Seeking Alpha

EDVA's  Instablog

EDVA
Send Message
I am part of a small investment group that combines significant business experience in product marketing and communications with legal analysis and interpretation. My partners and I combine for over 50 years of experience in these fields.
My blog:
EDVA DAILY
View EDVA's Instablogs on:
  • NEW INVESTMENTS: PLUG POWER (PLUG) - INTELGENX (IGXT)

    A week or so ago I was asked what stocks we were investing in lately and why. Since some are not primarily driven by patent enforcement I wasn't necessarily planning to talk about them but for those interested here is what we are dipping our toe into. There is much more information available on these stocks and our attempt here is simply to state our quick thoughts and impressions. This is by no means to advocate anyone following suit only what we have been drawn to. (Repost from Blog

    PLUG Power (PLUG): This is a company that we intend to own (perhaps trading around a core position) throughout the year and that happens to have quite a large stable of patents. In recent days and weeks PLUG has traded as high as $4.90/sh on news of new customer orders and positive guidance for 2014 and as low as $2.22, in large part on the basis of a news vacuum and perhaps the overall market downdraft. The companies that are becoming PLUG customers are best of breed...companies like Kroger, Fed-Ex and Walmart and PLUG has telegraphed new orders to come, some are to be announced this quarter. PLUG is in the hydrogen fuel cell business which was thought to be gaining steam many years ago but turned out to be a bit of hype and wishful thinking, clearly a bit ahead of its time in terms of adoption. It appears that the interest in and adoption of PLUG products has now turned the corner and the market is obviously beginning to pay attention. We think that PLUG will have trading volatility throughout the year since it is such a heavily followed stock and the expectations for revenue growth and profitability have been ramped up. On March 13th CEO Andy Marsh is again expected to address investors in one of a series of investor updates expected throughout the year. He has stated that in that he will guide for the remaining 2014 quarters in terms of both revenue and EDITDA. Should make for an interesting call.

    IntelGenx Technologies (IGXT): This little company has a PDUFA date of February 3, 2013 (obviously not much time to take advantage of this if you are so inclined) for it's anti-Migraine drug which is based upon the underlying agent in Merk's Maxalt Drug which achieves approximately $650M in U.S. sales. The bigger issue here, and the reason we bought the stock and will be holding a significant position through the FDA decision Monday, is that they have developed a patented technology called Versafilm. Versafilm basically allows them to put already approved drugs onto orally dissolving film strips that are apparently (among other benefits such as convenience, not needing water and so on) fast acting. The thing we like about this is that approval in our opinion validates the platform and makes this company a solid takeover target. They already have agreements with big Pharma and there is every reason to believe that dozens of high profile drugs could be applied to this technology. Since they have taken the 505(b)(2) path to regulatory approval (and is the path that would be used in future approvals) which is a far less costly and time consuming path, it is pretty easy to see a bigger pharmaceutical wanting to take these guys out at some point after approval. One interesting thing to note is that the Ex-CEO and his wife recently sold 10% of their holdings (they still hold 9M shares) which caused a major shakeout in the stock. What made us even more bullish is the way the stock immediately popped right back up on strong volume after the shakeout. Those buyers who bought on the way back up are obviously not the day-trader crowd. While we expect approval given the results of the required FDA safety and bioequivalence studies we certainly have no crystal ball and FDA approval can sometimes be a tricky thing. Given what we have seen speculated we put the downside risk at about .50 and the upside opportunity as much as $2. We note an NDA for the next drug in this company's pipeline, based on the underlying agent in the blockbuster ED drug Cialis, is likely to be filed later this year. IGXT closed trading yesterday at .90.

    These are our opinions only. Do your own due diligence or consult with a trusted financial adviser before investing in these or any other equities.

    Disclosure: I am long PLUG, IGXT.

    Jan 31 10:21 AM | Link | 5 Comments
  • WDDD: No Longer Obscure & Ready For Center Stage

    If you are a current investor in Worlds, the investment got a lot taller and better looking on Friday. That may seem like a strong statement given that the stock has doubled since I first alerted investors to it in early January but Worlds Inc. (OTCQB:WDDD), on the brink of finally unlocking the true value of its patents involving 3-D World creation and participation in the Massively Multiple Online Role Playing Game (MMORPG) space, raised $2.3M in what we believe was a highly favorable financing for the company and its investors. The purchasers, namely Hudson, Iroquois and GRQ (affiliated with Barry Honig), bought notes and warrants from WDDD. The notes were issued at a discount of 4 & 1/6% to face value (which is why the purchase amount is less than the aggregate face amount of the notes). The notes bear interest at 14% and are due March 13, 2016. The notes are secured by a pledge of all of the company's assets other than the company's patents, which is an important point for current investors. The notes are convertible at various fixed prices and these prices are subject to certain adjustments. Prior to any adjustment and prior to July 1, 2013, the principal and interest on the notes is convertible as follows:

    The Series A Notes convert at $.50, the Series B Notes convert at $.75 and the Series C Notes convert at $.35.

