Item 9A. Controls and Procedures
Item 9A.
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 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 January 2, 2021.
Notwithstanding the material weakness in our internal control over financial reporting, we have concluded that the consolidated financial statements included in this Form 10-K fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for our Company, as such term is defined in Rule 13a-15(f) under the Exchange Act. Our management conducted an evaluation, with the participation of our principal executive officer and principal financial officer, of the effectiveness of our internal control over financial reporting as of January 2, 2021, based on the criteria set forth in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that, due to the material weakness described below, our internal control over financial reporting was not effective as of January 2, 2021.
In designing our disclosure controls and procedures and internal control over financial reporting, our management recognizes that any control system, no matter how well-designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further, the design of our controls and procedures must reflect the fact that there are resource constraints, and management necessarily applies its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Because of the inherent limitations, our disclosure and internal controls may not prevent or detect all instances of fraud, misstatements or other control issues, and our evaluations of disclosure and internal controls cannot provide assurance that all such control issues have been detected. In addition, projections of any evaluation of the effectiveness of disclosure or internal controls to future periods are subject to risks, including, among others, that controls may become inadequate because of changes in conditions or that compliance with policies or procedures may deteriorate.
Our management determined that we had a material weakness in internal control over financial reporting due to the ineffective oversight within the financial reporting process as a result of the elimination of an audit committee with a financial expert and lack of a majority of independent directors on our Board in August 2020.
This report does not include an attestation report of our independent registered public accounting firm regarding our internal control over financial reporting, in accordance with applicable SEC rules that permit us to provide only management’s report in this report.
80
Table of Contents
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Remediation Initiatives
In an effort to remediate the identified material weakness and enhance our internal controls, we continue to maintain our financial reporting process we followed to prepare financial statements in accordance with U.S. GAAP for audit committee meetings on a quarterly and annual basis. Our Chief Executive Officer and sole director will oversee the process to ensure all required disclosures are made in our financial statements on a quarterly and annual basis.
Item 9B.
Other Information
None.
81
Table of Contents
PART II I
Item 10.
Directors, Executive Officers and Corporate Governanc e
In order to proactively address the economic effects of the recent coronavirus, our Board of Directors (referred to as our “Board” or “Board of Directors”) evaluated various cost-cutting measures, including review of the Board and committee structure, operations and compensation of the members thereof. As a result of its evaluation and because we are no longer subject to Nasdaq rules, the Board determined it to be in the best interests of its stockholders to reduce the number of directors serving on the Board to one director and to dissolve all committees of the Board effective immediately after our 2020 Annual Meeting of Stockholders on August 7, 2020.
Each member of the Board is elected annually at a meeting of our stockholders and serves for a one-year term until the next annual meeting of our stockholders and until his or her successor is elected and qualified, or until an earlier resignation or removal. Each of our executive officers is appointed by, and serves at the direction of, our Board, subject to the terms of our employment agreement with our President and Chief Executive Officer, which is described under “Employment Agreements” in Item 11 of this Form 10-K, and which establishes, among other things, such executive officer’s term of office.
The table and narrative below provide, for our current director and executive officers, each such individual’s name; age as of March 22, 2021; current position(s) with our Company; tenure in such position(s); information about such individual’s business experience and qualifications, including principal occupation or employment and principal business of the employer, if any, for at least the past five years, and involvement in certain legal or administrative proceedings, if any; and, for our director, other public company director positions held currently or at any time in the last five years and the experiences, qualifications, attributes and skills that led to the conclusion that such individual should serve as a director of our Company. There is no arrangement or understanding between any director or executive officer and any other person(s) pursuant to which such director or executive officer was or is to be selected as a director or executive officer of our Company, and there are no family relationships between any of our directors or executive officers.
Name
Age
Position(s)
Chun K. Hong
60
President, Chief Executive Officer and Sole Director
Gail Sasaki
64
Vice President, Chief Financial Officer and Secretary
Chun K. Hong is one of the founders of Netlist and has been our President and Chief Executive Officer and a director since our inception in June 2000. Mr. Hong assumed the title of Chairman of the Board of Directors in January 2004. Prior to his tenure at Netlist, Mr. Hong has served in various other executive positions including President and Chief Operating Officer of Infinilink Corporation, a DSL equipment company, as Executive Vice President of Viking Components, Inc., a memory subsystems manufacturing company, and as General Manager of Sales at LG Semicon Co., Ltd., a public semiconductor manufacturing company in South Korea. Mr. Hong received his Bachelor of Science degree in economics from Virginia Commonwealth University and his Master of Science degree in technology management from Pepperdine University’s Graduate School of Management. As one of our founders and as our Chief Executive Officer, Mr. Hong brings to the Board extensive knowledge of our organization and our market.
Gail Sasaki has been our Vice President and Chief Financial Officer since January 2008 and our Secretary since August 2007. From 2006 to January 2008, Ms. Sasaki served as our Vice President of Finance. Prior to her tenure at Netlist, Ms. Sasaki served in various senior financial roles, including Chief Financial Officer of eMaiMai, Inc., a commercial technology company based in Hong Kong and mainland China; Chief Financial Officer, Senior Vice President of Finance, Secretary and Treasurer of eMotion, Inc. (a Kodak subsidiary and formerly Cinebase Software), a developer of business-to-business media management software and services, and Chief Financial Officer of MicroNet Technology, Inc., a leader in storage technology. Ms. Sasaki also spent seven years in public accounting leaving as an audit manager with Arthur Young (now known as Ernst &Young LLP). Ms. Sasaki earned a Bachelor’s degree from the University of California at Los Angeles, and a Master of Business Administration degree from the University of Southern California.
