What changed in this filing

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Item 1. Business

2022-03-01 compared with 2021-03-26 · 52 added, 68 removed, 119 unchanged (50% of the section changed)

We provide high-performance modular memory subsystems to customers in diverse industries that require enterprise and storage class memory solutions to empower critical business decisions.

We have a history of introducing disruptive new products, such as one of the first load-reduced dual in-line memory module ("LRDIMM") based on our distributed buffer architecture, which has been adopted by the industry for DDR4 LRDIMM.

We were also one of the first to bring NAND flash memory ("NAND flash") to the memory channel with our NVvault non-volatile dual in-line memory modules ("NVDIMM") using software-intensive controllers and merging dynamic random access memory integrated circuits (“DRAM ICs” or "DRAM") and NAND flash to solve data bottleneck and data retention challenges encountered in high-performance computing environments.

We also offer storage class memory products called HybriDIMM to address the growing need for real-time analytics in Big Data applications, in-memory databases, high performance computing and advanced data storage solutions.

We publicly demonstrated a HybriDIMM prototype in August 2016 and sampled HybriDIMM to select customers in the second half of 2017.

We are continuously developing and improving upon the HybriDIMM product while exploring opportunities with strategic partners.

Due to the ground-breaking product development work of our engineering teams, we have built a robust portfolio of over 130 issued and pending U.S.

and foreign patents, many seminal, in the areas of hybrid memory, storage class memory, rank multiplication and load reduction.

Since our inception, we have dedicated substantial resources to the development, protection and enforcement of technology innovations we believe are essential to our business.

Our early pioneering work in these areas has been broadly adopted in industry-standard registered dual in-line memory modules (“RDIMM”), LRDIMM and in NVDIMM.

Our objective is to continue to innovate in our field and invest further in our intellectual property portfolio, with the goal of monetizing our intellectual property through a combination of product sales and licensing, royalty or other revenue-producing arrangements, which may result from joint development or similar partnerships or defense of our patents through enforcement actions against parties we believe are infringing them.

We also resell solid state drives (“SSDs”), NAND flash, DRAM products and other 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.

Netlist provides high-performance solid state drives and modular memory solutions to enterprise customers in diverse industries.

Our NVMe SSDs in various capacities and form factors and the line of custom and specialty memory products bring industry-leading performance to server and storage appliance customers and cloud service providers.

We license our portfolio of intellectual property including patents, in server memory, hybrid memory and storage class memory, to companies that implement our technology.

Impact of COVID-19 on our Business

The extent of the continuing impact of the COVID-19 pandemic on our operational and financial performance is uncertain and will depend on many factors outside our control, including the timing, extent, trajectory and duration of the pandemic, the emergence of new variants, the development, availability, distribution and effectiveness of vaccines and treatments, the imposition of protective public safety measures, and the impact of the pandemic on the global economy.

We continue to monitor the situation and may take further actions altering our business operations that we determine are in the best interests of our employees, customers, suppliers, and stakeholders, or as required by federal, state, or local authorities.

As COVID-19 and its impacts are unprecedented and ever evolving, future events and effects related to the pandemic cannot be determined with precision and actual results could significantly differ from estimates or forecasts.

The global high-performance memory module market is driven by increasing demand from data center and enterprise storage applications for improved input/output performance, lower latency and data retention capabilities in the event of unexpected system failure.

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In order to manage and analyze this data, we believe new computing and memory architectures need to be developed to satisfy the needs in the industry.

In high-performance computing environments, such as cloud-based computing and Big Data applications, a system's overall processing speed is limited to the ability of the central processing unit ("CPU") to access data cached in memory.

Memory speeds have failed to keep pace with improvements in CPU processing speeds, resulting in buffering delays encountered in highly intensive computing environments.

To mitigate challenges arising from differences in CPU and memory clock speeds, data center operators have increased the number of servers in their facilities as well as the memory content in each server.

Memory capacity is expanded through the use of DIMMs, generally incorporating up to 16 GB of DRAM per module with today’s technology and moving up to 64/128 GB of DRAM per module and beyond.

Our technology enables an intelligent controller to be integrated onto the DIMM, in order to manage the rapid flow of data between the CPU and memory.

The number of DIMMs incorporated into a server increases in correlation with the number of processing cores in the CPU.

DDR4 DIMMs incorporate our load-reduction technology to mitigate

the trade-off between operating speed and memory capacity inherent in prior generations of server DIMM.

These load-reduced DIMMs, or LRDIMMs, are now the predominant memory technology used in high-capacity servers and high-performance computing clusters.

