What changed in this filing

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Item 9A. Controls and Procedures

2022-03-01 compared with 2021-03-26 · 220 added, 189 removed, 311 unchanged (57% of the section changed)

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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.

Based on this evaluation, due to the material weaknesses in our internal control over financial reporting described below, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were not effective as of January 1, 2022.

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.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting.

Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S.

Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately reflect the transactions and dispositions of our assets;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S.

GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors;

and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.

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.

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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.

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 defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act) as of the end of the period covered by this report.

Based on this evaluation, due to (i) the lack of an independent board and audit committee and ineffective risk assessment and monitoring controls and (ii) ineffective design and maintenance of controls over user access and program change management related to certain information technology (IT) systems that support our financial reporting processes, our principal executive officer and our principal financial officer concluded that our internal control over financial reporting was not effective as of January 1, 2022.

Notwithstanding the material weaknesses 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.

The effectiveness of our internal control over financial reporting as of January 1, 2022 has been audited by KMJ Corbin & Company LLP, an independent registered public accounting firm, as stated in their report, which is included in Part II, Item 8, of this Form 10-K.

Changes in Internal Control Over Financial Reporting

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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.

In an effort to remediate the identified material weaknesses 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.

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.

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.

In an effort to remediate the identified material weakness related to our ineffective design and maintenance of controls over user access and program change management related to certain IT systems, we have hired a full-time Senior Director of IT in the fourth quarter of 2021 with a primary mandate to focus on SOX compliance and mitigation plans for 2022.

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.

Other Information

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

Not Applicable

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.

In order to proactively address the economic effects of the COVID-19 pandemic, 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.

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The table and narrative below provide, for our current director and executive officers, each such individual’s name;

age as of March 22, 2021;

age as of February 21, 2022;

current position(s) with our Company;

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President, Chief Executive Officer and Sole Director

Vice President, Chief Financial Officer and Secretary

Executive Vice President, Chief Financial Officer and Secretary

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.

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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.

Gail Sasaki has been our Executive Vice President and Chief Financial Officer since July 2021 and our Secretary since August 2007.

From January 2008 to July 2021, Ms.

Sasaki served as our Vice President and Chief Financial Officer, and from 2006 to January 2008, Ms.

Sasaki served as our Vice President of Finance.

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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.

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.

Compensation(2)

Nominating and

Governance(3)

Kiho Choi (4)

Choi (Chair), Cho and Welcher served on this committee during 2020 until August 2020.

Welcher (Chair) and Choi served on this committee during 2020 until August 2020.

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;

● 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;

● review and act as administrator of our incentive compensation and other stock-based plans.

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;

● 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

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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.

and our only other executive officer serving as such at any time during 2020 (our Vice President, Chief Financial Officer and Secretary, Ms.

Summary Compensation Table

Name and Principal Position

Base Salary($)

Compensation($)(2)

President and Chief Executive Officer

Vice President, Chief Financial Officer and Secretary

(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.

Compensation Discussion and Analysis

The following discussion and analysis of compensation arrangements of our named executive officers for 2021 should be read together with the compensation tables and related disclosures set forth below.

This discussion contains forward-looking statements that are based on our current considerations, expectations and determinations regarding future compensation programs.

The actual amount and form of compensation and the compensation programs that we adopt may differ materially from current or planned programs as summarized in this discussion .

The following discussion and analysis relates to the compensation arrangements for 2021 of (i) our principal executive officer, (ii) our principal financial officer and (iii) the most highly compensated person, other than our principal executive officer and principal financial officer, who was serving as an executive officer at the end of our fiscal year ended January 1, 2022 (our “named executive officers”).

We had no other executive officers serving at the end of our fiscal year ended January 1, 2022.

Our named executive officers for fiscal year 2021 were:

President, Chief Executive Officer and Sole Director

Executive Vice President, Chief Financial Officer and Secretary

Compensation Philosophy

Our compensation programs are intended to attract and retain employees with skills necessary to enable us to achieve our financial and strategic objectives and to motivate them through the use of appropriate incentives tied to our performance and market value to achieve those objectives.

We recognize that the goals of employee attraction, retention and motivation must be balanced against the necessity of controlling compensation expense, with the ultimate objective of building shareholder value.