    After July 1, 2013, the notes convert at the lower of the conversion rates in the preceding paragraph or 85% of the weighted average trading price of the WDDD common stock during the 20-day period prior to the date of conversion. Up to 75% of the Series A and B notes can be redeemed by the company for a 20% premium, subject to the right of the holder to convert the notes instead. The Series C notes (i.e., those convertible at $.35), are not redeemable. For those suggesting that the series C could be or already have been converted this is unlikely as registration is required to sell and once converted the interest is canceled.

    The investors were also granted 4,535,714 warrants. The warrants may be exercised at a strike price of $.50 at any time prior to the fifth anniversary of issuance. The warrants are subject to cashless exercise and a number of other typical features. They are subject to so-called "full-ratchet" anti-dilution protection, which means if the company issues new shares (with certain standard exceptions for stock options and the like) at less than $.50 per share the warrants become exercisable at that lower price. Absent an emergency, this means that the company is unlikely to issue any shares at a price below $.50 per share. The investors were also given standard registration rights and a right to participate in up to 50% of future fundraisings for three years.

    I realize that the foregoing short, high-level summary may beg a few questions. For this reason, I have created a "Q and A." to anticipate some of the likely queries about the financing. (Note: I get questions sent to my personal blog and to my SA inbox and some of the questions below are those questions. I apologize in advance but I will likely not have a lot of time in coming days to answer too many more questions about the financing.)

    Q: Who are the investors?

    A: The investors are Hudson Bay IP Opportunities Master Fund ("Hudson"), Iroquois Master Fund ("Iroquois") and GRQ Consultants inc, 401K. ("GRQ"). The first two funds appear to be affiliates of the well known-hedge funds which bear those names. They are both active players in the PIPE market. Hudson in particular is listed by Bloomberg as a top 100 performing hedge fund. GRQ appears to be an affiliate of Barry Honig, a well-known businessman based in Florida with experience and appetite for investing in small cap stocks with outstanding potential.

    Q: Why did Hudson, Iroquois and GRQ invest?

    A: First, let's look at downside protections: If WDDD were to lay an egg at the Markman (6/27/13) and/or at trial, absent a miracle, the investors will own notes which they cannot collect on March 13, 2016, as well as the right to sell a bunch of collateral that is not worth much and which does not include the company's patents. It is safe to assume that their $2.3 million cash investment is way under water in this scenario and therefore, this is NOT why they invested. A second, more plausible scenario is that similar to a bunch of other WDDD investors, they think (a) the price will increase prior to the Markman (being themselves the proverbial "smart investors," they know the price should lift somewhat just because they jumped in), (b) the price may well double (or better) from its pre-Markman high on news of a successful Markman hearing, and (c) the price will go further north upon a buyout of the company, a settlement with ATVI or a victory against ATVI at trial.

    But let's consider today's status and also what the upside scenario might look like from the perspective of the investors:

    3/18/13 $2.3 cash investment in notes and warrants; investors hold paper with theoretical upside; about 19% of their notes can be converted at $.35, the rest of the note conversion rights and warrants are out of the money until the price moves north of $.50 per share. The shares under the notes and warrants are "restricted' until a registration statement gets filed and becomes effective with the SEC permitting the resale of the shares. (The notes and warrants themselves have no registration rights.) So the investors did not invest for a quick flip - they do not have any shares to sell unless, like the rest of us, they bought them in the open market.

    7/1/13 (The day the second conversion price option under the Notes becomes effective): Let's assume a scenario that permits an exercise of all the in-the-money conversion rights and warrants on this date. The principal and interest (at 14%) on the notes is about $2,500,000 in the aggregate on this date. The three series of Notes break down into roughly 40/40/20% of the total investment amount. Let's assume again, conservatively, that on 7/1/13, after the Markman hearing but before the actual ruling from the Court on the Markman hearing, the price of WDDD shares is $1.00. (I say "conservatively" because I think that the price of WDDD shares will exceed $1 before the hearing and that based on reports (including mine which will be issued at breaks during and after the hearing), if things go well for WDDD the price could well be $2-3, or more.) Thus, I assume that the alternative conversion pricing of 85% times the 20-day weighted average price is not going to be relevant because it will be higher than the fixed prices of $.35, $.50 and $.75 and more favorable to the investors. At an assumed $1 PPS, upon exercise of all of the Notes the investors would receive about 4,726,190 shares of WDDD common worth $4,726,190. So the gain on the investment in the Notes as of this date would be $2,426,190, a tad over 100%.

