Recent and Projected Quarterly Financials:

While SGA expenses are not likely to get cut much further, verykool sales growth should continue to increase with the introduction of additional smartphones (4 new models have been released since 3Q11).With a couple of quarters of increased sales growth, IFON should be close to breakeven in operating profit. IFON could be cash flow positive as early as 4Q11, as I think working capital could be a source of cash for the next couple of quarters as inventory and prepaid expenses are currently high than likely needed for the near future.

Context and Insider Ownership:

With IFON’s marginal position in an unattractive industry, it’s not inconceivable that the company never makes an operating profit.  But if nothing goes right and the company continues to burn cash at the last quarter’s recent rate, it would take ~3.25 years for the cash per share to equal the share price. In addition the CEO, Joseph Ram currently owns 30% of the stock so he should be incentivized to avoid a dumb acquisition or continue on the current path forever if operating profits never materialize. His 30% share of the net cash equates to about 12 years of his current salary. He is currently 63 years old and has led the company since he founded it in 1994.

Valuation:

Below is a list of possible scenarios and the resulting share prices:

 The company has about $6.1M in operating loss carry forwards, so it shouldn’t be paying taxes for several years.

I think this stock has limited downside due to protection from IFON’s highly liquid balance sheet ($1.36 TBV and $1.33 NWC per share). If operating losses continue for 2 years before CEO Ram decides to give and liquidates, there would still be a gain from these levels:

You may be able to obtain a higher IRR by waiting a couple of quarters and buying just before IFON's first quarterly result with positive earnings. But beacuse of the magnitude of the discount, I am content to buy right now and wait.

Risks:

Weak 4Q11 results if some of the increase in 3Q11 sales was for Christmas inventory build.

Weak 1Q12 results if Chinese holidays effect production.

Stock price never rerates to cash per share.

Volume dries up and you get stuck in the stock.

IFON never liquidates and margin of safety erodes away. (Inertia is a hard thing to overcome and CEO/Founder Ram hasn’t quit yet with a cumulative deficit of $12.6M)