Mike Smargiassi - Investor Relations Chuck Hong - Chief Executive Officer Gail Sasaki - Chief Financial Officer

Suji Desilva - ROTH Capital Richard Shannon - Craig-Hallum

Good day. And welcome to Netlist Fourth Quarter 2017 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mike Smargiassi, Investor Relations. Please go ahead.

Thank you, Austin, and good afternoon, everyone. Welcome to Netlist’s fourth quarter 2017 conference call. Leading today’s call will be Chuck Hong, Chief Executive Officer of Netlist; and Gail Sasaki, Chief Financial Officer. As a reminder, our earnings release and a replay of today’s call can be accessed on the Investors section of the Netlist website at netlist.com. Before we start the call, I would note that today’s presentation of Netlist’s results and the answers to questions may include forward-looking statements, which are based on current expectations. The actual results could differ materially from those projected in the forward-looking statements, because of the number of risks and uncertainties that are expressed in the call, annual and current SEC filings and the cautionary statements contained in the press release today. Netlist assumes no obligation to update forward-looking statements. During this call, non-GAAP financial measures will be discussed. Reconciliations for those directly comparable GAAP financial measures are included in the press release, which was filed on Form 8-K. I would now like to turn the call over to Chuck.

Thanks, Mike, and good afternoon, everyone. I’d like to start off today's call with a quick recap of key events in 2017. First, we continue to make progress in a campaign to defend our intellectual property, including filing new actions in both the U.S. and abroad. We expanded our IP portfolio with the issuance of new patent on high-speed RDIMM and LRDIMM technologies. We believe these actions will position us to secure future licensing agreements. Second, we made further progress in the commercialization of HybriDIMM, including the shipment of evaluation systems to select customers. And third, we nearly doubled our full year revenue as we recorded strong sales of enterprise SSDs, high-density DRAM modules and custom DIMMs. In addition, we also qualified our EV and NV products with key customers and set the stage for growth in 2018. Since the third quarter, we have seen a significant increase in activity around NVvault, our memory module that combines the high-performance DRAM with non-volatility of NAND flash in collaboration with Nyriad, a software-based company that specializes in the use of GPUs to accelerate processing. We have achieved millions of IOPs, enabling levels of storage performance and integrity that are not possible with traditional CPU or rate-based systems. We demonstrated the solution with our hardware partner TYAN on their latest server platforms targeting big data and with HPC systems, a leading system integrator of high-performance computing solutions. And we held joint demonstrations at SuperComputing 2017 in Denver last November and at the Persistent Memory Summit in San Jose in January. Over the past six months NVvault has been qualified with over dozen target customers and partners, including a major server OEM, several major ODMs and with a major server CPU vendor on the latest x86 server platforms. The design and validation activities have accelerated over the past few months, with the increasing adoption of Intel Skylake, as well as AMD-based systems in the marketplace. In this heightened level of qualification activity bodes well for the prospects of ramping the NV through the course of this year. On EV, we continue to steadily grow our partnership with Inspur, the largest server vendor in China. Moving to HybriDIMM. Our commercialization efforts continue and during the past year we shipped our first HybriDIMM evaluation systems to select customers including a major ODM in Taiwan. We also held discussions with several potential partners including Samsung for the next phase of HybriDIMM commercialization. With the distribution of these evaluation systems we are now able to work directly with potential partners to highlight first-hand the unique capabilities of HybriDIMM and build upon the interest generated at SuperComputing 2017, where HybriDIMM concurrently operated -- was demonstrated operating a big data storage and an in-memory database application in multiple access modes. This demonstration was a first of its kind where storage access was achieved in the memory channel without severe deterioration of memory bandwidth. We continue to see significant interest throughout the industry in regards to storage class memory and the cost performance benefits of HybriDIMM. Within our product team, we recently appointed Rahul Advani as Vice President of Marketing. Rahul holds a PhD from MIT and brings almost 20 years of marketing and strategic planning experience from Intel, Micron and Microsemi. He is a proven executive and will play a critical role in our efforts to broaden customer relationships and bring our