After sinking to a 52-week low of 0.68 back on January 25, 2012 shares of Vringo, Inc. (AMEX: VRNG), a provider of software platforms for mobile social and video applications, have spiked considerably, touching 2.14 on Wednesday following their announced entry into a definitive agreement to merge with Innovate/Protect, a company that maximizes the economic benefits of intellectual property assets. While shares have cooled slightly, trading around the 1.61 level, they remain well above their 50-day moving average of 1.32 as well as their 200-day moving average of 1.36.
According to VRNG “the strategic combination with Innovate/Protect, Vringo will substantially increase its intellectual property portfolio, add significant talent in technological innovation, and be positioned to enhance its opportunities for revenue generation through the monetization of the combined company’s assets.” That intellectual property portfolio will include Innovate/Protect, Inc.’s eight patents acquired from the search engine Lycos Inc., currently held by I/P Engine, a wholly-owned subsidiary of Innovate/Protect.
Two of these eight patents are currently the subject of a patent infringement lawsuit filed by Innovate/Protect against Google, AOL, IAC Interactive, Gannett and Target, for “unlawfully using systems that incorporate features claimed in the two patents.” These features are related to relevance search technology that is used in the search engine industry to produce better search results, something that has “become the dominant technology used in search advertising to position high-quality advertisements.”
Obviously a favorable outcome in this situation would prove rewarding but before the scheduled trial, set for October 16, 2012, there will be a Markman claim hearing on June 4, 2012 in which a judge will essentially determine if the language of the patent claims warrant a patent infringement lawsuit going to trial. For shareholders of VRNG, the announced merger agreement with Innovate/Protect, expected to close in the second quarter 2012, may only pay off if it is determined that those companies infringed on those patents.
What this means is there is considerable risk involved in betting on VRNG at the moment. While the company remains optimistic about their own mobile social and video applications the reality is they have yet to generate meaningful revenue from their offerings.
These offerings include their Facetones™ application which integrates with Facebook and creates an automated video slideshow using friends’ photos from social media web sites, which is played each time a user communicates with a friend using a mobile device; their Video ReMix application, in partnership with music artists and brands, which allows users to create their own music video by tapping on a Smartphone or tablet; and their Fan Loyalty platform that lets users interact, vote and communicate with contestants in reality TV series with which VRNG partners.
While the applications may sound appealing the reality to date is they have produced little in the way of revenue for VRNG. In their most recent quarterly report published last November VRNG noted that since inception in 2006 through the close of the third quarter 2011,” we have generated only $787 thousand in revenues, which includes: $497 thousand from revenue-share subscription services, $109 thousand from one-time setup fees, $98 thousand from Facetones™, $45 thousand from Fan Loyalty application formats, and $30 thousand from Video ReMix platform. That’s not exactly doing shareholders much good, especially when you take into account VRNG’s admission that “From inception and until September 30, 2011, we recorded losses of $34.7 million and net cash outflow from operations of $28 million.”
Aside from the patent infringement claims VRNG is banking on their Facetones™ application, hoping to attract attention based on the Facebook name. Back in February VRNG reached an agreement with Facebook that covers Vringo’s official use of the Facetones™ Mark and Domain Name but by no means does this agreement represent any kind of relationship. To their credit VRNG has an agreement in place with ZTE Corp., the largest handset maker in China, which will put the Facetones™ app on all Android handsets that they manufacture.
What it all comes down to for VRNG is how will they monetize their applications? While it is clear they intend to generate their real revenue from advertising, and to a lesser extent from subscription based sign-ups for services, there is no guarantee that they will be successful and with the competition they face in this industry it would be difficult to predict a favorable outcome.