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Table of Contents

]

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 October 2, 2021

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.)

175 Technology Drive, Suite 150

Irvine, California

92618

(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 November 4, 2021, there were 227,029,703 outstanding shares of the registrant’s common stock.

Table of Contents

NETLIST, INC. AND SUBSIDIARIES

Form 10-Q

For the Quarter Ended October 2, 2021

TABLE OF CONTENTS

Page

PART I. — FINANCIAL INFORMATION

Item 1

Financial Statements

3

Item 2

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

22

Item 3

Quantitative and Qualitative Disclosures About Market Risk

29

Item 4

Controls and Procedures

29

PART II

Item 1

Legal Proceedings

31

Item 1A

Risk Factors

31

Item 6

Exhibits

56

SIGNATURES

57

2

Table of Contents

PART I. — FINANCIAL INFORMATION

Item 1.

Financial Statements

NETLIST, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except par value)

October 2,

January 2,

    

2021

    

2021

(unaudited)

ASSETS

Current Assets:

Cash and cash equivalents

$

62,282

$

13,326

Restricted cash

10,900

3,200

Accounts receivable, net of allowances of $198 (2021) and $157 (2020)

4,758

4,680

Inventories

19,387

3,198

Prepaid expenses and other current assets

729

514

Total current assets

98,056

24,918

Property and equipment, net

425

182

Operating lease right-of-use assets

165

114

Other assets

282

58

Total assets

$

98,928

$

25,272

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current Liabilities:

Accounts payable

$

28,164

$

5,327

Revolving line of credit

4,487

3,678

Accrued payroll and related liabilities

1,116

806

Accrued expenses and other current liabilities

424

777

Long-term debt due within one year

16,692

17,056

Total current liabilities

50,883

27,644

Long-term debt

146

Other liabilities

131

102

Total liabilities

51,014

27,892

Commitments and contingencies

Stockholders' equity (deficit):

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; 225,969 (2021) and 195,978 (2020) shares issued and outstanding

226

195

Additional paid-in capital

229,523

192,071

Accumulated deficit

(181,835)

(194,886)

Total stockholders' equity (deficit)

47,914

(2,620)

Total liabilities and stockholders' equity (deficit)

$

98,928

$

25,272

See accompanying notes.

3

Table of Contents

NETLIST, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

(In thousands, except per share amounts)

Three Months Ended

Nine Months Ended

October 2,

September 26,

October 2,

September 26,

2021

2020

2021

2020

Net product sales

$

26,749

$

10,212

$

66,009

$

35,749

License fee

40,000

Net sales

26,749

10,212

106,009

35,749

Cost of sales

24,241

8,875

59,135

30,477

Gross margin

2,508

1,337

46,874

5,272

Operating expenses:

Research and development

2,038

731

5,222

2,083

Intellectual property legal fees

8,461

784

14,585

2,257

Selling, general and administrative

2,590

1,816

7,639

5,994

Total operating expenses

13,089

3,331

27,446

10,334

Operating (loss) income

(10,581)

(1,994)

19,428

(5,062)

Other (expense) income, net:

Interest expense, net

(125)

(139)

(417)

(437)

Other (expense) income, net

(2)

3

641

(2)

Total other (expense) income, net

(127)

(136)

224

(439)

(Loss) income before provision for income taxes

(10,708)

(2,130)

19,652

(5,501)

Provision for income taxes

6,601

1

Net (loss) income

$

(10,708)

$

(2,130)

$

13,051

$

(5,502)

(Loss) earnings per share:

Basic

$

(0.05)

$

(0.01)

$

0.06

$

(0.03)

Diluted

$

(0.05)

$

(0.01)

$

0.06

$

(0.03)

Weighted-average common shares outstanding:

Basic

224,020

192,257

215,135

179,154

Diluted

224,020

192,257

235,862

179,154

See accompanying notes.

4

Table of Contents

NETLIST, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity (Deficit) (Unaudited)

(In thousands)

Additional

Total

Common Stock

Paid-in

Accumulated

Stockholders'

    

Shares

    

Amount

    

Capital

    

Deficit

    

Equity (Deficit)

Balance, January 2, 2021

195,978

$

195

$

192,071

$

(194,886)

$

(2,620)

Net loss

(4,017)

(4,017)

Issuance of common stock, net

11,700

12

9,349

9,361

Exercise of stock options

476

376

376

Exercise of warrants

6,508

7

3,975

3,982

Stock-based compensation

338

338

Restricted stock units vested and distributed

501

1

(1)

Tax withholdings related to net share settlements of equity awards

(150)

(276)

(276)

Balance, April 3, 2021

215,013

215

205,832

(198,903)

7,144

Net income

27,776

27,776

Exercise of stock options

345

256

256

Exercise of warrants

588

1

375

376

Stock-based compensation

379

379

Restricted stock units vested and distributed

63

Tax withholdings related to net share settlements of equity awards

(22)

(47)

(47)

Balance, July 3, 2021

215,987

216

206,795

(171,127)

35,884

Net loss

(10,708)

(10,708)

Issuance of common stock, net

2,973

3

16,913

16,916

Exercise of stock options

1,909

2

3,178

3,180

Exercise of warrants

4,712

5

2,906

2,911

Stock-based compensation

445

445

Restricted stock units vested and distributed

521

Tax withholdings related to net share settlements of equity awards

(133)

(714)

(714)

Balance, October 2, 2021

225,969

$

226

$

229,523

$

(181,835)

$

47,914

See accompanying notes.

