Item 2. Management’s Discussion and Analysis
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Note About Forward-Looking Statements
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) and other parts of this report include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements other than historical facts and often address future events or our future performance. Words such as "anticipate," "estimate," "expect," "project," "intend," "may," “will,” “might,” "plan," "predict," "believe," "should," “could” and similar words or expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.
Forward-looking statements contained in this MD&A include statements about, among other things:
● specific and overall impacts of the COVID-19 pandemic on our financial condition and results of operations;
● our beliefs regarding the market and demand for our products or the component products we resell;
● our ability to develop and launch new products that are attractive to the market and stimulate customer demand for these products;
● our plans relating to our intellectual property, including our goals of monetizing, licensing, expanding and defending our patent portfolio;
● our expectations and strategies regarding outstanding legal proceedings and patent reexaminations relating to our intellectual property portfolio, including our pending proceedings against SK hynix Inc., a South Korean memory semiconductor supplier (“SK hynix”);
● our expectations with respect to any strategic partnerships or other similar relationships we may pursue;
● the competitive landscape of our industry;
● general market, economic and political conditions;
● our business strategies and objectives;
● our expectations regarding our future operations and financial position, including revenues, costs and prospects, and our liquidity and capital resources, including cash flows, sufficiency of cash resources, efforts to reduce expenses and the potential for future financings; and
● the impact of the above factors and other future events on the market price and trading volume of our common stock.
All forward-looking statements reflect management’s present assumptions, expectations and beliefs regarding future events and are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those expressed in or implied by any forward-looking statements. These risks and uncertainties include those described under “Risk Factors” in Part II, Item 1A of this report. In light of these risks and uncertainties, our forward-looking statements should not be relied on as predictions of future events. Additionally, many of these risks and uncertainties are currently elevated by and may or will continue to be elevated by the COVID-19 pandemic. All forward-looking statements reflect our assumptions, expectations and beliefs only as of the date they are made, and except as required by law, we undertake no obligation to revise or update any forward-looking statements for any reason.
The following MD&A should be read in conjunction with our condensed consolidated financial statements and the related notes included in Part I, Item 1 of this report, as well as our Annual Report on Form 10-K for our fiscal year ended December 28, 2019 (the “2019 Annual Report”) filed with the Securities and Exchange Commission (the “SEC”). All information presented herein is based on our fiscal calendar, and references to particular years, quarters, months or periods refer to our fiscal years ended in January or December and the associated quarters, months and periods of those fiscal years. Each of the terms the “Company,” “Netlist,” “we,” “us,” or “our” as used herein refers collectively to Netlist, Inc. and its consolidated subsidiaries, unless otherwise stated.
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Overview
We provide high-performance modular memory subsystems to customers in diverse industries that require enterprise and storage class memory solutions to empower critical business decisions. We have a history of introducing disruptive new products, such as one of the first load reduced dual in-line memory modules ("LRDIMM") based on our distributed buffer architecture, which has been adopted by the industry for DDR4 LRDIMM. We were also one of the first to bring NAND flash memory ("NAND flash") to the memory channel with our 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. We also offer storage class memory products called HybriDIMM to address the growing need for real-time analytics in Big Data applications, in-memory databases, high performance computing and advanced data storage solutions. We publicly demonstrated a HybriDIMM prototype in August 2016 and sampled HybriDIMM to select customers in the second half of 2017. We are continuously developing and improving upon the HybriDIMM product while exploring opportunities with strategic partners.
Due to the ground-breaking product development of our engineering teams, we have built a robust portfolio of over 130 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 our inception, we have dedicated substantial resources to the development, protection and enforcement of technology innovations we believe are essential to our business. Our early pioneering work in these areas has been broadly adopted in industry-standard registered dual in-line memory modules (“RDIMM”), LRDIMM and in NVDIMM. Our objective is to continue to innovate in our field and invest further in our intellectual property portfolio, with the goal of monetizing our 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.
We also resell solid state drive (“SSD”), NAND flash, DRAM products and other component products to end-customers that are not reached in the distribution models of the component manufacturers, including storage customers, appliance customers, system builders and cloud and datacenter customers.
