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Item 8. Financial Statements and Supplementary Data

2023-02-28 compared with 2022-03-01 · 262 added, 203 removed, 608 unchanged (43% of the section changed)

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Operating lease right-of-use assets

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:

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Total current liabilities

Long-term debt

Operating lease liabilities

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Commitments and contingencies

Stockholders' equity (deficit):

Stockholders' equity:

Preferred stock, $ 0.001 par value— 10,000 shares authorized:

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Accumulated deficit

Total stockholders' equity (deficit)

Total liabilities and stockholders' equity (deficit)

Total stockholders' equity

Total liabilities and stockholders' equity

See accompanying Notes to Consolidated Financial Statements.

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Total operating expenses

Operating income (loss)

Other income (expense), net:

Interest expense, net

Operating (loss) income

Other income (expense), net:

Interest income (expense), net

Other income, net

Total other income (expense), net

Income (loss) before provision for income taxes

(Loss) income before provision for income taxes

Provision for income taxes

Net income (loss)

Earnings (loss) per share:

Net (loss) income

(Loss) earnings per share:

Weighted-average common shares outstanding:

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Balance, December 28, 2019

Issuance of common stock, net, and commitment shares

Common stock issued on conversion of Iliad Note

Issuance of common stock, net

Issuance of warrants

Exercise of stock options

Exercise of warrants

Stock-based compensation

1 unchanged sentence

Tax withholdings related to net share settlements of equity awards

Balance, December 28, 2019

Issuance of common stock, net, and commitment shares

Issuance of warrants

Balance, January 2, 2021

Issuance of common stock, net

Exercise of stock options

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Balance, January 1, 2022

Issuance of common stock, net, and commitment shares

Issuance of common stock, net

Exercise of stock options

Exercise of warrants

Stock-based compensation

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Tax withholdings related to net share settlements of equity awards

Balance, January 1, 2022

Balance, December 31, 2022

See accompanying Notes to Consolidated Financial Statements.

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Cash flows from financing activities:

Net borrowings under line of credit

Net borrowings (repayments) under line of credit

Proceeds from issuance of long-term debt

Principal repayments under finance lease

Repayments of long-term debt

Payments on note payable and long-term debt

Proceeds from issuance of common stock, net

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Netlist, Inc.

and its wholly-owned subsidiaries (collectively “Netlist,” “we,” “us,” or “our”) 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.

and its wholly owned subsidiaries (collectively the “Company”, “Netlist,” “we,” “us,” or “our”) provides high-performance memory solutions to enterprise customers in diverse industries.

Our products in various capacities and form factors and the line of custom and specialty memory products bring industry-leading performance to server and storage appliance customers and cloud service providers.

We license our portfolio of intellectual property including patents, in server memory, hybrid memory and storage class memory, to companies that implement our technology.

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Actual results may differ materially from those estimates.

We have evaluated events occurring subsequent to January 1, 2022, through the filing date of this Annual Report on Form 10-K and concluded that there were no events that required recognition and disclosures, other than those discussed elsewhere in the notes hereto.

We have evaluated events occurring subsequent to December 31, 2022, through the filing date of this Annual Report on Form 10-K and concluded that there were no events that required recognition and disclosures, other than those discussed elsewhere in the notes hereto.

Certain prior period amounts have been reclassified to conform to the current period’s presentation.

Our fiscal year is the 52 - or 53 -week period that ends on the Saturday nearest to December 31.

Our fiscal year 2021 ended on January 1, 2022, fiscal year 2020 ended on January 2, 2021, and fiscal year 2019 ended on December 28, 2019.

Our fiscal year 2022 ended on December 31, 2022, fiscal year 2021 ended on January 1, 2022, and fiscal year 2020 ended on January 2, 2021.

All fiscal years presented in this Form 10-K, except fiscal year 2020, included 52 weeks.

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In the first quarter of 2022, we 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 our consolidated financial statements.

Recently Issued Accounting Standards

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):

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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.

This ASU will be effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years and early adoption is permitted.

We do not expect a material impact on our consolidated financial statements upon the adoption of this ASU.

The adoption of this ASU did not have an impact on the Company’s condensed consolidated financial statements as the Company paid off its convertible debt in December 2021.

Revenue Recognition

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At contract inception, an assessment of the goods and services promised in the contracts with customers is performed and a performance obligation is identified for each distinct promise to transfer to the customer a good or service (or bundle of goods or services).

To identify the performance obligations, we consider all of the goods or services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices.

To identify the performance obligations, we consider all of the goods or services promised in the contract regardless of whether they are explicitly stated or are

implied by customary business practices.

Contracts with customers are comprised of customer purchase orders, invoices (including our standard terms and conditions) and written contracts.

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Common forms of variable consideration include limited rights of return for up to 30 days, except for sales of excess component inventories, which contain no right-of-return privileges and volume rebates for meeting established sales targets.

Estimates of variable consideration and determination of whether to include estimated amounts in the transaction

price are based largely on an assessment of the anticipated performance and all information (historical, current and forecasted) that is reasonably available.

Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the anticipated performance and all information (historical, current and forecasted) that is reasonably available.

Returns for products sold are estimated using the expected value method and are recorded as a reduction in reported revenues at the time of sale based upon historical product return experience and is adjusted for known trends to arrive at the amount of consideration to which we expect to receive.

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Generally, we do not have material amounts of contract assets since revenue is recognized as control of goods is transferred or as services are performed.

As of January 2, 2021, we recorded a contract liability of $ 0.3 million related to volume rebates to a customer, which is included in accrued expenses and other current liabilities in the consolidated balance sheets.

As of January 1, 2022, there was no such liability.

As of January 1, 2022 and December 31, 2022, there were no contract liabilities.

We offer standard product warranties generally ranging from one to three years to our memory subsystem products customers, depending on the negotiated terms of any purchase agreements, and have no other post-shipment obligations or separately priced extended warranty or product maintenance contracts.

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The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models.

Our financial instruments consist principally of cash and cash equivalents, restricted cash, a revolving line of credit, an unsecured promissory note and a convertible promissory note.

Our financial instruments consist principally of cash and cash equivalents, restricted cash, a revolving line of credit and note payable.

Cash equivalents consist of short-term investments with original maturities of three months or less and restricted cash consists of cash to secure standby letters of credit (see Note 3).

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

The fair value of the revolving line of credit, the unsecured promissory note 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 values of the revolving line of credit as of January 1, 2022 and January 2, 2021 and the unsecured promissory note as of January 2, 2021 approximate 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 us 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 convertible promissory note as of January 2, 2021 were $ 14.8 million and $ 12.1 million, respectively.

As of January 1, 2022, there was no outstanding balance of the convertible promissory note.

The fair value of the revolving line of credit and the note payable 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 values of the revolving line of credit as of December 31, 2022 and January 1, 2022 and the note payable as of December 31, 2022 and January 1, 2022 approximate fair value because the interest rate yield is near current market rates for comparable debt instruments.

Accounts Receivable, net

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When such factors and circumstances exist, we compare the projected undiscounted future net cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount.

These projected future cash flows may vary significantly over time as a result of increased competition, changes in technology, fluctuations in demand, consolidation of our customers and reductions in average sales prices.

