the Company completed a registered offering of shares of its common stock (the “2016 Offering”). In the 2016 Offering, the Company issued and sold 9,200,000 shares of its common stock at a price to the public of $1.25 per share. The net proceeds to the Company from the 2016 Offering were approximately $10.3 million, after deducting underwriting discounts and commissions and offering expenses paid or payable by the Company.
Stock-Based Compensation
The Company has stock-based compensation awards outstanding pursuant to its Amended and Restated 2006 Equity Incentive Plan, as re-approved by the Company’s stockholders on June 8, 2016 (the “Amended 2006 Plan”), under which a variety of stock-based awards, including stock options, may be granted to employees and non-employee service providers of the Company. In addition to awards granted pursuant to the Amended 2006 Plan, the Company periodically grants equity-based awards outside the 2006 Plan to certain new hires as an inducement to enter into employment with the Company.
Subject to certain adjustments, as of December 31, 2016, the Company was authorized to issue a maximum of 10,205,566 shares of its common stock pursuant to awards granted under the Amended 2006 Plan. Pursuant to the terms of the Amended 2006 Plan, the maximum number of shares of common stock subject to the plan automatically increased on the first day of each calendar year from January 1, 2007 through January 1, 2016, by the lesser of (i) 5.0% of the number of shares of common stock issued and outstanding as of the first day of the applicable calendar year, and (ii) 1,200,000 shares of common stock, subject to adjustment for certain corporate actions. Beginning January 1, 2017, the automatic annual increase to the number of shares of common stock that may be issued pursuant to awards granted under the Amended 2006 Plan is equal to the lesser of (i) 2.5% of the number of shares of common stock issued and outstanding as of the first day of the applicable calendar year, and (ii) 1,200,000 shares of common stock, subject to adjustment for certain corporate actions. As of December 31, 2016, the Company had 276,697 shares of common stock available for issuance pursuant to future awards to be granted under the Amended 2006 Plan. Stock options granted under the Amended 2006 Plan generally vest at a rate of at least 25% per year over four years and expire 10 years from the date of grant.
The following table summarizes the Company’s stock option activity during the periods presented:
|
|
|
Stock Options Outstanding |
|
||||||||||
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
Remaining |
|
Aggregate |
|
|||
|
|
|
Number of |
|
Average |
|
Contractual |
|
Intrinsic |
|
||||
|
|
|
Shares |
|
Exercise |
|
Life |
|
Value |
|
||||
|
|
|
(in thousands) |
|
Price |
|
(in years) |
|
(in thousands) |
|
||||
|
Options outstanding - December 27, 2014 |
|
|
7,234 |
|
$ |
2.40 |
|
|
|
|
|
|
|
|
Options granted |
|
|
2,515 |
|
|
0.81 |
|
|
|
|
|
|
|
|
Options exercised |
|
|
(10) |
|
|
0.73 |
|
|
|
|
|
|
|
|
Options cancelled |
|
|
(795) |
|
|
2.06 |
|
|
|
|
|
|
|
|
Options outstanding - January 2, 2016 |
|
|
8,944 |
|
|
1.98 |
|
|
|
|
|
|
|
|
Options granted |
|
|
1,530 |
|
|
1.10 |
|
|
|
|
|
|
|
|
Options exercised |
|
|
(293) |
|
|
0.70 |
|
|
|
|
|
|
|
|
Options cancelled |
|
|
(1,383) |
|
|
4.69 |
|
|
|
|
|
|
|
|
Options outstanding - December 31, 2016 |
|
|
8,798 |
|
$ |
1.46 |
|
|
6.5 |
|
$ |
1,263 |
|
|
Options exercisable - December 31, 2016 |
|
|
5,507 |
|
$ |
1.72 |
|
|
5.3 |
|
$ |
659 |
|
|
Options exercisable and expected to vest - December 31, 2016 |
|
|
8,330 |
|
$ |
1.48 |
|
|
5.3 |
|
$ |
1,179 |
|
The following table summarizes information about stock options outstanding and exercisable at December 31, 2016:
|
|
|
Stock Options Outstanding |
|
Stock Options Exercisable |
|
||||||||||
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
Remaining |
|
Weighted |
|
|
|
Remaining |
|
Weighted |
|
||
|
|
|
Number of |
|
Contractual |
|
Average |
|
Number of |
|
Contractual |
|
Average |
|
||
|
|
|
shares |
|
Life |
|
Exercise |
|
shares |
|
Life |
|
Exercise |
|
||
|
Exercise Price Range |
|
(in thousands) |
|
(in years) |
|
Price |
|
(in thousands) |
|
(in years) |
|
Price |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.20 - $1.00 |
|
4,145 |
|
7.3 |
|
$ |
0.72 |
|
2,188 |
|
6.4 |
|
$ |
0.72 |
|
|
$1.01 - $3.00 |
|
3,839 |
|
6.1 |
|
$ |
1.78 |
|
2,505 |
|
4.6 |
|
$ |
1.94 |
|
|
$3.01 - $5.00 |
|
779 |
|
4.5 |
|
$ |
3.58 |
|
779 |
|
4.5 |
|
$ |
3.58 |
|
|
$5.01 - $8.45 |
|
35 |
|
0.2 |
|
$ |
6.94 |
|
35 |
|
0.2 |
|
$ |
6.94 |
|
|
|
|
8,798 |
|
6.5 |
|
$ |
1.46 |
|
5,507 |
|
5.3 |
|
$ |
1.72 |
|
The following table summarizes the Company’s restricted stock award activity during the periods presented:
|
|
|
Restricted Stock Outstanding |
|
||||
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
Number of |
|
Grant-Date |
|
||
|
|
|
shares |
|
Fair Value |
|
||
|
|
|
(in thousands) |
|
per Share |
|
||
|
Balance outstanding at December 27, 2014 |
|
|
2 |
|
$ |
1.51 |
|
|
Restricted stock granted |
|
|
- |
|
|
- |
|
|
Restricted stock vested |
|
|
(1) |
|
|
1.51 |
|
|
Restricted stock forfeited |
|
|
(1) |
|
|
1.51 |
|
|
Balance outstanding at January 2, 2016 |
|
|
- |
|
$ |
- |
|
The following table presents details of the assumptions used to calculate the weighted-average grant date fair value of common stock options granted by the Company:
|
|
|
Year Ended |
|
||||
|
|
|
December 31, |
|
January 2, |
|
||
|
|
|
2016 |
|
2016 |
|
||
|
Expected term (in years) |
|
|
6.1 |
|
|
6.2 |
|
|
Expected volatility |
|
|
113 |
% |
|
113 |
% |
|
Risk-free interest rate |
|
|
1.50 |
% |
|
1.65 |
% |
|
Expected dividends |
|
$ |
- |
|
$ |
- |
|
|
Weighted-average grant date fair value per share |
|
$ |
0.89 |
|
$ |
0.69 |
|
|
Grant date fair value of options vested (in thousands) |
|
$ |
1,352 |
|
$ |
1,692 |
|
|
Intrinsic value of options exercised (in thousands) |
|
$ |
241 |
|
$ |
5 |
|
As of December 31, 2016, the amount of unearned stock-based compensation currently estimated to be expensed from 2017 through 2019 related to unvested common stock options is approximately $2.2 million, net of estimated forfeitures. The weighted-average period over which the unearned stock-based compensation is expected to be recognized is approximately 2.5 years. If there are any modifications or cancellations of the underlying unvested awards, the Company may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense or calculate and record additional expense. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that the Company grants additional common stock options or other stock-based awards
Warrants
In November 2015, concurrently with the issuance of the SVIC Note (see Note 5), the Company issued to SVIC the SVIC Warrant. The relative fair value of the SVIC Warrant was $1,165,000, which was recorded as a debt discount.
