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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
or
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Commission file number:
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As of November 6, 2023, there were
NETLIST, INC. AND SUBSIDIARIES
Form 10-Q
For the Quarter Ended September 30, 2023
TABLE OF CONTENTS
Page | ||||
3 | ||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 21 | |||
28 | ||||
28 | ||||
28 | ||||
29 | ||||
56 | ||||
57 | ||||
58 | ||||
2
PART I. — FINANCIAL INFORMATION
Item 1. | Financial Statements |
NETLIST, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except par value)
September 30, | December 31, | |||||
| 2023 |
| 2022 | |||
(unaudited) | ||||||
ASSETS | ||||||
Current Assets: | ||||||
Cash and cash equivalents | $ | | $ | | ||
Restricted cash | | | ||||
Accounts receivable, net of allowances of $ | | | ||||
Inventories | | | ||||
Prepaid expenses and other current assets | | | ||||
Total current assets | | | ||||
Property and equipment, net | | | ||||
Operating lease right-of-use assets | | | ||||
Other assets | | | ||||
Total assets | $ | | $ | | ||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||
Current Liabilities: | ||||||
Accounts payable | $ | | $ | | ||
Revolving line of credit | — | | ||||
Accrued payroll and related liabilities | | | ||||
Accrued expenses and other current liabilities | | | ||||
Long-term debt due within one year | — | | ||||
Total current liabilities | | | ||||
Operating lease liabilities | | | ||||
Other liabilities | | | ||||
Total liabilities | | | ||||
Commitments and contingencies | ||||||
Stockholders' equity: | ||||||
Preferred stock, $ | ||||||
Common stock, $ | | | ||||
Additional paid-in capital | | | ||||
Accumulated deficit | ( | ( | ||||
Total stockholders' equity | | | ||||
Total liabilities and stockholders' equity | $ | | $ | | ||
See accompanying Notes to Condensed Consolidated Financial Statements.
3
NETLIST, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except per share amounts)
Three Months Ended | Nine Months Ended | ||||||||||||
September 30, | October 1, | September 30, | October 1, | ||||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||
Net sales | $ | | $ | | $ | | $ | | |||||
Cost of sales | | | | | |||||||||
Gross profit | | | | | |||||||||
Operating expenses: | |||||||||||||
Research and development | | | | | |||||||||
Intellectual property legal fees | | | | | |||||||||
Selling, general and administrative | | | | | |||||||||
Total operating expenses | | | | | |||||||||
Operating loss | ( | ( | ( | ( | |||||||||
Other income, net: | |||||||||||||
Interest income, net | | | | | |||||||||
Other income, net | | | | | |||||||||
Total other income, net | | | | | |||||||||
Loss before provision for income taxes | ( | ( | ( | ( | |||||||||
Provision for income taxes | — | — | | | |||||||||
Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Loss per share: | |||||||||||||
Basic and diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Weighted-average common shares outstanding: | |||||||||||||
Basic and diluted | | | | | |||||||||
See accompanying Notes to the Condensed Consolidated Statements.
4
B
NETLIST, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders Equity (Unaudited)
(In thousands)
Additional | Total | |||||||||||||
Common Stock | Paid-in | Accumulated | Stockholders' | |||||||||||
| Shares |
| Amount |
| Capital |
| Deficit |
| Equity | |||||
Balance, December 31, 2022 | | $ | | $ | | $ | ( | $ | | |||||
Net loss | — | — | — | ( | ( | |||||||||
Issuance of common stock, net | | | | — | | |||||||||
Exercise of stock options | | — | | — | | |||||||||
Stock-based compensation | — | — | | — | | |||||||||
Restricted stock units vested and distributed | | | ( | — | — | |||||||||
Balance, April 1, 2023 | | | ( | | ||||||||||
Net loss | — | — | — | ( | ( | |||||||||
Issuance of common stock, net | | | | — | | |||||||||
Exercise of stock options | | — | | — | | |||||||||
Stock-based compensation | — | — | | — | | |||||||||
Restricted stock units vested and distributed | | — | — | — | — | |||||||||
Balance, July 1, 2023 | | | ( | | ||||||||||
Net loss | — | — | — | ( | ( | |||||||||
Issuance of common stock, net | | | | — | | |||||||||
Exercise of stock options | | — | | — | | |||||||||
Stock-based compensation | — | — | | — | | |||||||||
Restricted stock units vested and distributed | | — | — | — | — | |||||||||
Balance, September 30, 2023 | | $ | $ | | $ | ( | $ | | ||||||
See accompanying Notes to the Condensed Consolidated Statements.
