Is Vringo A Lottery Ticket Or An Investment?

| About: FORM Holdings (FH)

Ever since Vringo (VRNG) won its patent infringement case against Google (NASDAQ:GOOG) last November, shares of the company have had a tough time. Namely, VRNG shares are down more than 36% since "winning" their initial patent infringement case, which was supposed to set a precedent for future enforcement activities. This downturn in the stock has been caused, in part, by what shareholders view as undue delays in the case stemming from a clear lack of judgments emanating from the Eastern District of Virginia Courtroom. Indeed, I even penned an article a while back suggesting the key ruling for both parties, i.e. the "Running Royalty Rate", had a good chance of being handed down in May of this year.

Instead of listening to my flawless logic, the Judge presiding over the case apparently ignored me, and instead, did nothing with the case for months. When the Judge did get back to this particular case, he dealt Vringo shareholders an annoying schedule in which the parties are to work through the Workaround issue(s). Most annoyingly (to VRNG shareholders at least), the Judge actually asked the parties to essentially work out the royalty issue among themselves!

To beleaguered Vringo shareholders, this came off as a cruel joke, as the motion activity in the case demonstrably shows that the parties couldn't be farther apart on a potential resolution of anything-much less a critical aspect of the case such as the royalty rate.

With mounting losses, Vringo-ites have resorted to conspiracy theories about Google possibly bribing the Judge, President Obama somehow intervening at the behest of his good friend Google, and so on and so forth.

While I also like a good conspiracy theory to soothe the pain of 30% losses in an investment, I think it's wise to refrain from such nonsense in regards to Vringo as an investment vehicle. Instead, it's probably a better idea to do what we should all be doing as investors/traders: Read the company's latest 10-Q.

Unfortunately, the tale it has to tell is painful to hear for some, and lacks the whimsical embrace of a well-thought out conspiracy theory. Even so, investors and traders alike would be well served by giving it a thorough going over.

If we consult the Magic 8-Ball known as Vringo's 10-Q, it can teach us important things such as:

Why is Google Dragging this Out to the Bitter End? They lost already, right?

10-Q: …, it is difficult in general to predict the outcome of patent enforcement litigation at the trial or appellate (emphasis added) level. In the United States, there is a higher rate of appeals in patent enforcement litigation than standard business litigation. The defendant to any case we bring may file as many appeals as it allowed by right, including to the first, second and/or final courts of appeal (in the United States those courts would be the Federal Circuit and Supreme Court, respectively). Such appeals are expensive and time-consuming, and the outcomes of such appeals are sometimes unpredictable, resulting in increased costs and reduced or delayed revenue.

… even with a positive trial court verdict, the patents may be invalidated, found not infringed or rendered unenforceable on appeal.

Simply put, Google may somehow end up getting the entire case essentially tossed on appeal. While that scenario appears unlikely in light of the facts of the case (my humble non-legal beagle opinion), Google has the resources to go this route, which is why they are fighting the case tooth and nail.

Consulting the Oracle of the 10-Q again, we learn:

…parties would devote a substantial amount of resources in an attempt to avoid or limit a finding that they are liable for infringing our patents or, in the event liability is found, to avoid or limit the amount of associated damages. In addition, there is a risk that these parties may file reexaminations or other proceedings with the USPTO or other government agencies in the United States or abroad in an attempt to invalidate, narrow the scope or render unenforceable the patents we own.

Breaking this down, Google's second strategy is to minimize any award to Vringo, and their team of highly paid legal beagles is apparently of the belief that continuing the fight is a means to achieve this end. In other words, the case will end when it bloody well ends, and fretting over the snail's pace of the case is not a good use of one's time on this Earth.

So is Vringo a Lottery Ticket or an Investment?

Vringo is an Intellectual Property Enforcement company with no material revenues to speak of to date (again, read over the horror show that is the 10-Q in regards to their revenues). Worse yet, the company is starting to burn cash at an alarming rate (about $3.6 M a month) due to their increased enforcement activities that are global in scope (see below).

Enforcement Activities Underway

1. Google Adwords Suit in the U.S.

2. ZTE Infrastructure and Handset suits in Australia, France, Germany, Spain, and the United Kingdom.

3. ADT/Tyco Mobile terminal and remote monitoring lawsuit in the U.S.

4. Wireless Networking suit against ASUS in Germany

With about $43 M in cash and cash equivalents, I suspect Vringo will have to perform a secondary offering early next year to continue their torrid pace of legal activities and stay on solid financial footing, unless of course Google folds and hands over a princely sum in a timely fashion. Of course, a number of events could occur that would stave off a secondary as well, but so far, Vringo shareholders should realize that these huge tech giants don't take kindly to getting sued.

In sum, Vringo is, and always has been, a lottery ticket, not an investment. If and when they get paid from one of their "clients", shares of Vringo will finally begin to appreciate in value. Until then, Vringo-nites should expect lower lows in terms of PPS due to an increased cash burn rate stemming from expanded enforcement activities.

If you've come this far, however, just consider the fact that you can buy this lottery ticket at cheaper and cheaper prices. That's my plan anyways. But always keep in mind that patent infringement cases are highly "unpredictable" beasts, and the stage of the case doesn't matter nearly as much as the resources of the parties involved. All that wisdom and more can be found in Vringo's latest 10-Q.

Disclosure: I am long VRNG. 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.

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