Item 9A. Controls and Procedures
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
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 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. 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. GAAP. 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. 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 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. GAAP”).
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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
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 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. 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.
Item 9B.
Other Information
None.
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not Applicable
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PART II I
Item 10.
Directors, Executive Officers and Corporate Governanc e
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.
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 February 21, 2022; 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
61
President, Chief Executive Officer and Sole Director
Gail Sasaki
65
Executive 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 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. 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.
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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
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:
Name
Age
Position(s)
Chun K. Hong
61
President, Chief Executive Officer and Sole Director
Gail Sasaki
65
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
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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; and
● Favorable settlement of SK hynix litigation and signing of SK hynix $40 million licensing and $600 million supply agreement
Base Salary
The following table sets forth information regarding the annualized base salary rates at the end of 2021 for our named executive officers:
Name
Fiscal Year 2021 Base Salary ($)
Chun K. Hong
450,000
Gail Sasaki
275,000
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,
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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.
Bonus
Our bonuses are formula-based and weighted towards our financial growth and closely aligning the achievement of bonuses with our financial performance.
Perquisites
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; and
● 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. Hong. 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 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
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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.
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 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 $200,000. If the employment of Ms. Sasaki is terminated due to death or disability, any stock options held by Ms. Sasaki would vest to the same extent as they would have vested one year thereafter. Additionally, if the employment of Ms. Sasaki is terminated due to death or disability, 25% of the shares subject to outstanding stock options, or such lesser amount as is then unvested, would immediately vest and no additional shares would vest thereafter. Ms. Sasaki is eligible for a target cash bonus of 75% of her base salary, which are to be determined by our Board in its discretion based on various factors.
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Summary Compensation Table
The table below provides information about the compensation awarded to, earned by or paid to each of the following individuals, which we refer to collectively as our “named executive officers,” for each of the last three fiscal years.
Name and Principal Position
Year
Base Salary($)
Bonus($)
Stock Awards($)(1)
Option
Awards($)(2)
All Other
Compensation($)(3)
Total($)
Chun K. Hong(4)
2021
450,000
665,000
—
627,060
58,215
1,800,275
President, Chief Executive Officer and Sole Director
2020
467,308
180,000
94,290
—
62,092
803,690
2019
323,000
—
408,004
—
51,486
782,490
Gail Sasaki
2021
275,000
205,000
72,400
—
22,007
574,407
Executive Vice President, Chief Financial Officer and Secretary
2020
285,577
103,125
23,573
—
22,254
434,529
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) 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, $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 weekly fitness training.
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.
(4) Mr. 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
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
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addition, we may make matching contributions on the contributions of our employees on a discretionary basis. In 2021, we made matching contributions of $105,161. In 2020 and 2019, we did not make matching contributions.
Grants of Plan-Based Awards – 2021
The following table shows information regarding the incentive awards granted to the named executive officers for 2021:
All other stock awards: number of shares of stock or units
(#)(4)
All other option awards: number of securities underlying options
(#)
Exercise or base price of option awards ($/sh)
Grant date fair value of stock and option awards
Estimated future payouts under non-equity incentive plan awards
Name
Award Type
Grant Date
Threshold
($)
Target
($)
Maximum
($)
Chun K. Hong
Cash Incentive(1)
—
—
665,000
—
—
—
—
—
Stock Options(2)
1/13/2021
—
—
—
—
1,000,000
0.72
627,060
Gail Sasaki
Cash Incentive(1)
—
—
205,000
—
—
—
—
—
Time-Based RSUs(3)
1/13/2021
—
—
—
100,000
—
—
72,400
(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. Hong and Ms. Sasaki were granted 800,000 and 200,000 RSUs with aggregated fair values of $2,696,000 and $674,000, respectively, due to the significant increase in net sales and gross profit and net income recorded for the first time since 2006. The awards granted were within the reasonable range as provided in the 2021 third party compensation consultants’ report from Mercer LLC.