82
Table of Contents
Board Committees
Prior to the dissolution of all committees of the Board on August 7, 2020, our Board had an Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee, each of which is described below and operated pursuant to a written charter adopted by our Board. The table below shows the membership of these committees during 2020 through August 6, 2020. Our 2019 fiscal year ended December 28, 2019.
Name
Audit(1)
Compensation(2)
Nominating and
Corporate
Governance(3)
Jun S. Cho
●
●
Kiho Choi (4)
Chair
●
Blake A. Welcher
●
Chair
Chair
(1) Messrs. Choi (Chair), Cho and Welcher served on this committee during 2020 until August 2020.
(2) Messrs. Welcher (Chair) and Choi served on this committee during 2020 until August 2020.
(3) Messrs. Welcher (Chair) and Cho served on this committee during 2020 until August 2020.
(4) Our Board determined that Mr. Choi qualified as an “audit committee financial expert” in accordance with applicable SEC rules.
Audit Committee
The primary functions of our Audit Committee were, among other things, to:
● oversee our financial reporting process, including discussing with our independent registered public accounting firm the scope and plans for all annual audits and discussing with management and our independent registered public accounting firm the adequacy and effectiveness of our accounting and financial controls, systems to monitor and manage business risk, and legal and ethical compliance programs;
● review with management and our independent registered public accounting firm all of our audited and interim financial statements;
● review and approve in advance any transactions by us with related parties;
● appoint, terminate, replace, ensure the independence of and oversee our independent registered public accounting firm;
● pre-approve all audit services and, subject to a “de minimus” exception, all permissible non-audit services to be performed by the independent registered public accounting firm;
● be responsible for setting the corporate tone for quality financial reporting and sound business risk practices and ethical behavior; and
● establish procedures for the confidential and anonymous submission, receipt, retention and treatment of concerns or complaints regarding accounting, internal accounting controls and auditing matters.
Compensation Committee
The primary functions of our Compensation Committee were, among other things, to:
● review and approve, or make recommendations to the Board regarding, our programs and arrangements for our Section 16 executive officers, including salary, incentive compensation, equity compensation and perquisite programs;
● review the evaluation process and compensation structure for our non-Section 16 executive officers;
● assist the Board in developing and evaluating potential candidates for executive positions and oversee the development of executive succession plans; and
● review and act as administrator of our incentive compensation and other stock-based plans.
83
Table of Contents
Nominating and Corporate Governance Committee
The primary functions of our Nominating and Corporate Governance Committee were, among other things, to:
● lead the search for individuals qualified to become members of the Board and select director nominees to be presented at our annual meetings of stockholders;
● review the standards to be applied by the Board in making determinations as to whether a director satisfies applicable independence requirements;
● review the Board’s structure and the Board’s committee structure and make recommendations as appropriate, including recommending to the Board the directors to serve as members of each Board committee;
● conduct an annual performance evaluation of the Board and its committees;
● advise the Board on candidates for the positions of Chairman of the Board, Lead Independent Director, Chief Executive Officer and other executive officer positions;
● develop, recommend to the Board and review a set of corporate governance guidelines and a code of business conduct and ethics; and
● review changes in legislation, regulations and other developments impacting corporate governance and make recommendations to the Board with respect to these matters and corporate governance matters generally.
Code of Business Conduct and Ethics
Our Board has adopted a Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, as well as all of our other executive officers and employees and all of our directors. Shareholders may download a free copy of our Code of Business Conduct and Ethics from our website (www.netlist.com). We intend to disclose on our website any amendments to or waivers from this code by posting the relevant material on our website (www.netlist.com) in accordance with SEC rules.
Item 11.
Executive Compensatio n
2020 Compensation Adjustments
On March 6, 2020, our Compensation Committee approved compensation for our two named executive officers beginning calendar year 2020. The Compensation Committee approved a base salary of $450,000 per annum for Chun K. Hong, our Chief Executive Officer, and $275,000 per annum for Gail Sasaki, our Chief Financial Officer. In making this determination, the Compensation Committee considered that both officers had held their positions since our initial public offering in 2006 and that Mr. Hong had not received an increase in his base salary for 13 years and Ms. Sasaki had not received any increase in her base salary for 10 years. In its deliberations regarding the adjustments to base salary, the Compensation Committee considered the cost of living increases in the United States, California and Orange County, California during the period since the initial public offering as calculated according to various government and private publications. The final determination of base salary levels was made after considering the range of calculations as well as a number of other factors that the Compensation Committee determined to be relevant in the exercise of its business judgment. The Compensation Committee also established bonus targets for the officers of 100% of base salary dependent upon achieving agreed financial objectives. Finally, the Compensation Committee approved awards of 300,000 restricted stock units for Mr. Hong and 75,000 restricted stock units for Ms. Sasaki, subject to four-year vesting.
Executive Compensation
The table below provides information about the compensation awarded to, earned by or paid to each of the following individuals, which we refer to collectively as our “named executive officers,” for 2020 and 2019: each person serving at any time during 2020 as our principal executive officer (our President and Chief Executive Officer, Mr. Hong); and our only other executive officer serving as such at any time during 2020 (our Vice President, Chief Financial Officer and Secretary, Ms. Sasaki).
84
Table of Contents
Summary Compensation Table
Name and Principal Position
Year
Base Salary($)
Bonus($)
Stock
Awards($)(1)
All Other
Compensation($)(2)
Total($)
Chun K. Hong
2020
467,308
180,000
94,290
62,092
803,690
President and Chief Executive Officer
2019
323,000
—
408,004
51,486
782,490
Gail Sasaki
2020
285,577
103,125
23,573
22,254
434,529
Vice President, Chief Financial Officer and Secretary
2019
200,000
—
223,992
—
423,992
(1) Represents the grant date fair value of the restricted stock units (“RSUs”) granted during the year calculated in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, Compensation—Stock Compensation (“ASC 718”). The grant date fair value was determined using the fair value of the underlying shares of our common stock.
