What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-08-06 compared with 2024-05-06 · 47 added, 54 removed, 86 unchanged (54% 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 Final Judgment against Samsung Electronics Co., Ltd., Samsung Semiconductor Inc., and Samsung Electronics America Inc.

(collectively, “Samsung”);

● our ability to collect any damages awarded to us in our litigation with Samsung Electronics Co., Ltd., Samsung Semiconductor Inc., and Samsung Electronics America Inc.

(collectively, “Samsung”) in the event of an appeal;

● our ability to collect any damages awarded to us in our litigation with Micron.

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

13 unchanged sentences

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 23, 2024 (the “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.

months and periods of those fiscal years.

Each of the terms the “Company,” “Netlist,” “we,” “us,” or “our” as used herein refers collectively to Netlist, Inc.

and its consolidated subsidiaries, unless otherwise stated.

Netlist provides high-performance memory solutions to enterprise customers in diverse industries.

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

Netlist also licenses its intellectual property.

During the first quarter of 2024, we recorded net sales of $35.8 million, gross profit of $0.7 million and net loss of $17.0 million.

We are a leading innovator in memory and storage solutions, pushing the boundaries of technology to deliver unparalleled performance and reliability.

With a rich portfolio of patented technologies, we have consistently driven innovation in the field of cutting-edge enterprise memory and storage, empowering businesses and industries to thrive in the digital age.

During the second quarter of 2024, we recorded net sales of $36.8 million, gross profit of $0.8 million and net loss of $14.8 million.

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

We have also funded our operations with a revolving line of credit and term loans under a bank credit facility with Silicon Valley Bank, a division of First-Citizen Bank & Trust Company (“SVB”).

We have also funded our operations with a revolving line of credit under a bank credit facility with Silicon Valley Bank (“SVB”).

See “Liquidity and Capital Resources” below for more information.

Recent Developments

Fourth Amendment to Rights Agreement

On April 17, 2024, the Company entered into a fourth amendment (the “Fourth Amendment”) to the Company’s rights agreement dated as of April 17, 2017 (as amended from time to time, the “Rights Agreement”).

The Fourth Amendment appointed Equiniti Trust Company, LLC as rights agent and amended the definition of “Expiration Date” in the Rights Agreement to extend the term for an additional three year period which extended the final expiration of the Rights issued pursuant to the Rights Agreement from April 17, 2024 to April 17, 2027.

As a result and pursuant to the Fourth Amendment, the Rights will expire and become unexercisable on or before the close of business on April 17, 2027, in accordance with the terms of the Rights Agreement.

Jury Verdict and Judgment Against Samsung

On August 11, 2023, a 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 approximately $303 million in damages against 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 DDR4 LRDIMMs, DDR5 UDIMMs, DDR5 SODIMMs, and DDR5 RDIMMs, and HBM2, HBM2E, and HBM3 components.

Post-judgment motions are pending before the Court.

Following entry of an order regarding that post-judgment briefing, 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.

Additionally, as of the reporting date, all of the patents confirmed as being infringed on the jury verdict are either subject to Inter Partes Review (“IPR”) final written decisions, or an active IPR trial.

The outcome of each of the IPR proceedings related to each of these patents may affect the underlying collectability of the jury award in this matter.

September 2021 Lincoln Park 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 three months ended March 30, 2024, Lincoln Park purchased an aggregate of 1,240,000 shares of our common stock for a net purchase price of $2.1 million under the September 2021 Purchase Agreement.

During the six months ended June 29, 2024, Lincoln Park purchased an aggregate of 3,195,889 shares of our common stock for a net purchase price of $5.2 million under the September 2021 Purchase Agreement.

In connection with the purchases, we issued to Lincoln Park an aggregate of 10,046 shares of our common stock as additional commitment shares in noncash transactions.

5 unchanged sentences

Net Sales and Gross Profit

Net sales and gross profit for the three months ended March 30, 2024 and April 1, 2023 were as follows (dollars in thousands):

Net sales and gross profit for the three and six months ended June 29, 2024 and July 1, 2023 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 modules (“DIMMs”) and solid-state drives (“SSDs”).

