What changed in this filing

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Item 1A. Risk Factors

2021-08-17 compared with 2021-05-18 · 57 added, 58 removed, 589 unchanged (16% of the section changed)

7 unchanged sentences

● We have historically incurred losses and may continue to incur losses;

● The vast majority of our revenues in recent periods have been generated from resales of component products, including products sourced from Samsung, and any decline in these product resales could significantly harm our performance;

● The vast majority of our net product sales in recent periods have been generated from resales of component products, including products sourced from Samsung, and any decline in these product resales could significantly harm our performance;

● We are subject to risks relating to our focus on developing our HybriDIMM and NVvault products for our target customer markets;

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● We rely on our internal and third-party sales representatives to market and sell our products and the component products we resell, and any failure by these representatives to perform as expected could reduce our sales;

● Our operations could be disrupted by power outages, natural disasters or other factors;

● Difficulties with our global information technology systems, including any unauthorized access, could harm our business;

● Our operations could be disrupted by power outages, natural disasters, cyber attacks or other factors;

● Difficulties with our global information technology systems, including any unauthorized access or cyber-attacks, could harm our business;

● If we do not effectively manage any future growth we may experience, our resources, systems and controls may be strained and our results of operations may suffer;

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If we are unable to remediate the material weakness, or if we identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect our business;

● We are required to comply with certain provisions of Section 404 of the Sarbanes-Oxley Act of 2002, as amended that place significant demands on our resources.

● We are required to comply with certain provisions of Section 404 of the Sarbanes-Oxley Act of 2002, as amended that place significant demands on our resources, and the transition to the higher reporting and control standards that will apply to us as a “large accelerated filer” may cause management distraction and increased costs.

Risks Related to Intellectual Property and Litigation

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● We may not have sufficient working capital to fund our planned operations, and, as a result, we may need to raise additional capital in the future, which may not be available when needed, on acceptable terms or at all;

● The price and trading volume of our common stock has and may continue to fluctuate significantly;

● The price and trading volume of our common stock has and may continue to fluctuate significantly in reaction to real or perceived developments in our business;

● We have incurred a material amount of indebtedness to fund our operations, the terms of which have required us to pledge substantially all of our assets as security.

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● Sales of our common stock, or the perception that such sales could occur, could cause the market price of our stock to drop significantly, regardless of the state of our business;

● As a sole director, Chun K.

Hong has significant control over all corporate decisions that may not be in the best interest of our other stockholders;

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The ultimate impact and efficacy of government measures and potential future measures is currently unknown.

In addition, the continued spread of COVID-19, or the occurrence of other epidemics could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our products and further adversely impact our results of operations.

There are numerous uncertainties associated with the coronavirus outbreak, including the number of individuals who will become infected, whether a vaccine or cure that mitigates the effect of the virus will be synthesized, and, if so, when such vaccine or cure will be ready to be used, and the extent of the protective and preventative measures that have been put in place by both governmental entities and other businesses and those that may be put in place in the future.

In addition, the continued spread of COVID-19 variants, or the occurrence of other epidemics could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our products and further adversely impact our results of operations.

There are numerous uncertainties associated with the coronavirus outbreak, including the number of individuals who will become infected, whether vaccination level will increase sufficiently to stop the spread of COVID-19 and its variants, and the extent of the protective and preventative measures that have been put in place by both governmental entities and other businesses and those that may be put in place in the future.

Any or all of the foregoing uncertainties could have a material adverse effect on our results of operations, financial position and/or cash flows.

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Although we have in the past engaged in a series of cost reduction actions, such expense reductions alone will not make us profitable or allow us to sustain profitability if it is achieved, and eliminating or reducing strategic initiatives could limit our opportunities and prospects.

Our ability to achieve profitability will depend on increased revenue growth from, among other things, increased demand for our product offerings and our ability to monetize our intellectual property.

Our ability to achieve profitability will depend on increased revenue growth from, among other things, increased demand for our

product offerings and our ability to monetize our intellectual property.

We may not be successful in any of these pursuits, and we may never achieve profitability or sustain profitability if achieved.

The vast majority of our revenues in recent periods have been generated from resales of component products, including products sourced from Samsung, and any decline in these product resales could significantly harm our performance.

