What changed in this filing

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Item 1. Financial Statements

2020-11-10 compared with 2020-08-11 · 123 added, 181 removed, 463 unchanged (40% of the section changed)

4 unchanged sentences

(in thousands, except par value)

September 26,

Current Assets:

36 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 26,

September 28,

September 26,

September 28,

Cost of sales

7 unchanged sentences

Interest expense, net

Other expense, net

Other income (expense), net

Total other expense, net

22 unchanged sentences

Balance, June 27, 2020

Stock-based compensation

Exercise of stock options

Exercise of warrants

Restricted stock units vested and distributed

Tax withholdings related to net share settlements of equity awards

Issuance of common stock, net

Balance, September 26, 2020

See accompanying notes.

17 unchanged sentences

Balance, June 29, 2019

Stock-based compensation

Restricted stock units vested and distributed

Tax withholdings related to net share settlements of equity awards

Issuance of common stock, net

Common stock issued on conversion of Iliad Note

Balance, September 28, 2019

See accompanying notes.

3 unchanged sentences

(in thousands)

Six Months Ended

Nine Months Ended

September 26,

September 28,

Cash flows from operating activities:

16 unchanged sentences

Cash flows from financing activities:

Net repayments under line of credit

Net borrowings (repayments) under line of credit

Proceeds from issuance of long-term debt

3 unchanged sentences

Payments for taxes related to net share settlement of equity awards

Net cash provided by (used in) financing activities

Net cash provided by financing activities

Net change in cash, cash equivalents and restricted cash

24 unchanged sentences

The Company operates in one reportable segment, which is the design and manufacture of high-performance memory subsystems for the server, high-performance computing and communications markets.

The Company incurred net loss of $1.8 million and $3.4 million for the three and six months ended June 27, 2020 and $12.5 million and $17.1 million for the fiscal years ended December 28, 2019 and December 29, 2018, respectively.

The Company incurred net loss of $2.1 million and $5.5 million for the three and nine months ended September 26, 2020 and $12.5 million and $17.1 million for the fiscal years ended December 28, 2019 and December 29, 2018, respectively.

The Company has historically financed its operations primarily with revenues generated from operations, including product sales, and proceeds from issuances of debt and equity securities (see Notes 5 and 8).

16 unchanged sentences

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 June 27, 2020, 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.

The Company has evaluated events occurring subsequent to September 26, 2020, 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

22 unchanged sentences

In December 2019, the FASB issued ASU No.

2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes (“ASU 2019-12”), 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.

ASU 2019-12 also clarifies and simplifies other aspects of the accounting for income taxes.

ASU 2019-12 is effective for the Company beginning January 3, 2021 with early adoption permitted for any interim period before the effective date.

Certain amendments of ASU 2019-12 may be adopted on a retrospective basis, modified retrospective basis or prospective basis.

The Company is currently evaluating the impact ASU 2019-12 will have on its condensed consolidated financial statements.

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 ASU will be effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years and early adoption is permitted.

Certain amendments of this ASU may be adopted on a retrospective basis, modified retrospective basis or prospective basis.

The Company is currently evaluating the impact this guidance will have on its condensed consolidated financial statements.

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.

Fair Value Measurements

9 unchanged sentences

The carrying value of these instruments approximates their fair value due to their short-term nature.

value of the revolving line of credit, the PPP Loan and convertible promissory note is estimated by using current applicable rates for similar instruments as of the balance sheet date and an assessment of the credit rating.

The carrying value of the revolving line of credit as of June 27, 2020 and December 28, 2019 and the PPP Loan as of June 27, 2020 approximates fair value because the interest rate yield is near current market rates for comparable debt instruments.

The fair value of the revolving line of credit, the PPP Loan and convertible promissory note is estimated by using current applicable rates for similar instruments as of the balance sheet date and an assessment of the credit rating.

The carrying value of the revolving line of credit as of September 26, 2020 and December 28, 2019 and the PPP Loan as of September 26, 2020 approximates fair value because the interest rate yield is near current market rates for comparable debt instruments.

The fair value of the convertible promissory note is estimated by using a discounted cash flow analysis using borrowing rates available to the Company for debt instruments with similar terms and maturities and is classified in Level 2 of the valuation hierarchy.

The carrying value and estimated fair value of the secured convertible promissory note as of June 27, 2020 were $14.7 million and $12.3 million, respectively.

