0001558370-23-013975 10-Q 57 20230701 20230808 20230808 NETLIST INC 0001282631 3674 954812784 DE 1230 10-Q 34 001-33170 231152156 111 ACADEMY, SUITE 100 IRVINE CA 92617 949-435-0025 111 ACADEMY, SUITE 100 IRVINE CA 92617 10-Q 1 nlst-20230701x10q.htm 10-Q
http://fasb.org/us-gaap/2022#AccruedLiabilitiesCurrenthttp://fasb.org/us-gaap/2022#PropertyPlantAndEquipmentNethttp://fasb.org/us-gaap/2022#AccruedLiabilitiesCurrenthttp://fasb.org/us-gaap/2022#OtherLiabilitiesNoncurrent0001282631--12-302023Q2false24038200023129800023775200023092200000240382000231298000237752000230922000NETLIST INC2413070002325570000.060.020.130.050.060.020.130.05P9Mhttp://fasb.org/us-gaap/2022#AccruedLiabilitiesCurrenthttp://fasb.org/us-gaap/2022#PropertyPlantAndEquipmentNethttp://fasb.org/us-gaap/2022#AccruedLiabilitiesCurrenthttp://fasb.org/us-gaap/2022#OtherLiabilitiesNoncurrent0.001P10D0001282631us-gaap:CommonStockMember2023-04-022023-07-010001282631us-gaap:CommonStockMember2023-01-012023-04-010001282631us-gaap:CommonStockMember2022-04-032022-07-020001282631us-gaap:CommonStockMember2022-01-022022-04-020001282631us-gaap:RetainedEarningsMember2023-07-010001282631us-gaap:AdditionalPaidInCapitalMember2023-07-010001282631us-gaap:RetainedEarningsMember2023-04-010001282631us-gaap:AdditionalPaidInCapitalMember2023-04-0100012826312023-04-010001282631us-gaap:RetainedEarningsMember2022-12-310001282631us-gaap:AdditionalPaidInCapitalMember2022-12-310001282631us-gaap:RetainedEarningsMember2022-07-020001282631us-gaap:AdditionalPaidInCapitalMember2022-07-020001282631us-gaap:RetainedEarningsMember2022-04-020001282631us-gaap:AdditionalPaidInCapitalMember2022-04-0200012826312022-04-020001282631us-gaap:RetainedEarningsMember2022-01-010001282631us-gaap:AdditionalPaidInCapitalMember2022-01-010001282631us-gaap:CommonStockMember2023-07-010001282631us-gaap:CommonStockMember2023-04-010001282631us-gaap:CommonStockMember2022-12-310001282631us-gaap:CommonStockMember2022-07-020001282631us-gaap:CommonStockMember2022-04-020001282631us-gaap:CommonStockMember2022-01-0100012826312017-04-170001282631nlst:Amended2006PlanMember2023-07-010001282631us-gaap:SeriesAPreferredStockMember2017-04-170001282631us-gaap:RestrictedStockUnitsRSUMember2023-07-010001282631us-gaap:RestrictedStockUnitsRSUMember2022-12-310001282631us-gaap:RestrictedStockUnitsRSUMember2023-01-012023-07-010001282631us-gaap:RestrictedStockUnitsRSUMembernlst:Plan2006Member2023-01-012023-07-010001282631nlst:ResalesOfThirdPartyProductsMember2023-04-022023-07-010001282631nlst:ModularMemorySubsystemsMember2023-04-022023-07-010001282631nlst:ResalesOfThirdPartyProductsMember2023-01-012023-07-010001282631nlst:ModularMemorySubsystemsMember2023-01-012023-07-010001282631nlst:ResalesOfThirdPartyProductsMember2022-04-032022-07-020001282631nlst:ModularMemorySubsystemsMember2022-04-032022-07-020001282631nlst:ResalesOfThirdPartyProductsMember2022-01-022022-07-020001282631nlst:ModularMemorySubsystemsMember2022-01-022022-07-020001282631nlst:CitibankN.aMemberus-gaap:FinancialStandbyLetterOfCreditMember2023-01-012023-07-010001282631us-gaap:SeriesAPreferredStockMember2023-07-010001282631us-gaap:SeriesAPreferredStockMember2022-12-310001282631nlst:September2021LincolnParkPurchaseAgreementMember2023-01-012023-07-010001282631nlst:September2021LincolnParkPurchaseAgreementMember2022-01-022022-12-310001282631us-gaap:RetainedEarningsMember2023-04-022023-07-010001282631us-gaap:RetainedEarningsMember2023-01-012023-04-010001282631us-gaap:RetainedEarningsMember2022-04-032022-07-020001282631us-gaap:RetainedEarningsMember2022-01-022022-04-020001282631nlst:SiliconValleyBankMember2022-12-310001282631nlst:SiliconValleyBankMember2023-07-010001282631us-gaap:LetterOfCreditMembernlst:SiliconValleyBankMember2022-01-022022-12-310001282631nlst:SiliconValleyBankMember2022-01-022022-12-310001282631nlst:CitibankN.aMemberus-gaap:FinancialStandbyLetterOfCreditMember2023-07-010001282631nlst:SamsungLitigationsMember2023-05-302023-05-300001282631nlst:CitibankN.aMemberus-gaap:FinancialStandbyLetterOfCreditMember2023-06-062023-06-060001282631nlst:CitibankN.aMemberus-gaap:FinancialStandbyLetterOfCreditMember2023-05-152023-05-150001282631nlst:CitibankN.aMemberus-gaap:FinancialStandbyLetterOfCreditMember2023-06-060001282631nlst:CitibankN.aMemberus-gaap:FinancialStandbyLetterOfCreditMember2023-05-150001282631nlst:InsurancePolicyFinanceNotesPayable7.2PercentMember2023-01-040001282631nlst:SiliconValleyBankMemberus-gaap:PrimeRateMember2022-04-292022-04-290001282631nlst:CustomerThreeMemberus-gaap:SalesRevenueProductLineMemberus-gaap:CustomerConcentrationRiskMember2023-04-022023-07-010001282631nlst:CustomersMembernlst:SalesRevenueResaleOfProductsMemberus-gaap:CustomerConcentrationRiskMember2023-04-022023-07-010001282631nlst:CustomerOneMemberus-gaap:SalesRevenueProductLineMemberus-gaap:CustomerConcentrationRiskMember2023-04-022023-07-010001282631nlst:CustomerTwoMemberus-gaap:AccountsReceivableMemberus-gaap:CustomerConcentrationRiskMember2023-01-012023-07-010001282631nlst:CustomerThreeMemberus-gaap:SalesRevenueProductLineMemberus-gaap:CustomerConcentrationRiskMember2023-01-012023-07-010001282631nlst:CustomerThreeMemberus-gaap:AccountsReceivableMemberus-gaap:CustomerConcentrationRiskMember2023-01-012023-07-010001282631nlst:CustomersMembernlst:SalesRevenueResaleOfProductsMemberus-gaap:CustomerConcentrationRiskMember2023-01-012023-07-010001282631nlst:CustomerOneMemberus-gaap:SalesRevenueProductLineMemberus-gaap:CustomerConcentrationRiskMember2023-01-012023-07-010001282631nlst:CustomerOneMemberus-gaap:AccountsReceivableMemberus-gaap:CustomerConcentrationRiskMember2023-01-012023-07-010001282631nlst:CustomerFourMemberus-gaap:AccountsReceivableMemberus-gaap:CustomerConcentrationRiskMember2023-01-012023-07-010001282631nlst:CustomerTwoMemberus-gaap:SalesRevenueProductLineMemberus-gaap:CustomerConcentrationRiskMember2022-04-032022-07-020001282631nlst:CustomersMembernlst:SalesRevenueResaleOfProductsMemberus-gaap:CustomerConcentrationRiskMember2022-04-032022-07-020001282631nlst:CustomerOneMemberus-gaap:SalesRevenueProductLineMemberus-gaap:CustomerConcentrationRiskMember2022-04-032022-07-020001282631nlst:CustomerOneMemberus-gaap:AccountsReceivableMemberus-gaap:CustomerConcentrationRiskMember2022-01-022022-12-310001282631nlst:CustomerTwoMemberus-gaap:SalesRevenueProductLineMemberus-gaap:CustomerConcentrationRiskMember2022-01-022022-07-020001282631nlst:CustomersMembernlst:SalesRevenueResaleOfProductsMemberus-gaap:CustomerConcentrationRiskMember2022-01-022022-07-020001282631nlst:CustomerOneMemberus-gaap:SalesRevenueProductLineMemberus-gaap:CustomerConcentrationRiskMember2022-01-022022-07-0200012826312022-01-010001282631us-gaap:SellingGeneralAndAdministrativeExpensesMember2023-04-022023-07-010001282631us-gaap:ResearchAndDevelopmentExpenseMember2023-04-022023-07-010001282631us-gaap:CostOfSalesMember2023-04-022023-07-010001282631us-gaap:SellingGeneralAndAdministrativeExpensesMember2023-01-012023-07-010001282631us-gaap:ResearchAndDevelopmentExpenseMember2023-01-012023-07-010001282631us-gaap:CostOfSalesMember2023-01-012023-07-010001282631us-gaap:SellingGeneralAndAdministrativeExpensesMember2022-04-032022-07-020001282631us-gaap:ResearchAndDevelopmentExpenseMember2022-04-032022-07-020001282631us-gaap:CostOfSalesMember2022-04-032022-07-020001282631us-gaap:SellingGeneralAndAdministrativeExpensesMember2022-01-022022-07-020001282631us-gaap:ResearchAndDevelopmentExpenseMember2022-01-022022-07-020001282631us-gaap:CostOfSalesMember2022-01-022022-07-020001282631us-gaap:AdditionalPaidInCapitalMember2023-04-022023-07-0100012826312023-04-022023-07-010001282631us-gaap:AdditionalPaidInCapitalMember2023-01-012023-04-0100012826312023-01-012023-04-010001282631us-gaap:AdditionalPaidInCapitalMember2022-04-032022-07-0200012826312022-04-032022-07-020001282631us-gaap:AdditionalPaidInCapitalMember2022-01-022022-04-0200012826312022-01-022022-04-020001282631srt:MaximumMembernlst:September2021LincolnParkPurchaseAgreementMember2021-09-282021-09-280001282631nlst:September2021LincolnParkPurchaseAgreementMember2021-09-012021-09-300001282631nlst:September2021LincolnParkPurchaseAgreementMember2023-07-022023-08-030001282631nlst:Amended2006PlanMember2023-01-012023-07-010001282631nlst:September2021LincolnParkPurchaseAgreementMember2021-09-280001282631nlst:September2021LincolnParkPurchaseAgreementMember2021-09-282021-09-2800012826312022-01-022022-07-020001282631srt:MinimumMember2023-07-010001282631srt:MaximumMember2023-07-0100012826312017-04-172017-04-1700012826312022-12-310001282631nlst:SiliconValleyBankMember2023-01-012023-07-0100012826312023-07-0100012826312022-07-020001282631nlst:SvbCreditAgreementMember2022-04-222022-04-220001282631nlst:InsurancePolicyFinanceNotesPayable7.2PercentMember2023-01-152023-01-150001282631us-gaap:AccountsReceivableMemberus-gaap:CustomerConcentrationRiskMember2023-01-012023-07-010001282631us-gaap:AccountsReceivableMemberus-gaap:CustomerConcentrationRiskMember2022-01-022022-12-3100012826312023-08-0300012826312023-01-012023-07-01xbrli:sharesnlst:customerxbrli:pureiso4217:USDnlst:itemiso4217:USDxbrli:shares

