What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-28 compared with 2022-03-01 · 68 added, 84 removed, 94 unchanged (62% of the section changed)

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Our fiscal year is the 52- or 53-week period that ends on the Saturday nearest to December 31.

Our fiscal year 2021 ended on January 1, 2022, fiscal year 2020 ended on January 2, 2021, and fiscal year 2019 ended on December 28, 2019.

Our fiscal year 2022 ended on December 31, 2022, fiscal year 2021 ended on January 1, 2022, and fiscal year 2020 ended on January 2, 2021.

All fiscal years presented in this Form 10-K, except fiscal year 2020, included 52 weeks.

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Unless otherwise stated, 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.

Fiscal Year Highlights

Netlist provides high-performance memory solutions to enterprise customers in diverse industries.

Our products in various capacities and form factors and our line of custom and specialty memory products bring leading performance to customers in a variety of industries globally and cloud service providers.

Netlist licenses its portfolio of intellectual property, including solutions relating to volatile memory, storage memory, and hybrid memory.

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 Item 1A of this report.

Impact of COVID-19 on our Business

The extent of the continuing impact of the COVID-19 pandemic on our operational and financial performance is uncertain and will depend on many factors outside our control, including the timing, extent, trajectory and duration of the pandemic, the emergence of new variants, the development, availability, distribution and effectiveness of vaccines and treatments, the imposition of protective public safety measures, and the impact of the pandemic on the global economy.

We continue to 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.

As COVID-19 and its impacts are unprecedented and ever evolving, future events and effects related to the pandemic cannot be determined with precision and actual results could significantly differ from estimates or forecasts.

SK hynix License Agreement and Supply Agreement

On April 5, 2021, we entered into a Strategic Product Supply and License Agreement (the “License Agreement”) and Product Purchase and Supply Agreement with SK hynix, Inc., a South Korean memory semiconductor supplier (“SK hynix”).

Both agreements have a term of 5 years.

Under the License Agreement, (a) we have granted to SK hynix fully paid, worldwide, non-exclusive, non-assignable licenses to certain of our patents covering memory technologies and (b) SK hynix has granted to us fully paid, worldwide, non-exclusive, non-assignable licenses to our patent portfolio.

In addition, the License Agreement provided for the settlement of all intellectual property proceedings between us and SK hynix and a settlement fee of $40 million paid to us by SK hynix.

In addition, the parties have agreed to collaborate on certain technology development activities.

The impact of the 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.

Fiscal Year Highlights

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.

In December 2021, after meeting the conditions set forth in the amendment, the amount available for borrowing was increased to $7.0 million and the maturity date was extended to April 29, 2022 upon our request.

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 had 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.

From July 2019 through the completion of sales in July 2021, Lincoln Park purchased an aggregate of 21,120,265 shares of our common stock for a net purchase price of $10 million under the 2019 Purchase Agreement.

During the same period, in connection with the purchases, we issued to Lincoln Park an aggregate of 818,420 shares of our common stock as commitment shares in noncash transactions.

In July 2021, we completed the sales 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 had 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.

From March 2020 through the completion of sales in February 2021, Lincoln Park purchased an aggregate of 32,944,717 shares of our common stock for a net purchase price of $20 million under the 2020 Purchase Agreement.

During the same period, in connection with the purchases, we issued to Lincoln Park an aggregate of 917,431 shares of our common stock as commitment shares in noncash transactions.

In February 2021, we completed the sales under the 2020 Purchase Agreement.

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 had 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 2021, Lincoln Park purchased an aggregate of 2,383,748 shares of our common stock for a net purchase price of $17.4 million under the First 2021 Purchase Agreement.

In connection with the purchases, during 2021, we issued to Lincoln Park an aggregate of 120,500 shares of our common stock as commitment shares in noncash transactions.