5
NETLIST, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders Equity (Unaudited) (Continued)
(In thousands)
Additional | Total | |||||||||||||
Common Stock | Paid-in | Accumulated | Stockholders' | |||||||||||
| Shares |
| Amount |
| Capital |
| Deficit |
| Equity | |||||
Balance, January 1, 2022 | | $ | | $ | | $ | ( | $ | | |||||
Net loss | — | — | — | ( | ( | |||||||||
Issuance of common stock, net | | — | | — | | |||||||||
Exercise of stock options | | — | | — | | |||||||||
Stock-based compensation | — | — | | — | | |||||||||
Restricted stock units vested and distributed | | | ( | — | — | |||||||||
Tax withholdings related to net share settlements of equity awards | ( | — | ( | — | ( | |||||||||
Balance, April 2, 2022 | | | | ( | | |||||||||
Net loss | — | — | — | ( | ( | |||||||||
Issuance of common stock, net | | — | | — | | |||||||||
Exercise of stock options | | — | | — | | |||||||||
Stock-based compensation | — | — | | — | | |||||||||
Restricted stock units vested and distributed | | — | — | — | — | |||||||||
Tax withholdings related to net share settlements of equity awards | ( | — | ( | — | ( | |||||||||
Balance, July 2, 2022 | | | | ( | | |||||||||
Net loss | — | — | — | ( | ( | |||||||||
Exercise of stock options | | — | | — | | |||||||||
Stock-based compensation | — | — | | — | | |||||||||
Restricted stock units vested and distributed | | | ( | — | — | |||||||||
Tax withholdings related to net share settlements of equity awards | ( | — | ( | — | ( | |||||||||
Balance, October 1, 2022 | | $ | | $ | | $ | ( | $ | | |||||
See accompanying Notes to the Condensed Consolidated Statements.
6
NETLIST, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Nine Months Ended | ||||||
September 30, | October 1, | |||||
| 2023 |
| 2022 | |||
Cash flows from operating activities: | ||||||
Net loss | $ | ( | $ | ( | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||
Depreciation and amortization | | | ||||
Non-cash lease expense | | | ||||
Stock-based compensation | | | ||||
Changes in operating assets and liabilities: | ||||||
Accounts receivable | | | ||||
Inventories | | ( | ||||
Prepaid expenses and other assets | | | ||||
Accounts payable | ( | ( | ||||
Accrued payroll and related liabilities | ( | | ||||
Accrued expenses and other liabilities | ( | | ||||
Net cash used in operating activities | ( | ( | ||||
Cash flows from investing activities: | ||||||
Acquisition of property and equipment | — | ( | ||||
Net cash used in investing activities | — | ( | ||||
Cash flows from financing activities: | ||||||
Net borrowings (repayments) under line of credit | ( | | ||||
Principal repayments under finance lease | ( | ( | ||||
Payments on notes payable | ( | ( | ||||
Proceeds from issuance of common stock, net | | | ||||
Proceeds from exercise of stock options | | | ||||
Payments for taxes related to net share settlement of equity awards | — | ( | ||||
Net cash provided by financing activities | | | ||||
Net change in cash, cash equivalents and restricted cash | | ( | ||||
Cash, cash equivalents and restricted cash at beginning of period | | | ||||
Cash, cash equivalents and restricted cash at end of period | $ | | $ | | ||
Reconciliation of cash, cash equivalents and restricted cash at end of period: | ||||||
Cash and cash equivalents | $ | | $ | | ||
Restricted cash | | | ||||
Cash, cash equivalents and restricted cash at end of period | $ | | $ | | ||
See accompanying Notes to the Condensed Consolidated Statements.
7
NETLIST, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1—Description of Business
Netlist, Inc. and its wholly owned subsidiaries (collectively the “Company,” “Netlist,” “we,” “us,” or “our”) provides high-performance memory solutions to enterprise customers in diverse industries. 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 also licenses its intellectual property.
Note 2—Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Certain information and footnote disclosures normally included in the condensed consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of and for the year ended December 31, 2022, included in the Company’s Annual Report on Form 10-K filed with the SEC on February 28, 2023 (the “2022 Annual Report”).
In the opinion of management, all adjustments for the fair presentation of the Company’s condensed consolidated financial statements have been made. The adjustments are of a normal recurring nature except as otherwise noted. The results of operations for the interim periods are not necessarily indicative of the results to be expected for other periods or the full fiscal year. The Company has evaluated events occurring subsequent to September 30, 2023 through the filing date of this Quarterly Report on Form 10-Q and concluded that there were no events that required recognition and disclosures other than those discussed elsewhere in the notes hereto.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Netlist, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Fiscal Year
The Company’s fiscal year is the
Use of Estimates
The preparation of the accompanying condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported. Significant items subject to such estimates and assumptions made by management include, but not limited to, the determination of inventory reserves, allowance for doubtful accounts, and the discount rate used for lease obligation. Actual results may differ materially from those estimates.
8
Recently Adopted Accounting Guidance
Currently, there are no Accounting Standards Updates that the Company is required to adopt that are likely to have a material effect on its consolidated financial statements that have not been previously discussed in the Company's 2022 Annual Report.