Outstanding Equity Awards at Fiscal Year End
The following table shows information about the equity awards held by our named executive officers as of January 1, 2022:
Option Awards
Stock Awards
Name
Grant Date
Number of Securities
Underlying Unexercised
Options Exercisable(#)(1)
Number of Securities
Underlying Unexercised
Options Unexercisable(#)(1)
Option
Exercise Price($)
Option
Expiration Date
Number of Shares
That Have Not
Vested(#)(2)
Market Value of
Shares That Have Not
Vested($)(2)
Chun K. Hong
2/11/2013
300,000
—
0.71
2/11/2023
—
—
2/21/2014
300,000
—
2.05
2/21/2024
—
—
1/6/2015
300,000
—
0.84
1/6/2025
—
—
1/18/2016
300,000
—
0.70
1/18/2026
—
—
2/14/2017
300,000
—
1.02
2/14/2027
—
—
1/13/2021
187,500
812,500
0.72
1/13/2031
3/7/2019
—
—
—
—
278,436
1,795,912
3/6/2020
—
—
—
—
187,500
1,209,375
Gail Sasaki
3/18/2019
—
—
—
—
154,405
995,912
3/6/2020
—
—
—
—
46,875
302,344
1/13/2021
—
—
—
—
87,500
564,375
(1)
Represents stock option awards granted under the Netlist, Inc. Amended and Restated 2006 Equity Incentive Plan (the “Equity Plan”). These stock option awards that are not fully exercisable vest in 16 equal quarterly installments, subject to
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continued service on each vesting date, subject to accelerated vesting in certain circumstances as described under “Employment Agreements” above.
(2)
Represents RSUs granted under the Equity Plan. Restrictions on RSUs lapse in eight equal semi-annual installments from the grant date.
2021 Option Exercised and Stock Vested
The following table show information regarding the vesting during 2021 of stock options and RSUs previously granted to the named executive offers.
Option Awards
Stock Awards
Name
Number of Shares Acquired on Exercise(#)
Value Realized on Exercise($)(1)
Number of Shares Acquired on Vesting(#)
Value Realized on Vesting($)(2)
Chun K. Hong
300,000
1,106,687
260,625
1,021,648
Gail Sasaki
450,000
2,099,092
134,188
513,070
(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.
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 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., 111 Academy, Suite 100, Irvine, CA 92617.
Name of Beneficial Owner
Shares Beneficially Owned
Percent of Class(1)
Chun K. Hong (2)
6,994,847
3.0%
Gail Sasaki (3)
198,452
*
All executive officers and directors as a group (2 persons) (4)
7,193,299
3.1%
*
Represents beneficial ownership of less than 1%.
(1) All ownership percentages are based on 230,565,477 shares of our common stock outstanding as of the Table Date.
(2) Represents (i) 1,942,813 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
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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 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
The following table provides information as of January 1, 2022 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
8,126,728
(2)
0.88
1,726,990
(3)
Equity compensation plans not approved by security holders
450,000
(4)
0.77
—
Total
8,576,728
0.88
1,726,990
(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: 5,898,926 shares subject to outstanding stock options and 2,227,802 shares subject to outstanding RSUs.
(3) Subject to certain adjustments, as of January 1, 2022, we were authorized to issue a maximum of 17,405,566 shares of our common stock pursuant to awards granted under the Equity Plan.
(4) Consists of 450,000 stock option awards outstanding as of January 1, 2022.
Item 13.
Certain Relationships and Related Transactions, and Director Independenc e
Related Party Transactions
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. Hong, our President, Chief Executive Officer and Sole Director. For 2021, Mr. P. K. Hong earned cash salary of $250,000 and cash bonus of $175,000 and received $19,098 for weekly fitness training.
We have entered into indemnification agreements with each of our director and executive officers. In general, these agreements require us to indemnify each such individual to the fullest extent permitted under Delaware law against certain liabilities that may arise by reason of their service for us, and to advance expenses incurred as a result of any such proceeding as to which any such individual could be indemnified.
