Mike Smargiassi - IR, Brainerd Communicators, Inc. Chuck Hong - CEO Gail Sasaki - CFO Noel Whitley - VP Intellectual Property and Licensing

Richard Shannon - Craig-Hallum James Concidine - Main Management, LLC

Good day and welcome to the Netlist Third Quarter 2014 Conference 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 call over to Mr. Mike Smargiassi. Mr. Smargiassi, the floor is yours sir.

Thank you and good afternoon, ladies and gentlemen. Welcome to Netlist’s third quarter 2014 conference call. Leading today's call will be Chuck Hong, Chief Executive Officer of Netlist; and Gail Sasaki, Chief Financial Officer. We also have, Noel Whitley, VP Intellectual Property and Licensing joining us today. As a reminder, our earnings release and a replay of today’s call can be accessed on the Investor's 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. The third quarter results reflect our continuing investments in the three strategic areas of our business, driving NVvault product line into the cloud computing space. The development of HyperVault, the fastest next generation hybrid memory solution and the monetization of our IP assets. We saw tangible evidence of progress in each of these areas as we achieved NV qualifications in a number of new customers, reached important milestones in the development of HyperVault and moved for a preliminary injunction against the ULLtraDIMM product in our year-long trade secrets litigation in Northern District of California. We believe that the continued investments in these key areas will unlock the value of our products and IP assets and position the company for the long-term. During the quarter we moved forward in our direct work with a major HyperScale customer to integrate our best in class NVvault hybrid memory product into the DRAM channel of their datacenter server. We are currently working to qualify our products on four different motherboard solutions from various server vendors such as HP, Dell, Quanta and Wiwynn that will support the rollout of the servers for this HyperScale entity as they want the flexibility of multiple sourcing, but want our solution included in all of their options. We are within weeks of signing -- announcing the completion -- the qualification on one of their solutions being produced by one of the largest ODMs in the world. This ODM will be the first in the industry to announce a server with NVDIMM capability for cloud scale datacenter operations, and we are proud to be part of that rollout. These multiple qualifications will help to validate NVVault as an instrumental technology in the hyperscale computing environment focused on cloud computing, Big Data analytics, high-performance databases and low latency applications focused on cloud computing, Big Data, systems architecture - high performance data bases. The NVvault uses an advanced analytics high performance databases -- the NVvault uses an advanced system interface architecture on a DIMM subsystem providing fault data integrity and dramatically improves performance and applications such as metadata, indexing, cache, storage, logging, message queuing, on-line transactions, and RAID applications requiring higher throughput and lower latency. As a result of years of collaboration with Intel in this area, we believe we are the only NVDIMM vendor with seamless and sustainable integration into leading edge storage platforms. In side by side comparisons the NVVault has provided the highest rating in the industry in terms of critical performance parameters such as back-up and restore time in the case of power outage and the lowest power consumption. Netlist invented the NVDIMM back in 2006 and owns most of the seminal IP for this technology. We have also shipped almost 0.5 million units of NV over the past five years, over 20 times more than the total shipments from all of our competitors combined. We believe that the NVDIMM market is at its infancy and will grow to be a multibillion dollar market over the next few years and we will be well positioned to capture a large share of this growing market. Now, before providing an update on our R&D and IP efforts let me turn the call over to Gail for the financial review of the third quarter.

Thanks Chuck. Revenues for the third quarter ended September 27, 2014, were $4.8 million, compared to $4.3 million for the third quarter of 2013. Gross profit for the third quarter of 2014 was $1.1 million compared to a gross profit of $393,000 in the third quarter of 2013 reflecting a combination of improvements but mainly product mix. Net loss for the third quarter was $4.1 million, or $0.10 loss per share, compared to a net loss of $3.1 million or $0.10 loss per share in the third quarter of last year. These results include stock-based compensation in the second quarter of $505,000 compared with $441,000 in the prior period and depreciation and amortization expense of $187,000 compared with $353,000 in the prior year’s third 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 3 million for the third quarter of 2014 compared to an adjusted EBITDA loss of negative 2 million for the prior year period. Operating expenses were $4.8 million in the third quarter compared to $3.2 million in last year’s third quarter. However, without patent legal cost from both periods, operating expenses were flattish compared to last year’s third quarter. Gross profit over the next few quarters will continue to be dependent on a number of factors including revenue, unabsorbed manufacturing capacity, and change in product mix which may be impacted from continued difficultly in sourcing of raw materials. 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 third quarter with cash and cash equivalents and restricted cash totaling $15.2 million as compared to $17.3 million at the end of the second quarter. At the end of Q3, 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 9 million of incremental funds under our IP bank loan agreement with Fortress Investment Group which we believe gives us adequate runway with our current balance sheet. I will now turn the call back over to Chuck.