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

On April 29, 2022, we entered into an amendment to a credit agreement dated October 31, 2009, which may from time to time be amended, modified, supplemented or restated, (the “SVB Credit Agreement”), with SVB, which provides for a revolving line of credit of up to $10.0 million.

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 Wall Street Journal prime rate (“Prime Rate”) or 4.25%.

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

Second 2021 Lincoln Park Purchase Agreement

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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.

Subsequent to January 1, 2022, Lincoln Park purchased an aggregate of 250,000 shares of our common stock for a net purchase price of $1.5 million under the Second 2021 Purchase Agreement.

During 2022, Lincoln Park purchased an aggregate of 1,050,000 shares of our common stock for a net purchase price of $4.4 million under the Second 2021 Purchase Agreement.

In connection with the purchases, we issued to Lincoln Park an aggregate of 8,502 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.

Repayment of SVIC Promissory Note

On November 18, 2015, we entered into a Senior Secured Convertible Promissory Note and Warrant Purchase Agreement, with SVIC No.

28 Technology Business Investment L.L.P., a Korean limited liability partnership (“SVIC”) and affiliate of Samsung Venture Investment Co., pursuant to which we sold SVIC a Senior Secured Convertible Promissory Note (“SVIC Note”) and a Stock Purchase Warrant (“SVIC Warrant”).

The SVIC Note had an original principal amount of $15.0 million, accrued interest at a rate of 2% per year, was due and payable in full on December 31, 2021.

The SVIC Warrant granted SVIC a right to purchase 2,000,000 shares of our common stock at an exercise price of $0.30 per share, subject to certain adjustment as set forth therein, was only exercisable in the event we exercised our right to redeem the SVIC Note prior to December 31, 2025.

We made the repayment of $16.8 million on December 27, 2021, and SVIC purchased 2,000,000 shares of common stock at an exercise price of $0.30 per share on December 28, 2021.

As a result, neither the SVIC Note nor the SVIC Warrant remained outstanding as of January 1, 2022.

Subsequent to December 31, 2022, Lincoln Park purchased an aggregate of 2,650,000 shares of our common stock for a net purchase price of $4.3 million under the Second 2021 Purchase Agreement.

In connection with the purchases, we issued to Lincoln Park an aggregate of 8,284 shares of our common stock as additional commitment shares in noncash transactions.

Ineffective Internal Control over Financial Reporting

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

In performing their audit of our internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002, as amended, our independent registered public accounting firm concluded that our internal control over financial reporting was ineffective as of January 1, 2022 due to two material weaknesses.

The identified material weaknesses, at January 1, 2022, relate to (i) the lack of an independent board and audit committee and (ii) ineffective design and maintenance of controls over user access and program change management related to certain information technology (IT) systems that support our financial reporting processes.

In performing their audit of our internal control over financial reporting as required by Section 404 of SOX, our independent registered public accounting firm concluded that our internal control over financial reporting was ineffective as of December 31, 2022 due to one material weakness.

The identified material weakness, at December 31, 2022, relates to the lack of an independent board and audit committee.

While the control weaknesses identified did not result in any identified misstatements, a reasonable possibility exists that a material misstatement to the annual or interim consolidated financial statements and disclosures will not be prevented or detected on a timely basis.

In an effort to remediate the identified material weakness related to the lack of an independent board and audit committee and to enhance our internal controls, our finance and accounting personnel are continuing to follow all of the same procedures that they undertook in preparation for independent audit committee meetings on a quarterly and annual basis.

Our CEO and sole director will oversee these processes and review materials prepared by the finance and accounting staff as well as our independent auditors on a quarterly and annual basis.

In an effort to remediate the identified material weakness related to our ineffective design and maintenance of controls over user access and program change management related to certain IT systems, we hired a full-time Senior Director of IT in the fourth quarter of 2021 with a primary mandate to focus on SOX compliance and mitigation plans for 2022.