5

Table of Contents

NETLIST, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity (Deficit) (Unaudited) (Continued)

(In thousands)

Additional

Total

Common Stock

Paid-in

Accumulated

Stockholders'

    

Shares

    

Amount

    

Capital

    

Deficit

    

Deficit

Balance, December 28, 2019

169,539

$

169

$

179,086

$

(187,618)

$

(8,363)

Net loss

(1,542)

(1,542)

Issuance of commitment shares

1,529

2

(2)

Stock-based compensation

206

206

Restricted stock units vested and distributed

362

Tax withholdings related to net share settlements of equity awards

(135)

(32)

(32)

Balance, March 28, 2020

171,295

171

179,258

(189,160)

(9,731)

Net loss

(1,830)

(1,830)

Issuance of common stock, net

9,781

10

2,751

2,761

Stock-based compensation

164

164

Tax withholdings related to net share settlements of equity awards

(63)

(10)

(10)

Balance, June 27, 2020

181,013

181

182,163

(190,990)

(8,646)

Net loss

(2,130)

(2,130)

Issuance of common stock, net

14,180

14

9,399

9,413

Exercise of stock options

200

28

28

Exercise of warrants

256

Stock-based compensation

212

212

Restricted stock units vested and distributed

438

Tax withholdings related to net share settlements of equity awards

(136)

(61)

(61)

Balance, September 26, 2020

195,951

$

195

$

191,741

$

(193,120)

$

(1,184)

See accompanying notes.

6

Table of Contents

NETLIST, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

Nine Months Ended

October 2,

September 26,

  

2021

  

2020

Cash flows from operating activities:

Net income (loss)

$

13,051

$

(5,502)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Depreciation and amortization

95

112

Interest accrued on convertible promissory notes

226

227

Amortization of debt discounts

158

159

Non-cash lease expense

288

385

Gain on extinguishment of debt

(643)

Stock-based compensation

1,162

582

Changes in operating assets and liabilities:

Accounts receivable

(78)

(531)

Inventories

(16,189)

(1,025)

Prepaid expenses and other assets

(439)

340

Accounts payable

22,837

(1,081)

Accrued payroll and related liabilities

310

(75)

Accrued expenses and other liabilities

(683)

(505)

Net cash provided by (used in) operating activities

20,095

(6,914)

Cash flows from investing activities:

Acquisition of property and equipment

(318)

(25)

Net cash used in investing activities

(318)

(25)

Cash flows from financing activities:

Net borrowings under line of credit

809

398

Proceeds from issuance of long-term debt

637

Payments on note payable

(251)

(424)

Proceeds from issuance of common stock, net

26,277

12,174

Proceeds from exercise of stock options and warrants

11,081

28

Payments for taxes related to net share settlement of equity awards

(1,037)

(103)

Net cash provided by financing activities

36,879

12,710

Net change in cash, cash equivalents and restricted cash

56,656

5,771

Cash, cash equivalents and restricted cash at beginning of period

16,526

11,716

Cash, cash equivalents and restricted cash at end of period

$

73,182

$

17,487

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

Cash and cash equivalents

$

62,282

$

14,287

Restricted cash

10,900

3,200

Cash, cash equivalents and restricted cash at end of period

$

73,182

$

17,487

See accompanying notes.

7

Table of Contents

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” or “Netlist”) provides high-performance solid state drives and modular memory solutions to enterprise customers in diverse industries. The Company's NVMe SSDs in various capacities and form factors and the line of custom and specialty memory products bring industry-leading performance to server and storage appliance customers and cloud service providers. Netlist licenses its portfolio of intellectual property including patents, in server memory, hybrid memory and storage class memory, to companies that implement Netlist’s technology.

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 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 January 2, 2021, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 26, 2021 (the “2020 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 October 2, 2021, 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 2021 will include 52 weeks and ends on January 1, 2022 and its fiscal year 2020 included 53 weeks and ended on January 2, 2021. The four quarters of fiscal year 2021 each includes 13 weeks. The first three quarters of fiscal year 2020 each included 13 weeks and the fourth quarter included 14 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.

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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

In the first quarter of 2021, the Company adopted the Financial Accounting Standards Board (“FASB” Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes, which eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. This ASU also clarifies and simplifies other aspects of the accounting for income taxes. The adoption of this ASU did not have an impact on the Company’s condensed consolidated financial statements.

Recently Issued Accounting Guidance

In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU amends the guidance on convertible instruments and the derivatives scope exception for contracts in an entity's own equity, and also improves and amends the related earnings per share guidance for both Subtopics. The ASU will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years and early adoption is permitted. The Company is currently evaluating the impact this guidance will have on its condensed consolidated financial statements.