Thanks Gail. Our patent portfolio related to the NVVault product family and hybrid memory in general continues to grow. Several new patents have been allowed and we will issue shortly that expands our coverage of hybrid memory modules designed to operate on the memory channel. We anticipate that our issued patent portfolio in NV will double by the year end. Taken as a whole, our NV patent portfolio represents the most significant proprietary position with the earliest priority in the industry. We continue to move forward with our plan to develop and monetize our next generation product HyperVault which greatly expands the performance and capacity of DRAM channel storage. This product combines the best attributes of DRAM and flash raw materials and is the culmination of 10 years of R&D effort which resulted in both of our flagship products HyperCloud and NVVault. HyperVault builds 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 transformative technology, a true convergence of memory and storage. HyperVault provides multiple terabytes of SSD flash on the memory bus and is by far the fastest and lowest [PCO] [ph] storage solution in the industry that the industry has seen. We remain on track with our goal to roll out the product to the market mid next year. We’re proud to be at the forefront of this transformation in the industry and we plan to exploit the significant market opportunities through partnerships and the creation of an ecosystem that can help proliferate HyperVault products and technology. On the IP front, since our last call, we have continued to follow through on our patent and trade secret litigation against the ULLtraDIMM product from SanDisk which is produced in partnership with Diablo, a former contractor to Netlist. As described in our trade secret’s complaint, Diablo exploited its position as a trusted vendor to steal Netlist’s most valuable intellectual property and incorporate the stolen technology in the ULLtraDIMM. In October, Netlist filed a motion for preliminary injunction against the ULLtraDIMM product asking that Diablo and its partner SanDisk be immediately enjoined from any further manufacture or sale of the ULLtraDIMM. The motion details Diablo’s blatant breaches of contract beginning with actually using Netlist’s chips in earlier versions of the ULLtraDIMM and lays out the trade secret misappropriations which are supported by an in-depth report from an outside expert. This technical report demonstrates misappropriation of Netlist trade secrets in the ULLtraDIMM based on an analysis of Diablo’s confidential documents and testing of a current ULLtraDIMM module. The evidence cited in the motion shows that Diablo built the ULLtraDIMM from the foundation of Netlist’s breakthrough HyperCloud technology that Netlist shared with Diablo under a non-disclosure agreement. The court has set a tentative date of December 02, 2014 for a hearing on Netlist’s motion. If granted the preliminary injunction would immediately shut down any further manufacture and sale of the ULLtraDIMM. Netlist has further asked the court to order a recall of any ULLtraDIMM products previously sold. As detailed in a preliminary injunction motion we’re confident that we can demonstrate an overwhelming probability of prevailing on the merits of the case based on the evidence and the law. And that the court should order a stop to the manufacture and sale of the ULLtraDIMM. In another win for Netlist in the courts in September, the United States District Court of the Northern District of California denied without prejudice a motion to stay Netlist’s patent infringement action against SanDisk and Diablo technologies. SanDisk and Diablo had filed petitions in the United States Patent and Trademark Office requesting inter-parties review of the seven assorted patents. SanDisk and Diablo then joined in a motion to stay the patent case pending resolution of the reviews. This motion was denied. Turning to other IP matters, our industry leading patent portfolio continues to grow and strengthen as we reported earlier this year the Appeals Board at the U.S. PTO upheld a validity of all 60 claims in the re-examination of our 537 patent brought by Inphi. The reexamination process of the U.S. PTO is now closed but as expected Inphi filed notice of an appeal to the U.S. court of appeals for the federal circuit. The 537 is the only LRDIMM patent we’re aware of to have survived reexamination and be confirmed by the PTAB and we remain confident of prevailing at the federal circuit. And in the reexamination of our 912 patent, the examiner close prosecution confirming the patentability 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 of LRDIMM, DDR3 and DDR4. With each of these wins the value and importance of our patent portfolio continues to grow. As a result, we believe we’re well positioned 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. Finally, we’re pleased to welcome Jun Cho and Vince Sheeran to our Board of Directors. Jun brings a wealth of knowledge and context in the Asian-Pacific markets to Netlist as the general Counsel to Fi at Chrysler Asia-Pacific and Vice President and Assistant General Counsel to Chrysler Group LLC. Vince brings more than the 30 years of experience in the software and business services industries for global organizations. He has a comprehensive background in software sales and sales management, product strategy and marketing. Jun’s wealth of corporate legal knowledge and Asian contacts and Vince’s senior management expertise and leadership will be invaluable as we continue to execute on our IP and strategic product initiatives. So to conclude we remain focused on three game changing initiatives, proliferating the NVVault product line, bringing to market the fastest next generation hybrid memory solution and partnership with major industry players and monetizing our IP portfolio. We are confident that these targeted investments will position the company well for the long-term. Thank you all very much for listening and we are now ready for questions. Operator?

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions). The first question we have comes from Richard Shannon of Craig-Hallum. Please go ahead.