These projected future cash flows may vary significantly over time as a result of increased

competition, changes in technology, fluctuations in demand, consolidation of our customers and reductions in average sales prices.

If the carrying value is determined not to be recoverable from future operating cash flows, the asset is deemed impaired and an impairment loss is recognized to the extent the carrying value exceeds the estimated fair value of the asset.

The fair value of the asset or asset group is based on market value when available, or when unavailable, on discounted expected cash flows.

Management believes there is no impairment of long-lived assets as of January 1, 2022 and January 2, 2021.

Management believes there is no impairment of long-lived assets as of December 31, 2022 and January 1, 2022.

We determine if an arrangement is a lease at inception.

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Treasury rate that corresponds to the expected term of the grant effective as of the date of the grant.

The expected dividend assumption is based on our history

and management’s expectation regarding dividend payouts.

The expected dividend assumption is based on our history and management’s expectation regarding dividend payouts.

The grant-date fair value of RSAs and RSUs equals the closing price of our common stock on the grant date.

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We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities based on the technical merits of our position.

The tax benefit recognized in the financial statements for a particular tax position is based on the largest benefit that is more likely than not to be realized.

benefit recognized in the financial statements for a particular tax position is based on the largest benefit that is more likely than not to be realized.

The amount of unrecognized tax benefits is adjusted as appropriate for changes in facts and circumstances, such as significant amendments to existing tax laws, new regulations or interpretations by the taxing authorities, new information obtained during a tax examination, or resolution of an examination.

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Diluted earnings (loss) per share is calculated by dividing the net income (loss) by the weighted-average shares and dilutive potential common shares outstanding during the period.

Dilutive potential

shares consist of dilutive shares issuable upon the exercise of outstanding stock options and warrants computed using the treasury stock method, shares issuable under the conversion feature of a convertible note using the “if-converted” method, and shares issuable upon the vesting of RSAs and RSUs.

Dilutive potential shares consist of dilutive shares issuable upon the exercise of outstanding stock options and warrants computed using the treasury stock method, shares issuable under the conversion feature of a convertible note using the “if-converted” method, and shares issuable upon the vesting of RSAs and RSUs.

In periods of net loss, basic and diluted loss per share are the same, as the effect of dilutive potential shares on loss per share is anti-dilutive.

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accumulated depreciation and amortization

Substantially all our property and equipment, net, are located within the United States as of January 1, 2022 and January 2, 2021.

Substantially all our property and equipment are located within the United States as of December 31, 2022 and January 1, 2022.

Disaggregation of Net Sales

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Resales of third-party products

Sale of our modular memory subsystems

Sale of the Company's modular memory subsystems

Total net sales

During the second quarter of 2021, we 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”).

During the second quarter of 2021, we received and recognized an upfront non-refundable license fee of $ 40 million as consideration to enter into a Strategic Product Supply and License Agreement (“the Strategic Agreement”) with SK hynix, Inc., a South Korean memory semiconductor supplier, (“SK hynix”).

The license fee revenue was recognized when we granted the license of our 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, we recorded a provision for income taxes of $ 6.6 million related to the Korean withholding tax incurred.

In connection with the receipt of this fee, during the second quarter of 2021, we recorded a provision for income taxes of $ 6.6 million related to the Korean withholding tax incurred.

Net product sales by country presented below are based on the billing location of the customer (in thousands):

United States

People's Republic of China(1)

Other countries

Total net product sales

Total net sales

China includes Hong Kong and Taiwan.

The United States and China accounted for more than 10 % of our net product sales for 2022, 2021 and 2020.

For 2019, the United States was the only country that accounted for more than 10 % of our net product sales.

Earnings (Loss) Per Share

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

Net income (loss)

Net (loss) income

Weighted-average basic shares outstanding

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Weighted-average diluted shares

Basic earnings (loss) per share

Diluted earnings (loss) per share

We computed net loss per share using the two-class method required for unvested participating securities through the three months ended March 28, 2020.

Basic (loss) earnings per share

Diluted (loss) earnings per share

We computed net loss per share using the two-class method required for unvested participating securities through the three months ended March 28, 2020 as restricted stock awards were considered participating securities until they vested in full during that quarter.

No allocation of undistributed earnings to participating securities was performed for periods with net loss as such securities do not have a contractual obligation to share in our loss.

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Debt financing of insurance

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

Note 3—Credit Agreement

On October 31, 2009, Netlist 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, we 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 % and to extend the maturity date to December 30, 2021.

In December 2021, after meeting the conditions set forth in the amendment, the amount available for borrowing was increased to $ 7.0 million and the maturity date was extended to April 29, 2022 upon our request.

On October 31, 2009, Netlist and Silicon Valley Bank (“SVB”) entered into a credit agreement, which 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 $ 10.0 million, as amended.

The SVB Credit Agreement was most recently amended on April 29, 2022, and the borrowing base is limited to 85 % of eligible accounts receivable, subject to certain adjustments, and 50 % of eligible inventory.

Borrowings accrue interest on advance at a per annum rate equal to the greater of 0.75 % above the Wall Street Journal prime rate (“Prime Rate”) or 4.25 %.

The maturity date is April 28, 2023, as amended.

The SVB Credit Agreement requires letters of credit to be secured by cash, which is classified as restricted cash in the accompanying consolidated balance sheets.

As of January 1, 2022 and January 2, 2021, (i) outstanding letters of credit were $ 10.8 million and $ 3.2 million, respectively, and (ii) outstanding borrowings were $ 7.0 million and $ 3.7 million, respectively.

As of January 2, 2021, the availability under the revolving line of credit was $ 0.1 million.

There was no availability under the revolving line of credit as of January 1, 2022.

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

As of January 1, 2022, all obligations under the SVB Credit Agreement were secured by a first priority security interest in our tangible and intangible assets.

As of December 31, 2022 and January 1, 2022, (i) outstanding letters of credit were $ 18.6 million and $ 10.8 million, respectively, and (ii) outstanding borrowings were $ 4.9 million and $ 7.0 million, respectively.

There was no availability under the revolving line of credit as of December 31, 2022 and January 1, 2022.

As of December 31, 2022, all obligations under the SVB Credit Agreement were secured by a first priority security interest in our tangible and intangible assets.

The SVB Credit Agreement subjects us to certain affirmative and negative covenants, including financial covenants with respect to our liquidity and restrictions on the payment of dividends.

As of January 1, 2022, we were in compliance with our covenants under the SVB Credit Agreement.

As of December 31, 2022, we were in compliance with our covenants under the SVB Credit Agreement.

Our debt consisted of the following (in thousands):

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

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

Unamortized debt discounts and issuance costs

Notes payable

amounts due within one year

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Secured Convertible Note

On November 18, 2015, in connection with entering into the Joint Development and License Agreement (the “JDLA”) with Samsung, we issued to SVIC a secured convertible note (“SVIC Note”) and stock purchase warrant (“SVIC Warrant”).

On November 18, 2015, in connection with entering into the Joint Development and License Agreement (the “JDLA”) with Samsung, we issued to SVIC a secured convertible note (the “SVIC Note”) and stock purchase warrant (the “SVIC Warrant”).

