Good afternoon and welcome to the Netlist Fourth Quarter and Full Year 2018 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. Please go ahead.

Thank you, Chad, and good afternoon, everyone. Welcome to Netlist's fourth quarter and full year 2018 conference call. Leading today's call will be Chuck Hong, Chief Executive Officer of Netlist; and Gail Sasaki, Chief Financial Officer. As a reminder, the 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. In 2018, we move forward on a number of initiatives, including the campaign to the defend our IP. The expansion of the product offerings with the introduction of a new line of enterprise grade SSDs, the strengthening of our balance sheets and the build out of our patent portfolio. We ended the year with solid fourth quarter performance, which included increased revenue and an expanded product margin, compared to a year ago period. Moving to intellectual property initiatives. From March 11 to March 18, we will be in trial at the International Trade Commission, or the ITC against SK Hynix. We enter this hearing with positive momentum from two recent wins in the case. First in February, the ITC denied Hynix's motion for summary determination of non-infringement of Netlist’s 623 patents. Hynix attempted to short circuit the process without a trial going straight to a final ruling on this patent and was denied based on the Chief Administrative Law Judge’s view that the substantive merits of the 623 must be thoroughly considered in trial and a fast track to a decision is not appropriate. Hynix tried to do this once before with the entire case, asking the ITC to forego the trial and go straight to a ruling and failed as the commission remanded the case back to the Chief ALJ for a full trial. This most recent denial allows for due process and the facts to be considered for the 623 patent. The two patent assert in this case are the 623 patent against Hynix RDIMMs and the 907 patent against LRDIMMs. Both are children patents of the parent patent asserted in the first ITC action. And importantly, contain specific claims that have been refined and honed in view of infringement shortcomings in the first case. Second, last year, we received a favorable claim construction or a Markman order related to the claims from both the 623 and the 907 asserted patents from the ITC. In this comprehensive order, the Administrative Law Judge’s ruling cited with us on the definitions of key patent claims at the heart of the investigation. This Markman order, as do most Markman orders, provides the framework from which the authorities will ultimately decide if the patents are valid and infringe by Hynix. We are encouraged by these favorable decisions which acknowledged the improved infringement positions of the new Netlist patents asserted in the second ITC case. The initial determination of the investigation is scheduled to be issued by June 14, 2019, which will include a recommendation by the judge as to whether an exclusion order should be granted barring importation of SK Hynix’s RDIMM and LRDIMM products into the United States. Turning to Germany, in December a trial was held in the Munich District Court against LRDIMM being marketed by Hynix and Hewlett Packard Enterprises in Germany. This January, the court dismissed our action as the court followed a different claim construction than we advocated and did not find Netlist's utility model to be infringed. We plan to appeal the court's decision and have until March 5th to do so. In the EU, we currently have a pending patent application from which the German utility model is derived. We expect to receive an initial ruling on the validity of this patent application in the coming months. Moving to the U.S. Patent and Trial and Appeal Board or the PTAB, in January, we received a favorable decision that denied Google's rehearing request and upheld the validity of our 912 patent. Google first requested reexamination of the 912 patents in 2010, thereby staying our litigation against them for most of this decade. Other parties also participated in the effort to invalidate this patent but failed and gave up years ago, while Google continue the fight to invalidate. This comprehensive and final ruling by the PTAB rejected Google's three main arguments for invalidity and in the process reinforce the seminal value of the 912, which covers server memory modules, and the specific use of rank selecting signals teachings that can be found in the current DDR4 server memory modules, as well as the new DDR5 standards now being established. Google has approximately 60 days to file notices of appeal to the Federal Circuit. If they do not appeal the currently stayed litigation with Google regarding FBDIMMs and potentially other products would become unstayed. Also, in January, patent litigation initiated by Smart Modular against Netlist hyper cloud products was dismissed with prejudice by the U.S. District Court for the Eastern District of California. Netlist and Smart Modular jointly agreed to drop claims against one another including counterclaims Netlist brought against Smart Modular and their 295 patent, which was the subject of a final ruling of invalidity from the PTAB. Overall, with the addition of Chuck Houseman in October as our Chief Licensing Officer, we're pleased to report that the activity level in the area of intellectual property, both in terms of licensing discussions, as well as new patent continuations has been at its highest. We expect this trend to continue over the course of this year, as we engage in multiple litigations and negotiations, as well as redoubling our efforts on submitting new patent applications. Our portfolio today contains over 100 patents, many seminal covering memory modules, solid state drives, high bandwidth memory and other related products and technologies. In the past two years as we continue to update and expand our IP, keeping pace with the evolving memory industry, 13 new patents have been granted and dozens more applications have been placed in the pipeline. By pursuing patents on the innovations created by our engineers in the course of product development, we believe we will continue to strengthen the platform to launch new products, as well as secure licensing agreements. Turning now to product update. During the fourth quarter Netlist participated in Supercomputing 2017 in Dallas, Texas, where we worked in cooperation with our partnership to highlight and Netlist’s NVMe SSDs solid state drives, as well as HybriDIMM Storage Class Memory and NV vault offerings. This included co-marketing and product demonstrations at the show, we were pleased with the level of activity and follow up discussions with the system manufacturers and customers. The interest in our SSD products and DRAM products was strong, and has led to dozens of qualifications being started. As mentioned last quarter, central to the continuing effort to grow our product business are the new lines of enterprise and NVMe SSDs that we introduced last year. NVMe SSDs are the fastest growing part of the enterprise SSD market, with a 40% compound annual growth rate. These recently introduced SSDs have been very well received in the market with more than 55 customers' samplings, of which 15 qualifications are now complete and 12 more are in process. The remaining are in the pre-qualification evaluation stage. These SSDs are high performance fully featured and have capacities ranging from 2 terabytes to 16 terabytes. Distraction places us on a path for revenue ramp and production orders from SSDs in the first half of the year. For NVvault additional qualifications are in process with next generation Intel and AMD platforms. And we are now working closely with an x86 processor vendor to design in our NVvault in their reference platforms. Regarding the commercialization of HybriDIMM, we have made significant progress in this area in the last quarter, as in-depth discussions continued with potential partners ASIC partners for the development of media controller and continued progress with our software partners, ScaleMP, as well as memory and server ecosystem partners. I'll now turn the call over to Gail for the Financial Review.