innovative products to market. Turning now to licensing. We have continued to make progress in the campaign to defend our intellectual property. As previously discussed, our strategy is not dependent upon a single action or outcome, rather a methodical worldwide campaign involving multiple enforcement actions in various venues in the U.S. and abroad. Licensing campaigns often require years of effort and investment, particularly where the infringement is widespread and our experience has been no different. We are committed to seeing our strategy through to completion and remain optimistic that our efforts will ultimately result and Netlist being fairly compensated for our IP. I’d like to take a moment to review the outcome of our first ITC action against Hynix, which we refer to as ITC 1. We received the final determination in January, 16 months after filing our action and while the final decision was not what we had hoped for, we were encouraged by a number of points that were decided in our favor. In the ITC a patent owner is required to check four critical boxes to receive a favorable decision. We were successful on three of the four. First, the ITC found our patents to be valid and enforceable. Second, Netlist satisfy the public interest requirement of the ITC, including having complied with our RAND or reasonable and non-discriminatory licensing obligations. And third, Netlist satisfy the ITC's economic domestic requirements through its investment over the years in high-speed memory technologies. Where we fell short was in regards to infringement. The ITC found that the patents assert in this action were not infringed. However, we hope to leverage the favorable findings from ITC 1 on validity, RAND and domestic industry, as we move forward with our second ITC action or ITC 2 against Hynix. Importantly, we believe the two patents asserted in ITC 2 address the shortcomings identified by the judges -- by the judge in ITC 1 related to infringement. The 907 and 623 patents asserted in ITC 2 are related to and improve upon patents asserted in the prior investigation and were issued after ITC 1 was filed. Given the improved infringement positions of the two new patents and building on the positive findings from ITC 1 on validity, RAND and domestic industry, we believe we are well-positioned to achieve a positive outcome in ITC 2. The preliminary schedule for ITC 2 has been set and while the ITC can make adjustments, we currently expect the judge to conduct in Washington D.C. on April 23rd and 24th, and to issue a claim construction order approximately one month later, interpreting key claim elements of the two asserted patents. The parties will then have fact and expert discovery through the summer and early fall, followed by the ITC 2 trial, which is currently scheduled to begin on November 9, 2018. The judge is scheduled to issue an initial determination by March 1, 2019, which will include a recommendation as to whether an exclusion order should be granted, barring importation of Hynix’s RDIMM and LRDIMM products. In Germany, our infringement suit against Hynix LRDIMM products is proceeding. We had a preliminary hearing in Munich in January. We were pleased that the court denied request by Hynix to stay the case. The court also set a trial date for December 4th, where the court will determine whether Hynix’s LRDIMM products infringe. This decision from the German court is expected in early 2019 and if the court decides in our favor, injunction would likely go into effect at that time. The two suits we filed in China against Hynix are also proceeding through the courts, though the courts have not set a trial date for either. We remain focused on achieving a positive result in ITC 2. Alliance of communication with Hynix remain open, and we anticipate the dialogue between the parties will continue as the ITC 2 process moves forward. We are confident that the investments that we have made to build and defend our intellectual property have laid the groundwork for successful long-term licensing program. An important element of this strategy is growing and strengthening our patent portfolio in markets that are enormous today, such as high-speed server memory, as well as those with significant potential for the future, such as hybrid and storage class memory. Along those lines, we've had two patents issue in the last week related to hybrid memory technologies that came out of our NV and HybriDIMM development efforts. We've also had new patents issue recently related to the -- to DDR4 RDIMM and LRDIMM. In summary, we are focused on the execution of our strategic initiatives including building demand for EV and NV, and the continued commercialization of HybriDIMM. The expanding market for hybrid memory and storage class memory provides numerous opportunities to deliver value from our products and intellectual property. We also remain committed to defending our IP with the goal of entering licensing agreements that fairly compensates Netlist and its shareholders. I'll now turn the call over to Gail for the financial review.

