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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 1, 2023
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number: 001-33170
(Exact name of registrant as specified in its charter)
Delaware | 95-4812784 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
111 Academy, Suite 100 Irvine, California | 92617 | |
(Address of principal executive offices) | (Zip Code) |
(949) 435-0025
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ | Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company ☐ |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of August 3, 2023, there were 241,526,238 outstanding shares of the registrant’s common stock.
NETLIST, INC. AND SUBSIDIARIES
Form 10-Q
For the Quarter Ended July 1, 2023
TABLE OF CONTENTS
Page | ||||
3 | ||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 19 | |||
25 | ||||
25 | ||||
26 | ||||
26 | ||||
53 | ||||
54 | ||||
2
PART I. — FINANCIAL INFORMATION
Item 1. | Financial Statements |
NETLIST, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except par value)
July 1, | December 31, | |||||
| 2023 |
| 2022 | |||
(unaudited) | ||||||
ASSETS | ||||||
Current Assets: | ||||||
Cash and cash equivalents | $ | 24,348 | $ | 25,011 | ||
Restricted cash | 7,100 | 18,600 | ||||
Accounts receivable, net of allowances of $33 (2023) and $137 (2022) | 1,470 | 8,242 | ||||
Inventories | 9,953 | 10,686 | ||||
Prepaid expenses and other current assets | 736 | 1,308 | ||||
Total current assets | 43,607 | 63,847 | ||||
Property and equipment, net | 943 | 1,138 | ||||
Operating lease right-of-use assets | 1,915 | 2,043 | ||||
Other assets | 542 | 295 | ||||
Total assets | $ | 47,007 | $ | 67,323 | ||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||
Current Liabilities: | ||||||
Accounts payable | $ | 21,033 | $ | 28,468 | ||
Revolving line of credit | — | 4,935 | ||||
Accrued payroll and related liabilities | 1,317 | 1,588 | ||||
Accrued expenses and other current liabilities | 1,184 | 2,635 | ||||
Long-term debt due within one year | 152 | 447 | ||||
Total current liabilities | 23,686 | 38,073 | ||||
Operating lease liabilities | 1,483 | 1,744 | ||||
Other liabilities | 189 | 270 | ||||
Total liabilities | 25,358 | 40,087 | ||||
Commitments and contingencies | ||||||
Stockholders' equity: | ||||||
Preferred stock, $0.001 par value—10,000 shares authorized: Series A preferred stock, $0.001 par value; 1,000 shares authorized; none issued and outstanding | ||||||
Common stock, $0.001 par value—450,000 shares authorized; 241,307 and 232,557 shares issued and outstanding | 241 | 233 | ||||
Additional paid-in capital | 274,649 | 250,428 | ||||
Accumulated deficit | (253,241) | (223,425) | ||||
Total stockholders' equity | 21,649 | 27,236 | ||||
Total liabilities and stockholders' equity | $ | 47,007 | $ | 67,323 | ||
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 | Six Months Ended | ||||||||||||
July 1, | July 2, | July 1, | July 2, | ||||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||
Net sales | $ | 10,026 | $ | 55,358 | $ | 19,047 | $ | 105,558 | |||||
Cost of sales | 9,787 | 50,610 | 18,248 | 97,447 | |||||||||
Gross profit | 239 | 4,748 | 799 | 8,111 | |||||||||
Operating expenses: | |||||||||||||
Research and development | 2,255 | 2,672 | 4,556 | 5,129 | |||||||||
Intellectual property legal fees | 8,947 | 3,313 | 20,017 | 6,139 | |||||||||
Selling, general and administrative | 3,325 | 3,724 | 6,355 | 7,662 | |||||||||
Total operating expenses | 14,527 | 9,709 | 30,928 | 18,930 | |||||||||
Operating loss | (14,288) | (4,961) | (30,129) | (10,819) | |||||||||
Other income (expense), net: | |||||||||||||
Interest income, net | 277 | 15 | 333 | 4 | |||||||||
Other expense, net | (16) | (6) | (19) | (8) | |||||||||
Total other income (expense), net | 261 | 9 | 314 | (4) | |||||||||
Loss before provision for income taxes | (14,027) | (4,952) | (29,815) | (10,823) | |||||||||
Provision for income taxes | 1 | — | 1 | 1 | |||||||||
Net loss | $ | (14,028) | $ | (4,952) | $ | (29,816) | $ | (10,824) | |||||
Loss per share: | |||||||||||||
Basic and diluted | (0.06) | (0.02) | $ | (0.05) | |||||||||
Weighted-average common shares outstanding: | |||||||||||||
Basic and diluted | 240,382 | 231,298 | 237,752 | 230,922 | |||||||||
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 | 232,557 | $ | 233 | $ | 250,428 | $ | (223,425) | $ | 27,236 | |||||
Net loss | — | — | — | (15,788) | (15,788) | |||||||||
Issuance of common stock, net | 4,920 | 5 | 10,537 | — | 10,542 | |||||||||
Exercise of stock options | 381 | — | 264 | — | 264 | |||||||||
Stock-based compensation | — | — | 1,077 | — | 1,077 | |||||||||
Restricted stock units vested and distributed | 712 | 1 | (1) | — | — | |||||||||