Thanks, Chuck . Revenues for the full year ended December 29, 2018 were $33.5 million compared to revenues of $38.3 million for the 2017 period. The year-over-year variance in revenue was due to a decrease in Samsung resell products mitigated by an increase in higher margins Netlist specialty DIMM revenues. Revenues for the fourth quarter ended December 29, 2018 were $9 million compared to revenues of $8.5 million for the 2017 fourth quarter, an increase of 6% year-over-year. Revenue for the quarter were up by 25% consecutively. Fourth quarter product gross margin measured before manufacturing costs was 14.3% in the fourth quarter, benefiting from the more optimal product mix, up 2% consecutively and up by 6% in comparison to last year's fourth quarter. Q4 net gross margin was 9.5%, up consecutively as well as year-over-year. And although we do not guide given the current pace of bookings as of today, we do anticipate a flattish or slightly down first quarter revenue performance compared to last quarter due to the industry wide decrease in demand and resulting lower ASPs from what we see as conservative purchasing behavior by our customer base. Operating expenses for the full year 2018 were $18.7 million compared to $15.3 million in 2017. Full year operating expenses without litigation costs were down by 2.9% or 23%. Total operating expenses, including litigation were $5 million during the fourth quarter, flattish consecutively as compared to last year's fourth quarter. Again, the year-over-year increase reflects increased legal activity in support of patent portfolio prosecution, defense and the trials at the ITC and in Germany. Operating Expenses without litigation costs in the fourth quarter decreased by 15% from the fourth quarter of last year and were also down by 22% consecutively. We ended of 2018 with cash and cash equivalents and restricted cash of $16.7 million, compared to $19.4 million at the end of the third quarter, a net cash burn of $2.7 million, of which $2.3 million was used to pay down legal expenses. Q4 2018 cash cycle improved by five days for the quarter and by 53 days for the full year. We continue to practically manage the cash balance, which includes access to a $5 million working capital line of credit with Silicon Valley Bank, providing borrowing of up to 85% of eligible accounts receivable to support working capital and revenue growth. In a few weeks, we will be participating in one-on-one meetings at the 31st Annual ROTH Conference taking place March 17th to the 19th. Institutional investors should contact their ROTH representative for additional details. We look forward to talking with you at that time. Operator, we are now ready for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question will come from Suji Desilva with ROTH Capital. Please go ahead.