The carrying value and estimated fair value of the secured convertible promissory note as of September 26, 2020 were $14.7 million and $12.2 million, respectively.

The carrying value and estimated fair value of the secured convertible promissory note as of December 28, 2019 were $14.6 million and $11.7 million, respectively.

3 unchanged sentences

Inventories consisted of the following (in thousands):

September 26,

Raw materials

4 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 26,

September 28,

September 26,

September 28,

Weighted-average common shares outstanding—basic and diluted

3 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 26,

September 28,

September 26,

September 28,

Weighted average common share equivalents

2 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 26,

September 28,

September 26,

September 28,

Resales of third-party products

5 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 26,

September 28,

September 26,

September 28,

Less than 10% of net sales during the period.

As of June 27, 2020, three customers represented 22%, 13% and 11% of aggregate gross receivables, respectively.

As of September 26, 2020, four customers represented 27%, 19%, 11% and 10% of aggregate gross receivables, respectively.

As of December 28, 2019, one customer represented approximately 25% of aggregate gross receivables.

2 unchanged sentences

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 June 27, 2020, resales of these products represented approximately 58% and 68% of net sales, respectively.

For the three and six months ended June 29, 2019, they represented approximately 83% and 80% of net sales, respectively.

For the three and nine months ended September 26, 2020, resales of these products represented approximately 67% and 68% of net sales, respectively.

For the three and nine months ended September 28, 2019, they represented approximately 85% and 82% of net sales, respectively.

Cash Flow Information

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

Six Months Ended

Nine Months Ended

September 26,

September 28,

Common stock issued on conversion of convertible note payable and accrued interest

2 unchanged sentences

The borrowing base is limited to 85% of the eligible accounts receivable, subject to certain adjustments.

As of June 27, 2020, the borrowings under the SVB Credit Agreement bear interest based on the Wall Street Journal “prime rate” plus 2.75% and mature on April 30, 2021 (amended from March 30, 2020 on February 27, 2020).

As of September 26, 2020, the borrowings under the SVB Credit Agreement bear interest based on the Wall Street Journal “prime rate” plus 2.75% and mature on April 30, 2021.

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 June 27, 2020 and December 28, 2019, (i) outstanding letters of credit were $3.2 million and $2.8 million, respectively, (ii) outstanding

borrowings were $1.3 million and $3.0 million, respectively, and (iii) availability under the revolving line of credit was $0.1 million and $0.2 million, respectively.

As of September 26, 2020 and December 28, 2019, (i) outstanding letters of credit were $3.2 million and $2.8 million, respectively, (ii) outstanding borrowings were $3.4 million and $3.0 million, respectively, and (iii) availability under the revolving line of credit was $0.1 million and $0.2 million, respectively.

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).

7 unchanged sentences

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 June 27, 2020, the Company was in compliance with its covenants under the SVB Credit Agreement.

As of September 26, 2020, the Company was in compliance with its covenants under the SVB Credit Agreement.

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

September 26,

Secured convertible note, due December 2021, including accrued interest of $1,457 (2020) and $1,233 (2019), respectively

7 unchanged sentences

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 prior to its maturity date, and expires on December 31, 2025.

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 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.

1 unchanged sentence

These amounts are being amortized to interest expense over the term of the SVIC Note using the interest method.

For the three and six months ended June 27, 2020, interest expense related to the amortization of the issuance costs associated with the liability component was not material.

For the three and nine months ended September 26, 2020, 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 June 27, 2020, the outstanding principal and accrued interest on the SVIC Note was $16.4 million, and the outstanding SVIC Note balance, net of unamortized debt discounts and issuance costs, was $16.1 million.

As of September 26, 2020, the outstanding principal and accrued interest on the SVIC Note was $16.5 million, and the outstanding SVIC Note balance, net of unamortized debt discounts and issuance costs, was $16.2 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.

3 unchanged sentences

The SVIC Note subjects the Company to certain affirmative and negative operating covenants.

As of June 27, 2020, the Company was in compliance with its covenants under the SVIC Note.

As of September 26, 2020, the Company was in compliance with its covenants under the SVIC Note.

Unsecured Convertible Note

15 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 26,

September 28,

September 26,

September 28,

Operating lease cost

4 unchanged sentences

Lease modification to decrease ROU assets

For the three and six months ended June 27, 2020 and June 29, 2019, finance lease costs and cash flows from finance lease were immaterial.