]

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 1, 2023

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission file number: 001-33170

Graphic

NETLIST, INC.

(Exact name of registrant as specified in its charter)

Delaware

95-4812784

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

111 Academy, Suite 100

Irvine, California

92617

(Address of principal executive offices)

(Zip Code)

(949) 435-0025

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes     No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes     No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes    No 

As of August 3, 2023, there were 241,526,238 outstanding shares of the registrant’s common stock.

PART I. — FINANCIAL INFORMATION

Item 1.

Financial Statements

NETLIST, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except par value)

July 1,

December 31,

    

2023

    

2022

(unaudited)

ASSETS

Current Assets:

Cash and cash equivalents

$

24,348

$

25,011

Restricted cash

7,100

18,600

Accounts receivable, net of allowances of $33 (2023) and $137 (2022)

1,470

8,242

Inventories

9,953

10,686

Prepaid expenses and other current assets

736

1,308

Total current assets

43,607

63,847

Property and equipment, net

943

1,138

Operating lease right-of-use assets

1,915

2,043

Other assets

542

295

Total assets

$

47,007

$

67,323

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:

Accounts payable

$

21,033

$

28,468

Revolving line of credit

4,935

Accrued payroll and related liabilities

1,317

1,588

Accrued expenses and other current liabilities

1,184

2,635

Long-term debt due within one year

152

447

Total current liabilities

23,686

38,073

Operating lease liabilities

1,483

1,744

Other liabilities

189

270

Total liabilities

25,358

40,087

Commitments and contingencies

Stockholders' equity:

Preferred stock, $0.001 par value—10,000 shares authorized: Series A preferred stock, $0.001 par value; 1,000 shares authorized; none issued and outstanding

Common stock, $0.001 par value—450,000 shares authorized; 241,307 (2023) and 232,557 (2022) shares issued and outstanding

241

233

Additional paid-in capital

274,649

250,428

Accumulated deficit

(253,241)

(223,425)

Total stockholders' equity

21,649

27,236

Total liabilities and stockholders' equity

$

47,007

$

67,323

See accompanying Notes to Condensed Consolidated Financial Statements.

3

NETLIST, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

(In thousands, except per share amounts)

Three Months Ended

Six Months Ended

July 1,

July 2,

July 1,

July 2,

    

2023

    

2022

    

2023

    

2022

Net sales

$

10,026

$

55,358

$

19,047

$

105,558

Cost of sales

9,787

50,610

18,248

97,447

Gross profit

239

4,748

799

8,111

Operating expenses:

Research and development

2,255

2,672

4,556

5,129

Intellectual property legal fees

8,947

3,313

20,017

6,139

Selling, general and administrative

3,325

3,724

6,355

7,662

Total operating expenses

14,527

9,709

30,928

18,930

Operating loss

(14,288)

(4,961)

(30,129)

(10,819)

Other income (expense), net:

Interest income, net

277

15

333

4

Other expense, net

(16)

(6)

(19)

(8)

Total other income (expense), net

261

9

314

(4)

Loss before provision for income taxes

(14,027)

(4,952)

(29,815)

(10,823)

Provision for income taxes

1

1

1

Net loss

$

(14,028)

$

(4,952)

$

(29,816)

$

(10,824)

Loss per share:

Basic and diluted

$

(0.06)

$

(0.02)

$

(0.13)

$

(0.05)

Weighted-average common shares outstanding:

Basic and diluted

240,382

231,298

237,752

230,922

See accompanying Notes to the Condensed Consolidated Statements.

