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Vringo's Fundamental Value

|Includes:FORM Holdings Corp. (FH), GOOG, IDCC

Vringo (VRNG) recently announced its victory against Google (NASDAQ:GOOG) and affiliated customers of Google in a patent infringement. The news of the initial awards seemed to disappoint investors at first blush. However, after further review, the win is certainly a major positive for VRNG shareholders. Here are VRNG's achievements from yesterday:

1. Vringo's case against AOL, Inc. ("AOL"), Google, Inc. ("Google"), IAC Search & Media, Inc. ("IAC"), Gannett Company, Inc. ("Gannett"), and Target Corporation ("Target") (collectively, "Defendants") with respect to the Defendants' infringement of the asserted claims of U.S. Patent Nos. 6,314,420 (the "'420 Patent") and 6,775,664 (the "'664 Patent") (collectively, the "Patents") was a victory in terms of the Patents validity and subsequent infringement by the Defendants. This victory could pave the way for licensing arrangements which would avoid new litigation against other infringers and quickly develop cash flow.

2. This win in court gives VRNG the credibility in terms of their legal teams' capabilities and the soundness of their intellectual property "IP".

3. Through this litigation process, Vringo also demonstrated their ability to seize an opportunity to strengthen their balance with a direct stock sale without any extraordinary dilutive terms such as additional warrant coverage that are seen in other small companies that need cash.

4. The process has also created a lot of volume in the name which has its advantages in further financings if VRNG should need it.

5. VRNG can use its stock as currency to acquire new IP to bolster their portfolio. A veteran of the IP litigation world, Interdigital (NASDAQ:IDCC) has done this successfully and built a fundamentally strong cash flow earnings driven business around it.

Ultimately the question for Vringo is how many shares are in existence and how do we calculate Vringo's fundamental value.

First we need to look at the VRNG's SEC filings to see how many shares there are on a fully diluted basis. We think the larger share count on this basis is why the short sellers are comfortable selling this stock short right now. The most current filing is the prospectus supplement filed with the SEC in conjunction with the company's last direct equity sale described above. We copied this excerpt from the offering prospectus to show the cap chart for VRNG as follows:


The Offering

Common stock offered by us   10,344,998 shares
Common stock to be outstanding after this offering   75,756,269 shares
Price per share of common stock   $4.35
Use of proceeds   We intend to use the proceeds from this offering for general corporate working capital purposes. See "Use of Proceeds" on page S-6 of this prospectus supplement.
Risk factors   Investing in our common stock involves a high degree of risk. See "Risk Factors" beginning on page S-5 and page 7 of the accompanying prospectus.

The number of shares to be outstanding after this offering is based on 65,411,271 shares of common stock outstanding as of October 4, 2012. It does not include:

  9,434,660 shares of our common stock issuable upon exercise of stock options outstanding as of October 4, 2012 under our equity incentive plan as of that date, at a weighted average exercise price of $3.23 per share;
  3,123,334 shares of our common stock underlying restricted stock units outstanding as of October 4, 2012 pursuant to our equity incentive plan for employees, directors and consultants;
  6,998,333 shares of our common stock are available as of October 4, 2012 for future grant or issuance pursuant to our 2012 stock-based plan for employees, directors and consultants; and
  21,538,440 shares of common stock issuable upon the exercise of warrants outstanding as of October 4, 2012 at a weighted-average exercise price of $2.48 per share.


Lets take the 75,756,269 shares and add in the 9,434,660 shares options which are above the strike price and we can assume they will be exercised described in the first bullet point above. Then we add the shares from the second and fourth bullets for employee restricted stock units or "RSU" and the warrants with the exercise price of $2.48. The grand total of the fully diluted shares comes to 109,852,703. also important to note here is the warrants and option being exercised will bring $53,415,331 and $30,473,951 or $83,889,282 to the company adding to it value and market cap at least dollar for dollar.

So lets do a few more calculations to see what VRNG might be worth given a $500 million win yesterday as reported by several media outlet articles. Lets assume that VRNG has $50 million in cash today then add in the $500 million win then add the $83.9 million from warrant and option exercise and we have over $663 million. Dividing this by the fully diluted shares, we get a $5.77 per share number. This of course does not account for taxes or for future earnings which will come in licensing and litigation activities. If we take 30% off the $500 million win for taxes and divide the cash, it works out to $4.40 per share, which we believe is a base value for the stock as it sits today.

We do think that there may be some adjustments to the jury's monetary calculations after VRNG makes their post trial filings with Judge Jackson. VRNG said it is reviewing the formulas they provided at trial which the jury may have incorrectly used in their calculations. This may add present and future royalties to the total award to Vringo. We believe this may add to the many positive developments from this litigation.

Disclosure: I am long VRNG.

Stocks: FH, GOOG, IDCC