Mike Smargiassi - Investor Relations, Brainerd Communicators Inc. Chuck Hong - CEO Gail Sasaki - CFO

Richard Shannon - Craig-Hallum

Good afternoon everyone and welcome to the Netlist Q3 2015 Earnings Conference Call. [Operator Instructions]. 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 third 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. Good afternoon everyone. Our financial results this quarter continue to reflect the large R&D investments we are making in our new hybrid memory technologies which will be the basis for revenue growth in 2016 and beyond. With this quarter's progress on multiple fronts we remain very well positioned to execute on our three pronged strategy driven by our storage costs memory technology, leading Hybrid Memory solutions and our IP portfolio. Recent announcements by large industry players confirm the a clear movement towards more advanced non-volatile storage class memory which was pioneered by that Netlist. Industry commentary has focused on the movement of data for server and storage applications closer to the CPU and placing data next to where it is process and consumed in order to dramatically improve performance. This is the fundamental goal and functionality of HyperVault, HyperVault provides the CPU access to massive amounts of data which in the past had to be fetched individually from storage, a very inefficient process. HyperVault is built on a truly innovative hardware and software architecture and optimizes the capabilities of existing raw materials, DRAM and NAND flash to deliver the best overall system performance. Given the explosion of data and the industry's drive to gain more rapid access and extract intelligence from that data HyperVault is truly a timely and transformational technology. We are in active discussions with a potential strategic partner to bring HyperVault to market and partnership with them and other large industry players who see the enormous potential of this technology and believe that the Hybrid Memory sector will become a multibillion dollar market in the next couple of years. As we move into 2016 we’re also on track to bring our next generation NV products to market. This includes our NV Vault and it's PCI plug and play EXPRESSvault or EV3 both of these products deliver performance in the orders of magnitudes of superior to what is available in the market today from a cost performance perspective. We are currently in the technical evaluation stage with two dozen customers as indicated during last call and other customers in earlier stages sampling. Our funnel of target customers have continued to grow since last quarter, EV3 is uniquely suited to meet market requirement and indexing, journaling and caching given the superior ability to rapidly write data. We fully expect to see accelerated adoption of the EV3 and projected to become the largest portion of our revenue next year. Also on the road map is our DDR4 MDVault or MD4 [ph] which will be available for customer sampling later this month and this new product will also contribute to our product revenue growth next year. In order to support this top line growth in 2016 and potential strategic partnership on HyperVault we have made a significant investments in our infrastructure including key executive hires during the quarter. Mat Young, our new VP of Marketing comes to us from San Disk and Fusion.io and will head up efforts to broaden our customer reach into the storage market. Vahid Ordoubadian, our new VP of Advanced Engineering will take over our I.C level engineering execution as well as joint technology development programs with strategic partners. He comes to us with 25 years of experience from companies like Broadcom and Cadence. In addition we have hired many new sales and marketing talent over the past few months in order to drive our new products into the hands of many customers and gear up for ramping our business next year. Finally, the third point in our strategic plan is the monetization of our IP portfolio, where we have started to engage in the number of parties and licensing discussions and anticipate new revenue streams from these activities emerging in 2016. Over the past 15 years we've built significant expertise in creating leading edge memory module solutions to address customer needs to manage and analyze expanding amounts of data. This is reflected in our highly valuable patent portfolio that covers the fundamental technology at the core of the industry's movement to hybrid memory and storage costs memory solutions. With respect to the ULLtraDIMM Trade Secret litigation we expect to appeal the trial court decision to the Federal Circuit of Appeals by the end of the year. The separate seven patent lawsuit against the ULLtraDIMM product that includes both San Disk and Diablo will remain stayed until inter-party's review for four of the seven patents are completed likely sometime early next year. In the meantime three of the seven asserted patents have survived all challenges to their validity and are ready to proceed once we have decisions on the other four. We are therefore confident and having a strong patent position against not only the ULLtraDIMM \but on other hybrid memory products as well Now let me turn call the over to Gail for financial review of the third quarter. Gail?