In November 2015, in connection with the termination of the Company’s former loan agreement with Fortress and the Letter Agreement with Drawbridge, the Company issued to Fortress the Fortress Warrant and amended the exercise price per share of the Drawbridge Warrant (see Note 5). The Fortress Warrant and the amended Drawbridge Warrant were valued using the Black-Scholes option pricing model, which computed an estimated fair value of $624,000 for the Fortress Warrant and an estimated incremental fair value of $129,000 for the amended Drawbridge Warrant.
In November 2015, the Company issued warrants to purchase up to of 300,000 and 60,000 shares of the Company’s stock at an exercise price of $0.64 and $0.45 per share, respectively, to two different law firms as partial consideration for legal services rendered (each, a “Law Firm Warrant”). The Law Firm Warrants were valued at $185,000 and $49,000, respectively, based on their estimated fair values using the Black-Scholes option pricing model.
On April 4, 2016, the Drawbridge Warrant was exercised in part on a cashless basis, pursuant to which 1,000,000 shares subject to the warrant were exercised in exchange for the Company’s issuance of an aggregate of 674,300 shares of its common stock. On August 29, 2016, the portion of the Drawbridge Warrant that remained outstanding was exercised in part on a cashless basis, pursuant to which the remaining 648,351 shares subject to the warrant were exercised in exchange for the Company’s issuance of an aggregate of 465,555 shares of its common stock.
On November 22, 2016, the Fortress Warrant was exercised in full on a cashless basis, pursuant to which all 1,000,000 shares subject to the warrant were exercised in exchange for the Company’s issuance of an aggregate of 605,599 shares of its common stock.
On December 22, 2016, one of the Law Firm Warrants, to purchase up to 60,000 shares of the Company’s common stock, was exercised in full on a cash basis, pursuant to which the Company received gross proceeds of $27,000.
The following table summarizes the Company’s warrant activity during the periods presented:
|
|
|
|
|
|
Weighted |
|
|
|
|
|
Number of |
|
Average |
|
||
|
|
|
Shares |
|
Exercise |
|
||
|
|
|
(in thousands) |
|
Price |
|
||
|
Warrants outstanding – December 27, 2014 |
|
|
4,273 |
|
$ |
0.96 |
|
|
Warrant granted |
|
|
3,360 |
|
|
0.38 |
|
|
Warrants exercised |
|
|
- |
|
|
- |
|
|
Warrants outstanding – January 2, 2016 |
|
|
7,633 |
|
$ |
0.59 |
|
|
Warrant granted |
|
|
- |
|
|
- |
|
|
Warrants exercised |
|
|
(2,709) |
|
|
0.47 |
|
|
Warrants outstanding – December 31, 2016 |
|
|
4,924 |
|
$ |
0.66 |
|
|
|||
Note 9—401(k) Plan
The Company sponsors a 401(k) defined contribution retirement savings plan. Employees are eligible to participate in this plan if they are employed full-time and have reached 21 years of age. Participants may make pre-tax contributions to the plan subject to a statutorily prescribed annual limit. Each participant is fully vested in his or her contributions and investment earnings. The Company may make matching contributions on the contributions of a participant on a discretionary basis. The Company adopted a limited matching contribution policy in 2012 and, pursuant to this policy, made $123,000 and $90,000 in matching contributions to participants in this plan in the years ended December 31, 2016 and January 2, 2016, respectively.
|
|||
Note 10—Major Customers, Suppliers and Products
The Company’s product sales are concentrated in a small number of customers. The following table sets forth the percentage of the Company’s net product sales made to customers that each comprise 10% or more of the Company’s net product sales in the periods presented:
|
|
|
Year Ended |
|
||
|
|
|
December 31, |
|
January 2, |
|
|
|
|
2016 |
|
2016 |
|
|
|
|
|
|
|
|
|
Customer A |
|
* |
% |
27 |
% |
|
Customer B |
|
* |
% |
10 |
% |
|
Customer C |
|
16 |
% |
* |
% |
* less than 10% of total net product sales
Sales of the Company’s NVvault™ products represented 0.4% and 20% of net product sales in 2016 and 2015.
Sales of NAND flash products sourced from Samsung under its JDLA agreement represented 21% of our product sales in 2016.
The Company’s accounts receivable are concentrated with two customers at December 31, 2016, representing approximately 27% and 11% of aggregate gross receivables. At January 2, 2016, three customers represented approximately 24%, 19% and 14% of aggregate gross receivables, respectively. The loss of any of the Company’s significant customers or a reduction in sales to or difficulties collecting payments from any of them could significantly reduce the Company’s net product sales and adversely affect its operating results. The Company tries to mitigate risks associated with foreign receivables by purchasing comprehensive foreign credit insurance.
The Company’s purchases are concentrated in a small number of suppliers. The following table sets forth the percentage of the Company’s purchases made from suppliers that each comprise 10% or more of the Company’s total purchases in the periods presented:
|
|
|
Year Ended |
|
||
|
|
|
December 31, |
|
January 2, |
|
|
|
|
2016 |
|
2016 |
|
|
|
|
|
|
|
|
|
Supplier A |
|
* |
% |
14 |
% |
|
Supplier B |
|
* |
% |
12 |
% |
|
Supplier C |
|
73 |
% |
* |
% |
* less than 10% of total purchases
While the Company believes alternative suppliers could be utilized, its dependence on a small number of suppliers and the lack of any guaranteed sources for the essential components of its products exposes the Company to several risks, including the inability to obtain an adequate supply of these components, increases in their costs, delivery delays and poor quality. If the Company is not able to obtain components or other products in the amounts needed on a timely basis and at commercially reasonable prices, it may not be able to develop or introduce new products or it may experience interruptions in the delivery of its products that cause failures to meet customers’ demands. The occurrence of any of these risks could have a material adverse effect on the Company.
|
|||
Note 11—Segment and Geographic Information
The Company operates in one reportable segment: the design and manufacture of high-performance memory subsystems for the server, high-performance computing and communications markets. The Company evaluates financial performance on a company-wide basis.
To date, a majority of the Company’s international sales relate to shipments of products to its U.S. customers’ international manufacturing sites or third‑ party hubs. Net product sales derived from shipments to international destinations, primarily to Hong Kong (including foreign subsidiaries of customers that are headquartered in the United States), represented approximately 26% and 48% of the Company’s net product sales in 2016 and 2015, respectively. All of the Company’s net product sales to date have been denominated in U.S. dollars.
