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;
● our ability to remediate any material weakness and maintain effective internal control over financial reporting; 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.
24
Table of Contents
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 third quarter of 2020, we recorded net sales of $10.2 million, gross profit of $1.3 million and net loss of $2.1 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
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. The 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 certain 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.
25
Table of Contents
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 first nine months of 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 basis in connection with any additional purchases. We will not receive any cash proceeds from the issuance of these additional commitment shares. During the third quarter and first nine months of 2020, Lincoln Park purchased an aggregate of 13,748,158 shares and 23,400,122 shares of our common stock for a net purchase price of $9.4 million and $12.2 million, respectively, under the 2020 Purchase Agreement. In connection with the purchases, during the third quarter and first nine months of 2020, we issued to Lincoln Park an aggregate of 431,798 shares and 560,588 shares of our common stock, respectively, 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.
26
Table of Contents
Results of Operations
Net Sales and Gross Profit
Net sales, cost of sales and gross profit for the three and nine months ended September 26, 2020 and September 28, 2019 were as follows (dollars in thousands):
Three Months Ended
Nine Months Ended
September 26,
September 28,
%
September 26,
September 28,
%
2020
2019
Change
2020
2019
Change
Net sales
$
10,212
$
6,116
67%
$
35,749
$
16,733
114%
Cost of sales
8,875
5,666
57%
30,477
15,600
95%
Gross profit
$
1,337
$
450
197%
$
5,272
$
1,133
365%
Gross margin
13%
7%
15%
7%
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 $4.1 million during the third quarter of 2020 compared to the same quarter of 2019 primarily as a result of a $2.5 million overall increase in sales of NAND flash products (including a $1.5 million increase in Netlist’s flash SSD products and a $0.9 million increase in the resales of NAND flash products), and a $1.9 million increase in sales of other small outline dual in-line memory module (“SODIMM”) and RDIMM products, partially offset by a $0.1 million decrease in sales of our very low profile memory subsystem products and a $0.2 million increase in sales return reserve.
Net sales increased by $19.0 million during the first nine months of 2020 compared to the same period in 2019 primarily as a result of a $12.7 million increase in sales of NAND flash products (including a $6.3 million increase in Netlist’s flash SSD products and a $6.1 million increase in the resales of NAND flash products) and a $6.6 million overall increase in sales of SODIMM and RDIMM products (a $4.3 million increase in the resales of SODIMM and RDIMM products and a $2.3 million increase in sales of our Specialty SODIMM and RDIMM products), partially offset by an aggregate of $0.3 million increase in sales return reserve and customer discounts.
Net sales in all periods presented were impacted by fluctuating customer concentrations. During the third quarter of 2020 and 2019, two customers were equal to or more than 10% of net sales, with an aggregate of 35% and 23%, respectively, and during the third quarter of 2020, our four largest customers accounted for an aggregate of 52% of net sales. Of these four customers, three customers did not contribute any sales or contributed only insignificant sales during the same quarter of 2019. During the third quarter of 2019, our four largest customers accounted for an aggregate of 37% of net sales.
During the first nine months of 2020 and 2019, one customer accounted for equal to or more than 10% of net sales, with 15% and 11%, respectively, and during the first nine months of 2020, our four largest customers accounted for an aggregate of 33% of net sales. Of these four customers, three customers did not contribute any significant sales during the same period in 2019. During the first nine months of 2019, our four largest customers accounted for an aggregate of 30% of net sales.
Visibility to demand in our global markets continues and as a result, it is difficult for us to predict the effects of the COVID-19 pandemic on our business in the future.
27
Table of Contents
Gross Profit and Gross Margin
Gross profit increased during the third quarter and first nine months of 2020 compared to the same periods in 2019 due primarily to higher sales and gross profits on the sale of enterprise SSD 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 and nine months ended September 26, 2020 and September 28, 2019 were as follows (dollars in thousands):
Three Months Ended
Nine Months Ended
September 26,
September 28,
%
September 26,
September 28,
%
2020
2019
Change
2020
2019
Change
Research and development
$
731
$
583
25%
$
2,083
$
1,738
20%
Percentage of net sales
7%
10%
6%
10%
Intellectual property legal fees
$
784
$
979
(20%)
$
2,257
$
3,567
(37%)
Percentage of net sales
8%
16%
6%
21%
Selling, general and administrative
$
1,816
$
1,747
4%
$
5,994
$
5,724
5%
Percentage of net sales
18%
29%
17%
34%
Research and Development
Research and development expenses increased during the third quarter and first nine 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 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. No 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 as well as other District Court proceedings. TRGP is not currently funding our legal expenses.