For the three and nine months ended September 26, 2020 and September 28, 2019, finance lease costs and cash flows from finance lease were immaterial.

Supplemental balance sheet information related to leases was as follows:

September 26,

(in thousands)

17 unchanged sentences

Finance lease

Maturities of lease liabilities as of June 27, 2020 were as follows (in thousands):

Maturities of lease liabilities as of September 26, 2020 were as follows (in thousands):

Operating Leases

5 unchanged sentences

TRGP Agreement and Related Intercreditor Agreements

On May 3, 2017, the Company and TRGP entered into an investment agreement (the “TRGP Agreement”), which generally provides that TRGP will directly fund the costs incurred by or on behalf of the Company in connection with certain legal proceedings against SK hynix (see “Litigation and Patent Reexaminations” in this Note 7 below), including costs incurred since January 1, 2017 and costs to be incurred in the future in the Company’s first action in the U.S.

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, but excluding the Company’s second ITC action and its proceedings in international courts (all such funded costs, collectively, the “Funded Costs”).

In exchange for such funding, the Company has agreed that, if the Company recovers any proceeds in connection with the funded SK hynix proceedings, it will pay to TRGP the amount of the Funded Costs paid by TRGP plus an escalating premium based on when any such proceeds are recovered, such that the premium will equal a specified low-to-mid double-digit percentage of the amount of the Funded Costs and such percentage will increase by a specified low double-digit amount each quarter after a specified date until any such proceeds are recovered.

In addition, pursuant to the terms of a separate security agreement between the Company and TRGP dated May 3, 2017 (the “Security Agreement”), the Company has granted to TRGP (i) a first priority lien on, and security in, the claims underlying the funded SK hynix proceedings and any proceeds that may be received by the Company in connection with these proceedings, and (ii) a second priority lien on, and security in, the Company’s patents that are the subject of the funded SK hynix proceedings.

The TRGP Agreement does not impose financial covenants on the Company.

Termination events under the TRGP Agreement include, among others, any failure by the Company to make payments to TRGP thereunder upon receipt of recoveries in the SK hynix proceedings;

the occurrence of certain bankruptcy events;

certain breaches by the Company of its covenants under the TRGP Agreement or the related Security Agreement;

and the occurrence of a change of control of the Company.

If any such termination event occurs, subject to certain cure periods for certain termination events, TRGP would have the right to terminate its obligations under the TRGP Agreement, including its obligation to make any further payments of Funded Costs after the termination date.

In the event of any such termination by TRGP, the Company would continue to be obligated to pay TRGP the portion of any proceeds the Company may recover in connection with the SK hynix proceedings that TRGP would have been entitled to receive absent such termination, as described above, and TRGP may also be entitled to seek additional remedies pursuant to the dispute resolution provisions of the TRGP Agreement.

district court proceedings, 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.

In addition, pursuant to the terms of a separate security agreement between the Company and TRGP dated May 3, 2017 (the “Security Agreement”), the Company granted to TRGP (i) a first priority lien on, and security in, the claims underlying the funded SK hynix proceedings and any proceeds that may be received by the Company in connection with these proceedings, and (ii) a second priority lien on, and security in, the Company’s patents that are the subject of the funded SK hynix proceedings.

Agreement and its amendment do not impose financial covenants on the Company.

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.

In connection with the TRGP Agreement, in May 2017, TRGP, SVIC and SVB entered into the Intercreditor Agreements.

Pursuant to the terms of the Intercreditor Agreements, TRGP, SVB and SVIC have agreed to their relative security interest priorities in the Company’s assets, such that:

proceedings funded under the TRGP Agreement, a second priority security interest in the Company’s patent portfolio other than the patents that are the subject of the SK hynix proceedings funded under the TRGP Agreement, and a third priority security interest in the Company’s patents that are the subject of the SK hynix proceedings funded under the TRGP Agreement.