(2) For 2020, the amount consists of (a) for Mr. Hong, $10,936 for automobile rental payments, $7,509 for other vehicle-related costs, $24,600 for a country club membership, $14,769 for a health club membership, and $4,278 for income tax and estate planning costs incurred on Mr. Hong’s behalf, and (b) for Ms. Sasaki, the amount is for a health club membership. For 2019, the amount consists of $10,936 for automobile rental payments, $8,694 for other vehicle-related costs, $22,052 for a country club membership, $4,532 for a health club membership, and $5,272 for income tax and estate planning costs incurred on Mr. Hong’s behalf.
Employment Agreements
We entered into an employment agreement with our President and Chief Executive Officer, Mr. Hong, in September 2006. This agreement provides for an initial base salary of $323,000 plus other specified benefits, including the reimbursement of professional fees and expenses incurred in connection with income and estate tax planning and preparation, income tax audits and the defense of income tax claims; the reimbursement of membership fees and expenses for professional organizations and one country club; the reimbursement of employment-related legal fees; automobile rental payments and other vehicle-related expenses; and the reimbursement of health club membership fees and other similar health-related expenses. Mr. Hong may earn annual cash performance bonuses, at the discretion of our Compensation Committee or our Board, of up to 100% of his base salary based upon the achievement of individual and Company performance objectives.
Mr. Hong’s employment agreement automatically renews for additional one-year periods unless we provide or Mr. Hong provides notice of termination six months prior to the renewal date, but at all times Mr. Hong may terminate his employment upon six months’ advance written notice to us and we may terminate Mr. Hong’s employment upon 30 days’ advance written notice to Mr. Hong. If we terminate Mr. Hong’s employment without cause or if he resigns from his employment for good reason, which includes a termination or resignation upon a change of control of our Company, Mr. Hong would be entitled to receive continued payments of his base salary for one year, reimbursement of medical insurance premiums during that period unless he becomes employed elsewhere, a pro-rated portion of his annual performance bonus, and, if any severance payment is deemed to be an “excess parachute payment” within the meaning of Section 280G of the Code, an amount equal to any excise tax imposed under Section 4999 of the Code. In addition, upon any such termination or resignation, any unvested stock options held by Mr. Hong would immediately become fully vested and exercisable as of the effective date of the termination or resignation. If Mr. Hong’s employment is terminated due to death or disability, he or his estate would receive a lump-sum payment equal to half of his annual base salary and any stock options held by Mr. Hong would vest to the same extent as they would have vested one year thereafter. Additionally, if Mr. Hong’s employment is terminated due to death or disability, 25% of the shares subject to outstanding stock options, or such lesser amount as is then unvested, would immediately vest and become exercisable. If Mr. Hong resigns without good reason or is terminated for cause, we would have no further obligation to him other than to pay his base salary or other amounts earned by him through the date of resignation or termination.
85
Table of Contents
For purposes of Mr. Hong’s employment agreement:
● “cause” means a reasonable determination by the Board, acting in good faith based upon actual knowledge at the time, that Mr. Hong has (i) materially breached the terms of his employment agreement, or any other material agreement between us and Mr. Hong, including an arbitration agreement and a proprietary information and invention assignment agreement, (ii) committed gross negligence or engaged in serious misconduct in the execution of his assigned duties, (iii) been convicted of a felony or other serious crime involving moral turpitude, (iv) materially refused to perform any lawful duty or responsibility consistent with Mr. Hong’s position with our Company, or (v) materially breached his fiduciary duty or his duty of loyalty to our Company;
● “good reason” means (i) the assignment to Mr. Hong, without his consent, of duties inconsistent with his position so as to constitute a diminution of status with our Company, including an assignment of Mr. Hong to a position other than President and Chief Executive Officer of our Company, (ii) our reduction of Mr. Hong’s base salary as in effect at any time without Mr. Hong’s consent, other than a decrease of up to (and including) 10% in connection with an adverse change in the business operations or financial condition of our Company, (iii) the occurrence of a change of control, or (iv) a requirement that Mr. Hong relocate (or report on a regular basis) to an office outside of Orange County without his consent; and
● a “change of control” means the occurrence of any of the following: (i) any person or entity is or becomes the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of our Company representing a percentage of the combined voting power of our then-outstanding securities that is greater than 50%, (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date of Mr. Hong’s employment agreement, constituted our Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of our Company) whose appointment or election by the Board or nomination for election by our stockholders is approved or recommended by a vote of at least two-thirds of the directors then still in office who either were directors on the date of Mr. Hong’s employment agreement or whose appointment, election or nomination for election was previously so approved or recommended; (iii) there is consummated a merger or consolidation of our Company in which our Company does not survive or our Company survives but the shares of our common stock outstanding immediately prior to such merger or consolidation represent 50% or less of the voting power of our Company after such merger or consolidation; or (iv) our stockholders approve a plan of our complete liquidation or dissolution or there is consummated an agreement for our sale or disposition of all or substantially all of our assets, other than a sale or disposition of all or substantially all of our assets to an entity, at least 50% of the combined voting power of the voting securities of which are owned by our stockholders in substantially the same proportions as their ownership of our Company immediately prior to such sale.
