Michael Smargiassi - Brainerd Communicators, IR Chuck Hong - Chief Executive Officer Gail Sasaki - Chief Financial Officer

Rich Kugele - Needham & Company Richard Shannon - Craig-Hallum

Good day. And welcome to Netlist’s Third Quarter 2013 Earnings Webcast and Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference call over to Michael Smargiassi of Brainerd Communicators. Please go ahead.

Thank you, Denise, and good afternoon, ladies and gentlemen. Welcome to Netlist third quarter 2013 conference call. On 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 Investor section of the Netlist website at www.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 a 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. During our third quarter, we continue to focus on carefully managing our costs, while moving forward and introducing our new products to the high performance server market and working to maximize our IP assets. Earlier in the third quarter we announced the 32 gigabyte HyperCloud Memory Modules were qualified on the world’s best selling server, HP's ProLiant DL380p Gen8. In October, these modules officially available for purchase through HP. In addition, our 16 gigabyte and 32 gigabyte HyperCloud Memory Modules were selected as the default memory option on IBM system x3650 M4 for Virtualization Solutions. We also expanded our Hybrid DIMM DRAM to Flash and HyperCloud patent portfolios with two key issued patents during the quarter which continues to validate our technology leadership position for the storage and the high performance server markets for DDR3 and DDR4. These are all key developments for Netlist and I will provide an update on what this means for our company and how it impacts our business plan going forward in a moment. Now let me call the call -- turn the call over to Gail for the financial review of the quarter. Gail?

Thanks, Chuck. Good afternoon, everyone. Revenue for the third quarter ended September 28, 2013 was $4.3 million, compared to $6.4 million for the third quarter of 2012. Gross profit for the third quarter of 2013 was $393,000 compared to a gross profit of $388,000 in the third quarter of 2012. Gross profit over the next few quarters will continue to be dependent on the number of factors including revenues, unabsorbed manufacturing capacity, a change in product mix, as well as higher cost of materials, some of which we may not be able to pass through in form of higher ASPs. Operating expenses were $3.2 million in the third quarter of 2013, down from $5.1 million from the prior year’s third quarter, a 37% decrease and slightly up from $3 million in the second quarter of 2013. We will continue to focus on managing our quarterly operating expenses while targeting product execution, including additional qualifications at the OEMs and patent prosecution including strengthening our patent portfolios for both our HyperCloud, and NVvault product families. Adjusted EBITDA loss after adding back net interest expense, income taxes, depreciation, stock-based compensation, and net non-operating expense was approximately $2 million for the third quarter of 2013 compared to an adjusted EBITDA loss of $3.7 million for the prior year period. Net loss in the third quarter was $3.1 million or $0.10 loss per share compared to a net loss in the prior year period of $4.8 million or $0.17 loss per share. These results include stock-based compensation in the third quarter of $441,000 compared with $515,000 in the prior-year period, and depreciation and amortization expense of $353,000 compared with $471,000 in the prior year’s third quarter period. Third quarter capital expenditures totaled $26,000. We continue to anticipate not spending more than $200,000 in CapEx over the next several quarters. We ended the third quarter with cash and cash equivalents totaling $8 million, which was an increase of approximately $1.2 million from the end of the second quarter. The increase in our cash position and improved balance sheet reflects the strategic financing arrangement completed with Fortress Investment Group during the quarter. The agreement is backed by our patent portfolio and provides us with access of up to $15 million in liquidity. Thus far, we have drawn down $6 million and used $3.5 million to repay our term loan with Silicon Valley Bank and other costs related to the financing. Our cash cycle improved by 51 days year-over-year mainly from improved inventory turns. During the first 18 months of the new Fortress’ debt, payments will be interest only, which will help our cash flow during that period of time. In conjunction with the new financing, we amended our loan agreement with Silicon Valley Bank whereby Silicon Valley Bank will continue to provide us with a line of credit of up to $5 million collateralized by our accounts receivable. We have open capacity on this receivables base line of credit for working capital needs in addition to the Fortress line. Concurrent with the close of the Fortress and Silicon Valley Bank transactions during the quarter, we also raised an additional $1 million in equity from an institutional investor. The infusion of capital from Fortress is intended to support the ongoing development of our products and patent portfolios, which now includes 39 issued U.S. patents and 29 pending applications worldwide. We are pleased with the continued progress that’s been made in the various re-examination proceedings at the U.S. patent office, related to our earliest issued U.S. patents. Earlier this year, we have received news from the U.S. Patent and Trademark office confirming the patent’s ability of two network U.S. patents, the 274 and 537 patents. Both of these patents claim innovations critical to high-density server memory by allowing load isolation buffering. The IP protected by these patents is key to the performance advantages of HyperCloud as measured by the third-party white papers written by both IBM and HP. The USPTO examiner’s final answer after three years of our competitors trying to invalidate both patents, is that 100% of the 164 claims contained in these patents are valid. Next week on November 20th, Netlist and the USPTO examiner are scheduled to jointly defend our ‘274, ‘537 patents in all hearing against Inphi, who has the Right of Appeal as the losing party to appear before the patent trial Inphi’s Board at the USPTO. We are also continuing to pursue an aggressive monetization strategy for unlocking the value of our intellectual property for the benefit of our shareholders, including pursuing enforcement actions in certain instances where our intellectual property rights are being violated. In this regard, Netlist recently filed an amended complaint for Patent Infringement, Antitrust Violations and Trade Secret Misappropriation against Smart Modular, Smart Storage Systems, Smart Worldwide Holdings and Diablo Technologies, one of Netlist’s design contractors for HyperCloud. Netlist amended complaint alleges that the ULLtraDIMM product created by Diablo for Smart Storage Systems infringes five Netlist patents. The amended complaint also alleges Trade Secret Misappropriation against Diablo based in part on Diablo’s misuse of Netlist’s trade secrets to create the ULLtraDIMM product. Netlist intends to vigorously pursue these violations of our intellectual property rights. We will also continue to work closely with our partners at Fortress to explore various other options from maximizing the value of Netlist fundamental portfolio. I'll now turn it back over to Chuck.

