What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-09 compared with 2023-08-08 · 71 added, 54 removed, 86 unchanged (59% 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 any damages awarded to us under an EDTX Court Judgment following the jury verdict entered in our favor and against Samsung;

● our ability to collect any damages awarded to us under Final Judgment 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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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 filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2023 (the “ 2022 Annual Report”).

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.

4 unchanged sentences

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.

During the third quarter of 2023, we recorded net sales of $16.7 million, gross profit of $0.4 million and net loss of $17.3 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

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:

2023 SVB Credit Agreement

On November 7, 2023, we entered into a loan and security agreement (the “2023 SVB Credit Agreement”) with Silicon Valley Bank, a division of First-Citizen Bank & Trust Company, which provides for a revolving line of credit up to $10.0 million.

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

Borrowings accrue interest on advance at a per annum rate equal to the greater of 8.50% and the Wall Street Journal prime rate (“Prime Rate”).

The maturity date is November 7, 2025.

The 2023 SVB Credit Agreement requires letters of credit to be secured by cash, which is classified as restricted cash in the accompanying condensed consolidated balance sheets.

As of November 9, 2023, outstanding borrowings were $0, and availability under the revolving line of credit was $10.0 million.

The 2023 SVB Credit Agreement subjects the Company to certain affirmative and negative covenants, including financial covenants with respect to the Company’s liquidity and restrictions on the payment of dividends.

As of November 9, 2023, the Company was in compliance with its covenants under the 2023 SVB Credit Agreement.

2023 Offering

On August 14, 2023, we entered into a Securities Purchase Agreement with certain investors, pursuant to which we agreed to issue and sell to the investors in a registered offering (the “2023 Offering”) an aggregate of 11,111,112 shares of our common stock and warrants to purchase up to an aggregate of 11,111,112 shares of our common stock at a per share purchase price of $2.70 per share.

The 2023 Offering closed on August 17, 2023.

The net proceeds to us from the 2023 Offering were approximately $28.6 million, after deducting placement agent fees and offering costs paid by us.

The warrants are exercisable at any time on or after the issuance date, have a term of five years from the issuance date, and have an exercise price of $3.20 per share and contain customary 4.99%/9.99% blocker provisions.

On August 14, 2023 and in connection with the 2023 Offering, we entered into a Placement Agency Agreement (the “Placement Agreement”) with Roth Capital Partners, LLC (“Roth”), pursuant to which Roth agreed to act as the Company’s placement agent in connection with the 2023 Offering.

Pursuant to the terms of the Placement Agreement, in consideration for its placement agent services, we agreed to pay Roth a cash fee in an amount equal to 4% of the aggregate gross proceeds received by us in connection with the closing of the 2023 Offering.

In addition, pursuant to the 2023 Purchase Agreement, the Company and its director and executive officers entered into the Lock-Up Agreements, pursuant to which they agreed not to offer for sale, contract to sell, or sell any shares of the Company’s common stock or any securities convertible into, or exercisable or exchangeable for, shares of the Company’s common stock, for a period of 90 days from the closing of the 2023 Offering, subject to certain customary exceptions.

The 2023 Purchase Agreement also provides that the Company may not effect or enter into any Variable Rate Transactions (as defined in the 2023 Purchase Agreement) until the six month anniversary of the closing date of the 2023

Sales of the Company’s common stock pursuant to the September 2021 Purchase Agreement are permitted after 90 days following the closing of the 2023 Offering.

Final Judgment Against Samsung

On August 11, 2023, a final judgment was entered in the United States District Court for the Eastern District of Texas, which upheld the jury trial verdict on April 21, 2023 that awarded Netlist $303 million in damages against Samsung Electronics Co., Ltd., Samsung Semiconductor Inc., and Samsung Electronics America Inc.

(collectively, “Samsung”) for their willful infringement of five 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’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

On October 31, 2009, we entered into the SVB Credit Agreement, which provided for a revolving line of credit of up to $10.0 million, as amended.

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.

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.

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

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.

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 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 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.

On September 28, 2021, we entered into a purchase agreement (the “September 2021 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 $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 nine months ended September 30, 2023, Lincoln Park purchased an aggregate of 7,865,000 shares of our common stock for a net purchase price of $23.4 million under the September 2021 Purchase Agreement.

In connection with the purchases, we issued to Lincoln Park an aggregate of 44,939 shares of our common stock as additional commitment shares in noncash transactions.

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Net Sales and Gross Profit

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):

Net sales and gross profit for the three and nine months ended September 30, 2023 and October 1, 2022 were as follows (dollars in thousands):

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Cost of sales

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Net sales also include sales of Netlist’s own 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.

Net sales decreased by approximately $17.7 million during the third quarter of 2023 compared to the same period of 2022, primarily as a result of a $8.7 million decrease in the sale of registered DIMM (“RDIMM”) and discrete memory component products, a $5.5 million decrease in sales of Netlist’s flash and SSD products, and an $3.5 million decrease in sales of low-profile memory subsystem products.