Note 3—Supplemental Financial Information

Inventories

Inventories consisted of the following (in thousands):

October 2,

January 2,

 

2021

2021

Raw materials

$

3,704

$

578

Work in process

568

2

Finished goods

15,115

2,618

$

19,387

$

3,198

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(Loss) Earnings Per Share

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

Three Months Ended

Nine Months Ended

October 2,

September 26,

October 2,

September 26,

2021

2020

 

2021

2020

Numerator:

Net (loss) income

$

(10,708)

$

(2,130)

$

13,051

$

(5,502)

Denominator:

Weighted-average basic shares outstanding

224,020

192,257

215,135

179,154

Effect of dilutive securities

20,727

Weighted-average diluted shares

224,020

192,257

235,862

179,154

Basic (loss) earnings per share

$

(0.05)

$

(0.01)

$

0.06

$

(0.03)

Diluted (loss) earnings per share

$

(0.05)

$

(0.01)

$

0.06

$

(0.03)

The table below shows potentially dilutive weighted average common share equivalents, consisting of shares issuable upon the exercise of outstanding stock options and warrants using the treasury stock method, shares issuable upon conversion of the SVIC Note (see Note 5) using the “if-converted” method, and the vesting of 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

Nine Months Ended

October 2,

September 26,

October 2,

September 26,

    

2021

    

2020

    

2021

    

2020

Weighted average common share equivalents

21,158

14,278

13,526

Disaggregation of Net Sales

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

Three Months Ended

Nine Months Ended

October 2,

September 26,

October 2,

September 26,

2021

2020

    

2021

2020

Resales of third-party products

$

20,089

$

6,883

$

51,014

$

24,146

Sale of the Company's modular memory subsystems

6,660

3,329

14,995

11,603

License fee

40,000

Total net sales

$

26,749

$

10,212

$

106,009

$

35,749

During the second quarter of 2021, the Company received an upfront non-refundable license fee of $40 million as consideration to enter into a license agreement with SK hynix, Inc. a South Korean memory semiconductor supplier, (“SK hynix”). The license fee was recognized when the Company granted the license of its patents to SK hynix, since the performance obligation was satisfied at a point in time. In connection with the receipt of the license fee, during the second quarter of 2021, the Company recorded a provision for income taxes of $6.6 million related to the Korean withholding tax incurred.

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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

Nine Months Ended

October 2,

September 26,

October 2,

September 26,

2021

2020

2021

2020

Customer A

25%

*

15%

*

Customer B

13%

*

*

*

Customer C

*

21%

*

*

Customer D

*

14%

*

15%

*

Less than 10% of net sales during the period.

As of October 2, 2021 and January 2, 2021, one customer represented 28% and 50% of aggregate gross receivables, respectively. 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 nine months ended October 2, 2021, resales of these products represented approximately 75% and 77% of net product sales, respectively. For the three and nine months ended September 26, 2020, they represented approximately 67% and 68% of net product sales, respectively.

Cash Flow Information

The following table sets forth supplemental disclosure of non-cash financing activities:

Nine Months Ended

October 2,

September 26,

    

2021

    

2020

Gain on extinguishment of debt

$

643

$

Note 4—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 provides for a revolving line of credit up to $5.0 million. The borrowing base is limited to 85% of the eligible accounts receivable, subject to certain adjustments. On April 9, 2021, the Company entered into an amendment to the SVB Credit Agreement to accrue interest on borrowings at a per annum rate equal to the greater of 2.25% above the Wall Street Journal prime rate (“Prime Rate”) or 5.50% from the Prime Rate plus 2.75% previously and to extend the maturity date to December 30, 2021. The amount available for borrowing may be increased to $7.0 million and the maturity date will be extended to April 29, 2022 upon the Company’s request, if the Company meets certain conditions.

The SVB Credit Agreement requires letters of credit to be secured by cash, which is classified as restricted cash in the accompanying condensed consolidated balance sheets. As of October 2, 2021 and January 2, 2021, (i) outstanding letters of credit were $10.9 million and $3.2 million, respectively, (ii) outstanding borrowings were $4.5 million and $3.7 million, respectively, and (iii) availability under the revolving line of credit was $0.1 million and $0.1 million, respectively.

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On April 12, 2017, the Company and SVB entered into an amendment to the SVB Credit Agreement to, among other things, obtain SVB’s consent in connection with the Company’s rights agreement with Computershare Trust Company, N.A., as rights agent (see Note 8), and make certain administrative changes in connection with the Company’s funding arrangement with TR Global Funding V, LLC, an affiliate of TRGP Capital Management, LLC (“TRGP”) (see Note 7).

As of October 2, 2021, all obligations under the SVB Credit Agreement were secured by a first priority security interest in the Company’s tangible and intangible assets, other than its patent portfolio, which was subject to a first priority security interest held by Samsung Venture Investment Co. (“SVIC”) (see Note 5). The SVB Credit Agreement subjects the Company to certain affirmative and negative covenants, including financial covenants with respect to the Company’s liquidity and restrictions on the payment of dividends. As of October 2, 2021, the Company was in compliance with its covenants under the SVB Credit Agreement.