The vast majority of our revenues in recent periods have been generated from resales of component products, including SSDs, NAND flash and DRAM products.

The vast majority of our net product sales in recent periods have been generated from resales of component products and any decline in these product resales could significantly harm our performance.

The vast majority of our net product sales in recent periods have been generated from resales of component products, including SSDs, NAND flash and DRAM products.

We resell these 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.

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Although we expect these memory subsystems to continue to account for a portion of our revenues, we have experienced declines in sales of these products in recent periods, and these declines could continue or intensify in the future.

We believe market acceptance of these products or derivative products that incorporate our core memory subsystem technology is critical to our success, and any continued decline in sales of these products could have a material adverse impact on our performance and long-term prospects.

We believe market acceptance of these products or derivative products that incorporate our core memory subsystem

technology is critical to our success, and any continued decline in sales of these products could have a material adverse impact on our performance and long-term prospects.

We have invested significant research and development time and capital in the design of application-specific integrated circuits (“ASIC”) and hybrid devices, including our NVvault family of products and our next-generation HybriDIMM memory subsystem.

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Further, we may not be able to sell some of our products developed for one customer to a different customer because our products are often customized to address specific customer requirements, and even if we are able to sell these products to another customer, our margin on these products may be reduced.

Additionally, although customers are generally allowed only limited rights of return after purchasing our products or the component products we resell, we may determine that it is in our best interest to accept returns from certain large or key customers even if we are not contractually obligated to accept them in order to maintain good relations with these customers.

Additionally, although customers are generally allowed only limited rights of return after

purchasing our products or the component products we resell, we may determine that it is in our best interest to accept returns from certain large or key customers even if we are not contractually obligated to accept them in order to maintain good relations with these customers.

Any returns beyond our expectations could negatively impact our operating results.

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Moreover, if we are not able to obtain these components in the amounts needed on a timely basis and at commercially reasonable prices, we may not be able to develop or introduce new products, we may experience significant increases in our cost of sales if we are forced to procure components from alternative suppliers and are not able to negotiate favorable terms with these suppliers, or we may be forced to cease our sales of products dependent on the components or resales of the components we sell to customers directly.

Our dependence on a small number of suppliers and the lack of any guaranteed sources for the essential components of our products and the components we resell expose us to several risks, including the inability to obtain an adequate supply of these components, increases in their costs, delivery delays and poor quality.

adequate supply of these components, increases in their costs, delivery delays and poor quality.

Additionally, our customers qualify certain of the components provided by our suppliers for use in their systems.

If one of our suppliers experiences quality control or other problems, it may be disqualified by one or more of our customers.

disrupt our supplies of these components, and would also reduce the number of suppliers available to us and may require that we qualify a new supplier, which we may not be able to do.

This would disrupt our supplies of these components, and would also reduce the number of suppliers available to us and may require that we qualify a new supplier, which we may not be able to do.

Declines in customer demand for our products in recent periods have caused us to reduce our purchases of SSDs, DRAM ICs and NAND flash for use as components in our products.

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Our manufacturing operations involve significant risks.

We maintain a manufacturing facility in the People’s Republic of China (“PRC”) at which we produce most of our products.

We maintain a manufacturing facility in the People’s Republic of China (“PRC”) at which we produce a portion of our products.

These manufacturing activities require significant resources to maintain.

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In addition, the start-up costs associated with implementing new manufacturing technologies, methods and processes, including the purchase of new equipment and any resulting manufacturing delays and inefficiencies, could negatively impact our results of operations.

Additionally, we could experience a prolonged disruption, material malfunction, interruption or other loss of operations at our manufacturing facility for any number of reasons, including the occurrence of a contagious disease or illness, such as COVID-19, or catastrophic weather events, or we may need to add manufacturing capacity to satisfy any increased demand for our products.

Additionally, we could experience a prolonged disruption, material malfunction, interruption or other loss of operations at our manufacturing facility for any number of reasons, including the occurrence of a contagious disease or illness, such as COVID-19, or cyber attacks, or catastrophic weather events, or we may need to add manufacturing capacity to satisfy any increased demand for our products.

