Larry Oakley's Bold Ventures

Posted 6/7/2010

My latest Alert -- Augme Technologies (OTCBB: AUGT)

Comment

This is a significant update for AUGT. It briefly describes new Intellectual Property, ongoing litigation with AOL & Yahoo, & AUGT’s growing Mobile operations. There have been several key recent events that I wanted to share with you regarding AUGT, whose story is dynamic & is picking up steam.

Update on AUGT’s Litigation

There have been two significant events since my last update. On Friday 6/4, AUGT filed the final request for sanctions against AOL. As I reported in one of my first reports, AUGT filed a Motion for Sanctions for Spoliation of Evidence & Evasive Disclosure Practices in Patent Infringement Case against Tacoda (Acquired by AOL Inc.). Here is what I said about the Spoliation of Evidence:

In law, Spoliation of Evidence is the intentional or negligent withholding, hiding, alteration, or destruction of evidence relevant to a legal proceeding. It is a criminal act in the U.S. under Federal & most State law.

Spoliation has two consequences: First, the act is criminal by statute & may result in fines & incarceration for the parties who engaged in the spoliation. Second, case law has established that proceedings which might have been altered by the spoliation may be interpreted under a spoliation inference. The spoliation inference is a negative evidentiary inference that a finder of fact can draw from a party's destruction of a document or thing that is relevant to an ongoing or reasonably foreseeable civil or criminal proceeding: The finder of fact can review all evidence uncovered in as strong a light as possible against the spoliator & in favor of the opposing party.

The final filing is quite detailed. Outlining multiple instances by AOL of not only failing to supply the court ordered documentation, but also instances of where AOL appears to have ordered the documentation destroyed. I encourage you to read the filings yourself at www.pacer.gov. Its now in the judge’s hands to decide what to do, but it seems to me this is a case that shows exactly why avenues such as Sanctions for Spoliation are available to companies. If the company you are suing is allowed to destroy key incriminating evidence then it is going to be harder to prove infringement.

Another key development on the litigation side has to do with the suit against Yahoo. Both sides have agreed to meet to discuss possible settlement prior to 7/28/2010. The most encouraging aspect came from the conference call on 6/2/2010. As stated in the call, it appears that even if they can not finalize a settlement by the end of July, both sides plan to continue working with a mediator with the aim of a settlement. It certainly seems like Yahoo may not want to go down the same path as AOL with regards to this litigation. Keep in mind, just like Virnetx Holdings Corp. (VHC), one of my biggest recent successes, once one company has validated the technology by taking a license, it opens up the licensing across all infringers.

For your convenience, I include after this update, some information I included in my prior AUGT update in this column on 5/16/2010

Update on AUGT’s Intellectual Property

AUGT announced last week that it received a Notice of Allowance on another new patent, one that is a continuation of the company’s previously issued Patent Number 7,269,636. Please see press release http://finance.yahoo.com/news/Augme-Technologies-Inc-bw-3027267648.html?x=0&.v=1. Here is what AUGT’s Chief Technology Officer had to say. Note that the USPTO obviously not only recognizes the importance of the technology, but also its validity since it issued the 7,269,636 patent in 2007 based on the original 1999 filing & now issued this continuation patent.

"When issued, the new patent has the potential of materially enhancing both the value & validity of our intellectual property portfolio. The allowance of what would be our third patent underscores the fact that, despite the myriad of tactics employed by our initial enforcement targets to elongate the path to collecting infringement damages, the USPTO recognizes our first position & ownership of this breakthrough Internet targeting technology," said Nathaniel Bradley, Chief Technology and Product Officer for AUGT. "Our products, built upon our patented infrastructure, remain under constant development & deployment in both the Internet & Mobile market verticals.”

Update on AUGT’s Mobile Operations

AUGT held a year end conference call on 6/2/2010. Here are the key points from the call which included a question & answer session with management. The call highlighted the following key points illustrating the strong opportunity & progress made in AUGT’s mobile operations.

1. Estimating $2.8 million in revenue for FY11, their current period. First two quarters roughly $1million in revenues & last two $1.8 million. My opinion is that it will be doing roughly a 40-50% quarter over quarter growth rate this year & will end the year doing over $1 million per quarter in revenues. It is currently bidding on projects that are bigger than current quarter revenues.
It has new versions of its platforms coming this quarter. Management believes that the company is significantly ahead of the competition with its technology.

2. It has about $1.6 million in cash as of the 10K filing & plans are to reach cash flow positive this fiscal year ending February 2011.

3. It has zero debt.

4. The state of the business has never been stronger.

On the heals of our finding VHC ahead of the crowd, which brought readers exceptional returns, I continue to see AUGT as another emerging growth company -- one worth watching that has similar exciting potential. Small companies with valuable IP that can provide a gate-keeping element or barrier to entry into billion dollar verticals like online advertising & mobile advertising, are not only valuable, they may just find themselves the subject of takeover attempts as other larger players seek to exploit & unlock the real value of these scarce assets.

AUGT closed at $1.02 on Friday 6/4/2010, a low price in my opinion.

________________________________________

For Your Convenience, Here is an Explanation of the Sanctions that I Published in my “Bold Ventures” editorial column on 5/16/2010.