During the second quarter of 2020, we recorded net sales of $10.9 million, gross profit of $1.8 million and net loss of $1.8 million. We have historically financed our operations primarily with proceeds from issuances of equity and debt securities and cash receipts from revenues, including from product sales and a non-recurring engineering (“NRE”) fee from our November 2015 joint development and license agreement (“JDLA”) with Samsung Electronics Co., Ltd (“Samsung”). We have also funded our operations with a revolving line of credit and term loans under a bank credit facility, a funding arrangement for costs associated with certain of our legal proceedings against SK hynix and, to a lesser extent, equipment leasing arrangements. See “Recent Developments” and “Liquidity and Capital Resources” below for more information.
Recent Developments
Developments relating to SK hynix Proceedings
We have taken action to protect and defend our innovations by filing legal proceedings for patent infringement against SK hynix and two of its subsidiaries in the U.S. International Trade Commission (“ITC”), U.S. district court and the courts of Germany. In our second ITC action against SK hynix, on April 12, 2018, the ITC granted SK hynix’s motion for summary determination of non-infringement and terminated the investigation in its entirety. On April 23, 2018, the Company filed a petition seeking ITC review of this decision. On May 29, 2018, the ITC Commission remanded the Second ITC Action back to the ALJ to resolve the parties’ claim construction disputes and continue the investigation. On June 14, 2018, the ITC extended the target date for the final determination to August 5, 2019, with a final initial determination due by April 5, 2019. Based on this extended target date, the ITC scheduled a hearing on the merits to begin on December 14, 2018 and conclude on December 21, 2018. On September 13, 2018, the ITC rescheduled the hearing on the merits to begin on January 14, 2019 and conclude on January 18, 2019. On January 29, 2019, due to the government shutdown, the ITC again rescheduled the hearing on the merits to begin on March 11, 2019 and conclude on March 15, 2019. On March 12, 2019 the ALJ postponed the trial due to reasons unrelated to the dispute
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between the parties. The trial recommenced on July 15, 2019 and ended on July 19, 2019. An initial determination regarding our second ITC action against SK hynix was issued on October 21, 2019. In the initial determination, the Chief Administrative Law Judge found in Netlist’s favor held there was a violation of Section 337 of the Tariff Act of 1930 as amended with respect to U.S. Patent No. 9,606,907 and alternatively found there was no violation with respect to U.S. Patent No. 9,535,623. A final determination regarding our second ITC action against SK Hynix was issued on April 7, 2020. In the final determination, the ITC found no violation of section 337 of the Tariff Act of 1930, as amended with respect to U.S. Patent No. 9,606,907. Netlist has elected not to appeal this decision.
On January 31, 2019, the court in Germany found there was no infringement of the Utility Model asserted and dismissed the case. We do not intend to appeal this ruling. In our two separate ITC actions against SK hynix, we have requested exclusion orders that direct U.S. Customs and Border Protection to stop allegedly infringing SK hynix RDIMM and LRDIMM products from entering the United States. In our U.S. district court proceedings (which are currently stayed), we are primarily seeking damages. All of our patents involved in these proceedings allegedly cover key features of RDIMM and LRDIMM products.
On January 16, 2018, the ITC issued a final determination regarding our first ITC action against SK hynix filed in September 2016, in which it concluded there was no infringement of the patents in this action and terminated the ITC’s investigation related to these proceedings. We appealed this final determination to the Court of Appeals for the Federal Circuit, and oral arguments for this appeal were scheduled for December 5, 2019 at the Court of Appeals for the Federal Circuit. On December 12, 2019, the Court of Appeals for the Federal Circuit affirmed the invalidity ruling by the Patent Trial and Appeal Board involving the patents in litigation at the first ITC Action and dismissed the appeal of the final determination of the first ITC Action as moot.
First Amendment to TRGP Agreement
On January 23, 2020, we entered into the first amendment to the investment agreement dated May 3, 2017 with TR Global Funding V, LLC (“TRGP”) (“TRGP Agreement”) to amend the recovery sharing formula related to claims against SK hynix for alleged infringement of our patents. TRGP Agreement generally provided that TRGP directly fund the costs incurred by us or on our behalf in connection with our first ITC action and our U.S. district court proceedings against SK hynix.
