What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-07 compared with 2024-08-06 · 63 added, 33 removed, 100 unchanged (49% of the section changed)

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(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 collect any damages awarded to us in our litigation with Micron Technology, Inc.

● our beliefs and estimates regarding potential intellectual property suits or claims in process under current litigation;

● 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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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.

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.

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

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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.

During the third quarter of 2024, we recorded net sales of $40.2 million, gross profit of $1.1 million and net loss of $9.4 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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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 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.

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 had 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 28, 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.

On October 1, 2024, the September 2021 Purchase Agreement terminated on its terms.

2024 Offering

On October 11, 2024, we entered into a Securities Purchase Agreement (the “2024 Purchase Agreement”) with certain investors, pursuant to which we agreed to issue and sell to the investors in a registered offering (the “2024 Offering”) an aggregate of (i) 13,636,364 shares of our common stock, (ii) Series A Common Stock Purchase Warrants (the “Series A Warrants”) to purchase up to an aggregate of 13,636,364 shares of our common stock, and (iii) Series B Common Stock Purchase Warrants (the “Series B Warrants,” collectively, the “Warrants”) to purchase up to 13,636,364 shares of our common stock, at a per share purchase price of $1.10 per share and accompanying warrants.

The 2024 Offering closed on October 15, 2024.

The net proceeds to us were approximately $14.2 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.

The Series A Warrants have a term of five years from the issuance date, have an exercise price of $1.30 per share and provide for the cash payment of the value of the Series A Warrants based on the Black-Scholes pricing model upon the occurrence of certain fundamental transactions.

The Series B Warrants have a term of 100 days and have an exercise price of $1.10 per share.

On October 11, 2024, we entered into a Placement Agency Agreement (the “Placement Agreement”) with Roth Capital Partners, LLC (“Roth”), pursuant to which Roth agreed to act as our placement agent in

connection with the 2024 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 2024 Offering and upon the cash exercise of the Series B Warrants.

Pursuant to the 2024 Purchase Agreement, our director and executive officers entered into lock-up agreements with us, pursuant to which they agreed not to offer for sale, contract to sell, or sell any shares of our common stock or any securities convertible into, or exercisable or exchangeable for, shares of our common stock, for a period of 100 days from the closing of the 2024 Offering, subject to certain customary exceptions.

The 2024 Purchase Agreement also provides that we may not, subject to the exceptions described in the 2024 Purchase Agreement, effect or enter into any Variable Rate Transactions (as defined in the 2024 Purchase Agreement) until the one-year anniversary of the closing date of the 2024 Offering.

Economic Conditions, Challenges and Risks

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Net Sales and Gross Profit

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):

Net sales and gross profit for the three and nine months ended September 28, 2024 and September 30, 2023 were as follows (dollars in thousands):

Three Months Ended

Six Months Ended

Nine Months Ended

September 28,

September 30,

September 28,

September 30,

Cost of sales

Gross margin percentage

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.

Net sales increased by approximately $23.5 million during the third quarter of 2024 compared to the same period of 202 3, primarily as a result of a $23.9 million increase in the sale of registered DIMM (“RDIMM”) and discrete memory component products, partially offset by $1.1 million decrease in sales of our flash and solid-state drives (“SSD”) products.

Net sales increased by approximately $77.1 million during the first nine months of 2024 compared to the same period of 2023, primarily as a result of a $71.7 million increase in the sale of RDIMM and discrete memory component products and a $4.6 million increase in sales of our flash and SSD products.

Gross Profit and Gross Margin

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.

Gross profit increased during the third quarter and first nine months of 2024 compared to the same periods of 2023, primarily as a result of higher sales across all product groups.

Gross margin percentage was consistent during the first nine months of 2024 compared to the same period in 2023.

Operating Expenses

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

Operating expenses for the three and nine months ended September 28, 2024 and September 30, 2023, were as follows (dollars in thousands):

Three Months Ended

Six Months Ended

Nine Months Ended

September 28,

September 30,

September 28,

September 30,

Research and development

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Research and Development

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.