(i) TRGP has a first priority security interest in the Company’s claims underlying the funded SK hynix proceedings and any proceeds that may be received by the Company in connection with these proceedings relating to certain patents, and a second priority security interest in the Company’s patents that are the subject of the funded SK hynix proceedings, (ii) SVIC has a first priority security interest in the Company’s complete patent portfolio and a second priority security interest in all of the Company’s other tangible and intangible assets (other than the Company’s claims underlying and any proceeds it may receive from the SK hynix proceedings funded under the TRGP Agreement), and (iii) SVB has a first priority security interest in all of the Company’s tangible and intangible assets other than its patent portfolio and its claims underlying and any proceeds it may receive from the SK hynix proceedings funded under the TRGP Agreement, a second priority security interest in the Company’s patent portfolio other than the patents that are the subject of the SK hynix proceedings funded under the TRGP Agreement, and a third priority security interest in the Company’s patents that are the subject of the SK hynix proceedings funded under the TRGP Agreement.

The Company consented and agreed to the terms of each of the Intercreditor Agreements.

1 unchanged sentence

During the years ended December 29, 2018 and December 30, 2017, the Company excluded legal expenses of $1.8 million and $10.2 million, respectively, as a result of TRGP’s payment of these expenses under the TRGP Agreement.

The Company does not anticipate any further legal expenses will be paid by TRGP under this agreement.

Any settlement or other cash proceeds the Company may recover in the future in connection with the funded SK hynix proceedings would be reduced by the aggregate amount of legal expenses excluded by the Company as a result of TRGP’s payment of these expenses under the TRGP Agreement, plus the premium amount due to TRGP under the terms of the TRGP Agreement at the time of any such recovery.

No further legal expenses will be paid by TRGP under this agreement.

Any settlement or other cash proceeds the Company may recover in the future in connection with the funded SK hynix proceedings may be reduced by the aggregate amount of legal expenses excluded by the Company as a result of TRGP’s payment of these expenses under the TRGP Agreement, plus the premium amount due to TRGP under the terms of the amended TRGP Agreement at the time of any such recovery.

Litigation and Patent Reexaminations

18 unchanged sentences

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

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.

23 unchanged sentences

On May 31, 2016, the PTAB issued a decision affirming certain of the examiner’s decisions and reversing others.

On February 9, 2017, the PTAB granted the Company’s request to reopen prosecution before the USPTO examiner and remanded the consolidated proceeding to the examiner to consider the patentability of certain of the pending claims in view of the PTAB’s May 31, 2016 decision and comments from the parties.

On October 3, 2017, the examiner issued a determination as to the patentability of certain of the pending claims, which were found to be unpatentable.

5 unchanged sentences

Accruals have not been recorded for loss contingencies related to the ‘912 patent reexamination proceedings because it is not probable that a loss has been incurred and the amount of any such loss cannot be reasonably estimated.

‘627 Patent Reexamination

In September 2011, Smart Modular submitted a request for an Inter Partes Reexamination by the USPTO of the Company’s U.S.

7,864,627 (the “‘627 patent”), related to the ‘912 patent, alleging that the ‘627 patent is invalid and requesting that the USPTO reject the patent’s claims.

On November 16, 2011, the USPTO granted Smart Modular’s request and initiated reexamination.

By June 27, 2014, the USPTO’s patent examiner had rejected all of the ‘627 patent’s claims.

The Company appealed the examiner’s rejections to the PTAB, and on May 31, 2016, the PTAB issued a decision affirming some of the examiner’s rejections.

On July 31, 2016, the Company submitted a request to the PTAB to reopen prosecution before the examiner to amend the claims.

On February 9, 2017, the PTAB granted the Company’s request to reopen prosecution and remanded the proceeding to the examiner to consider the patentability of the amended claims in view of the PTAB’s May 31, 2016 decision and comments from Smart Modular.

On October 2, 2017, the examiner issued a determination that the amended claims should also be rejected.

On June 1, 2018, the PTAB reversed the examiner and found the amended claims to be patentable.

Smart Modular did not appeal this latest PTAB decision to the Federal Circuit.

On October 3, 2018, the USPTO issued a Notice of Intent to Issue a Reexam Certificate, and on November 5, 2018, the USPTO issued Reexamination Certificate No.

7,864,627 concluding the reexamination.

The original ‘627 patent had eighteen claims, and during the reexamination, five were canceled (claims 1, 4, 15, 19, 20) and the remaining fifteen were amended (claims 2, 3, 5-12, 14-18) into their current form as issued in the reexamination certificate.

Accruals have not been recorded for loss contingencies related to the ‘627 patent reexamination proceedings because it is not probable that a loss has been incurred and the amount of any such loss cannot be reasonably estimated.