With respect to the compensation of our named executive officers, our President, Chief Executive Officer and Sole Director, who has the responsibility to design a compensation program and set levels of compensation that attempt to achieve the optimal balance between employee attraction, retention and motivation, adjusted the executive officers’ compensation for 2021.

Key Factors in Determining Executive Compensation

Role of Compensation Consultants

Our sole Director has from time to time engaged the services of outside consultants to assist in making decisions regarding the establishment of Netlist’s compensation philosophy and programs.

Most recently the Company engaged Mercer to provide guidelines for executive compensation programs for 2022.

Role of Executive Officers in Compensation Decisions

Our sole Director has overall responsibility for the compensation of our Chief Executive Officer and Chief Financial Officer.

Our sole Director considered the executive officers’ responsibilities, performance, compensation, and

the compensation program’s ability to attract, retain and motivate executive talent.

These considerations reflected compensation levels that our sole Director believed were qualitatively commensurate with executive officers’ individual qualifications, experience, responsibility level, functional role, knowledge, skills and individual performance, as well as Netlist’s performance.

Role of Stockholder Say-on-Pay Votes

At each annual meeting held every three years, including most recently in 2019, we held triennial stockholder advisory “say-on-pay” votes on the compensation of our named executive officers for the immediately preceding fiscal years.

At the 2019 annual meeting, our stockholders overwhelmingly approved the compensation of our named executive officers, with over 78% of our stockholders present and entitled to vote at the meeting voting in favor of our compensation policies for our named executive officers.

Given this result, and following consideration of them, the former Compensation Committee had decided to retain our overall approach to executive compensation while continuing to evaluate our practices frequently, including in response to future say-on-pay votes.

Moreover, we are required to hold a vote at least every six years regarding how often to hold a stockholder advisory vote on the compensation of our named executive officers.

We held our most recent such vote at the 2019 annual meeting of stockholders, at which our stockholders indicated a preference for a triennial vote.

Consequently, the Board determined that we will hold a triennial stockholder advisory vote on the compensation of our named executive officers until they consider the results of our next say-on-pay frequency vote, which will be held at the 2025 annual meeting of stockholders.

Current Elements of Named Executive Officer Compensation

Overview and Fiscal Year 2021 Highlights

Our current executive compensation program generally consists of base salary, annual cash incentive compensation, equity-based incentives and other benefits.

We combine these elements in order to formulate compensation packages that provide competitive pay and align the interests of our named executive officers with long-term stockholder interests by rewarding the achievement of financial, operational and strategic objectives.

In 2021, our full-year accomplishments under our executive leadership included the following:

● Total revenues of $142.4 million, representing an increase of $95.1 million compared to the prior year;

● Net income of $4.8 million and gross margin of 34%, representing favorable changes of $12.1 million and 20.1%, respectively, compared to the prior year;

● Year-end cash and cash equivalent balance of $47.7 million, representing an increase of $34.4 million from the end of prior year;

● Favorable settlement of SK hynix litigation and signing of SK hynix $40 million licensing and $600 million supply agreement

The following table sets forth information regarding the annualized base salary rates at the end of 2021 for our named executive officers:

Fiscal Year 2021 Base Salary ($)

Equity-Based Incentives

Our equity award program is the primary vehicle for offering long-term incentives to our named executive officers.

Our equity-based incentives have historically been granted in the form of options to purchase shares of our common stock and restricted stock unit awards that are settled in shares of our common stock upon vesting, and we have granted to both our named executive officers awards that vest over a long-term period subject to continued service.

We believe that equity awards more closely align the interests of our named executive officers with our stockholders,

provide our named executive officers with incentives linked to long-term performance, and create an ownership culture.

In addition, the vesting features of our equity awards contribute to executive retention because these features provide an incentive to our named executive officers to remain in our employment during the scheduled vesting periods or until the achievement of the applicable performance milestones, which are expected to be achieved over the medium- to long-term.

To date, we have not had an established set of criteria for granting equity awards;

instead, the Board or our sole Director exercises judgment and discretion.

The sole Director considers, among other things, the role and responsibility of the named executive officer, competitive factors, the amount of stock-based equity compensation already held by the named executive officer, and the cash-based compensation received by the named executive officer, to determine the level and types of equity awards that it approves.

