Mike Smargiassi - Investor Relations, Brainerd Communicators Inc. Chuck Hong - Chief Executive Officer Gail Sasaki - Chief Financial Officer

Richard Shannon - Craig-Hallum

Good afternoon everyone and welcome to the Netlist Q2 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation there will an opportunity to ask questions. Please also note that today’s event is being recorded. At this time, I would now like to turn the conference call over to Mr. Mike Smargiassi. Sir, please go ahead.

Thank you, Jamie and good afternoon everyone. Welcome to Netlist’s second quarter 2015 conference call. Leading 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 Relations’ 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. Our financial results this quarter reflect the ongoing investments we’re making in product development, IP enforcement and overall repositioning of the business for sustainable growth over the next five years. This internal transition is taking place to meet strong industry trends that are opening up very large markets for hybrid memory, where Netlist Solutions can address multiple customer segments and allow us to be a key participant and a beneficiary. We see a clear movement towards leveraging NAND flash to complement DRAMs due to an increasing need for higher density, lower cost non-volatile memory for storage. As the pioneer and provider of such solutions, we remain well positioned to participate in this high growth area and we’re pleased with the industry validation of this market opportunity based on the announcements over the last three months from a number of major players. As discussed at the beginning of the year, we remain focused on three game-changing initiatives; proliferating the NV product line, bringing to market HyperVault in partnership with major industry players and monetizing our IP portfolio. We are committed to our three-point strategic plan, and we continue to execute against it to capitalize on the opportunity we see ahead. First: the introduction of our EXPRESSvault 3 or EV3 solutions into the marketplace. During the second quarter, we made significant progress in getting EV3 into target customer hands. At 400,000 to 500,000 IOPS EV3 is a product that delivers performance which is orders of magnitude superior than today’s fastest SSTs. The EV3 is based on the industry standard PCIe3 interface to enable plug-n-play connectivity, making the solution ready to use. There are no motherboard or bios adjustments that were required. There are no need to rewrite any of the software applications. We’re on plan for EV3 to begin shipping in volume by the end of the year. We are currently sampling this product to many server, storage appliance and data center customers. There has been a very positive response from the market to EV3’s breakthrough performance. Simply put in a server or storage system, EV3 provides the fastest medium to write data for indexing, journaling and cashing. Critical functions in a data center, and the market is taking notice of its high performance. We believe the product’s breakthrough performance and simplicity will allow it to be easily and quickly adopted by customers and accelerate its volume adoption. Accordingly, we expect the sale of EV3 to ramp rapidly throughout 2016 and will likely account for the largest portion of our revenues next year. Second, the continued development of our memory channel storage product HyperVault and HyperVault mobile and its further validation through strategic partners. The industry continues to move towards hybrid memory solutions as evidenced by recent announcements from companies such as Intel, Micron and the SNIA alliance. We are continuing to see strong interest from major companies in this category and in our HyperVault. And the key part of our strategy is to form strategic alliances with leading industry players to properly resource these opportunities and to accelerate market adoption. The first example of this strategy is our letter of intent with LG electronics where the two companies will work jointly on a HyperVault mobile memory controller targeted for LG’s next-generation smartphones. We are on track with the development of HyperVault and expect to begin sampling by the end of the year and anticipate that it will begin to contribute to revenues in the second half of 2016. Third: to extract value from our IP portfolio. As you know, we have been in litigation against Diablo on ULLtraDIMM and we have pursued our post-trial motions following the jury’s verdict in March. The parties presented our arguments to the court on July 8 with respect to a variety of motions including our request for judgment as a matter of law on breach of contract and for a new trial on Trade Secret Misappropriation. We expect the court will rule on these motions in the coming months though the timing of these rulings is within the discretion of the court. Further, the separate patent infringement suit against both SanDisk and Diablo on ULLtraDIMM remains on-hold while four of the Netlist patents are reviewed at the U.S. Patent Office. As reported on previous calls, the U.S. PTO twice refused requests from SanDisk and Smart Modular to review the other three Netlist patents asserted against ULLtraDIMM in this litigation. We firmly believe that the ULLtraDIMM contains Netlist proprietary and patented intellectual property. And we remain committed to enforcing our rights under this product. As a result of this activity, we have seen continued interests in Netlist’s IP portfolio from a number of entities. And we are actively engaged in discussions to monetize these valuable assets. Now, let me turn the call over the Gail for the financial review of the second quarter.

