One of the most overlooked data points in an IP-centric investment is the failure of investors to understand or locate the information pertaining to the share structure of the investment. The majority of the publicly traded IP-centric investments, or non-practicing entities (NPE), are typically spawned out of a reverse merger from a shell holding. They typically have legacy shareholders, past financing deals that include options/warrants, convertible notes, and they will have a transaction to merge the assets (patents) into the new company. All of the related information is disclosed in a company's SEC filings.
For all of my investments, but most importantly my IP investments, I keep an excel spreadsheet detailing the applicable information. When trying to determine an accurate valuation for the IP investment, I prefer to use the fully diluted value instead of using the outstanding share count. This article is not a comparison or evaluation of the prospects of the investments. Each company is in a substantially different period in their respective company's existence.
The first IP investment I want to discuss is Worlds.Com Inc (OTCQB:WDDD). Based on the 14A Proxy filing there are 103,153,250 fully diluted shares outstanding. We can break that down to 84,755,155 shares outstanding, 18,398,095 covered by options, warrants, and convertible notes. The company is currently authorized for 100M shares, which the company is voting on July 18, 2013 at the annual shareholders meeting to increase the authorized shares to 150M. The majority of the options are tied to CEO Thomas Kidrin who owns 1,290,000 shares and 7,500,000 options priced at $.076. The option expires on March 31, 2014.
The convertible note is a little more tricky with July 1, 2013 upon us. The Convertible Series A, B, and C notes will no longer be restricted by their rate of $.50, $.75, and $.35 price. The conversion will adjust to the lower of x, the conversion rate described above, or y, 85% of the average of the daily VWAP of each trading day during the twenty (20) consecutive trading day period ending on the trading day immediately prior to the conversion date, subject to adjustments as provided in the Notes.
I expect roughly 7-10M shares to be issued as the notes convert. The company has reserved 12,246,428 shares for issuance to the note holders. The third quarter quarterly filing will be important to read to update the fully diluted share count. Worlds.Com Inc currently has a fully diluted value of $30M. The rescheduled Markman Hearing in August and subsequent Markman Opinion will be the key drivers for the share price over the rest of 2013. How the additional dilution affects the share price prior to the Markman hearing will be very interesting to watch.
The second IP investment I want to discuss is Acacia Research Corporation (ACTG). Acacia's ownership is very straightforward as there are currently only 47,859,774 shares outstanding, and 494,670 equity based stock options. Shareholders approved the 2013 stock incentive plan authorizing 4,750,000 shares to be issued to employees for incentives. The company announced on April 23, 2013 an authorization to buy back up to $100M of its common stock through August 15, 2013. Based on the $20-$25 trading range the stock has been under, I anticipate roughly 4.5M shares that the company is able to buy back. Acacia is not obligated to buy any shares back but they would be very wise to do so. I anticipate that they will buy back between 500,000 to 1,000,000 shares under this purchase. Shares are trading near two year lows:
The second and third quarter reports should disclose how many shares the company bought back in their corresponding time periods. The fully diluted value of Acacia is $1.05B. The only way I see additional dilution is if a highly valued patent portfolio was placed on the market and Acacia bought the portfolio with stock. The Adaptix portfolio they purchased in early 2012 is a good example of a company Acacia might target in the future.
Last, we come to Vringo Inc (VRNG). Vringo currently has 82,766,635 shares outstanding through May 31, 2013, 18,769,114 warrants, 11,583,888 options, and 3,336,375 restricted stock units. The fully diluted count is roughly 116M shares for a June 28th valuation of $365M. Vringo is currently waiting for Honorable Judge Jackson to write his final opinion, specifically the hotly debated running royalty rate. Understanding the fully diluted value is very key for Vringo shareholders as a significant portion of Vringo's valuation is tied into the running royalty rate, which needs to translate into significant cash flows to justify the $365M valuation.
Vringo will record additional cash on the books due to the warrant and option exercise for around $102M. I don't expect the option/warrant l dilution to be recorded materially in 2013, unless Vringo trades over $5.06 for a substantial amount of time. The $5.06 price is a result of the October 2012 cash raise where 3,000,000 were issued. The 15,000,000 2012 merger warrants would be well in the money, which the holders would likely want to exercise.
Conclusion: Understanding a company's share structure is very important to understand in an IP-centric investment in order to best evaluate whether a certain investment fits in your portfolio. An investment can be impacted by financing transactions that will affect a stock performance in the short term and the long run.