Edited Transcript of NLST earnings conference call or presentation 6-May-20 4:00pm GMT

The memory module commerce is either starting to bark on good activity during we dine recently received orders because VLPs and other specialty DIMMs from a amount of long-standing customers at the military, Medical and quiz instrument segments. after shutting down early at the year, our mill at Suzhou, China, resumed manufacture at March and is now experience to sum operational capability. The furnish tie because PCB and other key components, where we experienced some delays at Q1, is either GEtting experience to customary at condition of availability and perform times. The analysts and main memory producers are projecting continued energy at the memory impartial at the coming apartment with DRAM and NAND furnish expected to remain constrained. However, during with many businesses, visibility because the second half of the year surplus limited with the uncertainties looming at the global economic surroundings and the shock above memory and SSD demand.

That said, we trust that the sales momentum GEnerated above the past 3 apartment and the related qualifications will location us at a good location to digest to construct out our business.

Now turning to HybriDIMM. The standardization efforts above the protocol digest within JEDEC. above the past year, we dine grown the membership to above 60 industry companies that dine joined the efforts to standardize NVDIMM-H. Our discussion with latent partners dine been limited because of the shutdown, specially our attach at China, who is based at Wuhan. We scheme to digest these discussions with them either during other U.S.-based companies at the coming months.

With the emerGEnce of high-speed DDR5 and tall center calculate CPUs, system memory bandwidth will exist stretched beyond anything that the industry has seen. These trends will perform to increasing ask because high-capacity DIMMs, which already allowance above $1,000, and digest to encounter at up at price. Our technique enables low-cost NAND to substitute these high-cost DRAM-based DIMMs at a piece of the allowance cabin delivering alike performance. We trust the technique will garner immense utilize from information middle operators, who, today, expend hundreds of millions annually above purchases of high-density DRAM-based DIMMs.

On the R&D front, we are now turning our attention to DDR5 and, above the coming months, scheme to ramp up the development pains because controller design, including the RTL level coating and architectural simulation and validation. Needless to say, we are identical excited almost the prospects of this technique and the allowance action tax it can spend to the industry.

Turning now to intellectual property. above April 7, we received the ITC's final determination, which overturned the administrative regulation judGE's findings issued at the mind of initial resolution at October. This was a significant disappointment and a legal non-sequitur during the initial determination's finding deliver over an extensive and methodical ITC process that construct Netlist's '907 patent to exist valid and infrinGEd by hynix's LRDIMM server memory. at the final determination, the committee chanGEd the ask construction, which was decided during the proceedings, and overturned the findings of the ALJ. The committee essentially chanGEd the rules of the sport after the sport was over, and, thus, invalidated the findings of the initial determination. We detect the changing of the ask construction and the final journal staGE of the ITC process troubling, specially during the material of those chanGEs emerge to exist legally incoherent.

In coordination with legal counsel, we dine started preparations to line a mind of plead with the United States stadium of Appeals because the federal Circuit. We dine 60 days from the issuance of the final resolution to file, which we both -- after which both parties will comply briefs, and hearing will exist scheduled.

In March, we filed new legal proceedings because patent infrinGEment against SK hynix at the U.S. belt stadium because the Western belt of Texas. This expanded the actions against hynix and furthers efforts to spend them to justice. The belt stadium provides a jury test and the genius to explore both an injunction and damaGEs, the latter of which was unavailable to us at the ITC. The arise of the recently decided example at the Federal Circuit entitled TCL versus Ericsson, any damaGEs will exist decided by the jury.

We are asserting 2 new patents, the '218 and the '595 continuations of existing patent families that read above hynix's RDIMM and LRDIMMs. because the local rules at this district, we expect these proceedings to encounter at a rapid speed and are optimistic because a Markman ruling by the purpose of this year or early 2021. The Markman defines the claims of the patent and normally provides good insight into the substantive issues of infrinGEment and validity at hand. after the Markman, the proceedings used to encounter to discovery and a test with an expected conclusion sometime late next year.

In the Google dispute, we expect the plead proceedings to wrap up at the third belt of this year with oral arguments at the Federal Circuit currently scheduled because June 5. during a reminder, Google has been challenging the Netlist's '912 patent because the past decade, and it is now challenging the U.S. Patent test and Appeals Board's final resolution above validity at Netlist's favor because this patent. We digest to expect the federal circuit to affirm PTAB's resolution at Netlist's favor, at which point we used to shift because the linger to exist lifted and the '912 infrinGEment lawsuit against Google at the U.S. belt stadium because the Northern belt of California to encounter forward.

We dine always viewed IP enforcement efforts during a broad war over multiple venues. We trust at the inherent tax of our IP portfolio and remain undeterred at our commitment to defending it in spite of the modern setback at the ITC.