As of December 31, 2016 and January 2, 2016, approximately $0.06 million and $0.1 million, respectively, of the Company’s long-lived assets, net of depreciation and amortization, were located outside the United States, primarily in the PRC. Substantially all other long-lived assets were located in the U
|
|||
Note 12—Subsequent Events
The Company has evaluated subsequent events through the filing date of this Annual Report on Form 10-K and determined that no subsequent events have occurred that would require recognition in the consolidated financial statements or disclosures in the notes thereto other than as discussed in the accompanying notes.
|
|||
Note 13—Quarterly Summary (Unaudited)
The following tables set forth the Company’s quarterly consolidated statements of operations data for the eight quarters ended December 31, 2016. In the opinion of management, this quarterly data has been prepared on the same basis as the audited consolidated financial statements. See Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Annual Report on Form 10-K in which these consolidated financial statements are included for descriptions of the effects of any extraordinary, unusual or infrequently occurring items recognized in any of the periods covered by this quarterly data. The results of operations for any one quarter are not indicative of the results to be expected in the current period or any future period.
Each of the Company’s quarters in its 2016 fiscal year was comprised of 13 weeks. Each of the Company’s quarters in its 2016 fiscal year was comprised of 13 weeks, except for the fourth quarter which was comprised of 14 weeks. Quarterly computations of per share amounts are made independently and, as a result, the sum of per share amounts for the four quarters in any one fiscal year may not add to the per share amount for such fiscal year.
|
|
|
Three Months Ended |
|
||||||||||
|
|
|
December 31, |
|
October 1, |
|
July 2, |
|
April 2, |
|
||||
|
|
|
2016 |
|
2016 |
|
2016 |
|
2016 |
|
||||
|
|
|
(in thousands, except per share data) |
|
||||||||||
|
Net product sales |
|
$ |
5,538 |
|
$ |
2,589 |
|
$ |
3,500 |
|
$ |
1,171 |
|
|
NRE revenue |
|
|
- |
|
|
- |
|
|
3,428 |
|
|
3,429 |
|
|
Total net revenues |
|
|
5,538 |
|
|
2,589 |
|
|
6,928 |
|
|
4,600 |
|
|
Cost of sales |
|
|
5,263 |
|
|
2,580 |
|
|
3,267 |
|
|
1,149 |
|
|
Gross profit |
|
|
275 |
|
|
9 |
|
|
3,661 |
|
|
3,451 |
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
1,347 |
|
|
1,463 |
|
|
1,831 |
|
|
1,646 |
|
|
Intellectual property legal fees |
|
|
855 |
|
|
409 |
|
|
1,023 |
|
|
823 |
|
|
Selling, general and administrative |
|
|
2,211 |
|
|
2,398 |
|
|
2,159 |
|
|
2,265 |
|
|
Total operating expenses |
|
|
4,413 |
|
|
4,270 |
|
|
5,013 |
|
|
4,734 |
|
|
Operating loss |
|
|
(4,138) |
|
|
(4,261) |
|
|
(1,352) |
|
|
(1,283) |
|
|
Other expense, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(150) |
|
|
(159) |
|
|
(132) |
|
|
(137) |
|
|
Other income (expense), net |
|
|
369 |
|
|
19 |
|
|
(10) |
|
|
8 |
|
|
Total other expense, net |
|
|
219 |
|
|
(140) |
|
|
(142) |
|
|
(129) |
|
|
Loss before provision for income taxes |
|
|
(3,919) |
|
|
(4,401) |
|
|
(1,494) |
|
|
(1,412) |
|
|
Provision for income taxes |
|
|
4 |
|
|
- |
|
|
- |
|
|
1 |
|
|
Net loss |
|
$ |
(3,923) |
|
$ |
(4,401) |
|
$ |
(1,494) |
|
$ |
(1,413) |
|
|
Net loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(0.06) |
|
$ |
(0.08) |
|
$ |
(0.03) |
|
$ |
(0.03) |
|
|
Weighted-average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
61,233 |
|
|
52,454 |
|
|
51,080 |
|
|
50,365 |
|
|
|
|
Three Months Ended |
|
||||||||||
|
|
|
January 2, |
|
September 26, |
|
June 27, |
|
March 28, |
|
||||
|
|
|
2016 |
|
2015 |
|
2015 |
|
2015 |
|
||||
|
|
|
(in thousands, except per share data) |
|
||||||||||
|
Net product sales |
|
$ |
1,709 |
|
$ |
1,617 |
|
$ |
1,429 |
|
$ |
2,114 |
|
|
NRE revenue |
|
|
1,143 |
|
|
- |
|
|
- |
|
|
- |
|
|
Total net revenues |
|
|
2,852 |
|
|
1,617 |
|
|
1,429 |
|
|
2,114 |
|
|
Cost of sales |
|
|
1,583 |
|
|
1,593 |
|
|
1,324 |
|
|
1,415 |
|
|
Gross profit |
|
|
1,269 |
|
|
24 |
|
|
105 |
|
|
699 |
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
1,680 |
|
|
1,449 |
|
|
1,536 |
|
|
1,384 |
|
|
Intellectual property legal fees, net of settlement transactions |
|
|
(1,091) |
|
|
899 |
|
|
2,238 |
|
|
3,542 |
|
|
Selling, general and administrative |
|
|
2,628 |
|
|
1,710 |
|
|
1,744 |
|
|
1,759 |
|
|
Total operating expenses |
|
|
3,217 |
|
|
4,058 |
|
|
5,518 |
|
|
6,685 |
|
|
Operating loss |
|
|
(1,948) |
|
|
(4,034) |
|
|
(5,413) |
|
|
(5,986) |
|
|
Other expense, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(648) |
|
|
(447) |
|
|
(489) |
|
|
(480) |
|
|
Other income (expense), net |
|
|
(1,749) |
|
|
(889) |
|
|
1,548 |
|
|
9 |
|
|
Total other expense, net |
|
|
(2,397) |
|
|
(1,336) |
|
|
1,059 |
|
|
(471) |
|
|
Loss before provision for income taxes |
|
|
(4,345) |
|
|
(5,370) |
|
|
(4,354) |
|
|
(6,457) |
|
|
Provision for income taxes |
|
|
- |
|
|
- |
|
|
|
|
|
1 |
|
|
Net loss |
|
$ |
(4,345) |
|
$ |
(5,370) |
|
$ |
(4,354) |
|
$ |
(6,458) |
|
|
Net loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(0.09) |
|
$ |
(0.11) |
|
$ |
(0.09) |
|
$ |
(0.14) |
|
|
Weighted-average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
50,353 |
|
|
50,354 |
|
|
50,354 |
|
|
44,708 |
|
|
|||
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. GAAP”).
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 or 53 week fiscal year ending on the Saturday closest to December 31. The 2016 fiscal year ended on December 31, 2016 and consisted of 52 weeks. Fiscal year 2015 ended on January 2, 2016 and consisted of 53 weeks.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP 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 revenues 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, recoverability of long-lived assets, valuation of stock-based transactions, estimates for completion of NRE revenue milestones 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. Actual results may differ materially from these estimates which may result in material adverse effects on the Company’s operating results and financial position.