Hi, Chuck, hi Gail, congratulations on the progress you've made in 2018 here. So looking ahead the ITC trial that we're watching closely, the March trial date and then the June determination are there any other events or kind of dates to watch other than those key milestones? That would provide indication as to how the -- how it's going for you guys along the way or is it really those two catalysts dates?

For the ITC two case those are the two periods that we should be looking at. There are in between the trial and the initial determination by the Chief ALJ, there will be briefings from both parties, as well as the ITC staff attorney that takes place. But in the end it is the judge's ruling, which we will all have been looking for.

Okay, that's helpful. And then with the outcome of the Google trial, can you talk about what some of the next dates or steps are in that process?

Yes. As I mentioned this almost a 10-year fight on the -- that Google started out with us suing them for infringement of FBDIMMs on a patent called the 386. The 912 patent is a child of that 386 patent and Google and others have been trying to invalidate it, because it is what we call a seminal patent that reads on the architecture of the memory module, server memory module. So Google has fought that pretty much to the end, they have an option to appeal this to the Federal Circuit Court of Appeals. They have the next I believe 60 days to do so. If they do not then the original litigation, which is currently stayed will and can and will become unstayed. And it will become an open litigation at that time on the FBDIMM product, which they consume back earlier in the decade. As well as potentially other products that server memory products that they're consuming today, on which we believe that 912 patents reads.

And that would happen automatically Chuck the understanding of that case?

No, we would have to take actions, but the only thing that kept this case stayed for this long was the continued fight by multiple parties to invalidate -- try to invalidate our patents. Now the law -- I think the rules in the PTAB are changing with the new director of the patent office so that they don't have these unlimited challenges. In the past the same party or multiple parties can bring unlimited number of invalidity challenges and just continue this to drive things on. But at this point, we believe the rolling that the PTAB provided the content of that ruling was -- is very compelling and thoroughly addressed and essentially repudiated the arguments that Google made, the three specific arguments. So it is unlikely that they would be able to prevail or reverse this ruling at the Federal Circuit. That is the opinion of our attorneys. And if that is the case, we'll see if they do appeal or not. But -- so yes, we think there's a lot of stake there.

And it seems the regulatory regime is moving toward your side in some ways, that's helpful.

Yes, I think in general some of the legislation, as well as certainly the roles within the U.S. PTO are starting to shift a little bit the pendulum swinging back to protect the rights of the patent owners.

That’s very timely. And then now a couple of questions on the business, the enterprise and NVMe SSD, what you consider as the 2019 revenue opportunity or maybe you can talk about the portion of the market you're addressing just to give us a sense of across the 2020 customers you talk about how big that business could potentially get for you?

We believe the NVMe SSD markets are -- it exceeds now $10 billion annually. Now the bulk of that market is addressed -- served by the major suppliers like Samsung, Intel, SanDisk, Quest [ph] and Digital, Micron, Toshiba. We are addressing the niche portion of this market with -- we have some higher performance, as well as specialized form factor and we are going after the system integrators and the smaller data centers in that market. So it is a big market. We believe that, our plan calls for us to exceed $10 million in sales of SSDs this year. I think we will see some evidence of that traction in starting next quarter. We -- as I mentioned, we have some 50 customers in the pipeline, a dozen or more qualifications completed and another dozen in process. So, qualifications are always a precursor to purchase orders. So, so far, I think we're optimistic about the SSD product line.

