What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-08 compared with 2023-05-10 · 47 added, 54 removed, 93 unchanged (52% of the section changed)

6 unchanged sentences

● our beliefs regarding the market and demand for our products or the component products we resell;

● our ability to collect the damages awarded to us by jury verdict in our trial with Samsung;

● our ability to collect any damages awarded to us under an EDTX Court Judgment following the jury verdict entered in our favor and against Samsung;

● our ability to develop and launch new products that are attractive to the market and stimulate customer demand for these products;

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● our expectations and strategies regarding outstanding legal proceedings and patent reexaminations relating to our intellectual property portfolio;

● specific and overall impacts of the coronavirus disease (“COVID-19”) pandemic on our financial condition and results of operations;

● our expectations with respect to any strategic partnerships or other similar relationships we may pursue;

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In light of these risks and uncertainties, our forward-looking statements should not be relied on as predictions of future events.

Additionally, many of these risks and uncertainties are currently elevated by and may or will continue to be elevated by and may or will continue to be elevated by the COVID-19 pandemic.

All forward-looking statements reflect our assumptions, expectations and beliefs only as of the date they are made, and except as required by law, we undertake no obligation to revise or update any forward-looking statements for any reason.

The following MD&A should be read in conjunction with our condensed consolidated financial statements and the related notes included in Part I, Item 1 of this report, as well as our Annual Report on Form 10-K for our fiscal year ended December 31, 2022 filed with the SEC.

All information presented herein is based on our fiscal calendar, and references to particular years, quarters, months or periods refer to our fiscal years ended in January or December and the associated quarters, months and periods of those fiscal years.

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Our products in various capacities and form factors and our line of custom and specialty memory products bring leading performance to customers in a variety of industries globally and cloud service providers.

Netlist licenses its portfolio of intellectual property, including solutions relating to improvements for volatile memory, non-volatile memory, computer storage, hybrid memory, and related subsystems.

During the first quarter of 2023, we recorded net sales of $9.0 million, gross profit of $0.6 million and net loss of $15.8 million.

Netlist also licenses its intellectual property.

During the second quarter of 2023, we recorded net sales of $10.0 million, gross profit of $0.2 million and net loss of $14.0 million.

We have historically financed our operations primarily with proceeds from issuances of equity and debt securities and cash receipts from revenues.

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Recent Developments

Damages Award Against Samsung

On April 21, 2023, we won a $303 million damages award against Samsung Electronics Co., Ltd., Samsung Semiconductor, Inc., and Samsung Electronics America, Inc.

(together “Samsung”) in the United States District Court for the Eastern District of Texas.

The award resulted from a jury trial that lasted six days, and involved five Netlist patents:

Jury Verdict Against Samsung

On April 21, 2023, an EDTX jury awarded Netlist $303 million in compensatory damages against Samsung for its willful infringement of five Netlist Patents.

The verdict resulted from a jury trial that lasted six Court days and involved the following Netlist patents:

10,949,339, 11,016,918, 11,232,054, 8,787,060, and 9,318,160.

The products found to infringe these patents were Samsung DDR4 LRDIMMs, DDR5 UDIMMs, DDR5 SODIMMs, and DDR5 RDIMMs, and HBM 2, 2E, and 3 components.

As of the reporting date, post-trial proceedings are being adjudicated and a Judgement has not yet been entered.

Upon entry of a Judgment, an appeal may be filed before the U.S.

Court of Appeals for the Federal Circuit.

Should any party file an appeal, that could cause a lengthy delay in our ability to collect a damages award from Samsung, lead to a reduction of the damages award, or lead to a remand or reversal of the jury’s verdict.

The products found to infringe these patents were Samsung’s DDR4 LRDIMMs, DDR5 UDIMMs, DDR5 SODIMMs, DDR5 RDIMMs, and Samsung’s HBM2, HBM2E, and HBM3 components.

As of the reporting date, Hon.

Chief Judge Gilstrap has not yet entered his Final Judgment.

Termination of SVB Credit Agreement

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

Borrowings accrued interest on advance at a per annum rate equal to the greater of 0.75% above the Prime Rate or 4.25%.

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

On April 28, 2023, the SVB Credit Agreement terminated in accordance with its terms.