Deferred Revenue
From time-to-time the Company receives pre-payments from its customers related to future services. Engineering development fee revenues, including NRE fees, are deferred and recognized ratably over the period the engineering work is completed.
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.
Restricted Cash
Restricted cash generally consists of cash to secure standby letters of credit. Restricted cash was $3.1 million as of December 31, 2016 and related to two standby letters of credits, and restricted cash was $0.4 million as of January 2, 2016 and related to three standby letters of credit.
Fair Value of Financial Instruments
The Company’s financial instruments consist principally of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued expenses and debt instruments. The fair value of the Company’s cash equivalents 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 performs credit evaluations of our customers’ financial condition and limits the amount of credit extended to its customers as deemed necessary, but generally requires no collateral. 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. Generally, the Company’s credit losses have been within expectations and the provisions established. However, the Company cannot guarantee that it will continue to experience credit loss rates similar to those experienced in the past.
The Company’s accounts receivable are highly concentrated among a small number of customers, and a significant change in the liquidity or financial position of one of these customers could have a material adverse effect on the collectability of the Company’s accounts receivable, liquidity and future operating results.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, 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. At times, deposits held with financial institutions may exceed the amount of insurance provided by the Federal Deposit Insurance Corporation and the Securities Investor Protection Corporation.
The Company’s trade accounts receivable are primarily derived from sales to OEMs in the server, high-performance computing and communications markets, as well as from sales to storage customers, appliance customers, system builders and cloud and datacenter customers. 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 10), foreign credit insurance, and letters of credit issued in its favor. 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.
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. Expenditures for repairs and maintenance are expensed as incurred. Upon retirement or sale, the cost and related accumulated depreciation and amortization of disposed assets are removed from the accounts and any resulting gain or loss is included in other expense, net.
Deferred Financing Costs, Debt Discount and Detachable Debt-Related Warrants
Costs incurred to issue debt are deferred and recorded as a reduction to the debt balance in the accompanying consolidated balance sheets. The Company amortizes debt issuance costs over the expected term of the related debt using the effective interest method. Debt discounts relate to the relative fair value of any warrants issued in conjunction with the debt are also recorded as a reduction to the debt balance and accreted over the expected term of the debt to interest expense using the effective interest method.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of the carrying value of long-lived assets held and used by the Company in its operations 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. These projected future cash flows may vary significantly over time as a result of increased competition, changes in technology, fluctuations in demand, consolidation of the Company’s customers and reductions in average selling prices. If the carrying value is determined not to be recoverable from future operating cash flows, the asset is deemed impaired and an impairment loss is recognized to the extent the carrying value exceeds the estimated fair value of the asset. The fair value of the asset or asset group is based on market value when available, or when unavailable, on discounted expected cash flows. The Company’s management believes there is no impairment of long-lived assets as of December 31, 2016. However, market conditions could change or demand for the Company’s products could decrease, which could result in future impairment of long-lived assets.
Warranty Liability
The Company offers product warranties generally ranging from one to three years, depending on the product and negotiated terms of any purchase agreements with its 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 future product return rates and expected repair or replacement costs (see Note 3). While such costs have historically been within management’s expectations and the provisions established, unexpected changes in failure rates could have a material adverse impact on the Company, requiring additional warranty reserves and could adversely affect the Company’s gross profit and gross margins.
Stock-Based Compensation
The Company accounts for equity issuances to non-employees in accordance with FASB 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 estimated 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 FASB 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 accompanying consolidated statements of operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. FASB 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 estimated 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 Securities and Exchange Commission (“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 the Company’s common stock on the grant date and the purchase price of the restricted stock award, if any, reduced by expected forfeitures.
If there are any modifications or cancellations of the underlying vested or unvested stock-based awards, the Company may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense, or record additional expense for vested stock-based awards. Future stock-based compensation expense and unearned stock- based compensation may increase to the extent that the Company grants additional common stock options or other stock-based awards.
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.
The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations may change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings. Therefore, the actual liability for U.S. or foreign taxes may be materially different from the Company’s estimates, which could require the Company to record additional tax liabilities or to reduce previously recorded tax liabilities, as applicable.
Research and Development Expenses
Research and development expenditures are expensed in the period incurred.
Interest Expense
Interest expense consists primarily of interest associated with our issued debt, including fees related to the term loans, accretion of debt discounts and amortization of debt issuance costs. The Company recognizes the accretion of debt discounts and the amortization of interest costs using the effective interest method.
Risks and Uncertainties
The Company is subject to a number of risks and uncertainties, including its ability to obtain profitable operations due to the Company’s history of losses and accumulated deficits, the Company’s dependence on a small number of customers for a substantial portion of its net product sales, risks related to intellectual property matters, market acceptance of and demand for the Company’s products, and the risks described below. These risks could have a material adverse effect on the Company’s consolidated financial position, results of operations and cash flows.
The Company has dedicated substantial resources to the development and protection of technology innovations essential to its business, and the Company expects these activities to continue for the foreseeable future. The Company also intends to aggressively pursue monetization avenues for its intellectual property portfolio, potentially including licensing, royalty or other revenue-producing arrangements. However, the Company’s revenues are currently generated by its product sales and a NRE fee received from Samsung in connection with the JDLA, and it may never be successful in generating a revenue stream from its intellectual property, in which case the Company’s investments of time, capital and other resources into its intellectual property portfolio may not provide adequate, or any, returns.
The Company also dedicates substantial resources to protecting its intellectual property, including its pending patent infringement litigation and U.S. International Trade Commission (“ITC”) proceedings against SK hynix Inc., a South Korean memory semiconductor supplier (“SK hynix”), and its efforts to defend its patents against challenges made by way of reexamination and review proceedings at the U.S. Patent and Trademark Office (“USPTO”) and Patent Trial and Appeal Board (“PTAB”) (see Note 7). The Company expects these activities to continue for the foreseeable future, without any guarantee that any ongoing or future patent protection or litigation activities will be successful. The Company is also subject to litigation based on claims that it has infringed the intellectual property rights of others, against which the Company intends to defend itself vigorously. Moreover, any litigation, regardless of its outcome, would involve a significant dedication of resources, including time and costs, would divert management’s time and attention and could negatively impact the Company’s results of operations. As a result, any current or future infringement claims by or against third parties could materially adversely affect the Company’s business, financial condition or results of operations.
The Company has also invested significant research and development time and costs into the design of application-specific integrated circuit (“ASIC”) and hybrid devices, including its NVvault family of products and most recently its next-generation HybriDIMM memory subsystem. The Company believes that market acceptance of these products or derivative products that incorporate its core memory subsystem technology is critical to its success. However, these products are subject to increased risks as compared to the Company’s legacy products. For example, the Company is dependent on a limited number of suppliers for the DRAM and ASIC devices that are essential to the functionality of these products and in the past it has experienced supply chain disruptions and shortages of DRAM and NAND flash required to create its NVvault family of products, and the Company’s products are generally subject to a product approval and qualification process with customers before purchases are made and the Company has experienced a longer qualification cycle than anticipated with some of these products, including its HyperCloud memory subsystems. These and other risks attendant to the production of the Company’s memory subsystem products could impair its ability to obtain customer or market acceptance of these products or obtain such acceptance in a timely manner, which would reduce the Company’s achievable revenues from these products and limit the Company’s ability to recoup its investments in the products.
