What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-02 compared with 2022-08-04 · 52 added, 57 removed, 112 unchanged (49% of the section changed)

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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 January 1, 2022 (the “2021 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.

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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.

During the second quarter of 2022, we recorded net sales of $55.4 million, gross profit of $4.7 million and net loss of $5.0 million.

During the third quarter of 2022, we recorded net sales of $34.4 million, gross profit of $2.2 million and net loss of $9.6 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 October 31, 2009, we entered into the SVB Credit Agreement, which provided for a revolving line of credit of up to $5.0 million.

The borrowing base was 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 was increased to $7.0 million and the maturity date was extended to April 29, 2022 upon our request, if we meet certain conditions.

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 was extended to April 28, 2023.

As of July 2, 2022, the outstanding borrowings under the SVB Credit Agreement were $8.0 million with additional borrowing availability of $2.0 million.

During the six months ended July 2, 2022, we made net borrowings of $1.0 million under the SVB Credit Agreement.

On October 31, 2009, we entered into the SVB Credit Agreement, which provides for a revolving line of credit of up to $10.0 million, as amended.

The SVB Credit Agreement was most recently amended on April 29, 2022, and the borrowing base is limited to 85% of eligible accounts receivable, subject to certain adjustments, and 50% of eligible inventory.

Borrowings accrue interest on advance at a per annum rate equal to the greater of 0.75% above the Prime Rate or 4.25%.

The maturity date is April 28, 2023, as amended.

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.

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 six months ended July 2, 2022, Lincoln Park purchased an aggregate of 650,000 shares of our common stock for a net purchase price of $3.7 million under the Second 2021 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 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 September 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 September 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 nine months ended October 1, 2022, Lincoln Park purchased an aggregate of 650,000 shares of our common stock for a net purchase price of $3.7 million under the September 2021 Purchase Agreement.

In connection with the purchases, we issued to Lincoln Park an aggregate of 7,168 shares of our common stock as additional commitment shares in noncash transactions.

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.

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.

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Net Sales and Gross Profit

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

Net sales and gross profit for the three and nine months ended October 1, 2022, and October 2, 2021 were as follows (dollars in thousands):

Three Months Ended

Six Months Ended

Nine Months Ended

Net product sales

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Net sales include (i) 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 and (ii) an upfront non-refundable fee pursuant to the Strategic Agreement with SK hynix entered into on April 5, 2021.

Net product sales increased by approximately $31.0 million during the second quarter of 2022 compared to the same quarter of 2021, primarily as a result of a $36.3 million increase in re-sale of SK hynix products and a $2.1 million increase in sale of Netlist’s flash and SSD products, offset by a $7.5 million decrease in sales of low-profile memory subsystem products.

Net product sales increased by approximately $66.3 million during the first six months of 2022 compared to the same period in 2021, primarily as a result of a $71.5 million increase in re-sale of SK hynix products and a $3.2 million increase in sale of Netlist’s flash and SSD products, offset by a $8.5 million decrease in sales of low-profile memory subsystem products.

Net product sales increased by approximately $7.7 million during the third quarter of 2022 compared to the same quarter of 2021, primarily as a result of a $12.4 million increase in re-sale of SK hynix products and a $4.9 million increase in sale of Netlist’s flash and SSD products, offset by a $9.6 million decrease in sales of low-profile memory subsystem products.

Net product sales increased by approximately $74.0 million during the first nine months of 2022 compared to the same period in 2021, primarily as a result of a $84.0 million increase in re-sale of SK hynix products and a $8.1 million increase in sale of Netlist’s flash and SSD products, offset by a $18.0 million decrease in sales of low-profile memory subsystem products.

Gross Profit and Gross Margin

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

Product gross profit decreased by $0.3 million during the third quarter of 2022 compared to the same quarter of 2021 primarily as a result of softer pricing environment and product sales mix.

Product gross profit increased during the first nine months of 2022 compared to the same period 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 six months ended July 2, 2022, and July 3, 2021, were as follows (dollars in thousands):

Operating expenses for the three and nine months ended October 1, 2022, and October 2, 2021, were as follows (dollars in thousands):

Three Months Ended

Six Months Ended

Nine Months Ended

Research and development

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Research and Development

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

Research and development expenses increased during the third quarter and the first nine months of 2022 compared to the same periods 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.

The decrease in intellectual property legal fees during the second quarter of 2022 compared to the same quarter of 2021 resulted primarily due to lower legal expenses incurred to defend our patent portfolio internationally.

During the first six months of 2022, intellectual property legal fees were consistent compared with the same period of 2021.

Intellectual property legal fees decreased during the third quarter and the first nine months of 2022 compared to the same periods of 2021 due primarily to lower legal expenses incurred to defend our patent portfolio internationally.

Selling, General and Administrative

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

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.

Selling, general and administrative expenses increased during the third quarter and the first nine months of 2022 compared to the same periods 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 Income (Expense), Net

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

Other income (expense), net for the three and nine months ended October 1, 2022, and October 2, 2021 was as follows (dollars in thousands):

Three Months Ended

Six Months Ended

Nine Months Ended

Interest income (expense), net

Other (expense) income, net

Total other (expense) income, 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 second quarter and first six months of 2022.