Amendment to SVB Credit Agreement
On February 27, 2020, we entered into an amendment to a credit agreement dated October 31, 2009 with Silicon Valley Bank (“SVB”) (as the same may from time to time be amended, modified, supplemented or restated, the “SVB Credit Agreement”) to extend the maturity date of the borrowings under the SVB Credit Agreement from March 30, 2020 to April 30, 2021.
2019 Lincoln Park Purchase Agreement
On June 24, 2019, we entered into a purchase agreement (the “2019 Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which we have the right to sell to Lincoln Park up to an aggregate of $10 million in shares of our common stock over the 36-month term of the Purchase Agreement subject to the conditions and limitations set forth in the 2019 Purchase Agreement. During the six months ended June 27, 2020 and subsequent to June 27, 2020, Lincoln Park did not purchase shares of our common stock under the 2019 Purchase Agreement.
2020 Lincoln Park Purchase Agreement
On March 5, 2020, we entered into another purchase agreement (the “2020 Purchase Agreement”) with Lincoln Park, pursuant to which we have the right to sell to Lincoln Park up to an aggregate of $20 million in shares of our common stock over the 36-month term of the 2020 Purchase Agreement subject to the conditions and limitations set forth in the 2020 Purchase Agreement. As consideration for entering into the 2020 Purchase Agreement, we issued to Lincoln Park 1,529,052 shares of our common stock as initial commitment shares in a noncash transaction on March 6, 2020 and will issue up to 917,431 additional shares of our common stock as additional commitment shares on a pro rata
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basis in connection with any additional purchases. We will not receive any cash proceeds from the issuance of these additional commitment shares. During the six months ended June 27, 2020, Lincoln Park purchased an aggregate of 9,651,964 shares of our common stock for a net purchase price of $2.8 million under the 2020 Purchase Agreement. In connection with the purchases, we issued to Lincoln Park an aggregate of 128,790 shares of our common stock as commitment shares in noncash transactions.
Subsequent to June 27, 2020, Lincoln Park purchased an aggregate of 13,198,158 shares of our common stock for a net purchase price of $9.0 million under the 2020 Purchase Agreement. In connection with the purchases, we issued to Lincoln Park an aggregate of 414,642 shares of our common stock as commitment shares in noncash transactions.
Paycheck Protection Program Loan
On April 23, 2020, we entered into an unsecured promissory note with a principal amount of $0.6 million through Hanmi Bank under the Paycheck Protection Program (“PPP”) (“PPP Loan”) administered by the Small Business Administration (“SBA”) and established as part of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The PPP Loan bears interest at 1.0% per annum and matures in April 2022 with the first six months of interest and principal payments deferred. The amount borrowed under the PPP Loan is eligible for forgiveness if we meet certain conditions.
Economic Conditions, Challenges and Risks
Our performance, financial condition and prospects are affected by a number of factors and are exposed to a number of risks and uncertainties. We operate in a competitive and rapidly evolving industry in which new risks emerge from time to time, and it is not possible for us to predict all of the risks we may face, nor can we assess the impact of all factors on our business or the extent to which any factor or combination of factors could cause actual results to differ from our expectations. See the discussion of certain risks that we face under “Risk Factors” in Part II, Item 1A of this report.
Impact of COVID-19 on our Business
The impact of the coronavirus disease (“COVID-19”) pandemic will have on our consolidated results of operations is uncertain. Although we initially observed demand increases in our products, we anticipate that the global health crisis caused by COVID-19 may negatively impact business activity across the globe. We will continue to actively monitor the situation and may take further actions altering our business operations that we determine are in the best interests of our employees, customers, suppliers, and stakeholders, or as required by federal, state, or local authorities. It is not clear what the potential effects of such alterations or modifications may have on our business, consolidated results of operations, financial condition, and liquidity.