4

B

NETLIST, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders Equity (Unaudited)

(In thousands)

Additional

Total

Common Stock

Paid-in

Accumulated

Stockholders'

    

Shares

    

Amount

    

Capital

    

Deficit

    

Equity

Balance, December 31, 2022

232,557

$

233

$

250,428

$

(223,425)

$

27,236

Net loss

(15,788)

(15,788)

Issuance of common stock, net

4,920

5

10,537

10,542

Exercise of stock options

381

264

264

Stock-based compensation

1,077

1,077

Restricted stock units vested and distributed

712

1

(1)

Balance, April 1, 2023

238,570

239

262,305

(239,213)

23,331

Net loss

(14,028)

(14,028)

Issuance of common stock, net

2,422

2

11,008

11,010

Exercise of stock options

129

140

140

Stock-based compensation

1,196

1,196

Restricted stock units vested and distributed

186

Balance, July 1, 2023

241,307

$

241

$

274,649

$

(253,241)

$

21,649

Additional

Total

Common Stock

Paid-in

Accumulated

Stockholders'

    

Shares

    

Amount

    

Capital

    

Deficit

    

Equity

Balance, January 1, 2022

230,113

$

231

$

243,866

$

(190,055)

$

54,042

Net loss

(5,872)

(5,872)

Issuance of common stock, net

303

1,767

1,767

Exercise of stock options

197

138

138

Stock-based compensation

682

682

Restricted stock units vested and distributed

533

1

(1)

Tax withholdings related to net share settlements of equity awards

(117)

(591)

(591)

Balance, April 2, 2022

231,029

232

245,861

(195,927)

50,166

Net loss

(4,952)

(4,952)

Issuance of common stock, net

354

1,973

1,973

Exercise of stock options

72

47

47

Stock-based compensation

790

790

Restricted stock units vested and distributed

50

Tax withholdings related to net share settlements of equity awards

(17)

(108)

(108)

Balance, July 2, 2022

231,488

$

232

$

248,563

$

(200,879)

$

47,916

See accompanying Notes to the Condensed Consolidated Statements.

5

NETLIST, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

Six Months Ended

July 1,

July 2,

    

2023

    

2022

Cash flows from operating activities:

Net loss

$

(29,816)

$

(10,824)

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization

195

157

Non-cash lease expense

315

314

Stock-based compensation

2,273

1,472

Changes in operating assets and liabilities:

Accounts receivable

6,772

399

Inventories

733

(6,187)

Prepaid expenses and other assets

325

83

Accounts payable

(7,435)

12,422

Accrued payroll and related liabilities

(271)

122

Accrued expenses and other liabilities

(1,876)

609

Net cash used in operating activities

(28,785)

(1,433)

Cash flows from investing activities:

Acquisition of property and equipment

(326)

Net cash used in investing activities

(326)

Cash flows from financing activities:

Net borrowings (repayments) under line of credit

(4,935)

1,019

Principal repayments under finance lease

(104)

(27)

Payments on notes payable

(295)

(373)

Proceeds from issuance of common stock, net

21,552

3,740

Proceeds from exercise of stock options

404

185

Payments for taxes related to net share settlement of equity awards

(699)

Net cash provided by financing activities

16,622

3,845

Net change in cash, cash equivalents and restricted cash

(12,163)

2,086

Cash, cash equivalents and restricted cash at beginning of period

43,611

58,479

Cash, cash equivalents and restricted cash at end of period

$

31,448

$

60,565

Reconciliation of cash, cash equivalents and restricted cash at end of period:

Cash and cash equivalents

$

24,348

$

40,465

Restricted cash

7,100

20,100

Cash, cash equivalents and restricted cash at end of period

$

31,448

$

60,565

See accompanying Notes to the Condensed Consolidated Statements.

6

NETLIST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 1—Description of Business

Netlist, Inc. and its wholly owned subsidiaries (collectively the “Company”, “Netlist”, “we”, “us”, or “our”) 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 also licenses its intellectual property.

Note 2—Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Certain information and footnote disclosures normally included in the condensed consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of and for the year ended December 31, 2022, included in the Company’s Annual Report on Form 10-K filed with the SEC on February 28, 2023 (the “2022 Annual Report”).

In the opinion of management, all adjustments for the fair presentation of the Company’s condensed consolidated financial statements have been made. The adjustments are of a normal recurring nature except as otherwise noted. The results of operations for the interim periods are not necessarily indicative of the results to be expected for other periods or the full fiscal year. The Company has evaluated events occurring subsequent to July 1, 2023 through the filing date of this Quarterly Report on Form 10-Q and concluded that there were no events that required recognition and disclosures other than those discussed elsewhere in the notes hereto.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Netlist, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Fiscal Year

The Company’s fiscal year is the 52- or 53-week period that ends on the Saturday nearest to December 31. The Company’s fiscal year 2023 will include 52 weeks and ends on December 30, 2023. Each quarter of fiscal year 2023 will be comprised of 13 weeks. Unless otherwise stated, references to particular years, quarters, months and periods refer to the Company’s fiscal years ended in January and the associated quarters, months and periods of those fiscal years.

Use of Estimates

The preparation of the accompanying condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported. Actual results may differ materially from those estimates.

Recently Adopted Accounting Guidance

Currently, there are no Accounting Standards Updates that the Company is required to adopt that are likely to have a material effect on its financial statements that have not been previously discussed in the Company's 2022 Annual Report.

7

Note 3—Supplemental Financial Information

Inventories

Inventories consisted of the following (in thousands):

July 1,

December 31,

    

2023

    

2022

Raw materials

$

7,351

$

8,223

Work in process

3

185

Finished goods

2,599

2,278

$

9,953

$

10,686

Loss Per Share

The following table shows the computation of basic and diluted loss per share of common stock (in thousands, except per share data):

Three Months Ended

Six Months Ended

July 1,

July 2,

July 1,

July 2,

2023

    

2022

    

2023

    

2022

Numerator: Net loss

$

(14,028)

$

(4,952)

$

(29,816)

$

(10,824)

Denominator: Weighted-average basic shares outstanding - basic and diluted

240,382

231,298

237,752

230,922

Net loss per share - basic and diluted

$

(0.06)

$

(0.02)

$

(0.13)

$

(0.05)

The table below shows potentially dilutive weighted average common share equivalents, consisting of shares issuable upon the exercise of outstanding stock options using the treasury stock method and the shares vesting of issuable upon the restricted stock units (“RSUs”). These potential weighted average common share equivalents have been excluded from the diluted net loss per share calculations above as their effect would be anti-dilutive (in thousands):

Three Months Ended

Six Months Ended

July 1,

July 2,

July 1,

July 2,

2023

    

2022

    

2023

    

2022

Weighted average common share equivalents

4,183

5,419

3,677

5,911

Disaggregation of Net Sales

The following table shows disaggregated net sales by major source (in thousands):

Three Months Ended

Six Months Ended

July 1,

July 2,

July 1,

July 2,

    

2023

2022

    

2023

2022

Resales of third-party products

$

8,589

$

49,168

$

15,498

$

94,753

Sale of the Company's modular memory subsystems

1,437

6,190

3,549

10,805

Total net sales

$

10,026

$

55,358

$

19,047

$

105,558

8

Major Customers and Products

The Company’s net product sales have historically been concentrated in a small number of customers. The following table sets forth the percentage of net product sales made to customers that each comprise 10% or more of total product sales:

Three Months Ended

Six Months Ended

July 1,

July 2,

July 1,

July 2,

2023

2022

2023

2022

Customer A

36%

32%

42%

42%

Customer B

*

23%

*

16%

Customer C

27%

*

14%

*

*

Less than 10% of net sales during the period.