Okay. Thanks, Gail. Our accelerated focus on uncovering the value of our IP Portfolio reflects our confidence in our proven industry-leading products and substantial proprietary position protecting these innovations. The recent qualification and availability of the 32 gigabyte HyperCloud on HP's ProLiant DL380p, further confirms the significance of our technology going forward. 32 gigabyte HCDIMM is the highest performing memory module available, maintaining maximum speed when expanded to full capacity. This compares to LRDIMMs and RDIMMs, which degrade in performance when memory capacity is expanded. HP customers can now run a full 768 gigabyte at 1333 mega-transfers per second. 32 gigabyte HyperCloud memory’s superior price/performance provides the absolute best solution for purchasers of high-density systems now and for future upgrades, enabling HP customers to maximize returns on their IT investment. HyperCloud utilizes our patented distributed architecture, which is being broadly adopted by the industry for DDR4 LRDIMM. We have made available the superior architecture for today's DDR3 servers, a generation ahead of the industry. With this groundbreaking product now available for purchase, we are moving forward and working with HP to drive unit sales across a number of key verticals levels. Further highlighting the strength of HyperCloud, in October, we announced that our 16 gigabyte and 32 gigabyte HyperCloud memory modules were selected as the default memory option on IBM system 3650 M4 for virtualization solutions. 16 gigabyte and 32 gigabyte HCDIMMs are the highest performing memory in IBM system x3650 M4 and HyperCloud is the leading memory solution for virtualization because it provides the highest throughput when expanded to full capacity. In addition to our progress in introducing HyperCloud, we continue to see traction for our EXPRESSvault product line which is being used by our storage customers increasingly to solve I/O bottlenecks. We have been seeing a good deal of market interest in the product from a number of potential customers and believe we are well-positioned to grow this business in the next several quarters. I should also note that, within our Vault line we have had a strong longstanding relationship with storage leaders like Whiptail which is now part of Cisco and we expect to build upon that relationship with Cisco. In summary, we are continuing to move forward in transitioning our business model and taking the necessary steps to secure the resources to unlock the value of our assets. We continue to believe that volume usage of 32 gigabyte HyperCloud will start to materialize in the coming quarters and act as the primary driver for the growth of our company over the next several years. We expect the business to scale as HyerrCloud and NV gain traction in the marketplace. In the near-term we will continue to maintain a disciplined approach to managing our expenses with the goal of prioritizing cash for continuing investment in future generation of our product technologies and enhancement of our patent portfolio. Before opening the call to questions, I would like to welcome our new Board members Blake Welcher and Charles Cargile. Blake brings extensive experience in intellectual property and licensing which will benefit Netlist as we execute on our IP monetization strategy. And Chuck brings more than 20 years of financial management experience including an extensive background in strategic development, capital structures and international operations. Thank you all very much for listening today and we are now ready for questions.

Thank you. (Operator Instructions) Our first question will come from Rich Kugele of Needham & Company. Please go ahead. Rich Kugele - Needham & Company: Thank you. Good afternoon. Couple of questions. First, on the revenue side, Gail, can you just provide the breakdown of the product lines, the composition of the revenue please?

Sure. Hi, Rich. Rich Kugele - Needham & Company: Hi.

As NV and EV about 20%, [PERT] 8%, HyperCloud 10%, VLP 27%, including Planar-X, Flash and other 31%. Rich Kugele - Needham & Company: Okay. And the Flash and others, what product does that refer to again, just remind us?

What’s mainly Flash… Rich Kugele - Needham & Company: Okay.