We have not entered into an employment agreement with Ms. Sasaki, our Vice President, Chief Financial Officer and Secretary. For 2019, Ms. Sasaki received an annualized base salary of $200,000. If Ms. Sasaki’s employment is terminated due to death or disability, any stock options held by Ms. Sasaki would vest to the same extent as they would have vested one year thereafter. Additionally, if Ms. Sasaki’s employment is terminated due to death or disability, 25% of the shares subject to outstanding stock options, or such lesser amount as is then unvested, would immediately vest and no additional shares would vest thereafter. Ms. Sasaki is eligible for a target cash bonus of 75% of her base salary, which is to be determined by our Board in its discretion based on various factors.
Cash Bonuses
For 2020, Mr. Hong and Ms. Sasaki received cash bonuses of $180,000 and $103,125, respectively, based on factors related to the Company’s performance during such period. No cash bonuses were paid to either Mr. Hong or Ms. Sasaki for 2019.
86
Table of Contents
Retirement Benefits
We maintain a savings plan that qualifies as a defined contribution plan under Section 401(k) of the Code, to which all of our employees, including our named executive officers, are able to contribute up to the limit prescribed by applicable tax rules on a before-tax basis. All of these employee contributions are fully-vested upon contribution. In addition, we may make matching contributions on the contributions of our employees on a discretionary basis. In 2020 and 2019, we did not make matching contributions.
Outstanding Equity Awards at Fiscal Year End
The following table shows information about the equity awards held by our named executive officers as of January 2, 2021:
Option Awards
Stock Awards
Name
Grant Date
Number of Securities
Underlying Unexercised
Options Exercisable(#)(1)
Number of Securities
Underlying Unexercised
Options Unexercisable(#)(1)
Option
Exercise Price($)
Option
Expiration Date
Number of Shares
That Have Not
Vested(#)(2)
Market Value of
Shares That Have Not
Vested($)(2)
Chun K. Hong
3/17/2011
300,000
—
2.21
3/17/2021
—
—
2/27/2012
300,000
—
3.59
2/27/2022
—
—
2/11/2013
300,000
—
0.71
2/11/2023
—
—
2/21/2014
300,000
—
2.05
2/21/2024
—
—
1/6/2015
300,000
—
0.84
1/6/2025
—
—
1/8/2016
300,000
—
0.70
1/18/2026
—
—
2/14/2017
281,250
18,750
1.02
2/14/2027
—
—
3/7/2019
—
—
—
—
464,062
279,783
3/6/2020
—
—
—
—
262,500
158,261
Gail Sasaki
3/17/2011
75,000
—
2.21
3/17/2021
—
—
2/27/2012
75,000
—
3.59
2/27/2022
—
—
2/11/2013
75,000
—
0.71
2/11/2023
—
—
2/21/2014
75,000
—
2.05
2/21/2024
—
—
1/6/2015
75,000
—
0.84
1/6/2025
—
—
1/18/2016
75,000
—
0.70
1/18/2026
—
—
2/14/2017
70,312
4,688
1.02
2/14/2027
—
—
3/18/2019
—
—
—
—
257,344
155,153
3/6/2020
—
—
—
—
65,625
39,565
(1)
Represents stock option awards granted under the Netlist, Inc. Amended and Restated 2006 Equity Incentive Plan (the “Equity Plan”). These stock option awards that are not fully exercisable vest in 16 equal quarterly installments, subject to continued service on each vesting date, subject to accelerated vesting in certain circumstances as described under “Employment Agreements” above.
(2)
Represents RSUs granted under the Equity Plan. Restrictions on RSUs lapse in eight equal semi-annual installments from the grant date.
Director Compensation
Non-Employee Director Compensation
Our non-employee directors received annual cash compensation of $30,000, which was paid in four equal quarterly installments, and additional cash payments of $1,000 for each regularly scheduled Board meeting and each Board committee meeting not held on the same day as a Board meeting that was attended by the director. The Lead Independent Director and the Chair of our Audit Committee each received additional cash compensation of $5,000 per
87
Table of Contents
year. All of our directors, including our non-employee directors, were also reimbursed for their reasonable out-of-pocket expenses incurred in attending Board and Board committee meetings.
In addition, each of our non-employee directors was granted a stock option award to purchase up to 25,000 shares of our common stock upon his or her initial appointment or election to the Board, and a stock option award to purchase up to 20,000 shares of our common stock each year in which he or she continued to serve as a director. For awards granted to non-employee directors before 2017, all stock options vested in 16 equal quarterly installments, and for awards granted to non-employee directors in 2017 and thereafter, all stock options vested in one installment on the, earlier of, the one-year anniversary of the award or the day prior to the next annual shareholders meeting, in all cases subject to continued service on each vesting date. All stock option awards granted to non-employee directors were granted under our equity compensation plans then in effect and had an exercise price equal to the fair market value of our common stock on the grant date of the award.
Directors who were our employees received no additional compensation for their service as directors.
Director Compensation Table
The following table shows the compensation of our non-employee directors for 2020 prior to the dissolution of all committees in August 2020. Mr. Hong, our President and Chief Executive Officer, is not included in this table because he is our employee and receives no additional compensation for his service as a director. The compensation received by Mr. Hong as our employee is described in this Item 11 above.
Name
Fees Earned or
Paid in Cash($)
Stock Awards($)(1)
Total($)
Jun S. Cho(2)
27,078
105,135
132,213
Kiho Choi
27,078
—
27,078
Blake A. Welcher(3)
25,065
70,090
95,155
(1) Represent the grant-date fair value of RSUs granted on August 10, 2020 calculated in accordance with ASC 718. The grant-date fair value was determined using the fair value of the underlying shares of our common stock. These RSUs fully-vested on the grant date.
(2) At the end of Fiscal 2020, Mr. Cho held stock options to purchase 105,000 shares of our common stock.