Thanks Chuck. Revenues for the second quarter ended June 27, 2015 were $1.4 million compared to revenues of $4.9 million for the second quarter ended June 28, 2014. The decrease was mainly due to the absence of prior generation NVvault and EXPRESSvault sales to Dell and others, which had accounted for 38% of the revenue in the 2014 second quarter. Gross profit for the second quarter ended June 27, 2015 was $100,000 compared to gross profit of $1 million in the second quarter of 2014, this reflecting the decline in revenue and the resulting unabsorbed manufacturing capacity. Net loss for the second quarter was $4.4 million or $0.09 loss per share, compared to a net loss in the prior year period of $3.5 million or $0.08 loss per share. These results include stock-based compensation expense of $0.4 million for the second quarter of 2015 and $0.5 million for the second quarter of 2014. And depreciation and amortization expense of $134,000 compared with $253,000 in the prior year’s second quarter period. Adjusted EBITDA loss after adding back net interest expense, income taxes, depreciation, stock-based compensation and net non-operating expense was approximately a loss of $4.9 million for the second quarter ended June 27, 2015, compared to an adjusted EBITDA loss of $2.3 million for the prior year period. Operating expenses were $5.5 million in the second quarter compared to $4.1 million in last year’s second quarter. After subtracting intellectual property and legal fees from both periods, operating expenses were up by $266,000 compared to last year’s second quarter, mainly due to increased headcount for our HyperVault, NVvault and EXPRESSvault next generation product development. We ended the quarter with cash and cash equivalents and restricted cash of $18.1 million as compared to $21.2 million at the end of the first quarter. We also had untapped capacity of $500,000 on our receivables bank line of credit from Silicon Valley Bank for working capital needs, plus access to $5 million of incremental funds under our IP Bank Loan Agreement with Fortress Investment Group. We believe our balance sheet and supplemental lines of credit provide us with more than ample runway to support our new product introduction and marketing plans and to execute on our IP monetization plans going forward. I’ll now turn the call back over to Chuck for concluding remarks.

Thanks Gail. In summary, we continue to invest in the three strategic areas of our business in order to capitalize on our IP and drive growth and value for our shareholders. With the ramp-up in the base products in the near term, we expect to start showing fruits of our investment in the near-term. We are also making steady progress for the development and introduction of our HyperVault product technology and working with strategic partners to accelerate its market adoption. We remain committed to our transformational plans and are excited about the industry momentum in the hybrid memory space and the market potential for our own hybrid solutions. We’re also pleased about the recognition we’re receiving from major industry players based on the discussions we’re having with potential customers and partners around our product and IP, which we believe bodes well for the future of the company. Thank you all very much for listening. And we are now ready for questions.

[Operator Instructions]. Our first question today comes from Richard Shannon of Craig-Hallum. Please go ahead.

Good afternoon Chuck and Gail, how are you guys doing?

Good, hi, Richard.

Hi Richard.

Hi, let’s see here, a few questions here, and Chuck thanks for the prepared comments. Let’s pass the first one on EV3, you talked about this all a bit last quarter, sounds like you’ve had a good quarter’s worth of progress here. Can you give us a sense of how broader the potential customer base is sampling this and is this really kind of the storage end-market that’s interested in or is it beyond that?

Richard, I believe we had mentioned on the previous call that we were targeting couple of dozen customers for EV3. And I think that number holds true. We have samples out to probably half a dozen significant targets. And it’s a matter of us building more products and debugging - going through the debugging process to get out the remaining 10 to 15 other customers. So, and those customers are both major storage vendors as well as software defined storage players, storage appliances and server manufacturers. So, it really, it’s a broad spectrum of players that we’re getting these samples out to.

Okay. In this qualification cycle I think you mentioned getting revenues exiting this year. Is this qualification time cycle, are you hitting the market windows that you need to, to hit the timeframes that your customers wish to enter the market, is there some playroom here or is there some risk of missing those in any way?

