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SA-Justin Giles---Supreme Court Decision Hammers Vringo Stock, All Eyes Now On ZTE

Oct. 6, 2015 11:21 AM ET | 4 comments | About: Vringo, Inc. (VRNG), Includes: GOOG, ZTCOY
Disclosure: I am/we are long VRNG. (More...)
Summary

SCOTUS strikes down Vringo's Writ Of Certiorari and what this means going forward.

After a long fight against Google, investors now turn all of their attention to ZTE.

Why I believe the selloff was overblown, why I'm still holding my shares and why I'm looking to double down on my position.

* Disclosure: I've been covering Vringo on Seeking Alpha for a number of years now (you can see my articles here), and still believe the reward outweighs the risk after Monday's reaction from investors.

It was a rough day for Vringo (NASDAQ:VRNG) shareholders Monday morning after learning that the company's Writ of Certiorari was denied by the Supreme Court of The United States.

Despite winning a jury trial, a district court ruling and numerous re-examinations attempts by Google (NASDAQ:GOOG) (NASDAQ:GOOGL) from the U.S. Patent & Trademark Office, Vringo received an adverse split-decision (2-1) earlier this year at the Court of Appeals for the Federal Circuit. The Writ of Certiorari was Vringo's latest attempt to overturn the injustice from the CAFC, who chose blindly to ignore an indisputably jury verdict.

Andrew Perlman, Chief Executive Officer of Vringo had this to say in a statement to shareholders on Monday (emphasis added);

Given the exceptionally low historical odds of being heard at the Supreme Court, we believe that the decline in today`s share price does not accurately reflect the change in Vringo`s underlying value. The decision by the Supreme Court does not have any effect on the over 600 patents and applications in Vringo`s patent portfolios.

As a Vringo shareholder, this decision is unfortunate, however I'm actually more disappointed in what it now means going forward for all entrepreneurs / companies who spend countless hours and money on patents that can now be declared worthless, despite winning every battle leading up to an appeal.

In it's Amicus Curiae brief supporting Vringo, the Boston Patent Law Association summed it nicely saying (emphasis added);

In effect, the Federal Circuit's treatment of the patents makes the jury trial nothing but a dress rehearsal, not the main event, as it should be.

While bad news is bad news, I didn't expect shares to fall as much as they did. While unfortunate, investors must now move forward as the attention now shifts directly on ZTE (OTCPK:ZTCOY) and the trouble it has put itself in.
VRINGO V. ZTE

Things have been heating up between Vringo and ZTE over the last few months in its battle in the Southern District of New York. First, Vringo accused ZTE of manipulating its shares. Second, ZTE keeps getting new lawyers, and lastly, subpoenas are flying everywhere as Vringo looks into whether or not Grayling, Edelman and Google saw NDA materials and, if so, what was done with that information that was given by ZTE in its breach of its NDA contract with Vringo.

Perlman talked about ZTE in his statement Monday adding (emphasis added);

We continue our global litigation against ZTE, which remains unaffected by today`s decision, and which to date, has achieved positive results and rulings in many countries around the world. While ZTE is a large player in the telecommunications infrastructure and handset industries, it represents a small percentage of the revenue that is generated from sales of those products.

This last paragraph tells me that ZTE isn't the only one Vringo has its eyes on with the likes of Huawei, China Unicom among many others.

On July 30, 2015, document 178-10 (Exhibit J) made headlines as ZTE openly shared Vringo's patent license price between both parties at $817 million:

(click to enlarge)

While I figured the licensing agreement was going to be worth more than a couple of peanuts (unlike some shorts have tried to claim it would be), this information clearly shows us just how much is on the line between both parties.

Yes, the loss against Google was big, but the battle with ZTE has now become just as big, if not bigger with what's transpired over the past year.

Guo Xiaoming, part of ZTE's general counsel, refused to appear in New York for his deposition this summer in the contract breach between both parties.

ZTE's reasoning is over fears that Guo will be arrested by the FBI after facilitating unauthorized exports to Iran, which was a direct violation of U.S sanctions. This is just further proof that ZTE does not honor its word when its says that it respects the intellectual property of others and is willing to negotiate royalty fees on FRAND (fair, reasonable and non-discriminatory) principles.

SDNY District Judge Lewis Kaplan rejected ZTE's request to show "mercy" and reconsider his order to appear in New York.

This of course means that sanctions are certainly on the way and Vringo is ready to roll.

(click to enlarge)

Instead of the normal four pages to do so, Vringo requested to file an over-the-length brief (as you can see above) of up to 12 pages in support of its sanctions motion. This of course is on top of the $800M+ license agreement the two companies are trying to hash out. As you can see, this is turning into a billion dollar case.
Conclusion

Monday's whopping 41 percent share decline is in no way justified in my opinion given the exceptionally low historical odds of being heard at the Supreme Court. Less than 10 percent of cases are heard as I mentioned in a previous article.

I believe investors should rethink the current situation in that Vringo's battle with ZTE is the fight for the cake, and anything that were to come from Google is just added icing.

Right now, Vringo sports a market cap of just $35 million. With cash of $22.3 million as of its latest quarter, the market is currently pricing in Vringo's patents and the rest of its business (assets, etc.) at $12.7 million. Does this seem right to you considering that the company has the upper hand against ZTE in a billion dollar battle? Of course not.

It's my belief that a plethora of traders were playing Monday's announcement as well as those investors who have lost track of everything else that is currently going on and in Vringo's favor.

With several injunctions already placed on ZTE throughout the world (Romania, Brazil, etc.) for more than a year now, Vringo continues to squeeze ZTE. This is why I plan on adding to my position as investors begin to finally realize what's actually at stake.
Risk Factors

1. Vringo may not be able to successfully license and monetize its patents and patent portfolios.

2. The court system is not always fair and just.

3. Vringo relies heavily on raising capital to help fund operations/business plans. With just over $22M in cash and a monthly burn rate of just over $1M, Vringo may need help to raise capital if a settlement isn't reached with ZTE in a timely manner.

4. To meet listing requirements on the Nasdaq, Vringo must trade over $1 by December 14, 2015, to regain compliance. A reverse split seems to be likely in order to maintain Vringo's listing if a settlement doesn't happen with ZTE.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.


http://seekingalpha.com/article/3553856-supreme-court-decision-hammers-vringo-stock-all-eyes-now-on-zte?auth_param=3ho9d:1b17ppn:e70e02a5af6af6b60d1b1182d6050794&uprof=51#