Balance, April 1, 2023 | 238,570 | 239 | 262,305 | (239,213) | 23,331 | |||||||||
Net loss | — | — | — | (14,028) | (14,028) | |||||||||
Issuance of common stock, net | 2,422 | 2 | 11,008 | — | 11,010 | |||||||||
Exercise of stock options | 129 | — | 140 | — | 140 | |||||||||
Stock-based compensation | — | — | 1,196 | — | 1,196 | |||||||||
Restricted stock units vested and distributed | 186 | — | — | — | — | |||||||||
Balance, July 1, 2023 | 241,307 | $ | 241 | $ | 274,649 | $ | (253,241) | $ | 21,649 | |||||
Additional | Total | |||||||||||||
Common Stock | Paid-in | Accumulated | Stockholders' | |||||||||||
| Shares |
| Amount |
| Capital |
| Deficit |
| Equity | |||||
Balance, January 1, 2022 | 230,113 | $ | 231 | $ | 243,866 | $ | (190,055) | $ | 54,042 | |||||
Net loss | — | — | — | (5,872) | (5,872) | |||||||||
Issuance of common stock, net | 303 | — | 1,767 | — | 1,767 | |||||||||
Exercise of stock options | 197 | — | 138 | — | 138 | |||||||||
Stock-based compensation | — | — | 682 | — | 682 | |||||||||
Restricted stock units vested and distributed | 533 | 1 | (1) | — | — | |||||||||
Tax withholdings related to net share settlements of equity awards | (117) | — | (591) | — | (591) | |||||||||
Balance, April 2, 2022 | 231,029 | 232 | 245,861 | (195,927) | 50,166 | |||||||||
Net loss | — | — | — | (4,952) | (4,952) | |||||||||
Issuance of common stock, net | 354 | — | 1,973 | — | 1,973 | |||||||||
Exercise of stock options | 72 | — | 47 | — | 47 | |||||||||
Stock-based compensation | — | — | 790 | — | 790 | |||||||||
Restricted stock units vested and distributed | 50 | — | — | — | — | |||||||||
Tax withholdings related to net share settlements of equity awards | (17) | — | (108) | — | (108) | |||||||||
Balance, July 2, 2022 | 231,488 | $ | 232 | $ | 248,563 | $ | (200,879) | $ | 47,916 | |||||
See accompanying Notes to the Condensed Consolidated Statements.
5
NETLIST, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Six Months Ended | ||||||
July 1, | July 2, | |||||
| 2023 |
| 2022 | |||
Cash flows from operating activities: | ||||||
Net loss | $ | (29,816) | $ | (10,824) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||
Depreciation and amortization | 195 | 157 | ||||
Non-cash lease expense | 315 | 314 | ||||
Stock-based compensation | 2,273 | 1,472 | ||||
Changes in operating assets and liabilities: | ||||||
Accounts receivable | 6,772 | 399 | ||||
Inventories | 733 | (6,187) | ||||
Prepaid expenses and other assets | 325 | 83 | ||||
Accounts payable | (7,435) | 12,422 | ||||
Accrued payroll and related liabilities | (271) | 122 | ||||
Accrued expenses and other liabilities | (1,876) | 609 | ||||
Net cash used in operating activities | (28,785) | (1,433) | ||||
Cash flows from investing activities: | ||||||
Acquisition of property and equipment | — | (326) | ||||
Net cash used in investing activities | — | (326) | ||||
Cash flows from financing activities: | ||||||
Net borrowings (repayments) under line of credit | (4,935) | 1,019 | ||||
Principal repayments under finance lease | (104) | (27) | ||||
Payments on notes payable | (295) | (373) | ||||
Proceeds from issuance of common stock, net | 21,552 | 3,740 | ||||
Proceeds from exercise of stock options | 404 | 185 | ||||
Payments for taxes related to net share settlement of equity awards | — | (699) | ||||
Net cash provided by financing activities | 16,622 | 3,845 | ||||
Net change in cash, cash equivalents and restricted cash | (12,163) | 2,086 | ||||
Cash, cash equivalents and restricted cash at beginning of period | 43,611 | 58,479 | ||||
Cash, cash equivalents and restricted cash at end of period | $ | 31,448 | $ | 60,565 | ||
Reconciliation of cash, cash equivalents and restricted cash at end of period: | ||||||
Cash and cash equivalents | $ | 24,348 | $ | 40,465 | ||
Restricted cash | 7,100 | 20,100 | ||||
Cash, cash equivalents and restricted cash at end of period | $ | 31,448 | $ | 60,565 | ||
See accompanying Notes to the Condensed Consolidated Statements.
6
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 July 1, 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 52- or 53-week period that ends on the Saturday nearest to December 31. The Company’s fiscal year 2023 will include 52 weeks and ends on December 30, 2023. Each quarter of fiscal year 2023 will be comprised of 13 weeks. Unless otherwise stated, references to particular years, quarters, months and periods refer to the Company’s fiscal years ended in January and the associated quarters, months and periods of those fiscal years.
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. Actual results may differ materially from those estimates.
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 financial statements that have not been previously discussed in the Company's 2022 Annual Report.