A few questions I have, I apologize for my voice, I got a little bit of sore throat here. Chuck if you can provide a little bit more detail on your first HyperScale customer. I think you mentioned you expect to be able to announce something in a few weeks here. Can you provide more details, is something that you are going to be announcing in a press release or is in part of a larger media venture, can you give us a little bit more understanding, there please.

Richard, as I mentioned, we are making good progress with new customer qualifications of which are the major HyperScale entity and there are multiple other important customers and we plan to consolidate all of those qualifications in a press release in the coming -- before the end of the year, that's our plan.

Okay. These other customers beyond the first one I think you've talked about for a few months. How important are these and what's the scale in opportunity from these other customers collectively? Are they nearly as big as what it sounds like the first one could be?

I think the first couple will -- are very well known names with - significant among the largest cloud operations in the world. And then there are other ODMs which we alluded to in the scripted comments. So, we believe this to be a major milestone in the ramp up or adoption of NVDIMM in the mainstream market.

Okay, fair enough. Following up in your comments regarding your patents I believe you were mentioning related to vaults. Can you tell us how many patents you have currently and then how many more you expect to be awarded by the end of the year.

Well I believe we have what, 80?

No.

Issued and pending? Okay, well -- yes. I will let -- I will turn it over to Noel to address that.

Hey Richard. So directly related to the Vault family, we currently have four issued patents, I guess five. We would expect that number to double by the end of the year and we have a number of other issued patents that also read on these designs, that did not come sort of directly out of our Vault family.

Okay, fair enough. And maybe a quick question for Gail. Gail, can you give us a sense of your legal expenses that you had in the third quarter, your expectations for the fourth? And then also it looks like R&D increased a fair amount from second to third quarter, should we expect that trend to continue. Can you give us a sense of what's the driver behind that?

Our legal expense was about $1.8 million for Q3. We do expect that to go down in Q4 and the quarters following. We had a lot of compressed work happen in this quarter. Regarding R&D, we've been hiring -- successfully hiring for HyperVault head count as well as continuing to hire for our NVVault R&D. I don’t know Chuck if you want to add anything else to our increased R&D expenses, but that's the basic dollars is increased headcount.

Okay, perfect here. And then let's see here, just going down my list of questions. Oh, yes, lastly Gail, can give us a sense of the segments of your sales in terms of NV HyperCloud and other in the third quarter?

Sure, so the vault family was about half, 48% to be exact, HyperCloud 21%, VLP and other was 10%, and Flash 21%.

Next we have Rich Kugele of Needham. It looks like he has disconnected from the conference. At this time, we have no further questions and we will go ahead and – actually, I apologize, I have one, it looks like we have a follow up from Rich Shannon of Craig-Hallum.

Well, I’ll jump in with a couple more questions since it appears there is some room here. Want to ask about HyperCloud, what do you expect as you look into next year, what has been the uptake from your two major early partners or specifically HP?

Richard, the bulk of the demand for HyperCloud right now is coming from IBM. And we continue to work with both HP and IBM to try to generate demand. These sales are quite lumpy based on specific applications and customers and installations. So, I don’t know that I can provide very much visibility on HyperCloud beyond what’s going on today.

Okay. So it sounds like you’re not necessarily expecting a market improvement from HP specifically then?

Not from what we can see right now.

Okay, that’s fair enough. One last question from me regarding your relationship with Fortress is, has there been any discussion or negotiation for a replacement agreement with them? And if so, if you can discuss maybe the points of negotiation where you expect to go what they’re looking for et cetera please.

We continue to talk with Fortress; there is an opportunity there to talk about increasing or helping to improve the cost of the actual patent monetization share. So we continue our discussions along those lines and also to provide potentially some additional liquidity as we -- that is necessary and for that we would most likely give up the part of the patent portfolio or allow them to collateralize the Vault portion of the patent portfolio which currently they do not have. That’s what’s going on with Fortress right now.

Okay. Do you view a renegotiation as very likely or hard to say? Can you give us a sense of how that’s going?

I think that within our control right now I think we’re continuing those conversations and we’ll just see how it goes; we’re considering potentially some other options as well.

Next with James Concidine of Main Management.

You had two directors sort of abruptly quit in the last quarter. Did that have anything to do with the disagreement perhaps at the Board on how to proceed with the legal proceedings with SanDisk?

I don’t think we can comment on that. We’ve made the changes and we have two new Board members replacing the two Board members that departed.

And let me follow that up with saying has there been discussions with SanDisk as to licensing agreement perhaps or is it still the two sides not talking whatsoever?

That’s an area that we can’t get into.

And this will conclude our Question-and-Answer Session. I would now like to turn the conference back over to Mr. Chuck Hong for any closing remarks. Sir?

Thank you all for listening today. I appreciate your interest in Netlist and we hope to report back with good results moving forward. Thank you.

And we thank you, sir, and to the rest of the management team for your time. The conference call is now concluded. We thank you all for attending today’s presentation. At this time, you may disconnect your lines. Thank you and take care everyone.