No, this is PCIe3 so this product is brand new to us. We’ve had expressed faults in the past but it was on PCIe GEN 1. This is a very fast product and I think the product concept is new to a lot of our customers. Despite that because it’s PCIe it is plug-n-play. And PCIe3 is not [indiscernible] to DDR3, DDR4 or any specific server platform from Intel. So, it’s - I think it’s mostly tied to the qualification cycle, how long that takes at each of these customers, and they vary. And then, also are they going to be replacing another solution with our product or are they going to introduce as a new offering or an option, that’s going to determine these market introduction windows that you’re talking about.

Okay, great. I appreciate that, Chuck. The next question I have is regarding the potential at Microsoft, based on the comments, it sounds like this is still an ongoing or an unknown opportunity here. Can you give us just an update on what’s going on there, do you view that as a near-term opportunity or had things changed since your last quarterly update?

Well, there is activity. DDR3 NV has been qualified. And there is some activity around that product and then there is some activity around the DDR4 NV. And obviously they are broad-based consumer of technologies. So EV3 is also, will be marketed and promoted to our customer.

Okay, fair enough. Let me delve into quickly on LG and the mobile HyperVault product there, any sort of detailed updates underlying the activity there and I know that you talked about the swing in LOI. What’s the timeframe and what kind of progress you’ve made to make this contractual arrangement with LG?

Well, we’re in a process of defining the specifications of the product. The HyperVault mobile solution will come out of the HyperVault server product. So, you can - we can look at it as a subset or a derivative of the HyperVault server product. So, we are very busy and on track to hit the development milestones on the HyperVault server product. And as, and that is at this point our first priority to get initial samples out to in the hands of beta customers by the end of this year. And once that is done then I think we can quickly then, because it is a subset we can quickly move to product ties to mobile chipset or the controller. And but, nevertheless there is ongoing discussions on specifications and basic details, technical details around the product.

Okay, it makes sense. Let’s see here, a quick question on legal side. Obviously we’re waiting for a judgment on the Diablo, post-trial motions. I was wondering Chuck if you can give us a sense of the next other legal activities since you know specific events happening in the next, the second half of the year, going into ‘16. I know, and then maybe a couple of them like the patent infringement case with Diablo SanDisk, but if you can detail those for us? And as with quantifying that Gail, if you could let us know what you think of the legal cost second half of the year?

Yes, Richard. As you know that the post-trial motions are pending. So after any jury verdict until the court makes a final ruling on the case through post-trial motions until they deliver final ruling. There is really no ruling. And we will have to receive that ruling to know what our next steps are on the Trade Secret case. There is as we said a separate patent lawsuit on SanDisk and Diablo regarding ULLtraDIMM that is in front of the same district court in Oakland. So, that will be scheduled we believe some time next year depending on the patent what they call the IPRs, the re-exams that are going on in the PTO of the four remaining patents. So seven were filed and three are not being re-examined because they were considered to be valid by the patent office. The other three will be going through the re-exam. So, pending that re-exam, the patent lawsuit will be calendared and we will move forward with that litigation. As I stated in the prepared remarks, we will likely, we are looking at this point, we are in discussions to perhaps partner, create partnership on the IP front for future IP enforcement. So that we can leverage the resources of some of these IP firms so that the financial burden of the monetization strategy or the litigation is lessened on the company.

Okay. Fair enough. One last question from me I’ll jump in line to see if there are others who will ask questions here. But Gail, just in terms of the outlook here for the third quarter, would it be fair to think about revenues in a similar level of the third quarter and also how should we think about cash exiting this third quarter?

Sure, Richard. The Q2, I think was probably the low-point for the year for our plan. And we are expecting modest improvement in Q3 and more improvement in Q4 as EV3 kicks in. We did ask about legal expense and I did want to mention that that trend does continue downward from the $4 million we had in Q1 to the $2 million in Q2 and we’re targeting less than $1 million for Q3. Regarding cash, our cash position at the end of the year was $18.1 million with access to funds from Fortress and Silicon Valley Bank. With a cash burn of $3 million during Q2 and estimating probably a similar to slightly more cash burn for Q3.

Okay, great. That’s all from me. I’ll jump in line guys. Thank you.

Okay, thanks Richard.

Ladies and gentlemen, that does conclude today’s Q&A and conference call. We do thank you for attending today’s presentation. You may now disconnect your telephone lines.