Vringo Inc., (NASDAQ:VRNG) has been a roller coaster ride for many investors. It recently executed a 1 for 10 reverse split and closed Friday at $1.60 a share. Over the past several years it has traded as high as $40 (split adjusted). At one point, it appeared poised to win monster patent damage awards and the stock soared but then it all slipped away after an adverse Federal Circuit Court decision and investors took a horrible bath. It recently reached a settlement with ZTE - one of its patent antagonists - which generated substantial cash. Now, VRNG is popping up on the screens of deep value investors.
The Balance Sheet - VRNG just released a business update which indicates that it has $27 million in cash and court deposits and $3.6 million in debt (which it intends to pay off). I calculate net cash at $23.4 million. As of the close of the last reporting period VRNG had 110.63 million shares and it issued (directly or indirectly) 16.66 new shares in connection with the acquisition of IDG, which owned Group Mobile and Fli Charge. These share numbers are pre-reverse split so that current share count should be 12.73 million. Thus, net balance sheet cash is $1.84 per share or 24 cents per share more than market cap.
The Patent Portfolio - VRNG has some patents of its own and also acquired a patent portfolio from Nokia (NYSE:NOK). It paid some $22 million for the Nokia portfolio. VRNG just reached a nice settlement in a patent dispute with ZTE, which is the primary reason for the large amount of balance sheet cash. It is very hard to determine how much VRNG will be able to generate from licensing its patents in the future and uncertainty in this regard has been the major factor leading to high volatility in the shares. There is obviously some value in the patent portfolio but it is admittedly hard to quantify. It should, however, be a source of positive cash flow.
Group Mobile - In October 2015, VRNG acquired IDG and thereby acquired two new businesses. It paid for IDG with convertible securities which, given the price of VRNG stock at the time of the acquisition, should be valued at a total of $6.35 million. The businesses generate gross revenue of about $7 million. We will likely get much more detail when VRNG's next quarterly report appears. The Group Mobile business involves the distribution of "rugged" or durable computers. These are frequently used by the military, police departments and security agencies as well as other entities that require computers which can operate under difficult physical conditions. This is a nice "meat and potatoes" business that should be able to generate relatively stable cash flow. The industry is large with the total market estimated at $5 billion and is now organized with relatively small "mom and pop" players. VRNG has lots of room to grow in this market through either a roll up strategy or by developing a top notch sales force and growing internally. Cash flow and a reasonable amount of growth are achievable without any heroic efforts, new breakthroughs, or customer acceptance of new products. This is a "block and tackle" situation rather than a "Hail Mary pass" situation and VRNG should be able to grow the business at a steady rate and generate stable cash flow.
Fli Charge - Fli Charge (the other business acquired in the IDG deal) is the business with the big potential upside. Fli Charge makes pads which can recharge a variety of electric powered devices (cell phones, power tools, etc.) without charging cords. The devices are simply placed on a Fli Charge pad and charge in a reasonable time. Multiple devices of different types can be charged at the same time on the same pad. The technology involves "conductive" charging and requires contact and, in that sense, is a bit less futuristic than the remote charging technology which other entities are developing. It also has a number of advantages over remote charging and should become popular with auto manufacturers, furniture companies and a number of other companies whose products these pads can be embedded. Fli Charge could grow rapidly as the conductive technology for recharging is adopted in various applications.
Conclusion - VRNG has made the transition from being a speculative "grand slam home run" stock to becoming a deep value ("less than balance sheet cash") stock. This is always a difficult transition because these two types of stocks appeal to very different types of investors and there is always the danger of losing the first audience before you have captured the new audience. I remember when this happened to Apple (NASDAQ:AAPL) early in this century with AAPL trading for less than net balance sheet cash. And I'm in no way suggesting that VRNG is another AAPL. But VRNG - at this price - offers asymmetric rewards. The upside is that Fli Charge becomes huge and the company explodes on the upside. The reasonable downside is that the VRNG continues to generate some cash by licensing patents and that the Group Mobile business achieves slow but steady growth. As a result, VRNG begins to generate positive cash flow and trades at an enterprise value which is a reasonable multiple of that cash flow. It is, of course, always possible that VRNG will simply run through its cash by losing money on its businesses. However, in the business update referenced above, management has indicated that the cash on hand should be sufficient for at least four years. It, therefore, seems that management is committed to a disciplined approach to growth.
We don't have a quarterly report reflecting the performance of the new businesses and, because the new businesses were acquired in the fourth quarter of 2015, the report for that quarter will probably not give us the picture we need. I am looking for this stock to pop if the report for the first quarter of 2016 provides analysts with data they can use to value the new VRNG.
Disclosure: I am/we are long VRNG, AAPL.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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