Good day, everyone and welcome to the Netlist First Quarter 2019 Earnings Results Conference Call. All participants will be in listen-only mode. [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 2019 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. I would now like to turn the call over to Chuck.

Thanks, Mike and good afternoon everyone. First quarter financial performance includes a decreased net loss on both the year-over-year and sequential basis compared to last quarter. The results reflect a positive impact of ongoing cost management, which partially compensated for the negative top line impact related to the worldwide server DRAM shipment decline and pricing erosion that has been widely reported that the weakness in demand for server DRAM is short-term as pricing and demand stabilizes from the second half of 2019. In regards to our product initiatives, the line of enterprise NVMe SSDs we have introduced to the market continues to receive strong reception from our traditional base of storage and enterprise server customers. We now have more than 70 customers sampling, of which 22 have completed qualifications and 16 more are in process. The remaining are in prequalification evaluation stage. We are also making headway with some Tier 1 OEMs with 1 of them qualified and 2 others engaged. Based on recent discussions and feedback from customers, we continue to add additional SKUs to the SSD offering and are planning to introduce next generation 96-layer NAND based products later this year. The expansion of the product offering will allow us to broaden the solution sets we bring to market and provide us with a full suite of features and capacity ranges. With the progress in the quarter, we remain on path for production orders over the next couple of quarters. The commercialization activities for HybriDIMM remain at the forefront as we engage potential ecosystem and ASIC partners, standardization efforts of HybriDIMM and JEDEC are also progressing well with balloting on various specifications expected to continue in the coming months. Turning now to our licensing initiatives, the activity level in the area of intellectual property remained elevated both in terms of licensing discussions litigation and key patent prosecution and defense. Netlist’s second trial at the United States International Trade Commission against SK Hynix started on March 11 this year as scheduled, but was temporarily suspended after a partial day of testimony due to an unexpected court related matter. Hynix attempted to utilize the suspension which was totally unrelated to the trial to their favor by filing a motion to stay the investigation. This motion was denied by the Chief Administrative Law Judge and resumption of the hearing has been scheduled for July 15. The initial determination of the investigation has also been reset for October 21, 2019 which will include a recommendation by the Chief ALJ as to whether an exclusion order should be granted that would bar importation of SK Hynix’s RDIMM and LRDIMM products into the United States. As noted on the last call, the two patents asserted indicates are the 623 against Hynix’s RDIMMs and the 907 patent against Hynix’s LRDIMMs. Both patents contain specific claims that have been refined in view of infringement shortcomings in the first case. Both patents received a favorable claim construction or a Markman order at the ITC. And this provides the framework from which the ITC will ultimately decide if the patents are valid and entrenched by Hynix. Another activity, we expect the hearing for the appeal of Netlist’s first ITC case to occur later this year. And in Germany, we recently filed an appeal of the Munich District Courts non-infringement ruling with a hearing estimated to occur approximately in 12 months. Finally, at the U.S. Patent Trial and Appeal Board, or the PTAB, Google filed notices of appeal to the Federal Circuit in regard to the PTAB’s final decision in Netlist’s favor for the 912 patent. We expect this to be an 18-month process, but ultimately expect the Federal Circuit to affirm PTAB’s decision, which was again in Netlist’s favor. In regards to the 907 ruling at the PTAB, all our arguments was completed in March and we expect to hear from the PTAB over the next couple of months. On the 623 patent, we have appealed the PTAB’s decisions and are awaiting the scheduling of oral arguments. I will now turn the call over to Gail for the financial review.

Thanks, Chuck. Revenues for the first quarter ended March 30, 2019 were $5.1 million compared to revenues of $8.9 million for the 2018 period. As noted earlier, the decrease in top line was directly related to the worldwide server DRAM shipment decline and pricing erosion. First quarter 2019 product gross profit which is before manufacturing cost was $631,000 at 12.4% compared to $682,000 for the first quarter 2018 at 7.7%. This year-over-year margin percentage increase is mainly due to our just-in-time inventory acquisition of our retail products during the first quarter. After manufacturing costs, the net gross margins were 5.5% for the current quarter and 4.3% for the last year’s quarter. And although we don’t guide given the current pace of bookings during the last 6 week, we anticipate a modest increase in second quarter revenue compared to the first quarter and for the product gross margin percentage to be comparable to the 2019 first quarter. Operating expenses were $4 million during the first quarter, down 17% year-to-year and consecutively. Legal expenses declined 32% from the year ago period and we expect additional decreases for the remaining quarters of the year. We ended the first quarter 2019 with cash and cash equivalents and restricted cash of $11.8 million compared to $16.7 million at the end of the fourth quarter. This was a net cash burn of $4.9 million, of which $3.1 million was to pay down legal expenses. We continue to proactively manage the overall cash cycle, which includes access to a $5 million working capital line of credit with Silicon Valley Bank, which provides borrowing of up to 85% of accounts receivable to support working capital and revenue growth. Operator, we are now ready for questions.

Thank you. [Operator Instructions] And today’s first questioner will be Suji Desilva with ROTH Capital. Please go ahead.

Hi, Chuck. Hi, Gail. So couple of questions maybe on the financials first. The OpEx, the R&D down typically year-over-year, is that level sustainable on the litigation fees around 1.5 per quarter, is that also sustainable?