Note 3—Supplemental Financial Information
Inventories
Inventories consisted of the following (in thousands):
September 30, | December 31, | |||||
| 2023 |
| 2022 | |||
Raw materials | $ | | $ | | ||
Work in process | | | ||||
Finished goods | | | ||||
$ | | $ | | |||
Loss Per Share
The following table shows the computation of basic and diluted loss per share of common stock (in thousands, except per share data):
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | October 1, | September 30, | October 1, | |||||||||
2023 |
| 2022 |
| 2023 |
| 2022 | ||||||
Numerator: Net loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Denominator: Weighted-average basic shares outstanding - basic and diluted | | | | | ||||||||
Net loss per share - basic and diluted | $ | ( | $ | ( | $ | ( | $ | ( | ||||
The table below shows potentially dilutive weighted average common share equivalents, consisting of shares issuable upon the exercise of outstanding stock options and warrants using the treasury stock method and the shares vesting of issuable upon the restricted stock units (“RSUs”).
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | October 1, | September 30, | October 1, | |||||||||
2023 |
| 2022 |
| 2023 |
| 2022 | ||||||
Weighted average common share equivalents | | | | | ||||||||
Disaggregation of Net Sales
The following table shows disaggregated net sales by major source (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | October 1, | September 30, | October 1, | |||||||||
| 2023 | 2022 |
| 2023 | 2022 | |||||||
Resales of third-party products | $ | | $ | | $ | | $ | | ||||
Sale of the Company's modular memory subsystems | | | | | ||||||||
Total net sales | $ | | $ | | $ | | $ | | ||||
9
Major Customers and Products
The Company’s net product sales have historically been concentrated in a small number of customers. The following table sets forth the percentage of net product sales made to customers that each comprise 10% or more of total product sales:
Three Months Ended | Nine Months Ended | |||||||
September 30, | October 1, | September 30, | October 1, | |||||
2023 | 2022 | 2023 | 2022 | |||||
Customer A | ||||||||
Customer B | ||||||||
Customer C | * | * | * | |||||
* | Less than 10% of net sales during the period. |
As of September 30, 2023,
The Company resells certain component products to end-customers that are not reached in the distribution models of the component manufacturers, including storage customers, appliance customers, system builders and cloud and datacenter customers. For both the three and nine months ended September 30, 2023, resales of these products represented approximately
Note 4—Standby Letters of Credit
Standby Letters of Credit
On December 1, 2022, Silicon Valley Bank issued on our behalf to a third party an irrevocable letter of credit in the amount of $
Note 5—Debt
The Company’s debt consisted of the following (in thousands):
September 30, | December 31, | |||||
| 2023 |
| 2022 | |||
Notes payable | $ | — | $ | | ||
Less: amounts due within one year | — | ( | ||||
Long-term debt | $ | — | $ | — | ||
Insurance Policy Finance Agreement
10
As of December 31, 2022, we had $
Note 6—Leases
The Company has operating and finance leases primarily associated with office and manufacturing facilities and certain equipment. The determination of which discount rate to use when measuring the lease obligation was deemed a significant judgment.
Lease cost and supplemental condensed consolidated cash flow information related to operating and finance leases were as follows (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | October 1, | September 30, | October 1, | |||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 | |||||
Lease cost: | ||||||||||||
Operating lease cost | $ | | $ | | $ | | $ | | ||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||
Operating cash flows from operating leases | $ | | $ | | $ | | $ | | ||||
Operating cash flows from finance leases | | | | | ||||||||
Financing cash flows from finance leases | | | | | ||||||||
Right-of-use assets obtained in exchange for lease obligations: | ||||||||||||
Operating leases | $ | — | $ | — | $ | — | $ | | ||||
Finance leases | $ | — | $ | — | $ | — | $ | | ||||
Lease modification to increase operating lease assets | $ | — | $ | — | $ | | $ | | ||||
For the three and nine months ended September 30, 2023 and October 1, 2022, finance lease costs were immaterial.
Supplemental condensed consolidated balance sheet information related to leases was as follows (in thousands):
September 30, | December 31, | |||||
2023 | 2022 | |||||
Operating Leases | ||||||
Operating lease right-of-use assets | $ | | $ | | ||
$ | | $ | | |||
Operating lease liabilities | | | ||||
Total operating lease liabilities | $ | | $ | | ||
Finance Leases | ||||||
Property and equipment, at cost | $ | | $ | | ||
Accumulated depreciation | ( | ( | ||||
$ | | $ | | |||
$ | | $ | | |||
| | |||||
Total finance lease liabilities | $ | | $ | | ||
11
The following table includes supplemental information:
September 30, | December 31, | |||||
2023 | 2022 | |||||
Weighted Average Remaining Lease Term (in years) | ||||||
Operating leases | ||||||
Finance leases | ||||||
Weighted Average Discount Rate | ||||||
Operating leases | ||||||
Finance leases | ||||||
Maturities of lease liabilities as of September 30, 2023, were as follows (in thousands):
Operating | Finance | |||||
Fiscal Year | Leases | Leases | ||||
2023 (remainder of the year) | $ | | $ | | ||
2024 | | | ||||
2025 | | | ||||
2026 | | | ||||
2027 | | — | ||||
Total lease payments | | | ||||
Less: imputed interest | ( | ( | ||||
Total | $ | | $ | | ||
Note 7—Commitments and Contingencies
Contingent Legal Expenses
We may retain the services of law firms that specialize in patent licensing and enforcement and patent law in connection with our licensing and enforcement activities. These law firms may be retained on a contingent fee basis whereby such law firms are paid on a scaled percentage of any negotiated fee, settlements or judgments awarded based on how and when the fees, settlements or judgments are obtained.