The Company’s manufacturing operations in the PRC are subject to various political, geographic and economic risks and uncertainties inherent to conducting business in the PRC. These include, among others, (i) volatility and other potential changes in economic conditions in the region, (ii) managing a local workforce and overcoming other practical barriers, such as language and cultural differences, that may subject the Company to uncertainties or unfamiliar practices or regulatory policies, (iii) risks imposed by the geographic distance between the Company’s headquarters and its PRC operations, including difficulties maintaining the desired amount of control over production capacity and timing, inventory levels, product quality, delivery schedules, manufacturing yields and costs, (iv) the Company’s limited experience creating and overseeing foreign operations generally, (v) changes in the laws and policies of the Chinese government that affect business practices generally or restrict local operations by foreign companies, and (vi) 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, which may be more uncertain following the results of the 2016 U.S. presidential election. Additionally, the Chinese government controls the procedures by which its local currency, the Chinese Renminbi (“RMB”), is converted into other currencies, which generally requires government consent, and imposes legal and regulatory restrictions on the movement of funds outside of the PRC. As a result, RMB may not be freely convertible into other currencies at all times and the Company may need to comply with regulatory procedures to repatriate funds from its Chinese operations. Any changes to currency conversion requirements or any failure by the Company to comply with repatriation procedures and regulations could adversely affect its operating results, liquidity and financial condition. In addition, fluctuations in the exchange rate between RMB and U.S. dollars may adversely affect the Company’s expenses and results of operations, the value of its assets and liabilities and the comparability of its period-to-period results. The liabilities of the Company’s subsidiary in the PRC exceeded its assets as of December 31, 2016 and January 2, 2016.
Foreign Currency Remeasurement
The functional currency of the Company’s foreign subsidiaries 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 2016 and 2015.
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, warrants and restricted stock awards, respectively, computed using the treasury stock method and shares issuable upon conversion of the SVIC note (see Note 5). 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.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in FASB Topic 605, Revenue Recognition. ASU 2014-9 implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. On July 9, 2015, the FASB approved amendments deferring the effective date of the standard by one year to December 15, 2017 for annual reporting periods beginning after that date and permitting early adoption of the standard, but not before the original effective date or for reporting periods beginning after December 15, 2016. The Company will not early adopt the new standard and therefore the new standard will be effective for the Company in the first quarter of its fiscal 2018. The Company has not yet selected a transition method and is currently assessing the impact the adoption of ASU 2014-9 will have on its consolidated financial statements and disclosures
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern. (“ASU 2014-15”) The amendments in this update provide guidance about management’s responsibilities to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The main provision of the amendments are for an entity’s management, in connection with the preparation of financial statements, to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Management’s evaluation should be based on relevant conditions and events that are known or reasonably knowable at the date the consolidated financial statements are issued. When management identifies conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern, the entity should disclose information that enables users of the consolidated financial statements to understand all of the following: (1) principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans); (2) management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations; and (3) management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern or management’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. The Company adopted ASU 2014-15 in the fourth quarter of 2016. The Company has included a discussion, in Note 1 of these consolidated financial statements, which discusses management’s plan to mitigate conditions that might raise doubt about the Company’s ability to continue as a going concern.
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330) ("ASU 2015-11"). The amendments in ASU 2015-11 require that an entity measure inventory within the scope of the standard at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transaction. The amendments in this update more closely align the measurement of inventory in U.S. GAAP with the measurement of inventory in International Financial Reporting Standards. ASU 2015-11 is effective for annual and interim periods beginning on or after December 15, 2016. The Company will adopt this guidance in the first quarter of 2017 and does not expect a material impact on its consolidated financial statements or disclosures.
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”), which eliminates the current requirement for an entity to separate deferred income tax liabilities and assets into current and non-current amounts in a classified balance sheet. Instead, the ASU requires deferred tax liabilities, deferred tax assets and valuation allowances to be classified as non-current in a classified balance sheet. ASU 2015-17 will be effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted. Additionally, this guidance may be applied either prospectively or retrospectively to all periods presented. The Company will adopt this guidance in the first quarter of 2017 and does not expect a material impact on its consolidated financial statements or disclosures.
In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). Under ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees may not apply a full retrospective transition approach. The Company is currently evaluating the impact of adopting of ASU 2016-02 on its consolidated financial statements and disclosures.
In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718) (“ASU 2016-09”), which simplified certain aspects of the accounting for stock-based payment transactions, including income taxes, classification of awards and classification in the statement of cash flows. ASU 2016-09 will be effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods. The Company will adopt this guidance in the first quarter of 2017 and does not expect a material impact on its consolidated financial statements and disclosures.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), which is intended to reduce the existing diversity in practice in how certain cash receipts and cash payments are classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years with early adoption permitted, provided that all of the amendments are adopted in the same period. The Company is currently evaluating the impact of adopting ASU 2016-15 on its consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory (ASU 2016-16), which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This amends current U.S. GAAP which prohibits recognition of current and deferred income taxes for all types of intra-entity asset transfers until the asset has been sold to an outside party. ASU 2016-16 is effective for fiscal years beginning after December 15, 2017, including interim periods therein with early application permitted. Upon adoption, the Company must apply a modified retrospective transition approach through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact of this new standard on its consolidated financial statements and disclosures, as well as its planned adoption date.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash (“ASU 2016-18”), which enhances and clarifies the guidance on the classification and presentation of restricted cash in the statement of cash flows. ASU 2016-18 is effective for fiscal periods beginning after December 15, 2018, including interim periods therein with early application permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements.
|
|||
|
|
|
December 31, |
|
January 2, |
|
||
|
|
|
2016 |
|
2016 |
|
||
|
|
|
(in thousands) |
|
||||
|
Raw materials |
|
$ |
884 |
|
$ |
1,174 |
|
|
Work in process |
|
|
47 |
|
|
98 |
|
|
Finished goods |
|
|
2,229 |
|
|
386 |
|
|
|
|
$ |
3,160 |
|
$ |
1,658 |
|
|
|
|
Estimated |
|
|
|
|
|
|
|
|
|
|
Useful |
|
December 31, |
|
January 2, |
|
||
|
|
|
Lives |
|
2016 |
|
2016 |
|
||
|
|
|
(dollars in thousands) |
|
||||||
|
Machinery and equipment |
|
3 - 7 yrs. |
|
$ |
8,941 |
|
$ |
8,934 |
|
|
Leasehold improvements |
|
* |
|
|
878 |
|
|
867 |
|
|
Furniture and fixtures |
|
5 yrs. |
|
|
375 |
|
|
368 |
|
|
Computer equipment and software |
|
3 - 7 yrs. |
|
|
4,045 |
|
|
3,788 |
|
|
|
|
|
|
|
14,239 |
|
|
13,957 |
|
|
Less accumulated depreciation and amortization |
|
|
|
|
(13,594) |
|
|
(13,549) |
|
|
|
|
|
|
$ |
645 |
|
$ |
408 |
|
*Estimated useful life is generally seven years, or the remaining lease term, whichever is shorter.