In connection with the termination of the SVB Credit Agreement, on April 28, 2023, all outstanding obligations for principal, interest, and fees under the SVB Credit Agreement were paid in full and all liens securing such obligations were released.

Borrowings accrued interest on advance at a per annum rate equal to the greater of 0.75% above the Prime Rate.

On the maturity date, April 28, 2023, the SVB Credit Agreement terminated in accordance with its terms.

In connection with the termination of the SVB Credit Agreement, all outstanding obligations for principal, interest, and fees were paid in full and all liens securing such obligations were released.

September 2021 Lincoln Park Purchase Agreement

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

During the three months ended April 1, 2023, Lincoln Park purchased an aggregate of 4,900,000 shares of our common stock for a net purchase price of $10.5 million under the September 2021 Purchase Agreement.

During the six months ended July 1, 2023, Lincoln Park purchased an aggregate of 7,300,000 shares of our common stock for a net purchase price of $21.6 million under the September 2021 Purchase Agreement.

In connection with the purchases, we issued to Lincoln Park an aggregate of 41,500 shares of our common stock as additional commitment shares in noncash transactions.

Subsequently, from April 2, 2023 through May 4, 2023, Lincoln Park purchased an aggregate of 1,950,000 shares of our common stock for a net purchase price of $9.2 million under the September 2021 Purchase Agreement.

connection with the purchase, we issued to Lincoln Park an aggregate of 17,562 shares of our common stock as additional commitment shares in noncash transactions.

Subsequently, from July 2, 2023 through August 3, 2023, Lincoln Park purchased an aggregate of 160,000 shares of our common stock for a net purchase price of $0.5 million under the September 2021 Purchase Agreement.

In connection with the purchases, we issued to Lincoln Park an aggregate of 947 shares of our common stock as additional commitment shares in noncash transactions.

Economic Conditions, Challenges and Risks

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Our suppliers generally seek to increase wafer output, improve yields, and reduce die size, which could result in further increases in worldwide supply and downward pressure on prices.

The continuing impact of the COVID-19 pandemic will have on our consolidated results of operations is uncertain.

We will continue to actively monitor the situation and may take further actions altering our business operations that we determine are in the best interests of our employees, customers, suppliers, and stakeholders, or as required by federal, state, or local authorities.

It is not clear what the potential effects of such alterations or modifications may have on our business, consolidated results of operations, financial condition, and liquidity.

Results of Operations

Net Sales and Gross Profit

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

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

Three Months Ended

Six Months Ended

Cost of sales

Gross margin percentage

Net sales include resales of certain components, modules, and other products, which include dual in-line memory module (“DIMMs”) and solid-state drives (“SSDs”).

Net sales include resales of certain components, modules, and other products, which include dual in-line memory modules (“DIMMs”) and solid-state drives (“SSDs”).

Net sales also include sales of Netlist’s own products.

Net sales decreased by approximately $41.2 million during the first quarter of 2023 compared to the same period of 2022, primarily as a result of a $29.9 million decrease in the sale of registered DIMM (“RDIMM”) and discrete memory component products, a $1.8 million decrease in sale of Netlist’s flash and SSD products, and a $9.5 million decrease in sales of low-profile memory subsystem products.

Net sales decreased by approximately $45.3 million during the second quarter of 2023 compared to the same period of 2022, primarily as a result of a $33.4 million decrease in the sale of registered DIMM (“RDIMM”) and discrete memory component products, a $3.8 million decrease in sales of Netlist’s flash and SSD products, and an $8.1 million decrease in sales of low-profile memory subsystem products.

Net sales decreased by approximately $86.5 million during the first six months of 2023 compared to the same period of 2022, primarily as a result of a $63.3 million decrease in the sale of RDIMM and discrete memory component products, a $5.6 million decrease in sales of Netlist’s flash and SSD products, and a $17.6 million decrease in sales of low-profile memory subsystem products.

Gross Profit and Gross Margin

Product gross profit and product gross margin percentage decreased during the first quarter of 2023 compared to the same period of 2022, primarily as a result of lower sales across all product group and softer pricing environment.

Product gross profit and product gross margin percentage decreased during the second quarter and first six months of 2023 compared to the same periods of 2022, primarily as a result of lower sales across all product groups and a softer pricing environment.