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Summary Results of Operations
Three Months Ended
Six Months Ended
June 27,
June 29,
%
June 27,
June 29,
%
(dollars in thousands, except per share amounts)
2020
2019
Change
2020
2019
Change
Net sales
$
10,906
$
5,512
98%
$
25,537
$
10,617
141%
Gross profit
1,826
404
352%
3,935
683
476%
Operating loss
(1,677)
(3,258)
(49%)
(3,068)
(7,037)
(56%)
Net loss
(1,830)
(3,519)
(48%)
(3,372)
(7,569)
(55%)
Net loss per share—basic and diluted
(0.01)
(0.02)
(50%)
(0.02)
(0.05)
(60%)
Net Sales and Gross Profit
Net sales, cost of sales and gross profit for the three and six months ended June 27, 2020 and June 29, 2019 were as follows (dollars in thousands):
Three Months Ended
Six Months Ended
June 27,
June 29,
%
June 27,
June 29,
%
2020
2019
Change
2020
2019
Change
Net sales
$
10,906
$
5,512
98%
$
25,537
$
10,617
141%
Cost of sales
9,080
5,108
78%
21,602
9,934
117%
Gross profit
$
1,826
$
404
352%
$
3,935
$
683
476%
Gross margin
16.7%
7.3%
15.4%
6.4%
Net Sales
Net sales include resales of certain component products, including SSDs and DRAM products, and sales of our high-performance memory subsystems.
Net sales increased by $5.4 million during the second quarter of 2020 compared to the same quarter of 2019 primarily as a result of a $4.1 million overall increase in sales of NAND flash products (including a $3.1 million increase in Netlist’s flash SSD products and a $0.9 million increase in the resales of NAND flash products), and a $1.3 million increase in sales of other small outline dual in-line memory module (“SODIMM”) and RDIMM products.
Net sales increased by $14.9 million during the first six months of 2020 compared to the same period in 2019 primarily as a result of a $10.2 million increase in sales of NAND flash products (including a $4.9 million increase in Netlist’s flash SSD products and a $5.2 million increase in the resales of NAND flash products) and a $4.7 million overall increase in sales of SODIMM and RDIMM products (a $3.5 million increase in the resales of SODIMM and RDIMM products and a $1.2 million increase in sales of our Specialty SODIMM and RDIMM products).
Net sales in all periods presented were impacted by fluctuating customer concentrations. During the second quarter of 2020, one customer accounted for equal to or more than 10% of net sales, with an aggregate of 22%, while during the same period in 2019, there was no customer that accounted for equal to or more than 10% of net sales. During the second quarter of 2020, our four largest customers accounted for an aggregate of 41% of net sales. Of these four customers, three customers did not contribute significant sales during the same quarter of 2019. During the second quarter of 2019, our four largest customers accounted for an aggregate of 31% of net sales.
During the first six months of 2020 and 2019, one customer accounted for equal to or more than 10% of net sales, with an aggregate of 16% and 10%, respectively, and during the first six months of 2020, our four largest customers accounted for an aggregate of 31% of net sales. Of these four customers, two customers did not contribute any sales or contributed only insignificant sales. During the first six months of 2019, our four largest customers accounted for an aggregate of 30% of net sales.
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Visibility in our global markets is lacking and demand uncertainty is intensifying. As a result, it is difficult for us to predict the effects of the pandemic on our business.
Gross Profit and Gross Margin
Gross profit increased during the second quarter and first six months of 2020 compared to the same periods in 2019 due primarily to higher sales and gross profits on the sale of enterprise SSD, Specialty SODIMM and RDIMM products. Gross margin (or gross profit as a percentage of net sales) fluctuates based on the change in our product mix over periods and the relative cost of the factory.
Operating Expenses
Operating expenses for the three months ended June 27, 2020 and June 29, 2019 were as follows (dollars in thousands):
Three Months Ended
Six Months Ended
June 27,
June 29,
%
June 27,
June 29,
%
2020
2019
Change
2020
2019
Change
Research and development
$
698
$
565
24%
$
1,352
$
1,155
17%
Percentage of net sales
6%
10%
5%
11%
Intellectual property legal fees
$
848
$
1,093
(22%)
$
1,473
$
2,588
(43%)
Percentage of net sales
8%
20%
6%
24%
Selling, general and administrative
$
1,957
$
2,004
(2%)
$
4,178
$
3,977
5%
Percentage of net sales
18%
36%
16%
37%
Research and Development
Research and development expenses increased during the second quarter and first six months of 2020 compared to the same periods in 2019 due primarily to an increase in employee headcount and overhead, partially offset by a decrease in travel, office and depreciation expenses.