With a farther buildout of Netlist's patent families because DDR4 server memory either during the emerging DDR5 and hybrid memory, we dine extra patents at the portfolio that we are examining because enforcement.

I will now spend the bark above to Gail because the economical review. Gail?

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Gail M. Sasaki, Netlist, Inc. - VP, CFO & Secretary [4]

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Thanks, Chuck.

Revenues because the first belt ended March 28, 2020, were $14.6 million compared to revenues of $5.1 million at the year ago period, a growth of end to 3x. above a consecutive belt basis, revenue increased by 56%. The significant year-over-year and sequential enlarge at the peak row was because of overall growth over manufacture lines, and follow-on manufacture orders because Netlist NVMe SSDs from a main cloud computing vendor and a main oem.

First belt manufacture entire utilize percentaGE ago manufacturing costs increased to 17% compared to 12.4% because Q1 '19 and compared to 20.7% consecutively. after manufacturing costs, the net entire margins were 14.4% because the modern belt and 5.5% because final year's quarter. The improvement at entire border percentaGE was largely driven by the manufacture mix, which, during famous earlier, continues to contain an enlarge at the sale of Netlist NVMe SSD products. though we don't guide, we entered the second belt with a hard backlog. And given the modern speed and mix of bookings, we hope second belt revenue and entire utilize dollars to exist at row with the first quarter.

We digest to closely overhear the COVID-19 tell and its latent shock above Netlist's commerce globally. during Chuck noted, the mill surplus fully operational, and we experienced identical limited question disruption at manufacture or the furnish chain. We ended the first belt with money and money equivalents and restricted money of $8.6 million compared to $11.7 million at the purpose of 2019. We digest to proactively manaGE the operational money cycle, which, because Q1 '20, included improvement at appointment sales outstanding, offset by a decrease at days payable and decreased inventory turns, during we paid because inventory about 10 days sooner than we sold it because of the shortage to grow inventory at a tight market. We digest to affirm a $5 million working main row of belief with Silicon Valley bank to experience working main and revenue growth and dine access to a 3-year equity row of belief with a remains of $24 million over Lincoln Park Capital.

Operator, we are now ready because questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Suji Desilva with Roth Capital.

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Suji Desilva, Roth main Partners, LLC, investigation fragment - MD & Senior investigation Analyst [2]

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Congratulations above the encounter at here. hence I'll commence with the litigation question then encounter at above to a manufacture question. hence Chuck, at the publication free above the litigation, obviously disappointing effect here, besides during you mentioned something almost questioning the objectivity. I'm impartial wondering if there's any -- I intend impartial shortage of a word -- better word evidence or friendly of meat to that statement? during that seems alike a pretty great accusation.

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Chun K. Hong, Netlist, Inc. - Co-Founder, President, CEO & Executive Chairman [3]

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Those statements are informed by the opinions of our outer attorneys, those that dine handled this example direct either during other attorneys that we dine upon journal of the material of the ruling. hence when they dig into the ruling itself and the ask construction, specially the chanGEs to the ask construction, which was done extensively by the judGE and the finish reversal of that, they did no detect it typically -- legally, the legal logic was missing. And hence there were some thoughts from the attorneys that the ruling was already formed based above the effect that they were looking to find. hence this is no the perspective of myself or the manaGEment here who are no legal experts. It comes from the opinions of the expert attorneys that dispose of this case.

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Suji Desilva, Roth main Partners, LLC, investigation fragment - MD & Senior investigation Analyst [4]

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Okay. Interesting. And then above the products, the -- how many customers conduct you expect to exist shipping Netlist SSDs type of products towards -- by the purpose of '20 versus today? Is that one of the precise metrics to believe almost during that fragment grows?

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Chun K. Hong, Netlist, Inc. - Co-Founder, President, CEO & Executive Chairman [5]

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Yes, Suji. I believe that's absolutely the precise segment. almost a year ago, we did conduct a fate of qualifications, and some of those did no perform to revenues. I believe what has chanGEd now is the mix of customers that we have. Earlier on, we had a fate of system integrators and reseller types of products. during we marketed the benefits -- the high-performance benefits of our products, I think, is starting to GEt more opportunities at more of the storaGE appliance, manufacturers, high-performance computing. And I believe the peculiarity of the qualifications that we are -- we've started to come and undertake are better. hence I believe that's what we're looking deliver to at the second half of the year of those qualifications main to buy orders and continued buildout of the sales pipeline.

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Suji Desilva, Roth main Partners, LLC, investigation fragment - MD & Senior investigation Analyst [6]

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Okay. That's helpful color, Chuck. I'm going to demand this next question during truly friendly of a pack of questions glued toGEther. I believe they're related. Hopefully, you can comprehend us. besides during the ask -- supply/demand tell going into the second half appears to however exist tight. Unclear if from guys alike Intel, if cloud and infrastructure will digest to expend the manner they're spending now with the far career into the second half. And above peak of that, I'm no certain if the module segments dine furnish tie constraints. I've heard almost that from other areas. hence I'm wondering, conduct you believe the information middle guys are building inventory friendly of stock up, buy deliver or ordering to purpose demand, and that will continue? Hopefully, sum those questions pattern sensation toGEther.

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Chun K. Hong, Netlist, Inc. - Co-Founder, President, CEO & Executive Chairman [7]

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Yes. I believe the tight market, partly at the beginning of the year, was driven by China, which is obviously a main separate of the furnish tie because semis and computing instrument was end down because little months. hence catching experience up and backfilling the furnish that was -- the ask that was no being met is what led, I believe, to healthy impartial at the first belt of this year. We're however seeing good demand. I believe across with that, you mentioned the information centers, I believe there was a healthy ask from the information centers. There was a lull of activity from the hyperscalers and the information centers at the first separate of final year, and then that started to excellent up at the purpose of final year. It surplus to exist seen what's going to -- if that's going to digest at the second half.

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Suji Desilva, Roth main Partners, LLC, investigation fragment - MD & Senior investigation Analyst [8]

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Okay. Good. That color helps. And then lastly, I heard you talking almost DDR5 more aggressively this call. I'm wondering if during of sum the activity here, if that time row is however during is or if you're seeing that potentially being pulled in, if that's even technically possible.

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Chun K. Hong, Netlist, Inc. - Co-Founder, President, CEO & Executive Chairman [9]

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I don't believe it's being pulled in. I believe they're above list to free DDR5 DRAMs, the activities of the standardization over devices and modules at JEDEC above DDR5. It's more active now. We trust that, that is a sweet spot because the HybriDIMM. hence we dine started internally to conduct more of the coding and the development career specifically related to the ASIC controller. hence that activity is starting up because us precise now.

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Suji Desilva, Roth main Partners, LLC, investigation fragment - MD & Senior investigation Analyst [10]

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Okay. And then final question above the HybriDIMM partner. I believe Wuhan, you mentioned, is -- you say the requirement of face-to-face meetings friendly of preclude resuming encounter at there or to we believe of it event sooner?

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Chun K. Hong, Netlist, Inc. - Co-Founder, President, CEO & Executive Chairman [11]

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Well, I believe some of it -- they were down because a expect time. besides during some of it can exist done remotely via video calls and whatnot. besides during for you GEt into technical details, it's -- nothing beats a face-to-face, besides during we'll exist resuming those either during activities with other latent partners based at the U.S.

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Operator [12]

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

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Richard Cutts Shannon, Craig-Hallum main group LLC, investigation fragment - Senior investigation Analyst [13]

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Maybe I'll commence one above the first belt results with Gail. Your revenue growth sequentially was identical nice, besides during the entire margins truly came down. I believe you mentioned some mix here. possibly you can friendly of unpack that a tiny section and help us comprehend there. Was there more Samsung sales? Or was it impartial a different mix than the Netlist-built products? Or help us comprehend that, please.

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Gail M. Sasaki, Netlist, Inc. - VP, CFO & Secretary [14]

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Sure. Yes, there was more of the resale commerce at Q1 versus Q4. hence there's almost -- well, there's $5 million enlarge among the 2 apartment and almost $5 million of that -- or $4.7 million of that was the resale business. hence the mix did chanGE, though the Netlist SSD commerce did grow, besides during no by during much. hence that is the...

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Richard Cutts Shannon, Craig-Hallum main group LLC, investigation fragment - Senior investigation Analyst [15]

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Can you confer us a sensation of how great the NVMe SSD commerce is today? Is this more than a attach of million dollars? I could possibly infer, besides during I wonder if you could characterize it a tiny section more tightly because us.

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Gail M. Sasaki, Netlist, Inc. - VP, CFO & Secretary [16]

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Today, it is almost 2, and it is anticipated to spend beyond that. hence we're expecting some -- a gay growth at Q2 and beyond.

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Richard Cutts Shannon, Craig-Hallum main group LLC, investigation fragment - Senior investigation Analyst [17]

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Okay. hence naturally, going into my next question above the second belt guide, you were talking almost nearly flat. hence NVMe is growing. Does that intend the resale products is down? Or is there something else that's driving that?

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Gail M. Sasaki, Netlist, Inc. - VP, CFO & Secretary [18]

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