    But wait, there's more: the warrants are now in the money and there are 4,535,714 shares available under those warrants at a price of just $.50! So this is worth another $2,267,857 upon exercise. So now the profits on that $2.3 million investment come to $4,694,047 - so we now have a 200% return in under 5 months. To the extent the share price on 7/1/13 (in my hypothetical conversion) or on the date of actual conversion is greater than $1, as I believe it will be, the profits for the investors will be even greater. We feel strongly that Hudson and Iroquois did not invest with a view to flipping on a successful Markman, so our 7/1/13 hypothetical is just that. (For what it is worth, according to its SEC filings, Iroquois still owns most of its VRNG position so at this point it would be hard to characterize them as a "flipper.") Their returns and other WDDD longs' returns could go up and down after that date depending on the usual factors involved in patent litigation.

    Q: What does Worlds get in this investment?

    A: For one thing, the amount of cash Worlds gets (which will be placed in an account over which the investors will have control-and our guess is that this was done to prevent unsecured creditors of the company from having any incentive or means to get their hands on these funds) will allow the company to largely or entirely clean up its balance sheet, which was one of the perceived risks of the WDDD profile. It could also allow the company to do other things such as: (1)hire additional team members, expand its board of directors, upgrade its SEC reporting or IR efforts, complete more road shows, etc.; (2) file more lawsuits (and there are plenty of potential additional infringers out there) and possibly"buy down" the legal fee contingency rate on current or future lawsuits by agreeing to pay a portion of the costs (nothing against Max Tribble and SG but I would rather WDDD pay them, say, 35% than 40%, with the resulting discount potentially worth millions), and (3) engage in strategic discussions with would be acquirers without having a balance sheet that signals weakness, (4) engage in further R&D and innovation, and so on.

    Q: What has happened to the company's capital structure? Does this increase the float? Does this dilute existing WDDD shareholders?

    A: At present, no shares of common stock have been issued to the investors because they have not exercised their conversion options or warrants. Thus, these underlying shares have not been added to the "float" and cannot be traded until they are registered with the SEC. These shares are indeed dilutive to existing owners. Keep in mind however, that dilution, like cholesterol comes in two forms: the (relatively) "good kind" which in this case is merely "ownership dilution", which simply means more shares got issued and the company raised money, and "price dilution", the "bad kind" which is when a company sells shares below the current trading price. The conversion price of the C Notes at $.35 was probably struck to take into account a 20- day average price leading up to the announcement of the deal so there was effectively zero price dilution - in fact more than 80% of the Notes and 100% of the warrants convert out of the money as of the date the deal was announced.

    Q: What does this mean for John Q Public who owns shares that he bought in the market?

    A: I think John is far better off now than he was before this deal got announced. For one thing, keep in mind that in my scenario above, the market cap of the company would be about about $70 million on 7/1/13, including the shares under the assumed conversion of notes and assuming the investors simply hold onto their warrants. So the existing shareholders will see the price of their shares double. Likewise, at higher prices we all own shares that we can eventually sell at much greater profit.

    Q: What will this deal do for liquidity of our holdings?

    A: In the short term, I think this transaction will result in a modest improvement in liquidity. Here's why: the reputation of these investors will likely draw significant additional investors to the stock, increasing the volume and liquidity. In the very recent past, a 100k-share order had a bit of an impact on price and it would be hard to sell that block "at the market." I think that in the near future there will be larger trades in the quotation system and the volume will pick up. If you like to think of your WDDD stock as a liquid asset, this is a good thing.

    With the addition of these institutional shareholders to WDDD's base the overall volume in the stock should intensify making this stock more liquid for all of us (though it could also become more volatile). However, the fact of the matter is that the increased share count (assuming conversion of the notes and exercise of the warrants) should actually alleviate possible volatility. The shares issue-able upon conversion would add about 4.8 million to the total outstanding (using the hypothetical price and conversion date I used above; the number will grow to cover the amount of interest accruing after that date (interest is also convertible) unless and until the company calls the Notes for redemption (which will force their conversion if the notes are in the money). Prior to the issuance of these new securities, per the company's rep in section 3(r) of the purchase agreement, the company had outstanding commitments to issue 10,562,500 shares under options and other common equivalents and it now has the notes and warrants that are also convertible/exchangeable into common stock.