Intellectual Property Legal Fees
Intellectual property legal fees consist of legal fees incurred for patent filings, protection and enforcement. Although we expect intellectual property legal fees to generally increase over time as we continue to protect, defend and enforce and seek to expand our patent portfolio, these increases may not be linear but may occur in lump sums depending on the due dates of patent filings and their associated fees and the arrangements we may make with our legal advisors in connection with enforcement proceedings, which may include fee arrangements such as with TRGP or contingent fee arrangements in which we would pay these legal advisors on a scaled percentage of any negotiated fees, settlements or judgments awarded to us based on if, how and when the fees, settlements or judgments are obtained. See Note 7 to the condensed consolidated financial statements included in Part I, Item 1 of this report for further discussion.
Pursuant to the terms of the TRGP Agreement, the legal expenses we incurred for our first action against SK hynix at the ITC and our U.S. district court proceedings that were paid directly by TRGP were excluded in their entirety from our financial statements. As of December 28, 2019, accumulated deficit excluded $1.7 million and $10.2 million of such legal expenses incurred in 2018 and 2017, respectively. We do not anticipate any further legal expenses will be paid by TRGP under this agreement. TPGP did not fund the legal expenses incurred for our second ITC action and our proceedings in international courts. TRGP is not currently funding our legal expenses.
Intellectual property legal fees decreased during the second quarter and first six months of 2020 compared to the same periods in 2019 due primarily to lower legal expenses incurred to defend our patent portfolio internationally, including the costs incurred for our second ITC action and inter partes review of our patents before the U.S. Patent and Trademark Office.
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Selling, General and Administrative
Selling, general and administrative expenses slightly decreased during the second quarter of 2020 compared to the same period in 2019 due primarily to a decrease in travel and product evaluation expenses, partially offset by an increase in sales and marketing payroll costs and sales commissions. During the first six months of 2020, selling, general and administrative expenses slightly increased compared to the same period in 2019 due primarily to an increase in sales and marketing payroll costs and related overhead and commissions, partially offset by a decrease in travel and product evaluation expenses.
Other Expense, Net
Other expense, net for the three and six months ended June 27, 2020 and June 29, 2019 was as follows (dollars in thousands):
Three Months Ended
Six Months Ended
June 27,
June 29,
%
June 27,
June 29,
%
2020
2019
Change
2020
2019
Change
Interest expense, net
$
(150)
$
(258)
$
(298)
$
(530)
Other expense, net
(2)
(2)
(5)
(1)
Total other expense, net
$
(152)
$
(260)
(42%)
$
(303)
$
(531)
(43%)
Interest expense, net, consists primarily of interest expense on the $15 million secured convertible note issued to Samsung Venture Investment Co. (“SVIC”) (“SVIC Note”) in November 2015, a revolving line of credit under the SVB Credit Agreement, and an unsecured convertible note with an original principal amount of $2.3 million issued to Iliad Research and Trading, L.P. in August 2018 (“Iliad Note”), along with the accretion of debt discounts and amortization of debt issuance costs on the SVIC Note and Iliad Note. The Iliad Note was fully converted to shares of our common stock during 2019 and there was no outstanding balance as of December 28, 2019. As a result, during the second quarter and first six months of 2020 compared to the same periods in 2019, the interest expense decreased.
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Liquidity and Capital Resources
Our primary sources of cash are historically proceeds from issuances of equity and debt securities and receipts from revenues, including from product sales and the NRE fee from our JDLA with Samsung. We have also funded our operations with a revolving line of credit under a bank credit facility, a funding arrangement for costs associated with certain of our legal proceedings against SK hynix and, to a lesser extent, equipment leasing arrangements.