(3) At the end of Fiscal 2020, Mr. Welcher held stock options to purchase 125,000 shares of our common stock.
Equity Compensation Plans
We currently maintain one equity incentive plan, the Equity Plan. The Equity Plan initially became effective in 2006, was amended and restated in 2010, 2016 and 2019. Our Board and, when required, our stockholders have previously approved the Equity Plan, including all amendments and restatements of such plan. The terms of the Equity Plan are summarized below.
Share Reserve and Share Limits
Each January 1, the number of shares reserved for issuance under the Equity Plan will continue to be automatically increased by the lesser of (i) 2.5% of the shares then issued and outstanding, or (ii) 1,200,000 shares. As of March 22, 2021, there were 16,205,566 total shares reserved for issuance under the Equity Plan, including 10,073,535 shares subject to outstanding equity awards granted under this plan.
Any shares subject to an award or portion of an award which is forfeited, canceled or expired shall be deemed not to have been issued for purposes of determining the maximum aggregate number of shares which may be issued under the Equity Plan. Shares that have been issued under the Equity Plan pursuant to an award generally shall not be returned to the reserve under the Equity Plan and shall not become available for future issuance under the Equity Plan, except that if unvested shares are forfeited, or repurchased by us at the lower of their original purchase price or their fair market value at the time of repurchase, such shares shall become available for future grant under the Equity Plan. Shares
88
Table of Contents
tendered or withheld in payment of an option exercise price shall not be returned to or become available for future issuance under the Equity Plan.
The maximum number of shares with respect to which options and stock appreciation rights may be granted to a participant during a calendar year is 1,000,000 shares (with an additional 1,000,000 shares of stock in connection with the participant’s initial employment). For awards of restricted stock, restricted stock units, and performance units that are intended to be performance-based compensation under Section 162(m) of the Code, the maximum number of shares granted to a participant during a calendar year is 1,000,000 shares.
Administration
The Equity Plan is administered, with respect to grants of awards to employees, directors, officers, and consultants, by the administrator, which is defined as the Board or one or more committees designated by the Board. With respect to grants to officers and directors, the committee shall be constituted in such a manner as to satisfy applicable laws, including Rule 16b-3 under the Exchange Act and Section 162(m) of the Code. The Equity Plan is administered by the Compensation Committee of our Board, the composition of which satisfies such tax and SEC rules, subject to such committee’s delegation to management to grant awards to certain eligible persons of up to 25,000 shares.
Eligibility
Persons eligible to receive awards under the Equity Plan include directors, officers and other employees of and consultants and advisors to our Company or any of our subsidiaries. As of January 2, 2021, approximately 70 officers and other employees of our Company and our subsidiaries (including all of the named executive officers) are eligible to receive awards under the Equity Plan.
Vesting
Although the Equity Plan provides the administrator with the discretion to determine the vesting schedule of any awards granted under the plan, stock option awards granted to employees under the Equity Plan typically vest over four years in either 16 equal quarterly installments or one installment of 25% of the shares subject to the award on the one-year anniversary of the grant date and 12 equal quarterly installments thereafter, subject to continued service on each vesting date. RSAs granted to employees under the Equity Plan vest annually on each anniversary of the grant date over a two-year term, and RSUs granted for employees and consultants under the Equity Plan typically vest semi-annually from the grant date over a four-year term, subject to continued service on each vesting date. RSUs granted for independent directors under the Equity Plan fully-vest on the grant date.
Adjustments Upon Corporate Transactions
The Equity Plan provides that, in the event of an “acquisition,” as defined in the Equity Plan, the administrator may provide for the termination of outstanding awards under the Equity Plan, unless awards are assumed or replaced by the successor entity in the acquisition. Except as provided in an individual award agreement, for the portion of each award that is not assumed or replaced by the successor entity, such portion of the award may be vested and become exercisable in full or be released from any repurchase or forfeiture rights before the effective date of the acquisition, provided that the participant’s continuous service has not terminated before such date.
Amendment, Suspension and Termination
The Equity Plan will be for a term of 10 years from its 2016 amendment and restatement, unless sooner terminated by the Board. The Board may at any time amend, suspend or terminate the Equity Plan, subject to obtaining stockholder approval for any amendment to the extent necessary to comply with applicable laws and rules.
89
Table of Contents
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matter s
Security Ownership of Certain Beneficial Owners and Management
The table below sets forth information regarding the ownership of our common stock, as of March 22, 2021 (the “Table Date”) unless otherwise indicated in the footnotes to the table, by (i) all persons known by us to beneficially own more than 5% of our common stock, (ii) each of our current directors, (iii) each of our named executive officers, and (iv) all of our directors and executive officers as a group. Unless otherwise indicated, each person named below possesses sole voting and investment power over all shares of common stock shown as beneficially owned by such person. Unless otherwise indicated, the address for each person named below is c/o Netlist, Inc., 175 Technology Drive, Suite 150, Irvine, CA 92618.
Name of Beneficial Owner
Shares Beneficially Owned
Percent of Class(1)
Chun K. Hong (2)
8,656,169
4.0%
Gail Sasaki (3)
712,421
*
All executive officers and directors as a group (2 persons) (4)
9,368,590
4.3%
*
Represents beneficial ownership of less than 1%.
(1) All ownership percentages are based on 215,013,027 shares of our common stock outstanding as of the Table Date.
(2) Represents (i) 1,862,500 shares of common stock issuable upon the exercise of stock options that are or will be vested and exercisable within 60 days after the Table Date and (ii) 6,793,669 outstanding shares of common stock, of which 6,439,233 shares are held by Mr. Hong and his wife, Won K. Cha, as co-trustees of the Hong-Cha Community Property Trust. Mr. Hong and Ms. Cha possess shared voting and investment power over the shares of common stock held by the Hong-Cha Community Property Trust, and each disclaims beneficial ownership of such shares except to the extent of his or her pecuniary interest therein.