As of July 1, 2023, four customers represented approximately 20%, 18%, 13% and 10% of aggregated gross accounts receivables, respectively. As of December 31, 2022, one customer represented approximately 69% of aggregate gross accounts receivables. The loss of a major customer or a reduction in sales to or difficulties collecting payments from these customers could significantly reduce the Company’s net sales and adversely affect its operating results. The Company mitigates risks associated with foreign and domestic receivables by purchasing comprehensive credit insurance.

The Company resells certain component products to end-customers that are not reached in the distribution models of the component manufacturers, including storage customers, appliance customers, system builders and cloud and datacenter customers. For the three and six months ended July 1, 2023, resales of these products represented approximately 86% and 81% of net product sales, respectively. For the three and six months ended July 2, 2022, resales of these products represented approximately 89% and 90% of net product sales, respectively.

Note 4—Credit Agreement and Standby Letters of Credit

SVB Credit Agreement

On October 31, 2009, the Company and Silicon Valley Bank (“SVB”) entered into a credit agreement, as the same may from time to time be amended, modified, supplemented or restated, (the “SVB Credit Agreement”), which provided for a revolving line of credit up to $10.0 million, as amended. The SVB Credit Agreement was most recently amended on April 29, 2022 to add 50% of eligible inventory to the previous borrowing base limited to 85% of eligible accounts receivable, subject to certain adjustments. Borrowings accrued interest on advance at a per annum rate equal to the greater of 0.75% above the Wall Street Journal prime rate (“Prime Rate”).     

The SVB Credit Agreement required letters of credit to be secured by cash, which were classified as restricted cash in the accompanying condensed consolidated balance sheets. As of December 31, 2022, (i) outstanding letters of credit were $18.6 million, (ii) outstanding borrowings were $4.9 million, and (iii) availability under the revolving line of credit was $0.

On the maturity date, April 28, 2023, the SVB Credit Agreement terminated in accordance with its terms. In connection with the termination of the SVB Credit Agreement, all outstanding obligations for principal, interest, and fees were paid in full and all liens securing such obligations were released.

Standby Letters of Credit

On May 15, 2023 and June 6, 2023, Citibank, N.A. issued on our behalf to third parties irrevocable letters of credit in the amount of $5.0 million and $2.0 million, respectively. The standby letters of credit are valid for a one-year term. As of July 1, 2023, the amount of outstanding letters of credit was approximately $7.0 million, and no amount has

9

been drawn from the letters of credit. A standby letter of credit is a guarantee of payment issued by a bank on our behalf that is used as payment of last resort should we fail to fulfill a contractual commitment with a third party.

Note 5—Debt

The Company’s debt consisted of the following (in thousands):

July 1,

December 31,

    

2023

    

2022

Notes payable

$

152

$

447

Less: amounts due within one year

(152)

(447)

Long-term debt

$

$

Insurance Policy Finance Agreement

As of July 1, 2023 and December 31, 2022, we had $0.2 million and $0.4 million, respectively, in short-term notes payable for the financing of insurance policies. On January 4, 2023, we entered into a short-term note payable for $0.4 million bearing interest at 7.2% to finance insurance policies. Principal and interest payments on this note began January 15, 2023 and are made evenly based on a straight line amortization over a 9-month period.

Note 6—Leases

The Company has operating and finance leases primarily associated with office and manufacturing facilities and certain equipment. The determination of which discount rate to use when measuring the lease obligation was deemed a significant judgment.

Lease cost and supplemental condensed consolidated cash flow information related to operating and finance leases were as follows (in thousands):

Three Months Ended

Six Months Ended

July 1,

July 2,

July 1,

July 2,

    

2023

2022

    

2023

    

2022

Lease cost:

Operating lease cost

$

194

$

198

$

389

$

396

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases

$

169

$

170

$

338

$

319

Operating cash flows from finance leases

3

2

6

3

Financing cash flows from finance leases

52

21

104

27

Right-of-use assets obtained in exchange for lease obligations:

Operating leases

$

$

33

$

$

588

Finance leases

$

$

372

$

$

372

Lease modification to increase operating lease assets

$

187

$

204

$

187

$

204

For the three and six months ended July 1, 2023 and July 2, 2022, finance lease costs were immaterial.

10

Supplemental condensed consolidated balance sheet information related to leases was as follows (in thousands):

July 1,

December 31,

2023

2022

Operating Leases

Operating lease right-of-use assets

$

1,915

$

2,043

Accrued expenses and other current liabilities

$

636

$

451

Operating lease liabilities

1,483

1,744

Total operating lease liabilities

$

2,119

$

2,195

Finance Leases

Property and equipment, at cost

$

488

$

488

Accumulated depreciation

(170)

(121)

Property and equipment, net

$

318

$

367

Accrued expenses and other current liabilities

$

194

$

211

Other liabilities

9

96

Total finance lease liabilities

$

203

$

307

The following table includes supplemental information:

July 1,

December 31,

2023

2022

Weighted Average Remaining Lease Term (in years)

Operating leases

3.3

3.9

Finance leases

1.0

1.5

Weighted Average Discount Rate

Operating leases

5.8%

5.5%

Finance leases

4.4%

4.4%

Maturities of lease liabilities as of July 1, 2023, were as follows (in thousands):

Operating

Finance

Fiscal Year

Leases

Leases

2023 (remainder of the year)

$

346

$

110

2024

702

91

2025

624

5

2026

639

2

2027

23

Total lease payments

2,334

208

Less: imputed interest

(215)

(5)

Total

$

2,119

$

203

Note 7Commitments and Contingencies

Contingent Legal Expenses

We may retain the services of law firms that specialize in patent licensing and enforcement and patent law in connection with our licensing and enforcement activities. These law firms may be retained on a contingent fee basis whereby such law firms are paid on a scaled percentage of any negotiated fee, settlements or judgments awarded based on how and when the fees, settlements or judgments are obtained.

11

Litigation and Patent Reexaminations

The Company is, from time to time, a party to litigation that arises in the normal course of its business operations. We own numerous patents and continue to seek to grow and strengthen our patent portfolio, which covers various aspects of our innovations and includes various claim scopes. We plan to pursue avenues to monetize our intellectual property portfolio, in which we would generate revenue by selling or licensing our technology, and we intend to vigorously enforce our patent rights against alleged infringers of such rights. We dedicate substantial resources to protecting and enforcing our intellectual property rights, including with patent infringement proceedings we file against third parties and defense of our patents against challenges made by way of reexamination and review proceedings at the U.S. Patent and Trademark Office (“USPTO”) and Patent Trial and Appeal Board (“PTAB” or the “Board”). We expect these activities to continue for the foreseeable future, with no guarantee that any ongoing or future patent protection or litigation activities will be successful, or that we will be able to monetize our intellectual property portfolio.