Litigation and Patent Reexaminations
The Company is, from time to time, a party to litigation that arises in the normal course of its business operations. We own numerous patents and continue to seek to grow and strengthen our patent portfolio, which covers various aspects of our innovations and includes various claim scopes. We plan to pursue avenues to monetize our intellectual property portfolio, in which we would generate revenue by selling or licensing our technology, and we intend to vigorously enforce our patent rights against alleged infringers of such rights. We dedicate substantial resources to protecting and enforcing our intellectual property rights, including with patent infringement proceedings we file against third parties and defense of our patents against challenges made by way of reexamination and review proceedings at the U.S. Patent and Trademark Office (“USPTO”) and Patent Trial and Appeal Board (“PTAB” or the “Board”). We expect these activities to continue for the foreseeable future, with no guarantee that any ongoing or future patent protection or litigation activities will be successful, or that we will be able to monetize our intellectual property portfolio.
Any litigation, regardless of its outcome, is inherently uncertain, involves a significant dedication of resources, including time and capital, and diverts management’s attention from our other activities. As a result, any current or future claims, allegations, or challenges by or against third parties, whether eventually decided in our favor or settled, could materially adversely affect our business, financial condition and results of operations. Additionally, the outcome of pending or future litigation and/or related patent reviews and reexaminations, as well as any delay in their resolution, could affect our ability to continue to sell our products, protect against competition in the current and expected markets for our products or license or otherwise monetize our intellectual property rights in the future.
12
Google Litigations
On December 4, 2009, Netlist filed a patent infringement lawsuit against Google, Inc. (“Google”) in the U.S. District Court for the Northern District of California (the “NDCA”), seeking damages and injunctive relief based on Google’s alleged infringement of our U.S. Patent No. 7,619,912 (the “‘912 Patent”). The current judge assigned to the case, Hon. Chief Judge Seeborg, entered an order via stipulation on October 17, 2022 staying the NDCA Google case until the resolution of a pending case filed by Netlist, Inc. against Samsung Electronics Co., Ltd., Samsung Semiconductor Inc., and Samsung Electronics America Inc. (collectively, “Samsung”) in the United States District Court for the Eastern District of Texas (“EDTX”) (Netlist, Inc. v. Samsung Elecs. Co., Ltd. et al., Case No. 2:22-cv-00293-JRG).
On July 26, 2022, Netlist filed patent infringement claims against Google Cloud EMEA Limited, Google Germany GmbH, Redtec Computing GmbH, and Google, seeking damages based on those defendants’ infringement of European Patents EP 2,454,735 (“EP735”) and EP 3,404,660 (“EP660”), which both generally relate to load reduced dual in line memory modules (“LRDIMM”) technologies. As of the reporting date, Google has submitted its statements of defense. As of the reporting date, the date for oral hearings before the Dusseldorf Court is currently scheduled for April 11, 2024.
On October 15, 2021, Samsung Electronics Co., Ltd. (“SEC”) and Samsung Semiconductor Inc. (“SSI”) initiated a declaratory judgement action against Netlist in the U.S. District Court for the District of Delaware (“DDE”) (Samsung Elecs. Co., Ltd., et. al. v. Netlist, Inc., Case No. 1:21-cv-01453-RGA). On September 12, 2022, Netlist amended its Counterclaims to include counterclaims against Google, LLC and Alphabet, Inc (together, “Google”). On November 15, 2022, Google responded to Netlist’s Counterclaims by filing a Motion to Dismiss or alternatively to sever and stay the counterclaims. As of the reporting date, the Court heard oral arguments for Google’s Motion to Dismiss or alternatively, Sever and Stay and Dismiss Willfulness and Indirect Infringement Allegations. On October 10, 2023, the DDE Court entered an order granting-in-part and denying-in-part SECL and SSI’s prior motion to stay the matter in light of pending IPRs and a Ninth Circuit appeal, in effect staying claims with respect to the ‘218 and ‘595 patents, while allowing claims under the ‘523 patent to proceed. On October 20, 2023, the Court held a claim construction hearing involving all parties. As part of the hearing, the Court also sought feedback from parties as to the issue of whether the matter should be stayed pending review of the Ninth Circuit’s recent unpublished decision on the underlying Central District of California action. As of the reporting date, the case remains set for Jury Trial to commence on February 3, 2025.
