CymorFund 10-Bagger Stock Pick: 01-Communique

01 Communique (TSXV-ONE) $0.49

January 31, 2014

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Investing 101 – Managing Risk 

Some professionals refer to the practice as a “binary” trade, meaning the stock either goes up dramatically, or down dramatically depending on a specific event. The stock does not gain or lose momentum, rather it dramatically moves instantly depending on a single event, such as the outcome of a lawsuit.

Some investors (including us) avoid betting on lawsuits, because of the uncertainty of courtroom decisions, which often bear no resemblance to commercial reality or to common sense. Judges and juries often are oblivious to commercial realities, or even to the effect and intent of the law. Betting on the outcome of a lawsuit, is one of the highest risk trades that any investor can make.

We usually strongly caution against buying stocks where the outcome of a lawsuit will determine the future value of a stock. That is a basic tenant of Investing 101.

Yet …. Rules Are Meant To be Broken

We have done amazingly well on our CymorFund 10-Bagger stock picks, and today we take  a very unusual risk. This trade is not for the Faint of Heart.

What follows is the stock chart for TSXV-ONE, 01 Communique.

The Stock Chart for 01 Communique

 

 Stock chart

It is hard to imagine such a volatile stock.  

  • In the year 2004, it traded below $0.05.
  • In 2008 it rose to almost $1.00.
  • In 2009 it fell to $0.12.
  • In 2011, it rose to $2.37
  • In 2012, it fell to $0.50,
  • Then rose to $1.30
  • In 2013, it fell to $0.20, 
  • In 2014, it has risen to $0.50 again.

The Story Behind 

This is a technology story, that started before everyone had easy access to the internet. Andrew Cheung (CEO) of 01-Communique came up with a technology on which they obtained patents. In simplest terms, it allowed users to penetrate a computer’s Firewall, and allow easy and instant access from one computer to another. This allowed computers to be used for a myriad of new applications such as faxing, joint work on projects, and so on.

  • It allows a technician to remotely access your computer when you can’t get your computer to work properly.
  • It allows you, or anyone with the proper access codes. to log into your computer from anywhere, and work on your home computer.

What developed from this, was a string of applications further developed by large and small companies such “Go to My Meeting”, “Go to My Computer”, “Go to Your PC”, “I’am In Touch” and so many others. The applications became wide and varied and the concept received wide recognition, with companies such as Citrix and so many others, either developing their own technology, or improving existing technology. 

01 Communique (ONE) – What is This All About?

01 Communique developed the original software (or so they claim), and still sells a modest amount of usage of the software, but the main emphasis of its activities, transitioned to enforcing its patents. About 7 years ago, ONE realized that the technology usage was becoming  widespread, and was generating HUGE REVENUES for other companies. 

ONE decided that it had a tiger by the tail, and being a small micro-cap, didn’t have the resources to compete with the Citrix’s of the world in convincing businesses and individuals to use its software instead of using the Citrix Software, or other competitors Software.

So it switched tactics. It decided to use the majority of its resources and limited cash to force other users of similar software to pay to ONE, royalties and ongoing usage fees. ONE launched a lawsuit, of major proportions against Citrix Systems, Inc. (NASDAQ:CTXS), claiming patent infringement, damages, payment to ONE of substantial monies for past infringement, and an ongoing royalty stream to ONE. The scope of the claim was in the many $100’s of Millions. THIS WAS A BIG DEAL.

A press release from 01 Communique announcing progress on the mattes was issued March 16, 2007. It follows:

“we commenced a patent infringement lawsuit against Citrix Systems Inc. (NSDQ:CTXS) in February 2006. The case is moving forward and we are confident in the merits of our case. The court issued a patent claim construction ruling adopting our claim construction for 19 of the 20 disputed claims terms. The claim construction hearing, also known as the Markman hearing, was held on November 2, 2006. “We are pleased with the Markman ruling,” said Andrew Cheung, President and CEO for 01 Communique. “The Judge’s ruling reaffirms our confidence in the merits of our case as we prepare in earnest for a jury trial.”

If you look at the stock chart, you can see the optimism. The stock moved almost to $1.00. A win in the court for 01 Communique, would be a massive boast in the per share value of ONE.

The Wait & The Cash Drain

Suing a company the size of Citrix is not an easy proposition. The world of legal litigation is a complicated one. The drain on the company resources began.

  • Years came and went.
  • Expected “Final Decision” dates came and went.
  • Raising of capital to continue became a regular event for ONE, with dilution, surrendering of tax losses, and so on.
  • Another lawsuits of a similar nature was embarked upon.
  • Partnerships with other companies who were also in the patent enforcement business came and went.
  • Every Court Hearing that was suppose to move the case forward, became another delay.

The Suit was issued in February 2006. It is now January 2014.  That makes it almost 8 years this court case has dragged through the courts, and there is yet to be a discovery between the parties.

The Other Court Case

In September 2010, ONE commenced another lawsuit against LogMeIn. A press release from the company is re-produced below.

LogMeIn Litigation – We commenced our patent infringement lawsuit against LogMeIn in September 2010 in the Eastern District of Virginia. A jury trial is scheduled to begin two weeks from now on Monday March 18, 2013 and is expected to last approximately 2 weeks. Our lawsuit alleges infringement by LogMeIn of our U.S. Patent No. 6,928,479 which was issued in August 2005 and does not expire until 2022. As well as alleging infringement we are alleging willful infringement which can result in a multiple of damages and going forward we are requesting the court grant an injunction against LogMeIn from continuing to use our patent. With respect to the period from the date the patent was issued in August 2005 to the present time we believe we are entitled to a reasonable royalty on revenue generated by LogMeIn from the use of our patented technology and a
reasonable royalty based on the value derived by LogMeIn for each of their free users that also make use of our patented technology.