Under these circumstances, we may be forced to rely on third parties for our manufacturing needs, which could increase our manufacturing costs, decrease our gross margin, decrease our control over manufacturing processes, limit our ability to satisfy customer requirements and demand and delay new product development until we could secure a relationship with a third-party manufacturer, which we may not be able to do in a timely manner, on acceptable terms or at all.

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As a result, these independent sales representatives could devote insufficient time or resources to marketing our products or the component products we resell, could market them in an ineffective manner or could otherwise be unsuccessful in selling adequate quantities of these products.

Our operations could be disrupted by power outages, natural disasters or other factors.

Due to the geographic concentration of our manufacturing operations in our PRC facility and our small number of component suppliers, including Samsung for many of the component products we resell, a disruption resulting from equipment or power failures, quality control issues, human errors, government intervention or natural disasters, including earthquakes and floods, could require significant costs to repair and could interrupt or interfere with product manufacture and sale and cause significant delays in product shipments, which could harm our customer relationships, financial condition and results of operations.

Our operations could be disrupted by power outages, natural disasters, cyber attacks or other factors.

Due to the geographic concentration of our manufacturing operations in our PRC facility and our small number of component suppliers, including Samsung and SK hynix for many of the component products we resell, a disruption resulting from equipment or power failures, quality control issues, human errors, government intervention, cyber attacks or natural disasters, including earthquakes and floods, could require significant costs to repair and could interrupt or interfere with product manufacture and sale and cause significant delays in product shipments, which could harm our customer relationships, financial condition and results of operations.

In the past, our PRC facility has suffered water damage as a result of heavy rains and floods, which forced us to temporarily halt manufacturing at the facility while necessary repairs or equipment replacements were made.

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Any of these outcomes could have a material adverse effect on our business and results of operations.

Difficulties with our global information technology systems, including any unauthorized access, could harm our business.

Difficulties with our global information technology systems, including any unauthorized access or cyber attacks, could harm our business.

We store key data about our business, including certain customer data, information about our and our customer’s intellectual property and other proprietary information, on our global information technology systems.

Any failure or malfunctioning of our global information technology systems, errors or misuse by system users, difficulties migrating stand-alone systems to our centralized systems or inadequacy of the systems in addressing the needs of our operations could disrupt our ability to timely and accurately manufacture and ship products, divert management’s and key employees’ attention from other business matters and involve significant costs and other resources to repair or otherwise resolve, any of which could have a material adverse effect on our business, financial condition and results of operations.

Any failure or malfunctioning of our global information technology systems, errors or misuse by system users, cyber attacks, difficulties migrating stand-alone systems to our centralized systems or inadequacy of the systems in addressing the needs of our operations could disrupt our ability to timely and accurately manufacture and ship products, divert management’s and key employees’ attention from other business matters and involve significant costs and other resources to repair or otherwise resolve, any of which could have a material adverse effect on our business, financial condition and results of operations.

Any such event could also disrupt our ability to timely and accurately process, report and evaluate key operating metrics and key components of our results of operations, financial position and cash flows and could adversely affect our ability to complete other important business processes, such as maintenance of our disclosure controls and procedures and internal control over financial reporting.

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

As described in Part I, Item 4, Controls and Procedures, we have concluded that our internal control over financial reporting was ineffective as of April 3, 2021 due to a material weakness.

The identified material weakness, at April 3, 2021, relates to the lack of an independent audit committee.

As described in Part I, Item 4, Controls and Procedures, we have concluded that our internal control over financial reporting was ineffective as of July 3, 2021 due to a material weakness.

The identified material weakness, at July 3, 2021, relates to the lack of an independent audit committee.

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

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Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC, which we collectively refer to as Section 404, require us to evaluate our internal control over financial reporting and require management to report on the effectiveness of this internal control as of the end of each fiscal year.

In addition, if and when we are no longer a “smaller reporting company” under applicable SEC rules, Section 404 will require us to obtain

an attestation report from our independent registered public accounting firm as to our internal control over financial reporting.

Our Section 404 evaluations may lead us to conclude that enhancements, modifications or changes to our internal control over financial reporting are necessary or desirable.

In addition, due to the increase in the value of our worldwide non-affiliate public float, we will lose our status as a “smaller reporting company” under applicable SEC rules at the end of this fiscal year ending January 2, 2022.