Our bonuses are formula-based and weighted towards our financial growth and closely aligning the achievement of bonuses with our financial performance.

Generally, we do not provide any perquisites or other personal benefits to our named executive officers except in certain limited circumstances and as provided in employment agreements.

Health and Welfare Benefits

We provide the following benefits to our named executive officers on the same basis provided to all of our employees:

● medical insurance including mental health, dental and vision;

● life insurance and accidental death and dismemberment insurance;

● a Section 401(k) plan for which discretionary matching contributions provided by Netlist;

● short-and long-term disability insurance;

● medical and dependent care flexible spending account;

● a health savings account.

Employment Agreements – Chief Executive Officer

In September 2006, we entered into an employment agreement with our President and Chief Executive Officer, Mr.

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;

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and the reimbursement of health club membership fees and other similar health-related expenses.

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.

Hong may earn annual cash performance bonuses, at the discretion of our Board, of up to 100% of his base salary based upon the achievement of individual and Company performance objectives.

Hong’s employment agreement automatically renews for additional one-year periods unless we provide or Mr.

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Hong would immediately become fully vested and exercisable as of the effective date of the termination or resignation.

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’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.

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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.

Sasaki’s employment is terminated due to death or disability, any stock options held by Ms.

Sasaki, our Executive Vice President, Chief Financial Officer and Secretary.

For 2021, 2020 and 2019, Ms.

Sasaki received an annualized base salary of $275,000, $285,577 and $200,000.

If the employment of Ms.

Sasaki 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.

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.

For 2020, Mr.

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.

Sasaki for 2019.

Additionally, if the employment of Ms.

Sasaki 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.

Sasaki is eligible for a target cash bonus of 75% of her base salary, which are to be determined by our Board in its discretion based on various factors.

Summary Compensation Table

Name and Principal Position

Base Salary($)

Stock Awards($)(1)

Compensation($)(3)

President, Chief Executive Officer and Sole Director

Executive Vice President, Chief Financial Officer and Secretary

The grant date fair value was determined using the fair value of the underlying shares of our common stock.

(2) Represents the grant date fair value of the option awards granted during the year calculated in accordance with ASC 718.

The assumptions used in the calculations for these amounts are described in Note 1—Summary of Significant Accounting Policies—Stock-Based Compensation and Note 9—Benefit Plans to our consolidated financial statements included in this Form 10-K.

The material terms of each stock option award granted in 2021 are described below under “Outstanding Equity Awards at Fiscal Year End.

(3) For 2021, the amount consists of (a) for Mr.

Hong, $10,816 for automobile rental payments, $7,527 for other vehicle-related costs, $26,027 for a country club membership, $5,480 for a health club membership, and $8,365 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 2020, the amount consists of (a) for Mr.

Hong’s behalf, and (b) for Ms.

Sasaki, the amount is for weekly fitness training.

Hong’s behalf.

Hong received no additional compensation for his service as a director.

CEO Pay Ratio – 2021

The 2021 annual total compensation of our CEO was $1,800,275, the 2021 annual total compensation of our median compensated employee was $56,160, and the ratio of these amounts is 32 to 1.

We determined our median compensated employee by using base salary, bonuses, and grant date fair value of equity awards granted to employees in 2021 as our consistently applied compensation measure.

We applied this measure to our employee population as of January 1, 2022, the last day of our 2021 fiscal year, and annualized base salaries for permanent full-time and part-time employees that did not work the full year.

Once we determined our median compensated employee using these measures, we calculated the employee’s 2021 annual total compensation using the same methodology that is used to calculate our CEO’s annual total compensation in the table entitled “Summary Compensation Table.”

Retirement Benefits

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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.

addition, we may make matching contributions on the contributions of our employees on a discretionary basis.

In 2021, we made matching contributions of $105,161.

In 2020 and 2019, we did not make matching contributions.

Grants of Plan-Based Awards – 2021

The following table shows information regarding the incentive awards granted to the named executive officers for 2021:

All other stock awards:

number of shares of stock or units

All other option awards:

number of securities underlying options

Exercise or base price of option awards ($/sh)

Grant date fair value of stock and option awards

Estimated future payouts under non-equity incentive plan awards

Cash Incentive(1)

Stock Options(2)

Cash Incentive(1)

Time-Based RSUs(3)

(1) Relates to the cash bonus granted as a result of a favorable settlement of SK hynix lawsuit during 2021.