(3) Represents (i) 450,000 shares of common stock issuable upon the exercise of stock options that are or will be vested and exercisable within 60 days after the Table Date and (ii) 262,421 outstanding shares of common stock.
(4) Represents (i) 2,312,500 shares of common stock issuable upon the exercise of stock options that are or will be vested and exercisable within 60 days after the Table Date and (ii) 7,056,090 outstanding shares of common stock.
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information as of January 2, 2021 about compensation plans under which our equity securities are authorized for issuance:
Equity Compensation Plan Information
Plan Category
Number of securities to be issued
upon exercise of
outstanding options, warrants and rights
Weighted-average exercise price of
outstanding options,
warrants and rights($)(1)
Number of securities remaining
available for future equity
compensation plans
Equity compensation plans approved by security holders
10,155,893
(2)
1.16
1,852,822
(3)
Equity compensation plans not approved by security holders
400,000
(4)
0.34
—
Total
10,555,893
1.12
1,852,822
(1) The weighted-average exercise price is calculated based solely on the exercise prices of the outstanding options and do not reflect the shares that will be issued upon the vesting of outstanding awards of RSUs, which have no exercise price.
(2) This number includes the following outstanding awards granted under the Equity Plan: 7,119,258 shares subject to outstanding stock options and 3,036,635 shares subject to outstanding RSUs.
(3) Subject to certain adjustments, as of January 2, 2021, we were authorized to issue a maximum of 16,205,566 shares of our common stock pursuant to awards granted under the Equity Plan.
(4) Consists of 400,000 stock option awards outstanding as of January 2, 2021.
90
Table of Contents
Item 13.
Certain Relationships and Related Transactions, and Director Independenc e
Related Party Transactions
Except as described below and except for employment arrangements and compensation for Board service, which are described in Item 11 above, since December 30, 2018, there has not been, nor is there currently proposed, any transaction or series of transactions in which our Company was or is to be a participant, in which the amount involved exceeds the lesser of $120,000 or 1% of the average of our total assets at year-end for our last two completed fiscal years, and in which any director, officer or beneficial owner of more than 5% of our common stock, or member of any such person’s immediate family, had or will have a direct or indirect material interest.
Our Vice President of Netlist Base and Commodity Sales (formally, our Vice President of Operations), Paik K. Hong, is the brother of Chun K. Hong, our President, Chief Executive Officer and Sole Director. For 2020, Mr. P. K. Hong earned cash salary of $238,846 and cash bonus of $256,200, received $8,791 for a health club membership, and was granted 300,000 shares of restricted stock units with the grant-date fair value of $153,000 measured in accordance with ASC 718. For 2019, Mr. P. K. Hong earned cash salary of $225,001 and cash bonus of $112,500 and was granted 411,750 shares of restricted stock units with the grant-date fair value of $223,992 measured in accordance with ASC 718. The grant-date fair value was determined using the fair value of the underlying shares of our common stock.
We have entered into indemnification agreements with each of our director and executive officers. In general, these agreements require us to indemnify each such individual to the fullest extent permitted under Delaware law against certain liabilities that may arise by reason of their service for us, and to advance expenses incurred as a result of any such proceeding as to which any such individual could be indemnified.
Director Independence
Our common stock was listed on The Nasdaq Capital Market until September 27, 2018. On September 27, 2018, our common stock began trading on the OTCQX ® Best Market. On August 11, 2020, our common stock began trading on the OTCQB ® . OTCQX ® Best Market and OTCQB ® do not require that a majority of the board of directors be independent. Our Board continued to consider the independence of our directors under the listing standards of The Nasdaq Capital Market until August 6, 2020.
Our Board determined that each of our directors served at any time in 2019 through August 2020, other than our President and Chief Executive Officer, Mr. Hong, was independent. In addition, our Board determined that each director served in 2019 through August 2020 as a member of our Audit Committee, Compensation Committee or Nominating and Corporate Governance Committee were independent under the listing standards of The Nasdaq Capital Market.
91
Table of Contents
Item 14.
Principal Accounting Fees and Service s
Fees Paid to Independent Registered Public Accounting Firm
The following table presents the aggregate fees billed to us by our independent registered public accounting firm, KMJ Corbin & Company LLP (“KMJ”), for 2020 and 2019:
2020($)
2019($)
Audit Fees (1)
118,550
126,800
Audit-Related Fees (2)
—
—
Tax Fees (2)
—
—
All Other Fees (2)
—
—
Total Fees
118,550
126,800
(1)
Audit fees consist of fees billed to us for professional services rendered for the audit of our annual consolidated financial statements and the review of our interim condensed consolidated financial statements included in our quarterly reports. These fees also include fees billed to us for professional services that are normally provided in connection with statutory and regulatory filings or engagements, including the review of our registration statements on Form S-3 and Form S-8 and certain other related matters, such as the delivery of comfort letters and consents in connection with these registration statements.
(2)
KMJ did not bill to us any audit-related fees, tax fees or other fees in 2020 or 2019.
Pre-Approval Policies and Procedures
Prior to its dissolution, our Audit Committee’s charter required our Audit Committee to pre-approve all audit and permissible non-audit services to be performed for us by our independent registered public accounting firm, except for certain “de minimus” non-audit services that may be ratified by the Audit Committee in accordance with applicable SEC rules, in order to assure that the provision of such services is compatible with maintaining the independence of our independent registered public accounting firm. Our Audit Committee pre-approved all services performed by KMJ in 2020 and 2019.