|
|
|
Year Ended |
|
||||
|
|
|
December 31, |
|
January 2, |
|
||
|
|
|
2016 |
|
2016 |
|
||
|
|
|
(in thousands) |
|
||||
|
Beginning balance |
|
$ |
122 |
|
$ |
246 |
|
|
Estimated cost of warranty claims charged to cost of sales |
|
|
49 |
|
|
41 |
|
|
Cost of actual warranty claims |
|
|
(82) |
|
|
(165) |
|
|
Ending balance |
|
|
89 |
|
|
122 |
|
|
Less current portion |
|
|
(53) |
|
|
(73) |
|
|
Long-term warranty liability |
|
$ |
36 |
|
$ |
49 |
|
|
|
|
Year Ended |
|
||||
|
|
|
December 31, |
|
January 2, |
|
||
|
|
|
2016 |
|
2016 |
|
||
|
|
|
(in thousands, except per share data) |
|
||||
|
Basic and diluted net loss per share: |
|
|
|
|
|
|
|
|
Numerator: Net loss |
|
$ |
(11,231) |
|
$ |
(20,527) |
|
|
Denominator: Weighted-average common shares |
|
|
|
|
|
|
|
|
outstanding, basic and diluted |
|
|
53,784 |
|
|
48,967 |
|
|
Basic and diluted net loss per share |
|
$ |
(0.21) |
|
$ |
(0.42) |
|
|
|
|
Year Ended |
|
||||
|
|
|
December 31, |
|
January 2, |
|
||
|
|
|
2016 |
|
2016 |
|
||
|
|
|
(in thousands) |
|
||||
|
Common share equivalents |
|
|
12,883 |
|
|
12,101 |
|
|
|
|
Year Ended |
|
||||
|
|
|
December 31, |
|
January 2, |
|
||
|
|
|
2016 |
|
2016 |
|
||
|
|
|
(in thousands) |
|
||||
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid (received) during the year for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
131 |
|
$ |
906 |
|
|
Income taxes |
|
$ |
- |
|
$ |
4 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash financing activities: |
|
|
|
|
|
|
|
|
Debt issuance costs associated with February 2015 debt financing |
|
$ |
- |
|
$ |
108 |
|
|
Detachable warrant issued with November 2015 debt financing |
|
$ |
- |
|
$ |
1,165 |
|
|
Acquisition of equipment through capital lease |
|
$ |
179 |
|
$ |
- |
|
|
Debt financing of insurance |
|
$ |
264 |
|
$ |
268 |
|
|
|||
|
|
|
|
|
December 31, |
|
January 2, |
||
|
|
|
|
|
2016 |
|
2016 |
||
|
|
|
|
|
(in thousands) |
||||
|
Convertible promissory note, SVIC, net of debt discount of $1,084 and $1,301 in 2016 and 2015, respectively |
|
|
|
$ |
13,916 |
|
$ |
13,699 |
|
Accrued interest on convertible promissory note with SVIC |
|
|
|
|
335 |
|
|
36 |
|
Notes payable and capital lease obligation |
|
|
|
|
151 |
|
|
13 |
|
|
|
|
|
$ |
14,402 |
|
$ |
13,748 |
|
Less current portion |
|
|
|
|
(151) |
|
|
(13) |
|
|
|
|
|
$ |
14,251 |
|
$ |
13,735 |
|
Fiscal Year |
|
|
|
(in thousands) |
|
|
2017 |
|
|
|
$ |
151 |
|
2018 |
|
|
|
|
- |
|
2018 |
|
|
|
|
- |
|
2019 |
|
|
|
|
- |
|
2020 |
|
|
|
|
- |
|
Thereafter |
|
|
|
|
15,335 |
|
Total payments on long-term debt |
|
|
|
|
15,486 |
|
Less current portion (including debt discount and debt issuance costs) |
|
|
|
|
(1,235) |
|
Long-term debt |
|
|
|
$ |
14,251 |
|
|
|
|
|
Year Ended |
||||
|
|
|
|
|
December 31, |
|
January 2, |
||
|
|
|
|
|
2016 |
|
2016 |
||
|
Interest expense: |
|
|
|
(in thousands) |
||||
|
SVB |
|
|
|
$ |
48 |
|
$ |
71 |
|
Fortress Credit Opportunities I LP (repaid in fiscal 2015) |
|
|
|
|
- |
|
|
1,940 |
|
SVIC |
|
|
|
|
523 |
|
|
54 |
|
Others |
|
|
|
|
23 |
|
|
4 |
|
|
|
|
|
|
594 |
|
|
2,069 |
|
Interest income |
|
|
|
|
(16) |
|
|
(5) |
|
|
|
|
|
$ |
578 |
|
$ |
2,064 |
|
|||
|
|
|
December 31, |
|
January 2, |
|
||
|
|
|
2016 |
|
2016 |
|
||
|
Deferred tax assets: |
|
(in thousands) |
|
||||
|
Reserves and allowances |
|
$ |
1,570 |
|
$ |
1,548 |
|
|
State taxes, net of federal income tax benefit |
|
|
1 |
|
|
2 |
|
|
Depreciation and amortization |
|
|
146 |
|
|
543 |
|
|
Other accruals |
|
|
226 |
|
|
394 |
|
|
Compensatory stock options and rights |
|
|
1,996 |
|
|
2,598 |
|
|
Other |
|
|
51 |
|
|
28 |
|
|
Tax credit carryforwards |
|
|
3,906 |
|
|
3,302 |
|
|
Operating loss carryforward |
|
|
35,424 |
|
|
30,315 |
|
|
Foreign operating loss carryforward |
|
|
1,192 |
|
|
1,480 |
|
|
Total deferred tax assets |
|
|
44,512 |
|
|
40,210 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Prepaid expenses |
|
|
(76) |
|
|
(63) |
|
|
Basis difference in warrant value |
|
|
(73) |
|
|
(452) |
|
|
Total deferred tax liabilities |
|
|
(149) |
|
|
(515) |
|
|
Subtotal |
|
|
44,363 |
|
|
39,695 |
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance |
|
|
(44,363) |
|
|
(39,695) |
|
|
|
|
$ |
- |
|
$ |
- |
|
|
|
|
Year Ended |
|
||||
|
|
|
December 31, |
|
January 2, |
|
||
|
|
|
2016 |
|
2016 |
|
||
|
|
|
(in thousands) |
|
||||
|
United States |
|
$ |
(10,606) |
|
$ |
(19,737) |
|
|
Foreign |
|
|
(620) |
|
|
(789) |
|
|
|
|
$ |
(11,226) |
|
$ |
(20,526) |
|
|
|
|
Year Ended |
|
||||
|
|
|
December 31, |
|
January 2, |
|
||
|
|
|
2016 |
|
2016 |
|
||
|
|
|
(in thousands) |
|
||||
|
Current: |
|
|
|
|
|
|
|
|
Federal |
|
$ |
- |
|
$ |
- |
|
|
State |
|
|
5 |
|
|
1 |
|
|
Total current |
|
|
5 |
|
|
1 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
Federal |
|
|
(3,349) |
|
|
(6,093) |