If our remedial measures are insufficient to address the material weakness, or if additional material weaknesses or significant deficiencies in our internal control over financial reporting occur in the future, we may not be able to timely or accurately report our results of operations or maintain effective disclosure controls and procedures.

In an effort to address the identified material weakness related to the lack of an independent board and audit committee and to enhance our internal controls, our finance and accounting personnel are continuing to follow all of the same procedures that they undertook in preparation for independent audit committee meetings on a quarterly and annual basis.

Our CEO and sole director will oversee these processes and review materials prepared by the finance and accounting staff as well as our independent registered public accounting firm on a quarterly and annual basis.

If our measures are insufficient to address the material weakness, or if additional material weaknesses or significant deficiencies in our internal control over financial reporting occur in the future, we may not be able to timely or accurately report our results of operations or maintain effective disclosure controls and procedures.

If we are unable to report financial information timely or accurately, or to maintain effective disclosure controls and procedures, we could be required to restate our financial statements and be subject to, among other things, regulatory or enforcement actions, securities litigation, limitations on our ability to access capital markets, debt rating agency downgrades or rating withdrawals, or loss in confidence of our investors, any one of which could adversely affect the valuation of our common stock and our business prospects.

We can give no assurance that the measures we have taken and plan to take in the future will remediate the material weaknesses identified or that any additional material weaknesses will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting.

We can give no assurance that the measures we have taken and plan to take in the future will remediate the material weakness identified or that any additional material weaknesses will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting.

Results of Operations

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Net product sales

Gross margin - product sales

Gross profit - product sales

Gross margin percentage - product sales

Gross margin percentage

Net sales include (i) resales of certain component products, including DIMMs, SSDs and dynamic random access memory integrated circuits (“DRAM ICs” or “DRAM”) products, and sales of our high-performance memory subsystems and (ii) an upfront non-refundable license fee of $40 million recognized for licensing of our patents pursuant to the License Agreement with SK hynix entered into in April 2021.

Net product sales increased by $55.1 million during 2021 compared to 2020 primarily as a result of a $52.0 million increase in the resale of DIMMs and components and an increase of $3.0 million of Netlist SSD and Netlist branded products.

Product gross margin increased in 2021 compared to 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.

Net sales include (i) resales of certain component products, including DIMMs, SSDs and DRAM products, and sales of our high-performance memory subsystems and (ii) an upfront non-refundable fee pursuant to the Strategic Agreement.

Net product sales increased by approximately $59.3 million during 2022 compared to 2021 primarily as a result of a $81.4 million increase in the sale of RDIMM and discrete component products and a $9.5 million increase in the sale of Netlist’s flash and SSD products, offset by a $31.6 million decrease in sales of low-profile memory subsystem products.

Gross Profit and Gross Margin

Product gross profit increased in 2022 compared to 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

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Research and Development

Research and development expenses increased in 2021 compared to 2020 primarily as a result of an increase in engineering employee headcount and overhead to support the development of the next generation HybriDIMM.

Research and development expenses increased in 2022 compared to 2021 due primarily to an increase in employee headcount, related overhead and new product research.

Intellectual Property Legal Fees

Intellectual property legal fees consist of legal fees incurred for enforcement, protection and patent filings and prosecution.

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.

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 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for further discussion.

Intellectual property legal fees increased during 2021 compared to 2020 due primarily to higher legal expenses incurred to seek 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 2022 compared to 2021 due primarily to higher legal expenses incurred to defend and enforce our patent portfolio internationally.

Selling, General and Administrative

Selling, general and administrative expenses increased in 2022 compared to 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 transitioned to becoming a “large accelerated filer” as of January 1, 2022 which means that we need to file our quarterly and annual reports on an accelerated basis and that we 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 require 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 expense, net for 2021 and 2020 was as follows (dollars in thousands):

Interest expense, net

Other 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.

In December 2021, we repaid the full amounts outstanding under the SVIC Note.