The SVIC Note had an original principal amount of $ 15.0 million, accrued interest at a rate of 2.0 % per year, was due and payable in full on December 31, 2021, and was convertible into shares of our common stock at a conversion price of $ 1.25 per share, subject to certain adjustments, on the maturity date of the SVIC Note.

Upon our change of control prior to the maturity date of the SVIC Note, the SVIC Note might, at our 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.

unpaid interest as of the redemption date.

The SVIC Warrant granted SVIC a right to purchase 2,000,000 shares of our common stock at an exercise price of $ 0.30 per share, subject to certain adjustments, was only exercisable in the event we would exercise our right to redeem the SVIC Note prior to its maturity date, and would expire on December 31, 2025.

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

For 2021, 2020 and 2019, we amortized $ 0.2 million, $ 0.2 million and $ 0.2 million, respectively, to interest expense in the accompanying consolidated statements of operations.

For 2021 and 2020, we amortized $ 0.2 million and $ 0.2 million, respectively, to interest expense in the accompanying consolidated statements of operations.

The effective interest rate, including accretion of the SVIC Note to par and amortization of debt issuance costs, was approximately 3.4 %.

As of January 2, 2021, 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 $ 16.3 million.

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

Upon issuance of the SVIC Note, Netlist, SVB and SVIC entered into an Intercreditor Agreement pursuant to which SVB and SVIC agreed to their relative security interests in our assets.

In May 2017, SVIC, SVB and TRGP entered into additional Intercreditor Agreements to modify certain of these lien priorities.

Additionally, upon issuance of the SVIC Note and the SVIC Warrant, Netlist and SVIC entered into a Registration Rights Agreement pursuant to which we were obligated to register with the Securities and Exchange Commission, upon demand by SVIC, the shares of our common stock issuable upon conversion of the SVIC Note or upon exercise of the SVIC Warrant.

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We made the repayment of $ 16.8 million on December 27, 2021 and SVIC purchased 2,000,000 shares of common stock at an exercise price of $ 0.30 per share on December 28, 2021.

As a result, neither the SVIC Note nor the SVIC Warrant remained outstanding as of January 1, 2022.

As a result, neither the SVIC Note nor the SVIC Warrant remained outstanding as of December 31, 2022 and January 1, 2022.

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.

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”) (the “PPP Loan”) administered by the Small Business Administration (“SBA”) and established as part of the Coronavirus Aid, Relief and Economic Security Act (the “CARES 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.

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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.

Insurance Policy Finance Agreement

As of December 31, 2022 and January 1, 2022, we had $ 0.4 million and $ 0.6 million, respectively, in short-term notes payable for the financing of insurance policies.

On December 29, 2021, we entered into a short-term note payable for $ 0.6 million bearing interest at 3.9 % to finance insurance policies.

Principal and interest payments on this note began January 15, 2022 and were made evenly based on a straight line amortization over a 9-month period with the final payment being made on September 15, 2022.

On January 4, 2023, we entered into a short-term notes payable for $ 0.4 million bearing interest at 7.2 % to finance insurance policies.

Principal and interest payments on this note began January 15, 2023 and are made evenly based on a straight line amortization over a 9-month period.

Note 5—Leases

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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 and finance leases were as follows (in thousands):

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

Operating lease cost

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Finance leases

Lease modification to increase operating lease assets

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

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Weighted Average Remaining Lease Term (in years)

Operating lease

Finance lease

Operating leases

Finance leases

Weighted Average Discount Rate

Operating lease

Finance lease

Maturities of lease liabilities as of January 1, 2022 were as follows (in thousands):

Operating leases

Finance leases

Maturities of lease liabilities as of December 31, 2022 were as follows (in thousands):

Total lease payments

imputed interest

As of January 1, 2022, we had $ 0.5 million of future payments under an additional lease for a corporate facility that had not yet commenced.

The lease will commence during 2022, with a lease term of five years .

Note 6—Income Taxes

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Tax credit carryforwards

Capitalized research and development expenses

Reserves and allowances

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Prepaid expenses

Basis difference in warrant and note

Depreciation and amortization

Total deferred tax liabilities

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In making such judgments, significant weight is given to evidence that can be objectively verified.

As of January 1, 2022 and January 2, 2021, a valuation allowance of $ 43.1 million and $ 39.3 million, respectively, has been provided based on our assessment that it is more

likely than not that sufficient taxable income will not be generated to realize the tax benefits of the temporary differences.

As of December 31, 2022 and January 1, 2022, a valuation allowance of $ 52.0 million and $ 43.1 million, respectively, has been provided based on our assessment that it is more likely than not that sufficient taxable income will not be generated to realize the tax benefits of the temporary differences.

The valuation allowance increased by $ 8.9 million, $ 3.8 million and $ 1.7 million during 2022, 2021, and 2020, respectively.

These increases in these years primarily relate to the increases in the net operating loss (“NOL”) carryforward and tax credit carryforwards.

As of January 1, 2022, we had (i) $ 142.2 million of federal NOL carryforwards, of which $ 104.2 million will expire from 2029 through 2037, and $ 38.0 million of which will be carried forward indefinitely, (ii) $ 75.9 million of state NOL carryforwards, which begin to expire in 2029 , (iii) federal tax credit carryforwards of $ 2.3 million, which begin to expire in 2026 , and (iv) state tax credit carryforwards of $ 2.1 million, which will be carried forward indefinitely.

In addition, as of January 1, 2022, we had $ 2.7 million of foreign NOL carryforwards from various jurisdictions, which begin to expire in 2022.

As of December 31, 2022, we had $ 166.1 million of federal NOL carryforwards, of which $ 104.2 million will expire from 2029 through 2037, and $ 61.9 million of which will be carried forward indefinitely, and $ 84.0 million of state NOL carryforwards that will expire from 2029 through 2041.

We had federal and state tax credit carryforwards of $ 2.5 million and $ 2.3 million, respectively, at December 31, 2022.

Federal tax credit carryforwards began to expire in 2022 and state tax credits carryforward indefinitely.

In addition, we had $ 0.5 million of NOL in the People’s Republic of China (“PRC”) that expired in 2022, with a remaining amount of $ 2.6 million of NOL carryforward in the PRC at December 31, 2022.

Utilization of the NOL and tax credit carryforwards is subject to an annual limitation due to the ownership percentage change limitations provided by Section 382 of the Internal Revenue Code (the “Code”) and similar state and foreign law provisions.

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We include interest and penalties related to uncertain tax positions within the provision for income taxes.

As of January 1, 2022 and January 2, 2021, the interest or penalties accrued related to unrecognized tax benefits were insignificant, and during 2021, 2020 and 2019, the interest and penalties related to uncertain tax position recorded were insignificant.

As of January 1, 2022, we had no unrecognized tax benefits that would significantly change in the next 12 months.

As of December 31, 2022 and January 1, 2022, the interest or penalties accrued related to unrecognized tax benefits were insignificant, and during 2022, 2021 and 2020, the interest and penalties related to uncertain tax position recorded were

insignificant.

As of December 31, 2022, we had no unrecognized tax benefits that would significantly change in the next 12 months.

Note 7—Commitments and Contingencies

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These law firms may be retained on a contingent fee basis whereby such law firms are paid on a scaled percentage of any negotiated fee, settlements or judgments awarded based on how and when the fees, settlements or judgments are obtained.

