NLST - Netlist: Key Upcoming Catalysts

2023-03-22 10:21:33 ET

Summary

• Netlist is rapidly approaching its trial against Samsung.
• Netlist is up over 300% in the last three months.
• Netlist is still in what may be the largest patent infringement case in history.

Introduction

I maintain a strong buy rating on Netlist, Inc. ( NLST ). Netlist is currently in what may become the largest patent infringement lawsuit of all time, and a trial in this battle is in less than a month. The massive payout potential of the lawsuits the company is in has created an asymmetric opportunity and a tremendous risk-to-reward ratio in my view. Over the past three years, I have published eight previous articles on Netlist and its story, with the most recent linked here .

This previous article covers the company in detail, and I will summarize it below. Read on if you know the Netlist story and want an update on current catalysts.

Netlist is currently in lawsuits with Google ( GOOG ) ( GOOGL ), Samsung ( SSNLF ), and Micron ( MU ), with their most significant case being against Google. These lawsuits are over whether or not these companies infringed on a multiple of Netlist's patents, including some which are seminal. Google was caught using the technology red-handed in its servers in 2009. Since then, Google has challenged the validity of Netlist's most important patent, the '912 patent. This case was taken up to one step below the supreme court, where it was ultimately decided in Netlist's favor. Now, Netlist is battling with the companies over what they will have to pay for the infringement Netlist is alleging the other companies have done over more than a decade.

Many court filings and court dates to watch out for are always being released, but the nearest case is against Samsung. This case is overseen by Judge Gilstrap, who has overseen 25% of the nation's patent litigation cases.

I have pulled a useful graph from StockTwits Poster Stokd showing the current litigation. Both of these graphs are created by Stokd and are just compiling information publicly available. Stokd has not had any editorial decisions with this piece.

Impending Catalysts

On average, 5,000-6,000 patent infringement lawsuits are filed per year. Of these cases, 95-97% end in a settlement.

We know for a fact that Samsung and Netlist have had settlement discussions. From one of the many heavily redacted court documents, a little nugget slipped through stating:

As it can be interpreted, the company has at least been in settlement discussions while in a stage where many companies settle.

The pretrial date of March 28th and the trial date of April 17th are key dates. Many court filings will be released before or shortly after these dates, changing the stock's valuation. Additionally, many settlements between parties are reached before these two dates. Finally, the trial decision will also be released in late April to May and will greatly impact the stock.

The anticipation of the trial has led to a recent stock price increase that will likely continue to increase into each of the above dates.

The case with Samsung creates a binary play. However, unless there is a global settlement between all of the companies Netlist is in litigation with, the big fish of Google is still out there, leaving plenty of stock growth potential after the Samsung case.

Financials

Netlist financials from its 10-K are

Net cash used in operating activities for 2022 was primarily a result of net loss of $33.4 million, non-cash adjustments to net loss of $4.2 million, partially offset by net cash inflows from changes in operating assets and liabilities of $14.2 million driven predominantly by an increase in accounts payable and accrued expenses and other liabilities and a decrease in accounts receivable and inventories. Net cash provided by financing activities for 2022 primarily consisted of $4.4 million in net proceeds from issuance of common stock under the Second 2021 Lincoln Park Purchase Agreement and $0.3 million in proceeds from exercise of stock options, partially offset by $2.1 million in net payments under the SVB Credit Agreement, $0.6 million in payments of note payable to finance insurance policies and $1.4 million in payments for taxes related to net share settlement of equity awards.

The company currently sits on $25 million in cash.

Netlist has struggled with an immense extra financial burden in litigation costs shown below.

Legal the last nine years:

These legal costs for a company that is currently OTC and has under $1 billion market cap show the immense potential of these lawsuits. If the company did not believe in significant returns from these lawsuits, it would have simply entered into a winning split with a law firm. Instead, they choose to pay the legal costs to keep all the winnings in-house.

Risks

Netlist is a company mainly valued as a series of binary plays around litigation. These legal battles give the company a significant risk to reward potential. Still, they also leave the company exposed to high volatility on legal decisions and significant drops in valuation upon unfavorable rulings.

Another risk to consider is that the company is currently listed OTC, which makes it have less liquidity than a traditional investment and can leave it open to more volatility than a typical stock.

Conclusion

Netlist has been on an incredible rise over the past few months that is likely to continue into the trial. The company is a lottery ticket of an investment with the asymmetric opportunity it presents. If you invest, be prepared for high volatility and many binary court decisions which affect valuation.

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