7
Note 3—Supplemental Financial Information
Inventories
Inventories consisted of the following (in thousands):
July 1, | December 31, | |||||
| 2023 |
| 2022 | |||
Raw materials | $ | 7,351 | $ | 8,223 | ||
Work in process | 3 | 185 | ||||
Finished goods | 2,599 | 2,278 | ||||
$ | 9,953 | $ | 10,686 | |||
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 | Six Months Ended | |||||||||||
July 1, | July 2, | July 1, | July 2, | |||||||||
2023 |
| 2022 |
| 2023 |
| 2022 | ||||||
Numerator: Net loss | $ | (14,028) | $ | (4,952) | $ | (29,816) | $ | (10,824) | ||||
Denominator: Weighted-average basic shares outstanding - basic and diluted | 240,382 | 231,298 | 237,752 | 230,922 | ||||||||
Net loss per share - basic and diluted | (0.06) | (0.02) | (0.13) | (0.05) | ||||||||
The table below shows potentially dilutive weighted average common share equivalents, consisting of shares issuable upon the exercise of outstanding stock options using the treasury stock method and the shares vesting of issuable upon the restricted stock units (“RSUs”). These potential weighted average common share equivalents have been excluded from the diluted net loss per share calculations above as their effect would be anti-dilutive (in thousands):
Three Months Ended | Six Months Ended | |||||||||||
July 1, | July 2, | July 1, | July 2, | |||||||||
2023 |
| 2022 |
| 2023 |
| 2022 | ||||||
Weighted average common share equivalents | 4,183 | 5,419 | 3,677 | 5,911 | ||||||||
Disaggregation of Net Sales
The following table shows disaggregated net sales by major source (in thousands):
Three Months Ended | Six Months Ended | |||||||||||
July 1, | July 2, | July 1, | July 2, | |||||||||
| 2023 | 2022 |
| 2023 | 2022 | |||||||
Resales of third-party products | $ | 8,589 | $ | 49,168 | $ | 15,498 | $ | 94,753 | ||||
Sale of the Company's modular memory subsystems | 1,437 | 6,190 | 3,549 | 10,805 | ||||||||
Total net sales | $ | 10,026 | $ | 55,358 | $ | 19,047 | $ | 105,558 | ||||
8
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 | Six Months Ended | |||||||
July 1, | July 2, | July 1, | July 2, | |||||
2023 | 2022 | 2023 | 2022 | |||||
Customer A | 36% | 32% | 42% | 42% | ||||
Customer B | * | 23% | * | 16% | ||||
Customer C | 27% | * | 14% | * | ||||
* | Less than 10% of net sales during the period. |
As of July 1, 2023, four customers represented approximately 20%, 18%, 13% and 10% of aggregated gross accounts receivables, respectively. As of December 31, 2022, one customer represented approximately 69% of aggregate gross accounts receivables. The loss of a major customer or a reduction in sales to or difficulties collecting payments from these customers could significantly reduce the Company’s net sales and adversely affect its operating results. The Company mitigates risks associated with foreign and domestic receivables by purchasing comprehensive credit insurance.
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 the three and six months ended July 1, 2023, resales of these products represented approximately 86% and 81% of net product sales, respectively. For the three and six months ended July 2, 2022, resales of these products represented approximately 89% and 90% of net product sales, respectively.
Note 4—Credit Agreement and Standby Letters of Credit
SVB Credit Agreement
On October 31, 2009, the Company and Silicon Valley Bank (“SVB”) entered into a credit agreement, as the same may from time to time be amended, modified, supplemented or restated, (the “SVB Credit Agreement”), which provided for a revolving line of credit up to $10.0 million, as amended. The SVB Credit Agreement was most recently amended on April 29, 2022 to add 50% of eligible inventory to the previous borrowing base limited to 85% of eligible accounts receivable, subject to certain adjustments. Borrowings accrued interest on advance at a per annum rate equal to the greater of 0.75% above the Wall Street Journal prime rate (“Prime Rate”).
The SVB Credit Agreement required letters of credit to be secured by cash, which were classified as restricted cash in the accompanying condensed consolidated balance sheets. As of December 31, 2022, (i) outstanding letters of credit were $18.6 million, (ii) outstanding borrowings were $4.9 million, and (iii) availability under the revolving line of credit was $0.
On the maturity date, April 28, 2023, the SVB Credit Agreement terminated in accordance with its terms. In connection with the termination of the SVB Credit Agreement, all outstanding obligations for principal, interest, and fees were paid in full and all liens securing such obligations were released.
Standby Letters of Credit
On May 15, 2023 and June 6, 2023, Citibank, N.A. issued on our behalf to third parties irrevocable letters of credit in the amount of $5.0 million and $2.0 million, respectively. The standby letters of credit are valid for a one-year term. As of July 1, 2023, the amount of outstanding letters of credit was approximately $7.0 million, and no amount has
9
been drawn from the letters of credit. A standby letter of credit is a guarantee of payment issued by a bank on our behalf that is used as payment of last resort should we fail to fulfill a contractual commitment with a third party.
Note 5—Debt
The Company’s debt consisted of the following (in thousands):
July 1, | December 31, | |||||
| 2023 |
| 2022 | |||
Notes payable | $ | 152 | $ | 447 | ||
Less: amounts due within one year | (152) | (447) | ||||
Long-term debt | $ | — | $ | — | ||
Insurance Policy Finance Agreement
As of July 1, 2023 and December 31, 2022, we had $0.2 million and $0.4 million, respectively, in short-term notes payable for the financing of insurance policies. On January 4, 2023, we entered into a short-term note payable for $0.4 million bearing interest at 7.2% to finance insurance policies. Principal and interest payments on this note began January 15, 2023 and are made evenly based on a straight line amortization over a period.
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 | Six Months Ended | |||||||||||
July 1, | July 2, | July 1, | July 2, | |||||||||
| 2023 | 2022 |
| 2023 |
| 2022 | ||||||
Lease cost: | ||||||||||||
Operating lease cost | $ | 194 | $ | 198 | $ | 389 | $ | 396 | ||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||
Operating cash flows from operating leases | $ | 169 | $ | 170 | $ | 338 | $ | 319 | ||||
Operating cash flows from finance leases | 3 | 2 | 6 | 3 | ||||||||
Financing cash flows from finance leases | 52 | 21 | 104 | 27 | ||||||||
Right-of-use assets obtained in exchange for lease obligations: | ||||||||||||
Operating leases | $ | — | $ | 33 | $ | — | $ | 588 | ||||
Finance leases | $ | — | $ | 372 | $ | — | $ | 372 | ||||
Lease modification to increase operating lease assets | $ | 187 | $ | 204 | $ | 187 | $ | 204 | ||||
For the three and six months ended July 1, 2023 and July 2, 2022, finance lease costs were immaterial.