Micron Litigations
On April 28, 2021, Netlist filed a complaint for patent infringement against Micron Technology, Inc. (“Micron”) in the U.S. District Court for the Western District of Texas, Waco Division (“WDTX”) (Case No. 6:21-cv00431 & Case No. 6:21-cv-00430). These proceedings are based on the alleged infringement by Micron’s LRDIMM and Micron’s non-volatile dual in line memory modules (“NVDIMM”) enterprise memory modules under four U.S. patents – U.S. Patent Nos. 10,489,314 (the “‘314 Patent”), 9,824,035 (the “‘035 Patent”), 10,268,608 (the “‘608 Patent”), and 8,301,833 (the “‘833 Patent”). The case was assigned to Hon. Judge Lee Yeakel, and the parties completed briefing on their claim construction arguments. On May 11, 2022, Judge Yeakel entered a stay of the case pending the resolution of Micron’s requested Inter Partes Review (“IPR”) proceedings against the four patents asserted by Netlist in this case (the ‘833, ‘035, ‘608, and ‘314 Patents). On May 4, 2023, the case was reassigned to Docket II in the WDTX Austin Division, given Hon. Judge Yeakel’s retirement. As of the reporting date, the matter remains and assigned to Docket II pending reassignment to an Article III Judge.
As noted above, Micron filed requests to bring IPR proceedings against Netlist’s ‘314, ‘035, ‘608, and ‘833 Patents. The PTAB granted Micron’s request for the ‘035, ‘833, and ‘314 Patents, but denied its request for the ‘608 Patent. The PTAB further denied Micron’s request for rehearing on the ‘608 Patent’s institution denial. Oral arguments were presented for the ‘035 Patent IPR on April 19, 2023, with the PTAB finding claims 2 and 6 of the ‘035 Patent patentable. On August 28, 2023, the PTAB determined that all challenged claims of the ‘833 patent were unpatentable. On October 30, 2023, the PTAB determined that all challenged claims of the ‘314 patent were patentable.
13
On March 31, 2022, Netlist filed patent infringement claims against Micron in Dusseldorf, Germany (“Micron Dusseldorf Action”), seeking damages based on their infringement of EP735 and EP660. On June 24, 2022, Netlist requested injunctive relief. Micron initiated a nullity proceeding against the asserted EP patents in this action, making Netlist’s response to the same as November 19, 2022. Primary briefing in the Micron Dusseldorf Action has concluded, while the German Federal Patent Court entered a preliminary opinion on EP735 and EP660 in a related invalidity proceedings that have been consolidated as of the reporting date. As of the reporting date, the Micron Dusseldorf Action is scheduled for oral hearings April 11, 2024.
On June 10, 2022, Netlist filed a complaint for patent infringement against Micron in the EDTX, Marshall Division (Case No. 2:22-cv-00203-JRG-RSP). These proceedings are based on the alleged infringement by Micron for the sale of its LRDIMMs, its memory modules utilizing on-board power management (“PMIC”), and its high bandwidth memory (“HBM”) components, under six U.S. Netlist patents: U.S. Patent Nos. 8,787,060 (the “‘060 Patent”), 9,318,160 (the “‘160 Patent), 10,860,506 (the “‘506 Patent”), 10,949,339 (the “‘339 Patent”), 11,016,918 (the “‘918 Patent”), and 11,232,054 (the “‘054 Patent”). The claim construction hearing took place before Hon. Magistrate Judge Roy Payne on July 26, 2023, and on October 30, 3023 the Court entered an Order confirming the Claim Construction outcome. The Jury Trial is scheduled to begin on January 22, 2024.
On August 1, 2022, Netlist filed a complaint for patent infringement against Micron in the EDTX (Case No. 2:22-cv-00294) under the ‘912 Patent, for Micron’s alleged infringement by the sale of its LRDIMMs and RDIMMs. On August 15, 2022, Netlist filed its first amended complaint, further addressing Micron’s infringement of U.S. Patent Nos. 9,858,215 (the “‘215 Patent”) and 11,093,417 (the “‘417 Patent”). On October 21, 2022, Hon. Chief Judge Gilstrap ordered that this Micron action and a parallel action by Netlist against defendants Samsung on the same patents (Case No. 2:22-cv-00293-JRG) be consolidated and set for a joint scheduling conference on November 17, 2022, further instructing that the Samsung action be considered the “LEAD CASE” and that any further filings from either action be submitted in that case for all pretrial matters. The claim construction hearing was advanced and took place before Hon. Chief Judge Gilstrap on September 26, 2023. As of the reporting date, the Court has not yet entered an Order confirming the Claim Construction outcomes, but the consolidated case has a docket control order listing trial beginning on April 15, 2024.
