INVESTMENT HIGHLIGHTS: With the trade secrets case vs. Diablo having suffered a major setback (along with the licensing deal that we expected to emerge from it) we are dropping coverage of NLST as it no longer fits within our revised coverage universe. Our previous Buy rating and price target should no longer be relied upon.
• Jury trials can be binary outcomes that are difficult to predict. That said, in the case of Netlist vs. Diablo (and after the preliminary injunction Netlist secured against Diablo pre-trial), we believed that NLST had a strong likelihood of prevailing. Unfortunately this was not the case, and Diablo announced yesterday after the close (Netlist this morning) that the jury had unanimously decided “that there was no breach of contract and that there was no misuse of trade secrets. Further, the jury confirmed Diablo’s sole ownership and inventorship of the ‘917 patent.’” Netlist argues that the jury did find for them on the two trademark counts. Recall that the case had gone to trial March 9th.
• Needham’s Take: Frankly, we are shocked that the company lost its case vs. Diablo given the preliminary injunction. We believed at the time of our upgrade that this trial would prove critical to securing a licensing agreement with major players such as SanDisk. The loss of this trial is a major blow to these efforts and materially changes the long-term investment outlook.
• What Now? A briefing on the preliminary injunction status will be held on April 3rd, with an oral hearing on April 10th. We suspect that the injunction against Diablo will now be lifted, leaving SanDisk free to resume shipments. Netlist intends to exhaust all appeals available.
• Outstanding patent lawsuits against Diablo (and others) remain, but are at least multiple quarters/potentially years away from any resolution.
• Recall that on February 18th the company had negatively pre-announced its 4Q results, expecting $2.5M in revenue and a non-GAAP loss between $5 and
Verdict: If Netlist wins the verdict, the jury will be asked to award compensatory damages. NLST’s witness argued for $6.5M while Diablo’s expert argued for $500K. The amount could be anywhere between these amounts. As a side note since many clients are reading the Yahoo message boards, NLST is almost certainly not going to get an award for more than $10M – some messages are saying it could be $80M.
Injunction or compensatory damages: After the verdict, Netlist will almost certain ask for an injunction for some meaningful period of time (their expert witness argued that Diablo got a 19-22 month headstart). Both sides will make arguments that may stretch out for weeks. If Netlist’s motion is granted, this injunction will be awarded in lieu of compensatory damages. We believe NLST prefers an injunction to compensatory damages, as it prevents Diablo from shipping product. We believe this will force Diablo to violate their Supply Escrow Agreement with SanDisk, and we believe SanDisk could simply take over production, cutting Diablo out of the process. We think this would drive SNDK to settle with NLST so they can start to ship the product.
Diablo requests a stay: Diablo will almost certainly request a stay of the injunction while the Court contemplates the motions about a permanent injunction. Since the Court already granted a preliminary injunction, it would make sense that the Court would keep it in place, but nothing is for certain.
Punitive damages: If NLST gets an injunction, which would be implemented in lieu of compensatory damages, it can still be awarded punitive damages. These are at the judgment of the Court, and generally have a high burden to be awarded, related to malicious and willful intent. While NLST believes these conditions exist, it is difficult to predict whether punitive damages will be awarded.
Yesterday, the trial concluded as expected, and there were 2 noteworthy events:
• Ruling on JMOL (Judgment as Matter of Law): NLST had requested that the Court conclude for the jury that Diablo had breached the contract, and Court denied this motion. We understand that JMOLs like this are fairly rare to achieve, given that they can often times result in a successful appeal on a procedural basis, and judges generally want to avoid having their cases successfully appealed in this manner. As we claimed yesterday, NLST already has a strong case, and their JMOL would have made it that much stronger.
• Diablo technical expert James McAlexander: We cannot get a full read on this witness since most of the testimony was given in a closed courtroom. However, the testimony that was in open court focused on the Diablo’s preliminary work with Micron a few months before their relationship with Netlist began. In that work, Micron had proposed some of the ideas that were also behind NLST’s patents and trade secrets, but that the engagement never resulted in a signed contract. McAlexander claimed that this work, based on 5 PowerPoint slides from Micron, was sufficient enough for Diablo to work out all of the trade secrets that Netlist codified in documents that were well over 100 pages in length, and did so in a few months time, whereas NLST took years and millions of dollars to create. We doubt any reasonable person would accept this argument. NLST recalled its technical expert to rebut some of that testimony.
Today, the counsel will spend a few hours arguing motions, the most important of which are the jury instructions. How the judge instructs the jury on interpretation of the contract is the most important element, Closing arguments are scheduled for Monday, and we expect a verdict no later than Wednesday.
Witnesses on the stand yesterday were: 1) Diablo VP Maher Amer, 2) Diablo damages expert James Malackowksi (founder of Ocean Tomo), and 3) Diablo technical expert Joseph McAlexander.
• Amer: continued cross-exam of discussion of technical minutia, mostly covered points discussed with other witnesses, so nothing all that additive.
• Malackowski: Diablo damages expert is claiming damages of only $500K vs. NLST’s expert’s claim of $6.5M. If jury finds for malicious intent, whatever amount could be doubled. As we said yesterday, it is unusual to get both monetary and injunctive relief, and NLST prefers to have injunctive relief. How the Court instructs the jury will give us a good idea of which form of relief are more likely.
• McAlexander: mostly closed courtroom, but both direct and cross-exam went easily shorter than the budgeted time. We do not know what was discussed, but NLST’s counsel’s take was that faster than expected is generally a positive sign for NLST.