|
|
State |
|
|
(1,607) |
|
|
(684) |
|
|
Foreign |
|
|
288 |
|
|
344 |
|
|
Change in valuation allowance |
|
|
4,668 |
|
|
6,433 |
|
|
Total deferred |
|
|
- |
|
|
- |
|
|
Income tax provision |
|
$ |
5 |
|
$ |
1 |
|
A reconciliation of income taxes computed by applying the statutory U.S. income tax rate to the Company’s loss before income taxes to the income tax provision is as follows:
|
|
|
Year Ended |
|||||
|
|
|
December 31, |
|
January 2, |
|
||
|
|
|
2016 |
|
2016 |
|
||
|
|
|
|
|
||||
|
U.S. federal statutory tax |
|
|
34 |
% |
|
35 |
% |
|
Valuation allowance |
|
|
(29) |
|
|
(32) |
|
|
Loss from foreign subsidiary |
|
|
(2) |
|
|
(2) |
|
|
Other |
|
|
(3) |
|
|
(1) |
|
|
Effective income tax provision rate |
|
|
0 |
% |
|
0 |
% |
|
|||
The following table shows rental expense, net of amortization of deferred gain and sublease income, for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
||||
|
|
|
December 31 |
|
January 2, |
|
||
|
|
|
2016 |
|
2016 |
|
||
|
|
|
|
|
|
|
|
|
|
Rental expense, net |
|
$ |
482 |
|
$ |
526 |
|
A summary of future minimum payments under operating lease commitments as of December 31, 2016 is as follows (in thousands):
|
|
|
|
|
|
Operating |
|
|
Fiscal Year |
|
|
|
|
Leases |
|
|
2017 |
|
|
|
|
$ |
201 |
|
|||
|
|
|
Stock Options Outstanding |
|
||||||||||
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
Remaining |
|
Aggregate |
|
|||
|
|
|
Number of |
|
Average |
|
Contractual |
|
Intrinsic |
|
||||
|
|
|
Shares |
|
Exercise |
|
Life |
|
Value |
|
||||
|
|
|
(in thousands) |
|
Price |
|
(in years) |
|
(in thousands) |
|
||||
|
Options outstanding - December 27, 2014 |
|
|
7,234 |
|
$ |
2.40 |
|
|
|
|
|
|
|
|
Options granted |
|
|
2,515 |
|
|
0.81 |
|
|
|
|
|
|
|
|
Options exercised |
|
|
(10) |
|
|
0.73 |
|
|
|
|
|
|
|
|
Options cancelled |
|
|
(795) |
|
|
2.06 |
|
|
|
|
|
|
|
|
Options outstanding - January 2, 2016 |
|
|
8,944 |
|
|
1.98 |
|
|
|
|
|
|
|
|
Options granted |
|
|
1,530 |
|
|
1.10 |
|
|
|
|
|
|
|
|
Options exercised |
|
|
(293) |
|
|
0.70 |
|
|
|
|
|
|
|
|
Options cancelled |
|
|
(1,383) |
|
|
4.69 |
|
|
|
|
|
|
|
|
Options outstanding - December 31, 2016 |
|
|
8,798 |
|
$ |
1.46 |
|
|
6.5 |
|
$ |
1,263 |
|
|
Options exercisable - December 31, 2016 |
|
|
5,507 |
|
$ |
1.72 |
|
|
5.3 |
|
$ |
659 |
|
|
Options exercisable and expected to vest - December 31, 2016 |
|
|
8,330 |
|
$ |
1.48 |
|
|
5.3 |
|
$ |
1,179 |
|
The following table summarizes information about stock options outstanding and exercisable at December 31, 2016:
|
|
|
Stock Options Outstanding |
|
Stock Options Exercisable |
|
||||||||||
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
Remaining |
|
Weighted |
|
|
|
Remaining |
|
Weighted |
|
||
|
|
|
Number of |
|
Contractual |
|
Average |
|
Number of |
|
Contractual |
|
Average |
|
||
|
|
|
shares |
|
Life |
|
Exercise |
|
shares |
|
Life |
|
Exercise |
|
||
|
Exercise Price Range |
|
(in thousands) |
|
(in years) |
|
Price |
|
(in thousands) |
|
(in years) |
|
Price |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.20 - $1.00 |
|
4,145 |
|
7.3 |
|
$ |
0.72 |
|
2,188 |
|
6.4 |
|
$ |
0.72 |
|
|
$1.01 - $3.00 |
|
3,839 |
|
6.1 |
|
$ |
1.78 |
|
2,505 |
|
4.6 |
|
$ |
1.94 |
|
|
$3.01 - $5.00 |
|
779 |
|
4.5 |
|
$ |
3.58 |
|
779 |
|
4.5 |
|
$ |
3.58 |
|
|
$5.01 - $8.45 |
|
35 |
|
0.2 |
|
$ |
6.94 |
|
35 |
|
0.2 |
|
$ |
6.94 |
|
|
|
|
8,798 |
|
6.5 |
|
$ |
1.46 |
|
5,507 |
|
5.3 |
|
$ |
1.72 |
|
|
|
|
Restricted Stock Outstanding |
|
||||
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
Number of |
|
Grant-Date |
|
||
|
|
|
shares |
|
Fair Value |
|
||
|
|
|
(in thousands) |
|
per Share |
|
||
|
Balance outstanding at December 27, 2014 |
|
|
2 |
|
$ |
1.51 |
|
|
Restricted stock granted |
|
|
- |
|
|
- |
|
|
Restricted stock vested |
|
|
(1) |
|
|
1.51 |
|
|
Restricted stock forfeited |
|
|
(1) |
|
|
1.51 |
|
|
Balance outstanding at January 2, 2016 |
|
|
- |
|
$ |
- |
|
|
|
|
Year Ended |
|
||||
|
|
|
December 31, |
|
January 2, |
|
||
|
|
|
2016 |
|
2016 |
|
||
|
Expected term (in years) |
|
|
6.1 |
|
|
6.2 |
|
|
Expected volatility |
|
|
113 |
% |
|
113 |
% |
|
Risk-free interest rate |
|
|
1.50 |
% |
|
1.65 |
% |
|
Expected dividends |
|
$ |
- |
|
$ |
- |
|
|
Weighted-average grant date fair value per share |
|
$ |
0.89 |
|
$ |
0.69 |
|
|
Grant date fair value of options vested (in thousands) |
|
$ |
1,352 |
|
$ |
1,692 |
|
|
Intrinsic value of options exercised (in thousands) |
|
$ |
241 |
|
$ |
5 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
Number of |
|
Average |
|
||
|
|
|
Shares |
|
Exercise |
|
||
|
|
|
(in thousands) |
|
Price |
|
||
|
Warrants outstanding – December 27, 2014 |
|
|
4,273 |
|
$ |
0.96 |
|
|
Warrant granted |
|
|
3,360 |
|
|
0.38 |
|
|
Warrants exercised |
|
|
- |
|
|
- |
|
|
Warrants outstanding – January 2, 2016 |
|
|
7,633 |