Note 5—Debt

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

October 2,

January 2,

 

2021

 

2021

Secured convertible note, due December 2021, including accrued interest of $1,762 (2021) and $1,538 (2020), respectively

$

16,762

$

16,538

Paycheck protection program loan, due April 2022, including accrued interest of $4 (2020), respectively

641

Notes payable

251

Unamortized debt discounts and issuance costs

(70)

(228)

Total debt

16,692

17,202

Less: amounts due within one year

(16,692)

(17,056)

Long-term debt

$

$

146

Secured Convertible Note

On November 18, 2015, in connection with entering into the Joint Development and License Agreement with Samsung Electronics Co., Ltd. (“Samsung”), the Company issued to Samsung Venture Investment Co. (“SVIC”) a secured convertible note (“SVIC Note”) and stock purchase warrant (“SVIC Warrant”). The SVIC Note has an original principal amount of $15.0 million, accrues interest at a rate of 2.0% per year, is due and payable in full on December 31, 2021, and is convertible into shares of the Company’s common stock at a conversion price of $1.25 per share, subject to certain adjustments, on the maturity date of the SVIC Note. Upon a change of control of the Company prior to the maturity date of the SVIC Note, the SVIC Note may, at the Company’s option, be assumed by the surviving entity or be redeemed upon the consummation of such change of control for the principal and accrued but unpaid interest as of the redemption date. The SVIC Warrant grants SVIC a right to purchase 2,000,000 shares of the Company’s common stock at an exercise price of $0.30 per share, subject to certain adjustments, is only exercisable in the event the Company exercises its right to redeem the SVIC Note on or prior to its maturity date, and expires on December 31, 2025.

The SVIC Warrant was valued at $1.2 million, based on its relative fair value, and was recorded as a debt discount. The Company also recorded $0.2 million of debt issuance costs as a debt discount for professional services fees rendered in connection with the transaction. These amounts are being amortized to interest expense over the term of the SVIC Note using the interest method. For the three and nine months ended October 2, 2021, interest expense related to the amortization of the issuance costs associated with the liability component was not material. The effective interest rate, including accretion of the SVIC Note to par and amortization of debt issuance costs, was approximately 3.4%. As of October 2, 2021, the outstanding principal and accrued interest on the SVIC Note was $16.8 million, and the outstanding SVIC Note balance, net of unamortized debt discounts and issuance costs, was $16.7 million.

In connection with the SVIC Note, SVIC was granted a first priority security interest in the Company’s patent portfolio and a second priority security interest in all of the Company’s other tangible and intangible assets. Upon

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issuance of the SVIC Note, the Company, SVB and SVIC entered into an Intercreditor Agreement pursuant to which SVB and SVIC agreed to their relative security interests in the Company’s assets. In May 2017, SVIC, SVB and TRGP entered into additional Intercreditor Agreements to modify certain of these lien priorities (see Note 7). Additionally, upon issuance of the SVIC Note and the SVIC Warrant, the Company and SVIC entered into a Registration Rights Agreement pursuant to which the Company is obligated to register with the Securities and Exchange Commission, upon demand by SVIC, the shares of the Company’s common stock issuable upon conversion of the SVIC Note or upon exercise of the SVIC Warrant.

The SVIC Note subjects the Company to certain affirmative and negative operating covenants. As of October 2, 2021, the Company was in compliance with its covenants under the SVIC Note.

Paycheck Protection Program Loan

On April 23, 2020, the Company 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. The PPP Loan bore interest at 1.0% per annum and would mature on April 23, 2022 with the first six months of interest and principal payments deferred. The amount borrowed under the PPP Loan was guaranteed by the SBA and was eligible for forgiveness in an amount equal to the sum of the eligible costs, including payroll, benefits, rent and utilities, incurred by the Company during the 24-week period beginning on the date the Company received the proceeds. The PPP Loan contained customary events of default, and the occurrence of an event of default might result in a claim for the immediate repayment of all amounts outstanding under the PPP Loan. In May 2021, the full amount outstanding under the PPP Loan was forgiven, resulting in a gain of $0.6 million during the second quarter of 2021.

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 cash flow information related to operating leases was as follows (in thousands):

Three Months Ended

Nine Months Ended

October 2,

September 26,

October 2,

September 26,

    

2021

2020

    

2021

    

2020

Lease cost:

Operating lease cost

$

85

$

141

$

325

$

446

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

Operating cash flows from operating leases

85

141

325

442

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

Finance leases

20

20

Lease modification to increase (decrease) lease assets

338

(365)

For the three and nine months ended October 2, 2021 and September 26, 2020, finance lease costs and cash flows from finance lease were immaterial.

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

October 2,

January 2,

2021

2021

Operating Leases

Operating lease right-of-use assets

$

165

$

114

Accrued expenses and other current liabilities

$

165

$

118

Finance Leases

Property and equipment, at cost

$

116

$

96

Accumulated depreciation

(49)

(34)

Property and equipment, net

$

67

$

62

Accrued expenses and other current liabilities

$

23

$

19

Other liabilities

47

46

Total finance lease liabilities

$

70

$

65

The following table includes supplemental information:

October 2,

January 2,

2021

2021

Weighted Average Remaining Lease Term (in years)

Operating lease

0.8

0.4

Finance lease

3.1

3.3

Weighted Average Discount Rate

Operating lease

5.5%

6.1%

Finance lease

5.2%

5.1%

Maturities of lease liabilities as of October 2, 2021 were as follows (in thousands):

Operating

Finance

Fiscal Year

Leases

Leases

2021 (remainder of the year)

$

63

$

6

2022

105

26

2023

26

2024

10

2025

5

Thereafter

3

Total lease payments

168

76

Less: imputed interest

(3)

(6)

Total

$

165

$

70

As of October 2, 2021, the Company had $2.4 million of future payments under additional leases, primarily for corporate facilities, that had not yet commenced. These leases will commence during 2021, with lease terms ranging from two to five years.