‘274 Patent Reexamination

As noted above, in April 2010 and June 2010, Inphi submitted requests for an Inter Partes Reexamination of the ‘274 patent by the USPTO.

On August 27, 2010, the request was granted.

In March 2012 and June 2012, the USPTO issued an ACP and a RAN, respectively, each of which confirmed the patentability of many of the ‘274 patent’s claims.

The parties involved filed various notices of appeal, responses and requests, and on November 20, 2013, the PTAB held a hearing on such appeals.

On January 16, 2014, the PTAB issued a decision affirming the examiner in part but reversing the examiner on new grounds and rejecting all of the patent’s claims.

On September 11, 2015, the USPTO examiner issued a determination rejecting the amended claims.

On January 23, 2017, the USPTO granted-in-part the Company’s petition to enter comments in support of its positions in the proceeding.

On May 9, 2017, the PTAB issued a decision on appeal affirming the rejection of all claims.

Netlist requested rehearing of the PTAB’s decision on June 6, 2017.

The PTAB denied the rehearing request on August 8, 2017.

On October 6, 2017, Netlist appealed the decision to the Court of Appeals for the Federal Circuit, which Netlist dismissed on March 19, 2018, thereby terminating the proceedings with the rejection of all ‘274 patent claims becoming final.

Accruals have not been recorded for loss contingencies related to the ‘274 patent reexamination proceedings because it is not probable that a loss has been incurred and the amount of any such loss cannot be reasonably estimated.

Smart Modular ‘295 Patent Litigation and Reexamination

On September 13, 2012, Smart Modular filed a patent infringement lawsuit against the Company in the U.S.

District Court for the Eastern District of California (the “Eastern District Court”).

The complaint alleges that the Company willfully infringes and actively induces the infringement of certain claims of U.S.

8,250,295 (“the ‘295 patent”) issued to Smart Modular and seeks damages and injunctive relief.

The Company answered Smart Modular’s complaint in October 2012, denying infringement of the ‘295 patent, asserting that the ‘295 patent is invalid and unenforceable, and asserting counterclaims against Smart Modular.

Accruals have not been recorded for loss contingencies related to Smart Modular’s complaint because it is not probable that a loss has been incurred and the amount of any such loss cannot be reasonably estimated.

On December 7, 2012, the USPTO granted the Company’s request for the reexamination of the ‘295 patent.

On April 29, 2014, the USPTO examiner issued an ACP confirming some claims and rejecting others, and on August 4, 2015, the examiner issued a RAN confirming all pending claims.

On September 4, 2015, the Company appealed to the PTAB.

The parties involved filed various notices of appeal, responses and requests, and on September 22, 2016, the PTAB held a hearing on such appeals.

On November 14, 2016, the PTAB issued a decision reversing the examiner and rejected all of the pending claims.

On January 23, 2017, Smart Modular filed a request to reopen prosecution.

The parties had the opportunity present evidence and arguments and the examiner issued a determination on May 8, 2017, which

found all pending claims to be unpatentable.

On December 12, 2017, the PTAB agreed with the examiner and found all pending claims to be unpatentable.

Smart Modular appealed the PTAB’s decision to the Court of Appeals for the Federal Circuit.

On March 28, 2018, the Eastern District Court stayed the proceedings related to the ‘295 patent.

On January 18, 2019, the Company and Smart Modular filed a Joint Motion to Dismiss with Prejudice, terminating the proceedings related to the ‘295 patent in the Eastern District Court.

Smart Modular and SanDisk Litigation

On July 1 and August 23, 2013, the Company filed complaints against Smart Modular, SMART Storage Systems (which was subsequently acquired by SanDisk Corporation (“SanDisk”)), Smart Worldwide Holdings (“Smart Worldwide”) and Diablo Technologies (“Diablo”) in the Central District Court, seeking, among other things, damages and other relief for alleged infringement of several of the Company’s patents by the defendants based on the manufacture and sale of the ULLtraDIMM memory module, alleged antitrust violations by Smart Modular and Smart Worldwide, and alleged trade secret misappropriation and trademark infringement by Diablo.

More particularly, the Company asserted claims from U.S.

and 8,516,187 (the “Asserted Patents”).

On August 23, 2013, Smart Modular and Diablo each filed a complaint in the Oakland Division of the Northern District Court seeking declaratory judgment of non-infringement and invalidity of the Asserted Patents.