92
Table of Contents
PART IV
Item 15.
Exhibits, Financial Statement Schedule s
(a) Documents filed as part of this report
(1) All financial statements
Index to Consolidated Financial Statements
Page
Consolidated Balance Sheets
49
Consolidated Statements of Operations
50
Consolidated Statements of Stockholders’ Deficit
51
Consolidated Statements of Cash Flows
52
Notes to Consolidated Financial Statements
53
Report of Independent Registered Public Accounting Firm
78
(2) Financial statement schedules
All financial statement schedules have been omitted, as they are not required, not applicable, or the required information is otherwise included.
(3) Exhibit listing
Incorporated by Reference
Exhibit No.
Description
Filed Herewith
Form
File No.
Exhibit
Filing Date
3.1
Restated Certificate of Incorporation of Netlist, Inc.
10-Q
001-33170
3.1
August 15, 2017
3.1.1
Certificate of Amendment to the Restated Certificate of Incorporation of Netlist, Inc.
10-Q
001-33170
3.1.1
August 15, 2017
3.1.2
Certificate of Amendment of the Restated Certificate of Incorporation of Netlist, Inc.
8-K
001-33170
3.1
August 17, 2018
3.1.3
Certificate of Designation of the Series A Preferred Stock of Netlist, Inc.
10-Q
001-33170
3.1.2
August 15, 2017
3.2
Amended and Restated Bylaws of Netlist, Inc.
8-K
001-33170
3.1
December 20, 2012
3.2.1
Certificate of Amendment to Amended and Restated Bylaws of Netlist, Inc.
8-K
001-33170
3.1
December 29, 2017
4.1
Description of the Registrant’s Securities
10-K
001-33170
4.1
March 10, 2020
4.2
Form of Warrant issued pursuant to the Securities Purchase Agreement, dated July 17, 2013
8-K
001-33170
4.1
July 18, 2013
4.3
Senior Secured Convertible Promissory Note, dated November 18, 2015, issued by Netlist, Inc. to SVIC No. 28 New Technology Business Investment LLP
8-K
001-33170
4.1
November 19, 2015
4.4
Stock Purchase Warrant, dated November 18, 2015, issued by Netlist, Inc. to SVIC No. 28 New Technology Business Investment LLP
8-K
001-33170
4.2
November 19, 2015
4.5
Stock Purchase Warrant, dated November 18, 2015, issued by Netlist, Inc.
10-K
001-33170
4.4
March 31, 2017
93
Table of Contents
Incorporated by Reference
Exhibit No.
Description
Filed Herewith
Form
File No.
Exhibit
Filing Date
4.6
Rights Agreement, dated as of April 17, 2017, by and between Netlist, Inc. and Computershare Trust Company, N.A., as rights agent
8-K
001-33170
4.1
April 17, 2017
4.7
Amendment No. 1 to Rights Agreement, dated as of April 16, 2018, by and between Netlist, Inc. and Computershare Trust Company, N.A., as rights agent.
8-K
001-33170
4.1
April 17, 2018
4.8
Amendment No. 2 to Rights Agreement, dated as of April 16, 2019, by and between the Company and Computershare Trust Company, N.A., as rights agent
8-K
001-33170
4.1
April 17, 2019
4.9
Amendment No. 3 to Rights Agreement, dated as of August 14, 2020, by and between Netlist, Inc. and Computershare Trust Company, as rights agent
8-K
001-33170
4.1
August 14, 2020
4.10
Form of Warrant Agreement to Purchase Common Stock issued pursuant to the Securities Purchase Agreement, dated September 12, 2018.
8-K
001-33170
4.1
September 14, 2018
10.1#
Form of Indemnity Agreement for officers and directors
S-1
333-136735
10.12
August 18, 2006
10.2#
Employment Agreement, dated September 5, 2006, between Netlist, Inc. and Chun K. Hong
S-1
333-136735
10.13
September 27, 2006
10.3#
Amended and Restated 2006 Equity Incentive Plan of Netlist, Inc.
10-K
001-33170
10.3
March 22, 2019
10.4#
Form of Restricted Stock Award Agreement issued pursuant to the Amended and Restated 2006 Equity Incentive Plan of Netlist, Inc.
10-Q
001-33170
10.2
May 17, 2010
10.5#
Form of Incentive Stock Option Award Agreement issued pursuant to the Amended and Restated 2006 Equity Incentive Plan of Netlist, Inc.
10-K
001-33170
10.6
March 31, 2017
10.6
Loan and Security Agreement, dated October 31, 2009, between Silicon Valley Bank and Netlist, Inc.
8-K
001-33170
10.1
November 2, 2009
10.7
Intercompany Subordination Agreement, dated October 31, 2009, among Silicon Valley Bank, Netlist, Inc., and Netlist Technology Texas, L.P.
8-K
001-33170
10.2
November 2, 2009
10.8
Guarantor Security Agreement, dated October 31, 2009, between Silicon Valley Bank and Netlist Technology Texas LP
8-K
001-33170
10.3
November 2, 2009
10.9
Intellectual Property Security Agreement, dated October 31, 2009, between Silicon Valley Bank and Netlist, Inc.
8-K
001-33170
10.4
November 2, 2009
10.10
Amendment to Loan Documents, dated March 24, 2010, between Silicon Valley Bank and Netlist, Inc.
10-Q
001-33170
10.1
May 7, 2010
94
Table of Contents
Incorporated by Reference
Exhibit No.
Description
Filed Herewith
Form
File No.
Exhibit
Filing Date
10.11
Amendment to Loan Documents, dated June 30, 2010, between Silicon Valley Bank and Netlist, Inc.