TRGP Agreement

Netlist and TRGP are parties to both an initial and an amended investment agreement (the “TRGP Agreement”), which generally provided that TRGP directly fund the costs incurred by or on our behalf in connection with our first action in the U.S.

International Trade Commission (“ITC”) and the U.S.

district court proceedings, but excluding all other proceedings (all such funded costs, collectively, the “Funded Costs”).

In exchange for such funding, we agreed that, if we 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, Netlist 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 our patents (the “First Amendment”).

We believe 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 we will be obligated to make payments to TRGP under the TRGP Agreement or the First Amendment.

Litigation and Patent Reexaminations

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We expect these activities to continue for the foreseeable future, with no guarantee that any ongoing or future patent protection or litigation activities will be successful, or that we will be able to monetize our intellectual property portfolio.

We are also subject to litigation based on claims that we have 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 our other activities.

As a result, any current or future infringement claims or patent challenges by or against third parties, whether eventually decided in our favor or settled, could materially adversely affect our business, financial condition and results of operations.

Additionally, the outcome of pending or future litigation and related patent reviews and reexaminations, as well as any delay in their resolution, could affect our ability to continue to sell our products, protect against competition in the current and expected markets for our products or license or otherwise monetize our intellectual property rights in the future.

Google Litigation

As a result, any current or future claims, allegations, or challenges by or against third parties, whether eventually decided in our favor or settled, could materially adversely affect our business, financial condition and results of operations.

Additionally, the outcome of pending or future litigation and/or related patent reviews and reexaminations, as well as any delay in their resolution, could affect our ability to continue to sell our products, protect against competition in the current and expected markets for our products or license or otherwise monetize our intellectual property rights in the future.

Google Litigations

On December 4, 2009, Netlist filed a patent infringement lawsuit against Google, Inc.

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District Court for the Northern District of California (the “NDCA”), seeking damages and injunctive relief based on Google’s alleged infringement of our U.S.

7,619,912 (the “‘912 patent”).

The NDCA case was stayed, pending challenges to the ‘912 patent before the United States Patent and Trademark Office.

Eventually, the United States Court of Appeals for the Federal Circuit confirmed the ‘912 patent’s validity on June 15, 2020, and the NDCA case stay was lifted which relates generally to technologies to implement rank multiplication.

As of the reporting date, the NDCA case was re-assigned to Chief Judge Seeborg of NDCA, and a set of parties’ cross-motions is set for hearing on March 3, 2022.

Inphi Litigation

On September 22, 2009, Netlist 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.

patends owned by us, including the ‘912 patent, U.S.

7,532,537 (the “‘537 patent”), and U.S.

7,636,274 (the “‘274 patent”), which was stayed pending the outcome of Inter Partes Reexamination proceedings of the patents.

After the United States Court of Appeals for the Federal Circuit upheld the validity of the claims in the ‘912 patent, Netlist eventually dismissed its lawsuit against Inphi without prejudice on August 18, 2021.

Micron Litigation

7,619,912 (the “‘912 Patent”) which relates generally to technologies to implement rank multiplication.

The NDCA case was stayed, pending challenges to the ‘912 Patent before the USPTO.

Eventually, the U.S.

Court of Appeals for the Federal Circuit confirmed the ‘912 Patent’s validity on June 15, 2020, and the NDCA case stay was lifted and the case proceeded before Hon.

Senior Judge Armstrong, where the parties entered cross motions for summary judgment.

On May 5, 2022, Hon.

Chief Judge Seeborg entered an Order granting Netlist’s Motion for Summary Judgement that Claim 16 of the ‘912 Patent is not subject to Google’s pleaded defense of Intervening Rights.

On July 13, 2022, Chief Judge Seeborg ordered – shortly before the planned July 14, 2022 case management conference – that the case be stayed for a 90-day period pending the outcome of an action initiated by Samsung Electronic Co., Ltd.

(“Samsung”) in Delaware involving the ‘912 Patent.

Samsung’s Delaware cause of action for the ‘912 Patent was dismissed by Judge Andrews there, and Netlist shortly thereafter brought a lawsuit against Samsung for their infringement of at least the ‘912 Patent in the U.S.

District Court for the Eastern District of Texas (“EDTX”).

In light of the pendency of the ‘912 Patent matter Netlist brought against Samsung in EDTX, Chief Judge Seeborg entered an order via stipulation on October 17, 2022 staying the NDCA Google case until the resolution of that EDTX action.

On July 26, 2022, Netlist filed a patent infringement lawsuit against Google Cloud EMEA Limited, Google Germany GmbH, Redtec Computing GmbH, and Google, Inc., seeking damages based on those defendants’ infringement of European Patents EP 2,454,735 (“EP735”) and EP 3,404,660 (“EP660”), which both generally relate to

load reduced dual in line memory modules (“LRDIMM”) technologies.

As of the reporting date, Google’s submitted its statement of defense.

The date for a final oral hearing on the issues in that German action are currently scheduled for November 9, 2023.

Micron Litigations

On April 28, 2021, Netlist filed a complaint for patent infringement against Micron Technology, Inc.

(“Micron”) in the United States District Court for the Western District of Texas, Waco Division (Case No.

(“Micron”) in the U.S.

District Court for the Western District of Texas, Waco Division (“WDTX”) (Case No.

6:21-cv00431 & Case No.

6:21-cv-00430) These proceedings are based on the alleged infringement by Micron’s load reduced dual in line memory modules (“LRDIMM”) and Micron’s non-volatile dual in line memory modules (“NVDIMM”) enterprise memory modules under four U.S.

patents – US Pat.

As of the reporting date, Micron filed its opening claim construction brief and the parties stipulated to transfer the matter to the Austin division.

6:21-cv-00430).

These proceedings are based on the alleged infringement by Micron’s LRDIMM and Micron’s non-volatile dual in line memory modules (“NVDIMM”) enterprise memory modules under four U.S.

patents – U.S.

10,489,314 (the “’314 Patent”), 9,824,035 (the “’035 Patent”), 10,268,608 (the “’608 Patent”), and 8,301,833 (the “’833 Patent”).

The case has been assigned to Hon.

Judge Lee Yeakel,

with the parties agreeing on a schedule for remaining claim construction briefing, and the matter is set for a case management conference March 3, 2022.

In parallel, Micron filed requests to bring Inter Partes Review (“IPR”) proceedings against three of the four asserted patents:

Patents 8,301,833, 9,854,035, and 10,268,608.

As of the reporting date, the PTAB has not made a decision to institute any of these IPR requests.

Judge Lee Yeakel, and the parties completed briefing on their claim construction arguments.

On May 11, 2022, Judge Yeakel entered a stay of the case pending the resolution of Micron’s requested Inter Partes Review (“IPR”) proceedings against the four patents asserted by Netlist in this case (the ‘833, ‘035, ‘608, and ‘314 Patents).

Following entry of that stay order on September 2, 2022, Micron moved the Court to “temporarily” lift the stay to add counterclaims for declaratory judgment of noninfringement of U.S.