So, Chuck first revenue could be 2Q -- is early 2Q 2019, is that right? Did I hear you, right?

Yes.

Okay, great. And then last question for Gail on the OpEx side. The litigation is relatively high in your OpEx now. Is there sort of a guidance for how that plays out the rest of the year? Is there some front end load to that or should it be sort of a steady spend give your activity?

We do expect it to go down Q1 and then further decreased after the ITC trial.

Okay. All right, great. Thanks, guys. Congrats again on the progress.

Thank you.

The next question will be from Richard Shannon with Craig-Hallum. Please go ahead.

Hi, Chuck and Gail. Thanks for taking my questions as well. I'm going to follow-up on a couple of these topics here. Maybe let's touch first on the first quarter and Gail gave some brief thoughts on revenues. I would assume that gross margins would generally reflect the curve of revenues during the quarter so being flat to down?

Gross margins I expect it to be flat.

Okay. And well I could probably calculate off top my head, I'll just ask you directly what do you think about cash burn in the quarter?

Well, I think I did talk about cash burn for Q4 being $2.7 million of which $2.3 million was for legation. Q1, we will -- we continue to manage the outlay for legal, but a way to think about the rest of the business is we had about $2.3 million in Q4 of total OpEx without legal, of which $2 million is cash based. We brought in $1.3 million from product margin. So you're looking at less than $1 million cash burn. As long as we continue positive work on cash cycle, I think we can anticipate less than $1 million on the rest of the business. And then however we can negotiate legal payments going forward I think that that maybe will help you put some numbers together.

Okay, yes. That would help a lot. Thanks for that. Chuck, following up on a couple other topics just want to get your sense overall of your recent Samsung branded revenues going forward is it something expect to be at least a flat it's not growing business or is this not going to sustained just a high level thoughts there would be great please.

Given the massive decline in the DRAM and NAND quarter-to-quarter I think we're expecting about a 50% price decline year-on-year. But from last quarter alone, I think we're already seeing anywhere from 20% to 30% price decline. So if the volumes were the same, I think you just have a natural decline. As Gail mentioned, I think we're looking at a flat to a slightly down quarter, which means we have -- we are generating more volume, but I don't think enough to make up for the decline in the ASPs of memory and SSD products.

Okay, that's helpful. Chuck, my last question is in your prepared remarks you talking about – Chuck Hausman your new licensing person VP, and you talked about greater activity there. Wonder if you could help characterize this and curious to the extent to which this is contingent upon having success with either with the ITC court, Germany or whether it's outside of that and any few points on when some of that may be -- may get to a successful conclusion.

Yes, Richard, Chuck Hausman comes from a non-practicing patent entity. So his background and orientation is really working with potential licensees whether they are makers or users of infringing products. So he has a lot of contacts and network of analyze attorneys in this industry. So that's enabled us to reach out probably in a more friendly manner to engage in discussions proactively, not necessarily tied to litigation outcome, but in view of the strength of the patent assets that we have today. And juxtaposing that with what is going on in future -- in upcoming memory standards, such as DDR5. So you don't need to -- in some cases clearly prove through litigation process or on a virtue of a positive ruling for people to see that, okay, it's inevitable the train is coming down the tracks and I don't need to get hit by it before I do something. So I think it's a different approach than what we've had here in the past, which is kind of okay litigation outcome, and then look for a licensing deal. This is more of a proactive outreach and broad discussions and I think it's been helpful.

Okay, that's helpful characterization. I think that's all my questions, I will jump in the line. Thank you guys.

Thanks, Richard.

Ladies and gentlemen, this concludes today's question-and-answer session and thus concludes Netlist's fourth quarter and full year 2018 earnings conference call. We thank you so much for joining today's presentation. You may now disconnect your lines. Take care.