Based on various motions filed by the parties, on November 26, 2013, the Central District Court severed and transferred the patent claims related to the ULLtraDIMM memory module to the Northern District Court.

On February 12, 2014, the Northern District Court granted the parties’ joint stipulation dismissing all claims against Smart Modular without prejudice.

On April 15, 2014, the Northern District Court granted the parties’ joint stipulation dismissing all claims against Smart Worldwide without prejudice.

Between June 18, 2014 and August 23, 2014, SanDisk, Diablo, and Smart Modular filed numerous petitions in the USPTO requesting Inter Partes Review (“IPR”) of the Company’s Asserted Patents.

On April 9, 2015, the Northern District Court stayed the proceedings as to the Company’s patent infringement claims pending resolution of all outstanding IPRs.

The trade secret misappropriation and trademark infringement claims against Diablo were fully adjudicated on August 17, 2016 (during the pendency of the IPR’s) and are no longer pending.

All of the IPRs filed by SanDisk, Diablo and SMART Modular associated with the Asserted Patents with Patent Nos.

ending in ‘185, ‘187 and ‘833 have been resolved in the Company’s favor and are no longer pending.

The IPRs associated with the Asserted Patents with Patent Nos.

ending in ‘150, ‘434, ‘501 and ‘536, and the appeals therefrom, have also concluded, with the Board confirming the patentability of several asserted claims.

The litigation, however, remains stayed pending resolution of IPRs filed by Hynix on the same or related patents.

On December 8, 2017, Diablo filed for bankruptcy, and on November 9, 2018, the Northern District Court dismissed all claims against Diablo without prejudice.

The Company’s patent infringement claims as to all Asserted Patents against SMART Storage Systems and SanDisk was dismissed on May 19.

SK hynix Litigation

6 unchanged sentences

In the Central District Court proceedings, the Company is primarily seeking damages.

On October 3, 2016, the ITC instituted an investigation of the trade practices of SK hynix and certain of its subsidiaries in connection with the First ITC Action, and held a hearing on the merits of the investigation from May 8, 2017 until May 11, 2017.

On November 14, 2017, the ITC issued a final initial determination for the First ITC Action, finding no infringement of the asserted patents and no violation of Section 337 of the Tariff Act, and on January 16, 2018, the ITC issued a final determination for the First ITC Action, affirming the findings of no infringement and no violation and terminating the investigation.

The Company appealed this final determination to the Court of Appeals for the Federal Circuit with oral arguments occurring on December 5, 2019.

On December 12, 2019, the Court of Appeals for the Federal Circuit affirmed the invalidity ruling by the PTAB involving the patents in litigation at the first ITC Action and dismissed the appeal of the final determination of the first ITC Action as moot.

On January 11, 2018, the ITC set a 19-month target date of July 3, 2019 for an investigation related to the Second ITC Action, with a final initial determination for the Second ITC Action being filed no later than March 1, 2019.

Based on this target date, the ITC scheduled a hearing on the merits of the investigation related to the Second ITC Action to begin on November 9, 2018 and conclude on November 19, 2018.

On April 12, 2018, the ITC granted SK hynix’s motion for summary determination of non-infringement and terminated the Second ITC Action in its entirety.

On April 23, 2018, the Company filed a petition seeking ITC review of this decision.

On May 29, 2018, the ITC Commission remanded the Second ITC Action back to the Administrative Law Judge (“ALJ”) to resolve the parties’ claim construction disputes and continue the investigation.

On June 14, 2018, the ITC extended the target date for the final determination to August 5, 2019, with a final initial determination due by April 5, 2019.

Based on this extended target date, the ITC scheduled a hearing on the merits to begin on December 14, 2018 and conclude on December 21, 2018.

On September 13, 2018, the ITC rescheduled the hearing on the merits to begin on January 14, 2019 and conclude on January 18, 2019.

On January 29, 2019, due to the government shutdown, the ITC again rescheduled the hearing on the merits to begin on March 11, 2019 and conclude on March 15, 2019.

On February 8, 2019, Chief Administrative Law Judge of the ITC issued an Order in Investigation No.

337-TA-1089 denying SK hynix’s motion for “Summary Determination of Non Infringement of Netlist’s U.S.

9,535,623 Based On Issue Preclusion.” On March 12, 2019, the ALJ postponed the trial due to reasons unrelated to the dispute between the parties.

The trial recommenced on July 15, 2019 and ended on July 19, 2019.