9,858,215 (the “’215 Patent”), 10,860,506 (the “’506 Patent”), 10,949,339 (the “’339 Patent”), 11,016,918 (the “’918 Patent”), 11,232,054 (the “’054 Patent”), 11,093,417 (the “’417 Patent”), and the ‘912 Patent.

This addition would encompass four of the six patents asserted in Netlist’s initial EDTX filing against Micron (Case No.

2:22-cv-00203 – further details of this case below), and all three of the patents asserted in Netlist’s second EDTX filing against Micron (Case No.

2:22-cv-00294 – further details of this case below).

On October 5, 2022, Judge Yeakel denied Micron’s motion and returned the action to a stayed state, asking only that the parties submit status reports within 10 days of any activity in the relevant underlying IPR proceedings.

As of the reporting date, the matter remains stayed pending the outcome of the related IPR proceedings.

As noted above, Micron filed requests to bring IPR proceedings against Netlist’s ‘314, ‘035, ‘068, and ‘833 Patents.

As of the reporting date, the PTAB granted Micron’s request for the ‘035, ‘833, and ‘314 Patents, but denied its request for the ‘608 Patent.

The PTAB further denied Micron’s request for rehearing on the ‘608 Patent’s institution denial.

As of the reporting date, the IPR trials under the ‘035, ‘833, and ‘314 Patents are proceeding following Netlist’s timely submissions of its related Patent Owner Responses.

Oral arguments for the ‘035, ‘833, and ‘314 Patents are set for April, June, and August 2023, respectively.

On March 31, 2022, Netlist filed a patent infringement lawsuit against Micron in Germany (“Micron Dusseldorf Case”), seeking damages based on their infringement of EP735 and EP660.

On June 24, 2022, Netlist filed an extension of its Complaint requesting injunctive relief.

Micron filed its statement of defense, thus setting Netlist’s deadline for a response as December 1, 2022.

Further, Micron initiated a nullity proceeding against the asserted EP patents in this action, making Netlist’s response to the same as November 19, 2022.

As of the reporting date, the date for the oral hearing in the Micron Dusseldorf Case is set for May 3, 2023.

On June 10, 2022, Netlist filed a complaint for patent infringement against Micron in the EDTX, Marshall Division (Case No.

2:22-cv-00203-JRG-RSP).

These proceedings are based on the alleged infringement by Micron for the sale of its LRDIMMs, its memory modules utilizing on-board power management modules (“PMIC”), and its high bandwidth memory (“HBM”) components, under six U.S.

Netlist patents:

the ‘060, ‘160, ‘506, ‘339, ‘918, and ‘054 Patents.

On September 2, 2022, contemporaneously with its filing in the stayed WDTX action, Micron moved the Court to stay and sever aspects of this initial EDTX case.

Following the denial of its parallel motion in the WDTX, Micron moved to withdraw its stay motion in this case, which Hon.

Chief Judge Gilstrap entered on October 15, 2022.

As of the reporting date, the case stands ready to proceed with a claim construction hearing set for July 19, 2023, and trial beginning on January 22, 2024.

On August 1, 2022, Netlist filed a complaint for patent infringement against Micron in the EDTX (Case No.

2:22-cv-00294) under the ‘912 Patent, for Micron’s alleged infringement by the sale of its LRDIMMs and RDIMMs.

On August 15, 2022, Netlist filed its first amended complaint, further addressing Micron’s infringement of the ‘215 and ‘417 Patents.

On September 12, 2022, Micron moved to stay this second EDTX action in light of its parallel motions pending in both the WDTX and initial EDTX cases.

Given the denial of Micron’s motion in the WDTX on October 5,

2022, Micron moved to withdraw its motion to stay in this action, which Chief Judge Gilstrap entered on October 13, 2022.

On October 21, 2022, Chief Judge Gilstrap ordered that this Micron action and a parallel action by Netlist against Samsung on the same patents (22-cv-00293-JRG) be consolidated and set for a joint scheduling conference on November 17, 2022, further instructing that the Samsung action be considered the “LEAD CASE” and that any further filings from either action be submitted in that case for all pretrial matters.

As of the reporting date, the consolidated case stands ready to proceed with a claim construction hearing set for October 5, 2023, and trial beginning on April 15, 2024.

Samsung Litigations

On May 28, 2020, Netlist filed a complaint against Samsung in the United States District Court for the Central District of California for Samsung’s breach of the parties’ JDLA.

On May 28, 2020, Netlist filed a complaint against Samsung in the U.S.

District Court for the Central District of California for Samsung’s breach of the parties’ Joint Development and License Agreement (“JDLA”).

On July 22, 2020, Netlist amended its complaint to seek a Declaratory Judgment that it properly terminated the JDLA in light of Samsung’s material breaches.

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On February 15, 2022, the Court entered a Final Judgment in favor of Netlist on each of its three claims and confirmed conclusively that all licenses granted under the JDLA were terminated.

On February 25, 2022, Samsung filed a Notice of Appeal, and the Federal Court of Appeals for the Ninth Circuit issued a Time Schedule Order on February 28, 2022 setting Samsung’s deadline to file an opening appeal brief as June 6, 2022.

On October 15, 2021, Samsung filed a declaratory judgement action against Netlist in the United States District Court for the District of Delaware (“DDE”), requesting in relevant part that the Delaware District Court declare that Samsung does not infringe Netlist’s U.S.

7,619,912, 9,858,218, 10,217,523, 10,474,595, 10,860,506, 10,949,339, and 11,016,918.

As of the reporting date, Samsung seeks leave to add U.S.

11,232,054 (issued Jan.

25, 2022) to the list.

On February 25, 2022, Samsung filed a Notice of Appeal, and the Federal Court of Appeals for the Ninth Circuit issued a Time Schedule Order on February 28, 2022.

On August 4, 2022, Netlist filed a cross-appeal seeking the Appeal Court’s reconsideration of the District Court’s finding that the fees Netlist paid to PwC were consequential damages, rather than recoverable general damages.

As of the reporting date, the parties have completed briefing on the appeal and cross-appeal, and await the Appeal Court setting a date for oral argument in 2023.

On October 15, 2021, Samsung filed a declaratory judgement action against Netlist in the U.S.

District Court for the District of Delaware (“DDE”), requesting in relevant part that the Delaware District Court declare that Samsung does not infringe Netlist’s U.S.

9,858,218 (the “’218 Patent”), 10,217,523 (the “’523 Patent”), 10,474,595 (the “’595 Patent”), and the ‘506, ‘339, ‘912 and ‘918 Patents.

As of the reporting date, Samsung seeks leave to add the ‘054 Patent (issued Jan.

25, 2022) to the action.

Netlist believes Samsung’s claims levied in the DDE action meritless, and the relief Samsung requests unjustified.

As of the reporting date, Netlist filed a motion seeking dismissal of Samsung’s DDE complaint, and an opposition contesting the inclusion of U.S.

11,232,054 as part of a second amended complaint filing.

On November 19, 2021, Samsung filed IPR proceedings contesting the invalidity of U.S.

Patents 9,858,218, 10,474,595, and 10,217,523.

Netlist filed a motion seeking dismissal of Samsung’s operative DDE complaint, and an opposition contesting the inclusion of the ‘054 Patent as part of Samsung’s proposed second amended complaint filing.