On November 18, 2022, Micron filed IPR requests contesting the validity of the ‘912, ‘339, and ‘506 Patents, along with motions requesting joinder to the pending Samsung IPRs related to the same patents (see below). As of the reporting date, Micron’s ‘912, ‘339, and ‘506 Patent IPRs have been joined with the corresponding Samsung IPR proceedings for the same respective patents. Oral hearings for the joined Samsung ‘339 and ‘506 Patents IPRs were held on July 19, 2023 and July 20, 2023, respectively. On June 30, 2023, the PTAB resumed the trial on the Samsung ‘912 Patent IPR (which included Micron’s claims via joinder) following USPTO Director Katherine Vidal’s sua sponte Director Review and scheduled the ‘912 Patent IPR for an oral hearing on January 31, 2024. On October 17, 2023 and October 18, 2023, the PTAB issued final written decisions stating that all challenged claims of the ‘506 and ‘339 Patents were unpatentable, respectively.
On January 6, 2023, Micron filed IPR requests contesting the validity of the ‘918 and ‘054 Patents, along with motions requesting joinder to the pending Samsung IPRs related to the same patents (see below). On June 23, 2023, the matters were joined with the corresponding Samsung IPRs on the same patents. On September 5, 2023, oral hearings for the ‘918 and ‘054 Patent IPRs were held. The matters are set for final written decisions, which may issue on or before December 7, 2023.
On May 8, 2023, Micron filed IPR requests contesting the validity of the ‘060 and ‘160 Patents, along with motions requesting joinder to the pending Samsung IPRs related to the same patents (see below). On October 26, 2023, the PTAB instituted the Micron ‘060 and ‘160 Patent IPRs and joined them with the earlier-filed ‘060 and ‘160 IPRs.
Samsung Litigations
On May 28, 2020, Netlist filed a complaint against Samsung in the U.S. District Court for the Central District of California for Samsung’s breach of the parties’ Joint Development and License Agreement (“JDLA”). On July 22, 2020,
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Netlist amended its complaint to seek a declaratory judgment that it properly terminated the JDLA in light of Samsung’s material breaches. On October 14, 2021, the Court entered summary judgment in Netlist’s favor and confirmed Netlist properly terminated the JDLA as of July 15, 2020. On February 15, 2022, the Court entered a final judgment in favor of Netlist on each of its three claims and confirmed that the licenses granted by Netlist under the JDLA were terminated. On February 25, 2022, Samsung filed a Notice of Appeal, and the Federal Court of Appeals for the Ninth Circuit Court of Appeals issued a Time Schedule Order on February 28, 2022. On August 4, 2022, Netlist filed a cross-appeal seeking the Appeal Court’s reconsideration of the District Court’s finding that the fees Netlist paid to PwC were consequential damages, rather than recoverable general damages. On June 8, 2023, the Ninth Circuit Court of Appeals heard oral arguments from both parties on the matter following completion of all briefing. On October 17, 2023, the Ninth Circuit panel issued an unpublished memorandum affirming-in-part and reversing-and-remanding-in-part the District Court’s rulings. On November 8, 2023, the Ninth Circuit issued a mandate to the California Central District Court.
On October 15, 2021, Samsung initiated a declaratory judgement action against Netlist in the DDE (Samsung Elecs. Co., Ltd., et. al. v. Netlist, Inc., Case No. 1:21-cv-01453-RGA), where it requested in relevant part that the DDE declare that Samsung does not infringe Netlist’s U.S. Patent Nos. 9,858,218 (the “‘218 Patent”), 10,217,523 (the “‘523 Patent”), 10,474,595 (the “‘595 Patent”), and the ‘506, ‘339, ‘912 and ‘918 Patents, while later seeking leave to add the ‘054 Patent (issued Jan. 25, 2022) to its action. On August 1, 2022, Hon. Judge Andrews dismissed all of Samsung’s counts related to Netlist’s ‘912, ‘506, ‘339, and ‘918 Patents, and denied Samsung’s request to bring its ‘054 claims in Delaware. On September 12, 2022, Netlist amended its Counterclaims to include counterclaims tying Google to the action. On November 15, 2022, Google responded to Netlist’s Counterclaims by filing a Motion to Dismiss or alternatively to Sever and Stay the counterclaims. On May 22, 2023, the Court heard oral arguments on Google’s Motion to Dismiss or alternatively, Sever and Stay and Dismiss Willfulness and Indirect Infringement Allegations. On October 10, 2023, the Court entered an order granting-in-part and denying-in-part Samsung’s prior motion to stay the matter in light of pending IPRs and a Ninth Circuit appeal, staying claims with respect to the ‘218 and ‘595 patents, while allowing claims under the ‘523 patent to proceed. As of the reporting date, the Court has not entered an Order on Google’s motion, but the Claim Construction hearing was held on October 20, 2023, and the Jury Trial is still scheduled to begin on February 3, 2025. Samsung has since filed another Motion to Stay given the recent Ninth Circuit decision. As of the reporting date, the parties are briefing the issues for the Court.