(2) The material terms of each stock option award granted in 2021 are described below under “Outstanding Equity Awards at Fiscal Year End.”

(3) The material terms of each RSU award granted in 2021 are described below under “Outstanding Equity Awards at Fiscal Year End.”

(4) During the first quarter of 2022, Mr.

Sasaki were granted 800,000 and 200,000 RSUs with aggregated fair values of $2,696,000 and $674,000, respectively, due to the significant increase in net sales and gross profit and net income recorded for the first time since 2006.

The awards granted were within the reasonable range as provided in the 2021 third party compensation consultants’ report from Mercer LLC.

Outstanding Equity Awards at Fiscal Year End

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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.

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.

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

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.

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.

Fees Earned or

Paid in Cash($)

Stock Awards($)(1)

(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.

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.

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.

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.

2021 Option Exercised and Stock Vested

The following table show information regarding the vesting during 2021 of stock options and RSUs previously granted to the named executive offers.

Option Awards

Number of Shares Acquired on Exercise(#)

Value Realized on Exercise($)(1)

Number of Shares Acquired on Vesting(#)

Value Realized on Vesting($)(2)

(1) Reflects the product of the number of shares of stock subject to the exercised option multiplied by the difference between the market price of our common stock at the time of exercise on the exercise date and the exercise price of the option

(2) Reflects the product of the number of shares of stock vested multiplied by the market price of our common stock on the vesting date

Employee Compensation Risks

Our management oversees management of risks relating to our compensation plans and programs and has assessed the risks associated with our compensation policies and practices for all employees, including non-executive officers.

These include risks relating to setting ambitious targets for our employees’ compensation or the vesting of their equity awards and our emphasis on equity-based compensation, and the potential impact of such practices on the retention or decision-making of our employees, particularly our senior management.

Based on the results of this assessment, we do not believe that our compensation policies and practices for all employees, including non-executive officers, create risks that are reasonably likely to have a material adverse effect on us.

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.

The table below sets forth information regarding the ownership of our common stock, as of February 21, 2022 (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.

Unless otherwise indicated, the address for each person named below is c/o Netlist, Inc., 111 Academy, Suite 100, Irvine, CA 92617.

Name of Beneficial Owner

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(1) All ownership percentages are based on 230,565,477 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.

(2) Represents (i) 1,942,813 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) 5,052,034 outstanding shares of common stock, of which 4,611,177

shares are held by Mr.

Hong and his wife, Won K.

1 unchanged sentence

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.

(3) Represents 60,844 shares of common stock from restricted stock that will vest within 60 days after the Table date and 137,608 shares of common stock outstanding.

(4) Represents (i) 2,003,657 shares of common stock issuable upon the exercise of stock options and restricted stock units that are or will be vested and exercisable within 60 days after the Table Date and (ii) 5,189,642 outstanding shares of common stock.

Securities Authorized for Issuance under Equity Compensation Plans

20 unchanged sentences

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.

Related party transactions are reviewed by our sole Director in accordance with our related party transaction policy.

Related parties include our directors and officers, their family members and affiliates, and certain beneficial owners.

In cases where the related party is a director or an affiliate of a director, that director does not participate in the review of the proposed transaction.

Except as described below and except for employment arrangements, which are described in Item 11 above, during 2021, there were no actual or proposed related party transactions in excess of $120,000 other than the following:.

Our Executive Vice President of Sales and Operations (formerly, our Vice President of Netlist Base and Commodity Sales), Paik K.

Hong, is the brother of Chun K.

1 unchanged sentence

For 2021, Mr.

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.

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.

Hong earned cash salary of $250,000 and cash bonus of $175,000 and received $19,098 for weekly fitness training.

We have entered into indemnification agreements with each of our director and executive officers.

1 unchanged sentence

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.

Principal Accounting Fees and Service s

Due to the dissolution of all committees of the Board and reduction of the number of directors to one director, our President and Chief Executive Officer, Mr.

Hong, in August 2020, we currently do not have an independent director.