The following tables present selected financial information as of June 27, 2020 and December 28, 2019 and for the first six months of 2020 and 2019 (in thousands):
June 27,
December 28,
2020
2019
Cash and cash equivalents
$
7,153
$
8,966
Convertible promissory note and accrued interest, net
16,403
15,793
Total PPP Loan and accrued interest
638
—
Working capital
5,957
5,442
Six Months Ended
June 27,
June 29,
2020
2019
Net cash used in operating activities
$
(2,782)
$
(6,666)
Net cash used in investing activities
(9)
(45)
Net cash provided by (used in) financing activities
1,428
(459)
During the six months ended June 27, 2020, net cash used in operating activities was primarily a result of net loss of $3.4 million and non-cash adjustments to net loss of $1.0 million, offset by net cash outflows from changes in operating assets and liabilities of $0.4 million driven predominantly by an increase in inventories due to higher purchases to support increased sales and accrued payroll and related liabilities, partially offset by a decrease in accounts receivable due to vigorous collection efforts. Net cash used in investing activities during the six months ended June 27, 2020 consisted of cash used to acquire property and equipment. Net cash provided by financing activities during the six months ended June 27, 2020 primarily consisted of $2.8 million in net proceeds from issuance of common stock under the 2020 Lincoln Park Purchase Agreement and $0.6 million in proceeds from the issuance of PPP Loan, partially offset by $1.6 million in net repayments under the SVB Credit Agreement.
During the six months ended June 29, 2019, net cash used in operating activities primarily resulted from net loss of $7.6 million and non-cash adjustments to net loss of $1.4 million, offset by net cash outflows from changes in operating assets and liabilities of $0.5 million driven predominantly from a decrease in accounts payable due to lower purchases and legal fees and payments made toward outstanding legal fees, partially offset by a decrease in inventories and accounts receivable, respectively. Net cash used in investing activities during the six months ended June 29, 2019 was the result of our purchases of property and equipment. Net cash used in financing activities during the six months ended June 29, 2019 primarily consisted of $0.2 million in net repayments under the SVB Credit Agreement and $0.2 million in payments of outstanding debt.
Capital Resources
2019 Lincoln Park Purchase Agreement
On June 24, 2019, we entered into the 2019 Purchase Agreement with Lincoln Park, pursuant to which we have the right to sell to Lincoln Park up to an aggregate of $10 million in shares of our common stock over the 36-month term of the 2019 Purchase Agreement subject to the conditions and limitations set forth in the 2019 Purchase Agreement. As of June 27, 2020, an aggregate of $3.6 million in shares of our common stock was available for purchases over the remaining term under the 2019 Purchase Agreement.
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2020 Lincoln Park Purchase Agreement
On March 5, 2020, we entered into the 2020 Purchase Agreement with Lincoln Park, pursuant to which we have the right to sell to Lincoln Park up to an aggregate of $20 million in shares of our common stock over the 36-month term of the 2020 Purchase Agreement subject to the conditions and limitations set forth in the 2020 Purchase Agreement. As of June 27, 2020, an aggregate of $8.2 million in shares of our common stock was available for purchases over the remaining term under the 2020 Purchase Agreement.
TRGP Agreemen t
On May 3, 2017, we entered into the TRGP Agreement, which generally provided that TRGP will directly fund the costs incurred by us or on our behalf in connection with our first ITC action and our U.S. district court proceedings against SK hynix. During 2018 and 2017, TRGP directly paid $1.7 million and $10.2 million on our behalf incurred in connection with these proceedings. On January 23, 2020, we entered into an amendment to the TRGP Agreement to alter the recovery sharing formula related to claims against SK hynix.
SVB Credit Agreement
On October 31, 2009, we entered into an SVB Credit Agreement, which provides for a revolving line of credit of up to $5.0 million. The borrowing base is limited to 85% of eligible accounts receivable, subject to certain adjustments as set forth in the SVB Credit Agreement. As of June 27, 2020, the borrowings under the SVB Credit Agreement bear interest at the Wall Street Journal “prime rate” plus 2.75% per annum and mature on April 30, 2021.
