Netlist Inc

Good day and welcome to the NETLIS second quarter 2022 earnings conference call and webcast. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. Later, we will conduct a question and answer session and instructions will be given at that time. Please note this event is being recorded. I would now like to turn the conference over to Mr. Mike Smarjasi with the Plunkett Group. Please go ahead, sir.

Thank you and good day, everyone. Welcome to NETLIS second quarter 2022 conference call. Leading today's call will be Chuck Hong, Chief Executive Officer of NETLIS, and Gail Sasaki, Chief Financial Officer. As a reminder, the earnings release and a replay of today's call can be accessed on the investor section of the NETLIS website at netlis.com. Before we start the call, I would note that today's presentation of NETLIS 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. NUTLIST assumes no obligation to update forward-looking statements. I would now like to turn the call over to Chuck.

Thanks, Mike, and good afternoon. Good morning, everyone. Throughout the second quarter, we continue to build on the solid momentum created this past year. Product revenue more than doubled over Q2 2021 to $55 million as we continue to benefit from an expanding customer base and a more diversified product line and execution on the Hynix product supply agreement. NetList also ended the quarter with a strong cash position of $61 million, providing significant flexibility to support strategic initiatives across the business, including licensing and marketing and R&D. Overall, we've been quite pleased with the company's performance in the first half of 2022. Market dynamics, including demand and pricing, were favorable throughout the period. As a result, we deliver product revenue growth of 169% and product gross profit almost double compared to the first half of last year. As we enter the second half of 2022, the memory and SSD markets are experiencing a slowing in demand, particularly in the consumer segment. Recent commentary across the semiconductor and memory industries has shown noted a pullback in pandemic-related demand and the current economic environment faces key headwinds. As a result, there has been a reduction in the growth outlook for the market, including the enterprise and data center segments. While the current environment is one of broad pessimism, the long-term consumer and business trends driving the need for more efficient and higher performance memory remain intact. and we believe we remain well positioned to capitalize on this trend. On the product side, as we stated in our last call, one of Netlist's biggest growth drivers in terms of year-over-year performance has been its relationship with SK Hynix. This has been a strong partnership that continues to grow as we take advantage of special access that has allowed us to broaden the Netlist product offering to include discrete components, EMCPs, and DDR5 memory modules, as well as to expand into markets and customers not well supported by the major DRAM manufacturers. Our ability to access products quickly allows customers to meet constrained product schedules, while smaller customers with DRAM TAMs of less than five to $10 million per year, appreciate our ability to provide indirect access to SK Hynix factory resources and support. We look forward to capitalizing on these new opportunities as the sales and marketing team deepens its understanding of these product lines and the unique needs of each customer. Moving on to intellectual property. In the Google case, Chief Judge Seaborg of the Northern District of California listened to our arguments, and in May, entered an order in NETLIS's favor on the very important issue of intervening rights for Claim 16 of the 912 patents. The judge also set forth the conclusive finding that NETLIS should be entitled to the full period of damages available under Claim 16. In parallel, Judge Seaborg denied our request to add more details to our infringement contention charting. We do not believe that this denial will have a material impact on our case, as the scope of infringement will be determined through the discovery process. Following that order, Judge Seaborg paused the case for a 90-day period and reset the case management conference in California to October 27, 2022. That pause gave us time to learn the outcome of our early motion practice in Samsung's Delaware declaratory judgment action. Just yesterday, we received an order from Judge Andrews in Delaware dismissing Samsung's claim for declaratory relief under the 912.506.339 and 918 patents and denying Samsung's attempt to add the 054 patent to his suit in Delaware. I will cover these patents in a bit more detail in a moment, but the 506, 339, 918, and 054 patents are all subject to our action against Samsung in the Eastern District of Texas, meaning Samsung will have to face us on these patents in trial in May of next year. That's been scheduled before Chief Judge Gilstrap. We are very pleased with Judge Andrews' well-reasoned explanation for his dismissal and feel that this is a significant victory in our ongoing pursuit to ensure that Samsung and Google engage on fair and reasonable terms. We now look forward to seeing how Judge Seaborg approaches case management in California over the next couple months, given the recent losses Samsung suffered in Delaware. we remain committed to seeing Google answer for its long-term infringement of our proprietary memory technologies at trial. Netlist's patent infringement action against Samsung in the Eastern District of Texas involves six patents, all distinct from the 912 patent we've asserted against Google or the 3RDEM patent Samsung cited in its Delaware action. Netlist's complaint highlights Samsung's infringement of two patents relating to NETLIS's LRDEM technologies, two patents relating to NETLIS's on-module power management under the new DDR5 standard, and two patents relating to high bandwidth memory or HBM technologies. NETLIS is the leader in developing LRDEM technologies, having created many of the patents applicable to the technology. DDR5 is shortly expected to dominate the market for both server and consumer memory. HBM is the technology which is being quickly adopted for memory-intensive computing tasks. The latest generation of HBM chips are in high demand for a number of mainstream uses, including graphics and AI-assisted design and facial recognition systems. Altogether, the six patents relate to important memory technologies that will be used for years to come. Chief Judge Gilstrap of the Eastern District of Texas usually moves patent cases to trial very rapidly, and our Samsung case is no exception there. He has already set our claim construction hearing for October 14th, and as I mentioned before, the jury trial starts May 1st, 2023. The NETLIS case against Micron in the Western District of Texas is paused pending the resolution of the five IPR Micron filed against NETLIS. To that point, we received confirmation on July 19th that Micron's petition to institute an inter-parties review of our LRDM 608 patent was denied by the PTAB. We await the PTAB's decision on the pending challenging pending a petition challenging our NVDEM 833 patent, and we'll file our preliminary responses to Micron's twin petitions attacking the 314 patent. Since our first quarter call in May, we filed a new action against Micron in the Eastern District of Texas. Like the Samsung Eastern District of Texas case, this case against Micron before it's Chief Judge Gilstrap also involves DDR5 and HBM technologies. Finally, we filed cases against Micron, Samsung, and last week against Google in Germany for these companies' infringement of our European LRDEM patents, EP735 and EP660, both considered standard essential. We brought our suit against Micron and Samsung for their manufacturing and distribution of infringing modules, while we are pursuing Google's use of infringing memory modules in Germany. By their nature, German actions are different than infringement proceedings in the U.S. For example, in Germany, we will proceed in each action to a final oral hearing before the court alone. So far, we have oral hearings set for May 4, 2023, in our Micron Germany case, and September 5, 2023, in our Samsung Germany action. In addition to monetary damages, Netlist is also seeking injunctive relief in the Micron matter, receiving an injunction with me to complete bar on Micron use or sale of all infringing LRDEM modules within Germany. As with the U.S.-based cases, we are encouraged by the Dusseldorf Court's attention to our claims and its rapid scheduling of the final oral hearings next year. Now I will turn the call over to Gail for the financial review.