… 25% of this is significantly Flash. And then we have other industrial [DIMM] and RDIMM products in the other category. Rich Kugele - Needham & Company: Okay. And then in terms of your various bank lines and loans, given your current revenue level, what percentage of those maximum drawdowns do you actually have access to today?

For our Silicon Valley Bank line, think it is about $1.5 billion at the end of the quarter, which is based on our accounts receivables number and… Rich Kugele - Needham & Company: Is it like a trailing four quarters or something or what is based on?

No. It’s whatever the accounts receivable of balance is at a point in time. Rich Kugele - Needham & Company: Okay.

So today it’s higher than that, so we can borrow against that number. Does that answer your question? Rich Kugele - Needham & Company: Okay. Yeah. It does. And then what about on the $15 million?

Yeah. So, on the purchase line we have some milestones which we are planning to hit early in the first quarter of next year at which point in time $4 billion will be available to us and then the remaining amount is to be discussed. Rich Kugele - Needham & Company: Okay. And then just lastly on the 32 gig qualification, are you getting any pushback from IBM or HP on the working capital or are they now comfortable with the fortress access to be available to support them as they do start giving you significant orders and when do you expect to see significant orders since they are already shipping it those servers?

Rich, they are in fact shipping those servers, but our product at HP has only been available for sale in the last 30 days. So we are working with them to go market and joint account calls to some of their bigger users in the high-density memory verticals. So we expect to see traction from HP starting at the end of the year and ramping through the course of early next year. Then in terms of our ability, we’ll be able to borrow against demand that’s created. We’ve got sufficient credit lines to be able to do that. So there is no concern that’s been expressed from the customer base. Rich Kugele - Needham & Company: Okay. And I know you don’t provide official guidance but at least directionally what would you expect the overall revenue or cash burn to be like next quarter?

As I think, the revenue should improve in the next couple of quarters. Over the next couple of quarters, it will improve. Rich Kugele - Needham & Company: Okay. Any comments on the cash burn, should we assume a similar amount next quarter?

I think that’s fair. Rich Kugele - Needham & Company: Okay. All right. Thank you very much.

Thanks Rich.

Our next question will come from Richard Shannon of Craig-Hallum. Please go ahead. Richard Shannon - Craig-Hallum: Hey Chuck and Gail, how are you doing?

Hey Richard.

Hi Rich. Richard Shannon - Craig-Hallum: Maybe a follow-up on one of the previous questions here, you said you are expecting -- I think Chuck you said you’re expecting some ramp up in order in channel sales from one of your new relationships with the two big OEMs towards the end of the quarter. Can you give us any more thoughts or detail regarding how you are expecting those OEMs to market around your new relationship there? You mentioned your prepared remarks about co-marketing in specific verticals, maybe give us a little more flavor around that they will be great.

As we talked about with IBM, we have -- they've set up HyperCloud as the default memory selection for virtualization. Virtualization as we know is a major vertical for high density memory. We are working with their sales force. Recently, over the last couple of months, we’ve held a number of sales training and with their various sales force some on east coast, some out here on the west coast to help them understand the benefits of HyperCloud with higher bandwidth in virtualized environments. So they are training. There are sales promotion, sales incentives in place for the sales force, both at IBM and at HP. HP, we are working with their product manager, server managers that are responsible for the product line and making joint calls identifying and determining the major accounts that require high memory footprint and calling on those accounts on Wall Street in particular to help brand the product and create demand for HyperCloud. And we do that also in comparison with our performance comparison and in relation to competitive offerings, which are LRDIMM and standard registered. So, lots of activity with the major OEMs and their server sales and marketing groups organizations to create demand with end customers. Richard Shannon - Craig-Hallum: Okay. You mentioned in your comments as well and again in press release earlier this month regarding being a default option at IBM and their 3650 server I think. How powerful do you think having your HyperCloud as default option will be? I mean, could that be meaningfully more share relative to IBM’s overall share in the server market just because of that or how do you -- what kind of impact do you think that could have?

The IBM share of the server market is what it is. Within the IBM share, we’re hoping to create greater demand for HyperCloud versus standard commodity offerings, which are registered DIMMs and LRDIMMs, so that’s supplied by four, five different suppliers in the industry. And then, among the various verticals, high-performance computing, oil and gas analytics, high frequency trading and so forth, that are related to high density memory requirements. We believe virtualization is one of the largest of those verticals. And so we expect to see some good demand that's created in the virtualization market. We work with Vmware in the past as well. So, 3650 is the largest selling server within the IBM server line. So having our product as the default option in that vertical should help us create demand. Richard Shannon - Craig-Hallum: Okay. Great. I think those are all my questions. I will jump out of the line, guys. Thank you.

Thanks, David.

Thanks, David.

And ladies and gentlemen that will conclude our question-and-answer session. And at this time, the Netlist conference call and webcast has concluded. We thank you for attending today's presentation. You may now disconnect your lines. And once again the Netlist conference call and webcast has concluded. You may now disconnect your lines.