Intellectual property legal fees decreased during the third quarter and first nine 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.
28
Table of Contents
Selling, General and Administrative
Selling, general and administrative expenses slightly increased during the third quarter of 2020 compared to the same period in 2019 due primarily to an increase in product evaluation expenses, outside services and sales commissions, partially offset by a decrease in travel expenses. During the first nine months of 2020, selling, general and administrative expenses also 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 and outside services, partially offset by a decrease in travel and product evaluation expenses.
Other Expense, Net
Other expense, net for the three and nine months ended September 26, 2020 and September 28, 2019 was as follows (dollars in thousands):
Three Months Ended
Nine Months Ended
September 26,
September 28,
%
September 26,
September 28,
%
2020
2019
Change
2020
2019
Change
Interest expense, net
$
(139)
$
(245)
$
(437)
$
(775)
Other income (expense), net
3
(4)
(2)
(5)
Total other expense, net
$
(136)
$
(249)
(45%)
$
(439)
$
(780)
(44%)
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 third quarter and first nine months of 2020 compared to the same periods in 2019, the interest expense decreased.
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 September 26, 2020 and December 28, 2019 and for the first nine months of 2020 and 2019 (in thousands):
September 26,
December 28,
2020
2019
Cash and cash equivalents
$
14,287
$
8,966
Convertible promissory note and accrued interest, net
16,176
15,793
Total PPP Loan and accrued interest
639
—
Working capital
13,559
5,442
Nine Months Ended
September 26,
September 28,
2020
2019
Net cash used in operating activities
$
(6,914)
$
(9,232)
Net cash used in investing activities
(25)
(70)
Net cash provided by financing activities
12,710
1,286
29
Table of Contents
During the nine months ended September 26, 2020, net cash used in operating activities was primarily a result of net loss of $5.5 million and non-cash adjustments to net loss of $1.5 million, offset by net cash outflows from changes in operating assets and liabilities of $2.9 million driven predominantly by an increase in inventories due to higher purchases to support increased sales and an increase in accounts receivable due to higher sales, partially offset by a decrease in accounts payable and accrued expenses and other current liabilities. Net cash provided by financing activities during the nine months ended September 26, 2020 primarily consisted of $12.2 million in net proceeds from issuance of common stock under the 2020 Lincoln Park Purchase Agreement, $0.6 million in proceeds from the issuance of the PPP Loan and $0.4 million in net borrowings under the SVB Credit Agreement, partially offset by $0.4 million in payments of outstanding debt.
During the nine months ended September 28, 2019, net cash used in operating activities primarily resulted from net loss of $10.7 million and non-cash adjustments to net loss of $2.1 million, offset by net cash outflows from changes in operating assets and liabilities of $0.6 million driven predominantly from a decrease in accounts payable due to lower purchases and legal fees and payments made toward outstanding legal fees, and a decrease in accrued expenses and other current liabilities primarily from the recognition of current portion of operating lease liabilities, partially offset by a decrease in inventories and accounts receivable, respectively. Net cash used in investing activities during the nine months ended September 28, 2019 was the result of our purchases of property and equipment. Net cash provided by financing activities primarily consisted of $2.5 million in proceeds from issuance of common stock to Lincoln Park, partially offset by $0.8 million in net repayments under the SVB Credit Agreement and $0.4 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 September 26, 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.
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 September 26, 2020, an aggregate of $7.8 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 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. 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 September 26, 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.
30
Table of Contents
As of September 26, 2020, the outstanding borrowings under the SVB Credit Agreement were $3.4 million with additional borrowing availability of $0.1 million. During the nine months ended September 26, 2020, we made net borrowings of $0.4 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. However, the SVIC Note will mature at the end of December 2021, and if it is not converted into equity, we may not have adequate liquidity to repay the obligations thereunder unless we raise additional capital or enter into an amendment to the SVIC Note. While we believe that we will be able to raise such funds or obtain an amendment to the SVIC Note, there can be no assurance that this will occur.
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 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
31
Table of Contents
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.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.