Wireless Ronin updates SEC filings in preparation for going public via IPO

As we noted a few months ago, digital signage company Wireless Ronin wants to go public, and despite the seemingly impossible math, they seem to be making some progress. I noticed yesterday that they just updated their filings with the SEC, which gives us some insight into how they burn cash, and what they want to do with the $25M that they're trying to raise from their IPO. I'm not a lawyer, I'm not an accountant, and I'm not really qualified to do any kind of thorough financial review of a private company preparing for an IPO, so please take the rudimentary analysis below as my personal opinion and speculation, and nothing else.

First, here's Wireless Ronin's cash flow statement for the past few years:

												Nine Months Ended
				Year Ended				Year Ended
				December 31,				December 31,				September 30,				September 30,
				2005				2004				2006				2005
												(Unaudited)				(Unaudited)
Cash flows used in investing activities
	Purchases of property and equipment				(272,114	)			(257,634	)			(280,311	)			(218,779	)
		Net cash used in investing activities			(272,114	)			(257,634	)			(280,311	)			(218,779	)
Cash flows provided by financing activities
	Net proceeds from bank lines of credit and short-term notes payable				400,000				450,000				4,825,000				(150,000	)
	Payment for deferred financing costs				(100,000	)			—				(864,509	)			(100,000	)
	Payment for prepaid offering costs				—				—				(354,973	)			—
	Net proceeds from short-term notes payable — related parties				200,000				—				400,000				133,805
	Proceeds from long-term notes payable				—				1,634,740				195,300				—
	Proceeds from long-term notes payable — related parties				3,000,000				113,750				—				3,000,000
	Payments on long-term notes payable				(1,023,069	)			(372,653	)			(657,336	)			(748,787	)
	Proceeds from issuance of common stock and equity units				1,215,000				—				—				1,215,000
		Net cash provided by financing activities			3,691,931				1,825,837				3,543,482				3,350,018
		INCREASE IN CASH AND CASH EQUIVALENTS			34,943				80,932				222,730				294,523
Cash and cash equivalents at beginning of period					99,644				18,712				134,587				99,644
Cash and cash equivalents at end of period				$	134,587			$	99,644			$	357,317			$	394,167

There's a healthy $4.8M draw from their credit lines during the first 9 months of 2006, but otherwise this is pretty uninteresting. Now let's have a look at the income statement:

											Unaudited
											Nine Months Ended
			Years Ended December 31,								September 30,
			2005				2004				2006				2005
Statement of Operations Data
	Sales		$	710,216			$	1,073,990			$	1,917,414			$	542,455
	Cost of revenue(1)			939,906				1,029,072				765,264				394,583
	Selling, general and administrative			2,889,230				2,168,457				3,540,547				2,130,901
	Research and development expenses			881,515				687,398				623,883				678,255
	Other expenses			789,490				528,433				3,305,978				654,925
	Net loss			(4,789,925	)			(3,339,370	)			(6,318,285	)			(3,316,209	)
Loss per common share			$	(7.18	)		$	(6.87	)		$	(7.79	)		$	(5.18	)
Weighted average basic and diluted shares outstanding				666,712				486,170				811,174				640,650

Hmm, that's a bit more of a problem. In 2006 for every $1 that came in, a bit more than $4 went out, for a net loss of $3 for every dollar of revenues. A big portion of these expenses, at least in 2006, is the $3M they paid in interest, but I guess that's what it costs to have a gigantic line of credit. Perhaps they've been forced to go the equity route because they simply can't stomach paying this type of interest anymore.

All considered, I'm not sure how sustainable this kind of operating model is, though according to their use of funds, most of it went to G&A and marketing expenses, and not hardware R&D and inventory, as I would have guessed. In fact, we can see here that those big booths at tradeshows must be costing them a pretty penny, while their hardware/software solution is a more modest expense in terms of programming and maintenance (or they haven't spent that much on it of late):

			Nine Months Ended
			September 30
											Increase
			2006				2005				(Decrease)
Sales				1,917,414				542,455				1,374,959
Cost of Sales				765,264				394,583				370,681
	Gross Profit			1,152,150				147,872				1,004,278
Sales and marketing expenses				1,057,790				922,432				135,358
Research and development expenses				623,883				678,255				54,372
General and administrative expenses				2,482,784				1,208,469				1,274,315
	Operating expenses			4,164,457				2,809,156				1,355,301
	Operating loss			(3,012,307	)			(2,661,284	)			(351,023	)
Other income (expenses):
	Interest expense			(3,316,774	)			(674,108	)			2,642,666
	Interest income			8,834				1,330				(7,504	)
	Sundry			1,962				17,853				15,891
				(3,305,978	)			(654,925	)			2,651,053
	Net loss		$	(6,318,285	)		$	(3,316,209	)		$	(3,002,076	)

The authors of the documents also offer these notes:

Sales
Our sales increased for the first nine months of 2006 when compared to the first nine months of 2005 by $1,374,959. Included in 2006 was $236,658 of previously deferred revenue from a terminated alliance, $500,000 from deferred revenue from a strategic partnership, and almost $1,200,000 from new billing. The continued increase in sales focus and the closing of prospects from our backlog were the primary reasons for the increase. We expect continued increases as our sales organization continues to mature and our products gain market acceptance.

Cost of Sales
Cost of sales for the first nine months of 2006 was $765,264, compared to $394,583 for the comparable 2005 period. The cost of sales increase is due to increased revenues. After deducting deferred revenue from the terminated alliance and the strategic relationship, the cost of sales increased proportionately to the sales increase, with our gross profit being 35% for the first nine months of 2006.

Operating Expenses
Operating expenses for the first nine months of 2006 were $4,164,457 compared to $2,809,156 for the comparable period of 2005. The increase amounted to $1,355,301.

There's a huge amount of additional data in the filings themselves, so if you're interested, I suggest you check them out.

Here's my take on things: Wireless Ronin has spent millions of dollars producing and marketing a product that, by WireSpring's last estimate, is one of about 270 substantially similar competitive offerings available in the marketplace. Nearly all of the competing products can claim some kind of competitive advantage, and in my daily/weekly/monthly customer encounters I rarely come across Wireless Ronin as a competitor. Perhaps they're targeting a different niche than we are, but the lack of visibility is interesting nonetheless.

The company is trying to raise around $20M in the IPO, and the document indicates that the firm values itself at around $45M after the money. Thus, that suggests they've valued themselves at about $25M before the money, which is around 12X sales (and an infinite multiple of profits, since the company has lost money every year it has been in business).

My personal (and obviously NOT impartial) opinion is that this would not be a wise investment to make unless you were very rich and needed some excitement and volatility in your portfolio. There's simply too much competition in what is really an unproven marketplace, and the company seems to burn through cash at a pace that will be very hard to support without regular, ongoing offerings of stock that will dilute shareholders' ownership at a rapid pace.

2006-11-06 UPDATE: Digital View's Dave Haynes seems to feel the same way as I do about this deal, according to this recent post on his sixteen:nine weblog.

2006-11-30 UPDATE: Wireless Ronin somhow managed to successfully complete their IPO. Thanks again to Dave at sixteen:nine for picking this up!