Note 7—Commitments and Contingencies

TRGP Agreement

On May 3, 2017, the Company and TRGP entered into an investment agreement (the “TRGP Agreement”), which generally provided that TRGP directly fund the costs incurred by or on behalf of the Company in connection with the Company’s first action in the U.S. International Trade Commission (“ITC”) and its U.S. district court proceedings,

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but excluding all other proceedings (all such funded costs, collectively, the “Funded Costs”). In exchange for such funding, the Company agreed that, if the Company recovered any proceeds in connection with the funded SK hynix proceedings relating to certain patents, it would pay to TRGP the amount of the Funded Costs paid by TRGP plus an escalating premium based on when any such proceeds are recovered. On January 23, 2020, the Company and TRGP entered into an amendment to the TRGP Agreement to alter the recovery sharing formula related to claims against SK hynix for alleged infringement of the Company’s patents (the “First Amendment”). The Company believes that the SK hynix License Agreement entered into on April 5, 2021 falls outside the scope of the TRGP Agreement and the First Amendment to the TRGP Agreement and does not anticipate that it will be obligated to make payments to TRGP under the TRGP Agreement or the First Amendment.

Litigation and Patent Reexaminations

The Company owns numerous patents and continues to seek to grow and strengthen its patent portfolio, which covers various aspects of the Company’s innovations and includes various claim scopes. The Company plans to pursue avenues to monetize its intellectual property portfolio, in which it would generate revenue by selling or licensing its technology, and it intends to vigorously enforce its patent rights against alleged infringers of such rights. The Company dedicates substantial resources to protecting and enforcing its intellectual property rights, including with patent infringement proceedings it files against third parties and defense of its 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”). The Company expects 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 the Company will be able to monetize its intellectual property portfolio. The Company is also subject to litigation based on claims that it has infringed on the intellectual property rights of others.

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 other activities of the Company. As a result, any current or future infringement claims or patent challenges by or against third parties, whether or not eventually decided in the Company’s favor or settled, could materially adversely affect the Company’s business, financial condition and results of operations. Additionally, the outcome of pending or future litigation and related patent reviews and reexaminations, as well as any delay in their resolution, could affect the Company’s ability to continue to sell its products, protect against competition in the current and expected markets for its products or license or otherwise monetize its intellectual property rights in the future.

Google Litigation

On December 4, 2009, the Company filed a patent infringement lawsuit against Google, Inc. (“Google”) in the U.S. District Court for the Northern District of California (the “Northern District Court”), seeking damages and injunctive relief based on Google’s alleged infringement of the Company’s U.S. Patent No. 7,619,912 (the “‘912 patent”), which relates generally to technologies to implement rank multiplication. In February 2010, Google answered the Company’s complaint and asserted counterclaims against the Company seeking a declaration that the patent is invalid and not infringed, and claiming that the Company committed fraud, negligent misrepresentation and breach of contract based on the Company’s activities in the Joint Electron Device Engineering Council (“JEDEC”) standard-setting organization. The counterclaim seeks unspecified compensatory damages. Accruals have not been recorded for loss contingencies related to Google’s counterclaim because it is not probable that a loss has been incurred and the amount of any such loss cannot be reasonably estimated. In October 2010, Google requested and was later granted an Inter Partes Reexamination of the ‘912 patent by the USPTO. The reexamination proceedings are described below. In connection with the reexamination request, the Northern District Court granted the Company’s and Google’s joint request to stay the ‘912 patent infringement lawsuit against Google until the completion of the reexamination proceedings. On January 31, 2019, the PTAB, in response to Google’s rehearing request, denied rehearing of the PTAB’s previous decision upholding the validity of claims in Netlist’s ‘912 patent. On April 16, 2019, Google filed an appeal to this decision. On June 15, 2020, the United States Court of Appeals for the Federal Circuit affirmed the PTAB’s previous decision upholding the validity of claims in Netlist’s ‘912 patent. The Google litigation is now resuming with issuance of the ‘912 reexamination certificate and the scheduling of a Markman hearing for March 9, 2022.

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Inphi Litigation

On September 22, 2009, the Company filed a patent infringement lawsuit against Inphi Corporation (“Inphi”) in the U.S. District Court for the Central District of California (the “Central District Court”). The complaint, as amended, alleges that Inphi is contributorily infringing and actively inducing the infringement of U.S. patents owned by the Company, including the ‘912 patent, U.S. Patent No. 7,532,537 (the “‘537 patent”), which relates generally to memory modules with load isolation and memory domain translation capabilities, and U.S. Patent No. 7,636,274 (the “‘274 patent”), which is related to the ‘537 patent and relates generally to load isolation and memory domain translation technologies. The Company is seeking damages and injunctive relief based on Inphi’s use of the Company’s patented technology. Inphi denied infringement and claimed that the three patents are invalid. In June 2010, Inphi requested and was later granted Inter Partes Reexaminations of the ‘912, ‘537 and ‘274 patents by the USPTO. The reexamination proceedings are described below (except for the reexamination proceeding related to the ‘537 patent, which have concluded with the confirmation of all of the claims of such patent). In connection with the reexamination requests, Inphi filed a motion to stay the patent infringement lawsuit with the Central District Court until completion of the reexamination proceedings, which was granted. On April 16, 2019, Inphi filed an appeal to the PTAB’s January 31, 2019 decision upholding the validity of claims in Netlist’s ‘912 patent. On June 15, 2020, the United States Court of Appeals for the Federal Circuit affirmed the PTAB’s previous decision upholding the validity of claims in Netlist’s ‘912 patent. On August 18, 2021, Netlist dismissed this lawsuit without prejudice.

