What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-09 compared with 2021-11-10 · 58 added, 84 removed, 102 unchanged (58% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Note About Forward-Looking Statements

Note Regarding 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.

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Netlist licenses its portfolio of intellectual property including patents, in server memory, hybrid memory and storage class memory, to companies that implement Netlist’s technology.

To learn more, visit www.netlist.com.

During the third quarter of 2021, we recorded net sales of $26.7 million, gross margin of $2.5 million and net loss of $10.4 million.

During the first quarter of 2022, we recorded net sales of $50.2 million, gross margin of $3.4 million and net loss of $5.9 million.

We have historically financed our operations primarily with proceeds from issuances of equity and debt securities and cash receipts from revenues.

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Amendment to SVB Credit Agreement

On April 9, 2021, 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 accrue interest on advances at a per annum rate equal to the greater of 2.25% above the Wall Street Journal prime rate (“Prime Rate”) or 5.50% and to extend the maturity date to December 30, 2021.

On October 31, 2009, we entered into the 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.

On April 9, 2021, we entered into an amendment to the SVB Credit Agreement to accrue interest on advances at a per annum rate equal to the greater of 2.25% above the Prime Rate or 5.50% and to extend the maturity date to December 30, 2021.

The amount available for borrowing may be increased to $7.0 million and the maturity date will be extended to April 29, 2022 upon our request, if we meet certain conditions.

First 2021 Lincoln Park Purchase Agreement

On July 12, 2021, we entered into a purchase agreement (the “First 2021 Purchase Agreement”) with Lincoln Park, pursuant to which we have the right to sell to Lincoln Park up to an aggregate of $17.4 million in shares of our common stock over the 36-month term of the First 2021 Purchase Agreement subject to the conditions and limitations set forth in the First 2021 Purchase Agreement.

During the third quarter of 2021, Lincoln Park purchased an aggregate of 2,000,000 shares of our common stock for a net purchase price of $14.9 million under the First 2021 Purchase Agreement.

In connection with the purchases, during the third quarter of 2021, we issued to Lincoln Park an aggregate of 103,292 shares of our common stock as additional commitment shares in noncash transactions.

Subsequent to October 2, 2021, Lincoln Park purchased an aggregate of 383,748 shares of our common stock for a net purchase price of $2.5 million under the First 2021 Purchase Agreement.

In connection with the purchases, we issued to Lincoln Park an aggregate of 17,208 shares of our common stock as additional commitment shares in noncash transactions.

We completed the sales under the First 2021 Purchase Agreement in October 2021.

Second 2021 Lincoln Park Purchase Agreement

On April 29, 2022, we entered into an amendment to the SVB Credit Agreement to accrue interest on advance at a per annum rate equal to the greater of 0.75% above the Prime Rate or 4.25%.

The borrowing base is limited to 85% of eligible accounts receivable, subject to certain adjustments, and 50% of eligible inventory.

The maximum amount available for borrowing was increased to $10.0 million and the maturity date to April 28, 2023.

As of April 2, 2022, the outstanding borrowings under the SVB Credit Agreement were $4.7 million with additional borrowing availability of $0.1 million.

During the three months ended April 2, 2022, we made net payments of $2.3 million under the SVB Credit Agreement.

September 2021 Lincoln Park Purchase Agreement

On September 28, 2021, we entered into a purchase agreement (the “Second 2021 Purchase Agreement”) with Lincoln Park, pursuant to which we have the right to sell to Lincoln Park up to an aggregate of $75 million in shares of our common stock over the 36-month term of the Second 2021 Purchase Agreement subject to the conditions and limitations set forth in the Second 2021 Purchase Agreement.

Subsequent to October 2, 2021, Lincoln Park purchased an aggregate of 650,000 shares of our common stock for a net purchase price of $4.8 million under the Second 2021 Purchase Agreement.

During 2021, Lincoln Park purchased an aggregate of 1,550,000 shares of our common stock for a net purchase price of $10.9 million under the Second 2021 Purchase Agreement.

In connection with the purchases, we issued to

Lincoln Park an aggregate of 20,809 shares of our common stock as additional commitment shares in noncash transactions.

During the first quarter of 2022, Lincoln Park purchased an aggregate of 300,000 shares of our common stock for a net purchase price of $1.8 million under the Second 2021 Purchase Agreement.