|
$ |
0.59 |
|
|
Warrant granted |
|
|
- |
|
|
- |
|
|
Warrants exercised |
|
|
(2,709) |
|
|
0.47 |
|
|
Warrants outstanding – December 31, 2016 |
|
|
4,924 |
|
$ |
0.66 |
|
|
|||
|
|
|
Year Ended |
|
||
|
|
|
December 31, |
|
January 2, |
|
|
|
|
2016 |
|
2016 |
|
|
|
|
|
|
|
|
|
Customer A |
|
* |
% |
27 |
% |
|
Customer B |
|
* |
% |
10 |
% |
|
Customer C |
|
16 |
% |
* |
% |
* less than 10% of total net product sales
The Company’s purchases are concentrated in a small number of suppliers. The following table sets forth the percentage of the Company’s purchases made from suppliers that each comprise 10% or more of the Company’s total purchases in the periods presented:
|
|
|
Year Ended |
|
||
|
|
|
December 31, |
|
January 2, |
|
|
|
|
2016 |
|
2016 |
|
|
|
|
|
|
|
|
|
Supplier A |
|
* |
% |
14 |
% |
|
Supplier B |
|
* |
% |
12 |
% |
|
Supplier C |
|
73 |
% |
* |
% |
* less than 10% of total purchases
|
|||
|
|
|
Three Months Ended |
|
||||||||||
|
|
|
December 31, |
|
October 1, |
|
July 2, |
|
April 2, |
|
||||
|
|
|
2016 |
|
2016 |
|
2016 |
|
2016 |
|
||||
|
|
|
(in thousands, except per share data) |
|
||||||||||
|
Net product sales |
|
$ |
5,538 |
|
$ |
2,589 |
|
$ |
3,500 |
|
$ |
1,171 |
|
|
NRE revenue |
|
|
- |
|
|
- |
|
|
3,428 |
|
|
3,429 |
|
|
Total net revenues |
|
|
5,538 |
|
|
2,589 |
|
|
6,928 |
|
|
4,600 |
|
|
Cost of sales |
|
|
5,263 |
|
|
2,580 |
|
|
3,267 |
|
|
1,149 |
|
|
Gross profit |
|
|
275 |
|
|
9 |
|
|
3,661 |
|
|
3,451 |
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
1,347 |
|
|
1,463 |
|
|
1,831 |
|
|
1,646 |
|
|
Intellectual property legal fees |
|
|
855 |
|
|
409 |
|
|
1,023 |
|
|
823 |
|
|
Selling, general and administrative |
|
|
2,211 |
|
|
2,398 |
|
|
2,159 |
|
|
2,265 |
|
|
Total operating expenses |
|
|
4,413 |
|
|
4,270 |
|
|
5,013 |
|
|
4,734 |
|
|
Operating loss |
|
|
(4,138) |
|
|
(4,261) |
|
|
(1,352) |
|
|
(1,283) |
|
|
Other expense, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(150) |
|
|
(159) |
|
|
(132) |
|
|
(137) |
|
|
Other income (expense), net |
|
|
369 |
|
|
19 |
|
|
(10) |
|
|
8 |
|
|
Total other expense, net |
|
|
219 |
|
|
(140) |
|
|
(142) |
|
|
(129) |
|
|
Loss before provision for income taxes |
|
|
(3,919) |
|
|
(4,401) |
|
|
(1,494) |
|
|
(1,412) |
|
|
Provision for income taxes |
|
|
4 |
|
|
- |
|
|
- |
|
|
1 |
|
|
Net loss |
|
$ |
(3,923) |
|
$ |
(4,401) |
|
$ |
(1,494) |
|
$ |
(1,413) |
|
|
Net loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(0.06) |
|
$ |
(0.08) |
|
$ |
(0.03) |
|
$ |
(0.03) |
|
|
Weighted-average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
61,233 |
|
|
52,454 |
|
|
51,080 |
|
|
50,365 |
|
|
|
|
Three Months Ended |
|
||||||||||
|
|
|
January 2, |
|
September 26, |
|
June 27, |
|
March 28, |
|
||||
|
|
|
2016 |
|
2015 |
|
2015 |
|
2015 |
|
||||
|
|
|
(in thousands, except per share data) |
|
||||||||||
|
Net product sales |
|
$ |
1,709 |
|
$ |
1,617 |
|
$ |
1,429 |
|
$ |
2,114 |
|
|
NRE revenue |
|
|
1,143 |
|
|
- |
|
|
- |
|
|
- |
|
|
Total net revenues |
|
|
2,852 |
|
|
1,617 |
|
|
1,429 |
|
|
2,114 |
|
|
Cost of sales |
|
|
1,583 |
|
|
1,593 |
|
|
1,324 |
|
|
1,415 |
|
|
Gross profit |
|
|
1,269 |
|
|
24 |
|
|
105 |
|
|
699 |
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
1,680 |
|
|
1,449 |
|
|
1,536 |
|
|
1,384 |
|
|
Intellectual property legal fees, net of settlement transactions |
|
|
(1,091) |
|
|
899 |
|
|
2,238 |
|
|
3,542 |
|
|
Selling, general and administrative |
|
|
2,628 |
|
|
1,710 |
|
|
1,744 |
|
|
1,759 |
|
|
Total operating expenses |
|
|
3,217 |
|
|
4,058 |
|
|
5,518 |
|
|
6,685 |
|
|
Operating loss |
|
|
(1,948) |
|
|
(4,034) |
|
|
(5,413) |
|
|
(5,986) |
|
|
Other expense, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(648) |
|
|
(447) |
|
|
(489) |
|
|
(480) |
|
|
Other income (expense), net |
|
|
(1,749) |
|
|
(889) |
|
|
1,548 |
|
|
9 |
|
|
Total other expense, net |
|
|
(2,397) |
|
|
(1,336) |
|
|
1,059 |
|
|
(471) |
|
|
Loss before provision for income taxes |
|
|
(4,345) |
|
|
(5,370) |
|
|
(4,354) |
|
|
(6,457) |
|
|
Provision for income taxes |
|
|
- |
|
|
- |
|
|
|
|
|
1 |
|
|
Net loss |
|
$ |
(4,345) |
|
$ |
(5,370) |
|
$ |
(4,354) |
|
$ |
(6,458) |
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|
Net loss per common share: |
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|
|
|
|
|
|
|
|
|
|
|
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|
Basic and diluted |
|
$ |
(0.09) |
|
$ |
(0.11) |
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$ |
(0.09) |
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$ |
(0.14) |
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|
Weighted-average common shares outstanding: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
50,353 |
|
|
50,354 |
|
|
50,354 |
|
|
44,708 |
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