Operating Expenses

Operating expenses for the three months ended April 1, 2023, and April 2, 2022, were as follows (dollars in thousands):

Operating expenses for the three and six months ended July 1, 2023 and July 2, 2022, were as follows (dollars in thousands):

Three Months Ended

Six Months Ended

Research and development

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Research and Development

Research and development expenses decreased during the first quarter of 2023 compared to the same period of 2022 due primarily to a decrease in employee headcount and related overhead.

Research and development expenses decreased during the second quarter and first six months of 2023 compared to the same periods of 2022 due primarily to a decrease in employee headcount and related overhead.

Intellectual Property Legal Fees

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See Note 7 to the condensed consolidated financial statements included in Part I, Item 1 of this report for further discussion.

Intellectual property legal fees increased during the first quarter of 2023 compared to the same period of 2022 due primarily to higher legal expenses incurred to protect and enforce our patent portfolio.

Intellectual property legal fees increased during the second quarter and first six months of 2023 compared to the same periods of 2022 due primarily to higher legal expenses incurred to protect and enforce our patent portfolio.

Selling, General and Administrative

Selling, general and administrative expenses decreased during the first quarter of 2023 compared to the same period of 2022 due primarily to a decrease in employee headcount and overhead and outside services.

Selling, general and administrative expenses decreased during the second quarter and first six months of 2023 compared to the same periods of 2022 due primarily to a decrease in employee headcount and overhead and outside services.

Other Income (Expense), Net

Other income (expense), net for the three months ended April 1, 2023, and April 2, 2022 was as follows (dollars in thousands):

Other income (expense), net for the three and six months ended July 1, 2023 and July 2, 2022 was as follows (dollars in thousands):

Three Months Ended

Interest income (expense), net

Six Months Ended

Interest income, net

Other expense, net

Total other income (expense), net

Interest income, net increased during the first quarter of 2023 compared to the same period of 2022, primarily as a result of a higher interest rate earned on cash balances.

During the first quarter of 2023, other expense was consistent compared with the same period of 2022.

Interest income, net increased during the second quarter and first six months of 2023 compared to the same periods of 2022, primarily as a result of higher interest rate earned on cash balances.

During the second quarter and first six months of 2023, other expense was consistent compared with the same periods of 2022.

Liquidity and Capital Resources

Our primary sources of cash are historically proceeds from issuances of equity and debt securities and receipts from revenues.

Our primary sources of cash are historically proceeds from issuances of equity and receipts from revenues.

In addition, we have received proceeds from our entry into a Strategic Product Supply and License Agreement with SK hynix, Inc., a South Korean memory semiconductor supplier (“SK hynix”), on April 5, 2021 (the “Strategic Agreement”), which we use to support our operations.

We have also funded our operations with a revolving line of credit under a bank credit facility, and to a lesser extent, equipment leasing arrangements.

We are currently seeking to obtain a new bank credit facility to replace the terminated facility we had with SVB.

The following tables present selected financial information as of April 1, 2023, and December 31, 2022 and for the first three months of 2023 and 2022 (in thousands):

The following tables present selected financial information as of July 1, 2023 and December 31, 2022 and for the first six months of 2023 and 2022 (in thousands):

Cash, cash equivalents and restricted cash

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Working capital

Three Months Ended

Net cash provided by (used in) operating activities

Six Months Ended

Net cash used in operating activities

Net cash used in investing activities

Net cash provided by (used in) financing activities

During the three months ended April 1, 2023, net cash used in operating activities was primarily a result of net loss of $15.8 million, non-cash adjustments to net loss of $1.3 million, and net cash inflows from changes in operating assets and liabilities of $1.7 million driven predominantly by a decrease in accounts receivable and inventories, partially offset by a decrease in accounts payable due to lower inventory purchases.

Net cash provided by financing activities during the three months ended April 1, 2023 primarily consisted of $10.5 million in net proceeds from issuance of common stock under the September 2021 Purchase Agreement, $0.3 million in proceeds from exercise of stock options, offset by $4.9 million in net repayments under the SVB Credit Agreement and $0.1 million in payments of note payable to finance insurance policies.

