Filing summary
Entity mismatch: The supplied filing is Vringo, Inc.’s Form 10-Q, not a filing for XWELL, Inc. The summary below describes Vringo and should not be attributed to XWELL.
Business context and reporting period
The filing covers the quarter and nine months ended September 30, 2011. Vringo described itself as a development-stage mobile software company, with products including video ringtones, Facetones, Video ReMix, and Fan Loyalty. It reported limited revenue and ongoing dependence on external financing.
Financial performance and condition
Amounts below are in U.S. dollars; financial statement amounts are in thousands unless noted.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $182 | $54 | $556 | $128 |
| Gross profit (loss) | $147 | $(10) | $451 | $(3) |
| Operating expenses | $1,699 | $1,727 | $5,409 | $4,795 |
| Operating loss | $(1,517) | $(1,673) | $(4,853) | $(4,667) |
| Net loss | $(2,050) | $(2,832) | $(4,663) | $(9,441) |
| Net loss per share | $(0.32) | $(0.51) | $(0.78) | $(4.15) |
Gross margin was approximately 81% in both 2011 periods, compared with a gross loss in the comparable 2010 periods. The company attributed higher revenue mainly to Malaysia and product-development work; Q3 2011 revenue also included $45,000 from Facetones development. Lower Q3 research and development and marketing costs partly offset higher general and administrative expense. Nine-month general and administrative costs increased 74%, partly due to public-company, financing, and merger-related professional fees.
Operating cash use was $4.094 million for the first nine months, versus $4.734 million a year earlier. Cash and equivalents were $1.713 million at September 30, 2011, down from $5.407 million at year-end 2010. Current assets were $2.084 million against current liabilities of $3.339 million, or negative working capital of approximately $1.255 million. Stockholders’ equity was negative $3.393 million.
Vringo raised $2.5 million through secured convertible notes in July 2011. At quarter-end, the notes had a carrying amount of $2.447 million and were due January 1, 2012 unless converted or otherwise addressed under their terms. The prior venture loan had been settled and repaid in 2011. The company also reported $2.156 million of warrant derivative liabilities, valued using significant unobservable inputs.
Changes, outlook, risks, and unusual items
- Nine-month revenue increased 334% year over year, but remained small relative to operating costs. Net loss improved from 2010, when substantial bridge-financing-related interest expenses contributed to the loss.
- A $963,000 gain from restructuring the venture loan helped the 2011 nine-month result. Warrant revaluation produced a $386,000 expense for the period; these and other financing-related items make net results less indicative of operating performance.
- Management said existing cash was expected to fund operations into Q1 2012. If a planned stock financing was completed and the notes converted, it expected funding into at least Q2 2012. Without financing or conversion, the notes and accrued interest would become payable January 1, 2012, and Vringo said it lacked cash to repay them. The filing states there was substantial doubt about the company’s ability to continue as a going concern.
- The planned stock offering required shareholder approval to issue shares exceeding the NYSE Amex 19.99% threshold. The offering funds were held in escrow pending approval; failure to obtain approval would prevent the offering and require funds to be returned. Additional equity could substantially dilute existing holders.
- NYSE Amex had accepted Vringo’s compliance plan, with a target of December 31, 2011; failure to regain compliance could lead to delisting. The company also reported that its disclosure controls were ineffective due to material weaknesses involving financial-reporting controls and segregation of duties.
- Subsequent developments included a cooperation agreement with Zlango that replaced a proposed acquisition, and a November 2011 agreement to preload Facetones on certain ZTE Android handsets. These were announced after the reporting date and do not establish realized revenue.
- Other identified risks include dependence on mobile-carrier and content partners, access to Facebook photos for Facetones, lack of redundant data hosting, foreign-exchange exposure to the Israeli shekel, and rapid technology and market changes.
Important facts for investors to verify
- Confirm the filing issuer: the document identifies Vringo, Inc., not XWELL, Inc.
- Verify the status and terms of the proposed stock financing, shareholder approval, and conversion or repayment of the January 2012 notes.
- Check subsequent cash balances, operating cash burn, and whether the stated funding runway was achieved.
- Assess actual paid-user revenue and commercial performance of carrier, Facetones, and ZTE arrangements, rather than relying on partner reach, downloads, or announcements.
- Review progress on NYSE Amex listing compliance and remediation of the disclosed control weaknesses.