Mike Smargiassi - IR Chuck Hong - CEO Gail Sasaki - CFO

Rich Kugele - Needham Richard Shannon - Craig-Hallum

Good day and welcome to the Netlist Second Quarter 2014 Earnings Call and Webcast. All participants will be in listen-only mode. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Mike Smargiassi of Brainerd Communications. Please go ahead.

Thank you, Laura, and good afternoon, ladies and gentlemen. Welcome to Netlist’s second quarter 2014 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 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. 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 the second quarter, we continue to focus on executing our strategic plan. For the past two years, we’ve been working closely with one of the world’s largest Hyperscale customers to design in our NVvault into the DRAM channel of their datacenter servers. During the quarter, we were named as one of the two companies that will supply the NV in high volume as the customer deploys servers integrated with NV over the coming years. We also worked closely with Intel on the BIOS front and are pleased to have been referred by them to this important customer. We expect to announce details of initial purchase orders before the end of the year. We invented the first NV hybrid memory product close to a decade ago, at that time our product was primarily used for data backup increasingly today NV is being used by customers as a data accelerator for their systems much like a turbo charger for storage. Our products operated DRAM speeds to store critical write data for indexes and logs to read hot data, the most commonly access from storage and to provide data persistence. During the quarter, we continue to work with Intel to more broadly enable NVvault in the fastest bus available, the memory channel. As a result of years of collaboration with Intel in this area, Netlist maybe the only NVDIMM vendor with seamless and sustainable integration into leading edge storage platforms. We also recently showcase that same product to the market as the industry’s best performing NVDIMM running at 2 DIMMs per channel 1600 along with full compatibility with off the shelf MRC from Intel at the Flash Memory Summit last week. We’re also working closely with Supermicro to jointly call on potential NV customers and in general proliferate NV use across many different applications. Through these efforts, we are confident of expanding our sales funnel and drive further penetration of the NVvault into a broad diverse space of customers. During the quarter, we increased our sales force resources in order to take advantage of that growing opportunity. We announced the appointment of Mitchell Statham as Senior Vice President of Worldwide Sales and Marketing. In this newly created position, Mitch will be focused with revenue driving profit growth to expansion of our customer base worldwide. Mitch brings a wealth of industry experience and a strong track record of performance having previously led sales organizations as STATSChipPac, Kilopass, and Lantronix. Now before providing an update on our R&D and IP efforts, let turn the call over to Gail for the financial review of the second quarter. Gail?

Yes, thanks Chuck. Revenues for the second quarter in at June 28, 2014 were $4.9 million compared to $5.1 million for the second quarter of 2013. Gross profit for the second quarter of 2014 was just under $1 million compared to a gross profit of $247,000 in the second quarter of 2013. Reflecting a combination of improvements including product mix and improved inventory management. Net loss for the first quarter was $3.5 million or $0.08 per share compared to a net loss of $2.9 million or $0.09 loss per share in the second quarter of last year. This result include stock-based compensation in the second quarter of $515,000 compared with $369,000 in the prior year period and depreciation and amortization expense of $253,000 compared with $395,000 in the prior year second quarter. Adjusted EBITDA loss after adding back net interest expense, income taxes, depreciation, stock-based compensation and net non-operating expense was approximately a negative $2.3 million for the second quarter of 2014 compared to an adjusted EBITDA loss of negative $2 million for the prior year period. Operating expenses were $4.1 million in the second quarter compared to $3 million in the last year’s second quarter. However, without patent legal cost from both periods operating expenses were flattish compared to last year’s second quarter. Gross profit over the next few quarters will continue to be dependent on a number of factors including revenue, unabsorbed manufacturing capacity, change in product mix as well as higher cost of materials some of which we may not be able to pass through in the form of higher ASPs. We will continue to focus on managing our quarterly operating expenses while targeting product execution including strengthening our patent portfolios for both our HyperCloud and NVvault product families. We ended the second quarter with cash and cash equivalents and restricted cash totaling $17.3 million as compared to $19 million at the end of the first quarter. At the end of Q2, we also had untapped capacity of $2.5 million on our receivables bank line of credit from Silicon Valley Bank for working capital needs and access to an additional $9 million funds under our IP bank loan agreement with the Fortress Investment Group. I will now turn it back over to Chuck.