    Q: Does this financing set us up for a listing on Nasdaq or Amex (NYSE Mkt)?

    A: Not in and of itself, no. But it is an important step in that direction. The alternative listing criteria of the exchanges permit issuers to qualify in various ways but Worlds does not currently meet any of them. However, if its share price approaches $1 they could begin thinking about the mechanics of this. (There are other non-quantitative requirements for listing but these are usually fairly easy to meet.) My $.02 is that even if the price of the stock gets to $1.00 (we actually just need a $75 million market cap, to be precise) the company is better off waiting until after the Markman (assuming it is positive) and then potentially doing a reverse split (unless the price is robust enough which it could be) in connection with (a) a Nasdaq or Amex listing, and (b) a secondary offering or private placement that will allow it to call the redeemable portion of the March 2013 Convertible Notes (they will get converted instead because they will be in the money if the Markman hearing goes well, and thus this debt will become equity on the balance sheet). Assuming that any funds raised will not actually get used to redeem Notes, these funds can then be used to clean up WDDD's balance sheet by paying off any of its remaining payables. Calling the Notes will allow the Company to stop the accrual of the 14% interest rate on 75% of the series A and B Notes, which constitute over 80% of the total loan amount. I can envision circumstances that would make a listing with no secondary offering preferable, but again I think the Company should wait until after the Markman to do a listing (and I strongly believe they will), which could then come six to nine months down the road.

    Q: Does WDDD really need this money and if so did they raise too much?

    A: One could argue that WDDD does not have an immediate need for $2.3 million (although it fixes a hole in its balance sheet caused by unpaid payables and loans) but the price to pay for bringing in these kinds of investors is that you have to give them an opportunity to put some money to work. I think the right balance was struck. (BTW, I saw this sort of PIPE deal happening at a point when the price was at $.50. Given the out-of-the money conversion and warrant pricing that the company negotiated, I think this deal is NOT premature from the company's standpoint.)

    Q: Are Hudson, Iroquois and GRQ now insiders of the company? Are they subject to any restrictions on trading?

    A: Unless these investors own more shares than they bought in the financing, they are not likely to be insiders who are subject to any reporting obligations or any duty to refrain from trading in WDDD shares. (Note that they did not obtain any control rights with respect to WDDD, such as the right to sit on the board. In all likelihood, the only non-public information they had about WDDD was that they were about to announce the financing. Now that the financing has been announced, these investors are free to buy and sell shares like the rest of us, and to speak to people they know about Worlds. To the extent that actions speak louder than words, once again the mere fact that these folks invested is likely to attract interest in the stock. Hudson and Iroquois are known commodities and Honig has a history of investing in public companies and is often accompanied in such investments by billionaire investor and businessman Philip Frost. These investors have other cohorts as well, billionaires among them. Accumulation by these folks or their friends can be expected and it will take place anonymously unless and until one of them (or a group) reaches a 5% ownership threshold. This is perfectly legal and is nothing but good news for current shareholders.

    My strong sense is that these investors have done their homework on the patents and the ATVI case. (Full disclosure: my group has been studying the patents for several months. We continue to study the prior art references cited by the defendant and are matching them up to the PA listed in the most recent WDDD patents. We have not completed that work or I might have more to say on that topic).

    Q: How does this deal rate from the standpoint of WDDD and the standpoint of current investors?

    A: We rate it an 8.5/10 for both sides. I had initially thought $1 pre-Markman, which I said when I first started a public dialogue on Worlds. My own damages analysis broadened that range slightly. In my earlier analysis while I was hoping to see a major investor enter the scene I did not add that to my estimate. With this new investment a case may be made for exponential movement. I am not saying that will happen but many factors may be brought to bear here. They include: elevated marketing exposure, increased press coverage, additional lawsuits and additional and potentially much bigger investors coming aboard. That list is hardly exhaustive but it forms the rationale for the elements that would provide greater movement.

    A note to those on the sidelines wondering when is the right time to get in. Each minute, each hour, each day that passes by you run the risk of a significant price surge the likes of which we have not seen thus far. My sense is that even those with an instinct to flip for small gains hoping to get back in for a few pennies less have realized that is a fool's errand. In my opinion this stock remains significantly if not dramatically undervalued. Whether that changes today or this week I can't say for sure but it will change and soon.

    Disclosure: I wrote this analysis with a member of my group who is an attorney with a long-standing background in securities law. Please do your own due diligence before investing in this or any other investment. We are long VRNG and long WDDD. After the financing on 3/15/13 was announced we added 20% to our current WDDD position and depending upon other developments we may add more.