Any litigation, regardless of its outcome, is inherently uncertain, involves a significant dedication of resources, including time and capital, and diverts management’s attention from our other activities. As a result, any current or future claims, allegations, or challenges by or against third parties, whether eventually decided in our favor or settled, could materially adversely affect our business, financial condition and results of operations. Additionally, the outcome of pending or future litigation and/or related patent reviews and reexaminations, as well as any delay in their resolution, could affect our ability to continue to sell our products, protect against competition in the current and expected markets for our products or license or otherwise monetize our intellectual property rights in the future.

Google Litigations

On December 4, 2009, Netlist filed a patent infringement lawsuit against Google, Inc. (“Google”) in the U.S. District Court for the Northern District of California (the “NDCA”), seeking damages and injunctive relief based on Google’s alleged infringement of our U.S. Patent No. 7,619,912 (the “‘912 Patent”). The current judge assigned to the case, Hon. Chief Judge Seeborg, entered an order via stipulation on October 17, 2022 staying the NDCA Google case until the resolution of a pending case filed by Netlist, Inc. against Samsung Electronics Co., Ltd. in the United States District Court for the Eastern District of Texas (“EDTX”) (Netlist, Inc. v. Samsung Elecs. Co., Ltd. et al., Case No. 2:22-cv-00293-JRG).

On July 26, 2022, Netlist filed patent infringement claims against Google Cloud EMEA Limited, Google Germany GmbH, Redtec Computing GmbH, and Google, seeking damages based on those defendants’ infringement of European Patents EP 2,454,735 (“EP735”) and EP 3,404,660 (“EP660”), which both generally relate to load reduced dual in line memory modules (“LRDIMM”) technologies. As of the reporting date, Google has submitted its statements of defense. As of the reporting date, the date for oral hearings before the Dusseldorf Court is currently scheduled for November 9, 2023.

On October 15, 2021, Samsung initiated a declaratory judgement action against Netlist in the U.S. District Court for the District of Delaware (“DDE”) (Samsung Elecs. Co., Ltd., et. al. v. Netlist, Inc., Case No. 1:21-cv-01453-RGA). On September 12, 2022, Netlist amended its Counterclaims to include counterclaims against Google, LLC and Alphabet, Inc. On November 15, 2022, Google, LLC and Alphabet, Inc. responded to Netlist’s Counterclaims by filing a Motion to Dismiss or alternatively to sever and stay the counterclaims. As of the reporting date, the Court has heard oral arguments for Google’s Motion to Dismiss or alternatively, Sever and Stay and Dismiss Willfulness and Indirect Infringement Allegations. As of the reporting date, the case remains active and set for a claim construction hearing on October 20, 2023, and the Jury Trial is scheduled to begin on February 3, 2025.

Micron Litigations

On April 28, 2021, Netlist filed a complaint for patent infringement against Micron Technology, Inc. (“Micron”) in the U.S. District Court for the Western District of Texas, Waco Division (“WDTX”) (Case No. 6:21-cv00431 & Case No. 6:21-cv-00430). These proceedings are based on the alleged infringement by Micron’s LRDIMM and Micron’s non-volatile dual in line memory modules (“NVDIMM”) enterprise memory modules under four U.S. patents – U.S. Patent Nos. 10,489,314 (the “‘314 Patent”), 9,824,035 (the “‘035 Patent”), 10,268,608 (the “‘608 Patent”),

12

and 8,301,833 (the “‘833 Patent”). The case was assigned to Hon. Judge Lee Yeakel, and the parties completed briefing on their claim construction arguments. On May 11, 2022, Judge Yeakel entered a stay of the case pending the resolution of Micron’s requested Inter Partes Review (“IPR”) proceedings against the four patents asserted by Netlist in this case (the ‘833, ‘035, ‘608, and ‘314 Patents). On May 4, 2023, the case was reassigned to Docket II in the WDTX Austin Division, given Hon. Judge Yeakel’s retirement. As of the reporting date, the matter remains stayed pending the outcome of the related IPR proceedings and assigned to Docket II pending reassignment to an Article III Judge.

As noted above, Micron filed requests to bring IPR proceedings against Netlist’s ‘314, ‘035, ‘608, and ‘833 Patents. The PTAB has granted Micron’s request for the ‘035, ‘833, and ‘314 Patents, but denied its request for the ‘608 Patent. The PTAB further denied Micron’s request for rehearing on the ‘608 Patent’s institution denial. Oral arguments were presented for the ‘035 Patent IPR on April 19, 2023, with the PTAB entering a Final Written Decision finding claims 2, 6, and 22 of the ‘035 Patent patentable. As of the reporting date, the IPR trials under the ‘833 and ‘314 Patents are proceeding. Oral arguments for the ‘833 Patent occurred as scheduled on June 7, 2023. The ‘314 Patent IPRs are still set for a consolidated oral argument on August 15, 2023.

On March 31, 2022, Netlist filed patent infringement claims against Micron in Dusseldorf, Germany (“Micron Dusseldorf Action”), seeking damages based on their infringement of EP735 and EP660. On June 24, 2022, Netlist requested injunctive relief. Micron initiated a nullity proceeding against the asserted EP patents in this action, making Netlist’s response to the same as November 19, 2022. Primary briefing in the Micron Dusseldorf Action has concluded, while the German Federal Patent Court entered a preliminary opinion on EP735 and EP660 in a related invalidity proceedings that have been consolidated as of the reporting date. Currently, the Micron Dusseldorf Action is scheduled for oral hearings in April 2024.

On June 10, 2022, Netlist filed a complaint for patent infringement against Micron in the EDTX, Marshall Division (Case No. 2:22-cv-00203-JRG-RSP). These proceedings are based on the alleged infringement by Micron for the sale of its LRDIMMs, its memory modules utilizing on-board power management (“PMIC”), and its high bandwidth memory (“HBM”) components, under six U.S. Netlist patents: U.S. Patent Nos. 8,787,060 (the “‘060 Patent”), 9,318,160 (the “‘160 Patent), 10,860,506 (the “‘506 Patent”), 10,949,339 (the “‘339 Patent”), 11,016,918 (the “‘918 Patent”), and 11,232,054 (the “‘054 Patent”). The claim construction hearing took place before Hon. Magistrate Judge Roy Payne on July 26, 2023, and as of the reporting date, the Court has not entered an Order confirming the Claim Construction outcome. The Jury Trial is scheduled to begin on January 22, 2024.

On August 1, 2022, Netlist filed a complaint for patent infringement against Micron in the EDTX (Case No. 2:22-cv-00294) under the ‘912 Patent, for Micron’s alleged infringement by the sale of its LRDIMMs and RDIMMs. On August 15, 2022, Netlist filed its first amended complaint, further addressing Micron’s infringement of U.S. Patent Nos. 9,858,215 (the “‘215 Patent”) and 11,093,417 (the “‘417 Patent”). On October 21, 2022, Hon. Chief Judge Gilstrap ordered that this Micron action and a parallel action by Netlist against defendants Samsung Electronics Co. Ltd., Samsung Semiconductor Inc., and Samsung Electronics America Inc. (“Samsung”) on the same patents (Case No. 2:22-cv-00293-JRG) be consolidated and set for a joint scheduling conference on November 17, 2022, further instructing that the Samsung action be considered the “LEAD CASE” and that any further filings from either action be submitted in that case for all pretrial matters. As of the reporting date, the consolidated case stands ready to proceed with a claim construction hearing set for October 5, 2023 and trial beginning on April 15, 2024.

