Filing summary
Entity and period: The supplied filing is FORM Holdings Corp. (formerly Vringo, Inc.), not XWELL, Inc. It is a Form 10-Q for the quarter and nine months ended September 30, 2016. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context
In May 2016, FORM repositioned itself as a holding company focused on acquiring and building small and middle-market growth businesses. Its operating segments were Group Mobile, FLI Charge and intellectual property. Group Mobile sells rugged computing products and related services; FLI Charge develops conductive wireless charging products and technology; and the IP segment seeks to monetize a portfolio of more than 600 patents and applications. The company had acquired Group Mobile and FLI Charge in October 2015.
Financial results and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $3.105 | — | $16.511 | $0.150 |
| Operating loss | $(3.777) | $(9.690) | $(18.098) | $(25.018) |
| Net loss | $(5.261) | $(11.871) | $(20.023) | $(27.356) |
| Basic and diluted loss per share | $(0.34) | $(1.16) | $(1.35) | $(2.82) |
| Operating cash flow | Not provided separately | Not provided separately | $(2.969) | $(13.553) |
- Q3 revenue comprised $1.755 million of product revenue and $1.350 million of licensing revenue. Nine-month revenue comprised $5.486 million of product revenue and $11.025 million of licensing revenue.
- Product revenue less cost of goods sold was $0.195 million in Q3 and $0.620 million for the nine months. These are product-only amounts; the filing does not present a consolidated gross margin that incorporates the costs associated with licensing revenue.
- At September 30, cash and cash equivalents were $21.679 million, total current assets $25.996 million, and current liabilities $7.874 million. Working capital was approximately $18.122 million. Total assets were $35.317 million and total liabilities $8.594 million.
- The senior secured notes were repaid in full in July 2016. No notes remained outstanding at quarter-end; derivative warrant liabilities were $0.601 million.
- Cash declined $3.272 million from year-end 2015. Investing activities provided $0.024 million and financing activities used $0.327 million during the nine months.
Material changes versus the prior comparable periods
- Revenue increased substantially, primarily because Group Mobile and FLI Charge were included following their 2015 acquisition and the IP segment recognized licensing and settlement proceeds. The company reported $11.0 million of IP revenue for the nine-month period, including an $8.9 million license payment received in May.
- Net losses narrowed year over year for both the quarter and nine months. Lower IP litigation costs and higher revenue contributed; results also reflect the acquired businesses and a major noncash patent impairment.
- FORM recorded an $11.937 million impairment charge on its patent assets in May, reducing their carrying value substantially. Nine-month amortization and impairment expense totaled $13.404 million.
- General and administrative expense rose to $3.955 million in Q3 and $10.212 million for the nine months. The company cited XpresSpa transaction costs and expenses of the acquired businesses, partly offset by lower stock-based compensation.
- Operating cash use fell to $2.969 million from $13.553 million in the prior-year nine-month period. Management attributed the improvement mainly to cash receipts from Group Mobile and IP operations.
- Common shares outstanding increased from 13.220 million at December 31, 2015 to 15.800 million at September 30, 2016, including shares issued in debt repayment and a subscription financing.
Outlook, risks and unusual items
- Management expected available funds to support operations for at least the next 12 months and beyond, based on current plans. It also said additional capital could be sought for acquisitions; future financing could be dilutive.
- The proposed XpresSpa merger was pending shareholder approval at the November 28, 2016 meeting. Consideration was to include 2.5 million common shares, preferred stock with a $23.75 million initial liquidation preference and 9% annual interest, and five-year warrants for 2.5 million shares at $3.00 per share. Completion was not assured.
- FORM disclosed significant merger risks, including dilution, transaction costs, integration challenges, potential delays or failure to close, and litigation by Amiral Holdings seeking relief that could delay or prevent the merger. The filing also described XpresSpa’s approximately $6.5 million secured note, which would remain outstanding and be guaranteed by FORM after closing.
- FLI Charge had not generated substantial product revenue. It raised approximately $0.224 million through crowdfunding and presales, recorded as deferred revenue, and expected to deliver products in Q4 2016. Management was considering financing for the segment but gave no assurance it would occur.
- The company reported that ZTE-related court deposits had been returned and that disputes with ASUS were settled. Certain patent appeals and the status of a Chinese regulatory investigation remained unresolved; management recorded no liability for these matters. The filing also noted ongoing discussions over potential royalties owed to a former patent owner.
- Management said disclosure controls were effective at a reasonable-assurance level as of September 30, 2016. The filing disclosed no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing is for FORM Holdings Corp., not XWELL, Inc.
- Check whether the proposed XpresSpa merger was approved and completed, and review the final securities issued, dilution, preferred-stock terms and debt guarantee.
- Assess the sustainability of licensing revenue, which included substantial settlement and one-time license payments, and the economics of recurring product sales.
- Review the patent impairment assumptions, remaining IP value, litigation and appeal status, and any royalties payable to former patent owners.
- Track cash usage, working capital needs, supplier concentration at Group Mobile, and whether additional financing or acquisition spending changes the liquidity outlook.