    Disclosure: I am long VRNG, OTCQB:WDDD.

    Additional disclosure: Please do your own research before purchasing this or any other investment.

    Mar 19 9:42 AM | Link | 8 Comments
  • Worlds Inc. (WDDD) Making A Move

    I have had several people email me in the past couple of days asking about the recent rise in Worlds Inc. (OTCQB:WDDD) and what could be expected from here. In early January I mentioned it in a Yahoo post as an attractive patent play for those looking to diversify a little from the likes of VRNG, VHC, PRKR and...well you get the idea. The reason WDDD caught my eye is at a price of .21 with an attractive share structure and a relatively low float (confirmed by Worlds CEO Thom Kidrin in an interview with joenatural here-make sure to read down to the update in the comments section) combined with the prospect of a total award in the $500M range, this appeared to be a prospector's dream. At a closing price of .44 Wednesday the market would seem to agree. Worlds currently has 82M shares outstanding with only 100M authorized. Having recently raised over $300K Mr. Kidrin states the company has enough cash for the next 12 months. Since the venerable firm of Susman Godfrey has taken Worlds' case on a contingency basis, it appears the cost of operations are little more than SEC filing fees, modest salaries, consulting and administrative.

    In their lawsuit against Activision, Worlds cites no less than 59 claims of infringement across a handful of patents in the Massively Multiplayer Online Role Playing Game space (MMORPG). Remember that for a finding of infringement only one claim need be infringed. Note: One of the things that I look for is who does the original prosecution of the patents. That patent work was done by Townsend, Townsend and Crew, a well respected and first-rate boutique IP firm out of San Francisco (now Kilpatrick Townsend & Stockton LLP). In short Worlds created the ability for people, hundreds of thousands of people in fact, through player/Avatars, to enter a 3-D 'World' where they could play in the same game together seamlessly.

    One of the things that stands out in evaluating WDDD's future prospects (since no one likes a one trick pony) is the realization that to play a MMORPG game it appears one must use the technology created by Worlds Inc. Thus there are many other potential infringers beyond Activision in a space of some $13b annually. Mr. Kidrin mentioned in an interview that he expected the District Court in Massachusetts to schedule a trial (if necessary) within 8 months of the Markman Hearing which puts the date somewhere in the first half of 2014. Interestingly, The District Court adopted rule 16.6 in 2008 to better streamline patent cases and in-so-doing has made Massachusetts a more inviting home for Patent litigants.

    Demand for the stock is compelling and the volume on successive days this week has been over 2 Million shares which marks the most ever for the company. WDDD has an all important Markman Hearing coming up on June 27th where in a majority of cases the party that prevails in such hearings often prevails in the litigation. My own take is that Worlds was undervalued from the start and in many ways that stems from lack of recognition by investors. Worlds is a very small company that had struggled to survive for many years but which has developed technology that it appears numerous companies are making billions from. It is now ready for its long awaited day in court. And before you label Worlds a patent troll please understand that the original Worlds patents were created by Worlds employees or those under contract with Worlds to do so.

    One thing that it appears investors are beginning to realize is that there is limited risk in a pre-Markman stock. By way of example many people (including me and those I work with) are awaiting Judge Jackson's final post-trial rulings in the Vringo v. Google case at the time of this writing. That is far from a risk-free trading zone. While I expect the Judge to affirm the jury's verdict and the stock to ultimately find a home far north of where it is, a ruling for Google's motion for judgment as a matter of law with respect to infringement, for example, would be disastrous for Vringo and its shareholders (at least near-term and the battle would be uphill from there). Worlds does not face such peril at this time and is not likely to until we await the results of the Markman Hearing which are likely to come at end of July.

    So what would a Markman win mean for Worlds? I'm guessing we could see a valuation of some $200-250M as the court will have sent its strongest signal as to how it will determine things at trial. I think we could see half of that number leading to June 27th because people by their nature are more optimistic in these cases, especially when they see attorneys of the caliber of Max Tribble (lead counsel for Susman Godfrey in the Worlds case) lining up to face down the likes of Activision. I won't do it here because others have done it so well elsewhere, but do a little diligence on Max and on Susman Godfrey in general and you will know what I'm talking about. None of this is to say that Worlds case is a slam dunk, far from it, but given what I have seen thus far I like their chances.

    Disclosure: I am long OTCQB:WDDD, VRNG.

    Additional disclosure: This instablog is published for informational purposes only and the author advises anyone interested in any of the companies mentioned to do their own due diligence or speak with a qualified investment professional prior to investing in these or any other companies.

    Feb 28 8:54 AM | Link | 19 Comments
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.