Technical challenges arising from the production of DRAM using leading edge semiconductor manufacturing processes is limiting the material's long-term viability as the high-speed memory of choice in demanding computing environments.

Conversely, NAND flash, while characterized by lower access speeds, is scaling down in cost and scaling up in density at a significantly better rate than DRAM.

Technical challenges arising from the production of dynamic random access memory integrated circuits (“DRAM ICs” or “DRAM”) using leading edge semiconductor manufacturing processes is limiting the material's long-term viability as the high-speed memory of choice in demanding computing environments.

Conversely, NAND flash memory (“NAND flash”), while characterized by lower access speeds, is scaling down in cost and scaling up in density at a significantly better rate than DRAM.

This has led the industry to explore alternative computer architectures and new memory materials capable of bridging DRAM's superior access speed with NAND flash's lower cost and higher densities.

We expect memory subsystems relying on intelligent controller technology to leverage NAND flash will most effectively address the industry's growing need for high-speed data management and analytics.

Product Technologies

Our portfolio of proprietary technologies and design techniques includes:

HybriDIMM Technology

HybriDIMM technology is, we believe, a breakthrough that allows for data that lives on a slower media, such as NAND flash, to coexist on the memory channel without breaking the deterministic nature of the memory channel.

A proprietary software protocol controls the movement of data between DRAM and NAND flash on the DIMM while maintaining the integrity of the memory channel.

HybriDIMM technology is material and protocol agnostic, allowing for leverage of future storage and memory technologies on the DIMM.

Distributed Buffer Architecture

We invented the distributed buffer architecture that enables the buffering of data signals along the bottom edge of the memory module using multiple data buffer devices distributed between the edge connector and the DRAM.

The result is shorter data paths, improved signal integrity, and reduced latency compared to the industry-standard design for DDR3 LRDIMM.

The memory industry has widely adopted our distributed architecture for DDR4 LRDIMM.

The result is shorter data paths, improved signal integrity, and reduced latency compared to the industry-standard design for DDR3 load-reduced dual in-line memory module ("LRDIMM").

The memory industry has widely adopted our

distributed architecture for DDR4 LRDIMM.

Our HyperCloud product was our first LRDIMM product built on this distributed buffer architecture.

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Our innovative very low profile (“VLP”) DIMMs provide developers of server blades, storage bridge bay applications, telecommunications servers, switches and routers with a wide range of high performance memory options where efficient use of motherboard space is critical.

Our technology has allowed us to decrease the system board space

required for memory, and improve thermal performance and operating speeds, by enabling our customers to use alternative methods of component layout.

Our technology has allowed us to decrease the system board space required for memory, and improve thermal performance and operating speeds, by enabling our customers to use alternative methods of component layout.

Thermal Management Designs

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Due to our relationships with memory channel customers, in addition to our own products, we resell certain component products that we purchase for the purpose of resale.

We have purchased certain of these products, including SSDs, NAND flash and DRAM products, from Samsung under the terms of a joint development and license agreement (“JDLA”).

We have also sourced these products from other suppliers to the extent sufficient product is not available from Samsung to meet customer demand or in the event of other Samsung supply issues.

In 2020 and 2019, resales of these products represented approximately 66% and 77% of our net sales, respectively.

We have purchased certain of these products under the terms of a product supply agreement with SK hynix, Inc.

(“SK hynix”).

We have also sourced resale products from other suppliers.

Additionally, we sell excess component inventory to distributors and other users of memory integrated circuits.

For information regarding our concentrations and customers, see Note 10 “Major Customers, Suppliers and Products” of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.

Storage Class Memory

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HybriDIMM unifies DRAM and NAND flash in a plug-and-play module, delivering terabyte storage capacities operating at DRAM-like nanosecond memory speeds.

HybriDIMM’s architecture combines an on-DIMM co-processor with our software-defined data management algorithm.

HybriDIMM’s feature set encompasses the NVDIMM functionalities adopted by the industry.

HybriDIMM’s architecture combines an on-DIMM co-processor

with our software-defined data management algorithm.

HybriDIMM’s feature set encompasses the non-volatile dual in-line memory modules (“NVDIMM”) functionalities adopted by the industry.

HybriDIMM dramatically improves application performance by reducing data access latency by up to 1,000 times versus the fastest existing storage solution known to us.

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We leverage a portfolio of proprietary technologies and design techniques, including efficient planar design, alternative packaging techniques and custom semiconductor logic, to deliver memory subsystems with persistence, high density, small form factor, high signal integrity, attractive thermal characteristics, reduced power consumption and low cost per bit.