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

Net sales increased by approximately $26.8 million during the first quarter of 2024 compared to the same period of 2023, primarily as a result of a $24.2 million increase in the sale of registered DIMM (“RDIMM”) and discrete memory component products, a $1.5 million increase in sales of Netlist’s flash and SSD products, and a $1.1 million increase in sales of low-profile memory subsystem products.

Net sales increased by approximately $26.8 million during the second quarter of 2024 compared to the same period of 202 3, primarily as a result of a $23.0 million increase in the sale of registered DIMM (“RDIMM”) and discrete memory component products, a $2.5 million increase in sales of our flash and SSD products, and a $1.2 million increase in sales of low-profile memory subsystem products.

Net sales increased by approximately $53.6 million during the first six months of 2024 compared to the same period of 2023, primarily as a result of a $47.3 million increase in the sale of RDIMM and discrete memory component products, a $4.1 million increase in sales of our flash and SSD products, and a $2.3 million increase in sales of low-profile memory subsystem products.

Gross Profit and Gross Margin

Product gross profit increased during the first quarter of 2024 compared to the same period of 2023, primarily as a result of higher sales across all product groups.

Product gross margin percentage decreased during the first quarter of 2024 compared to the same period of 2023, primarily as a result of product sales mix.

Gross profit increased during the second quarter and first six months of 2024 compared to the same periods of 2023, primarily because higher sales across all product groups.

Gross margin percentage decreased during the first six months of 2024 compared to the same period in 2023, primarily as a result of product sales mix.

Operating Expenses

Operating expenses for the three months ended March 30, 2024 and April 1, 2023, were as follows (dollars in thousands):

Operating expenses for the three and six months ended June 29, 2024 and July 1, 2023, were as follows (dollars in thousands):

Three Months Ended

Six Months Ended

Research and development

5 unchanged sentences

Research and Development

Research and development expenses increased during the first quarter of 2024 compared to the same period of 2023 due primarily to an increase in employee headcount and related overhead.

Research and development expenses increased during the second quarter and first six months of 2024 compared to the same periods of 2023 due primarily to an increase in employee headcount and the related overhead.

Intellectual Property Legal Fees

Intellectual property legal fees consist of fees incurred for patent drafting and prosecution, opposition to third-party post-grant patent proceedings, and patent enforcement and licensing.

Although we expect intellectual property legal fees to generally increase over time as we continue to expand, protect and enforce our patent portfolio, these increases may not be linear but may occur in lump sums depending on the due dates of filings and their associated fees, and the arrangements we may make with our legal advisors in connection with enforcement proceedings, which may include fee arrangements or contingent fee arrangements in which we would pay these legal advisors on a scaled percentage of any negotiated fees, settlements or judgments awarded to us based on if, how and when the fees, settlements or judgments are obtained.

awarded to us based on if, how and when the fees, settlements or judgments are obtained.

See Note 5 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 2024 compared to the same period of 2023 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 2024 compared to the same periods of 2023 due primarily to higher legal expenses incurred to protect and enforce our patent portfolio.

Selling, General and Administrative

Selling, general and administrative expenses increased during the first quarter of 2024 compared to the same period of 2023 due primarily to an increase in employee headcount and overhead and outside services.

Other Income, Net

Other income, net for the three months ended March 30, 2024 and April 1, 2023 was as follows (dollars in thousands):

Three Months Ended

Interest income, net

Other income (expense), net

Total other income, net

Interest income, net increased during the first quarter of 2024 compared to the same period of 2023, primarily as a result of higher interest rate earned on higher cash balances.

Other income, net included sublease income for our warehouse space located in Irvine, California during the first quarter of 2024.

Selling, general and administrative expenses decreased during the second quarter and first six months of 2024 compared to the same periods of 2023 due primarily to a decrease in employee headcount and the related overhead and outside services.

Liquidity and Capital Resources

2 unchanged sentences

We have also funded our operations with a revolving line of credit under a bank credit facility with SVB.