10
Supplemental condensed consolidated balance sheet information related to leases was as follows (in thousands):
The following table includes supplemental information:
July 1, | December 31, | |||||
2023 | 2022 | |||||
Weighted Average Remaining Lease Term (in years) | ||||||
Operating leases | 3.3 | 3.9 | ||||
Finance leases | 1.0 | 1.5 | ||||
Weighted Average Discount Rate | ||||||
Operating leases | 5.8% | 5.5% | ||||
Finance leases | 4.4% | 4.4% | ||||
Maturities of lease liabilities as of July 1, 2023, were as follows (in thousands):
Operating | Finance | |||||
Fiscal Year | Leases | Leases | ||||
2023 (remainder of the year) | $ | 346 | $ | 110 | ||
2024 | 702 | 91 | ||||
2025 | 624 | 5 | ||||
2026 | 639 | 2 | ||||
2027 | 23 | — | ||||
Total lease payments | 2,334 | 208 | ||||
Less: imputed interest | (215) | (5) | ||||
Total | $ | 2,119 | $ | 203 | ||
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.
11
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.
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. 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 November 9, 2023.
On October 15, 2021, Samsung 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. On November 15, 2022, Google, LLC and Alphabet, Inc. 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 has heard oral arguments for Google’s Motion to Dismiss or alternatively, Sever and Stay and Dismiss Willfulness and Indirect Infringement Allegations. As of the reporting date, the case remains active and set for a claim construction hearing on October 20, 2023, and the Jury Trial is scheduled to begin 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”),
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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 stayed pending the outcome of the related IPR proceedings 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 has 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 entering a Final Written Decision finding claims 2, 6, and 22 of the ‘035 Patent patentable. As of the reporting date, the IPR trials under the ‘833 and ‘314 Patents are proceeding. Oral arguments for the ‘833 Patent occurred as scheduled on June 7, 2023. The ‘314 Patent IPRs are still set for a consolidated oral argument on August 15, 2023.
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. Currently, the Micron Dusseldorf Action is scheduled for oral hearings in April 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 as of the reporting date, the Court has not 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 Electronics Co. Ltd., Samsung Semiconductor Inc., and Samsung Electronics America Inc. (“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. As of the reporting date, the consolidated case stands ready to proceed with a claim construction hearing set for October 5, 2023 and 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 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
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matters were joined with the corresponding Samsung IPRs on the same patents. As of the reporting date, the ‘918 and ‘054 Patent IPRs are scheduled for an oral hearing on September 11, 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). As of the reporting date, Netlist’s deadline to provide its preliminary response to each of these Micron IPRs is August 24, 2023.
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, 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 conclusively 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. As of the reporting date, the Ninth Circuit Court of Appeals has not yet entered its Order on the matter.
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, LLC and Alphabet, Inc. (jointly “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. As of the reporting date, the Court has not entered an Order on Google’s motion, the Claim Construction hearing is still set for October 20, 2023, and the Jury Trial is still scheduled to begin on February 3, 2025.
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 $303 million for Samsung’s infringement. On May 30, 2023, Hon. Chief Judge Gilstrap conducted a bench trial to assess the merits of Samsung’s affirmative defenses excusing its infringement of only the ‘339, ‘918, and ‘054 Patents. As of the reporting date, the Court has not yet entered an Order regarding the outcome the May Bench Trial, or a Judgement contemplating both the Jury and Bench Trial.
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. Oral arguments for the joined Samsung ‘339 and ‘506 Patent IPRs were heard on July 19, 2023 and July 20, 2023, respectively. As of the reporting date, the Board has not issued a final written decision regarding Samsung’s IPRs of the ‘339 and ‘506 Patents.
On May 17, 2022, Samsung filed two IPR petitions contesting the validity of Netlist’s ‘918 and ‘054 Patents. On December 6, 2022, the Board instituted an IPR trial for the ‘054 Patent, and then instituted an IPR trial for the ‘918 Patent the next day. As of the reporting date, Micron has joined these Samsung IPRs on the ‘918 and ‘054 Patents, and oral arguments are set to be heard on September 11, 2023.
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. As of the reporting date, the infringement matters are set for an Oral Hearing in the Dusseldorf Court on September 5, 2023.
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. As of the reporting date, the consolidated case stands ready to proceed with a claim construction hearing set for October 5, 2023 and trial beginning on April 15, 2024.
On August 26, 2022, Samsung filed two IPR petitions contesting the validity of Netlist’s ‘060 and ‘160 Patents. On January 19, 2023, Netlist filed its Patent Owner Preliminary Responses in those proceedings. As of the reporting date, the Board instituted trials for both IPRs, set substantive briefing deadlines, and ultimately the date for oral argument on January 11, 2024.
On January 10, 2023, Samsung filed two IPR petitions contesting the validity of the ‘215 and ‘417 Patents. The Board accorded these IPRs a filing date of January 10, 2023 and Netlist filed its Patent Owner Preliminary Responses by the May 9, 2023 deadline. As of the reporting date, the Board has not yet entered an institution decision on either of Samsung’s IPR petitions here.
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 deadline to submit its preliminary response to the petition is September 14, 2023.
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)
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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 10,000,000 shares of serial preferred stock, with a par value of $0.001 per share. No shares of preferred stock were outstanding as of July 1, 2023 or December 31, 2022.
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 one right (each, a “Right”) for each outstanding share of the Company’s common stock to stockholders of record at the close of business on May 18, 2017 (the “Record Date”), and authorized the issuance of one Right for each share of the Company’s common stock issued by the Company (except as otherwise provided in the Rights Agreement) between the Record Date and the Distribution Date (as defined below).