Intellectual Property

We believe the strength of our intellectual property rights will be important to the success of our business.

We utilize patent and trade secret protection, confidentiality agreements with customers and partners, disclosure and invention assignment agreements with employees and consultants and other contractual provisions to protect our technologies and other proprietary information.

As of January 2, 2021, we had 98 U.S.

and foreign issued patents and 33 pending U.S and foreign patent applications.

Assuming they are properly maintained and are not invalidated by reexamination proceedings, our patents will expire at various dates between 2022 and 2035.

Our issued patents cover various aspects of our innovations and include various claim scopes and, as a result, we believe our business is not materially dependent on any one claim in any of our existing patents or pending patent applications.

We have devoted significant resources to develop and enforce our intellectual property portfolio.

For instance, we have taken action to protect and defend our innovations by filing legal proceedings for patent infringement against SK hynix and its subsidiaries in the U.S.

District Court for the Western District of Texas which remains ongoing.

All of our patents involved in these proceedings cover key features of RDIMM and LRDIMM products.

We resell certain component products that we purchase for the purpose of resale to certain 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.

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For further information about our customer concentrations, see Note 10 “Major Customers, Suppliers and Products” to our consolidated financial statements in Part II, Item 8 of this Form 10-K.

We do not consider our businesses to be seasonal to any significant degree.

We do not have long-term agreements with any of our customers.

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Additionally, they help us address the long-term business and technology goals of our customers.

We employ a team approach to business

development whereby our sales team and independent representatives identify, qualify and prioritize customer prospects through offices in a number of locations worldwide.

Manufacturing and Supply

We employ a team approach to business development whereby our sales team and independent representatives identify, qualify and prioritize customer prospects through offices in a number of locations worldwide.

Manufacturing

We manufacture memory subsystem products at our facility in the PRC, which is certified in International Organization for Standardization (“ISO”) 9001:2008 Quality Management Systems and ISO 14001:2004 Environmental Management Standards.

We manufacture memory subsystem products at our facility in the People’s Republic of China (“PRC”), which is certified in International Organization for Standardization (“ISO”) 9001:2008 Quality Management Systems and ISO 14001:2004 Environmental Management Standards.

Our in-house manufacturing function, combined with our engineering and design capabilities, allows us to assemble our memory subsystems quickly and in high volume.

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We acquire components and materials, such as field-programmable gate arrays (“FPGAs”), ASICs, DRAM ICs and NAND flash, directly from integrated circuit manufacturers and assemble them into our finished subsystem products.

We also purchase some of these component products from Samsung under the terms of the JDLA, and from alternative suppliers, for the purpose of resale to customers directly.

We have developed supplier relationships with several manufacturers of these component products, and we typically qualify our memory subsystem products with our customers using multiple component manufacturers.

However, our actual purchases of component products, both for integration into our products and for resale, are concentrated in a small number of suppliers, including an affiliate of Samsung, from which we obtained 28% and 37% of our total inventory purchases in 2020 and 2019, respectively, Memblaze Limited from which we obtained 14% of our total inventory purchases in 2020 and Techtronics (Singapore) Pte, Ltd from which we obtained 11% and 17% of our total inventory purchases in 2020 and 2019, respectively.

For further information about our supplier concentrations, see Note 12 “Major Customers, Suppliers and Products” to our consolidated financial statements in Part II, Item 8 of this Form 10-K.

However, our actual purchases of component products, both for integration into our products and for resale, are concentrated in a small number of suppliers.

Various factors could impact the availability of materials or components, and shortages or increases in lead times have occurred in the past, are currently occurring with respect to some materials and components, and may occur from time to time in the future.

We order component products based primarily on forecasts of customer demand, which subjects us to certain inventory risks in the event our forecasts are not accurate.

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Our quality assurance engineers work with our suppliers to ensure that the raw materials we receive meet our quality standards.

These engineers also perform on-site supplier factory audits and use our internal test and inspection systems to verify that purchased components and materials meet our specifications.

These engineers also perform on-site supplier factory audits and use our internal test and inspection systems to verify that purchased components and materials meet

our specifications.

Our supplier quality program and incoming material quality control program are important aspects of our manufacturing and sale processes.

As of January 1, 2022, we had 99 active U.S.

and foreign patents and 31 pending U.S and foreign patent applications.

Our patents have various terms expiring between 2022 and 2037.

Our products are primarily targeted to OEMs in the server, high-performance computing and communications markets.

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These markets are intensely competitive, as numerous companies vie for business opportunities at a limited number of large OEMs and other customers.