Thanks, Chuck. On the topline we delivered substantial year-over-year growth in 2017. Revenues for the full year ended December 30, 2017 were $38.3 million, compared to revenues of $19.7 million for the 2016 period, an increase of 95%. The year-over-year increase in revenue primarily reflects the sale of enterprise grade, high-capacity SSDs and high-density DRAM modules to growing base of customers. Revenues for the fourth quarter ended December 30, 2017 were $8.5 million, compared to revenues of $5.5 million for the 2016 period, an increase of 53%. Although, we don't guide looking at the first quarter of 2018 revenue, we currently expect to be that in line with the first quarter of 2017. Full year 2017 gross profit was $2.5 million, compared to gross profit of $7.4 million in 2016. The 2016 period included $6.9 million in non-recurring engineering revenues and gross profit for Phase 1 of the five-year joint development agreement with Samsung. Gross profit for the fourth quarter of 2017 was $407,000. Net loss for the full year 2017 was $13.4 million, compared to a net loss of $11.2 million in 2016. Fourth quarter net loss was $3.1 million, compared to a net loss in the prior year period of $3.9 million. Operating expenses for the full year 2017 were $15.3 million, compared to $18.4 million in 2016. Operating expenses were $3.4 million in the fourth quarter of 2017, compared to $4.4 million in last year's fourth quarter. Expenses declined on an absolute basis for both the full year and fourth quarter period across R&D and SG&A, mainly due to ongoing proactive cost management. Before turning to our balance sheet I would like to comment on our NASDAQ listing. As previously disclosed in our 8-K filings, NASDAQ has notified the company that it no longer meets the continued listing requirements of the minimum bid price of the $1 and minimum market cap of $35 million. NASDAQ provided the company with an initial 180-day grace period for the minimum bid price requirement, which concluded yesterday. We will receive a letter today, which will allow us to request a second 180-day grace period from different NASDAQ panel. This is a standard process that NASDAQ and although it will be up to the discretion of the panel, we expect to be granted an extension of the grace period for another 180-day. We ended 2017 with cash and cash equivalents and restricted cash of $9.5 million as compared to $11 million at the end of the third quarter, a net cash burn of $1.5 million. We continue to proactively manage our operating expenses and our overall cash cycle. We recently renewed our working capital line of credit with Silicon Valley Bank, which provide borrowing of up to 80% of our eligible account receivable balance up to $5 million to support product revenue. During Q4 ‘17 we also realize a benefit of close to $1 million in reduced legal expenses from our financial arrangement with TRGP and for the year we have realized the total benefit of $10.2 million. The cash position at the end of the year also includes $2.8 million in net proceeds from our aftermarket ATM facility during the fourth quarter. And as of March 23, 2018, we have received total net proceeds of close to $5 million on the ATM facility with the balance of $4 million to utilize under the facility through November 2019. Thank you for listening. Operator, we are now ready for questions.

[Operator Instructions] Our first question comes from Suji Desilva with ROTH Capital. Please go ahead.

Hi, Chuck. Hi, Gail. How are you doing?

Hi, Suji.

So for the Samsung joint development, Chuck, can you talk about, what the next milestone we should be watching for there are on the five-year agreement? Just understanding what we should expect next there?

We've been in discussions with them. The next stop would be to take the design that we have on the controller and convert that into a ASIC. It is our controller currently is on an FPGA. The product is -- as we've seen through demonstration is operational. However, it is -- the FPGA is inherently limited to 1866 megahertz -- mega transfer speed for second. And the Skylake systems that are out in the market and beyond are at 2.3 gigahertz and beyond. So that is the next step is to convert the FPGA into an ASIC chip.

Okay. Great. And then, on HybriDIMM, you said you have lead customers in -- initial lead customers in the qualification phase. What’s the typical length of that qualification phase and in answering that what timing would you think will come out of the qualification phase?

Suji are you -- did you – you are talking about HybriDIMM or NV?

HybriDIMM, sorry.

Okay. On HybriDIMM, well, the HybriDIMM is going to require this controller. I think the thing that we are doing now, as I mentioned in this – in the opening remarks is that, we have the system with HybriDIMM running out at a number of customers, potential customers and partners, including a major ODM in Taiwan. And they are verifying functionality, they are running their tests on it, but again it is at the lower speed. So, I think, for it to become a mass-produced product to get on Skylake or any of the AMD epic systems, we would have to convert the controller into an ASIC. The driver is portable. We don't need to do too much work on the driver. But, I think, the basic gate is going to be the conversion to ASIC.