Thanks Gail. We have long belief that hybrid memory storage will fundamentally alter computing as we’ve known it. Our NVvault family of products was the first step towards that future as we combined DRAMs and flash storage and brought it to the DRAM channel. We are now taking the second step by developing the next generation product, code name HyperVault, which greatly expands the performance and capacity of DRAM channel storage. This product combines the best attribute of DRAM and flash raw materials and as the culmination of 10 years of R&D effort which resulted in both of our flagship products HyperCloud and NVvault. HyperVault build on the intellectual property, which has been seminal to each product family and will provide performance beyond any product that is currently available. It is a truly transformative product that will be positioned to capture the emerging megatrend that is the conversions of storage and memory. We are proud to be at the forefront of this transformation in the industry and we plan to exploit the significant market opportunity through partnerships with major industry players and the creation of an eco-system that can help proliferate HyperVault technology. During the quarter, we have continued to follow through on our patent and trade secret losses against the UltraDIMM product from SanDisk, which is produced in partnership with the outlook of former contractor to Netlist. As described in our trade secrets complaint, Diablo exploited its position as a trusted vendor to steal Netlist’s most valuable intellectual property and incorporate the stolen technology in the UltraDIMM. Our trade secret disclosure identified in detail 60 technical trade secrets that we disclosed to Diablo and confidence and as described in the compliant we believe were used in the UltraDIMM. As we previously reported, the whistleblower letter states that Diablo stole Netlist’s architecture and design to create the UltraDIMM and then conspire to hide this stuff by instructing it’s employees, not to speak to customers about the fact. The evidence we have reviewed so far is consistent with events described in the whistleblower letter. In fact, Diablo has acknowledged in court filings recently that an earlier version of UltraDIMM actually used Netlist chips, they have taken the position that they were allowed to do so, an unrealistic argument given the agreement between the companies and the fact that Diablo as a contractor was not authorized to use Netlist’s IP to create a competing product. This submission and the evidence we’ve reviewed so far strongly supports our assertions in this case. The trade secret law suit and the related suits asserting infringement of seven Netlist patents against both SanDisk and Diablo are well underway, discovery is ongoing and we’ll continue through the summer. Depositions will begin soon starting in late August with the two former Diablo employees named in the whistleblower letter. Netlist intends to aggressively pursue all available remedies in the trade secrets and patent suits, including an injunction against the UltraDIMM product as well as damages, royalties and restitution for Diablo’s misappropriation of Netlist trade secrets. In the related patent case the parties of exchange infringement and invalidity contingence and the claim construction process has begun. In late June of this year SanDisk and Diablo filed petitions in the U.S. PTO requesting interparty review of all seven patents in the case. We expect the U.S. PTO to decide by the end of the year or early next year, whether to proceed with one or more of these IPRs that’s possible that the patent case will be stayed pending decisions from the patent office. However, we’re confident that the trade secrete case will proceed regardless of what happens with the IPRs. Turning to other IP matters, our industry leading patent portfolio continues to grow and strengthen as we previously reported earlier this year the Appeals Board at USPTO upheld the validity of all 60 claims in the reexamination of our 537 patent. And in the reexamination of our 912 patent the examiner close prosecution confirming the patent ability of over 90 claims. Most of these patents include claims generally directed to the fundamental concepts of rank multiplication and load reduction which are integral to the design LRDIMM and DDR3 and DDR4. We are pleased with the significant progress made in both of these reexaminations. We have also significantly expanded our patent coverage of hybrid memory devices. Netlist invented the first hybrid memory device nearly a decade ago and therefore our patent portfolio related to this technology is by far the most robust and has the earliest priority in the industry. We have more than half dozen patterns today covering fundamental concepts integral to the design of hybrid devices and we continue to get additional claims allowed by the patent office. With each of these wins the value and importance of our patent portfolio is becoming increasingly clear as a result we believe we are well position to move our patent monetization efforts forward with a wide range of industry participants as the market for LRDIMMs and hybrid memory grow at a rapid pace. In summary, our strategic plan encompasses three game changing initiatives. One, proliferating the NVvault product line particularly into the cloud computing space; two, bringing to market the fastest next generation hybrid memory solution and partnership with major industry players; and three, monetize our IP portfolio. We continue to take steps to execute on these strategic initiatives and unlock the value of our industry leading products and IP assets and position the company for the long term. Thank you all very much for listening today. And we are now ready for questions. Operator?

