Good day, and welcome to the Netlist Incorporated Third Quarter 2020 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Mike Smargiassi with The Plunkett Group. Please go ahead, sir.

Thank you, and good day, everyone. Welcome to Netlist’s third quarter 2020 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 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. I would now like to turn the call over to Chuck.

Thanks, Mike, and hello, everyone. In the third quarter, we once again delivered solid financial performance compared to the prior year. Revenue grew nearly 70% and we more than doubled our revenue for the first nine months of the year compared to the year ago period. We also continue to see improvement in profitability, as we delivered gains in gross profit and closely managed operating expenses, resulting in a 30% reduction in the third quarter net loss. In the first half of 2020, we benefited from a solid demand environment for enterprise SSDs. While demand from data center and enterprise customers remained healthy, the second half of 2020 has seen increases in the supply of enterprise SSDs from multiple vendors. And as a result, there's been some pressure on ASPs as we moved into the fourth quarter. We continue to believe that the long-term outlook for enterprise SSDs is strong as the need for high performance storage remains robust across numerous segments of the economy. We believe we are well positioned as we move into 2021 as we focus on expanding our customer base into targeted end markets and strengthening the Netlist’s SSD portfolio. In September, we expanded our product line with the first production shipment of the 96 layer NAND high performance NVMe SSDs. These next generation drives provide exceptional performance and provide cost benefits to customers compared to current mainstream 64 layer NAND SSDs. The addition of TCG Opal encryption key management, a new feature, provides the highest level of security for data centers as well as military and government agency end markets. We have been pleased by the initial response from customers and the qualification started earlier this year are set to wrap up by year end. In partnership with industry leaders, we are showcasing these SSDs at Supercomputing 2020, which kicked off virtually this week. The Digi-Key partnership we announced in October also opens a new distribution channel for Netlist’s products. As a trusted global supplier and resource for design engineers across industries Digi-Key significantly expands the visibility and reach of the products we offer. Finally, in the third quarter, we took steps to strengthen the sales and marketing leadership with the appointments of Cameron Sinclair as Vice President of Sales; and Tinh Ngo as Vice President of Marketing. Both executives bring extensive industry relationships and deep knowledge of the memory business, particularly in the embedded Flash and industrial DIMM space. Together, they will lead the company's efforts to expand the customer base to create new revenue streams and build out our product line. Turning now to intellectual property. The actions to defend the fundamental value of our IP portfolio continue to move forward. In the legal proceedings for patent infringement against SK hynix in the U.S. District Court for the Western District of Texas, the judge has made the decision to combine our two cases. There will now be a single case in which we are asserting the ‘218 and ‘595 patents, continuations of existing patent families that read on hynix’s RDIMM and LRDIMMs and the ‘523 patent, which is a new self-test patent. The Markman hearing for the consolidated action has been scheduled for March 2021 with a trial set involving all three patents in December of 2021. The net result of the consolidation by the court is to schedule is a small move in the trial date in the ‘218 and the 595 ‘actions, which was originally scheduled for October, while the ‘523 case will be on a faster track. In the Google action, as we noted in the last call, the Federal Circuit affirmed the U.S. Patent Trial and Appeal Board's final decision earlier this year, validating Netlist’s seminal ‘912 patent. The appeal window to the U.S. Supreme Court to challenge that decision expires next Monday, November 16. We continue to believe an appeal of this case is unlikely to be accepted by the Supreme Court. And assuming Google does not file for appeal, the U.S. PTO will move to issue the claims of the ‘912 patent under a reexamination certificate, a process which we believe will take a few months. At that point, once the reexamination certificate is issued, we will immediately request the state to be lifted in the pending patent infringement case against Google and the trial to resume in the U.S. District Court for the Northern District of California. As we believe Google is one of the largest manufacturer and consumer of memory modules, we continue to explore the applicability of the rest of our patent portfolio to Google's activities in addition to the ‘912 patent. We are aggressively building out our patent portfolio while continuing to engage in discussions with implementers, as well as review our options for additional enforcement actions. I'll now turn the call over to Gail for the financial review. Gail?

Thanks Chuck. Revenues for the third quarter ended September 26, 2020 were $10.2 million compared to revenues of $6.1 million in the year ago period, an increase of 67%. For the first nine months of the year revenue reached $35.7 million, an improvement of 114% from the same period last year. A significant increase in the top-line was mainly due to growth of SSD revenue, including increased contribution from Netlist’s NVMe SSDs. Q3 ‘20 product gross profit percentage, which is before our manufacturing costs increased to 15.9% compared to 12.6% for Q3 ‘19. After manufacturing costs, the net gross margins were 13.1% for the current quarter and 7.4% for the last year's quarter. The improvement in gross margin percentage was primarily driven by an increase in the sale of SSD products quarter-over-quarter and cumulatively we have a 365% improvement compared to the first nine months of last year. Although we don't guide, industry commentary continues to indicate a soft supply, causing downward pressure on average selling prices and a continued lack of visibility through the end of the year. But based on current backlog and given the current pace and mix of our bookings to-date, we anticipate fourth quarter revenue to be similar to the last quarter. We ended the third quarter with cash and cash equivalents and restricted cash of $17.5 million, compared to $10.4 million at the end of the second quarter. We raised approximately $9.4 million during the third quarter using the equity line of credit. Cash burn in Q3 was approximately $2 million, well within our near-term target range, which we’ve discussed of $1 million to $2.5 million. The current cash balance provides us with substantial runway, allowing us to continue to invest in strategic R&D, as well as to execute on intellectual property portfolio activity. We have approximately $11.4 million remaining on the equity line of credit if we choose to use it, which does not expire for another two and a half years. In addition, we continue to very carefully manage the operational cash cycle, which for Q3 ‘20 included increased inventory turns as we decreased gross inventory by 18% consecutively. This was offset by an increase in day sales outstanding and a decrease in days payable. We also continue to maintain a $5 million working capital line of credit with Silicon Valley Bank to support working capital and revenue growth. Finally, we will be participating in ROTH Technologies Virtual Conference one-on-one event this Thursday, November 12. Please contact your ROTH representative if you would like to join us and we will look forward to connecting with you. Operator, we are now ready for your questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And our first question will come from Richard Shannon with Craig-Hallum. Please go ahead.

Hi, Chuck and Gail. Thanks for taking my questions. I guess just a couple of thoughts or questions on the outlook here in the fourth quarter. You're kind of looking for revenues to be similar to third quarter. Is the split of sales between your new NVMe SSDs and other products roughly similar or is there a change in the mix in either direction?

It will be roughly similar.

Roughly similar, okay. And then Chuck you’d mentioned some greater downward pricing pressure on SSDs. What does this mean for your thoughts about gross margins going into the fourth quarter and kind of where you see them going beyond that?

Yes, Richard, I think the ASP declines are in the range of -- in the teens in general from first half into the second half of this year. And the projections are for that to a relatively flat -- it will bottom out at the end of this year and then remain flat through first half of next year. The impact to the gross profit, we're looking at anywhere from a few percentage points to 5%, 6% on the SSD products only. So, don't think -- overall revenues -- for the overall product sales, the gross profit won't be impacted significantly.

And can you remind us or give us a sense of how big your NVMe SSD revenue stream is today, either in dollars or percentage terms just roughly speaking?

Richard, I'll take that. So, for the nine months, it's been roughly about 18% of our revenue.

Okay. And Chuck you talked about in your prepared remarks, I think even last quarter about desiring to broaden your customer base with the SSDs. Can you talk a little bit about your progress there where you're seeing some interest? I think you talked to about two larger customers you've had supporting this product line so far and there’s some qualifications with storage related OEMs last quarter, I think it was new M.2 product. Can kind of broadly talk about where you're seeing some interest and hopefully broadening of the customer base?

Yes, I think the M.2 products opened up a lot of doors in the storage appliance space and even some industrial space, for example. Recently, are getting qualified at a company that makes police car dash cams and security equipment. That was due to M.2. So most of the qualifications that we're starting to see, the new customer applications are in the industrial and embedded space, as well as storage appliance space. So that's ongoing. And then the two majors that we're working on, they have remained consistent in their demand and the revenue stream from the two major anchor customers continue to be stable.

Okay. Any ability to add either major server or cloud customers in the next couple of quarters or so? If any qualification is going on with that type of customers?

We're obviously targeting as we mentioned on past calls, some of the Tier 2 cloud vendors. And we're having those discussions today. I think the progress is more with the industrial and the embedded space at this point. But we've got good contacts into the major OEMs. And we continue to have those discussions.

And my last question, I'll jump on the line. Related to Google, if I -- hope I didn't miss anything in your prepared comments. But what kind of timeframe should we expect for the resumption of the trial in the Northern District of California? Do you have any indirect indication from the courts or any expectations of general timeframes to think about there?

Yes, I think we know the timeline for the appeal and once the appeals are exhausted, then you have the Patent Office, which will reissue the claims, the valid claims of the ‘912 patent. Once that is done, we'll immediately request the court in the Northern District of California to on-stay and resume the case. Now, some of this will depend on what's on their docket. We've made a lot of progress on that case prior to the casing state. So, it's hard to know, but we are estimating sometime in late Q1, early Q2 for the case to resume.

Okay. And when you say case to resume, you mean having something scheduled or actually having hearings and other related events?

Well, that's probably, Richard, the same thing. When a case gets put on to the docket, it gets scheduled and then you'll have a case management conference, you'll have initial briefs and responses. So -- yes, so the entire case once it's put onto the docket, the entire case is scheduled at that point.

Our next question will come from Suji Desilva with ROTH Capital. Please go ahead.

Hi, Chuck. Hi, Gail. So, on the data center kind of demand or the SSD demand, end markets, how would you characterize where they are in the inventory digestion versus recovery kind of cycle, and maybe you could cross reference what's supply demand in NAND is doing to that equation?

Yes, Suji. From all indications of the digestion of inventory that was acquired by many of the data centers early on in the year, they've overbooked and accumulated quite a bit of inventory, because of the lack of visibility with the pandemic and the economy in the second half. So, that stockpile has been dwindled from what we see. And they're beginning to order again. But, still there has been increases in the output from multiple major vendors of SSDs. So, that's led to -- the demand is there. The demand is coming back, but the supply on the shelves of the vendors remain quite high. And -- but as that supplies work through, we believe end of the year, starting Q1, things will start to normalize and the ASP declines will start to subside going into next year.

And just a follow up question on the Google litigation. I understand the timeframe you discussed in the prior question -- to the prior question. But for the reissuing -- the issuing of the examination certificate is the only thing that needs to happen now -- for that to happen that the appeals fail, is that -- or is there anything else left between herein issuing that certificate?

Now, no, there is nothing substantive that need to happen. It's really an administrative process. If Google does not appeal, then at that point, the Patent Office will kick in the year to reissue the valid claims of this patent, making the patent wholly valid at that point and usable again in the case.

And last question maybe bigger picture question on SSDs and any other bigger hybrid memory opportunity. With the new hires in management, can you talked about what maybe subtly different in the approach going forward versus perhaps the past that can help drive growth there, interaction with the customer base? I know you’ve brought a pretty solid team, just curious how that might shift the approach, if any.

Yes. As we indicated in the prepared remarks, the two executives that were hired last quarter, both have decades of experience in the memory module and the embedded Flash industry. So we hired them specifically to grow the business in that space, which are -- a lot of which comprises of a lot of telecom, networking, embedded applications, industrial applications, using different types of SSD products, USB, and M.2 SSD, slimSATA 2.5 inch, CFast, these are all of the smaller SSDs that are being utilized really ubiquitously across all of these applications. So, that's their area of expertise. So, with them coming on board, and in the last few months, we've already embarked on new designs of these products, and have started to open up all opportunities at customers in this embedded Flash and industrial DIMM space. So, that's their particular expertise. So, that is a bit different from the enterprise SSD, datacenter SSDs. That's the -- that -- those are more of the Tier 2 cloud with much higher capacity SSDs, 8, 16 terabyte, 32 terabyte types of SSD. Whereas the better space or smaller capacity, many more form factors and much more qualification, design-intensive types of applications.

Call it there, Chuck would automotive be an opportunity in this realm?

Yes.

This concludes our question-and-answer session, as well as our conference call today. Thank you for attending today's presentation. You may now disconnect.