This law suit was also for a very significant amount of money, although far less than the Citrix lawsuit. In June 2013, the company announced that the Court had found against its Log Me In claim.

The Stock Price

If you wish to take the time and bother, you can track all of the dramatic stock price swings to these various court decisions, postponements, hopes and dashed hopes.

So Why Are We Interested in 01 Communique

 The stakes are very high here. There are roughly 65,000,000 shares out with a bit of dilution available. For easy of calculation, figure 70,000,000.

  • A win in the Log Me In lawsuit could mean somewhere around $1.00 per share after expenses. 
  • A win in the Citrix lawsuit could mean $0 or $10.00 per share after expenses.

The shares are currently trading at just below $0.50.

These figures mentioned above are extremely crude, and a win could be a total of $1.00 as a statement of right or wrong, or a loss with lots of expenses that will doom the company, or a win of massive proportions with ongoing significant revenue.

What is more on the table, is that a win could bring two other massive benefits.

  • A significant continued cash flow from royalties until 2022. In the technology business, a rule of thumb is 10% of revenues could be a royalty obligation.
  • According to the CEO, there are over 100 additional companies that are supposedly infringing on these patents, and lawsuits would be commenced against one after another.

Could 01 Communique Win One or Both Lawsuits?

If they do win, the windfall for shareholders will be stupendous, The CEO with a position of over 10,000,000 shares will be fabulously rich. Yet it is important to remember that the Courts cannot be depended upon to decide as the issuers of the lawsuits wish them to decided. 

Some factors to consider:

  • The company claims that its lawyers almost never take cases on a contingency basis. It apparently is a large and experienced law firm who are experts in this field, and has a docket so far (according to the company) of over $10,000,000. This is a significant financial commitment on the part of the law firm. ONE paid the disbursements incurred until a maximum was reached, and now the law firm is also paying all of the expenses. Without a win in court, the law firm has lost a great deal.
  • The original judge in the case has been replaced with another judge, who last week ordered the two sides to come up with a timetable for discoveries within a month. This is apparently a rigid timetable.
  • Based on the timeline, ONE believes the case will finally be in court in the autumn of 2014.
  • Should the Courts finally force the parties to cease delaying, a settlement before the date set for trial is reasonable to expect.
  • In the other case, ONE and its lawyers believe that a grievous mistake was made and the Court erred. The appeal is now underway and again the company is optimistic. The appeal is scheduled to be heard within 3-6 months.
  • What gives ONE optimism, is several factors, according to management:
    1. Most patent enforcement cases are lost. Apparently almost 90% are dismissed. Although difficult to interpret, the judge supposedly found the patent valid.
    2. The appeal by Citrix was supposedly dismissed
    3. The delays were because a “stay” was put in place in 2008, and the judges recent decision is supposedly a step toward lifting that stay.
    4. ONE firmly states that the LogMeIn case decision will be overturned as they believe the judge did not rule on the proper basis.

All very optimistic and complicated. 

How to Gamble

If you like a gamble, this is an interesting one. The largest two factors in deciding to take a gamble are 1) the odds, & 2) the win/loss ration.

  1. In this case, it seems the odds have swung in ONE’s favor. Depending on court decisions is real gambling, but the odds may be in your favor.
  2. The win in this case could be an enormous lift in the value per share plus continuing revenues. The loss could be a maximum of $0.49 per share.

 

CymorFund’s 10-Bagger Stock Pick – Buy 01 Communique – $0.49 (TSXV-ONE)

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By Larry Cyna

Mr. Cyna is an accomplished investor in the Canadian public markets for over 20 years, and has managed significant portfolios. He is a financing specialist for private and public companies, and has expertise in real estate and debt obligations. He has assisted private companies accessing the public markets, has been a founding director of public companies and continues as a strategic consultant to selected clientele. He is and has been a director, a senior officer and on the Advisory Board of a number of TSX and TSXV public companies in the mining, resource, technology and telecommunications sectors, and the Founding Director of two CPC’s with qualifying transactions in mining and minerals. He was an honorary director of the Rotman School of Management MBA IMC program, has completed the Canadian Securities Institute Canadian Securities Course & Institute Conduct and Practices Handbook Course, was a former Manager under contract to an Investment Manager at BMO Nesbitt Burns, a roster mediator under the Ontario Mandatory Mediation Program, Toronto, a member of the Institute of Corporate Directors of Ontario, a member of the Upper Canada Dispute Resolution Group, and the Ontario Bar Association, Alternate Dispute Resolution section. He obtained his designation as a Chartered Accountant in Ontario in 1971 and was the recipient of the Founder’s Prize for academic achievement together with a cash reward. He became a CPA in the State of Illinois, USA in 1999 under IQEX with a grade of 92%. He is a Member of the Institute of Chartered Accountants of Ontario and the Canadian Institute of Chartered Accountants. He holds certificates in Advanced ADR & in Civil Justice in Ontario, Faculty of Law, University of Windsor, certificate in Dispute Resolution from the Ontario Institute of Chartered Accountants. Previous accomplishments are Manager of Cymor Risk Consultants LP specializing in Risk Management Assessment; CEO of Cyna & Associates specializing in mediation and ADR; Founder & Senior Partner of Cyna & Co, Chartered Accountants, a fully licensed and accredited public accountancy firm with international affiliations; and was a partner in a large public accountancy firm. Mr. Cyna is well known in the Canadian Investing community. He is invited to, and attends presentations given by public companies usually 3 or 4 times each week. These presentations are intended by the various hosting companies to present their inside story to sophisticated parties and Investment Managers for the purpose of attracting funding, or of making parties more interested in acquiring shares of those companies. Being a part of this keeps Mr. Cyna deeply involved in the current market and leads to numerous investment opportunities.