NetList Inc (NLST)

[TheLastOneSitting]

NLST--9-14-18 SeekingAlpha explanation on why big-gains are coming!

Two very important points to take from the below article, first an investor paid $10,000,000 for shares at $0.45 so to make money this will have to go much higher. Second the potential for a settlement before the January tiral is huge and would be at dollars per share (111,000,000 O/S) if they settled or win in January.

"In my previous article about Netlist, I warned investors of a coming dilutive move.

With this dilutive move behind us, I took another look at the company and have a new view to share.

The patent infringement case against SK Hynix could result in a substantial monetary gain for Netlist.

With the cash now on hand to make it through to the end of litigation, the prospect is promising.

While there are still risks to consider, Netlist may be a good buy at these levels.

Netlist (NLST) recently climbed more than 500% on excitement with regard to a patent infringement case against SK Hynix (OTC:HXSCF). The company announced a favorable claim construction order that could lead to a financial settlement in the infringement case.

In a previous article, I took a look at the stock, finding that at the current levels, then $0.75 per share or so, the stock was a risky investment. In the article, I pointed to concerning financial data that would likely lead to a dilutive transaction in an attempt to raise funds.

In a press release on Wednesday, September 12, 2018, the company announced a dilutive transaction through which it would raise gross proceeds in the amount of $10 million.

With the new cash on hand, the company may have the funds it needs in order to make it through the patent litigation. Should all go well, this could prove to be a substantial windfall for Netlist and its investors. As a result of new developments, I believe that the stock will see gains from here.
Another Look At The Company's Financial Data

Now that Netlist has raised funds, the financial picture looks quite different. First and foremost, as of June 30, 2018, the company had about $7 million in cash on hand. Unfortunately, that's not much when losses eat about half of that per quarter. In fact, in the most recent quarter, the company generated a net loss of about $3.4 million. So, as of June 30th, the company had enough money to get it through about six months of operations, or through December.

On August 27, 2018, Netlist announced that it had closed an agreement that would lead to another $2.27 million in funding. Even then, the company would be stretching its budget to where it would actually receive funding under the patent litigation. With this in mind, I pointed out that a dilutive offering was coming, and that prediction quickly came true.

On Wednesday, September 12, 2018, Netlist announced that it would be raising approximately $10 million in gross proceeds by issuing 22.22 million shares of common stock. These shares would be sold at a price of $0.45 per share at a time when the going price for shares was still well above $0.60 per share. While the transaction was a dilutive one, the company would net $9.1 million in the move.

As a result, while the cash on hand at the end of the most recent quarter might get burned through by the end of the year, the company now has $9.1 million from the most recent offering and $2.27 million from the late-August announcement, leaving it with approximately $11.37 million to start the year 2019 off with. At the most recent rate of loss, $3.4 million per quarter, these funds should last until about October of next year. As a result, the company has plenty of time for the litigation against SK Hynix to come to a head.
The Patent Infringement Case Can Be A Major Win

Now that the cash on hand is no longer an issue, I decided to take a closer look into the international patent infringement case between Netlist and SK Hynix. What I found was the potential for a major win for the company.

First, I looked for previous cases like this one against SK Hynix, and it didn't take long to find. In June of 2013, SK Hynix decided to settle a computer memory IP case out of court, coughing up $240 million to Rambus to do so. In 2015, SK Hynix extended the license for the IP, paying out another $432 million.

If a settlement in the Netlist v. SK Hynix case prove to be even half of the settlement that was offered in the Rambus case, it would be a substantial financial gain for Netlist, bringing the company to the figurative next level.
Netlist Has A Real Chance At Coming Out The Victor In Litigation

In the case between Netlist and SK Hynix, the balance is leaning toward Netlist at the moment. On September 6, 2018, Netlist announced that an Administrative Law Judge sided with the company on key claim construction issues at the heart of this case.

Claim construction orders are looked upon as the framework from which the International Trade Commission decides if patents are valid and infringed. With the claim construction order being in favor of Netlist, there is a strong chance that the International Trade Commission will come to the conclusion that Netlist's patents are indeed valid and were infringed upon by SK Hynix in the production of two computer memory-related products. Therefore, the case is leaning in Netlist's favor.
The Two Probable Outcomes Of The Patent Litigation

In my view, considering that the claim construction order leaned in favor of Netlist, I don't believe that a ruling of patents being invalid or uninfringed is likely. As a result, I believe that there are two probable outcomes in this case:

A Settlement - The most likely outcome considering the state of the case is that SK Hynix and Netlist will work together to produce a settlement before the trial ends. This settlement would likely include a large sum of money (potentially hundreds of millions of dollars) paid to Netlist by SK Hynix in exchange for the licensing of the company's intellectual property.

A Judgement In Favor Of Netlist - The other probable outcome, though I believe it to be less likely, is that the case will continue through trial. At the moment, it is expected that a preliminary ruling will be provided in mid-to late January. Considering the positive claim construction order, the trial would likely end in a ruling in favor of Netlist, generating a financial win for the company.

So, no matter how you slice it, with odds in favor of Netlist in litigation, chances are that this case will end with a financial win for the company.
The Implications Could Go Far Further

The memory chip market is a massive one, with leaders like Micron (MU), Cisco (CSCO), HP (HPQ), and Dell (DVMT) all spending billions of dollars in order to get an edge on the competition. A patent infringement win in this high-dollar industry could not only lead to an immediate financial gain but also to long-term success.

At the end of the day, these companies are spending billions of dollars on innovation because they know that even the smallest edge on competitors in this market can equate to a massive amount of market share. Should the Netlist patent hold up, showing that Netlist has that edge, it may be approached by the big players in the industry, looking for licensing deals that would help to give them coverage of that edge. All in all, should the case become a victory for Netlist, it has the potential to lead to long-term good news for the company.
Consider The Risks

As with any investment, there are risks to consider if you're thinking about investing in Netlist. Here are what I believe to be the most pressing risks to consider:

Patent Litigation - My bullish view with regard to Netlist is highly dependent on a positive outcome in the current patent litigation between the company and SK Hynix. Should SK Hynix take the win in this litigation, the stock could fall tremendously.

Recent Dilution - I am always concerned about companies that dilute shares in order to keep their heads above water financially. While I understand the reason for dilution and saw it coming a mile away, the fact that dilution is in the company's recent history is a red flag in my opinion.

Competitive Market - The memory market is a competitive one with several big players. While a patent win against SK Hynix would likely lead to further relationships with these players, it is important for innovation to continue if the smaller guy, Netlist, wants to stay in the game. Should innovation come to a halt at any time, the stock could suffer greatly as the leaders in the industry pull further ahead.

The Takeaway

If you would have asked me three days ago about NLST's stock, I would have told you to stay away. With the threat of a dilutive offering in the near future, any mid-to-long-term prospects were trumped in my book. However, now that the offering is over and the declines have set in, I believe that it may be time to consider getting involved. The company does have a very real chance at winning a patent infringement case against SK Hynix that could produce substantial funding. Furthermore, should the case be won, further positive implications could be in store for Netlist. While you should always consider the risks before making an investment, I believe that Netlist is likely to see gains from this point.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks."

https://seekingalpha.com/article/4206338-netlist-see-big-gains-ahead