During the second quarter and first six months of 2021, other (expense) income, net, included the gain on forgiveness of the PPP Loan of $0.6 million.

Other income (expense), net

Total other income (expense), net

Interest expense, net, in 2021 consisted primarily of interest expense on the $15 million secured convertible note issued to Samsung Venture Investment Co.

(“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.

The SVIC Note was paid off in the fourth quarter of 2021 resulting in a decrease in interest expense for the third quarter and the first nine months of 2022 compared to the same periods of 2021.

Other income, net increased during the third quarter of 2022 compared to the same quarter of 2021 primarily as a result of a one-time gain from a sanction judgment.

During the first nine months of 2021, other income, net included the gain on forgiveness of the Paycheck Protection Program Loan of $0.6 million.

This gain was recognized during the second quarter of 2021 resulting in a decrease in other income for the first nine months of 2022 compared to the same period 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 July 2, 2022, and January 1, 2022 and for the first six months of 2022 and 2021 (in thousands):

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

Cash, cash equivalents and restricted cash

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Working capital

Six Months Ended

Nine Months Ended

Net cash provided by (used in) operating activities

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Net cash provided by financing activities

During the six months ended July 2, 2022, net cash used in operating activities was primarily a result of net loss of $10.8 million, non-cash adjustments to net loss of $1.9 million, and net cash inflows from changes in operating assets and liabilities of $7.4 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, partially offset by an increase in inventories.

Net cash provided by financing activities during the six months ended July 2, 2022 primarily consisted of $1.0 million in net borrowings under the SVB Credit Agreement, $3.7 million in net

proceeds from issuance of common stock under the Second 2021 Lincoln Park Purchase Agreement, $0.2 million in proceeds from exercise of stock options, offset by $0.4 million in payments of note payable to finance insurance policies and $0.7 million in payments for taxes related to net share settlement of equity awards.

During the six months ended July 3, 2021, net cash provided by operating activities was primarily a result of net income of $23.8 million and non-cash adjustments to net income of $0.6 million, offset by net cash inflows from changes in operating assets and liabilities of $2.8 million driven predominantly by an increase in accounts payable due to higher purchases to support increased sales, partially offset by an increase in inventories.

Net cash provided by financing activities during the six months ended July 3, 2021 primarily consisted of $9.4 million in net proceeds from issuance of common stock under the 2020 and 2019 Lincoln Park Purchase Agreements, $4.4 million in proceeds from exercise of warrants, $0.6 million in proceeds from exercise of stock options, partially offset by $2.9 million in net repayments under the SVB Credit Agreement.

During the nine months ended October 1, 2022, net cash used in operating activities was primarily a result of net loss of $20.4 million, non-cash adjustments to net loss of $3.1 million, and 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 a decrease in accounts payable, partially offset by a decrease in accounts receivable and an increase in accrued expenses and other liabilities.

Net cash provided by financing activities during the nine months ended October 1, 2022 primarily consisted of $1.0 million in net borrowings under the SVB Credit Agreement, $3.7 million in

net proceeds from issuance of common stock under the September 2021 Lincoln Park Purchase Agreement, $0.3 million in proceeds from exercise of stock options, offset by $0.6 million in payments of note payable to finance insurance policies and $1.3 million in payments for taxes related to net share settlement of equity awards.

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 Purchase Agreement with Lincoln Park, 2020 Purchase Agreement with Lincoln Park and First 2021 Lincoln Park Purchase Agreement, $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.

Capital Resources

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 July 2, 2022, $60.4 million remains available under the September 2021 Purchase Agreement with Lincoln Park.

As of October 1, 2022, $60.4 million remains available under the September 2021 Purchase Agreement with Lincoln Park.

SVB Credit Agreement

On October 31, 2009, we entered into the SVB Credit Agreement, which provided for a revolving line of credit of up to $5.0 million.

The borrowing base was limited to 85% of eligible accounts receivable, subject to certain adjustments as set forth in the SVB Credit Agreement.

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

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 was extended to April 28, 2023.

As of July 2, 2022, the outstanding borrowings under the SVB Credit Agreement were $8.0 million with additional borrowing availability of $2.0 million.

During the six months ended July 2, 2022, we made net borrowings of $1.0 million under the SVB Credit Agreement.

On October 31, 2009, we entered into the SVB Credit Agreement, which provides for a revolving line of credit of up to $10.0 million, as amended.

Borrowings accrue interest on advance at a per annum rate equal to the greater of 0.75% above the Prime Rate or 4.25%.

The maturity date is April 28, 2023, as amended.

As of October 1, 2022, the outstanding borrowings under the SVB Credit Agreement were $8.0 million with additional borrowing availability of $0.2 million.

During the nine months ended October 1, 2022, we made net borrowings of $1.0 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 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.

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 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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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.

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.

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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