On November 19, 2021, Samsung filed IPR requests contesting the validity of the ‘218, the ‘595, and the ‘523 Patents. Netlist filed its initial responses to Samsung’s IPR petitions on February 18, 2022, contesting the institution of any IPR on the grounds propounded. As of the reporting date, the PTAB issued a final written decision finding all of the claims of the ‘523 Patent valid and patentable, while finding all of the claims of the ‘218 and ‘595 Patents unpatentable.
On December 20, 2021, Netlist filed a complaint for patent infringement against Samsung in the EDTX (Case No. 2:21-cv-00463-JRG) under the ‘506, ‘339, and ‘918 Patents. On May 3, 2022, Netlist entered a First Amended Complaint pursuant to the Federal Rules of Civil Procedure (“FRCP”) Rule 15, adding claims for infringement under three additional patents: the ‘060, ‘160, and ‘054 Patents. Netlist brought claims under the ‘339, ‘918, ‘054, ‘060, and ‘160 Patents in its Jury Trial, which concluded on April 21, 2023, with the entry of the jury’s verdict into the public record. The jury unanimously found that Samsung willfully infringed Netlist’s ‘339, ‘918, ‘054, ‘060, and ‘160 Patents through the sale of their DDR4 LRDIMMs, DDR5 DIMMs, and HBMs, and that none of the patent claims asserted at trial were invalid. The jury awarded Netlist, Inc. a total of approximately $
On February 17, 2022, Samsung filed an IPR request contesting the validity of only claim 16 within the ‘912 Patent. Samsung then filed two additional IPR requests contesting the validity of the ‘506 and ‘339 Patents. Netlist filed
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its Patent Owner’s Preliminary Response for the ‘912 and ‘339 Patent IPRs on July 21, 2022, and for the ‘506 Patent IPR on July 28, 2022. On January 19, 2023, the PTAB instituted IPR trials on both the ‘912 and ‘339 Patents. The following day, the PTAB instituted an IPR trial on the ‘506 Patent. On October 19, 2022, the PTAB instituted IPR trials on the ‘912 and ‘339 Patents, while two days later it instituted an IPR trial on the ’506 Patent. On January 5, 2023, USPTO Director Katherine K. Vidal entered an Order in the ‘912 Patent proceeding mandating a sua sponte Director review of the Board’s decision granting institution of the ‘912 Patent, and staying the underlying proceedings in lieu of a supplemental briefing schedule set by the Director herself. On February 3, 2023, Director Vidal entered a decision requiring the assigned Board to reevaluate Netlist’s request for discovery on the admitted relationship between Samsung and Google and reassess whether Google is a “Real Party in Interest.” On June 30, 2023, the Board resumed the trial on the Samsung ‘912 Patent IPR, which now also includes Micron’s claims via joinder (see above), and scheduled the ‘912 Patent IPR for further substantive briefing and an oral hearing on January 31, 2024. On October 17, 2023 and October 18, 2023, the PTAB issued final written decisions stating that all challenged claims of the ‘506 and ‘339 Patents were unpatentable, respectively.
On May 17, 2022, Samsung filed
On June 3, 2022, Netlist filed patent infringement lawsuits against Samsung in Dusseldorf, Germany, seeking damages for Samsung’s infringement of Netlist’s Patents EP735 and EP660. An Oral Hearing was held in the Dusseldorf Court on September 5, 2023 to determine the question of infringement specifically. The Court confirmed at the hearing that an Order would issue either staying the matter until a decision was reached on validity by the German Federal Patent Court, or a dismissal of the case if there were no infringement. On September 25, 2023, the Dusseldorf Court entered a stay of the matter until the German Federal Patent Court renders a decision in the nullity actions currently pending for the EP735 Patent and EP660 Patent. As of the reporting date, the German Federal Patent Court’s oral hearing on the EP735 Patent is set for March 2024, while the hearing on the EP660 Patent is set for July 2024.
On August 1, 2022, Netlist filed a complaint for patent infringement against Samsung in the EDTX (Case No. 2:22-cv-00293) under the ‘912 Patent, which relates generally to technologies to implement rank multiplication. On August 15, 2022, Netlist filed its first amended complaint here, further addressing Samsung’s infringement of the ‘215 and ‘417 Patents. On October 21, 2022, Hon. Chief Judge Gilstrap ordered that this action and a parallel action by Netlist against Micron on the same patents (22-cv-00294-JRG) be consolidated and set for a joint scheduling conference on November 17, 2022, further instructing that this Samsung action be considered the “LEAD CASE” and that any further filings from either action be submitted in therefore all pretrial matters. The claim construction hearing was advanced and took place before Hon. Chief Judge Gilstrap on September 26, 2023. As of the reporting date, the Court has not yet entered an Order confirming the Claim Construction outcomes, and the consolidated case still has a docket control order listing trial beginning on April 15, 2024.
On August 26, 2022, Samsung filed
On January 10, 2023, Samsung filed
On April 27, 2023, Samsung filed an IPR petition contesting the validity of the ‘608 Patent. The Board accorded Samsung’s IPR petition a filing date on June 14, 2023. As of the reporting date, Netlist’s has submitted its preliminary response to the petition. The PTAB will enter its institution decision on or before December 14, 2023.
