NETLIST, INC. 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. 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;
? 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, maintain effective internal
? control over financial reporting and satisfy the accelerated and enhanced
disclosure obligations that will apply to us as we transition from a "smaller
reporting company" to a "large accelerated filer" in 2022; 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
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Overview
During the first quarter of 2022, we recorded net sales of
Recent Developments
SK hynix License Agreement and Supply Agreement
On
Amendment to SVB Credit Agreement
On
On
As of
On
During 2021,
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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.
Results of Operations
Net sales and gross margin for the three months ended
Three Months Ended
April 2, April 3, %
2022 2021 Change
Net sales $ 50,200 $ 14,897 237%
Cost of sales 46,837 13,396 250%
Gross profit $ 3,363 $ 1,501 124%
Gross margin 7 % 10 %
Net 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
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Gross Margin
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 months ended
Three Months Ended
April 2, April 3, %
2022 2021 Change
Research and development $ 2,457 $ 1,124 119 %
Percentage of net sales 5 % 8 %
Intellectual property legal fees
6 % 15 %
Selling, general and administrative
8 % 13 %
Research and Development
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
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.
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 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
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Other Expense, Net
Other expense, net for the three months ended
Three Months Ended
April 2, April 3, %
2022 2021 Change
Interest expense, net $ (11) $ (147)
Other expense, net (2) (2)
Total other expense, net
Interest expense, net, in 2021 consisted primarily of interest expense on the
Liquidity and Capital Resources
Our primary sources of cash are historically proceeds from issuances of equity and debt securities and receipts from revenues. In addition, we have received proceeds from non-recurring engineering and licensing of our patent portfolio, including as a result of our entry into the SK hynix License Agreement, which we use to support our operations. 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
April 2, January 1,
2022 2022
Cash, cash equivalents and restricted cash $ 58,330 $ 58,479
Convertible promissory note and accrued interest, net 376 562
Working capital 48,652 52,613
Three Months Ended
April 2, April 3,
2022 2021
Net cash provided by (used in) operating activities
(221) (41)
Net cash (used in) provided by financing activities (1,145) 14,322
During the three months ended
During the three months ended
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to support increased sales, partially offset by an increase in accounts payable.
Net cash provided by financing activities during the three months ended
Capital Resources
On
SVB Credit Agreement
On
On
As of
Sufficiency of Cash Balances and Potential Sources of
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
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
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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 II, Item 8 of our 2021 Annual Report and in the MD&A in our 2021 Annual Report. There have been no significant changes to our critical accounting policies since our 2021 Annual Report.
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