Thank you. (Operator Instructions) And our first question will come from Rich Kugele of Needham. Rich Kugele - Needham: Let’s first talk about the NVvault opportunity with this large datacenter customer, can you give us a sense of how this product might ramp and your ability to procure enough components as that ramp on vaults sounded like maybe you get some POs late this year and then revenue maybe early next year is that the way to think about it.

Yes, Rich. We expect to receive the first POs before the end of the year and expect to start delivering product in Q1 and we expect the volumes to ramp rather in the course next year and into 2016. Rich Kugele - Needham: But you would expect this to be comparable to what NVvault was doing before in terms of magnitude or more or like the hyper cloud level?

We think this is a very significant opportunity, it is one of the top Hyperscale customers in the industry. They have million plus servers deployed overtime. The plan is to integrate NVDIMMs into many of those servers that are deployed and the new ones that will be deployed overtime. So we expect a substantial opportunity volume wise. Rich Kugele - Needham: And you mention that your one or two suppliers for this is the -- is there kind of a prime in the secondary or will you expect to split that business?

I think we will share and a large chunk of that business I don’t know at this point whether we will be primary or secondary but we expect to have a significant share of the business. Rich Kugele - Needham: Okay. And then, obviously later this year in September actually we’re going to see grandly come out from Intel and obviously you’ve got the DDR4 RAM underway. So can you just update us on your qualifications for those two?

For the NV product line? Rich Kugele - Needham: Yes, throughout.

Well, this current opportunity is for NV with Hyperscale customers this particular customers and other potential Hyperscale customers, they are working on NVDDR3 platforms, those end users are not necessarily following the Intel tick-tock model and the adoption of the platforms and also we expect these NVDDR3 opportunities to expand out next three to four years and NVDDR4 is still yet to be defined in terms of enablement in the DRAM channel. So, much of our work around NV qualifications and design ends will be on the current DDR3 platforms. Rich Kugele - Needham: Okay.

We don’t think any the DDR4 in the short term will impact those opportunities. Rich Kugele - Needham: Okay, and then in terms of the quarter, you just reported, it was a bit softer than what we were modeling we’ve been kind of thinking it would be more of a flattish quarter, can you just talk about the demand dynamics in the various categories?

I think it has been the existing run rates for HyperCloud and NV the base business with existing customers have been relatively flat and therefore the flat quarter that we just reported. Going forward, we’ve a lot of qualifications and design work that’s being done as we speak and just as this opportunity with the large Hyperscale customer materialized over 18 months, 24 months’ worth of work, we believe there are a bunch of qualification activities in the pipeline that will start to materialize in the second half of this year and into 2015. Rich Kugele - Needham: Okay, just lastly on expenses in cash, so if I heard your comments right, you’re spending probably about a $1 million a quarter on legal expenses of one sort or another, is that correct? And then in terms of your cash burned and your balancing of available cash, can you give us a sense on your expectations for how much run rate you’ve got?

Rich, the legal expense, you are right, was about $1 million for the quarter. We have a very solid cash position right now with about an additional $2.5 million availability for working capital and the $9 million as I discussed from Fortress. So, we have a lot of run rate with our current balance sheet.

And the next question is from Richard Shannon of Craig-Hallum. Richard Shannon - Craig-Hallum: Doing great, thanks. Chuck, just wanted to confirm I think your initial comments you’re saying that you basically won the award with this initial Hyperscale customer, just want to clarify that, want to make sure of your wording there exactly.