10-Q
001-33170
10.2
August 12, 2010
10.12
Amendment to Loan Documents, dated September 30, 2010, between Silicon Valley Bank and Netlist, Inc.
10-Q
001-33170
10.1
November 16, 2010
10.13
Amendment to Loan Documents, dated May 11, 2011, between Silicon Valley Bank and Netlist, Inc.
10-Q
001-33170
10.1
May 12, 2011
10.14
Amendment to Loan Documents, dated August 10, 2011, between Silicon Valley Bank and Netlist, Inc.
10-Q
001-33170
10.1
August 15, 2011
10.15
Amendment to Loan Documents, dated May 14, 2012, between Silicon Valley Bank and Netlist, Inc.
10-Q
001-33170
10.1
May 15, 2012
10.16
Forbearance to Loan and Security Agreement, dated March 27, 2013, between Netlist, Inc. and Silicon Valley Bank
10-K
001-33170
10.32
March 29, 2013
10.17
Amendment to Loan Documents, dated July 17, 2013, between Netlist, Inc. and Silicon Valley Bank
10-Q
001-33170
10.6
November 12, 2013
10.18
Amendment to Loan Documents, dated September 30, 2014, between Netlist, Inc. and Silicon Valley Bank
10-K
001-33170
10.24
March 27, 2015
10.19
Senior Secured Convertible Promissory Note and Warrant Purchase Agreement, dated November 18, 2015, between Netlist, Inc. and SVIC No. 28 New Technology Business Investment LLP
8-K
001-33170
10.1
November 19, 2015
10.20
Registration Rights Agreement, dated November 18, 2015, between Netlist, Inc. and SVIC No. 28 New Technology Business Investment LLP
8-K
001-33170
10.2
November 19, 2015
10.21
Amendment to Loan Documents, dated January 29, 2016, between Netlist, Inc. and Silicon Valley Bank
8-K
001-33170
10.1
February 1, 2016
10.22
Amendment to Loan and Security Agreement, dated March 27, 2017, between Netlist, Inc. and Silicon Valley Bank
8-K
001-33170
10.1
March 29, 2017
10.23
Amendment to Loan and Security Agreement, dated April 12, 2017, by and between Netlist, Inc. and Silicon Valley Bank
10-Q
001-33170
10.1
August 15, 2017
10.24
Amendment to Loan and Security Agreement, dated March 20, 2018, by and between Netlist, Inc. and Silicon Valley Bank
8-K
001-33170
10.1
March 26, 2018
95
Table of Contents
Incorporated by Reference
Exhibit No.
Description
Filed Herewith
Form
File No.
Exhibit
Filing Date
10.25
Amendment to Loan and Security Agreement, dated March 21, 2019, by and between Netlist, Inc. and Silicon Valley Bank
10-K
001-33170
10.25
March 22, 2019
10.26
Amendment to Loan and Security Agreement, dated February 27, 2020, by and between Netlist, Inc. and Silicon Valley Bank
10-K
001-33170
10.26
March 10, 2020
10.27§
Investment Agreement, dated May 3, 2017, by and between Netlist, Inc. and TR Global Funding V, LLC
10-Q
001-33170
10.2
August 15, 2017
10.28
Security Agreement, dated May 3, 2017, by and between Netlist, Inc. and TR Global Funding V, LLC
10-Q
001-33170
10.3
August 15, 2017
10.29
Intercreditor Agreement, dated May 3, 2017, by and between SVIC No. 28 New Technology Business Investment L.L.P. and TR Global Funding V, LLC and consented and agreed to by Netlist, Inc.
10-Q
001-33170
10.4
August 15, 2017
10.30
Intercreditor Agreement, dated May 3, 2017, by and between Silicon Valley Bank and TR Global Funding V, LLC and consented and agreed to by Netlist, Inc.
10-Q
001-33170
10.5
August 15, 2017
10.31
Amended and Restated Intercreditor Agreement, dated April 20, 2017, by and between SVIC No. 28 New Technology Business Investment L.L.P and Silicon Valley Bank and consented and agreed to by Netlist, Inc.
10-Q
001-33170
10.6
August 15, 2017
10.32
Purchase Agreement, dated June 24, 2019, between Netlist, Inc. and Lincoln Park Capital Fund, LLC
8-K
001-33170
1.1
June 24, 2019
10.33
Purchase Agreement, dated March 5, 2020, between Netlist, Inc. and Lincoln Park Capital Fund, LLC
10-K
001-33170
10.37
March 10, 2020
21.1
Subsidiaries of Netlist, Inc.
X
23
Consent of KMJ Corbin & Company LLP
X
31.1
Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer
X
31.2
Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer
X
32+
Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer
X
101.INS
XBRL Instance Document
X
101.SCH
XBRL Taxonomy Extension Schema Document
X
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
X
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
X
96
Table of Contents
Incorporated by Reference
Exhibit No.
Description
Filed Herewith
Form
File No.
Exhibit
Filing Date
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
X
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
X
+
Furnished herewith.
#
Management contract or compensatory plan or arrangement.
§
Confidential treatment has been granted with respect to portions of this exhibit.
Item 16.
Form 10-K Summary.
None.
97
Table of Contents
SIGNATURE S
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 26, 2021
Netlist, Inc.
By:
/s/ Chun K. Hong
Chun K. Hong
President, Chief Executive Officer and Sole Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature
Title
Date
/s/ Chun K. Hong
President, Chief Executive Officer and Sole Director
Chun K. Hong
(Principal Executive Officer)
March 26, 2021
/s/ Gail Sasaki
Vice President and Chief Financial Officer
Gail Sasaki
(Principal Financial and Accounting Officer)
March 26, 2021
98
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.