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

Other income, net for 2022 and 2021 was as follows (dollars in thousands):

Interest income (expense), net

Other income, net

Total other income, net

Interest expense, net, in 2021 consisted primarily of interest expense on the Senior Secured Convertible Promissory Note issued on November 18, 2015 (the “SVIC Note”) to SVIC No.

28 Technology Business Investment L.L.P., a Korean limited liability partnership (“SVIC”), an affiliate of Samsung Venture Investment Co., 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 December 2021 resulting in a decrease in interest expense for 2022 compared to 2021.

Other income, net in 2021 included the gain on forgiveness of the PPP Loan of $0.6 million unsecured promissory note entered into on April 23, 2020, by and between the Company and Hanmi Bank under the Paycheck Protection Program (“PPP”) (the “PPP Loan”) administered by the Small Business Administration (“SBA”).

This gain was recognized during the second quarter of 2021 resulting in a decrease in other income for 2022 compared to 2021.

Provision for Income Taxes

During 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.

For 2022, our effective tax rate was 0% due primarily to our net loss and valuation allowances.

During 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 fee pursuant to the Strategic Agreement of $40 million from SK hynix recognized during the second quarter of 2021.

Due primarily to this withholding tax, our effective tax rate for 2021 was higher at 58% than the statutory federal income tax rate of 21%.

For 2020, our effective tax rate was 0% with the statutory tax rate of 21% due primarily to our net loss and valuation allowances.

Liquidity and Capital Resources

We believe our existing balance of cash and cash equivalents, which totaled $58.5 million as of January 1, 2022, along with cash receipts from revenues, borrowing availability under the SVB Credit Agreement, the equity financing available under the Second 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, which totaled $43.6 million as of December 31, 2022, along with cash receipts from revenues, borrowing availability under the SVB Credit Agreement, the equity financing available under the Second 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.

In addition, on April 5, 2021, we entered into a Product Purchase and Supply Agreement (the “Supply Agreement”) with SK hynix and the Strategic Agreement.

Both agreements have a term of 5 years.

Under the Strategic Agreement, (a) we have granted to SK hynix worldwide, non-exclusive, non-assignable licenses to certain of our patents covering memory technologies and (b) SK hynix has granted to us worldwide, non-exclusive, non-assignable licenses to its patent portfolio.

In addition, the Strategic Agreement provided for the settlement of all intellectual property proceedings between us and SK hynix and a settlement fee of $40 million paid to us by SK hynix.

In addition, the parties have agreed to collaborate on certain technology development activities.

For a description of contractual obligations, see Note 4, “Debt” and Note 5, “Leases” of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.

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Net change in cash, cash equivalents and restricted cash

Net cash used in operating activities for 2022 was primarily a result of net loss of $33.4 million, non-cash adjustments to net loss of $4.2 million, partially offset by net cash inflows from changes in operating assets and liabilities of $14.2 million driven predominantly by an increase in accounts payable and accrued expenses and other liabilities and a decrease in accounts receivable and inventories.

Net cash provided by financing activities for 2022 primarily consisted of $4.4 million in net proceeds from issuance of common stock under the Second 2021 Lincoln Park Purchase Agreement and $0.3 million in proceeds from exercise of stock options, partially offset by $2.1 million in net payments under the SVB Credit Agreement, $0.6 million in payments of note payable to finance insurance policies and $1.4 million in payments for taxes related to net share settlement of equity awards.

Net cash provided by operating activities for 2021 was primarily a result of net income of $4.8 million, non-cash adjustments to net income of $2.0 million, offset by net cash outflows from changes in operating assets and liabilities of $1.0 million driven predominantly by an increase in accounts payable, partially offset by an increase in accounts receivable and inventories.

