Filing identity and reporting period
Important identification issue: The supplied filing is Vringo, Inc.’s Form 10-Q for the quarter ended September 30, 2012; it is not identified as a filing by XWELL, Inc. Investors should verify the issuer and filing before relying on this summary. Dollar amounts below are in U.S. dollars; financial statement amounts are generally in thousands unless stated otherwise.
Vringo reported as a development-stage company focused on intellectual property monetization and mobile applications. Its July 19, 2012 merger with Innovate/Protect, Inc. (I/P) was accounted for as a reverse acquisition: I/P is the accounting acquirer, and Vringo’s results are included only from the merger date. Comparisons with 2011 therefore are not directly like-for-like.
Financial performance and position
| Metric | Q3 2012 | Nine months ended September 30, 2012 |
|---|---|---|
| Revenue | $266 | $266 |
| Cost of revenue | $3,415 | $5,976 |
| Research and development | $997 | $997 |
| Marketing, general and administrative | $6,364 | $7,508 |
| Operating loss | $(10,510) | $(14,215) |
| Net loss | $(3,124) | $(6,836) |
| Basic loss per share | $(0.06) | $(0.27) |
Q3 revenue comprised $76 from subscriptions and content sales after the merger, $90 from a Nokia development project, and $100 from a partial AOL settlement. Cost of revenue substantially exceeded revenue. Q3 results included a $7,240 noncash gain from revaluing derivative warrants, which reduced the reported net loss relative to the operating loss.
For the first nine months, operating cash use was $5,962; investing cash use was $19,419, including the Nokia patent acquisition; and financing cash inflow was $29,717. Cash increased to $9,549 at September 30. Cash and cash equivalents were $9,549, current assets $10,310, and current liabilities $4,468, for reported net working capital of approximately $5,842. The company had no note payable remaining at quarter-end after repaying the $3,200 related-party note in August. Total liabilities were $24,585, including $17,280 of derivative warrant liabilities and deferred tax liabilities.
Total assets were $114,696, including $69,511 of goodwill and $34,559 of net intangible assets. Stockholders’ equity was $90,111. Cash burn from operations averaged approximately $1,110 per month in Q3 and $662 per month for the nine-month period, according to management.
Changes, transactions, and unusual items
- The merger materially changed the business, capital structure, and reporting basis. Former I/P holders owned approximately 55% of common shares and 67.61% on a fully diluted basis immediately after closing.
- In August, Vringo acquired a Nokia portfolio of more than 500 patents and applications for $22,000 plus $578 of capitalized acquisition costs. The agreement provides for Nokia royalties of 35% of portfolio gross revenue above $22,000, and includes specified repurchase and impairment-payment provisions.
- Q3 and nine-month expenses included substantial noncash stock-based compensation: $5,363 in Q3 and $5,532 for the nine months. The company reported $24,248 of unrecognized share-based compensation cost at quarter-end.
- At September 30, common shares outstanding were 64.8 million; 80.3 million were reported outstanding as of November 14. Warrants, options, and other equity awards create significant potential dilution.
Outlook, commentary, and risks
Management said that, taking account of post-quarter financing and warrant exercises, available resources were expected to fund operations for at least the next twelve months. The company reported approximately $60.5 million of cash and cash equivalents as of November 14, 2012. This includes the approximately $44.9 million net proceeds from an October registered direct offering and subsequent cash warrant exercises. Management anticipated increased operating and investing cash use as it develops products and pursues intellectual-property acquisitions; additional financing could be dilutive.
On November 6, a jury found infringement of the asserted Lycos patent claims and set past-damages amounts of $15.8 million for Google, $7.943 million for AOL, $6.650 million for IAC, approximately $4.322 million for Gannett, and approximately $98,833 for Target; it also found a 3.5% running royalty rate. These were post-quarter jury findings, not reported quarter revenue or cash receipts. The court’s obviousness ruling remained pending, and post-trial motions and appeals could affect the outcome. The patent office had also issued a non-final rejection in a reexamination proceeding; the company’s response was due November 25, 2012.
Vringo’s UK patent suit against ZTE was another post-quarter development. The company estimated UK litigation legal fees of approximately $2.4 million over the following twelve months and warned it could be responsible for a substantial portion of the defendant’s legal fees if unsuccessful. Other principal risks include failure to monetize patents, costly or adverse litigation, patent invalidity or non-infringement findings, dependence on carrier and technology partners, uncertain product revenue, foreign-currency exposure, and potential dilution. The company disclosed that its disclosure controls and procedures were ineffective due to a material weakness in accounting for equity, debt, and derivative instruments.
Key facts for investors to verify
- Confirm that the issuer and filing are Vringo, Inc., not XWELL, Inc., and confirm the reverse-acquisition basis used for period comparisons.
- Check subsequent filings for the final court rulings, post-trial motions, appeals, reexamination results, and any amounts actually collected or recognized from the litigation.
- Review subsequent-event accounting for the October warrant exercise and replacement warrants, which the company expected to have a material financial-statement impact.
- Validate post-quarter cash, operating burn, financing proceeds, and the assumptions underlying management’s twelve-month liquidity expectation.
- Assess the Nokia portfolio’s monetization prospects, royalty terms, and contractual restrictions, as well as potential dilution from outstanding warrants, options, and awards.