Micron Litigation

On April 28, 2021, the Company filed legal proceedings for patent infringement against Micron Technology, Inc. (“Micron”) in the United States District Court for the Western District of Texas (Case No. 6:21-cv-00431 & Case No. 6:21-cv-00430). These proceedings are based on the alleged infringement by Micron’s load-reduced dual in-line memory modules (“LRDIMM”) and Micron’s non-volatile dual in-line memory modules (“NVDIMM”) enterprise memory products of four of the Company’s U.S. patents – US Pat. No. 10,489,314; US Pat. No. 9,824,035; US Pat. No. 10,268,608; & US Pat. No. 8,301,833. Case schedules for these cases have not yet been set.

Samsung Litigation

On May 28, 2020, the Company filed legal proceedings against Samsung in the United States District Court for the Central District of California seeking damages for breach of contract of the Joint Development and License Agreement (the “JDLA”) entered into between Netlist and Samsung on November 12, 2015. On July 22, 2020, the Company amended its complaint to further seek a Declaratory Judgment that Netlist terminated the JDLA including the patent license under the JDLA. These proceedings are based on the alleged material breach by Samsung of the JDLA. On October 14, 2021, the court entered summary judgment in favor of Netlist on Samsung’s material breach of the supply obligation and material breach of tax withholding claims. The court further held that Netlist had properly terminated the JDLA on July 15, 2020. Finally, the court held that Netlist could not recover consequential damages. Trial on direct damages for the case is set to begin on November 30, 2021.

Other Contingent Obligations

In the ordinary course of its business, the Company has made certain indemnities, commitments and guarantees pursuant to which it may be required to make payments in relation to certain transactions. These include, among others: (i) intellectual property indemnities to the Company’s customers and licensees in connection with the use, sale and/or license of Company products; (ii) indemnities to vendors and service providers pertaining to claims based on the Company’s negligence or willful misconduct; (iii) indemnities involving the accuracy of representations and warranties in certain contracts; (iv) indemnities to directors and officers of the Company to the maximum extent permitted under the laws of the State of Delaware; (v) indemnities to SVIC and SVB pertaining to all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with transactions contemplated by the applicable investment or loan documents, as applicable; and (vi) indemnities or other claims related to certain real estate leases, under which the Company may be required to indemnify property owners for environmental and other liabilities or may face other claims arising from the Company’s 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,

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commitments and guarantees do not provide for any limitation of the maximum potential for future payments the Company could be obligated to make. Historically, the Company has 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 condensed 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 October 2, 2021 or January 2, 2021.

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.

2019 Lincoln Park Purchase Agreement

On June 24, 2019, the Company entered into a purchase agreement (the “2019 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 $10 million in shares of its common stock subject to the conditions and limitations set forth in the 2019 Purchase Agreement. As consideration for entering into the 2019 Purchase Agreement, the Company issued to Lincoln Park 818,420 shares of its common stock as initial commitment shares in a noncash transaction on June 24, 2019 and will issue up to 818,420 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.

During the three and nine months ended October 2, 2021, Lincoln Park purchased an aggregate of 406,074 shares and 2,075,503 shares of the Company’s common stock for a net purchase price of $2.0 million and $3.6 million, respectively, under the 2019 Purchase Agreement. In connection with the purchases, during the three and nine months ended October 2, 2021, the Company issued to Lincoln Park an aggregate of 165,319 shares and 294,787 shares of its

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common stock, respectively, as additional commitment shares in noncash transactions. In July 2021, the Company completed the sales under the 2019 Purchase Agreement.

2020 Lincoln Park Purchase Agreement

On March 5, 2020, the Company entered into a purchase agreement (the “2020 Purchase Agreement”) with Lincoln Park, pursuant to which the Company had the right to sell to Lincoln Park up to an aggregate of $20 million in shares of its 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. As consideration for entering into the 2020 Purchase Agreement, the Company issued to Lincoln Park 1,529,052 shares of its common stock as initial commitment shares in a noncash transaction on March 6, 2020 and would issue up to 917,431 additional shares of its common stock as additional commitment shares on a pro rata basis in connection with any additional purchases. The Company would not receive any cash proceeds from the issuance of these additional commitment shares.

During the nine months ended October 2, 2021, Lincoln Park purchased an aggregate of 9,544,595 shares of the Company’s common stock for a net purchase price of $7.8 million under the 2020 Purchase Agreement. In connection with the purchases, during the nine months ended October 2, 2021, the Company issued to Lincoln Park an aggregate of 356,843 shares of its common stock as additional commitment shares in noncash transactions. In February 2021, the Company completed the sales under the 2020 Purchase Agreement.

First 2021 Lincoln Park Purchase Agreement

On July 12, 2021, the Company entered into a purchase agreement (the “First 2021 Purchase Agreement”) with Lincoln Park, pursuant to which the Company has the right to sell to Lincoln Park up to an aggregate of $17.4 million in shares of its common stock subject to the conditions and limitations set forth in the First 2021 Purchase Agreement. As consideration for entering into the First 2021 Purchase Agreement, the Company issued to Lincoln Park 80,000 shares of its common stock as initial commitment shares in a noncash transaction on July 12, 2021 and will issue up to 120,500 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.

