Filing summary
Entity and period: The supplied filing is Vringo, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2012. This conflicts with the request metadata identifying XWELL, Inc.; the filing text does not identify XWELL as the registrant. Financial amounts below are in U.S. dollars, generally thousands unless stated otherwise.
Business context
Vringo described itself as a development-stage mobile software company, with products including video ringtones, Facetones, Video ReMix and Fan Loyalty applications. It reported services launched with carrier and other partners, but said it had not generated significant revenue from its planned principal operations. The company had 24 full-time and four part-time employees as of March 31, 2012.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue | $106 | $147 |
| Cost of revenue | $31 | $25 |
| Gross profit / margin | $75 / 70.8% | $122 / 83.0% |
| Research and development | $512 | $519 |
| Marketing | $759 | $621 |
| General and administrative | $1,460 | $665 |
| Operating loss | $(2,656) | $(1,683) |
| Net loss | $(5,644) | $(1,109) |
| Basic and diluted loss per share | $(0.46) | $(0.19) |
| Cash used in operating activities | $(1,215) | $(1,517) |
At March 31, 2012, cash and cash equivalents were $3.63 million, current assets $3.93 million, current liabilities $1.21 million, and working capital approximately $2.7 million. Total assets were $4.07 million and stockholders’ equity was $1.02 million. Long-term liabilities included $1.84 million of derivative warrant liabilities; the balance sheet showed no conventional borrowing balance at quarter-end. Cash increased $2.44 million during the quarter, principally from $3.65 million of warrant exercise proceeds. Financing cash flow was $3.65 million; investing cash flow was $(5,000).
Changes versus the prior comparable period
- Revenue fell $41,000, or 28%, principally due to lower one-time setup and Video ReMix revenue and a decline in Maxis subscribers; new Malaysian and UK revenue partly offset the decrease.
- Operating loss widened by $973,000. General and administrative expense rose $795,000, mainly from merger-related professional fees and share-based compensation; marketing expense increased $138,000.
- Net loss increased by $4.54 million, including a $2.57 million non-operating charge for reload warrants issued to induce warrant exercises, along with warrant fair-value remeasurement. Thus, net loss reflected substantial warrant-related non-cash or non-operating effects.
- Operating cash use improved by $302,000 year over year, while cash proceeds from financing shifted from a $345,000 outflow in Q1 2011 to $3.65 million of warrant exercises in Q1 2012.
Outlook, risks and unusual items
- Going concern: Management and the filing disclosed substantial doubt about the company’s ability to continue as a going concern. The company reported cumulative losses of $43.2 million and cumulative operating cash use of $30.5 million since inception. It expected continued losses and said continuation depended on the proposed merger, further financing or other strategic transactions, and product development.
- Runway and funding needs: The filing gives differing runway statements: the financial-statement note says existing cash was expected to support activity into Q1 2013, while MD&A says that after taking the proposed merger into account, cash would support activity into Q4 2012. Management estimated additional resources of $0.9 million and $4.4 million for the 12-month periods ending March 2013 and March 2014 on a standalone basis, and $4.3 million and $11.8 million for the combined company. These needs included estimated merger and integration costs. Management also anticipated possible proceeds of up to $5 million from additional warrant exercises, subject to registration, market price and holder action; these proceeds were not assured.
- Proposed merger: Vringo agreed to merge with Innovate/Protect, with closing subject to shareholder approval and other conditions. Management estimated a Q3 2012 closing. The transaction was expected to materially dilute existing shareholders; former Innovate/Protect holders were projected to own approximately 67.55% of the combined company on a fully diluted basis. The merger was not yet completed.
- Other unusual items: Vringo raised $3.65 million through February warrant exercises and issued reload warrants for 2.66 million shares at $1.76 per share. The CEO’s separation agreement resulted in accrued severance of $233,000 and continued option vesting provisions. The NYSE Amex notified the company in April 2012 that a prior continued-listing deficiency had been resolved, subject to ongoing eligibility review.
- Controls and risks: Management concluded disclosure controls were ineffective and identified a material weakness in accounting for equity, debt and derivative instruments; remediation included greater use of external valuation and accounting experts. Risks included the merger failing to close, further dilution or inability to raise capital, dependence on carrier partners and advertising, rapid technology change, regulatory and currency exposure, reliance on Facebook access for Facetones, and lack of redundant data hosting.
The filing provided no formal financial guidance. Management expected continued operating losses, anticipated higher merger-related and other costs, and said revenue growth depended on product adoption, partnerships and monetization.
Important facts for investors to verify
- Confirm the registrant: the supplied document is Vringo, Inc., not XWELL, Inc.; resolve the entity and period mismatch before relying on this summary.
- Check the merger’s closing status, shareholder approvals, final consideration, dilution and post-merger funding requirements.
- Verify the registration and exercise status of reload warrants and whether expected proceeds were actually received.
- Reconcile the filing’s differing cash-runway statements and assess actual cash burn against the stated funding needs.
- Review the material weakness remediation and subsequent disclosure-control assessments.
- Assess revenue quality and customer concentration, including subscriber trends, carrier payment timing and dependence on Facebook and mobile platforms.