During the three months ended April 2, 2022, net cash provided by operating activities was primarily a result of net loss of $5.9 million, non-cash adjustments to net loss of $0.9 million, and net cash inflows from changes in operating assets and liabilities of $6.2 million driven predominantly by an increase in accounts payable due to higher inventory purchases to support increase in sales and higher legal fees to defend our patent portfolio, and a decrease in accounts

Net cash used in financing activities during the three months ended April 2, 2022 primarily consisted of $1.8 million in net proceeds from issuance of common stock under the September 2021 Purchase Agreement, $0.1 million in proceeds from exercise of stock options, offset by $2.3 million in net repayments under the SVB Credit Agreement and $0.6 million in payments for taxes related to net share settlement of equity awards.

Net cash provided by financing activities

During the six months ended July 1, 2023, net cash used in operating activities was primarily a result of net loss of $29.8 million, non-cash adjustments to net loss of $2.8 million, and net cash outflows from changes in operating assets and liabilities of $1.8 million due to a decrease in accounts payable and a decrease in accrued expenses and other liabilities, partially offset by a decrease in accounts receivable due to a decrease in inventories.

Net cash provided by financing activities during the six months ended July 1, 2023 primarily consisted of $21.6 million in net proceeds from issuance of common stock under the September 2021 Purchase Agreement, $0.4 million in proceeds from exercise of stock options, offset by $4.9 million in net repayments under the SVB Credit Agreement, and $0.3 million in payments of notes payable to finance insurance policies.

During the six months ended July 2, 2022, net cash used in operating activities was primarily a result of net loss of $10.8 million, non-cash adjustments to net loss of $1.9 million, and net cash inflows from changes in operating assets and liabilities of $7.4 million driven predominantly by an increase in accounts payable due to higher inventory purchases to support an increase in sales and legal fees to defend our patent portfolio, and a decrease in accounts receivable, partially offset by an increase in inventories.

Net cash provided by financing activities during the six months ended July

2, 2022 primarily consisted of $1.0 million in net borrowings under the SVB Credit Agreement, $3.7 million in net proceeds from issuance of common stock under the September 2021 Purchase Agreement, $0.2 million in proceeds from exercise of stock options, offset by $0.4 million in payments of note payable to finance insurance policies and $0.7 million in payments for taxes related to net share settlement of equity awards.

Capital Resources

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On September 28, 2021, we entered into the September 2021 Purchase Agreement with Lincoln Park, pursuant to which we have the right to sell to Lincoln Park up to an aggregate of $75.0 million in shares of our common stock over the 36-month term of the September 2021 Purchase Agreement subject to the conditions and limitations set forth in the September 2021 Purchase Agreement.

As of April 1, 2023, $49.2 million remains available under the September 2021 Purchase Agreement with Lincoln Park.

As of July 1, 2023, $38.1 million remains available under the September 2021 Purchase Agreement with Lincoln Park.

SVB Credit Agreement

1 unchanged sentence

Borrowings accrued interest on advance at a per annum rate equal to the greater of 0.75% above the Prime Rate or 4.25%.

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

On April 28, 2023, the SVB Credit Agreement terminated in accordance with its terms.

In connection with the termination of the SVB Credit Agreement, on April 28, 2023, all outstanding obligations for principal, interest, and fees under the SVB Credit Agreement were paid off in full and all liens securing such obligations were released.

Borrowings accrued interest on advance at a per annum rate equal to the greater of 0.75% above the Prime Rate.

On the maturity date, April 28, 2023, the SVB Credit Agreement terminated in accordance with its terms.

In connection with the termination of the SVB Credit Agreement, all outstanding obligations for principal, interest, and fees were paid in full and all liens securing such obligations were released.

Sufficiency of Cash Balances and Potential Sources of Additional Capital

We believe our existing balance of cash and cash equivalents together with cash receipts from revenues, the equity financing available under September 2021 Purchase Agreement, funds raised through other future debt and equity offerings and taking into account cash expected to be used in our operations, will be sufficient to meet our anticipated cash needs for at least the next 12 months.

We believe our existing balance of cash and cash equivalents together with cash receipts from revenues, the equity financing available under the September 2021 Purchase Agreement, funds raised through other future equity offerings and taking into account cash expected to be used in our operations, will be sufficient to meet our anticipated cash needs for at least the next 12 months.

Off-Balance Sheet Arrangements

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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 2. Management’s Discussion and Analysis