On August 1, 2022, the Court entered an Order on the pending motions denying Samsung’s request to amend its operative complaint a second time to add a count against the ‘054 Patent, and granting-in-part Netlist’s motion that various causes of action be dismissed.

Specifically, Hon.

Judge Andrews dismissed all of Samsung’s counts related to Netlist’s ‘912, ‘506, ‘339, and ‘918 Patents.

Thus, on August 22, 2022, Netlist entered its Answer to Samsung’s remaining Counterclaims.

On September 12, 2022, Netlist amended its Counterclaims to include counterclaims tying Google, LLC and Alphabet, Inc.

to the action.

On November 15, 2022, Google, LLC and Alphabet, Inc.

responded to Netlist’s Counterclaims by filing a Motion to Dismiss or alternatively to Sever and Stay the claims directed at Google specifically from the action.

As of the reporting date, briefing has concluded and Netlist requested an oral argument on Google’s motion.

Further, the Court set the Claim Construction hearing for October 20, 2023, and the beginning of the Jury Trial on February 3, 2025.

On November 19, 2021, Samsung filed IPR requests contesting the validity of U.S.

9,858,218 (the “’218 Patent”), 10,474,595 (the “’595 Patent”), and 10,217,523 (the “’523 Patent”).

Netlist filed its initial responses to Samsung’s petitions on February 18, 2022, contesting the institution of any IPR on the grounds propounded.

As of the reporting date, the PTAB has not yet made decision to institute any of these IPR requests.

On February 17, 2022, Samsung filed a separate IPR request contesting the invalidity of only claim 16 within Netlist’s U.S.

Patent 7,619,912.

As of the reporting date, the PTAB has not yet issued a filing date for their latest challenge.

On December 20, 2021, Netlist filed for a complaint for patent infringement against Samsung in the United States Court for the Eastern District of Texas (Case No.

2:21-cv-463) under US Pat.

As of the reporting date, no schedule has been set for this action.

As of the reporting date, the PTAB has granted Samsung’s IPR requests related to the ‘218, ‘523, and ‘595 Patents.

Netlist filed its Patent Owner’s Response for the ‘523 Patent IPR on August 4, 2022, and its Patent Owner Responses for the ‘218 Patent and ’595 Patent IPRs on August 15, 2022.

As of the reporting date, Oral Arguments were heard for the ‘523 IPR (February 1, 2023), and the ‘218 Patent and ‘595 Patent IPRs (February 15, 2023), leaving the PTAB to enter its final written decision on all three IPRs by the second quarter of 2023.

On December 20, 2021, Netlist filed a complaint for patent infringement against Samsung, Samsung Semiconductor, Inc., and Samsung Electronics America, Inc.

in the EDTX (Case No.

2:21-cv-463) under the ‘506, ‘339, and ‘918 Patents.

Samsung responded to Netlist’s complaint on April 12, 2022, and Chief Judge Gilstrap ordered a scheduling conference be set.

On May 3, 2022, Netlist entered a First Amended Complaint pursuant to the Federal Rules of Civil Procedure (“FRCP”) Rule 15, adding claims for infringement under three additional patents:

the ‘060, ‘160, and ‘054 Patents.

On May 4, 2022, Netlist complied with the EDTX local patent rules and served its preliminary

infringement contentions on Samsung.

On May 27, 2022, Samsung moved to stay this action and sever the patents it sought to add to its Declaratory Judgement action in Delaware.

On August 2, 2022, Samsung withdrew that first motion to stay in light of Judge Andrews’s order mandating dismissal of all Samsung’s claims related to the Texas Netlist patents the day before.

On August 30, 2022 Samsung moved to stay the action a second time, this time in light of its IPR petitions, and its appeal of the Central District California Judgment at the 9th Circuit Court of Appeals.

The matter was fully briefed as of October 17, 2022.

As of the reporting date, the claim construction hearing took place on November 4, 2022 in Hon.

Magistrate Judge Roy Payne’s Court.

On December 14, 2022, Magistrate Payne entered an order construing all fourteen claim terms in dispute.

As of the reporting date, the matter is set for pretrial proceedings.

The Final Pretrial Conference is currently set for March 27, 2023, while the trial start is now set for April 17, 2023.

On February 17, 2022, Samsung filed an IPR request contesting the validity of only claim 16 within the ‘912 Patent.

Samsung then filed two additional IPR requests contesting the validity of the ‘506 and ‘339 Patents.

Netlist filed its Patent Owner’s Preliminary Response for the ‘912 and ‘339 Patent IPRs on July 21, 2022, and for the ‘506 Patent IPR on July 28, 2022.

On January 19, 2023, the PTAB instituted IPR trials on both the ‘912 and ‘339 Patents.

The following day, the PTAB instituted an IPR trial on the ‘506 Patent.

On October 19, 2022, the PTAB instituted IPR trials on the ‘912 Patent and ‘339 Patent, while two days later it instituted an IPR trial on the ’506 Patent.

On November 2, 2022, Netlist file a Request for Rehearing for the ‘912 Patent institution decision, while simultaneously requesting review of the institution decision be undertaken by the USPTO’s Precedential Opinion Panel.

On January 5, 2023, USPTO Director Katherine K.

Vidal entered an Order in the proceeding mandating a sua sponte Director review of the Board’s decision granting institution of the ‘912 Patent, and staying the underlying proceedings in lieu of a supplemental briefing schedule set by the Director herself.

On February 3, 2023, Director Vidal entered a decision requiring the assigned PTAB Board to reevaluate Netlist’s request for discovery on the admitted relationship between Samsung and Google and ordered that if the Board determines Google is a “Real Party in Interest,” the Board must vacate its institution decision and deny Samsung’s Petition.

As of the reporting date, Netlist has timely filed its Patent Owner Responses for the ‘339 and ‘506 Patent IPR proceedings.

On May 17, 2022, Samsung filed two IPR petitions contesting the validity of Netlist’s ‘918 and ‘054 Patents.

On December 6, 2022, the Board instituted an IPR trial for the ‘054 Patent, and then instituted an IPR trial for the ‘918 Patent the next day.

On December 9, 2022, the Board set a joint schedule for both IPRs, making Netlist’s deadline to file its Patent Owner Response March 1, 2023.

On June 3, 2022, Netlist filed a patent infringement lawsuit against Samsung in Dusseldorf, Germany, seeking damages for Samsung’s infringement of Netlist’s Patents EP735 and EP660.

The Dusseldorf Court set an Oral Hearing date for September 5, 2023.

On August 1, 2022, Netlist filed a complaint for patent infringement against Samsung, Samsung Semiconductor, Inc., and Samsung Electronics America, Inc.

in the EDTX (Case No.

2:22-cv-00293) under the ‘912 Patent, which relates generally to technologies to implement rank multiplication.

On August 15, 2022, Netlist filed its first amended complaint here, further addressing Samsung’s infringement of the ‘215 Patent and ‘417 Patent.

On August 31, 2022, Samsung Semiconductor, Inc.

and Samsung Electronics America, Inc.

sought and received extensions of time to respond to Netlist’s first amended complaint until October 7, 2022.

Before answering on September 20, 2022, Samsung collectively moved the Court to sever and transfer the ‘912 Patent from the action and stay the remaining portions of this proceeding in light of Samsung’s appeal before 9th Circuit Court of Appeals.