Pursuant to the First 2021 Purchase Agreement, on any business day and as often as every other business day over the 36-month term of the First 2021 Purchase Agreement, the Company has the right, from time to time, at its sole discretion and subject to certain conditions, to direct Lincoln Park to purchase up to 750,000 shares of its common stock, with such amount increasing as the closing sale price of its common stock increases; provided Lincoln Park’s obligation under any single such purchase will not exceed $3.0 million, unless the Company and Lincoln Park mutually agree to increase the maximum amount of such single regular purchase. If the Company directs Lincoln Park to purchase the maximum number of shares of common stock it then may sell in a regular purchase, then in addition to such regular purchase, and subject to certain conditions and limitations in the First 2021 Purchase Agreement, the Company may direct Lincoln Park to purchase an additional amount of common stock that may not exceed the lesser of (i) 300% of the number of shares purchased pursuant to the corresponding regular purchase and (ii) 30% of the total number of shares of its common stock traded during a specified period on the applicable purchase date as set forth in the First 2021 Purchase Agreement. Under certain circumstances and in accordance with the First 2021 Purchase Agreement, the Company may direct Lincoln Park to purchase shares in multiple accelerated purchases on the same trading day.

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 First 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 First 2021 Purchase Agreement. In all instances, the Company may not sell shares of its common stock to Lincoln Park under the First 2021 Purchase Agreement if that would result in Lincoln Park beneficially owning more than 9.99% of its common stock.

The First 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

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Rate Transaction (as defined in the First 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 2021 Purchase Agreement. The Company has the right to terminate the First 2021 Purchase Agreement at any time, at no cost to the Company.

During the three months ended October 2, 2021, Lincoln Park purchased an aggregate of 2,000,000 shares of the Company’s common stock for a net purchase price of $14.9 million under the First 2021 Purchase Agreement. In connection with the purchases, during the three months ended October 2, 2021, the Company issued to Lincoln Park an aggregate of 103,292 shares of its common stock as additional commitment shares in noncash transactions.

Subsequent to October 2, 2021, Lincoln Park purchased an aggregate of 383,748 shares of the Company’s common stock for a net purchase price of $2.5 million under the First 2021 Purchase Agreement. In connection with the purchases, the Company issued to Lincoln Park an aggregate of 17,208 shares of its common stock as additional commitment shares in noncash transactions. In October 2021, the Company completed the sales under the First 2021 Purchase Agreement.

Second 2021 Lincoln Park Purchase Agreement

On September 28, 2021, the Company entered into a purchase agreement (the “Second 2021 Purchase Agreement”) with 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 Second 2021 Purchase Agreement. Concurrent with the execution of the Second 2021 Purchase Agreement, the Company also entered into a registration rights agreement with Lincoln Park relating to the Company’s common stock to be sold to Lincoln Park. As consideration for entering into the Second 2021 Purchase Agreement, the Company issued to Lincoln Park 218,750 shares of its common stock as initial commitment 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.

Pursuant to the Second 2021 Purchase Agreement, on any business day and as often as every other business day over the 36-month term of the Second 2021 Purchase Agreement, the Company has the right, from time to time, at its sole discretion and subject to certain conditions, to direct Lincoln Park to purchase up to 750,000 shares of its common stock, provided Lincoln Park’s obligation under any single such purchase will not exceed $4.0 million, unless the Company and Lincoln Park mutually agree to increase the maximum amount of such single regular purchase. If the Company directs Lincoln Park to purchase the maximum number of shares of common stock it then may sell in a regular purchase, then in addition to such regular purchase, and subject to certain conditions and limitations in the Second 2021 Purchase Agreement, the Company may direct Lincoln Park to purchase an additional amount of common stock that may not exceed the lesser of (i) 300% of the number of shares purchased pursuant to the corresponding regular purchase or (ii) 30% of the total number of shares of its common stock traded during a specified period on the applicable purchase date as set forth in the Second 2021 Purchase Agreement. Under certain circumstances and in accordance with the Second 2021 Purchase Agreement, the Company may direct Lincoln Park to purchase shares in multiple accelerated purchases on the same trading day.

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 Second 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 Second 2021 Purchase Agreement. In all instances, the Company may not sell shares of its common stock to Lincoln Park under the Second 2021 Purchase Agreement if that would result in Lincoln Park beneficially owning more than 9.99% of its common stock.

The Second 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 Second 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 Second 2021 Purchase

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Agreement. The Company has the right to terminate the Second 2021 Purchase Agreement at any time, at no cost to the Company.

During the three months ended October 2, 2021, Lincoln Park did not purchase shares of the Company’s common stock under the Second 2021 Purchase Agreement. Subsequent to October 2, 2021, Lincoln Park purchased an aggregate of 650,000 shares of the Company’s common stock for a net purchase price of $4.8 million under the Second 2021 Purchase Agreement. In connection with the purchases, the Company issued to Lincoln Park an aggregate of 9,111 shares of its common stock as additional commitment shares in noncash transactions.