On November 18, 2022, Micron filed IPR requests contesting the validity of the ‘912, ‘339, and ‘506 Patents, along with motions requesting joinder to the pending Samsung IPRs related to the same patents (see below). As of the reporting date, Micron’s ‘912, ‘339, and ‘506 Patent IPRs have been joined with the corresponding Samsung IPR proceedings for the same respective patents. Oral hearings for the joined Samsung ‘339 and ‘506 Patents IPRs were held on July 19, 2023 and July 20, 2023, respectively. On June 30, 2023, the PTAB resumed the trial on the Samsung ‘912 Patent IPR (which included Micron’s claims via joinder) following USPTO Director Katherine Vidal’s sua sponte Director Review and scheduled the ‘912 Patent IPR for an oral hearing on January 31, 2024.

On January 6, 2023, Micron filed IPR requests contesting the validity of the ‘918 and ‘054 Patents, along with motions requesting joinder to the pending Samsung IPRs related to the same patents (see below). On June 23, 2023, the

13

matters were joined with the corresponding Samsung IPRs on the same patents. As of the reporting date, the ‘918 and ‘054 Patent IPRs are scheduled for an oral hearing on September 11, 2023.

On May 8, 2023, Micron filed IPR requests contesting the validity of the ‘060 and ‘160 Patents, along with motions requesting joinder to the pending Samsung IPRs related to the same patents (see below). As of the reporting date, Netlist’s deadline to provide its preliminary response to each of these Micron IPRs is August 24, 2023.

Samsung Litigations

On May 28, 2020, Netlist filed a complaint against Samsung in the U.S. District Court for the Central District of California for Samsung’s breach of the parties’ Joint Development and License Agreement (“JDLA”). On July 22, 2020, Netlist amended its complaint to seek a declaratory judgment that it properly terminated the JDLA in light of Samsung’s material breaches. On October 14, 2021, the Court entered summary judgment in Netlist’s favor and confirmed Netlist properly terminated the JDLA as of July 15, 2020. On February 15, 2022, the Court entered a final judgment in favor of Netlist on each of its three claims and confirmed conclusively that the licenses granted by Netlist under the JDLA were terminated. On February 25, 2022, Samsung filed a Notice of Appeal, and the Federal Court of Appeals for the Ninth Circuit Court of Appeals issued a Time Schedule Order on February 28, 2022. On August 4, 2022, Netlist filed a cross-appeal seeking the Appeal Court’s reconsideration of the District Court’s finding that the fees Netlist paid to PwC were consequential damages, rather than recoverable general damages. On June 8, 2023, the Ninth Circuit Court of Appeals heard oral arguments from both parties on the matter following completion of all briefing. As of the reporting date, the Ninth Circuit Court of Appeals has not yet entered its Order on the matter.

On October 15, 2021, Samsung initiated a declaratory judgement action against Netlist in the DDE (Samsung Elecs. Co., Ltd., et. al. v. Netlist, Inc., Case No. 1:21-cv-01453-RGA), where it requested in relevant part that the DDE declare that Samsung does not infringe Netlist’s U.S. Patent Nos. 9,858,218 (the “‘218 Patent”), 10,217,523 (the “‘523 Patent”), 10,474,595 (the “‘595 Patent”), and the ‘506, ‘339, ‘912 and ‘918 Patents, while later seeking leave to add the ‘054 Patent (issued Jan. 25, 2022) to its action. On August 1, 2022, Hon. Judge Andrews dismissed all of Samsung’s counts related to Netlist’s ‘912, ‘506, ‘339, and ‘918 Patents, and denied Samsung’s request to bring its ‘054 claims in Delaware. On September 12, 2022, Netlist amended its Counterclaims to include counterclaims tying Google, LLC and Alphabet, Inc. (jointly “Google”) to the action. On November 15, 2022, Google responded to Netlist’s Counterclaims by filing a Motion to Dismiss or alternatively to Sever and Stay the counterclaims. On May 22, 2023, the Court heard oral arguments on Google’s Motion to Dismiss or alternatively, Sever and Stay and Dismiss Willfulness and Indirect Infringement Allegations. As of the reporting date, the Court has not entered an Order on Google’s motion, the Claim Construction hearing is still set for October 20, 2023, and the Jury Trial is still scheduled to begin on February 3, 2025.

On November 19, 2021, Samsung filed IPR requests contesting the validity of the ‘218, the ‘595, and the ‘523 Patents. Netlist filed its initial responses to Samsung’s IPR petitions on February 18, 2022, contesting the institution of any IPR on the grounds propounded. As of the reporting date, the PTAB issued a final written decision finding all of the claims of the ‘523 Patent valid and patentable, while finding all of the claims of the ‘218 and ‘595 Patents unpatentable.

On December 20, 2021, Netlist filed a complaint for patent infringement against Samsung in the EDTX (Case No. 2:21-cv-00463-JRG) under the ‘506, ‘339, and ‘918 Patents. On May 3, 2022, Netlist entered a First Amended Complaint pursuant to the Federal Rules of Civil Procedure (“FRCP”) Rule 15, adding claims for infringement under three additional patents: the ‘060, ‘160, and ‘054 Patents. Netlist brought claims under the ‘339, ‘918, ‘054, ‘060, and ‘160 Patents in its Jury Trial, which concluded on April 21, 2023, with the entry of the jury’s verdict into the public record. The jury unanimously found that Samsung willfully infringed Netlist’s ‘339, ‘918, ‘054, ‘060, and ‘160 Patents through the sale of their DDR4 LRDIMMs, DDR5 DIMMs, and HBMs, and that none of the patent claims asserted at trial were invalid. The jury awarded Netlist, Inc. a total of $303 million for Samsung’s infringement. On May 30, 2023, Hon. Chief Judge Gilstrap conducted a bench trial to assess the merits of Samsung’s affirmative defenses excusing its infringement of only the ‘339, ‘918, and ‘054 Patents. As of the reporting date, the Court has not yet entered an Order regarding the outcome the May Bench Trial, or a Judgement contemplating both the Jury and Bench Trial.

On February 17, 2022, Samsung filed an IPR request contesting the validity of only claim 16 within the ‘912 Patent. Samsung then filed two additional IPR requests contesting the validity of the ‘506 and ‘339 Patents. Netlist filed

14

its Patent Owner’s Preliminary Response for the ‘912 and ‘339 Patent IPRs on July 21, 2022, and for the ‘506 Patent IPR on July 28, 2022. On January 19, 2023, the PTAB instituted IPR trials on both the ‘912 and ‘339 Patents. The following day, the PTAB instituted an IPR trial on the ‘506 Patent. On October 19, 2022, the PTAB instituted IPR trials on the ‘912 and ‘339 Patents, while two days later it instituted an IPR trial on the ’506 Patent. On January 5, 2023, USPTO Director Katherine K. Vidal entered an Order in the ‘912 Patent proceeding mandating a sua sponte Director review of the Board’s decision granting institution of the ‘912 Patent, and staying the underlying proceedings in lieu of a supplemental briefing schedule set by the Director herself. On February 3, 2023, Director Vidal entered a decision requiring the assigned Board to reevaluate Netlist’s request for discovery on the admitted relationship between Samsung and Google and reassess whether Google is a “Real Party in Interest.” On June 30, 2023, the Board resumed the trial on the Samsung ‘912 Patent IPR, which now also includes Micron’s claims via joinder (see above), and scheduled the ‘912 Patent IPR for further substantive briefing and an oral hearing on January 31, 2024. Oral arguments for the joined Samsung ‘339 and ‘506 Patent IPRs were heard on July 19, 2023 and July 20, 2023, respectively. As of the reporting date, the Board has not issued a final written decision regarding Samsung’s IPRs of the ‘339 and ‘506 Patents.

