Recently, I’ve been following Netlist, Inc. (NASDAQ: NLST) incredibly closely. My decision to follow the stock came after the company saw dramatic gains in value due to a claim construction issuance in a patent ruling that went in favor of the company.
The news hit investors like a bullet, sending the stock soaring in multiples over the next couple of trading sessions. At the time, I saw a stock that was up 500% in less than 5 days. After digging in, I found that the company’s financial position did not warrant the growth in the stock. As a result, I predicted that a dilutive move to raise funds was around the corner.
Yesterday, Netlist lost more than 40% during the trading session after announcing a registered direct offering. That’s the dilutive move that I was expecting! Now that this move is behind us, the game has changed and NLST may be a strong investment opportunity after all. Let’s dig in and see what’s happening.
The Claim Construction
The claim construction was announced on September 6, 2018. The company said in a press release that the International Trade Commission (ITC) issued a claim construction order in an investigation of SK hynix memory products. The order included the RDIMM and the LRDIMM enterprise memory products.
The case surrounds the allegation that SK hynix products infringe upon Netlist patents, numbers 9,606,907 and 9,535,623. Because the calim construction order was in favor of the company, it now has the upper hand in trials. These trials are expected to begin later this year with a preliminary verdict offered in January of 2019.
The bulls loved this news. After all, a favorable claim construction order could lead to a financial settlement. And these settlements can be massive. In fact, a recent settlement entered into by SK hynix came to a total of $240 million!
Why I Still Wasn’t A Fan
At the end of the day, legal disputes take time. Should all go well, Netlist would be awarded a settlement in mid-to-late January in the patent infringment case, and that would be great.
However, in the meantime, the company was skating on thin ice financially. Based on the most recent financial report, I came to the conclusion that the company would likely raise funds. All of the cards seemed to fall into place:
- Netlist needed money quickly as cash on hand was starting to dry up.
- The company’s share values climbed substantially across a few trading session, opening the door to a dilutive offering that would yield more funding for the company.
From there, it was just a matter of time (not much time might I add), before the company acted, raising funds through a dilutive move.
Yesterday, Netlist Diluted Shares
On Wednesday, September 12, 2018, Netlist announced the dilutive transaction that I was expecting to see. The company announced that it would be raising gross proceeds of approximately $10 million through a registered direct offering of a common stock under an agreement with institutional investors. Of the $10 million, the company expects to receive net proceeds of $9.1 million.
Under the terms of the agreement, the company would issue 22.22 million registered shares of NLST common stock. These shares would then be purchased at a price of just $0.45 per share. Also, for each share of common stock purchased, the investor will receive a registered warrant to purchase one half of a share of common stock with an exercise price of $0.65 per share. These shares may be exercised 6 months from the date of issuance and for a period of five years thereafter.
As you would imagine, investors didn’t take the news well. The price of NLST shares fell dramatically, losing more than 40% in the session. Nonetheless, this may open the door to opportunity.
Is NLST A Buy Given Recent News?
At this point, I do believe that Netlist represents a potentially strong opportunity. With the recent offering in mind, the company now has the cash on hand that it needs in order to make its way through the patent infringement case against SK hynix. With a favorable claim construction order, I believe that should the case go to trial, Netlist will likely be the victor. So, there are two probable options. Either the company will settle out of court for a substantial amount, or a settlement in court is likely to yield substantial revenue. Either way, if investors can wait, there’s a strong opportunity for substantial revenue.
In the past, I was concerned as the writing was on the wall, suggesting that a dilutive move to raise funds was coming. Now that this move is over, the stock is trading substantially lower, and fear is high. This could be a perfect time to enter a position for the long run in hopes of a big patent infringement-related win!