Today, the trial will consist of completing McAlexander testimony, and perhaps one other witness, and then testimony will be completed (a day early). Then the jury will be dismissed and the lawyers will haggle over jury instructions, the JMOL (which the Court did not issue an order on yesterday) and other remaining items. Closing arguments are still scheduled for Monday.
""""this trial has zero to d with netlist IP. that trial will take years at least 5-6"""
Did you see I used more quotation marks than you???
Only zero is you.
I'm looking at it from two perspectives. 1) legal fees and damage awards. Think your numbers are fair but with a jury its anyone's guess. Wouldn't expect much from Diablo anyways given financial condition.
2) Think what some are overlooking is that a favorable ruling validates NLST's IP, Diablo is out of the market and that SNDK and others now have to license NLST IP or buy product . Global royalties range from 1 - 2.5% with large upfront payments so if think about the near-term potential for cash flow and market penetration, than you can get $50 -$100 million worth of near-term value off of + ruling.
Caveat: Fortress has a sweetheart deal of % of revs with a cap, so you take some of the upside off.
Both Needham and Craig Hallum have someone at the trial so you can prob assume that their clients, thus trading volume, will get the news asap
Yesterday, the following witnesses appeared in court: Netlist damages expert, Diablo VP Michael Parziale, former NLST VP of engineering (called by Diablo) Ron Nickel and Diablo’s VP Maher Amer.
Summary of each witness:
• NLST damages expert: NLST is asking for both monetary and injunctive relief. We understand that it is unusual to get both forms and NLST is angling for injunctive relief. Their damages expert said that Diablo's theft gave them a 19-22 month head start.
• Parziale: Spent more than half of the testimony discussing Netlist putting their own logo on Diablo's chip. On cross-exam, he was asked whether they were suing NLST for doing so and he said "no". They asked these questions of other witnesses, including Chuck Hong; we think this is a weak point to make, since there is legally nothing wrong here.
• Nickel: NLST was prepared for critical testimony of NLST CEO Chuck Hong, but the witness focused on how disappointed he was that Hypercloud qualifications were so late. On cross-exam, Nickel was asked to read an email he sent in which he claimed that Diablo has the worst possible track record of performance in the semiconductor industry. NLST thought this witness would have made them look bad, but felt that this went better than expected.
• Amer: Spent most of his time going into technical minutia, without the aid of any exhibits, which probably confused the jury. NLST spent little time on cross-exam.
One witness that wasn't called was Diablo's competition expert, and counsel said they wouldn't be calling one. This effectively cedes the point that Diablo's product does compete with NLST. NLST has filed for a JMOL, “Judgment as Matter of Law”, in which they ask the court to order the jury to conclude that Diablo has breached the contract. If successful, Diablo will not have an legal case to make. Their only hope would be to use misdirection and try to characterize NLST as bad actors; we believe that the opposite has happened.
On St. Patrick's Day, many revelers will raise a pint of stout and wish their companions "Slainté!"—the Irish word, pronounced SLAN-cha, for "health." The toast may brim with scientific truth. Researchers have reported that Guinness may be as effective as daily aspirin in reducing the blood clots that cause heart attacks. (The benefit derives from antioxidants, which the researchers said reduce cholesterol deposits on arterial walls. The compounds are found in dark Irish stouts but not their paler cousins.)
Day 6 of the trial consisted of completing the testimony of NLST’s competition expert, Jim Handy, NLST’s technical expert, Tim Jansen, who worked at HP at the time it was qualifying Hypercloud, and its damages expert. Most of the trial yesterday was closed to everyone but the jury and counsel (no representatives from either company due to sensitive nature of information being discussed). The feedback we got from NLST came through its counsel, and they said their witnesses did well, making their points clearly to the jury. NLST said that their technical expert finished in less than the allotted time, suggesting that cross-exam was less onerous than expected.
NLST will rest its case today after the damages expert completes its cross-examination. Diablo will call 4-5 witnesses, including the following people:
• Diablo VP and cofounder Cedric Paillard
• NLST CFO: NLST expects them to use her testimony about NLST’s financial losses to paint it as a failed company
• Former NLST VP of Engineering Ron Nickel: Nickel apparently is a disgruntled former employee who will probably portray NLST, and particularly Chuck Hong, in a bad light. He was VP of Engineering starting in 2010, so his tenure was after most of important events occurred, so probably won’t be disputing any key technical evidence.
• Diablo competition expert witness (closed courtroom)
• Diablo technical expert witness (closed courtroom)
From what we have heard about NLST’s case so far and the expected Diablo case, we think NLST is positioned well. We believe they have made their key points that Diablo did use their chips, and that the contract didn’t allow them to do that. Furthermore, Netlist has shown that the UlltraDIMM is competitive with NLST’s products, and Diablo appear to be bad actors. We will see how Diablo’s case rolls out over the next 3 days, but it will involve portraying NLST as a failed company, both technically and financially.
James McCubbin, WidePoint CFO, added, "2014 was a year of investment in our sales and marketing resources and in our personnel and technology platforms in order to build and improve upon our operating infrastructure, which should allow us to accelerate growth and expand margins as we progress into 2015 and beyond. We believe we will deliver financial leverage and improved operating performance as we work towards adding higher-margin recurring revenue to our sales mix in 2015."
Unless theres a new policy, i dont know why they delete analysts comments. Been posting since 2000 and this board is the only one that happens on. Pips and jism trying their best to keep factual posts off.