On October 21, 2019, the ITC issued an initial determination for the Second ITC Action, finding infringement by SK hynix of asserted Netlist U.S.

9,606,907 (the “‘907 Patent”) resulting in a violation of Section 337 of the Tariff Act.

On January 31, 2020, the ITC issued a Notice of Commission Determination regarding Investigation No.

337-TA-1089, which stated the ITC would review in part the positive Final Initial Determination and extended the target date for completion of the Investigation from February 21, 2020 to April 7, 2020.

On April 7, 2020, the ITC issued a Notice of the Commission’s Final Determination regarding its Investigation No.

337-TA-1089 of SK hynix enterprise memory products.

The Notice stated that the ITC found no violation of section 337 of the Tariff Act of 1930, as amended and that the investigation is therefore terminated.

Netlist has elected not to appeal this decision.

Between December 30, 2016 and January 20, 2017, SK hynix filed numerous petitions in the USPTO requesting IPR of certain of the Company’s patents, including the patents asserted in the First ITC Action and the Central District Court proceedings, which have now concluded and certain of which are now on appeal to the Court of Appeals for the Federal Circuit.

Between December 19, 2017 and February 7, 2018, SK hynix filed additional petitions in the USPTO requesting IPR of the patents asserted in the Second ITC Action which are now proceeding.

On March 21, 2019, the PTAB issued a Final Written Decision finding Netlist’s U.S.

9,535,623 invalid.

Netlist has elected not to continue appealing this decision.

On June 27, 2019, the PTAB issued Final Written Decisions on two IPR proceedings regarding Netlist’s U.S.

9,606,907 (the “‘907 Patent”) based on the reference Ellsberry, holding that claims 1-39 and 42-65 of the ‘907 Patent are unpatentable, but claims 40 and 41 are not unpatentable.

On July 12, 2019, Netlist filed a Motion to Terminate under 35 U.S.C.

§ 315(e)(1) the remaining two IPR proceedings regarding the ‘907 Patent based on the references Halbert and Amidi.

On July 19, 2019, SK hynix filed and served their opposition to Netlist’s Motion to Terminate.

The PTAB issued a decision to Terminate IPR IPR2018-0036 on August 5, 2019.

On July 17, 2017, the Central District Court granted in part SK hynix’s request to stay the infringement proceedings pending further order of the court.

On July 11, 2017, the Company filed legal proceedings for patent infringement against SK hynix and certain of its distributors in the courts of Germany and the PRC based on the alleged infringement by SK hynix’s LRDIMM products of certain of the Company’s patents in those jurisdictions.

On January 25, 2018, the court in Germany held a preliminary hearing and then held the trial on December 6, 2018.

In December 2017, SK hynix filed petitions challenging the validity of the patents asserted by the Company in Germany and the PRC.

On June 3, 2018, the patent asserted in the PRC was found to be invalid.

On June 19, 2018, the Company withdrew the patent infringement suits filed in the PRC.

On January 31, 2019, the court in Germany dismissed the infringement action, and ordered the Company to bear the costs of the action.

Netlist has elected not to appeal the German court’s finding.

The First and Second ITC Actions are no longer pending and the parallel Central District Court infringement proceedings are currently proceedings pending further order of the court.

On March 17, 2020, Netlist filed legal proceedings alleging patent infringement against SK hynix in the U.S.

5 unchanged sentences

6:20-cv-00194-ADA.

The Markman hearing in this case is scheduled for March 2021 and the trial is scheduled for December 2021.

On June 15, 2020, Netlist filed a second round of legal proceedings alleging patent infringement against SK hynix in the U.S.

4 unchanged sentences

6:20-cv-00525-ADA.

The Markman hearing in this case is scheduled for March 2021 and the trial is scheduled for December 2021.

Other Contingent Obligations

13 unchanged sentences

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 June 27, 2020 or December 28, 2019.

No shares of preferred stock were outstanding as of September 26, 2020 or December 28, 2019.

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.

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).

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 and April 16, 2019) will expire on the close of business on April 17, 2021.

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.

6 unchanged sentences

The Company will not receive any cash proceeds from the issuance of these additional commitment shares.

Pursuant to the 2019 Purchase Agreement, on any business day and as often as every other business day over the 36-month term of the 2019 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 400,000 shares of its common stock, with such amount increasing as the closing sale price of its common stock increases;

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 $1.0 million, unless the Company and Lincoln Park mutually agree to increase the maximum amount of such single regular purchase.