In connection with the purchases, we issued to Lincoln Park an aggregate of 3,387 shares of our common stock as additional 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 bore interest at 1.0% per annum and would mature in April 2022 with the first six months of interest and principal payments deferred.

The amount borrowed under the PPP Loan was eligible for forgiveness if we would meet certain conditions.

In May 2021, the full amount outstanding under the PPP Loan was forgiven resulting in a gain of $0.6 million.

Economic Conditions, Challenges and Risks

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Net Sales and Gross Margin

Net sales and gross margin for the three and nine months ended October 2, 2021 and September 26, 2020 were as follows (dollars in thousands):

Net sales and gross margin for the three months ended April 2, 2022, and April 3, 2021 were as follows (dollars in thousands):

Three Months Ended

Nine Months Ended

September 26,

Net product sales

Gross margin - product sales

Gross margin percentage - product sales

Gross margin percentage

Net sales include (i) resales of certain SSDs and DRAM products, and sales of our high-performance memory subsystems and (ii) an upfront non-refundable license fee recognized for licensing of our patents pursuant to the License Agreement with SK hynix entered into on April 5, 2021.

Net product sales increased by $16.5 million during the third quarter of 2021 compared to the same quarter of 2020 primarily as a result of a $14.2 million increase in the resale of DIMMs and components and an increase of $2.3 million of Netlist SSD and Netlist branded products.

Net product sales increased by $30.3 million during the first nine months of 2021 compared to the same period in 2020 primarily as a result of a $29.3 million increase in the resale of DIMMs and components and an increase of $1.0 million of Netlist SSD and Netlist branded products.

Product gross margin increased during the third quarter and first nine months of 2021 compared to the same periods of 2020 due primarily to higher sales across all product groups.

Product gross margin percentage decreased between the periods as a result of the change in our product mix.

Cost of sales

Net sales include resales of component products including DIMMs, SSDs, and dynamic random access memory (“DRAM ICS” OR DRAM) products, and sales of our high-performance memory subsystems.

Net product sales increased by approximately $35.3 million during the first quarter of 2022 compared to the same quarter of 2021, primarily as a result of a $35.2 million increase in re-sale of SK Hynix products and a $1.1 million increase in sale of Netlist’s flash and SSD products, offset by a $1.0 million decrease in sales of low profile memory subsystem products.

Product gross profit increased during the first quarter of 2022 compared to the same periods of 2021 due primarily to higher sales across all product groups.

Product gross margin percentage decreased between the periods as a result of the change in our product mix and increased component product resales as a percentage of revenue.

Operating Expenses

Operating expenses for the three and nine months ended October 2, 2021 and September 26, 2020 were as follows (dollars in thousands):

Operating expenses for the three months ended April 2, 2022, and April 3, 2021, were as follows (dollars in thousands):

Three Months Ended

Nine Months Ended

September 26,

Research and development

Percentage of net product sales

Percentage of net sales

Intellectual property legal fees

Percentage of net product sales

Percentage of net sales

Selling, general and administrative

Percentage of net product sales

Percentage of net sales

Research and Development

Research and development expenses increased during the third quarter and first nine months of 2021 compared to the same periods of 2020 due primarily to an increase in employee headcount and related overhead.

Research and development expenses increased during the first quarter 2022 compared to the same period of 2021 due primarily to an increase in employee headcount, related overhead and new product research.

Intellectual Property Legal Fees

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See Note 7 to the condensed consolidated financial statements included in Part I, Item 1 of this report for further discussion.

Intellectual property legal fees increased during the third quarter and first nine months of 2021 compared to the same periods of 2020 due primarily to higher legal expenses incurred to seek damages for breach of contract of the Joint Development and License Agreement entered into between Netlist and Samsung on November 12, 2015 and to defend and enforce our patent portfolio.

Intellectual property legal fees increased during the first quarter 2022 compared to the same period of 2021 primarily due to our continued efforts to defend and enforce our patent portfolio.

Selling, General and Administrative

Selling, general and administrative expenses increased during the third quarter and first nine months of 2021 compared to the same periods of 2020 due primarily to an increase in employee headcount and overhead and outside services.

As a result of the significant increase in the value of our non-affiliate public float in recent periods, we will be transitioning to becoming a “large accelerated filer” at the end of this fiscal year ending January 2, 2022 which means that we will need to file our quarterly and annual reports on an accelerated basis and that we will need to be prepared to have our independent registered public accounting firm audit and attest to our internal control over financial reporting.

Complying with these new requirements will require that we invest a material amount in enhancing our financial reporting infrastructure that will cause our selling, general and administrative expenses to increase in future periods.

Other (Expense) Income, Net

Other (expense) income, net for the three and nine months ended October 2, 2021 and September 26, 2020 was as follows (dollars in thousands):

Selling, general and administrative expenses increased during the first quarter of 2022 compared to the same period of 2021 due primarily to an increase in employee headcount and overhead and outside services.

As a result of the significant increase in the value of our non-affiliate public float in recent periods, we are a “large accelerated filer” as of the end of fiscal year ended January 2, 2022 which means that we need to file our quarterly and annual reports on an accelerated basis and that we are required to have our independent registered public accounting firm audit and attest to our internal control over financial reporting.

Complying with these requirements requires us to invest a material amount in enhancing our financial reporting infrastructure that will cause our selling, general and administrative expenses to increase in future periods.

Other Expense, Net

Other expense, net for the three months ended April 2, 2022, and April 3, 2021 was as follows (dollars in thousands):

Three Months Ended

Nine Months Ended

September 26,

Interest expense, net

Other (expense) income, net

Total other (expense) income, net

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 and a revolving line of credit under the SVB Credit Agreement, along with the accretion of debt discounts and amortization of debt issuance costs on the SVIC Note.

During the first nine months of 2021, other (expense) income, net includes the gain on forgiveness of the PPP Loan of $0.6 million recognized during the second quarter of 2021.

Provision for Income Taxes

During the first nine months of 2021, we recorded a provision for income taxes of $6.6 million related to the Korean withholding tax incurred in connection with the upfront non-refundable license fee of $40 million from SK hynix recognized during the second quarter of 2021.

The Korean withholding tax was treated as a significant unusual event for interim tax reporting.

Other expense, net

Total other expense, net

Interest expense, net, in 2021 consisted primarily of interest expense on the $15 million secured convertible note issued to SVIC in November 2015 and a revolving line of credit under the SVB Credit Agreement, along with the accretion of debt discounts and amortization of debt issuance costs on the SVIC Note.

The SVIC note was paid off in the fourth quarter of 2021 resulting in a decrease in interest expense for the first quarter of 2022.

During the first quarter of 2022, other expense was consistent compared with the same quarter of 2021.

Liquidity and Capital Resources

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We have also funded our operations with a revolving line of credit under a bank credit facility, and to a lesser extent, equipment leasing arrangements.

The following tables present selected financial information as of October 2, 2021 and January 2, 2021 and for the first nine months of 2021 and 2020 (in thousands):

Cash and cash equivalents

The following tables present selected financial information as of April 2, 2022, and January 1, 2022 and for the first three months of 2022 and 2021 (in thousands):

Cash, cash equivalents and restricted cash

Convertible promissory note and accrued interest, net

Total PPP Loan and accrued interest

Working capital

Nine Months Ended

September 26,

Three Months Ended

Net cash provided by (used in) operating activities

Net cash used in investing activities

Net cash provided by financing activities

During the nine months ended October 2, 2021, net cash provided by operating activities was primarily a result of net income of $13.1 million, non-cash adjustments to net income of $1.3 million, and net cash inflows from changes in operating assets and liabilities of $5.7 million driven predominantly by an increase in accounts payable due to higher inventory purchases to support increase in sales and higher legal fees to defend our patent portfolio, partially offset by an

increase in inventories.

Net cash provided by financing activities during the nine months ended October 2, 2021 primarily consisted of $26.3 million in net proceeds from issuance of common stock under the 2019, 2020 and First 2021 Lincoln Park Purchase Agreements, $11.1 million in proceeds from exercise of stock options and warrants and $0.8 million in net borrowings under the SVB Credit Agreement, partially offset by $1.0 million in payments for taxes related to net share settlement of equity awards.

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.

Net cash (used in) provided by financing activities

During the three months ended April 2, 2022, net cash provided by operating activities was primarily a result of net loss of $5.9 million, non-cash adjustments to net loss of $0.9 million, and net cash inflows from changes in operating assets and liabilities of $6.2 million driven predominantly by an increase in accounts payable due to higher inventory purchases to support increase in sales and higher legal fees to defend our patent portfolio, and a decrease in accounts receivable.