Research and development expenses slightly decreased during the third quarter of 2024 compared to the same period of 2023, primarily due to a decrease in the use of outside services.

Research and development expenses slightly increased during the first nine months of 2024 compared to the same periods of 2023 due primarily to an increase in the use of outside services.

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.

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

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 jury trial management, due dates of various 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.

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 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.

Intellectual property legal fees decreased during the third quarter and first nine months of 2024 compared to the same periods of 2023 due primarily to lower 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 2024 compared to the same periods of 2023 due primarily to a decrease in employee headcount and the related overhead and outside services.

Selling, general and administrative expenses slightly increased during the third quarter compared to the same periods of 2023 due primarily to a higher audit and public company related fees.

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

Liquidity and Capital Resources

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 with SVB.

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):

The following tables present selected financial information as of September 28, 2024 and December 30, 2023 and for the first nine months of 2024 and 2023 (in thousands):

September 28,

Cash, cash equivalents and restricted cash

Working capital

Six Months Ended

Nine Months Ended

September 28,

September 30,

Net cash used in operating activities

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Net cash provided by financing activities

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.

During the nine months ended September 28, 2024, net cash used in operating activities was primarily a result of net loss of $41.2 million, non-cash adjustments to net loss of $4.3 million, and net cash inflows from changes in operating assets and liabilities of $11.4 million driven predominantly by a decrease in inventories due to higher turnovers, increase in deferred revenue related to an advance payment received on an order shipped in October 2024 and decrease in accounts receivable due to faster cash collections, 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 nine months ended September 28, 2024 primarily consisted of $5.2 million in net proceeds from issuance of common stock under the September 2021 Purchase Agreement, partially offset by $2.3 million in net repayments under the 2023 SVB Credit Agreement and by $0.5 million in payments of notes payable to finance insurance policies.

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, partially offset by $4.9 million in net repayments under the credit agreement between us 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..

Capital Resources

2024 Offering

On October 11, 2024, we entered into the 2024 Purchase Agreement with certain investors, pursuant to which we agreed to issue and sell to the investors in the 2024 Offering an aggregate of 13,636,364 shares of our common stock and Series A Warrants and Series B Warrants, each to purchase up to an aggregate of 13,636,364 shares of our common stock (totaling 27,272,728 shares of our common stock) at a per share

purchase price of $1.10 per share.

The 2024 Offering closed on October 15, 2024.

The net proceeds to us from the 2024 Offering were approximately $14.2 million, after deducting placement agent fees and offering costs paid by us.

2023 SVB Credit Agreement

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The maturity date is November 7, 2025.

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.

As of September 28, 2024, the outstanding borrowings under the 2023 SVB Credit Agreement were $1.6 million with no availability under the revolving line of credit.

During the nine months ended September 28, 2024, we made net repayments of $2.3 million under the 2023 SVB Credit Agreement.

2023 Offering

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

On September 28, 2021, we entered into the September 2021 Purchase Agreement with Lincoln Park, pursuant to which we had 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 September 28, 2024, $31.0 million remained available under the September 2021 Purchase Agreement with Lincoln Park.

On October 1, 2024, the September 2021 Purchase Agreement terminated on its terms.

Sufficiency of Cash Balances and Potential Sources of Additional Capital

We believe our existing balance of cash and cash equivalents together with the cash received under the Strategic Agreement with SK hynix, proceeds from issuances of debt and equity securities, including our equity line with Lincoln Park, cash receipts from revenues, borrowing availability under the 2023 SVB Credit Agreement, the equity financing available under the September 2021 Purchase Agreement, funds raised through 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 the cash received under the Strategic Agreement with SK hynix, proceeds from issuances of debt and equity securities, including our equity line with Lincoln Park, cash receipts from revenues, borrowing availability under the 2023 SVB Credit Agreement, funds raised through 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