As a result, Section 404 will require us

to obtain an attestation report from our independent registered public accounting firm as to our internal control over financial reporting.

We expect that our Section 404 evaluations will lead us to conclude that enhancements, modifications and changes to our internal control over financial reporting are necessary and desirable.

Implementing any such changes would divert the attention of management, involve significant time and costs and negatively impact our financial reporting functions during the transition, any of which could have a material negative effect on our results of operations and financial condition.

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We intend to pursue monetization avenues for our intellectual property portfolio, potentially including licensing, royalty or other revenue-producing arrangements.

However, we have not generated any such revenue stream from our intellectual property to date, and we may never be successful in achieving this objective.

However, other than the license fee we received under the SK hynix License Agreement, we have not generated any such revenue stream from our intellectual property to date, and we may never be successful in achieving this objective.

Although we may pursue agreements with third parties to commercially license certain of our products or technologies, we may never successfully enter into any such agreement.

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Our business strategy includes litigating claims against others, such as our competitors and customers, to enforce our intellectual property, contractual and commercial rights, including, in particular, our patent portfolio and our trade secrets, as well as to challenge the validity and scope of the proprietary rights of others.

This or other similar proceedings could also subject us to counterclaims or countersuits against us, or the parties we sue could seek to invalidate our patents or other intellectual property rights through reexamination or similar processes at the USPTO or

similar bodies.

This or other similar proceedings could also subject us to counterclaims or countersuits against us, or the parties we sue could seek to

invalidate our patents or other intellectual property rights through reexamination or similar processes at the USPTO or similar bodies.

Further, any legal disputes with customers could cause them to cease buying or using our products or the component products we resell or delay their purchase of these products and could substantially damage our relationship with them.

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We have submitted a number of patent applications regarding our proprietary processes and technology, many of which have resulted in issued patents.

For our pending patent applications, it is uncertain when or if any of the claims in these applications will be allowed or result in issued patents,

in which case the technologies or processes sought to be patented would remain unprotected from use by third parties.

For our pending patent

applications, it is uncertain when or if any of the claims in these applications will be allowed or result in issued patents, in which case the technologies or processes sought to be patented would remain unprotected from use by third parties.

In addition, although we intend to continue filing patent applications with respect to new processes and technologies we develop, patent protection may not be available for some of these processes or technologies.

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We may not have sufficient working capital to fund our planned operations, and, as a result, we may need to raise additional capital in the future, which may not be available when needed, on acceptable terms or at all.

To support our activities in the near term, we expect to rely on cash generated from our business, the cash received under the SK hynix License Agreement and proceeds from issuances of debt and equity securities, including our equity lines with Lincoln Park, and borrowing availability under our credit facility with SVB.

To support our activities in the near term, we expect to rely on cash generated from our business, the cash received under the SK hynix License Agreement and proceeds from issuances of debt and equity securities, including our equity line with Lincoln Park, and borrowing availability under our credit facility with SVB.

Taking into account our planned activities and sources of capital, we believe we have sufficient cash resources to satisfy our capital needs for at least the next 12 months.

However, our estimates of our operating revenues and expenses and working capital requirements could be incorrect, and we may use our cash resources faster than we anticipate.

Moreover, our SVIC Note will mature in December 2021, and if it is not converted into equity, the repayment will significantly deplete our cash resources unless we raise additional capital or enter into an amendment to the SVIC Note.

Further, some or all of our

ongoing or planned investments may not be successful and could further deplete our capital without immediate, or any, cash returns.

Moreover, our SVIC Note will mature in December 2021, and if it is not converted into equity, the repayment will significantly deplete our cash

Further, some or all of our ongoing or planned investments may not be successful and could further deplete our capital without immediate, or any, cash returns.

Our capital requirements will depend on many factors, including, among others:

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If an event of default were to occur under any of these instruments or agreements and we were unable to obtain a waiver for the default, the counterparties could, among other remedies, accelerate our obligations under the debt instrument or other agreement and exercise their rights to foreclose on their security interests, which would cause substantial harm to our business and prospects.

We believe that the SK hynix License Agreement falls outside the scope of the TRGP Agreement.