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Director Independence
Due to the dissolution of all committees of the Board and reduction of the number of directors to one director, our President and Chief Executive Officer, Mr. Hong, in August 2020, we currently do not have an independent director.
Item 14.
Principal Accountant Fees and Service s
Fees Paid to Independent Registered Public Accounting Firm
The following table presents the aggregate fees billed to us by our independent registered public accounting firm, KMJ Corbin & Company LLP (“KMJ”), for 2021 and 2020:
2021($)
2020($)
Audit Fees (1)
202,650
118,550
Audit-Related Fees (2)
—
—
Tax Fees (2)
—
—
All Other Fees (2)
—
—
Total Fees
202,650
118,550
(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 2021 or 2020.
Pre-Approval Policies and Procedures
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.
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PART IV
Item 15.
Exhibits and 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
45
Consolidated Statements of Operations
46
Consolidated Statements of Stockholders’ Equity (Deficit )
47
Consolidated Statements of Cash Flows
48
Notes to Consolidated Financial Statements
49
Reports of Independent Registered Public Accounting Firm
71
Schedule II – Valuation and Qualifying Accounts
87
(3) Financial statement schedules
Schedule II – Valuation and Qualifying Accounts (in thousands)
AR Allowance and Sales Returns Reserve
Balance at Beginning of Year
Charged to Expense
Write-offs
Balance at End of Year
December 28, 2019
$
39
$
(289)
$
311
$
61
January 2, 2021
$
61
$
(541)
$
637
$
157
January 1, 2022
$
157
$
(104)
$
230
$
283
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
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
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Incorporated by Reference
Exhibit No.
Description
Filed Herewith
Form
File No.
Exhibit
Filing Date
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
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 Netlist, Inc. 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
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Incorporated by Reference
Exhibit No.
Description
Filed Herewith
Form
File No.
Exhibit
Filing Date
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
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
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Table of Contents
Incorporated by Reference
Exhibit No.
Description
Filed Herewith
Form
File No.
Exhibit
Filing Date
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
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
Amendment to Loan and Security Agreement dated April 9, 2021, by and between Netlist, Inc. and Silicon Valley Bank
10-Q
001-33170
10.1
May 18, 2021
10.28
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
10.29
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
10.30
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
10.31
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
10.32
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
10.33
Purchase Agreement, dated June 24, 2019, between Netlist, Inc. and Lincoln Park Capital Fund, LLC
8-K
001-33170
1.1
June 24, 2019
10.34
Purchase Agreement, dated March 5, 2020, between Netlist, Inc. and Lincoln Park Capital Fund, LLC
10-K
001-33170
10.37
March 10, 2020
10.35
Purchase Agreement dated July 12, 2021, between Netlist, Inc. and Lincoln Park Capital Fund, LLC
8-K
001-33170
1.1
July 12, 2021
10.36
Registration Rights Agreement, dated July 12, 2021 between Netlist, Inc. and Lincoln Park Capital Fund, LLC
8-K
001-33170
1.2
July 12, 2021
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Incorporated by Reference
Exhibit No.
Description
Filed Herewith
Form
File No.
Exhibit
Filing Date
10.37
Purchase Agreement, dated September 28, 2021 between Netlist, Inc. and Lincoln Park Capital, LLC
8-K
001-33170
1.1
September 28, 2021
10.38
Registration Rights Agreement, dated September 28, 2021, between Netlist, Inc. and Lincoln Park Capital Fund, LLC.
8-K
001-33170
1.2
September 28, 2021
10.39
Lease, dated April 28, 2021, by and between Netlist, Inc. and University Research Park, LLC
8-K
001-33170
10.1
May 3, 2021
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
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
X
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
X
104
The cover page from the Company’s Annual
X
Report on Form 10-K for the fiscal year ended January 1, 2022 (formatted as inline XBRL and contained in Exhibit 101)
+
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.
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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 1, 2022
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 1, 2022
/s/ Gail Sasaki
Executive Vice President and Chief Financial Officer
Gail Sasaki
(Principal Financial and Accounting Officer)
March 1, 2022
92
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.