These sanctions are twofold. They illustrate a continuous two plus year pattern of AOL not only willfully refusing to turn over the court required evidence & documents, but it depicts the intentional destruction of relevant source code while under a legal obligation to preserve it. If this isn’t enough, they also illustrate AOL’s repeated & intentional attempts to prolong litigation by inundating Augme’s counsel & technical experts with literally hundreds of thousands of lines of seemingly irrelevant & manipulated code long after Tacoda’s lead technical person disclosed in her deposition she had been given instructions to destroy it! Ironically, she appears to have been given these instructions just a short matter of days following the initial meeting between the parties.

Actually, the code existed when the parties first met, so it could be assumed that AOL must have learned the degree to which it had a problem & did what many guilty parties would do -- destroyed the evidence. All of this deplorable behavior while brazenly suggesting that it was complying with the court’s repeated instructions.

The second key part of the sanction filing is how Augme’s two world renowned experts in this field have had to go to great lengths to show infringement & have documented this in the filing.

Whether the sanctions get approved or not, all this work will be utilized at the trial. Frankly, I’d love to sit on that jury! Even though the subject matter of the patent infringement is technical in nature, the sanctions filing is written in easy to understand terminology, making it completely understandable by a layperson. In reading the document, there can be no mistaking the great lengths AOL has gone through to try to protect themselves. This effort can only be seen as an indication of both the value of this technology & its importance to AOL & its business. Common sense would dictate that had they not been infringing, none of their steps or strategy would have been applicable. This reminds me of something my mom used to tell me growing up, “The naked truth is always better than a well dressed lie.”

Some other important insights may be gleamed from the sanctions filing. I thought it was interesting to note everyone associated with Tacoda has now been fired, including its head technical person. AOL bought Tacoda for $275 million yet it appears that not one member of Tacoda still resides with AOL today. This indicates to me that the $275 million was for the technology & the technology alone. I guess that makes perfect sense considering what AOL has done to try to prevent Augme from laying legal claim to it. Interestingly, it appears as though AOL has said close to ten times that they were delivering all the required documents, yet it still has not produced the court required documents to date! I think the judge just might say enough is enough! See Exhibit 72 of the filing.

With the filing of the sanctions, AOL now has three weeks to respond & then Augme has three weeks for a final rebuttal before it goes to the judge. Augme requested some very specific sanctions. It appears that if any of the four requested are granted, then infringement has basically already been proven prior to the start of the trial. From the simple examples that were shown in the filing it seems that foundational technology that Augme owns is used all over the AOL web pages. This reminds me a lot of the i4i/Microsoft case but much more pervasive. Of course everyone knows where that stands with Microsoft having to pay $240 million & remove the code from all products. My guess is i4i had the same type of IP value studies done as I pointed to here (Kenrich Group third party valuation report 8k) that showed the value of the IP & that Microsoft figured given their size & financial position they would eventually win.

It gets even better because AOL is not alone in its plight to protect the structural integrity of its online & mobile advertising platforms; Augme is also suing Yahoo for infringement of the same for their acquisition of Blue Lithium for $300 million. This case is undergoing the ADR (Alternate Dispute Resolution) process which allows the two parties to discuss settlement while the case continues. Also keep in mind Yahoo chose not to use its own high powered in-house IP counsel but instead engaged a group called Morrison/Foerster who specialize in the settlement of such cases rather than litigation. If the sanctions are deservingly granted, would a competitor like Yahoo love to be in the position AOL will now be in? We all know there is no love lost between Yahoo & AOL!

Keep in mind this valuation only covered IP & that the Mobile side of Augme looks to be very promising, especially considering the recent acquisitions of AdMob ($750m), Quattro Wireless ($275M), & now possibly Millennial Media ($500M). There is a major land grab going on in the Mobile space & Augme is one of the up & comers in the space. Add its patents that could make them a gatekeeper to a couple of different billion dollar verticals & it may only be a matter of time before they tickle someone’s fancy.

Call JoAnne Yau at 512-659-0150 or 800-864-1231 ext. 28
jayau@phillipscompany.com
________________________________________

My comments in this column are strictly my personal opinion. At times, I will include forward-looking information as that term is defined in the Private Security Reform Act of 1995. Such information & the related company are subject to many risks & uncertainties. There can be no assurance that actual results, business conditions, business developments, losses & contingencies, local & foreign factors, & other matters will not differ materially from those suggested in any of my forward-looking statements. Such differences are the result of all sorts of factors (some examples: market conditions, competition, advances in technology, acquisitions, mergers, potential litigation, personnel changes, market changes, capital availability, etc., etc.).

Do not run out & buy a stock just because I am enthusiastic about the situation. Call the company before you buy -- satisfy yourself first. I always include a phone number for that purpose. My purpose in this column is to respond to your request for my personal opinion. You have the responsibility of making your own investment decisions. Do not give up that responsibility.

My editorial coverage has always been, is now, and always will be without charge. That includes what I write in Conservative Speculator, and what I write in "Larry Oakley's Opinion, " "Larry Oakley's Stock Pick," "Larry Oakley's Comment," & "Larry Oakley's Bold Ventures" columns. It also includes what I write in such venues as articles submitted to other publications, interviews on radio & television, and at the investment seminars and conferences at which I am a featured speaker. By doing all my editorial work free of charge, I have the advantage of writing about what companies I particularly like. There are occasions when I will write about a company that is a paying participant on WallStreetCorner -- that's because I like the company. I always make it clear to them that editorial coverage is free and is not a part of the fee they pay to have their Profile researched, prepared, & posted at WallStreetCorner.