The following tables present selected financial information as of March 30, 2024 and December 30, 2023 and for the first three months of 2024 and 2023 (in thousands):

The following tables present selected financial information as of June 29, 2024 and December 30, 2023 and for the first six months of 2024 and 2023 (in thousands):

Cash, cash equivalents and restricted cash

Debt due within one year

Working capital

Three Months Ended

Six Months Ended

Net cash used in operating activities

1 unchanged sentence

Net cash provided by financing activities

During the three months ended March 30, 2024, net cash used in operating activities was primarily a result of net loss of $17.0 million, non-cash adjustments to net loss of $1.6 million, and net cash inflows from changes in operating assets and liabilities of $1.1 million driven predominantly by an increase in accounts payable due to higher legal fees to defend our patent portfolio and an increase in accrued expenses and other liabilities, partially offset by an increase in inventories due to higher purchases to support increased sales.

Net cash provided by financing activities during the three months ended March 30, 2024 primarily consisted of $0.5 million in net borrowings under the 2023 SVB Credit Agreement (as defined below), $2.1 million in net proceeds from issuance of common stock under the September 2021 Purchase Agreement, offset by $0.1 million in payments of notes payable to finance insurance policies.

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 2023 SVB Credit Agreement and $0.1 million in payments of notes payable to finance insurance policies.

During the six months ended June 29, 2024, net cash used in operating activities was primarily a result of net loss of $31.7 million, non-cash adjustments to net loss of $3.0 million, and net cash inflows from changes in operating assets and liabilities of $6.7 million driven predominantly by an increase in deferred revenue related to an advance payment received on an order shipped in July 2024 and decrease in inventories due to higher turnovers, partially offset by the decrease in accounts payable due to the payments made for the legal fees incurred to defend our patent portfolio.

Net cash provided by financing activities during the six months ended June 29, 2024 primarily consisted of $5.2 million in net proceeds from issuance of common stock under the September 2021 Purchase Agreement, $0.7 million in net borrowings under the 2023 SVB Credit Agreement, offset by $0.3 million in payments of notes payable to finance insurance policies.

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 (as defined below), and $0.3 million in payments of notes payable to finance insurance policies.

Capital Resources

4 unchanged sentences

The maturity date is November 7, 2025.

As of March 30, 2024, the outstanding borrowings under the 2023 SVB Credit Agreement were $4.4 million with no availability under the revolving line of credit.

During the three months ended March 30, 2024, we made net borrowings of $0.5 million under the 2023 SVB Credit Agreement.

As of June 29, 2024, the outstanding borrowings under the 2023 SVB Credit Agreement were $4.6 million with no availability under the revolving line of credit.

During the six months ended June 29, 2024, we made net borrowings of $0.7 million under the 2023 SVB Credit Agreement.

2023 Offering

On August 14, 2023, we entered into a Securities Purchase Agreement (the “2023 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 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.

1 unchanged sentence

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 March 30, 2024, $34.1 million remains available under the September 2021 Purchase Agreement with Lincoln Park.

As of June 29, 2024, $31.0 million remains available under the September 2021 Purchase Agreement with Lincoln Park.

Sufficiency of Cash Balances and Potential Sources of Additional Capital

2 unchanged sentences

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditure or capital resources that is material to investors.

Recent Accounting Pronouncement

In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures, which updates reportable segment disclosure requirements on an annual and interim basis.

This ASU is effective for the annual period ending December 31, 2024, and the interim period thereafter.

Early adoption is permitted.

We will adopt this ASU using a retrospective transition method.

We are currently evaluating the impact of adopting this ASU.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740):

Improvements to Income Tax Disclosures, which will require us to disclose specified additional information in its income tax rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold.

This ASU is effective for annual periods beginning after December 15, 2024.

Early adoption is permitted.

We will adopt this ASU using either a prospective or retrospective transition method.

We are currently evaluating the impact of adopting this ASU.

Critical Accounting Policies and Use of Estimates

8 unchanged sentences

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