Business context and reporting period
This is FORM Holdings Corp.’s Form 10-Q for the quarter and six months ended June 30, 2016—not a filing under the name XWELL, Inc. FORM, formerly Vringo, repositioned itself in May 2016 as a holding company. Its operations comprised Group Mobile, FLI Charge and intellectual property. The common stock began trading under ticker FH on May 9, 2016.
Financial results and liquidity
Amounts below are in millions of dollars, except per-share data. The 2015 comparison does not include Group Mobile or FLI Charge, which FORM acquired in October 2015.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $11.362 | $0 | $13.406 | $0.150 |
| Gross profit | $9.183 | Not meaningful | $10.100 | Not meaningful |
| Operating loss | $(10.715) | $(8.575) | $(14.321) | $(15.328) |
| Net loss | $(10.807) | $(8.509) | $(14.762) | $(15.485) |
| Basic and diluted loss per share | $(0.72) | $(0.90) | $(1.01) | $(1.65) |
| Operating cash flow | — | $0.698 | $(7.713) |
Gross profit equals revenue less cost of goods sold; gross margin was approximately 80.8% in Q2 and 75.3% for the first half. These consolidated margins include substantial intellectual-property licensing revenue and should not be read as product-only margins. Q2 revenue comprised $8.912 million in licensing and $2.450 million in product sales. For the first half, intellectual-property revenue was $9.650 million, Group Mobile revenue $3.727 million, and FLI Charge revenue $0.029 million.
Cash and cash equivalents were $27.449 million at June 30, versus $24.951 million at December 31, 2015. Total current assets were $28.373 million and current liabilities $7.566 million. Total assets were $37.747 million; total liabilities were $8.035 million. The June 30 balance sheet showed $0.800 million in senior secured notes, net carrying value. FORM reported $1.850 million of investing cash inflow, mainly from court-deposit refunds, and $0.050 million of financing cash outflow. Management said it expected to have sufficient funds for at least 12 months.
Material changes versus the prior comparable period
- Revenue rose sharply, primarily because of acquired businesses and intellectual-property licenses; the prior-year quarter had no revenue.
- Operating loss worsened in Q2, despite lower operating legal costs, as FORM recorded a $11.937 million noncash patent impairment. First-half operating loss improved versus 2015, but included the same impairment.
- Operating legal costs fell 22.3% in Q2 and 42.1% for the first half, mainly following the December 2015 ZTE settlement and license.
- General and administrative expense increased 43.8% in Q2 and 18.1% for the first half, reflecting the acquired businesses, expanded staffing, marketing and product development, and costs associated with prospective acquisitions.
- Operating cash flow improved to positive $0.698 million from negative $7.713 million in the first half of 2015, attributed mainly to cash receipts from Group Mobile and intellectual-property operations.
Outlook, risks, contingencies and unusual items
- Strategy: Management planned to grow Group Mobile through new products, sales coverage and additional verticals; develop FLI Charge partnerships; monetize patents through licensing and strategic partnerships; and pursue acquisitions. Management’s stated acquisition screen referred to businesses with a path to revenue above $100 million.
- Patent impairment: The May repositioning triggered an impairment test. FORM concluded projected undiscounted patent cash flows were below carrying value and recorded the $11.937 million charge, reducing patent carrying value to $1.526 million at May 6. Goodwill was $4.863 million, with no impairment indicator reported.
- Debt paid after quarter-end: On July 1, 2016, FORM prepaid its amended notes, using $2.011 million of cash, including principal, accrued interest and a 15% early-repayment premium. The repayment released liens on company assets, including intellectual property.
- Subsequent XpresSpa merger agreement: On August 8, 2016, FORM agreed to acquire XpresSpa, an airport spa-services and products business. Consideration included 2.5 million common shares, preferred stock with a stated $23.750 million liquidation preference, and five-year warrants for 2.5 million shares at $3.00. The preferred stock carried 9% interest and was initially convertible into approximately 3.958 million common shares. FORM also agreed to sell 750,574 common shares for $1.734 million and to invest $1.734 million in XpresSpa preferred units pending the merger. The merger was subject to conditions; completion was not assured. The filing described expected ownership as approximately 18% for former XpresSpa holders on an outstanding-common basis, or 33% fully diluted.
- FLI Charge: Its Indiegogo campaign had raised $177,000 by June 30, recorded as deferred revenue; product delivery was expected in Q4 2016. FORM said FLI Charge had not yet generated substantial product revenue.
- Legal and operating risks: ZTE-related proceedings included an open Chinese NDRC investigation and patent appeals in China and the Netherlands. Litigation involving Google in India remained pending after FORM settled with ASUS. FORM also disclosed a pending DirecTV suit, a dispute with a former patent owner over royalty entitlement, and acquisition-related execution risks. Three suppliers represented about 80% of Group Mobile inventory purchases; supplier agreements were generally short-term and terminable on relatively short notice.
- Other items: A shareholder rights plan intended to protect tax assets could dilute certain acquirers and deter a takeover. Management said disclosure controls were effective as of June 30, 2016. The company reported no defaults on senior securities and no off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the issuer and period: the supplied filing is FORM Holdings Corp.’s Q2 2016 10-Q, not a filing by XWELL, Inc.
- Review the composition and repeatability of licensing revenue, especially the $8.9 million one-time Q2 patent-license payment, alongside operating results excluding the patent impairment.
- Track cash and liquidity after the July 1 debt payoff and the August XpresSpa investments, share sale and proposed merger; the June 30 balance sheet predates those transactions.
- Verify merger closing conditions, final consideration, preferred-stock and warrant dilution, and any related-party aspects of transaction due diligence.
- Assess patent monetization prospects and remaining litigation exposure, including the unresolved proceedings and royalty dispute.
- Monitor Group Mobile product margins, supplier concentration and FLI Charge’s ability to convert crowdfunding and partnerships into delivered products and recurring revenue.