Net cash used in financing activities during the three months ended April 2, 2022 primarily consisted of $1.8 million in net proceeds from issuance of common stock under the Second 2021 Lincoln Park Purchase Agreements, $0.1 million in proceeds from exercise of stock options, offset by $2.3 million in net repayments under the SVB Credit Agreement and $0.6 million in payments for taxes related to net share settlement of equity awards.

During the three months ended April 3, 2021, net cash used in operating activities was primarily a result of net loss of $4.0 million and non-cash adjustments to net loss of $0.6 million, offset by net cash outflows from changes in operating assets and liabilities of $0.9 million driven predominantly by an increase in inventories due to higher purchases

to support increased sales, partially offset by an increase in accounts payable.

Net cash provided by financing activities during the three months ended April 3, 2021 primarily consisted of $9.4 million in net proceeds from issuance of common stock under the Lincoln Park Purchase Agreements, $4.0 million in proceeds from exercise of warrants, $0.4 million in proceeds from exercise of stock options and $1.0 million in net borrowings under the SVB Credit Agreement, partially offset by $0.3 million in payments of taxes related to net share settlement of equity awards.

Capital Resources

First 2021 Lincoln Park Purchase Agreement

On July 12, 2021, we entered into the First 2021 Purchase Agreement with Lincoln Park, pursuant to which we have the right to sell to Lincoln Park up to an aggregate of $17.4 million in shares of our common stock over the 36-month term of the First 2021 Purchase Agreement subject to the conditions and limitations set forth in the First 2021 Purchase Agreement.

In October 2021, we completed the sales under the First 2021 Purchase Agreement.

Second 2021 Lincoln Park Purchase Agreement

On September 28, 2021, we entered into the Second 2021 Purchase Agreement with Lincoln Park, pursuant to which we have the right to sell to Lincoln Park up to an aggregate of $75 million in shares of our common stock over the 36-month term of the Second 2021 Purchase Agreement subject to the conditions and limitations set forth in the Second 2021 Purchase Agreement.

September 2021 Lincoln Park Purchase Agreement

On September 28, 2021, we entered into the September 2021 Purchase Agreement with Lincoln Park, pursuant to which we have the right to sell to Lincoln Park up to an aggregate of $75.0 million in shares of our common stock over the 36-month term of the September 2021 Purchase Agreement subject to the conditions and limitations set forth in the Second 2021 Purchase Agreement.

As of April 2, 2022, $62.4 million remains available under the September 2021 Purchase Agreement with Lincoln Park.

SVB Credit Agreement

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The amount available for borrowing may be increased to $7.0 million and the maturity date will be extended to April 29, 2022 upon our request, if we meet certain conditions.

As of October 2, 2021, the outstanding borrowings under the SVB Credit Agreement were $4.5 million with additional borrowing availability of $0.1 million.

During the nine months ended October 2, 2021, we made net borrowings of $0.8 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 bore interest at 1.0% per annum and would mature in April 2022 with the first six months of interest and principal payments deferred.

The amount borrowed under the PPP Loan was eligible for forgiveness if we would meet certain conditions.

In May 2021, the full amounts outstanding under the PPP Loan was forgiven.

On April 29, 2022, we entered into an amendment to the SVB Credit Agreement to accrue interest on advance at a per annum rate equal to the greater of 0.75% above the Prime Rate or 4.25%.

The borrowing base is limited to 85% of eligible accounts receivable, subject to certain adjustments, and 50% of eligible inventory.

The maximum amount available for borrowing was increased to $10.0 million and the maturity date to April 28, 2023.

As of April 2, 2022, the outstanding borrowings under the SVB Credit Agreement were $4.7 million with additional borrowing availability of $0.1 million.

During the three months ended April 2, 2022, we made net payments of $2.3 million under the SVB Credit Agreement.

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 First and Second 2021 Lincoln Park Purchase Agreements, funds raised through other future 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.

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 September 2021 Lincoln Park Purchase Agreement, funds raised through other future 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.

Off-Balance Sheet Arrangements

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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 of America (“U.S.

The preparation of our condensed consolidated 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 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.

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.

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There have been no significant changes to our critical accounting policies since our 2021 Annual Report.

Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis