Mike Smargiassi - IR Chuck Hong - CEO Gail Sasaki - CFO

Suji Desilva - ROTH Capital Richard Shannon - Craig-Hallum

Good day, everyone. And welcome to Netlist First Quarter 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] And please note that today’s event is being recorded. And I would now like to turn the conference over to Mike Smargiassi of Investor Relations. Please go ahead.

Thank you, William, and good afternoon, everyone. Welcome to Netlist’s first quarter 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, 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. We assume 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. First quarter revenue performance was in line with our internal plan. Revenue reflected steady sales of enterprise-grade memory modules and growing demand for NV and specialty DIMMS. Our bottom line results reflect cost controls across the business despite increased legal expenses, which we expect to reduce in future quarters. Starting with our product business, while it’s only been six weeks since our last call, we continue to see solid activity around NVvault. Year-to-date, we have more than 15 new customer qualifications initiated. Our collaboration with partners such as Nyriad, TYAN and others are ongoing as we work to open up new opportunities. Qualification units showed healthy growth in the quarter and we expect to see further momentum for NV as we move through the year. Our HybriDIMM commercialization efforts continue to make progress as well. There is significant interest throughout the industry in regards to storage class memory and the performance and cost benefits of HybriDIMM. In addition, there is broad support from multiple architectures ramping in data centers. Our discussions with multiple OEMs, memory and ecosystem partners remain active. This includes potential partners for the conversion of our controller to an ASIC chip set and the exploration of opening up the technology through industry standardization. Finally, our specialty module business with legacy and custom DRAMs continues to grow. And while we don’t provide specific guidance, we currently anticipate moderate growth in product revenue for Q2 as compared to the first quarter of 2018. Turning now to licensing. We continue to press forward with a campaign to defend our intellectual property against SK Hynix. Infringement suit against Hynix LRDIMM products in Germany is proceeding according to schedule. We filed the latest briefs with the German court at the end of April. The parties will file another round of briefs over the next few months in preparation for trial in December where the court will address infringement and other related issues. We remain optimistic about our position and look forward to the court’s decision expected in early 2019. If the court decides in our favor, an injunction would go into effect at the time for Hynix products sold in Germany. On the first ITC action, we are preparing an appeal of the final determination or FD received in January to the U.S. Court of Appeals for the Federal Circuit. Our opening brief in June will challenge the ITC’s findings of non-infringement which we believe were wrongly decided. We anticipate that briefings from both parties will be complete by the end of the summer, with oral arguments being heard by Federal Circuit sometime in the first half of 2019. We look forward to having appellate court carefully review the ITC’s findings and are hopeful that the errors in the FD will be corrected and the patent’s found to be infringed. In the second ITC action against Hynix on April 12, the Administrative Law Judge granted Hynix’s motion for summary determination of non-infringement and issued an initial determination or ID, terminating the investigation. This was an unexpected and very disappointing ruling as the ID came less than two weeks before the scheduled Markman hearing, and did not take into consideration the substantial briefing submitted by the parties as part of the Markman process. We believe the Administrative Law Judge erred by a abruptly terminating the investigation without the benefit of a Markman hearing, which led to numerous fundamental errors in the ID. We filed a petition for a review on April 23rd asking the ITC commission to reconsider the ID and correct these errors. The commission will issue and FD at the conclusion of its review likely in the next few months, which will either affirm the findings in the ID or remand the case back to the judge for further proceedings. If the ID is affirmed, we will appeal the FD to the Federal Circuit. The campaign to defend our IP is a methodical worldwide effort with multiple enforcement actions in different venues in the U.S. and abroad. It’s a licensing strategy we remain committed to as we seek fair compensation for our IP. In summary, we remain focused on the execution of our strategic initiatives including building demand for NV and specialty modules and a continued commercialization of HybriDIMM. We also remain committed to defending our IP with the goal of entering licensing agreements that fairly compensate Netlist and its shareholders. I’ll now turn the call over to Gail for the financial review.

Thanks, Chuck. On the topline, we delivered solid performance. Revenues for the first quarter ended March 31, 2018 were $8.9 million, compared to revenues of $9.4 million for the 2017 period, with a modest improvement consecutively over the fourth quarter of 2017. First quarter 2018 gross profit was $379,000 and net loss was $4.7 million. Operating expenses were $4.9 million in the first quarter compared to $3.9 million in last year’s first quarter. We delivered an absolute dollar reduction in R&D and SG&A expenses equating to a 21% decrease year-over-year through ongoing proactive cost management. Legal fees during Q1 ‘18 reflects increased cost associated with the preparation for the ITC to Markman hearing. Moving forward, we expect legal fees to decline, given the work that is now behind us and the current litigation calendar. Before turning to the balance sheet, I would like to update you on the Company’s Nasdaq listing. Last week on Thursday May 10th, we attended a hearing of a Nasdaq panel in Washington D.C. and requested the grant of a second 108-day grace period for the minimum bid price deficiency. We expect to receive the panel’s decision within the next week or so and are hopeful we will receive an additional grace period. We ended the first quarter with cash and cash equivalents and restricted cash of $8 million as compared to $9.5 million at the end of fourth quarter. Our net cash decreased to $1.5 million. We continue to proactively manage operating expenses, as discussed earlier, and overall cash cycle, and continue to access the working capital line of credit with Silicon Valley Bank, which provides borrowing of up to 80% of eligible accounts receivable up to $5 million to support revenue growth. Our cash position at the end of the quarter included $1.8 million in net proceeds from the aftermarket facility during the first quarter. As of May 11th, we have received total proceeds for $5.3 million on the ATM facility with a balance of $3.7 million to utilize under the facility through November 2019. Thank you for listening. Operator, we are now ready for questions.

Thank you. And we will now begin the question-and-answer session. [Operator Instructions] And our first questioner today will be Suji Desilva with ROTH Capital. Please go ahead with your question.

So, can you talk about the NV product and the HybriDIMM products whether they would be a study ramp as the customers start to take them on or whether there’d be an inflection point in a couple of quarters, based some platform that’s in the marketplace?

Yes. Suji, the NVDIMMs are being qualified mostly on Intel platforms, some on AMD. And I think the market is finally starting to adopt and we’re seeing growing activities on qualifications. So, I think we should see an uptick of revenues from NV in the second half of the year. On the HybriDIMM, we are in discussions with a number of parties regarding getting the control or converted into an ASIC chipset, which will allow it to go to mass production. So that’s the first step. But, there is quite a bit of interest. We’re also exploring the possibility of getting HybriDIMM standardized in the industry standards body.

And Chuck, along those lines, a follow-up. Is there any update on the Samsung JD? I know it’s one of the people there -- one of the potential partners you have for HybriDIMM?

Right. They’ve been a partner in this five-year JDLA agreement. And yes, we are in discussions about the possibility of having them convert the current FPGA into an ASIC chip.

Question on the financials. Can you talk about what the ongoing litigation cost would be versus what you have today and what kind of run rate it could come down to as you try to whittle that expense line down?

Sure. I think we will see a definite decline in Q2, probably something like 50% of what we had in Q1 and then after that a much smaller number, probably something closer to 20% of what we had in Q1.

And our questioner today will be Richard Shannon with Craig-Hallum. Please go ahead.

I’ve got a follow-up on the NV topic here. I think you talked about 15 qualifications in processes. My notes show that you had 12 of them last quarter, which is good to see some progress there. Chuck, wondering if you can give us any sense of timing here especially relative to any larger wins here. It sounds like you are talking about second half, anyway you can be a little bit more specific on that. And just any other details about ramp processes here?

Yes, Richard, I think the qualification activities have picked up across the board for us and with other suppliers of NV in the industry. I think it’s -- the adoption of the technology across Intel platforms and with AMD’s end processors starting to increase and people are seeing the benefit of the technology. Some of this is optional. Other, meaning that the NV is qualified but it’s an optional attachment in the server, and with other applications, there is -- the entire system is filled with NVDIMM. So, I think we’ll have to monitor which of those systems take off in terms of volume production. In general, I think in the second half, we will see some volume production and uptick in demand.

To follow up on one of your threads there Chuck, do you have any sense of how the machines are being marketed that are qualifying you, and are they broader applications or more specific vertical ones?

They are, I think one in particular Nyriad, a company that we’ve worked with now for several quarters of getting our product designed in; we’re the sole source of NV there. They are in the blockchain environment and it’s a highly NV intensive application. For example, 16 units of NV to each system. So, something like that is very much a specific vertical. Others are more generic server appliances, server storage appliances, where it could be anywhere from 1 to 4 NVs per system.

And maybe last, just quick question on this topic. Chuck, do you get a sense of whether you are in general a sole source for design or first source or second source or any color you are hearing from your partners on your positioning?

NV is generally one source for most of these customers, because it is quasi custom. There is a lot of technical issues to work through a lot of handshaking between the system and the components. There are software and firmware considerations as well. So, it’s not an easy product. Once you have it compatible with one sources, it’s very difficult for a customer to take enormous amount of work and technical hurdles for them to overcome to bring on a second source. So, whether it’s our customers or other vendors’ customers, we’re generally in a sole-source position.

A couple of other questions probably for Gail here. Gail, you talked about thought process for the second quarter revenues, talking about some product growth here. Is this coming from some new products that can be evolved or the Samsung branded products or can you Gail help us understand where that’s coming from and any way you can quantify the magnitude of the growth?

Sure. I think it’s probably even percentage growth. We did about 76% of Samsung resell for Q1 and 24% was specialty DIMMs and other. I think, we’ll see growth in both of those areas. There was NV as well, but I think that will happen more in the second half of the year, as Chuck indicated.

And then, last quick question for me is on cash burn. Anyway you can help us think about that in the hard terms or relative to what you did in the year for first quarter before the ATM?

Sure. On terms of the cash decrease from Q1 to Q2, I think it’ll be similar. That’s our plan.

And this will conclude our question-and-answer session, and today’s conference call. Thank you for attending today’s presentation. And you may now disconnect your lines.