Net sales decreased by approximately $104.2 million during the first nine months of 2023 compared to the same period of 2022, primarily as a result of a $72.1 million decrease in the sale of RDIMM and discrete memory component products, a $11.1 million decrease in sales of Netlist’s flash and SSD products, and a $21.0 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 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.

Product gross profit and product gross margin percentage decreased during the third quarter and first nine 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 and six months ended July 1, 2023 and July 2, 2022, were as follows (dollars in thousands):

Operating expenses for the three and nine months ended September 30, 2023 and October 1, 2022, were as follows (dollars in thousands):

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Research and development

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Research and Development

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.

Research and development expenses decreased during the third quarter and first nine 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 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.

Intellectual property legal fees increased during the third quarter and first nine 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 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 and six months ended July 1, 2023 and July 2, 2022 was as follows (dollars in thousands):

Selling, general and administrative expenses decreased during the third quarter and first nine 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, Net

Other income, net for the three and nine months ended September 30, 2023 and October 1, 2022 was as follows (dollars in thousands):

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Interest income, net

Other expense, net

Total other income (expense), net

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.

Other income, net

Total other income, net

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

Other income, net included a one-time gain from a sanction judgment during the third quarter and first nine months of 2022 resulting in a decrease in other income for the third quarter and the first nine months of 2023 compared to the same periods of 2022.

Liquidity and Capital Resources

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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.

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):

The following tables present selected financial information as of September 30, 2023 and December 31, 2022 and for the first nine months of 2023 and 2022 (in thousands):

September 30,

Cash, cash equivalents and restricted cash

1 unchanged sentence

Working capital

Six Months Ended

Nine Months Ended

September 30,

Net cash used in operating activities

1 unchanged sentence

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.

During the nine months ended September 30, 2023, net cash used in operating activities was primarily a result of net loss of $47.2 million, non-cash adjustments to net loss of $4.2 million, and net cash inflows from changes in operating assets and liabilities of $2.9 million due to a decrease in accounts receivable and in inventories, partially offset by a decrease in accounts payable and a decrease in accrued expenses and other liabilities.

Net cash provided by financing activities during the nine months ended September 30, 2023 primarily consisted of $23.4 million in net proceeds from issuance of common stock under the September 2021 Purchase Agreement, $28.6 million in net proceeds from the 2023 Offering, $0.5 million in proceeds from exercise of stock options, offset by $4.9 million in net repayments under the credit agreement between the Company and Silicon Valley Bank, dated October 31, 2009 , which was terminated on April 28, 2023 (the “2009 SVB Credit Agreement”), and $0.4 million in payments of notes payable to finance insurance policies.

During the nine months ended October 1, 2022, net cash used in operating activities was primarily a result of net loss of $20.4 million, non-cash adjustments to net loss of $3.1 million, and net cash outflows from changes in operating assets and liabilities of $0.4 million driven predominantly by an increase in inventories due to higher purchases to support increased sales and a decrease in accounts payable, partially offset by a decrease in accounts receivable and an

increase in accrued expenses and other liabilities.

Net cash provided by financing activities during the nine months ended October 1, 2022 primarily consisted of $1.0 million in net borrowings under the 2009 SVB Credit Agreement, $3.7 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 $0.6 million in payments of note payable to finance insurance policies and $1.3 million in payments for taxes related to net share settlement of equity awards.

Capital Resources

2023 Offering

On August 14, 2023, we entered into the 2023 Purchase Agreement with certain investors, pursuant to which we agreed to issue and sell to the investors an aggregate of 11,111,112 shares of our common stock and warrants purchase up to an aggregate of 11,111,112 shares of our common stock at a per share purchase price of $2.70 per share.

The 2023 Offering closed on August 17, 2023.

The net proceeds to us from the 2023 Offering were $28.6 million, after deducting placement agent fees and offering costs paid by us.

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 $75.0 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 July 1, 2023, $38.1 million remains available under the September 2021 Purchase Agreement with Lincoln Park.

SVB Credit Agreement

On October 31, 2009, we entered into the SVB Credit Agreement, which provided for a revolving line of credit of up to $10.0 million, as amended.

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.

As of September 30, 2023, $36.3 million remains available under the September 2021 Purchase Agreement with Lincoln Park.

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 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.

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 the 2023 Offering and 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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Critical Accounting Policies and Use of Estimates

The preparation of our condensed consolidated financial statements in conformity with U.S.

The preparation of our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S.

GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of net sales and expenses during the reporting period.

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Actual results may differ from our estimates, which may result in material adverse effects on our consolidated operating results and financial position.

Our critical accounting policies and estimates are discussed in Note 2 to the condensed consolidated financial statements in this report and in the notes to consolidated financial statements in Part II, Item 8 of our 2022 Annual

Report and in the MD&A in our 2022 Annual Report.

There have been no significant changes to our critical accounting policies since our 2022 Annual Report.

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