Business context and reporting period
The filing is Vringo, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2016. The request metadata names XWELL, Inc.; that does not match the registrant identified in the filing.
Vringo reported three segments: Intellectual Property, Fli Charge (wire-free power technology) and Group Mobile (rugged computing products). Group Mobile and Fli Charge were acquired in October 2015, so their results are not included in the 2015 comparison.
Financial results and position
Amounts below are in millions of dollars unless noted.
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $2.044 | $0.150 |
| Cost of goods sold | $1.127 | — |
| Operating expenses | $5.650 | $6.903 |
| Operating loss | $(3.606) | $(6.753) |
| Net loss | $(3.955) | $(6.976) |
| Basic and diluted loss per share | $(0.28) | $(0.75) |
| Cash used in operating activities | $(5.429) | $(3.502) |
- Revenue rose $1.894 million, or 1,262.7%. Q1 2016 revenue comprised $0.750 million of licensing, $1.277 million from Group Mobile and $0.017 million from Fli Charge.
- Gross profit was approximately $0.917 million, or 44.9% of revenue, based on reported revenue and cost of goods sold. The filing does not present a consolidated gross-margin measure.
- Cash and cash equivalents were $20.560 million at March 31, down $4.391 million from year-end. Current assets were $23.385 million; current liabilities were $3.721 million. Court deposits were $0.831 million.
- Senior secured notes had $1.749 million of outstanding principal after the March exchange; the balance-sheet carrying value was $0.554 million after discounts and issuance costs. A separate $0.266 million Group Mobile bank loan was included in current liabilities.
- Investing activities provided $1.087 million, mainly from court-deposit refunds, partly offset by $0.086 million of software purchases. Financing activities used $0.050 million for debt-modification costs.
Material changes versus the prior comparable period
- Licensing revenue increased $0.600 million. Group Mobile and Fli Charge added $1.294 million of product revenue; neither segment contributed revenue in Q1 2015 because Vringo acquired them later that year.
- Operating legal costs fell 76.8% to $0.720 million, primarily as costs associated with the ZTE campaign declined after its December 2015 settlement. General and administrative expense decreased 1.5% to $2.952 million; lower stock-based compensation was largely offset by expenses from the acquired businesses.
- Operating cash use increased by $1.927 million year over year, despite the lower net loss. Management attributed cash outflows in part to vendor payments for prior-period costs and lower accounts payable and accruals.
- Weighted-average shares increased to 14.16 million from 9.34 million. Loss per share improved, while the company continued to report a net loss.
Outlook, commentary and risks
- Management expected available funds to cover operations for at least the next 12 months and beyond, and anticipated lower capital needs as litigation costs declined and Group Mobile systems and marketing projects neared completion. It cautioned that future revenue may not offset expenses and additional capital-raising could be dilutive.
- On March 9, Vringo amended its notes: principal was no longer convertible, cash repayment was extended to June 30, 2017, interest rose from 8% to 10% and became payable monthly, and 102% of remaining principal is due at maturity. The company agreed to maintain at least $2.9 million in cash. It also reduced the exercise price of 537,500 warrants from $10 to $3 per share.
- A subsequent event, not Q1 revenue, was a licensing agreement signed April 25 for a one-time $8.9 million payment due within 30 days, in exchange for a perpetual license to certain patents.
- Vringo reported that the ZTE settlement ended the parties’ pending litigation, but some proceedings and patent matters remained unresolved. The ASUS disputes were settled in March 2016. The company reported a pending DirecTV patent suit and no expected material adverse outcome from other litigation.
- On March 16, Nasdaq notified Vringo that it did not meet the requirement for at least three audit committee members. Vringo submitted a compliance plan on April 29 and had not received a response by May 5; delisting remained a risk.
- The March shareholder rights plan was intended to protect tax assets and may deter certain acquisitions. It can trigger at specified ownership thresholds, subject to exceptions and board discretion.
- Fli Charge had not generated substantial product revenue. Group Mobile faced demand, pricing, product-cycle and supplier risks; five named suppliers represented about 80% of its inventory purchases, and supplier agreements were generally short-term and terminable on relatively short notice.
Important facts for investors to verify
- Confirm the intended issuer: this source is Vringo, Inc., not XWELL, Inc.
- Track collection and accounting for the $8.9 million post-quarter license payment and its effect on liquidity.
- Verify note principal, monthly interest payments, the $2.9 million minimum-cash covenant and repayment obligations due in 2017.
- Check Nasdaq’s response to the audit committee compliance plan and whether Vringo retained its listing.
- Assess whether licensing income and the acquired businesses can sustain revenue and reduce cash burn, given the operating cash outflow and continuing losses.
- Monitor unresolved ZTE-related proceedings, the DirecTV case, and potential dilution from warrants and equity issuance.