Okay. That’s helpful color. And last question on ITC 2, understand that you're asserting different patents this time. Any other procedural differences in the ITC 2 case versus ITC 1 that we should be aware of that might impact the output there? Thanks.

Yes. That – in ITC 1 there was no Markman or Markman is the claim construction hearing, where the judge construes the meaning of key terms of the patent. So there are six judges at the ITC. They all have different processes. The current judge that we have, Judge Pender, he goes through a very detail Markman process and that will happen in April, the current schedule is for it to happen on April 23rd and 24th in front of that judge. And we believe that Markman hearing by its nature will clarify the terms -- the key terms of the patent which in turn will clarify for the parties whether there is infringement -- the issues of infringement and validity.

Okay. Great.

So that is -- that Markman hearing will be important and that is the key difference. In ITC 1 the judge went right from the start of the case right to trial. There was no Markman hearing.

Okay. Very helpful. Thanks Chuck. Thank you.

Okay. Thank you, Suji.

Our next question comes from Richard Shannon with Craig-Hallum. Please go ahead.

Hi, Chuck and Gail. Thanks for taking my questions. I apologize if there is any ambient noise here. I am not in the office today. I want to follow-up on one of the previous questions regarding the HybriDIMM. I think you talked about need to get an ASIC done here to get to higher speed. When do you think that will be done? Is that something that you intend to do internally or you -- will you partner for that?

We will partner for that. We are in discussion with the couple of potential partners for conversion of this our controller to ASIC. We are also contemplating opening up the technology through the industry’s standard body JEDEC.

Okay. Interesting. But any sense of when that might be ready if you started any of the initial process you would get to market as soon as possible?

Well, we are pretty much ready with the product in every which fashion. We've done – the product is operational, functional, we've done demonstrations. We've got a very well-developed specification that it can be taken by an ASIC vendor and convert it to ASIC, probably, within four to five quarter timeframe.

Okay. Okay. That’s helpful. And shifting over to the EV and NV product lines [Audio Gap] (24:51-24:57) you have made a few interesting comments on both product lines about some engagement there. Is this broadly speaking how do you see the revenue streams developing there? How much more qualification engagement process versus are we getting to the point, we are going to see some meaningful revenue growth this year?

No. We – in the last three months or four months, I think, the adoption of Skylake. Skylake is becoming bigger and bigger share of the market and that is really the first Intel-based platform which NV is being used. So we are on the approved vendor list of -- one of the major CPU vendors, on a major OEM approved vendor list, as well as several ODM. So we believe that that's the right foundation and that’s going to lead to – that’s going to trickle-down to a lot of different customers from there on. So we need – I’m not sure [inaudible] that make platforms. So we think in the second half we will start to see these things or this qualification and approved vendor listing positions will be converted into some decent revenues.

Okay. That’s helpful. And last question for me. Just regarding the kind of the Samsung rebranded SSD product line. Could you give us a sense of how that revenue will trend this quarter, this year, obviously, from the small base last year was very good, one might see it’s -- the growth is leveling off here. I just want to get your thoughts of how that’s – how do you expect that curb that ramp to go?

Yeah. Richard, I think, that's – it’s a function of the market, as well as our ability to secure supply from Samsung. The DRAM module market has been continues to be strong. The high-density server RDIMM and LRDIMM and we've done very well there. The SSD side of it has slowed a little bit. We expect, as Gail mentioned, for those revenues to remain at current levels through next quarter. We think it will turn up in the second half. We are increasing our customer base and it’s a matter of negotiating with Samsung to increase the support or product supply.

Okay. Fair enough. That is helpful. That’s all the questions for me. Thank you very much.

Yeah. Thanks, Richard.

Thanks, Richard.

This concludes our question-and-answer session, as well as today's conference. We thank you for attending today's presentation and you may disconnect at this time. Have a great day.