On May 17, 2022, Samsung filed two IPR petitions contesting the validity of Netlist’s ‘918 and ‘054 Patents. On December 6, 2022, the Board instituted an IPR trial for the ‘054 Patent, and then instituted an IPR trial for the ‘918 Patent the next day. As of the reporting date, Micron has joined these Samsung IPRs on the ‘918 and ‘054 Patents, and oral arguments are set to be heard on September 11, 2023.

On June 3, 2022, Netlist filed patent infringement lawsuits against Samsung in Dusseldorf, Germany, seeking damages for Samsung’s infringement of Netlist’s Patents EP735 and EP660. As of the reporting date, the infringement matters are set for an Oral Hearing in the Dusseldorf Court on September 5, 2023.

On August 1, 2022, Netlist filed a complaint for patent infringement against Samsung in the EDTX (Case No. 2:22-cv-00293) under the ‘912 Patent, which relates generally to technologies to implement rank multiplication. On August 15, 2022, Netlist filed its first amended complaint here, further addressing Samsung’s infringement of the ‘215 and ‘417 Patents. On October 21, 2022, Hon. Chief Judge Gilstrap ordered that this action and a parallel action by Netlist against Micron on the same patents (22-cv-00294-JRG) be consolidated and set for a joint scheduling conference on November 17, 2022, further instructing that this Samsung action be considered the “LEAD CASE” and that any further filings from either action be submitted in therefore all pretrial matters. As of the reporting date, the consolidated case stands ready to proceed with a claim construction hearing set for October 5, 2023 and trial beginning on April 15, 2024.

On August 26, 2022, Samsung filed two IPR petitions contesting the validity of Netlist’s ‘060 and ‘160 Patents. On January 19, 2023, Netlist filed its Patent Owner Preliminary Responses in those proceedings. As of the reporting date, the Board instituted trials for both IPRs, set substantive briefing deadlines, and ultimately the date for oral argument on January 11, 2024.

On January 10, 2023, Samsung filed two IPR petitions contesting the validity of the ‘215 and ‘417 Patents. The Board accorded these IPRs a filing date of January 10, 2023 and Netlist filed its Patent Owner Preliminary Responses by the May 9, 2023 deadline. As of the reporting date, the Board has not yet entered an institution decision on either of Samsung’s IPR petitions here.

On April 27, 2023, Samsung filed an IPR petition contesting the validity of the ‘608 Patent. The Board accorded Samsung’s IPR petition a filing date on June 14, 2023. As of the reporting date, Netlist’s deadline to submit its preliminary response to the petition is September 14, 2023.

Other Contingent Obligations

In the ordinary course of our business, we have made certain indemnities, commitments and guarantees pursuant to which we may be required to make payments in relation to certain transactions. These may include, among others: (i) intellectual property indemnities to our customers and licensees in connection with the use, sale and/or license of our products; (ii) indemnities to vendors and service providers pertaining to claims based on our negligence or willful misconduct; (iii) indemnities involving the accuracy of representations and warranties in certain contracts; (iv)

15

indemnities to our directors and officers to the maximum extent permitted under the laws of the State of Delaware; (v) indemnities pertaining to all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with transactions contemplated by applicable investment or loan documents, as applicable; and (vi) indemnities or other claims related to certain real estate leases, under which we may be required to indemnify property owners for environmental and other liabilities or may face other claims arising from our use of the applicable premises. The duration of these indemnities, commitments and guarantees varies and, in certain cases, may be indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential for future payments we could be obligated to make. Historically, we have not been obligated to make significant payments as a result of these obligations, and no liabilities have been recorded for these indemnities, commitments and guarantees in the accompanying consolidated balance sheets.

Note 8—Stockholders’ Equity

Serial Preferred Stock

The Company’s authorized capital stock includes 10,000,000 shares of serial preferred stock, with a par value of $0.001 per share. No shares of preferred stock were outstanding as of July 1, 2023 or December 31, 2022.

On April 17, 2017, the Company entered into a rights agreement (as amended from time to time, the “Rights Agreement”) with Computershare Trust Company, N.A., as rights agent. In connection with the adoption of the Rights Agreement and pursuant to its terms, the Company’s board of directors authorized and declared a dividend of one right (each, a “Right”) for each outstanding share of the Company’s common stock to stockholders of record at the close of business on May 18, 2017 (the “Record Date”), and authorized the issuance of one Right for each share of the Company’s common stock issued by the Company (except as otherwise provided in the Rights Agreement) between the Record Date and the Distribution Date (as defined below).

Each Right entitles the registered holder, subject to the terms of the Rights Agreement, to purchase from the Company, when exercisable and subject to adjustment, one unit consisting of one one-thousandth of a share (a “Unit”) of Series A Preferred Stock of the Company (the “Preferred Stock”), at a purchase price of $6.56 per Unit, subject to adjustment. Subject to the provisions of the Rights Agreement, including certain exceptions specified therein, a distribution date for the Rights (the “Distribution Date”) will occur upon the earlier of (i) 10 business days following a public announcement that a person or group of affiliated or associated persons (an “Acquiring Person”) has acquired or otherwise obtained beneficial ownership of 15% or more of the then-outstanding shares of the Company’s common stock, and (ii) 10 business days (or such later date as may be determined by the Company’s board of directors) following the commencement of a tender offer or exchange offer that would result in a person or group becoming an Acquiring Person. The Rights are not exercisable until the Distribution Date and, unless earlier redeemed or exchanged by the Company pursuant to the terms of the Rights Agreement (as amended on April 16, 2018, April 16, 2019 and August 14, 2020) will expire on the close of business on April 17, 2024.

In connection with the adoption of the Rights Agreement, the Company’s board of directors approved a Certificate of Designation of the Series A Preferred Stock (the “Certificate of Designation”) designating 1,000,000 shares of its serial preferred stock as Series A Preferred Stock and setting forth the rights, preferences and limitations of the Preferred Stock. The Company filed the Certificate of Designation with the Secretary of State of the State of Delaware on April 17, 2017.

Common Stock

September 2021 Lincoln Park Purchase Agreement

On September 28, 2021, the Company entered into a purchase agreement (the “September 2021 Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which the Company has the right to sell to Lincoln Park up to an aggregate of $75 million in shares of its common stock subject to the conditions and limitations set forth in the September 2021 Purchase Agreement. As consideration for entering into the September 2021 Purchase Agreement, the Company issued to Lincoln Park 218,750 shares of its common stock as initial commitment

16

shares in a noncash transaction on September 28, 2021 and will issue up to 143,750 additional shares of its common stock as additional commitment shares on a pro rata basis in connection with any additional purchases. The Company will not receive any cash proceeds from the issuance of these additional commitment shares.

