Item 1.01.
Entry into a Material Definitive Agreement.
As previously disclosed, in September 2016, Netlist, Inc. (the Company) filed legal proceedings for patent infringement against SK hynix Inc., a South Korean memory semiconductor supplier, and two of its subsidiaries in the U.S. International Trade Commission and in district court (collectively, the SK hynix Proceedings).
On May 3, 2017, the Company and TR Global Funding V, LLC, an affiliate of TRGP Capital Management, LLC (TRGP), entered into an investment agreement (the TRGP Agreement), pursuant to which TRGP has agreed to directly fund the costs incurred by or on behalf of the Company in connection with the SK hynix Proceedings and certain
inter partes
patent review proceedings relating to the Companys patents that are the subject of the SK hynix Proceedings, in each case including costs incurred since January 1, 2017 and as more fully described in the TRGP Agreement (all such funded costs, collectively, the Funded Costs). In exchange for such funding, the Company has agreed that, if the Company recovers any proceeds in connection with the SK hynix Proceedings, it will pay to TRGP the amount of the Funded Costs paid by TRGP plus an escalating premium based on when any such proceeds are recovered, such that the premium will equal a specified low-to-mid double-digit percentage of the amount of the Funded Costs and such percentage will increase by a specified low double-digit amount each quarter after a specified date until any such proceeds are recovered. In addition, pursuant to the terms of a separate security agreement between the Company and TRGP dated May 3, 2017 (the Security Agreement), the Company has granted to TRGP (i) a first-priority lien on, and security in, the claims underlying the SK hynix Proceedings and any proceeds that may be received by the Company in connection with such proceedings, and (ii) a second-priority lien on, and security in, the Companys patents that are the subject of the SK hynix Proceedings.
The TRGP Agreement does not impose financial covenants on the Company. Termination events under the TRGP Agreement include, among others, any failure by the Company to make payments to TRGP thereunder upon receipt of recoveries in the SK hynix Proceedings; the occurrence of certain bankruptcy events; certain breaches by the Company of its covenants under the TRGP Agreement or the Security Agreement; and the occurrence of a change of control of the Company. If any such termination event occurs, subject to certain cure periods for certain termination events, TRGP would have the right to terminate its obligations under the TRGP Agreement, including its obligation to make any further payments of Funded Costs after the termination date. In the event of any such termination by TRGP, the Company would continue to be obligated to pay TRGP the portion of any proceeds the Company may recover in connection with the SK hynix Proceedings that TRGP would have been entitled to receive absent such termination, as described above, and TRGP may also be entitled to seek additional remedies pursuant to the dispute resolution provisions of the TRGP Agreement.
In connection with the TRGP Agreement, TRGP entered into intercreditor agreements with SVIC No. 28 New Technology Business Investment L.L.P. (SVIC) and Silicon Valley Bank (SVB), each of which holds a security interest in certain of the Companys assets in connection with outstanding loans made to the Company, and SVIC and SVB entered into an intercreditor agreement with each other (such intercreditor agreements, collectively, the Intercreditor Agreements). Pursuant to the terms of the Intercreditor Agreements, TRGP, SVB and SVIC have agreed to their relative security interest priorities in the Companys assets. The Company consented and agreed to the terms of each of the Intercreditor Agreements.
The foregoing descriptions of the TRGP Agreement, the Security Agreement and the Intercreditor Agreements are intended to be summaries and do not purport to be complete. As a result, such descriptions are subject to, and qualified in their entirety by reference to, the full text of each such document, which will be filed as exhibits to the Companys Quarterly Report on Form 10-Q for the quarter ending June 30, 2017.