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, one unit consisting of one -thousandth of a share (a “Unit”) of Series A Preferred Stock of the Company (the “Preferred Stock”), at a purchase price of $6.56 per Unit, subject to adjustment. Subject to the provisions of the Rights Agreement, including certain exceptions specified therein, a distribution date for the Rights (the “Distribution Date”) will occur upon the earlier of (i) 10 business days following a public announcement that a person or group of affiliated or associated persons (an “Acquiring Person”) has acquired or otherwise obtained beneficial ownership of 15% or more of the then-outstanding shares of the Company’s common stock, and (ii) business days (or such later date as may be determined by the Company’s board of directors) following the commencement of a tender offer or exchange offer that would result in a person or group becoming an Acquiring Person. The Rights are not exercisable until the Distribution Date and, unless earlier redeemed or exchanged by the Company pursuant to the terms of the Rights Agreement (as amended on April 16, 2018, April 16, 2019 and August 14, 2020) will expire on the close of business on April 17, 2024.
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 1,000,000 shares of its serial preferred stock as Series A Preferred Stock and setting forth the rights, preferences and limitations of the Preferred Stock. The Company filed the Certificate of Designation with the Secretary of State of the State of Delaware on April 17, 2017.
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 $75 million in shares of its common stock subject to the conditions and limitations set forth in the September 2021 Purchase Agreement. As consideration for entering into the September 2021 Purchase Agreement, the Company issued to Lincoln Park 218,750 shares of its common stock as initial commitment
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shares in a noncash transaction on September 28, 2021 and will issue up to 143,750 additional shares of its common stock as additional commitment shares on a pro rata basis in connection with any additional purchases. The Company will not receive any cash proceeds from the issuance of these additional commitment shares.
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 9.99% of its common stock.
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 36 months after the date of the September 2021 Purchase Agreement. The Company has the right to terminate the September 2021 Purchase Agreement at any time, at no cost to the Company.
During 2022, Lincoln Park purchased an aggregate of 1,050,000 shares of our common stock for a net purchase price of $4.4 million under the September 2021 Purchase Agreement. In connection with the purchases, we issued to Lincoln Park an aggregate of 8,502 shares of our common stock as additional commitment shares in noncash transactions. During the six months ended July 1, 2023, Lincoln Park purchased an aggregate of 7,300,000 shares of our common stock for a net purchase price of $21.6 million under the September 2021 Purchase Agreement. In connection with the purchases, we issued to Lincoln Park an aggregate of 41,500 shares of our common stock as additional commitment shares in noncash transactions.
Subsequently, from July 2, 2023 through August 3, 2023, Lincoln Park purchased an aggregate of 160,000 shares of our common stock for a net purchase price of $0.5 million under the September 2021 Purchase Agreement. In connection with the purchases, we issued to Lincoln Park an aggregate of 947 shares of our common stock as additional commitment shares in noncash transactions.
Note 9—Stock-Based Awards
As of July 1, 2023, the Company had 113,836 shares of common stock reserved for future issuance under its Amended and Restated 2006 Incentive Plan (“Amended 2006 Plan”). Stock options granted under the Amended 2006 Plan generally vest at a rate of at least 25% per year over four years and expire 10 years from the grant date. RSUs granted for employees and consultants generally vest in equal installments annually and fully vest over a four-year term from the grant date.
Stock Options
The following table summarizes the activity related to stock options during the six months ended July 1, 2023:
Weighted- | ||||||
Number of | Average | |||||
Shares | Exercise | |||||
(in thousands) |
| Price | ||||
Outstanding as of December 31, 2022 | 4,866 | $ | 0.93 | |||
Granted | — | — | ||||
Exercised | (510) | 0.80 | ||||
Expired or forfeited | (147) | 2.22 | ||||
Outstanding as of July 1, 2023 | 4,209 | $ | 0.90 | |||
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Restricted Stock Units
The following table summarizes the activity related to RSUs during the six months ended July 1, 2023:
Weighted- | ||||||
Average | ||||||
Number of | Grant-Date | |||||
Shares | Fair Value | |||||
(in thousands) | per Share | |||||
Balance nonvested as of December 31, 2022 | 3,442 | $ | 3.36 | |||
Granted | 1,579 | 3.36 | ||||
Vested | (898) | 2.38 | ||||
Forfeited | (180) | 3.89 | ||||
Balance nonvested as of July 1, 2023 | 3,943 | $ | 3.55 | |||
Stock-Based Compensation
The following table summarizes the stock-based compensation expense by line item in the condensed consolidated statements of operations (in thousands):
Three Months Ended |
| Six Months Ended | |||||||||||
July 1, | July 2, | July 1, | July 2, | ||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||
Cost of sales | $ | 53 | $ | 16 | $ | 71 | $ | 19 | |||||
Research and development | 186 | 215 | 460 | 391 | |||||||||
Selling, general and administrative | 957 | 559 | 1,742 | 1,062 | |||||||||
Total | $ | 1,196 | $ | 790 | $ | 2,273 | $ | 1,472 | |||||
As of July 1, 2023, the Company had approximately $11.3 million, net of estimated forfeitures, of unearned stock-based compensation, which it expects to recognize over a weighted-average period of approximately 2.9 years.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Note Regarding Forward-Looking Statements
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) and other parts of this report include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements other than historical facts and often address future events or our future performance. Words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “may,” “will,” “might,” “plan,” “predict,” “believe,” “should,” “could” and similar words or expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.