Principal Accountant Fees and Service s

Fees Paid to Independent Registered Public Accounting Firm

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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.

Exhibits, Financial Statement Schedule s

Prior to its dissolution in August 2020, 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.

Our Audit Committee pre-approved all services performed by KMJ in 2020.

All services performed by KMJ in 2021 were pre-approved by our Sole Director.

Exhibits and Financial Statement Schedule s

(a) Documents filed as part of this report

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Consolidated Statements of Operations

Consolidated Statements of Stockholders’ Deficit

Consolidated Statements of Stockholders’ Equity (Deficit )

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

Reports of Independent Registered Public Accounting Firm

Schedule II – Valuation and Qualifying Accounts

(3) Financial statement schedules

All financial statement schedules have been omitted, as they are not required, not applicable, or the required information is otherwise included.

Schedule II – Valuation and Qualifying Accounts (in thousands)

AR Allowance and Sales Returns Reserve

Balance at Beginning of Year

Charged to Expense

Balance at End of Year

December 28, 2019

January 2, 2021

January 1, 2022

All other financial statement schedules have been omitted, as they are not required, not applicable, or the required information is otherwise included.

(3) Exhibit listing

20 unchanged sentences

November 19, 2015

Incorporated by Reference

Filed Herewith

Stock Purchase Warrant, dated November 18, 2015, issued by Netlist, Inc.

3 unchanged sentences

March 31, 2017

Incorporated by Reference

Filed Herewith

Rights Agreement, dated as of April 17, 2017, by and between Netlist, Inc.

6 unchanged sentences

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

2 to Rights Agreement, dated as of April 16, 2019, by and between Netlist, Inc.

and Computershare Trust Company, N.A., as rights agent

April 17, 2019

20 unchanged sentences

November 2, 2009

Incorporated by Reference

Filed Herewith

Intellectual Property Security Agreement, dated October 31, 2009, between Silicon Valley Bank and Netlist, Inc.

1 unchanged sentence

Amendment to Loan Documents, dated March 24, 2010, between Silicon Valley Bank and Netlist, Inc.

Incorporated by Reference

Filed Herewith

Amendment to Loan Documents, dated June 30, 2010, between Silicon Valley Bank and Netlist, Inc.

30 unchanged sentences

August 15, 2017

Incorporated by Reference

Filed Herewith

Amendment to Loan and Security Agreement, dated March 20, 2018, by and between Netlist, Inc.

1 unchanged sentence

March 26, 2018

Incorporated by Reference

Filed Herewith

Amendment to Loan and Security Agreement, dated March 21, 2019, by and between Netlist, Inc.

4 unchanged sentences

March 10, 2020

Amendment to Loan and Security Agreement dated April 9, 2021, by and between Netlist, Inc.

and Silicon Valley Bank

Investment Agreement, dated May 3, 2017, by and between Netlist, Inc.

19 unchanged sentences

March 10, 2020

Purchase Agreement dated July 12, 2021, between Netlist, Inc.

and Lincoln Park Capital Fund, LLC

July 12, 2021

Registration Rights Agreement, dated July 12, 2021 between Netlist, Inc.

and Lincoln Park Capital Fund, LLC

July 12, 2021

Incorporated by Reference

Filed Herewith

Purchase Agreement, dated September 28, 2021 between Netlist, Inc.

and Lincoln Park Capital, LLC

September 28, 2021

Registration Rights Agreement, dated September 28, 2021, between Netlist, Inc.

and Lincoln Park Capital Fund, LLC.

September 28, 2021

Lease, dated April 28, 2021, by and between Netlist, Inc.

and University Research Park, LLC

Subsidiaries of Netlist, Inc.

7 unchanged sentences

XBRL Taxonomy Extension Label Linkbase Document

Incorporated by Reference

Filed Herewith

XBRL Taxonomy Extension Presentation Linkbase Document

XBRL Taxonomy Extension Definition Linkbase Document

The cover page from the Company’s Annual

Report on Form 10-K for the fiscal year ended January 1, 2022 (formatted as inline XBRL and contained in Exhibit 101)

Furnished herewith.

11 unchanged sentences

/s/ Gail Sasaki

Vice President and Chief Financial Officer

Executive Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

1 unchanged sentence

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 9A. Controls and Procedures