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On October 9, 2023, Samsung initiated a declaratory judgement action against Netlist in the District of Delaware (Samsung Elecs. Co., Ltd., et. al. v. Netlist, Inc., Case No. 1:23-cv-01122-RGA), where it requested in relevant part that the DDE declare that Samsung does not infringe Netlist’s U.S. Patent No. 11,386,024 (the “‘024 Patent”) and that Netlist allegedly breached its contractual obligations to JEDEC and thus harmed Samsung as a third-party beneficiary.
Other Contingent Obligations
In the ordinary course of our business, we have made certain indemnities, commitments and guarantees pursuant to which we may be required to make payments in relation to certain transactions. These may include, among others: (i) intellectual property indemnities to our customers and licensees in connection with the use, sale and/or license of our products; (ii) indemnities to vendors and service providers pertaining to claims based on our negligence or willful misconduct; (iii) indemnities involving the accuracy of representations and warranties in certain contracts; (iv) indemnities to our directors and officers to the maximum extent permitted under the laws of the State of Delaware; (v) indemnities pertaining to all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with transactions contemplated by applicable investment or loan documents, as applicable; and (vi) indemnities or other claims related to certain real estate leases, under which we may be required to indemnify property owners for environmental and other liabilities or may face other claims arising from our use of the applicable premises. The duration of these indemnities, commitments and guarantees varies and, in certain cases, may be indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential for future payments we could be obligated to make. Historically, we have not been obligated to make significant payments as a result of these obligations, and no liabilities have been recorded for these indemnities, commitments and guarantees in the accompanying consolidated balance sheets.
Note 8—Stockholders’ Equity
Serial Preferred Stock
The Company’s authorized capital stock includes
On April 17, 2017, the Company entered into a rights agreement (as amended from time to time, the “Rights Agreement”) with Computershare Trust Company, N.A., as rights agent. In connection with the adoption of the Rights Agreement and pursuant to its terms, the Company’s board of directors authorized and declared a dividend of
Each Right entitles the registered holder, subject to the terms of the Rights Agreement, to purchase from the Company, when exercisable and subject to adjustment,
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In connection with the adoption of the Rights Agreement, the Company’s board of directors approved a Certificate of Designation of the Series A Preferred Stock (the “Certificate of Designation”) designating
Common Stock
September 2021 Lincoln Park Purchase Agreement
On September 28, 2021, the Company entered into a purchase agreement (the “September 2021 Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which the Company has the right to sell to Lincoln Park up to an aggregate of $
The Company controls the timing and amount of any sales of its common stock to Lincoln Park. There is no upper limit on the price per share that Lincoln Park must pay for the Company’s common stock under the September 2021 Purchase Agreement, but in no event will shares be sold to Lincoln Park on a day the closing price is less than the floor price specified in the September 2021 Purchase Agreement. In all instances, the Company may not sell shares of its common stock to Lincoln Park under the September 2021 Purchase Agreement if that would result in Lincoln Park beneficially owning more than
The September 2021 Purchase Agreement does not limit the Company’s ability to raise capital from other sources at the Company’s sole discretion, except that, subject to certain exceptions, the Company may not enter into any Variable Rate Transaction (as defined in the September 2021 Purchase Agreement, including the issuance of any floating conversion rate or variable priced equity-like securities) during the
During 2022, Lincoln Park purchased an aggregate of
2023 Offering
On August 14, 2023, the Company entered into a Securities Purchase Agreement (the “2023 Purchase Agreement”) with certain investors, pursuant to which the Company agreed to issue and sell to the investors in a registered offering (the “2023 Offering”) an aggregate of
In addition, pursuant to the 2023 Purchase Agreement, the Company and our director and executive officers entered into lock-up agreements (the “Lock-Up Agreements”), pursuant to which they agreed not to offer for sale,
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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 Offering. 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.
Note 9—Stock-Based Awards
As of September 30, 2023, the Company had
Stock Options
The following table summarizes the activity related to stock options during the nine months ended September 30, 2023:
Weighted- | ||||||
Number of | Average | |||||
Shares | Exercise | |||||
(in thousands) |
| Price | ||||
Outstanding as of December 31, 2022 | | $ | | |||
Granted | — | — | ||||
Exercised | ( | | ||||
Expired or forfeited | ( | | ||||
Outstanding as of September 30, 2023 | | $ | | |||
Restricted Stock Units
The following table summarizes the activity related to RSUs during the nine months ended September 30, 2023:
Weighted- | ||||||
Average | ||||||
Number of | Grant-Date | |||||
Shares | Fair Value | |||||
(in thousands) | per Share | |||||
Balance nonvested as of December 31, 2022 | | $ | | |||
Granted | | | ||||
Vested | ( | | ||||
Forfeited | ( | | ||||
Balance nonvested as of September 30, 2023 | | $ | | |||
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