Forward-looking statements contained in this MD&A include statements about, among other things:
| ● | our beliefs regarding the market and demand for our products or the component products we resell; |
| ● | our ability to collect any damages awarded to us under an EDTX Court Judgment following the jury verdict entered in our favor and against Samsung; |
| ● | our ability to develop and launch new products that are attractive to the market and stimulate customer demand for these products; |
| ● | our plans relating to our intellectual property, including our goals of monetizing, licensing, expanding and defending our patent portfolio; |
| ● | our expectations and strategies regarding outstanding legal proceedings and patent reexaminations relating to our intellectual property portfolio; |
| ● | our expectations with respect to any strategic partnerships or other similar relationships we may pursue; |
| ● | the competitive landscape of our industry; |
| ● | general market, economic and political conditions; |
| ● | our business strategies and objectives; |
| ● | our expectations regarding our future operations and financial position, including revenues, costs and prospects, and our liquidity and capital resources, including cash flows, sufficiency of cash resources, efforts to reduce expenses and the potential for future financings; |
| ● | our ability to remediate any material weakness, maintain effective internal control over financial reporting; and |
| ● | the impact of the above factors and other future events on the market price and trading volume of our common stock. |
All forward-looking statements reflect management’s present assumptions, expectations and beliefs regarding future events and are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those expressed in or implied by any forward-looking statements. These risks and uncertainties include those described under “Risk Factors” in Part II, Item 1A of this report. In light of these risks and uncertainties, our forward-looking statements should not be relied on as predictions of future events. All forward-looking statements reflect our assumptions, expectations and beliefs only as of the date they are made, and except as required by law, we undertake no obligation to revise or update any forward-looking statements for any reason.
The following MD&A should be read in conjunction with our condensed consolidated financial statements and the related notes included in Part I, Item 1 of this report, as well as our 2022 Annual Report. All information presented herein is based on our fiscal calendar, and references to particular years, quarters, months or periods refer to our fiscal years ended in January or December and the associated quarters, months and periods of those fiscal years. 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.
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Overview
Netlist 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.
During the second quarter of 2023, we recorded net sales of $10.0 million, gross profit of $0.2 million and net loss of $14.0 million. 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. See “Recent Developments” and “Liquidity and Capital Resources” below for more information.
Recent Developments
Jury Verdict Against Samsung
On April 21, 2023, an EDTX jury awarded Netlist $303 million in compensatory damages against Samsung for its willful infringement of five Netlist Patents. The verdict resulted from a jury trial that lasted six Court days and involved the following Netlist patents: U.S. Patent Nos. 10,949,339, 11,016,918, 11,232,054, 8,787,060, and 9,318,160. The products found to infringe these patents were Samsung’s DDR4 LRDIMMs, DDR5 UDIMMs, DDR5 SODIMMs, DDR5 RDIMMs, and Samsung’s HBM2, HBM2E, and HBM3 components. As of the reporting date, Hon. Chief Judge Gilstrap has not yet entered his Final Judgment.
Termination of SVB Credit Agreement
On October 31, 2009, we entered into the SVB Credit Agreement, which provided for a revolving line of credit of up to $10.0 million, as amended. The SVB Credit Agreement was most recently amended on April 29, 2022 to add 50% of eligible inventory to the previous borrowing base limited to 85% of eligible accounts receivable, subject to certain adjustments. Borrowings accrued interest on advance at a per annum rate equal to the greater of 0.75% above the Prime Rate.
On the maturity date, April 28, 2023, the SVB Credit Agreement terminated in accordance with its terms. In connection with the termination of the SVB Credit Agreement, all outstanding obligations for principal, interest, and fees were paid in full and all liens securing such obligations were released.
September 2021 Lincoln Park Purchase Agreement
On September 28, 2021, we entered into the September 2021 Purchase Agreement with Lincoln Park, pursuant to which we have the right to sell to Lincoln Park up to an aggregate of $75 million in shares of our common stock over the 36-month term of the September 2021 Purchase Agreement subject to the conditions and limitations set forth in the September 2021 Purchase Agreement.
During the six months ended July 1, 2023, Lincoln Park purchased an aggregate of 7,300,000 shares of our common stock for a net purchase price of $21.6 million under the September 2021 Purchase Agreement. In connection with the purchases, we issued to Lincoln Park an aggregate of 41,500 shares of our common stock as additional commitment shares in noncash transactions.
Subsequently, from July 2, 2023 through August 3, 2023, Lincoln Park purchased an aggregate of 160,000 shares of our common stock for a net purchase price of $0.5 million under the September 2021 Purchase Agreement. In connection with the purchases, we issued to Lincoln Park an aggregate of 947 shares of our common stock as additional commitment shares in noncash transactions.
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Economic Conditions, Challenges and Risks
Our performance, financial condition and prospects are affected by a number of factors and are exposed to a number of risks and uncertainties. We operate in a competitive and rapidly evolving industry in which new risks emerge from time to time, and it is not possible for us to predict all of the risks we may face, nor can we assess the impact of all factors on our business or the extent to which any factor or combination of factors could cause actual results to differ from our expectations. See the discussion of certain risks that we face under “Risk Factors” in Part II, Item 1A of this report.
In recent periods, there has been a significant increase in worldwide supply of semiconductor memory and storage that has led to declines in demand and average selling prices for our products, which could materially and adversely affect our business, results of operations, or financial condition. Our suppliers generally seek to increase wafer output, improve yields, and reduce die size, which could result in further increases in worldwide supply and downward pressure on prices.
Results of Operations
Net Sales and Gross Profit
Net sales and gross profit for the three and six months ended July 1, 2023 and July 2, 2022 were as follows (dollars in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||||||||
July 1, | July 2, | % | July 1, | July 2, | % | |||||||||||||||||
| 2023 |
| 2022 |
| Change |
| Change |
| 2023 |
| 2022 |
| Change |
| Change | |||||||
Net sales | $ | 10,026 | $ | 55,358 | (45,332) | (82%) | $ | 19,047 | $ | 105,558 | (86,511) | (82%) | ||||||||||
Cost of sales | 9,787 | 50,610 | (40,823) | (81%) | 18,248 | 97,447 | (79,199) | (81%) | ||||||||||||||
Gross profit | $ | 239 | $ | 4,748 | $ | (4,509) | (95%) | $ | 799 | $ | 8,111 | $ | (7,312) | (90%) | ||||||||
Gross margin percentage | 2% | 9% | (7%) | 4% | 8% | (4%) | ||||||||||||||||
Net Sales
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 decreased by approximately $45.3 million during the second quarter of 2023 compared to the same period of 2022, primarily as a result of a $33.4 million decrease in the sale of registered DIMM (“RDIMM”) and discrete memory component products, a $3.8 million decrease in sales of Netlist’s flash and SSD products, and an $8.1 million decrease in sales of low-profile memory subsystem products.