The legal fees definitely, we expect to see some decreases from Q1 as we go through the rest of the year.

Okay.

And, yes, as for R&D, I think we have mentioned in the past that we completed the first phase of our HybriDIMM work. And as we entered this commercialization phase, we may start to rehire specific skillsets, but for right now we are waiting and working on with the partner and hopefully get that closed first.

Okay, that’s helpful. And then on the SSD, it sounds like you have a lot of activity going, Chuck or Gail, what are the potential volumes here as some of these 70 customers sampling might come online, what kind of unit volumes to be thinking about in the next several quarters as it ramps up?

Suji, I think it depends on the customers which of the qualified customers ramp up in their volumes of their storage systems. But we think in the second half we can get to a run-rate of a few million dollars of SSD revenues per quarter.

Okay, great. That’s helpful. And then lastly just to kind of wrap up on the litigation here, the Hynix litigation, can you just remind us Chuck all the reasons you are more optimistic this time around come July versus the past go around. I know you took the 623 and 907 you refined them, but just if you could kind of list through all the things that make you more optimistic this time? That will be very helpful. Thank you.

Yes. Suji, the patents that are being asserted in this second ITC case were children patents that were refined and more targeted to the infringement and validity issues. It resolved some of the infirmities that we had in the first case. So, we feel very good about that. I think that was validated – the quality of these new children patent or the second generation patents were validated by the Markman ruling that was given by the ITC judge in this second case, where he ruled on the claim constructions mostly to our favor.

Okay. Thanks, guys.

Thanks, Suji.

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

Well, thanks Chuck and Gail for taking my questions. Maybe ask a question on the thoughts on the second quarter, Gail, I think you said sales maybe directionally up in the gross margins maybe similar, would that assume that perhaps your Netlist branded products, including perhaps the SSDs are growing to grow a little bit, maybe the Samsung branded products might be flat to down. Is that a fair assumption based on watch that?

I would say that the resell products will probably be flat to up and we will also see some contribution from the Netlist SSD line.

Okay. I would assume that for the Netlist SSDs we are talking about less than $1 million, maybe well less than $1 million contribution, is that fair?

That’s probably fair. We expect it to ramp nicely in the second half, but that’s probably where we are headed for this quarter and for the Samsung resale as we noted Q1 there was a obviously huge decline in the ASPs worldwide for server memory as low as SSDs something in the order 30% to 40% quarter-to-quarter decline. I think things are stabilizing a bit. Q1, it was a historically softer of the four quarters. So I think in general demand has picked up nicely in Q2 and the price decline has slowed down. So I think what we are seeing good traction thus far through the first half of this quarter.

Okay, that’s helpful. Chuck, maybe a couple more questions from me. It sounds like you are getting some good traction I guess some good breads on the SSDs here. Maybe Chuck if you can remind us of your advantages of differentiation here, I think they are primarily based on performance or maybe you could kind of re-declare what those advantages are at this point in time and how big that TAM looks like for products in that category?

Yes, Richard. Again, our SSD products, we have got a full offering within NVMe category. That’s the focus. That’s the higher end in our price storage category. And we have a speed advantage, performance advantage, IOPS advantage as measured as compared to some of the major incumbent suppliers today. So, that’s important and many of our customers that tend to be the higher end looking for high-performance. We also are able to move quicker than some of the bigger guys. And one of the major guys in this NVMe space is moving out, is going end of life with a particular form factor within this NVMe category called AIC or half height half length form factor. That is our primary niche and that we believe to be a thoroughly large niche at a $1 billion annual market. So we are very focused in our segment of the NVMe market. And based on the performance advantage that we have and with some of the competitors departing that market, I think we are in a good position to take advantage of these calls that we have secured over the last 6 months and look forward to ramp up in the revenues in the second half.

Okay, that’s helpful readouts. And then Chuck let’s see here, I do want to ask you about progress of what we can expect in the future here in terms of acquiring and announcing a NAC partner for the HybriDIMM, what’s your view looking for Chuck rest of the year?

We are in discussions with a couple of parties. They are both out in Asia and we recently – I recently made a trip out there and we are doing right now some business model and technical due diligence with those candidates, candidate partners and we are working actively to close one or more of those partnerships.

Okay. Does the closing – is that depend on anything regarding the JEDEC standardization or what’s kind of the obstacles or steps need to be taken where you think that will be completed?

Yes, the JEDEC standardization is also being done in parallel that will set the stage for lighter adoption with multiple controller suppliers and overall just standardizing everything about the controller as well as the DIMM product and the protocol of this NVDIMM-H. So that – we are working on that through JEDEC with, we have couple of dozen members in the committee and we are working through that with wider group of players, but that will help us also to secure the ASIC partner, because it will set the stage for standardized product.

Okay, excellent. One last question for Gail, if you could give us a sense of what you are expecting for cash burn in the second quarter, if not an absolute number maybe relatively to what happened in the first quarter?

I think operating cash burn will be in the range of 1 to 2 again and then it will be – and then the rest will be dependent on how much of legal payments we make. It won’t be the $3 million that we did this quarter, but it’s something less than that.

Okay, perfect. That’s all the questions for me. Thank you.

Okay. Thanks, Richard.

And this will conclude the question and answer session as well as today’s conference call. Just want to thank you all for attending today’s presentation and you may now disconnect your lines.