The matter is fully briefed, but Samsung’s response deadline remains currently set for November 29, 2022.

Apart from Samsung’s early motion practice and its remaining response deadline, on October 21, 2022, Chief Judge Gilstrap ordered that this action and a parallel action by Netlist against Micron on the same patents (22-cv-00294-JRG) be consolidated and set for a joint scheduling conference on November 17, 2022, further instructing that this Samsung action be considered the “LEAD CASE” and that any further filings from either action be submitted in therefore all pretrial matters.

On January 20, 2023, following the entry of Samsung’s First Amended Answer, Netlist moved the Court for Leave to File a Second Amended Complaint that would include additional claims of infringement related specifically to Samsung’s infringement of Netlist’s ‘608 Patent.

As of the reporting date, the consolidated case stands ready to proceed with a claim construction hearing set for October 5, 2023, and trial beginning on April 15, 2024.

On August 26, 2022, Samsung filed two IPR petitions contesting the validity of Netlist’s U.S.

8,787,060 (the “’060 Patent”) and 9,318,160 (the “’106 Patent”).

On January 19, 2023, Netlist filed its Patent Owner Preliminary Responses in those proceedings.

As of the reporting date, the parties await the Board’s decision on institution.

On January 10, 2023, Samsung filed two IPR petitions contesting the validity of the ‘215 and ‘417 Patents.

As of the reporting date, the Board has accorded these IPR a filing date of January 10, 2023, making the deadline for Netlist to file its Patent Owner Preliminary Response April 10, 2023.

Other Contingent Obligations

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The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential for future payments we could be obligated to make.

Historically, we have not been obligated to make

significant payments as a result of these obligations, and no liabilities have been recorded for these indemnities, commitments and guarantees in the accompanying consolidated balance sheets.

Historically, we have not been obligated to make significant payments as a result of these obligations, and no liabilities have been recorded for these indemnities, commitments and guarantees in the accompanying consolidated balance sheets.

Note 8—Stockholders’ Equity

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Our 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 January 1, 2022 or January 2, 2021.

No shares of preferred stock were outstanding as of December 31, 2022 or January 1, 2022.

On April 17, 2017, we entered into a rights agreement (as amended from time to time, the “Rights Agreement”) with Computershare Trust Company, N.A., as rights agent.

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We have one class of common stock with a par value of $ 0.001 per share.

On August 7, 2020, our stockholders approved an amendment to the Restated Certificate of Incorporation to increase the number of shares of the common stock authorized for issuance from 300,000,000 to 450,000,000 .

The number of shares of the common stock authorized for issuance is 450,000,000 .

2019 Lincoln Park Purchase Agreement

On June 24, 2019, we entered into the 2019 Purchase Agreement with Lincoln Park, pursuant to which we have the right to sell to Lincoln Park up to an aggregate of $ 10 million in shares of our common stock subject to the conditions and limitations set forth in the 2019 Purchase Agreement.

On June 24, 2019, we entered into a purchase agreement (“the 2019 Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which we have the right to sell to Lincoln Park up to an aggregate of $ 10 million in shares of our common stock subject to the conditions and limitations set forth in the 2019 Purchase Agreement.

As consideration for entering into the 2019 Purchase Agreement, we issued to Lincoln Park 818,420 shares of our common stock as initial commitment shares in a noncash transaction on June 24, 2019 and would issue up to 818,420 additional shares of our common stock as additional commitment shares on a pro rata basis in connection with any additional purchases.

We would not receive any cash proceeds from the issuance of these additional commitment shares.

During 2019, Lincoln Park purchased an aggregate of 19,044,762 shares of our common stock for a net purchase price of $ 6.4 million under the 2019 Purchase Agreement.

In connection with the purchases, during 2019, we issued to Lincoln Park an aggregate of 523,633 shares of our common stock as additional commitment shares in noncash transactions.

During 2020, Lincoln Park did not purchase shares of our common stock under the 2019 Purchase

During 2020, Lincoln Park did not purchase shares of our common stock under the 2019 Purchase Agreement.

During 2021, Lincoln Park purchased an aggregate of 2,075,503 shares of our common stock for a net purchase price of $ 3.6 million under the 2019 Purchase Agreement.

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2020 Lincoln Park Purchase Agreement

On March 5, 2020, we entered into the 2020 Purchase Agreement with Lincoln Park, pursuant to which we had the right to sell to Lincoln Park up to an aggregate of $ 20 million in shares of our 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.

On March 5, 2020, we entered into another purchase agreement (“the 2020 Purchase Agreement”) with Lincoln Park, pursuant to which we had the right to sell to Lincoln Park up to an aggregate of $ 20 million in shares of our 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, we issued to Lincoln Park 1,529,052 shares of our common stock as initial commitment shares in a noncash transaction on March 6, 2020 and would issue up to 917,431 additional shares of our common stock as additional commitment shares on a pro rata basis in connection with any additional purchases.

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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 subject to the conditions and limitations set forth in the First 2021 Purchase Agreement.

As consideration for entering into the First 2021 Purchase Agreement, we issued to Lincoln Park 80,000 shares of our common stock as initial commitment shares in a noncash transaction on July 12, 2021 and would issue up to 120,500 additional shares of our common stock as additional commitment shares on a pro rata basis in connection with any additional purchases.

our common stock as additional commitment shares on a pro rata basis in connection with any additional purchases.

We would not receive any cash proceeds from the issuance of these additional commitment shares.

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We 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, we have the right, from time to time, at our sole discretion and subject to certain conditions, to direct Lincoln Park to purchase up to 750,000 shares of our common stock, provided Lincoln Park’s obligation under any single such purchase will not exceed $ 4.0 million, unless we and

Lincoln Park mutually agree to increase the maximum amount of such single regular purchase.

If we direct Lincoln Park to purchase the maximum number of shares of common stock we 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, we 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 our common stock traded during a specified period on the applicable purchase date as set forth in the Second 2021 Purchase Agreement.

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In connection with the purchases, we issued to Lincoln Park an aggregate of 20,809 shares of our common stock as additional commitment shares in noncash transactions.

Subsequent to January 1, 2022, Lincoln Park purchased an aggregate of 200,000 shares of our common stock for a net purchase price of $ 1.3 million under the Second 2021 Purchase Agreement.

During 2022, Lincoln Park purchased an aggregate of 1,050,000 shares of our common stock for a net purchase price of $ 4.4 million under the Second 2021 Purchase Agreement.

In connection with the purchases, we issued to Lincoln Park an aggregate of 8,502 shares of our common stock as additional commitment shares in noncash transactions.

Subsequent to December 31, 2022, Lincoln Park purchased an aggregate of 2,650,000 shares of our common stock for a net purchase price of $ 4.3 million under the Second 2021 Purchase Agreement.

In connection with the purchase, we issued to Lincoln Park an aggregate of 8,284 shares of our common stock as additional commitment shares in noncash transactions.

Warrant activity during 2021 is as follows:

Weighted-Average

(in thousands)

Exercise Price

Outstanding as of January 2, 2021

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Note 9—Benefit Plans

Equity Incentive Plan

Our Amended and Restated 2006 Equity Incentive Plan (the “Amended 2006 Plan”) provides for broad-based equity grants to our employees and non-employee service providers.