1 unchanged sentence

Under certain circumstances and in accordance with the 2019 Purchase Agreement, the Company may direct Lincoln Park to purchase shares in multiple accelerated purchases on the same trading day.

During the six months ended June 27, 2020 and subsequent to June 27, 2020, Lincoln Park did not purchase shares of the Company’s common stock under the 2019 Purchase Agreement.

During the nine months ended September 26, 2020, Lincoln Park did not purchase shares of the Company’s common stock under the 2019 Purchase Agreement.

The Company controls the timing and amount of any sales of its common stock to Lincoln Park.

11 unchanged sentences

Under certain circumstances and in accordance with the 2020 Purchase Agreement, the Company may direct Lincoln Park to purchase shares in multiple accelerated purchases on the same trading day.

During the six months ended June 27, 2020, Lincoln Park purchased an aggregate of 9,651,964 shares of the Company’s common stock for a net purchase price of $2.8 million under the 2020 Purchase Agreement.

In connection with the purchases, the Company issued to Lincoln Park an aggregate of 128,790 shares of its common stock as additional commitment shares in noncash transactions.

Subsequent to June 27, 2020, Lincoln Park purchased an aggregate of 13,198,158 shares of the Company’s common stock for a net purchase price of $9.0 million under the 2020 Purchase Agreement.

In connection with the purchases, the Company issued to Lincoln Park an aggregate of 414,642 shares of its common stock as additional commitment shares in noncash transactions.

During the three and nine months ended September 26, 2020, Lincoln Park purchased an aggregate of 13,748,158 shares and 23,400,122 shares of the Company’s common stock for a net purchase price of $9.4 million and

$12.2 million, respectively, under the 2020 Purchase Agreement.

In connection with the purchases, during the three and nine months ended September 26, 2020, the Company issued to Lincoln Park an aggregate of 431,798 shares and 560,588 shares of its common stock, respectively, as additional commitment shares in noncash transactions.

The Company controls the timing and amount of any sales of its common stock to Lincoln Park.

3 unchanged sentences

The Company has the right to terminate the 2020 Purchase Agreement at any time, at no cost to the Company.

As of June 27, 2020, there were outstanding warrants to purchase an aggregate of 15,010,012 shares of the Company’s common stock with a weighted-average exercise price of $0.62.

There were no activities during the six months ended June 27, 2020.

Warrant activity for the nine months ended September 26, 2020 is as follows:

(in thousands)

Outstanding as of December 28, 2019

Outstanding as of September 26, 2020

During the nine months ended September 26, 2020, the Company issued 255,813 shares of its common stock upon the cashless exercise of 300,000 of its warrants.

Note 9—Stock-Based Awards

As of June 27, 2020, the Company had 2,456,572 shares of common stock reserved for future issuance under its Amended and Restated 2006 Incentive Plan (“Amended 2006 Plan”).

As of September 26, 2020, the Company had 1,794,072 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.

2 unchanged sentences

Stock Options

The following table summarizes the activity related to stock options during the six months ended June 27, 2020:

The following table summarizes the activity related to stock options during the nine months ended September 26, 2020:

(in thousands)

1 unchanged sentence

Expired or forfeited

Outstanding as of June 27, 2020

Outstanding as of September 26, 2020

Restricted Stock Awards and Restricted Stock Units

The following table summarizes the activity related to RSAs and RSUs during the six months ended June 27, 2020:

The following table summarizes the activity related to RSAs and RSUs during the nine months ended September 26, 2020:

(in thousands)

Outstanding as of December 28, 2019

Outstanding as of June 27, 2020

Outstanding as of September 26, 2020

Stock-Based Compensation

1 unchanged sentence

Three Months Ended

Six Months Ended

Nine Months Ended

September 26,

September 28,

September 26,

September 28,

Cost of sales

1 unchanged sentence

Selling, general and administrative

As of June 27, 2020, the Company had approximately $1.4 million, net of estimated forfeitures, of unearned stock-based compensation, which it expects to recognize over a weighted-average period of approximately 2.7 years.

As of September 26, 2020, the Company had approximately $1.6 million, net of estimated forfeitures, of unearned stock-based compensation, which it expects to recognize over a weighted-average period of approximately 2.4 years.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements