Q1 2024 Netlist Inc Earnings Call

Participants

Mike Smargiassi; Investor Relations; Netlist Inc

Chun Hong; Chairman of the Board, President, Chief Executive Officer; Netlist Inc

Gail Sasaki; Chief Financial Officer, Executive Vice President, Company Secretary; Netlist Inc

Suji Desilva; Analyst; Roth Capital Partners LLC

Presentation

Operator

Good morning, everyone, and welcome to the Netlist First Quarter 2024 Earnings Conference Call and Webcast. (Operator Instructions) Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Mike Smargiassi, Investor Relations. Sir, please go ahead.

Mike Smargiassi

Thank you, Jamie, and good day, everyone, and welcome to Netlist's First Quarter 2024 conference call. In today's call will be Chuck Hong, Chief Executive Officer of Netlist; and Gail Sasaki, Chief Financial Officer. As a reminder, you can access the earnings release and a replay of today's call 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 your questions may include forward-looking statements, which are based on current expectations. Actual results could therefore 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 today's press release. Netlist assumes no obligation to update forward-looking statements.
I will now turn the call over to Chuck.

Chun Hong

Thanks, Mike, and hello, everyone. In the first quarter, our product revenue came in at $36 million, a threefold increase from a year ago period. This performance reflects further improvement in both the price and demand environment.
The two recent earthquakes in Taiwan have resulted in minimal market disruption, but we continue to expect additional price increases for both DRAM and NAN products as we move through the rest of the year. As the memory market continues to rebound, Netlist remains well positioned to capitalize on the positive market conditions.
Now turning to the legal update thus far this year, we have received the disappointing results in the IPRs at the Patent Trial and Appeals Board for the five asserted patents in Atlas's and $303 million jury award against Samsung. And in that case, we've now received final written decisions of fund patentability for those five patents. We are reviewing each of these decisions carefully and considering next steps, parties have 30 days to file a request to challenge the result at the PTO itself.
And this appeal process can take several months. And if denied. The PTA. will enter a final decision and denial. The stent opens the window to file an appeal with the US Federal Circuit Court of Appeals for the three three nine patent covering LR dem. Netlist has already filed a notice of appeal with the Federal Circuit. We expect the Federal Circuit appeal process to take 18 to 24 months to reach its conclusion for the nine, 18 and oh five for patents covering on module power management technologies for DDR5 memory modules. We plan to file an appeal to the Federal Circuit.
Finally, in regard to the oh six, oh and one six zero patents covering HBM memory, we will decide shortly whether to file a request for the rehearing by the PTO panel or a request for the PTO DIRECTOR review as these proceedings move forward, I would note the jury verdict and judgment against Samsung in the Eastern District of Texas remains in place and we await a final order from the court last week, Netlist this claim 16 of the seminal nine 12 patent was also found on patentable.
The 912 patent has been subject to five district five distinct reviews at the USPTO and Federal Circuit between 2010 and today are 14 years of its total available life. In that time alone, the patent office has seen five different directors and now the nine 12 patent was found for the first time be unpalatable by this by this recent pita panel.
912 has been subject of serial re-examination and abuse attacks and was invalid and was validated five times over, including by the Federal Circuit Court of Appeals only now in near 14 of its near continuous scrutiny as this Board decided that claim 16 of the nine 12 patent may be obvious, and this was an IPR filed by Samsung, admittedly ACTING at Google's behest.
And so doing this Board has unwound over a decade of decisions what made by its predecessors at the P-type itself and the Federal Circuit Court of Appeals and made clear that the purpose of the PTAP is not about calling bad patents with killing good patents if it serves their interests in some way.
912 history is the poster child of how to abuse post grant review processes and prevent innovators like Netlist's from stopping large infringers in court, it is disturbing to see the USPTO can reconsider the validity of this patent for the sixth time and only now reverse more than a decade of decisions were considering all post decision options, standard and otherwise to redress this unprecedented injustice in the Eastern District of Texas.
The court has separated and Atlas has consolidated cases against Micron and Samsung. The jury trial against Micron was set to begin April 29th. However, earlier this week, it was rescheduled to May 20th due to a last-minute emergency. The court has not set a trial date for the parallel Samsung case, but we hope to have a set after our trial against Samsung in the Central District, CONCLUSION and a breach of contract case against Samsung and a US District Court for the Central District of California judge Marc Schorr.
He has set the final trial conference for May sixth and a jury trial start date of May 16th. We are looking forward to this proceeding because this trial represents Netlist's this first opportunity to bring all of Samsung's past actions to light before a jury. We expect the trial to last approximately one week.
Our case against Micron in the Western District of Texas is still currently state, but we filed a motion to move this case through the Eastern District of Texas. We're making this motion as the case has been sitting in a non assigned judicial docket and is still not assigned to a judge.
This case involves Netlist patents covering Micron's use of DDR4 LRDIMM technology and two of the four asserted patents in this case have already been found valid and patentable by the Theta.
In summary, the memory market continues to improve and we are preparing now for a very busy month in May with two federal jury trials to conduct the breach of contract case against Samsung in Los Angeles and a patent infringement case against Micron in Marshall, Texas.
I'll turn the call over to Gail for the financial review.

Gail Sasaki

Thanks, Chuck. For the three months ended March 30th, 2024, total revenues were $35.8 million compared to $9 million in the year ago period. This was a 297% increase from the first quarter of history and a 7% increase on a sequential quarter basis, the revenue increase highlights the strong turnaround in the memory market from the year ago period.
And while we cannot formally guide given our booking and shipping for the second quarter, of 2024 to date, plus the industry outlook for continued growth in both memory demand and pricing. We currently expect a moderate increase in revenue for the second quarter of 2024 when compared to the first quarter of 2024.
The increase in operating expense for the first quarter was mainly due to increased legal expense related to the number of active campaigns and upcoming jury trial separately, we do expect legal costs to remain elevated through the second quarter of 2024, after which we anticipate reductions through the end of the year as we ended the first quarter with cash and cash equivalents and restricted cash of $41.1 million compared to approximately $53 million at the end of 2023.
With a $10 million working capital line of credit and approximately $34 million available on the equity line of credit. We continue to maintain significant financial flexibility and liquidity going forward. And as always, we manage the operational cash cycle very carefully with days sales improved by 48 days over last year as well as days in inventory improved by 57 days over last year's Q1.
Operator, we are now ready for questions.

Question and Answer Session

Operator

Suji Desilva, Roth Capital.

Suji Desilva

Hi, Chuck. Hi, Gail. I'm just trying to understand from the relationship of the, um, the Samsung finding in East Texas to Russia for that to the breach of contract case in California. Chuck, can you just tell me if those two are linked or if they're kind of separate impacts?

Chun Hong

They're obviously related because it's those patents that are being that have been found invalid in the PTA. proceedings. Now the PTAB proceedings are obviously not final within the pit at DLR, then decision and the P tab is final and that has been appealed to the Federal Circuit.
The two other families, one involving the PMACDDR. five and the HBM and the two patents each there, the four patents altogether, they will still be going through a further processes within the pit that neither a director review or a a rehearing.
And and once we go through that then as we can then appeal that those to the Federal Circuit, the federal US Federal Circuit appeal decision, it is for all practical purposes is the final decision on those patents, but and the system is set up so that the District Court through each trial, a jury trial.
This is a reaches its own decision on both infringement and validity. So you have actually two competing decisions that will get to the appellate court for a final final. So I don't know if that is helpful, but that's how the process works.

Suji Desilva

No, it definitely helps. And maybe a follow-up question there. Chuck, just to understand, I mean, as an example, the nine 12 patent having gone through 14 years of sort of reviews is a decision either direction, final or kind of situation where it can go back and forth on that note as indefinitely, which is?

Chun Hong

Yes, just to clarify what we just spoke of is the $300 million a jury verdict. First of all, that remains in place. These decisions at the PTA, our P. tab is a government agency under the USPTO, which is under the Department of Commerce and the executive branch.
So it's a decision that the courts look at, but the courts render their own decision under the judicial branch and they have their decision on the $303 million infringement verdict that remains in place now so that we do we've got a court decision of a infringement and validity duty and a damages award for $300 million.
That remains intact while a government agency has found the patents to be unpacked printable. So you've got two conflicting decisions that needs that need to get resolved at the Federal Circuit Court of Appeals. That's where all of this kind of gets reconciled. The nine 12 patent is separate from it and a separate case arm along with a couple of other LRDIMM patents.
And that is what we call the Eastern District of Texas case two against both Micron and Samsung and one of those cases, the one against Micron is set to go to trial on the 20th of May. But and your question about whether the nine 12 from what we will do with that?
Yes, it's there is no other patent. I don't think in history that have gone through what this has gone through. It has been found valid by the USPTO and Pete had four separate times from and what this recent panel has done. First of all and instituting this patent is kind of extraordinary that they instituted something that their predecessors has has said that it's been valid.
They should have not instituted it, particularly because it was broad. It was challenged by Samsung. And they clearly blatantly said that they're doing this on behalf of Google. So it should not have been instituted. So there's something wrong that's going on there. Clearly at the peak tab. And yes, we need to enlist you know some higher powers in the government.
And in the past, we have had a poll like people like Paul Michelle, who used to be the the the chief judge at the Federal Circuit, right? And our bad criticizing and the decision to even institute this patent again at the at the time of institutions. So we are looking at different options because this is what's happening here.
It's not double jeopardy, it's quadruple quintuple. I mean, it's a once you've been given a clear, clear title to an asset in this country. Should that should be your title. They are now questioning your title four different times or the fifth different time.
And on the fifth time they're saying now, okay, all of the four proprietor examinations and the Federal Circuit finding is as wrong. We're finding some different angle to see that this was should have never been patentable. So it's yes, it is quite the, yes, P&L it's hard to even put in to a single award, what's happened here.

Suji Desilva

What's happened here now appreciate the insight on the challenges you have there. And I think you made it relatively clear. What's going on. I'm switching over to the product side, the on the memory market improving, I guess, pricing firming. Can you just talk about the puts and takes in that? I guess the demand would drive the pricing up, but maybe supply hasn't been expanded and how that affects your opportunity for resale and new product opportunity in that three quarters?

Chun Hong

Yes, Suji, on the the market has certainly become better on a it's not a it's not any kind of a significant shortage as of yet. But on just in general compared to last year, things are improving. And you see that from results from our big suppliers like Hynix recently in Micron.
So I think about D-Ram and will continue to the price will appreciate and the demand is in those remaining relatively strong, and that will continue out through the rest of this year. We're seeing some we're seeing good demand from our customers as well so we believe that things will improve our results.
Certainly, the top line will continue to incrementally improved for the second half of this year. The bottom line obviously are going to depend on. We're still we're still spending quite a bit on the legal front with the two trials coming up in May.
And then we continue to invest significantly in the CXL development, which is really, you know, it is going to be the market for the second half of this decade. So and we were As said, we manage the investments as closely as possible and tightly as possible. And but these are investments that we need to make as a business, given that we must monetize the assets that we have here.

Suji Desilva

Okay, thanks.

Chun Hong

Thanks.

Gail Sasaki

Thanks, Suji.

Operator

And ladies and gentlemen, with that, we'll be ending today's question and answer session as well as today's conference call and presentation. We do thank everyone for joining. You may now disconnect your lines.