We also periodically grant equity-based awards

outside the Amended 2006 Plan to certain new hires as an inducement to enter into employment with us.

Subject to certain adjustments, as of January 1, 2022, we were authorized to issue a maximum of 17,405,566 shares of our common stock pursuant to awards granted under the Amended 2006 Plan.

We also periodically grant equity-based awards outside the Amended 2006 Plan to certain new hires as an inducement to enter into employment with us.

Subject to certain adjustments, as of December 31, 2022, we were authorized to issue a maximum of 17,405,566 shares of our common stock pursuant to awards granted under the Amended 2006 Plan.

Pursuant to the terms of the Amended 2006 Plan, beginning January 1, 2017, the automatic annual increase to the number of shares of common stock that may be issued pursuant to awards granted under the Amended 2006 Plan is equal to the lesser of (i) 2.5 % of the number of shares of our common stock issued and outstanding as of the first day of the applicable calendar year, and (ii) 1,200,000 shares of our common stock, subject to adjustment for certain corporate actions.

As of January 1, 2022, we had 1,726,990 shares of our common stock available for issuance pursuant to future awards to be granted under the Amended 2006 Plan.

As of December 31, 2022, we had 240,982 shares of our common stock available for issuance pursuant to future awards to be granted under the Amended 2006 Plan.

Stock Options

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The following table summarizes the activity related to stock options during 2022:

Weighted-Average

Contractual Life

(in thousands)

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Expired or forfeited

Outstanding as of January 1, 2022

Exercisable as of January 1, 2022

Vested and expected to vest as of January 1, 2022

The total intrinsic value of stock options exercised during 2021 was $ 10.8 million.

There was no significant intrinsic value of options exercised during 2020 and 2019.

Outstanding as of December 31, 2022

Exercisable as of December 31, 2022

Vested and expected to vest as of December 31, 2022

The total intrinsic value of stock options exercised during 2022 and 2021 was $ 1.5 million and $ 10.8 million, respectively.

There was no significant intrinsic value of options exercised during 2020.

Restricted Stock Awards and Restricted Stock Units

RSAs granted under the Amended 2006 Plan vest annually on each anniversary of the grant date over a two-year term.

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-vested on 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-vested on the grant date.

There was no activity related to RSAs during 2022.

The following table summarizes the activity related to RSUs during 2022:

Weighted-Average

Grant-Date Fair

(in thousands)

Value per Share

Balance nonvested as of January 1, 2022

Balance nonvested as of December 31, 2022

Stock-Based Compensation

3 unchanged sentences

Selling, general and administrative

As of January 1, 2022, we had approximately $ 4.2 million, net of estimated forfeitures, of unearned stock-based compensation, which we expect to recognize over a weighted-average period of approximately 2.9 years.

As of December 31, 2022, we had approximately $ 9.4 million, net of estimated forfeitures, of unearned stock-based compensation, which we expect to recognize over a weighted-average period of approximately 2.9 years.

We have a defined contribution plan under Section 401(k) of the Code (“401(k)”) covering full-time domestic employees who meet certain eligibility requirements.

1 unchanged sentence

We may make matching contributions on the contributions of a participant on a discretionary basis.

During 2021, our matching contributions totaled $0.1 million.

During 2020 and 2019, we did not make any matching contributions.

During 2022 and 2021, our matching contributions totaled $ 0.1 million and $ 0.1 million, respectively.

During 2020, we did no t make any matching contributions.

Note 10—Major Customers, Suppliers and Products

2 unchanged sentences

Less than 10 % of total net product sales

As of December 31, 2022, one customer represented approximately 69 % of aggregate gross accounts receivable.

As of January 1, 2022, four customers represented approximately 26 %, 16 %, 13 % and 13 %, respectively, of aggregate gross accounts receivable.

As of January 2, 2021, one customer represented approximately 50 % of aggregate gross accounts receivable.

The loss of any of our significant customers or a reduction in sales to or difficulties collecting payments from any of these customers could significantly reduce our net product sales and adversely affect our operating results.

13 unchanged sentences

We have audited the accompanying consolidated balance sheets of Netlist, Inc.

and subsidiaries (the “Company”) as of January 1, 2022 and January 2, 2021, the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended January 1, 2022, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of January 1, 2022 and January 2, 2021, and the results of its operations and its cash flows for each of the three years in the period ended January 1, 2022, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of January 1, 2022, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 1, 2022 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.

and subsidiaries (the “Company”) as of December 31, 2022 and January 1, 2022, the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and January 1, 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 28, 2023 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

26 unchanged sentences

Irvine, California

March 1, 2022

February 28, 2023

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

3 unchanged sentences

We have audited the internal control over financial reporting of Netlist, Inc.

and subsidiaries (the “Company”) as of January 1, 2022, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

In our opinion, because of the material weaknesses, described below, on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of January 1, 2022, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements of the Company as of January 1, 2022 and January 2, 2021, the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended January 1, 2022, and the related notes and the schedule listed in the Index at Item 15 (collectively, “the consolidated financial statements”) , and our report dated March 1, 2022 expressed an unqualified opinion on those consolidated financial statements.

and subsidiaries (the “Company”) as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

In our opinion, because of the material weakness, described below, on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements of the Company as of December 31, 2022 and January 1, 2022, the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and the schedule listed in the Index at Item 15 (collectively, “the consolidated financial statements”) , and our report dated February 28, 2023 expressed an unqualified opinion on those consolidated financial statements.

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 the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

The following material weaknesses have been identified an included in management’s assessment:

The following material weakness has been identified and included in management’s assessment:

● The Company’s sole member of the board of directors also serves in an executive management role at the Company.

As a result, the Company has ineffective oversight of the financial reporting process due to the lack of an audit committee and the lack of an independent board of directors to ensure adequate monitoring and oversight of internal controls .

Additionally, the Company (i) did not have an effective risk assessment process as it did not sufficiently identify and assess risks, including financial reporting risks, that may limit the achievement of Company objectives, and (ii) did not have effective monitoring as it did not implement effective monitoring controls that were responsive to changes in the business or the timely remediation of identified control deficiencies.

● The Company has ineffective design and maintenance of controls over user access and program change management related to certain information technology (IT) systems that support the Company’s financial reporting processes.

User and privileged access were not appropriately provisioned, and program changes were not adequately reviewed prior to being placed in production.

As a result, process level automated controls and manual controls that are dependent on the completeness and accuracy of information derived from the affected IT systems were also ineffective because they could have been adversely impacted.

This material weakness was due to the Company having an insufficient number of IT personnel to identify and assess risks associated with changes in the IT environment resulting in inappropriate assignment of user and privileged access as well as insufficient documentation for control operations.

The material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the fiscal year 2021 consolidated financial statements, and this report does not affect our report on those consolidated financial statements.

The material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the fiscal year 2022 consolidated financial statements, and this report does not affect our report on those consolidated financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s

Report on Internal Control over Financial Reporting.

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

15 unchanged sentences

Irvine, California

March 1, 2022

February 28, 2023

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

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-K

Item 8. Financial Statements and Supplementary Data