We face competition from DRAM suppliers, memory module providers and logic suppliers for many of our products, including NVvault and HybriDIMM.

We face competition from DRAM suppliers, memory module providers and logic suppliers for many of our products.

Additionally, if and to the extent we enter new markets or pursue licensing arrangements to monetize our technologies and intellectual property portfolio, we may face competition from a large number of competitors that produce solutions utilizing similar or competing technologies.

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Any of these actions could reduce our customers’ demand for our products or the component products we resell.

Additionally, some of our significant suppliers could choose to sell component products to customers directly, which would adversely affect our ability to resell these products, or may be choose to manufacture competitive memory subsystem products themselves or reduce our supply of essential components of our products, which could adversely affect our ability to manufacture and sell our memory subsystems.

Additionally, some of our significant suppliers could choose to sell component products to customers directly, which would adversely affect our ability to resell these products, or choose to manufacture competitive memory subsystem products themselves or reduce our supply of essential components of our products, which could adversely affect our ability to manufacture and sell our memory subsystems.

We believe the principal competitive factors in the selection of memory subsystems or the component products we resell by existing and potential future customers are:

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We believe the continued and timely development of new products and improvement of existing products are critical to our business and prospects for growth.

To this end, we have assembled a team of engineers with expertise in computer architectures, system memory, subsystem design and memory software, as well as PCB design, VLP design and thermal management.

Our engineers also focus on developing and incorporating new techniques, methodologies and processes for testing and manufacturing

our products, and also collaborate with our customers to provide us with insights into and expertise in systems architecture, power budget, performance requirements, operating environment (such as air flow and operating temperature) and any mechanical constraints.

To this end, we have assembled a team of engineers with expertise in computer architectures, system memory, subsystem design and memory software, ASIC design, as well as high density PCB design and thermal management.

Our engineers also focus on developing and incorporating new techniques, methodologies and processes for testing and manufacturing our products, and also collaborate with our customers to provide us with insights into and expertise in systems architecture, power budget, performance requirements, operating environment (such as air flow and operating temperature) and any mechanical constraints.

We have invested significant resources in our product research and development efforts.

Our customers typically do not separately compensate us for design and engineering work involved in developing application-specific products for them.

As of January 2, 2021, we had approximately 70 full-time and part-time employees.

Human Capital

As of January 1, 2022, we had approximately 120 full-time and part-time employees globally.

Our future success will depend in part on our ability to attract, retain and motivate highly qualified technical, managerial and other personnel for whom competition is intense.

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We have never experienced a work stoppage, and we believe our employee relations are good.

Compliance with Environmental and Other Laws

We promote an atmosphere of mutual respect and recognize that diversity creates differences in perspective that strengthens our business.

It is our practice to hire, motivate and retain people solely on the basis of ability, experience, training and future potential.

We invest in our workforce by offering competitive salaries, incentives, and benefits.

Our incentives are meritocracy-based and we have a strong pay for performance culture that we believe drives superior results.

We offer our employees opportunities to advance their careers at Netlist.

We are focused on leadership progression and encourage our employees take advantage of new opportunities.

Government Regulations

We are subject to various and frequently changing U.S.

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It is difficult and costly to manage the requirements of every authority having jurisdiction over our various activities and to comply with their varying standards.

Any changes to existing regulations or adoption of new regulations may result in significant additional expense to us or our customers.

Any changes to existing regulations or adoption of new regulations may result in significant

additional expense to us or our customers.

Further, our failure to comply with any applicable laws and regulations may result in a variety of administrative, civil and criminal enforcement measures, including monetary penalties or imposition of sanctions or other corrective requirements.

General Information

We were incorporated in Delaware in June 2000 and commenced operations in September 2000.

Our principal executive offices are located at 175 Technology Drive, Suite 150, Irvine, California 92618 and our telephone number at that address is (949) 435-0025.

Our corporate website address is www.netlist.com .

We file reports with the Securities and Exchange Commission (“SEC”) and make available, free of charge, on or through our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and information statements and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

Available Information

Information about us is available at our website, www.netlist.com.

Our filings are available free of charge on our website as soon as reasonably practicable after they are electronically filed with, or furnished to the Securities and Exchange Commission (“SEC”), including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and information statements and amendments to these reports or statements.

All SEC filings are also available at the SEC’s website at www.sec.gov.

Our website also contains copies of our corporate governance guidelines, code of business conduct and ethics, insider trading policy and whistleblower policy.

The information contained on the websites referenced in this Form 10-K is not incorporated by reference into this filing.

Further, our references to website URLs are intended to be inactive textual references only.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business