Thanks, Chuck. Revenues for the third quarter ended September 26, 2015 were $1.6 million compared to revenues of $4.8 million for the third quarter ended September 27, 2014. The decrease was mainly due to the absence of prior generation NVvault and EXPRESSvault sales to Dell and others, accounted for 48% of the revenue in the 2014 third quarter. Gross profit for the third quarter ended September 26, 2015 was $24,000 compared to gross profit of $1.1 million for the third quarter 2014, reflecting the decline in revenue and the resulting allocation of overhead over a lower revenue base. Net loss for the third quarter was $5.4 million or $0.11 loss per share, compared to a net loss in the prior year period of $4.1 million or $0.10 loss per share. These results include stock-based compensation expense of $0.4 million for the third quarter of 2015 and $0.5 million for the third quarter of 2014. And depreciation and amortization expense of $30,000 compared with $187,000 in the prior year’s third quarter period. Adjusted EBITDA loss after adding back net interest expense, income taxes, depreciation, stock-based compensation and net non-operating expense was a loss of $3.6 million for the third quarter ended September 26, 2015, compared to an adjusted EBITDA loss of $3 million for the prior year period. Operating expenses were $4.1 million in the third quarter compared to $4.8 million in last year’s third quarter. After subtracting intellectual property and legal fees from both periods, operating expenses were flattish compared to last year’s third quarter. We ended the quarter with cash and cash equivalents and restricted cash of $13.3 million as compared to $18.1 million at the end of the second quarter. Our cash burn included a onetime expense of $900,000 for satisfaction of a court bond plus an additional $900,000 in legal fees both mainly related to the recent litigation. As mentioned last quarter our legal expenses have continued to trend downward to a target of under 400,000 per quarter for the foreseeable future. We will remain disciplined in managing our expenses while continuing to invest in 2016 revenue growth. At the end of the third quarter we also had untapped capacity on our receivables bank line of credit from Silicon Valley Bank for working capital needs and access to 5 million of incremental funds under our IP bank loan agreement with Fortress Investment Group. We're also working proactively to restructure our short term liabilities with our creditors and vendors, and are confident that our balance sheet plus our supplemental lines of credit provide us with sufficient runway to support the opportunities in front of us. Finally I want to update you on our NASDAQ listing, as we’ve previously disclosed we were provided with a grace period through November 3, 2015 to regain compliance with the bid price and market value rules. As we did not retain compliance during that time and because the NASDAQ staff did not have any further discretion to grant as additional time we plan to request a hearing before the NASDAQ hearing panel to present our plan to regain compliance with those listing requirements. The panel has a discretion to grab us an additional 180 period to meet the bid price and market value listing requirements. We plan to request a hearing tomorrow but the hearing likely to be scheduled within 30 to 45 days thereafter. Our stock will continue to trade on the exchange pending the ultimate outcome of the hearing. And we fully expect to be able to remedy the deficiencies within the grace period granted by the panel. I'll turn the call back over to Chuck for concluding remarks.

Thanks, Gail. The markets transition toward high density low cost memory represents a tremendous opportunity for Netlist as we are well positioned as the pioneer of Hybrid Memory products including storage class memory. Although I can't offer any specific comments at this time we’re in active discussions with a potential strategic partner to bring HyperVault and the related technology to market and partnership with them. We remain committed to our transformational plan and at it's three core objectives taking are EV and MD products to market to create a base of top line revenue, bringing HyperVault to market with a partner and monetizing our patent portfolio. We're excited about the industry momentum we see in Hybrid Memory market and the customer adoption potential for our innovative memory technologies. Thank you all very much for listening and we are now ready for questions.

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

Some very interesting remarks from both of you Chuck, I know you finished up saying you can't really discuss much of the -- what may be going on with these strategic discussions but as you well know that's not going to prevent me from trying to delve into that so bit more, so let me let me try to ask clarifying questions here. Did I hear you say that the strategic discussions might involve both a license and potentially an investment, did I hear that correctly?

I'm not sure whether we commented on that but they certainly involves the HyperVault technology and investment could be part of the discussion.

And as we’re talking about one entity or there are multiple potential discussions ongoing?

There have been multiple entities in the past. What I'm referring to here it is one entity.

Do you have any thoughts on a potential time frame by which might be able to announce something like this?

I probably will not be able to comment on that.

Let's move on to the EV3, I apologize my line went out so I may not have caught all your comments Chuck, but I think you mentioned something about on the order of 2000 customers that you're currently engaged with some extent here. Can you give us a sense on the timing here? Are qualifications near completion? Do you expect to ramp up this quarter, do we expect to see any revenues this quarter, is it more of 2016?

As of now there are about two dozen customers that have the samples and are in various stages of technical evaluation and qualification, we expect to see volume this thing going into volume production in Q1. So we will have a number of customers coming on in Q1 and then a number of customers coming in Q2, Q3, so there will be layering of customer demand throughout the year next year.

Chuck do you’ve any way of giving people a sense of what you view as the addressable market next year for EV3? What this really do for you next year?

Well certainly it's a new product category that addresses fast writes in a data center. It performs a specific function namely caching, journaling so it is a new product so it's going to require some time but we believe the market opportunity over time is in the hundreds of millions. We think you know our plan certainly I think we would you would project this to be in tens of millions of dollars in revenues next year. And you know I can't give you a specific number but it will allow us to grow our revenue substantially from where we are today

Okay. And is there any timing aspect related to your customers ramping up with your product either in terms of the Intel processor cadence or other ecosystem things that are out of control?

No I think that's the difference between EXPRESSvault which is a PCIe product. Since it's PCIe it's a standard on its own. It can run on any DDR2, DDR3, DDR4 it does not matter, the product will work regardless of the stepping of the Intel processor. So there isn't a specific window, it's just a matter of us getting the product adopted into the hands of a lot of customers to try it out and they see the value and they will adopt it and it will not be tied to Intel server cadence.

Maybe just a couple more questions, I guess probably for Gail. Gail, what do you expect your cash exiting the fourth quarter and I guess assuming just a slight amount of debt and then do you’ve any thoughts on the qualitative or quantitative you can offer on what you view look for guidance or for revenues as such in the fourth quarter?

I will address cash first I think and my remarks indicated that this quarter we have a million onetime expense which we don't expect to happen in Q4 plus a reduced amount of legal fees. So you know I think we kind of looked forward to about a $3 million cash burn on an ongoing basis for the foreseeable next few quarters, and we continue to not guide on revenue but as Chuck indicated I think based on where we’re with qualifications we’re expecting our revenue ramp to start in Q1 of 2016.

And ladies and gentlemen I'm showing no additional questions. I will now end today's conference call. Thank you for attending today's presentation. You may now disconnect your telephone lines.4