As of June 27, 2020, the outstanding borrowings under the SVB Credit Agreement were $1.3 million with additional borrowing availability of $0.1 million. During the six months ended June 27, 2020, we made net repayments of $1.6 million under the SVB Credit Agreement.
Paycheck Protection Program Loan
On April 23, 2020, we entered into the PPP Loan with a principal amount of $0.6 million through Hanmi Bank under the PPP administered by the SBA and established as part of the CARES Act. The PPP Loan bears interest at 1.0% per annum and matures in April 2022 with the first six months of interest and principal payments deferred. The amount borrowed under the PPP Loan is eligible for forgiveness if we meet certain conditions.
Sufficiency of Cash Balances and Potential Sources of Additional Capital
We believe our existing balance of cash and cash equivalents together with cash receipts from revenues, borrowing availability under the SVB Credit Agreement, the equity financing available under the 2020 and 2019 Lincoln Park Purchase Agreements, funds raised through the debt and equity offerings and taking into account cash expected to be used in our operations, will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our capital requirements will depend on many factors, including, among others: the acceptance of, and demand for, our products; our levels of net product sales and any other revenues we may receive, including NRE, license, royalty or other fees; the extent and timing of any investments in developing, marketing and launching new or enhanced products or technologies; the costs of developing, improving and maintaining our internal design, testing and manufacturing processes; the costs associated with defending and enforcing our intellectual property rights; and the nature and timing of acquisitions and other strategic transactions in which we participate, if any.
Although we expect to rely in the near term on our existing cash and cash equivalents balance and our primary source of cash described above, our estimates of our operating revenues and expenses and working capital requirements could be incorrect, and we may use our cash resources faster than we anticipate. Further, some or all of our ongoing or planned investments may not be successful and could result in further losses. Until we can generate sufficient revenues to finance our cash requirements from our operations, which we may never do, we may need to increase our liquidity and capital resources by one or more measures, which may include, among others, reducing operating expenses, restructuring our balance sheet by negotiating with creditors and vendors, entering into strategic partnerships or alliances, raising
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additional financing through the issuance of debt, equity or convertible securities or pursuing alternative sources of capital, such as through asset or technology sales or licenses or other alternative financing arrangements. We may not be able to obtain capital when needed, on terms acceptable to us or at all and may have the need to seek the authorization of additional shares from our stockholders, which could be costly, time-consuming and unsuccessful.
Inadequate working capital would have a material adverse effect on our business and operations and could cause us to fail to execute our 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 us to significantly modify our 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 our ongoing and planned investments in corporate infrastructure, research and development projects, business development initiatives and sales and marketing activities, among other activities. Modification of our business model and operations could result in an impairment of assets, the effects of which cannot be determined. Furthermore, if we continue to issue equity or convertible debt securities to raise additional funds, our existing stockholders may experience significant dilution, and the new equity or debt securities may have rights, preferences and privileges that are superior to those of our existing stockholders. If we incur additional debt, it may increase our leverage relative to our earnings or to our equity capitalization or have other material consequences. If we pursue asset or technology sales or licenses or other alternative financing arrangements to obtain additional capital, our operational capacity may be limited and any revenue streams or business plans that are dependent on the sold or licensed assets may be reduced or eliminated. Moreover, we may incur substantial costs in pursuing any future capital-raising transactions, including investment banking, legal and accounting fees, printing and distribution expenses and other similar costs, which would reduce the benefit of the capital received from the transaction.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditure or capital resources that is material to investors.
Critical Accounting Policies and Use of Estimates
The preparation of our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of net sales and expenses during the reporting period. By their nature, these estimates and assumptions are subject to an inherent degree of uncertainty. We base our estimates and assumptions on our historical experience, knowledge of current conditions and our beliefs of what could occur in the future considering available information. We review our estimates and assumptions on an ongoing basis. Actual results may differ from our estimates, which may result in material adverse effects on our consolidated operating results and financial position.
Our critical accounting policies and estimates are discussed in Note 2 to the condensed consolidated financial statements in this report and in the notes to consolidated financial statements in Part IV, Item 15 of our 2019 Annual Report and in the MD&A in our 2019 Annual Report. There have been no significant changes to our critical accounting policies since our 2019 Annual Report.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
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