Filing identity and reporting period
Important identity mismatch: The request metadata identifies XWELL, Inc., but the supplied Form 10-Q is for Vringo, Inc. It covers the quarter and six months ended June 30, 2012; the financial statements are unaudited. The results below describe Vringo, not XWELL.
Before the July 19, 2012 merger with Innovate/Protect, Vringo developed mobile video, social and ringtone applications. The June 30 financial statements do not include the merger. Vringo says the merger will be accounted for as a reverse acquisition, with Innovate/Protect identified as the accounting acquirer.
Financial results and position
Amounts are in U.S. dollars; financial statement figures are in thousands except per-share data.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $100 | $227 | $206 | $374 |
| Operating expenses | $2,071 | $1,880 | $4,833 | $3,710 |
| Operating loss | $(1,971) | $(1,653) | $(4,627) | $(3,336) |
| Net loss | $(5,169) | $(1,504) | $(10,813) | $(2,613) |
| Basic and diluted loss per share | $(0.36) | $(0.26) | $(0.81) | $(0.45) |
| Cash used in operations | Not stated separately | Not stated separately | $(2,531) | $(2,916) |
Q2 revenue fell 56% year over year; first-half revenue fell 45%. Management attributed the declines mainly to lower subscription revenue and fewer Facetones and Fan Loyalty development projects. First-half operating costs rose 30%, including higher general and administrative costs associated with merger and acquisition activity.
Q2 net loss widened substantially, principally because of a $3.086 million non-cash expense from revaluing warrant liabilities. The six-month warrant revaluation expense was $3.497 million; reload warrant issuance also generated $2.567 million of expense in the first half. These items materially affected reported net loss.
At June 30, cash and cash equivalents were $3.374 million, current assets $3.606 million, current liabilities $1.552 million, and working capital approximately $2.1 million. Total assets were $3.735 million; stockholders’ equity was a deficit of $1.372 million. Long-term warrant derivative liabilities were $3.555 million. Cash increased $2.184 million during the first half, primarily from $4.728 million of warrant and option exercises, partly offset by operating cash use.
There was no material debt reported on the June 30 balance sheet. After the merger, Vringo assumed and guaranteed a secured note with a stated outstanding balance of $3.2 million, 0.46% interest and a June 22, 2013 maturity. The note is secured by Innovate/Protect assets, including Lycos patents, and includes potential mandatory redemptions and a 125% redemption price in certain change-of-control circumstances.
Material developments, outlook and risks
- Merger and dilution: Former Innovate/Protect holders received common shares, convertible preferred stock and warrants. They held about 55.04% of common shares after closing, or 67.61% on a fully diluted basis. The merger’s accounting impact was still being evaluated.
- Financing and Nokia patents: On August 10, Vringo completed a registered direct offering of 9.6 million shares at $3.25, for $31.2 million gross and approximately $30.5 million net. It paid Nokia $22 million for a portfolio of over 500 patents and applications; the agreement also provides for a 35% royalty on defined portfolio revenue above $22 million. Remaining proceeds were intended for debt repayment and operations.
- Liquidity outlook: Management expected combined-company resources, after the offering and patent purchase, to fund operations for at least 12 months from the balance-sheet date. It also warned that further acquisitions could require additional financing and that warrant exercises, while potentially providing up to $31 million, were uncertain and could be dilutive. The filing nevertheless states that substantial doubt about Vringo’s ability to continue as a going concern existed.
- Operations and legal exposure: Vringo planned to pursue mobile applications and intellectual-property monetization, including patent licensing and litigation. The Lycos patent case against online search and other companies remained scheduled for trial in October 2012. A July partial settlement with AOL provided $100,000; specified claims involving Google Search and IAC’s Ask Sponsored Listings were dismissed, while other claims were retained. Litigation outcomes, costs and recoveries were uncertain.
- Other costs and risks: Management expected higher legal, administrative and integration costs. The filing estimated approximately $1.9 million of additional merger-related option compensation and described material post-merger equity awards. Risks include unsuccessful patent monetization, litigation outcomes or appeals, integration challenges, customer and carrier concentration, dependence on Facebook photo access for Facetones, foreign-exchange exposure, and possible dilution from warrants and equity awards.
- Controls: Management concluded disclosure controls were ineffective as of June 30 because of a material weakness involving recognition, valuation and accounting for equity, debt and derivative instruments. Remediation included expanded use of external valuation and accounting experts.
No formal earnings or revenue guidance is stated in the supplied filing. Management’s stated operational outlook includes continued development and distribution of mobile products, additional carrier and strategic relationships, and expansion and monetization of intellectual-property assets.
Most important facts for investors to verify
- Confirm the issuer: the supplied filing is Vringo, Inc., not XWELL, Inc.
- Review the completed merger’s final accounting, consideration valuation, capitalization and fully diluted share count.
- Verify offering proceeds, use of funds, remaining liquidity, repayment of the secured note and any note redemption rights.
- Assess the Nokia portfolio’s title, contractual restrictions, royalty provisions and actual monetization prospects.
- Track the Lycos patent litigation, including remaining claims, trial or appeal developments, costs and any recoveries.
- Review remediation of the disclosed material weakness and the effect of post-merger awards, warrant exercises and potential dilution.