Net cash provided by financing activities for 2021 primarily consisted of $39.6 million in net proceeds from issuance of common stock under the 2019, 2020 and First and Second 2021 Lincoln Park Purchase Agreements, $11.8 million in proceeds from exercise of stock options and warrants and $3.3 million in net borrowings under the SVB Credit Agreement, partially offset by $17.1 million in repayment of SVIC Note and other debt and $1.1 million in payments for taxes related to net share settlement of equity awards.

Net cash used in operating activities for 2020 was primarily a result of a net loss of $7.3 million, adjusted for non-cash charges of $2.1 million, offset by net cash outflows from changes in working capital balances of $2.9 million driven predominantly by a decrease in accounts payable, partially offset by an increase in accounts receivable.

Net cash provided by financing activities for 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 $0.7 million in net borrowings under the SVB Credit Agreement, partially offset by $0.4 million in payments of note payable to finance insurance policies.

Net cash provided by financing activities for 2021 primarily consisted of $39.6 million in net proceeds from issuance of common stock under the Purchase Agreement, dated as of June 24, 2019, by and between the Company and Lincoln Park (the “2019 Purchase Agreement”), the Purchase Agreement, dated as of March 5, 2020, by and between the Company and Lincoln Park (the “2020 Purchase Agreement”), the Purchase Agreement, dated as of July 12, 2021, by and between the Company and Lincoln Park (the “First 2021 Purchase Agreement”), and the Second 2021 Purchase Agreement, $11.8 million in proceeds from exercise of stock options and warrants and $3.3 million in net borrowings under the SVB Credit Agreement, partially offset by $17.1 million in repayment of SVIC Note and other debt and $1.1 million in payments for taxes related to net share settlement of equity awards.

Capital Resources

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.

As of January 1, 2022, $64.1 million remains available under the Second 2021 Purchase Agreement with Lincoln Park.

2021 Purchase Agreement.

As of December 31, 2022, $59.7 million remains available under the Second 2021 Purchase Agreement with Lincoln Park.

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 $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 In December 2021, after meeting the conditions set forth in the amendment, the amount available for borrowing was increased to $7.0 million and the maturity date was extended to April 29, 2022 upon our request.

As of January 1, 2022, the outstanding borrowings under the SVB Credit Agreement were $7.0 million.

During the year ended January 1, 2022, we made net borrowings of $3.3 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.

As of December 31, 2022, the outstanding borrowings under the SVB Credit Agreement were $4.9 million with no availability under the revolving line of credit.

During the year ended December 31, 2022, we made net repayments of $2.1 million under the SVB Credit Agreement.

Critical Accounting Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States and our discussion and analysis of our financial condition and operating results require our management to make judgments, assumptions and estimates that affect the amounts reported.

Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K describes the significant accounting policies and methods used in the preparation of our consolidated financial statements.

Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

While our significant accounting policies are described in more detail in Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K, we believe the accounting policies discussed below used in the preparation of our consolidated financial statements require the most significant estimates, judgments, assumptions and decisions.

Sales Return Reserves

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We evaluate inventory balances for excess quantities and obsolescence on a regular basis by analyzing estimated demand, inventory on hand, sales levels and other information and reduce inventory balances to net realizable value for excess and obsolete inventory based on this analysis.

At the point of the write-down recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.

point of the write-down recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.

We offer standard product warranties generally ranging from one to three years to our memory subsystem products customers, depending on the negotiated terms of any purchase agreements, and has no other post-shipment obligations or separately priced extended warranty or product maintenance contracts.

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Stock-based awards are comprised principally of stock options, restricted stock awards (“RSAs”) and restricted stock units (“RSUs”).

Stock-based compensation cost is measured at the grant date based on the fair value of the award

and is recognized as an expense over the requisite service period, which is the vesting period, on a straight-line basis, net of estimated forfeitures.

Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as an expense over the requisite service period, which is the vesting period, on a straight-line basis, net of estimated forfeitures.

We use the Black-Scholes option pricing model to determine the grant date fair value of stock options.

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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-K

Item 7. Management’s Discussion and Analysis