The Company controls the timing and amount of any sales of its common stock to Lincoln Park. There is no upper limit on the price per share that Lincoln Park must pay for the Company’s common stock under the September 2021 Purchase Agreement, but in no event will shares be sold to Lincoln Park on a day the closing price is less than the floor price specified in the September 2021 Purchase Agreement. In all instances, the Company may not sell shares of its common stock to Lincoln Park under the September 2021 Purchase Agreement if that would result in Lincoln Park beneficially owning more than 9.99% of its common stock.

The September 2021 Purchase Agreement does not limit the Company’s ability to raise capital from other sources at the Company’s sole discretion, except that, subject to certain exceptions, the Company may not enter into any Variable Rate Transaction (as defined in the September 2021 Purchase Agreement, including the issuance of any floating conversion rate or variable priced equity-like securities) during the 36 months after the date of the September 2021 Purchase Agreement. The Company has the right to terminate the September 2021 Purchase Agreement at any time, at no cost to the Company.

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 September 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. During the six months ended July 1, 2023, Lincoln Park purchased an aggregate of 7,300,000 shares of our common stock for a net purchase price of $21.6 million under the September 2021 Purchase Agreement. In connection with the purchases, we issued to Lincoln Park an aggregate of 41,500 shares of our common stock as additional commitment shares in noncash transactions.

Subsequently, from July 2, 2023 through August 3, 2023, Lincoln Park purchased an aggregate of 160,000 shares of our common stock for a net purchase price of $0.5 million under the September 2021 Purchase Agreement. In connection with the purchases, we issued to Lincoln Park an aggregate of 947 shares of our common stock as additional commitment shares in noncash transactions.

Note 9—Stock-Based Awards

As of July 1, 2023, the Company had 113,836 shares of common stock reserved for future issuance under its Amended and Restated 2006 Incentive Plan (“Amended 2006 Plan”). Stock options granted under the Amended 2006 Plan generally vest at a rate of at least 25% per year over four years and expire 10 years from the grant date. RSUs granted for employees and consultants generally vest in equal installments annually and fully vest over a four-year term from the grant date.

Stock Options

The following table summarizes the activity related to stock options during the six months ended July 1, 2023:

Weighted-

Number of

Average

Shares

Exercise

(in thousands)

    

Price

Outstanding as of December 31, 2022

4,866

$

0.93

Granted

Exercised

(510)

0.80

Expired or forfeited

(147)

2.22

Outstanding as of July 1, 2023

4,209

$

0.90

17

Restricted Stock Units

The following table summarizes the activity related to RSUs during the six months ended July 1, 2023:

Weighted-

Average

Number of

Grant-Date

Shares

Fair Value

(in thousands)

per Share

Balance nonvested as of December 31, 2022

3,442

$

3.36

Granted

1,579

3.36

Vested

(898)

2.38

Forfeited

(180)

3.89

Balance nonvested as of July 1, 2023

3,943

$

3.55

Stock-Based Compensation

The following table summarizes the stock-based compensation expense by line item in the condensed consolidated statements of operations (in thousands):

Three Months Ended

    

Six Months Ended

July 1,

July 2,

July 1,

July 2,

2023

2022

2023

2022

Cost of sales

$

53

$

16

$

71

$

19

Research and development

186

215

460

391

Selling, general and administrative

957

559

1,742

1,062

Total

$

1,196

$

790

$

2,273

$

1,472

As of July 1, 2023, the Company had approximately $11.3 million, net of estimated forfeitures, of unearned stock-based compensation, which it expects to recognize over a weighted-average period of approximately 2.9 years.

18

Item 2.

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

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: 

our beliefs regarding the market and demand for our products or the component products we resell;
our ability to collect any damages awarded to us under an EDTX Court Judgment following the jury verdict entered in our favor and against Samsung;
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
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. 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 2022 Annual Report. All information presented herein is based on our fiscal calendar, and references to particular years, quarters, months or periods refer to our fiscal years ended in January or December and the associated quarters, months and periods of those fiscal years. Each of the terms the “Company,” “Netlist,” “we,” “us,” or “our” as used herein refers collectively to Netlist, Inc. and its consolidated subsidiaries, unless otherwise stated.

19

Overview

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 also licenses its intellectual property.

During the second quarter of 2023, we recorded net sales of $10.0 million, gross profit of $0.2 million and net loss of $14.0 million. We have historically financed our operations primarily with proceeds from issuances of equity and debt securities and cash receipts from revenues. We have also funded our operations with a revolving line of credit and term loans under a bank credit facility. See “Recent Developments” and “Liquidity and Capital Resources” below for more information.

Recent Developments

Jury Verdict Against Samsung

On April 21, 2023, an EDTX jury awarded Netlist $303 million in compensatory damages against Samsung for its willful infringement of five Netlist Patents. The verdict resulted from a jury trial that lasted six Court days and involved the following Netlist patents: U.S. Patent Nos. 10,949,339, 11,016,918, 11,232,054, 8,787,060, and 9,318,160. The products found to infringe these patents were Samsung’s DDR4 LRDIMMs, DDR5 UDIMMs, DDR5 SODIMMs, DDR5 RDIMMs, and Samsung’s HBM2, HBM2E, and HBM3 components. As of the reporting date, Hon. Chief Judge Gilstrap has not yet entered his Final Judgment.

Termination of 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 $10.0 million, as amended. The SVB Credit Agreement was most recently amended on April 29, 2022 to add 50% of eligible inventory to the previous borrowing base limited to 85% of eligible accounts receivable, subject to certain adjustments. Borrowings accrued interest on advance at a per annum rate equal to the greater of 0.75% above the Prime Rate.

On the maturity date, April 28, 2023, the SVB Credit Agreement terminated in accordance with its terms. In connection with the termination of the SVB Credit Agreement, all outstanding obligations for principal, interest, and fees were paid in full and all liens securing such obligations were released.

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 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 the six months ended July 1, 2023, Lincoln Park purchased an aggregate of 7,300,000 shares of our common stock for a net purchase price of $21.6 million under the September 2021 Purchase Agreement. In connection with the purchases, we issued to Lincoln Park an aggregate of 41,500 shares of our common stock as additional commitment shares in noncash transactions.

Subsequently, from July 2, 2023 through August 3, 2023, Lincoln Park purchased an aggregate of 160,000 shares of our common stock for a net purchase price of $0.5 million under the September 2021 Purchase Agreement. In connection with the purchases, we issued to Lincoln Park an aggregate of 947 shares of our common stock as additional commitment shares in noncash transactions.

20

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.

In recent periods, there has been a significant increase in worldwide supply of semiconductor memory and storage that has led to declines in demand and average selling prices for our products, which could materially and adversely affect our business, results of operations, or financial condition. Our suppliers generally seek to increase wafer output, improve yields, and reduce die size, which could result in further increases in worldwide supply and downward pressure on prices.

Results of Operations

Net Sales and Gross Profit

Net sales and gross profit for the three and six months ended July 1, 2023 and July 2, 2022 were as follows (dollars in thousands):

Three Months Ended

Six Months Ended

July 1,

July 2,

%

July 1,

July 2,

%

    

2023

    

2022

    

Change

    

Change

 

2023

    

2022

    

Change

    

Change

Net sales

$

10,026

$

55,358

(45,332)

(82%)

$

19,047

$

105,558

(86,511)

(82%)

Cost of sales

9,787

50,610

(40,823)

(81%)

18,248

97,447

(79,199)

(81%)

Gross profit

$

239

$

4,748

$

(4,509)

(95%)

$

799

$

8,111

$

(7,312)

(90%)

Gross margin percentage

2%

9%

(7%)