Net sales decreased by approximately $86.5 million during the first six months of 2023 compared to the same period of 2022, primarily as a result of a $63.3 million decrease in the sale of RDIMM and discrete memory component products, a $5.6 million decrease in sales of Netlist’s flash and SSD products, and a $17.6 million decrease in sales of low-profile memory subsystem products.
Gross Profit and Gross Margin
Product gross profit and product gross margin percentage decreased during the second quarter and first six months of 2023 compared to the same periods of 2022, primarily as a result of lower sales across all product groups and a softer pricing environment.
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Operating Expenses
Operating expenses for the three and six months ended July 1, 2023 and July 2, 2022, were as follows (dollars in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||||||||
July 1, | July 2, | % | July 1, | July 2, | % | |||||||||||||||||
| 2023 |
| 2022 |
| Change |
| Change |
| 2023 |
| 2022 |
| Change |
| Change | |||||||
Research and development | $ | 2,255 | $ | 2,672 | $ | (417) | (16%) | $ | 4,556 | $ | 5,129 | $ | (573) | (11%) | ||||||||
Percentage of net sales | 22% | 5% | 24% | 5% | ||||||||||||||||||
Intellectual property legal fees | $ | 8,947 | $ | 3,313 | 5,634 | 170% | $ | 20,017 | $ | 6,139 | 13,878 | 226% | ||||||||||
Percentage of net sales | 89% | 6% | 105% | 6% | ||||||||||||||||||
Selling, general and administrative | $ | 3,325 | $ | 3,724 | (399) | (11%) | $ | 6,355 | $ | 7,662 | (1,307) | (17%) | ||||||||||
Percentage of net sales | 33% | 7% | 33% | 7% | ||||||||||||||||||
Research and Development
Research and development expenses decreased during the second quarter and first six months of 2023 compared to the same periods of 2022 due primarily to a decrease in employee headcount and related overhead.
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. See Note 7 to the condensed consolidated financial statements included in Part I, Item 1 of this report for further discussion.
Intellectual property legal fees increased during the second quarter and first six months of 2023 compared to the same periods of 2022 due primarily to higher legal expenses incurred to protect and enforce our patent portfolio.
Selling, General and Administrative
Selling, general and administrative expenses decreased during the second quarter and first six months of 2023 compared to the same periods of 2022 due primarily to a decrease in employee headcount and overhead and outside services.
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Other Income (Expense), Net
Other income (expense), net for the three and six months ended July 1, 2023 and July 2, 2022 was as follows (dollars in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||||||||
July 1, | July 2, | % | July 1, | July 2, | % | |||||||||||||||||
| 2023 |
| 2022 |
| Change |
| Change |
| 2023 |
| 2022 |
| Change |
| Change | |||||||
Interest income, net | $ | 277 | $ | 15 | $ | 262 | $ | 333 | $ | 4 | $ | 329 | ||||||||||
Other expense, net | (16) | (6) | (10) | (19) | (8) | (11) | ||||||||||||||||
Total other income (expense), net | $ | 261 | $ | 9 | $ | 252 | (2,800%) | $ | 314 | $ | (4) | $ | 318 | 7950% | ||||||||
Interest income, net increased during the second quarter and first six months of 2023 compared to the same periods of 2022, primarily as a result of higher interest rate earned on cash balances. During the second quarter and first six months of 2023, other expense was consistent compared with the same periods of 2022.
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.
The following tables present selected financial information as of July 1, 2023 and December 31, 2022 and for the first six months of 2023 and 2022 (in thousands):
July 1, | December 31, | |||||
| 2023 |
| 2022 | |||
Cash, cash equivalents and restricted cash | $ | 31,448 | $ | 43,611 | ||
Long-term debt due within one year | 152 | 447 | ||||
Working capital | 19,921 | 25,774 | ||||
Six Months Ended | ||||||
July 1, | July 2, | |||||
| 2023 |
| 2022 | |||
Net cash used in operating activities | $ | (28,785) | $ | (1,433) | ||
Net cash used in investing activities | - | (326) | ||||
Net cash provided by financing activities | 16,622 | 3,845 | ||||
During the six months ended July 1, 2023, net cash used in operating activities was primarily a result of net loss of $29.8 million, non-cash adjustments to net loss of $2.8 million, and net cash outflows from changes in operating assets and liabilities of $1.8 million due to a decrease in accounts payable and a decrease in accrued expenses and other liabilities, partially offset by a decrease in accounts receivable due to a decrease in inventories. Net cash provided by financing activities during the six months ended July 1, 2023 primarily consisted of $21.6 million in net proceeds from issuance of common stock under the September 2021 Purchase Agreement, $0.4 million in proceeds from exercise of stock options, offset by $4.9 million in net repayments under the SVB Credit Agreement, and $0.3 million in payments of notes payable to finance insurance policies.
