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A Close Look at Netlist, Inc. (OTCMKTS: NLST)

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Netlist, Inc. (OTCMKTS: NLST) has been trending steadily higher in recent days as the markets march full steam ahead. NLST has a history of explosive moves running to $0.665 earlier this year.

NLST is one we have been covering for years here at MCP. We stated 2 years ago the stock exploded to $1.10 in September after the Company announced a favorable claim construction order in ITC Investigation of SK hynix. Since a recent dip below $0.30 Netlist is rising fast.

Netlist, Inc. (OTCMKTS: NLST) provides high-performance SSDs and modular memory subsystems to enterprise customers in diverse industries. Flagship products NVvault® and EXPRESSvault™ enable customers to accelerate data in their servers and storage and reliably protect enterprise-level cache, metadata and log data in the event of a system failure or power outage. HybriDIMM™, Netlist’s next-generation storage class memory product, addresses the growing need for real-time analytics in Big Data applications, in-memory databases, high-performance computing and advanced data storage solutions. Netlist also manufactures and provides a line of specialty and legacy memory products to storage customers, appliance customers, system builders and cloud and datacenter customers. Netlist holds a portfolio of patents, many seminal, in the areas of hybrid memory, storage class memory, rank multiplication and load reduction.

Netlist exploded in September after the Company announced a favorable claim construction order in ITC Investigation of SK hynix. The order was favorable to Netlist with regard to both of its asserted patents, U.S. Patent Nos. 9,606,907, and 9,535,623. The Administrative Law Judge (ALJ) sided with Netlist on the key claim construction issues at the heart of the 1089 Investigation.  The claim construction order serves as the framework from which the ITC will ultimately decide if the patents are valid and infringed by SK hynix, and therefore represents a critical juncture in the case.

NLST reported Q3 results on November 4 reporting Net sales for the third quarter ended September 28, 2019 were $6.1 million, compared to net sales of $7.2 million for the quarter ended September 29, 2018. Gross profit for the quarter ended September 28, 2019 was $0.5 million, or 7.4% of net sales, compared to a gross profit of $0.6 million, or 8.1% of net sales, for the quarter ended September 29, 2018. As of September 28, 2019, cash, cash equivalents and restricted cash was $8.6 million, total assets were $17.0 million, working capital was $1.9 million, total debt and accrued interest, net of debt discount, was $18.2 million, and stockholders’ deficit was ($11.7) million.

“During the third quarter we grew product revenue sequentially and improved operating performance on both a sequential and year over year basis,” said Netlist’s Chief Executive Officer, C.K. Hong. “We recently received a favorable Notice of Initial Determination from the United States International Trade Commission (ITC) which represents a major milestone in the multi-year effort to protect our valuable intellectual property.”

On October 21, 2019 the ITC issued a Notice of Initial Determination finding that Netlist’s standard-essential ‘907 patent is being infringed by Korean manufacturer SK hynix’s sale, sale for importation, and importation into the United States of accused LRDIMM memory modules in violation of Section 337 of the Tariff Act.

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On December 18 NLST announced the United States Court of Appeals for the Federal Circuit (CAFC) has affirmed the Patent Trial and Appeal Board’s (PTAB) decision with respect to the invalidity of U.S. Pat. Nos. 8,869,064, 8,001,434 and 8,359,501 via a Rule 36 summary affirmance relating to Netlist’s first action at the United States International Trade Commission (ITC) against SK hynix. The related appeal with respect to the Final Determination of Netlist’s first action at the ITC (Investigation No. 337-TA-1023) was found to be moot in light of the affirmances. Netlist and its counsel are exploring its legal options in view of the ruling at the CAFC.

On October 31, 2017, Netlist filed a second action at the ITC against SK hynix related to RDIMM and LRDIMM enterprise memory products involving other patents. On October 21, 2019 Netlist received the notice of Initial Determination from the ITC in regard to the Company’s second ITC action against SK hynix (Investigation No. 337-TA-1089). According to the ID, the ITC determined that SK hynix infringed Netlist Patent No. 9,606,907 in violation of Section 337 of the Tariff Act of 1930, as amended. As a result, SK hynix is currently facing an exclusion order on the sale, sale for importation, and importation into the United States of billions of dollars annually of certain server memory modules. A Final Determination, in this second action, is currently scheduled to be issued by the ITC commission on February 21, 2020.

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Currently trading at a $60 million market valuation Netlist has $18.1 million in the treasury and significant sales reporting revenues for the third quarter ended September 29, 2018 were $7.2 million, compared to revenues of $9.0 million for the quarter ended September 30, 2017.  The Company recently received a favorable ruling from the U.S. International Trade Commission (ITC) as part of its case against SK hynix which targets billions of dollars of unlicensed server memory products. With the recent financing behind them NLST now has the cash on hand to make it through to the end of litigation and the prospect is promising. We will be updating on Netlist when more details emerge so make sure you are subscribed to Microcapdaily so you know what’s going on with Netlist.

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Disclosure: we hold no position in NLST either long or short and we have not been compensated for this article.

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