Warrants

Warrant activity for the nine months ended October 2, 2021 is as follows:

Weighted

Number of

Average

Shares

Exercise

    

(in thousands)

    

Price

Outstanding as of January 2, 2021

13,911

$

0.59

Granted

Exercised

(11,911)

0.64

Expired

Outstanding as of October 2, 2021

2,000

0.30

Note 9—Stock-Based Awards

As of October 2, 2021, the Company had 630,323 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 semi-annually from the grant date over a four-year term, and RSUs granted for independent directors fully-vest on the grant date.

Stock Options

The following table summarizes the activity related to stock options during the nine months ended October 2, 2021:

Weighted-

Number of

Average

Shares

Exercise

(in thousands)

    

Price

Outstanding as of January 2, 2021

7,519

$

1.12

Granted

1,995

1.01

Exercised

(2,730)

1.40

Expired or forfeited

(740)

1.68

Outstanding as of October 2, 2021

6,044

0.89

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Restricted Stock Units

The following table summarizes the activity related to RSUs during the nine months ended October 2, 2021:

Weighted-

Average

Number of

Grant-Date

Shares

Fair Value

(in thousands)

per Share

Outstanding as of January 2, 2021

3,037

$

0.53

Granted

305

4.54

Vested

(1,085)

0.57

Forfeited

(88)

0.51

Outstanding as of October 2, 2021

2,169

1.07

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

    

Nine Months Ended

October 2,

September 26,

October 2,

September 26,

2021

2020

2021

2020

Cost of sales

$

2

$

1

$

9

$

8

Research and development

160

63

438

154

Selling, general and administrative

283

148

715

420

Total

$

445

$

212

$

1,162

$

582

As of October 2, 2021, the Company had approximately $3.9 million, net of estimated forfeitures, of unearned stock-based compensation, which it expects to recognize over a weighted-average period of approximately 3.0 years.

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Item 2.

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

Note About 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 January 2, 2021 (the “2020 Annual Report”) filed with the Securities and Exchange Commission (the “SEC”). All information presented herein is based on our fiscal calendar, and references to particular years, quarters, months or periods refer to our fiscal years ended in January or December and the associated quarters, months and periods of those fiscal years. 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.

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Overview

Netlist provides high-performance solid state drives and modular memory solutions to enterprise customers in diverse industries. Our NVMe SSDs in various capacities and form factors and the line of custom and specialty memory products bring industry-leading performance to server and storage appliance customers and cloud service providers. Netlist licenses its portfolio of intellectual property including patents, in server memory, hybrid memory and storage class memory, to companies that implement Netlist’s technology. To learn more, visit www.netlist.com.

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

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 its 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.

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

First 2021 Lincoln Park Purchase Agreement

On July 12, 2021, we entered into a purchase agreement (the “First 2021 Purchase Agreement”) with Lincoln Park, pursuant to which we have the right to sell to Lincoln Park up to an aggregate of $17.4 million in shares of our common stock over the 36-month term of the First 2021 Purchase Agreement subject to the conditions and limitations set forth in the First 2021 Purchase Agreement. During the third quarter of 2021, Lincoln Park purchased an aggregate of 2,000,000 shares of our common stock for a net purchase price of $14.9 million under the First 2021 Purchase Agreement. In connection with the purchases, during the third quarter of 2021, we issued to Lincoln Park an aggregate of 103,292 shares of our common stock as additional commitment shares in noncash transactions.

Subsequent to October 2, 2021, Lincoln Park purchased an aggregate of 383,748 shares of our common stock for a net purchase price of $2.5 million under the First 2021 Purchase Agreement. In connection with the purchases, we issued to Lincoln Park an aggregate of 17,208 shares of our common stock as additional commitment shares in noncash transactions. We completed the sales under the First 2021 Purchase Agreement in October 2021.

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Second 2021 Lincoln Park Purchase Agreement

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

Subsequent to October 2, 2021, Lincoln Park purchased an aggregate of 650,000 shares of our common stock for a net purchase price of $4.8 million under the Second 2021 Purchase Agreement. In connection with the purchases, we issued to Lincoln Park an aggregate of 9,111 shares of our common stock as additional commitment shares in noncash transactions.

Paycheck Protection Program Loan

On April 23, 2020, we entered into an unsecured promissory note with a principal amount of $0.6 million through Hanmi Bank under the Paycheck Protection Program (“PPP”) (“PPP Loan”) administered by the Small Business Administration (“SBA”) and established as part of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The PPP Loan bore interest at 1.0% per annum and would mature in April 2022 with the first six months of interest and principal payments deferred. The amount borrowed under the PPP Loan was eligible for forgiveness if we would meet certain conditions. In May 2021, the full amount outstanding under the PPP Loan was forgiven resulting in a gain of $0.6 million.

Economic Conditions, Challenges and Risks

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.

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Results of Operations

Net Sales and Gross Margin

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

Three Months Ended

Nine Months Ended

October 2,

September 26,

%

October 2,

September 26,

%

  

2021

 

2020

 

Change

 

2021

 

2020

 

Change

Net product sales

$

26,749

$

10,212

162%

$

66,009

$

35,749

85%

License fee

40,000

Net sales

26,749

10,212

162%

106,009

35,749

197%

Gross margin - product sales

$

2,508

$

1,337

88%

$

6,874

$

5,272

30%

Gross margin percentage - product sales

9%

13%

10%

15%

Gross margin

$

2,508

$

1,337

88%

$

46,874

$

5,272

789%

Gross margin percentage

9%

13%