Richard, the award equates the actual orders and that is forth coming at the end of the year, what has occurred is that we have been named as formerly as one of the supplier. So, that’s after many many months of technical design and as well as qualification works, lots of software BIOS work with the customer. So, yes we are one of the named suppliers. Richard Shannon - Craig-Hallum: Okay, how confident are you of the timeframe for getting the purchase order and ultimately starting to ship. Any sense of the certainty of that coming from your customer?

Yes, we have a forecast, we have been given the rollout plan at a high level and this is a project that is live and being implemented at the customer. So we have some visibility into the numbers today. So I think we’re pretty confident that there will be a ramp up in the volumes starting early next year. Richard Shannon - Craig-Hallum: Okay. I think in the last conference call you gave us sense of what that opportunity might be, how does this forecast you seen compare to how you portrayed the opportunity last quarter.

I don’t know that I provided any precise numbers, but the visibility that we’re getting thus far shows that this will be a significant opportunity even beyond what we had expected initially. Richard Shannon - Craig-Hallum: Okay, great. One more question on this general topic on Hyperscale customers, you mentioned this quarter I think well as last that this work was a result of recommendation from Intel to this customer. Has Intel recommended you for other customers or have you started to work in any meaningful regard with any other like type of customers and what is the visibility and timeframe for those engagements?

I don’t know that Intel is out there recommending one supplier over the others, I think the fact that we were their primary partner consistently over the last three years with their storage group in Arizona enabling the NV on to the DRAM channel, made it pretty easy for them to tell customers in general that we have a, Netlist has a reliable product that works with the Intel BIOS and MRC in this product. So it’s hard to know how actively are they talking to these customers but in this case we were able to triangulate information that in fact that this Hyperscale customer receive were that we were reliable source for NV and we have been working on NV for close to a decade. So we believe there are other opportunities in this space and we are actively engaged with similar customers in the Hyperscale space. Richard Shannon - Craig-Hallum: Okay, fair enough. Maybe that’s enough for that topic I’ll jump to a couple of other questions here. I think in you prepared remarks you talked about the legal case, the trade secrets case against Diablo and SanDisk. It sounds like you’re getting increasing confident regarding the discovery and depositions coming up soon, do you have any sense of timing of when you might feel confident and actually file for an injunction against UltraDIMM product, any idea when that might happen?

Let me first clarify that there are two cases in the northern district in Oakland and one is a trade secrets case and that is against Diablo only and there is a seven patent infringement case and that is against both SanDisk and Diablo. And both of those cases are preceding priority schedule that is on the court dockets. And through discovery we have obviously received and have reviewed quite a bit of material documents and products and we are very confident that the evidence thus far is consistent with the position and the assertions that we’ve made in this case. And there is depositions forthcoming at the end of this month and we believe that even in recent weeks there has been admissions by Diablo that they’ve actually used our chip on the earlier versions of UltraDIMM. So we continue to pursue this and we believe that all the evidence will be brought to bear and the truth of the matter as to the ownership of the IP will come out here pretty shortly. Richard Shannon - Craig-Hallum: Okay, fair enough. Maybe just one last question from me and I will jump out of line. Talking to prepared comments you talked about strategic plan with three initiatives and one of them is bring hybrid memory products to the market and talked about partnerships, can you expand on what you mean there as go to market partnerships or supply customer chips can you elaborate on that at all?

Yes, Richard we have the NV product, we are in development of hyper vault product which is a much higher capacity higher speed product that will go into the DRAM channel. It will be a product that will run faster and has lower cost per bit characteristics than any other solution that is available in the market today. And with that opportunity we are in discussions with a number of potential strategic partners, major players in the industry to bring together the necessary resources to expedite the solution to market and to exploit the enormous opportunity that this technology is assessed. So we’re active today in those discussions.

This concludes our question-and-answer session I would like to turn the conference back over to Chuck Hong for any closing remarks.

Thank you all very much for listening today and we look forward to updating our progress next quarter. Thank you.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.