We believe that the SK hynix License Agreement falls outside the scope of the TRGP Agreement and the First Amendment to the TRGP Agreement, and we do not anticipate that we will be obligated to make payments to TRGP under the TRGP Agreement and the First Amendement to the TRGP Agreement.

Additionally, incurrence and maintenance of this or other debt could have material adverse consequences on our business and financial condition, such as:

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We have historically funded our operations in large part with proceeds from equity and convertible debt financings, and we expect to continue to do so in the future.

In addition to capital-raising purposes, we may also issue securities from time to time at prices and on other terms as we determine for acquiring other businesses or assets in exchange for shares of our common stock or other securities, issuing securities to collaborators in connection with strategic partnerships, attracting and retaining employees with equity compensation, or other purposes.

If we sell common stock or other equity or convertible debt securities in the future, our then-existing stockholders could be

materially diluted by such issuances and new investors could gain rights, preferences and privileges senior to the holders of our common stock, which could cause the price of our common stock to decline.

strategic partnerships, attracting and retaining employees with equity compensation, or other purposes.

If we sell common stock or other equity or convertible debt securities in the future, our then-existing stockholders could be materially diluted by such issuances and new investors could gain rights, preferences and privileges senior to the holders of our common stock, which could cause the price of our common stock to decline.

Sales of our common stock, or the perception that such sales could occur, could cause the market price of our stock to drop significantly, regardless of the state of our business.

As of April 3, 2021, there were 215,013,027 shares of our common stock outstanding.

As of July 3, 2021, there were 215,986,964 shares of our common stock outstanding.

In addition, 8,103,439 shares of our common stock are subject to outstanding stock options, 2,603,051 shares of our common stock are subject to outstanding unvested restricted stock units, 6,744,444 shares of our common stock are subject to outstanding warrants, and 13,349,918 shares of our common stock subject to an outstanding convertible note.

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These and other provisions in our certificate of incorporation and bylaws and of Delaware law, as well as the existence of our rights agreement, could make it more difficult for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by our board of directors, including a merger, tender offer, proxy contest or other change of control transaction involving our Company.

Any delay or prevention of a change of control transaction or changes in our board of directors could prevent the consummation of a transaction in which our stockholders could receive a substantial premium over the then-current market price for our common stock.

Any delay or prevention of a change of control transaction or changes in our board of directors could prevent the consummation of a transaction in which our

stockholders could receive a substantial premium over the then-current market price for our common stock.

In addition, these anti-takeover provisions could reduce the price that investors are willing to pay for shares of our common stock.

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Exhibit Description

Certificate of Amendment to the Restated Certificate of Incorporation of Netlist, Inc.

August 10, 2020

Amendment to Amended and Restated Bylaws of Netlist, Inc.

August 10, 2020

Amendment No.

3 to Rights Agreement, dated as of August 14, 2020, by and between Netlist, Inc.

and Computershare Trust Company, N.A., as rights agent

August 14, 2020

Amendment to Loan and Security Agreement, dated April 9, 2021, by and between Netlist, Inc.

and Silicon Valley Bank

Lease, dated April 28, 2021, by and between Netlist, Inc.

and University Research Park LLC

Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer

1 unchanged sentence

Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer

XBRL Instance Document

XBRL Taxonomy Extension Schema Document

XBRL Taxonomy Extension Calculation Linkbase Document

XBRL Taxonomy Extension Label Linkbase Document

XBRL Taxonomy Extension Presentation Linkbase Document

XBRL Taxonomy Extension Definition Linkbase Document

Inline XBRL Instance Document

Inline XBRL Taxonomy Extension Schema Document

Inline XBRL Taxonomy Extension Calculation Linkbase Document

Inline XBRL Taxonomy Extension Label Linkbase Document

Inline XBRL Taxonomy Extension Presentation Linkbase Document

Inine XBRL Taxonomy Extension Definition Linkbase Document

Cover Page Interactive Data File (embedded within the Inline XBRL document)

Furnished herewith.

Portions of this Exhibit have been omitted in accordance with Regulation S-K Item 601(b)(10)(iv).

The Registrant

agrees to furnish an unredacted copy of this Exhibit to the SEC upon its request.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

August 17, 2021

Netlist, Inc.

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

What changed 10-Q

Item 1A. Risk Factors