During the six months ended July 2, 2022, net cash used in operating activities was primarily a result of net loss of $10.8 million, non-cash adjustments to net loss of $1.9 million, and net cash inflows from changes in operating assets and liabilities of $7.4 million driven predominantly by an increase in accounts payable due to higher inventory purchases to support an increase in sales and legal fees to defend our patent portfolio, and a decrease in accounts receivable, partially offset by an increase in inventories. Net cash provided by financing activities during the six months ended July
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2, 2022 primarily consisted of $1.0 million in net borrowings under the SVB Credit Agreement, $3.7 million in net proceeds from issuance of common stock under the September 2021 Purchase Agreement, $0.2 million in proceeds from exercise of stock options, offset by $0.4 million in payments of note payable to finance insurance policies and $0.7 million in payments for taxes related to net share settlement of equity awards.
Capital Resources
September 2021 Lincoln Park Purchase Agreement
On September 28, 2021, we entered into the September 2021 Purchase Agreement with Lincoln Park, pursuant to which we have the right to sell to Lincoln Park up to an aggregate of $75.0 million in shares of our common stock over the 36-month term of the September 2021 Purchase Agreement subject to the conditions and limitations set forth in the September 2021 Purchase Agreement. As of July 1, 2023, $38.1 million remains available under the September 2021 Purchase Agreement with Lincoln Park.
SVB Credit Agreement
On October 31, 2009, we entered into the SVB Credit Agreement, which provided for a revolving line of credit of up to $10.0 million, as amended. The SVB Credit Agreement was most recently amended on April 29, 2022 to add 50% of eligible inventory to the previous borrowing base limited to 85% of eligible accounts receivable, subject to certain adjustments. Borrowings accrued interest on advance at a per annum rate equal to the greater of 0.75% above the Prime Rate.
On the maturity date, April 28, 2023, the SVB Credit Agreement terminated in accordance with its terms. In connection with the termination of the SVB Credit Agreement, all outstanding obligations for principal, interest, and fees were paid in full and all liens securing such obligations were released.
Sufficiency of Cash Balances and Potential Sources of Additional Capital
We believe our existing balance of cash and cash equivalents together with cash receipts from revenues, the equity financing available under the September 2021 Purchase Agreement, funds raised through other future equity offerings and taking into account cash expected to be used in our operations, will be sufficient to meet our anticipated cash needs for at least the next 12 months.
Off-Balance Sheet Arrangements
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.
Critical Accounting Policies and Use of Estimates
The preparation of our condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of net sales and expenses during the reporting period. By their nature, these estimates and assumptions are subject to an inherent degree of uncertainty. We base our estimates and assumptions on our historical experience, knowledge of current conditions and our beliefs of what could occur in the future considering available information. We review our estimates and assumptions on an ongoing basis. Actual results may differ from our estimates, which may result in material adverse effects on our consolidated operating results and financial position.
Our critical accounting policies and estimates are discussed in Note 2 to the condensed consolidated financial statements in this report and in the notes to consolidated financial statements in Part II, Item 8 of our 2022 Annual
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Report and in the MD&A in our 2022 Annual Report. There have been no significant changes to our critical accounting policies since our 2022 Annual Report.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Foreign Currency Exchange Risk
The majority of our sales and our expenses are denominated in U.S. dollars. Since we operate in the People’s Republic of China (“PRC”), a percentage of our operational expenses are denominated in Chinese Renminbi (“RMB”) and exchange volatility could positively or negatively impact those operating costs. Additionally, we may hold certain assets and liabilities in local currency on our consolidated balance sheet. As the operational expenses in RMB is immaterial, we do not believe that foreign exchange volatility has a material impact on our current business or results of operations.
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.
Our management conducted an evaluation, with the participation of our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, due to the elimination of our audit committee in August 2020, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were not effective as of July 1, 2023.
Notwithstanding the material weakness in our internal control over financial reporting, we have concluded that the unaudited condensed consolidated financial statements included in this Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended July 1, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Remediation Initiatives
In an effort to address the identified material weakness and enhance our internal controls related to our lack of an independent board and audit committee, we continue to maintain our financial reporting process we followed to prepare consolidated financial statements in accordance with U.S. GAAP for audit committee meetings on a quarterly and annual basis. We engage all departments groups to identify risks to the achievement of our goals as a basis for determining how the risks should be managed. Our Chief Executive Officer and sole director will oversee the process to ensure all required disclosures are made in our consolidated financial statements on a quarterly and annual basis.
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PART II. — OTHER INFORMATION
Item 1. | Legal Proceedings |
The information under “Litigation and Patent Reexaminations” in Note 7 to the condensed consolidated financial statements included in Part I, Item 1 of this report is incorporated herein by reference.
Item 1A. Risk Factors
Risks Related to Our Business, Operations and Industry
| ● | Significant increases in worldwide supply of semiconductor memory and storage could lead to declines in demand and average selling prices for our products, which could materially and adversely affect our business, results of operations, or financial condition; |
| ● | We have historically incurred losses and may continue to incur losses; |
| ● | We maintain our cash at financial institutions, often in balances that exceed federally insured limits; |
| ● | We may not be able to collect the damages awarded to us in our litigation with Samsung, which could have an adverse impact on our business, financial condition and operating results; |
| ● | The vast majority of our net product sales in recent periods have been generated from resales of products, including products sourced from SK hynix, and any decline in these product resales could significantly harm our performance; |
| ● | We are subject to risks relating to our focus on developing our Compute Express Link (“CXL”) products for our target customer markets; |
| ● | Sales to a small number of customers have historically represented a significant portion of our net product sales, and the loss of, or a significant reduction in sales to, any one of these customers could materially harm our business; |
| ● | We are subject to risks of disruption in the supply of component products; |
| ● | Our customers require that our products undergo a lengthy and expensive qualification process without any assurance of sales; |
| ● | If we are unable to timely and cost-effectively develop new or enhanced products that achieve customer and market acceptance or technologies we can monetize, our revenues and prospects could be materially harmed; |