FORM Holdings Corp. (now identified in the request as XWELL, Inc.) — FY2016 Form 10-K
Reporting period: Year ended December 31, 2016. The filing is by FORM Holdings Corp., formerly Vringo, Inc.; it does not identify the registrant as XWELL. Financial amounts below are in U.S. dollars, generally shown in millions. XpresSpa was acquired on December 23, 2016, so its results are consolidated only for the final days of 2016.
Business context
FORM repositioned itself in May 2016 as a holding company focused on travel, health and wellness, and technology. Its four operating segments were XpresSpa, Group Mobile, FLI Charge, and intellectual property. The XpresSpa acquisition was completed for reported consideration of $37.4 million, primarily securities; in February 2017, preferred-stock consideration was reduced to a $23.588 million liquidation preference. The filing also reports a February 2017 acquisition of Excalibur, after year-end.
Key financial results and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $18.974 million | $22.687 million |
| Operating loss | $(22.417) million | $(10.344) million |
| Net loss attributable to FORM | $(24.006) million | $(11.157) million |
| Basic and diluted loss per share | $(1.58) | $(1.09) |
| Net cash used in operating activities | $(8.441) million | $(2.571) million |
- Revenue fell 16.4%. Intellectual-property revenue declined $10.575 million to $11.175 million; the 2015 comparison included a $21.5 million ZTE settlement and license payment. Group Mobile revenue was $6.638 million, FLI Charge $0.350 million, and XpresSpa $0.811 million after acquisition.
- Operating expenses rose to $41.391 million from $33.031 million. Major items included $11.937 million of patent impairment, $13.782 million of depreciation, amortization and impairment, and $14.790 million of general and administrative expense.
- Cash and cash equivalents were $17.910 million at year-end, down $7.041 million. Current assets were $23.544 million and current liabilities $11.773 million. Operating cash use averaged approximately $0.703 million monthly, versus $0.214 million in 2015.
- Year-end liabilities included $6.5 million of long-term XpresSpa debt and no balance on FORM’s former senior secured notes. The XpresSpa debt is secured, bears 11.24% interest, and matures May 1, 2018, with a possible one-year extension subject to consent. Total assets were $82.807 million; stockholders’ equity was $64.169 million.
- The $6.5 million debt is owed to Rockmore, an investment entity controlled by a company director, and is guaranteed by FORM. XpresSpa’s debt covenants and collateral therefore remain relevant to the parent.
Material changes and unusual items
- The December 2016 XpresSpa acquisition added $57.527 million of assets, including $20.303 million of goodwill and $13.620 million of acquired intangible assets, as well as the $6.5 million secured debt. It was the principal driver of the year-end balance-sheet expansion.
- FORM repaid its prior senior secured notes in July 2016 for $2.011 million, including an early-repayment fee; the repayment released liens on company assets. In March, debt restructuring also involved stock issuance and a reduction in warrant exercise prices.
- FORM’s May 2016 strategic repositioning triggered an impairment test and a $11.937 million patent impairment charge. In December, it assigned certain Nokia-related patents to Nokia, offsetting $1.750 million of royalties payable and recording a $0.564 million disposal gain.
- Acquisition-related securities included 2.5 million common-stock warrants exercisable at $3.00 and Series D preferred stock accruing 9% annually. The preferred stock is senior to common stock, initially convertible into approximately 3.931 million common shares, and may be repaid in cash or stock at seven-year maturity; stock repayment may be dilutive.
- FORM reported a $671,000 legal-loss accrual. It described multiple pending or resolved disputes; management said it did not expect outstanding matters to have a material adverse effect, while noting legal outcomes are uncertain. A wage-hour class action had reached a settlement in principle by February 2017.
Outlook, commentary and risks
Management expected available funds to cover operations for at least the next 12 months and beyond, based on current plans. It anticipated increased funding needs for XpresSpa expansion and planned several new locations in 2017, while working on 25 additional airport requests for proposals. Its stated goals included growing XpresSpa comparable-store sales and, longer term, doubling locations; growing Group Mobile through new products, sales coverage and new verticals; and continuing intellectual-property licensing and partnerships. Management was exploring strategic alternatives for FLI Charge, including financing.
- XpresSpa had not been cash-flow positive and depended on parent funding for new locations. Results are exposed to air-travel volumes, passenger dwell time, airport leases and concessions, labor availability and costs, and build-out requirements.
- Group Mobile depended on a small supplier group representing approximately 81% of inventory purchases; supplier arrangements were generally short-term and could be terminated on relatively short notice.
- FLI Charge was early-stage, with uncertain product acceptance, commercialization, partner licensing and financing prospects. Rapid technology change and competition pose risks across Group Mobile and FLI Charge.
- Patent monetization depends on uncertain licensing and litigation outcomes, which may take years and require substantial expense. Patent-law changes and challenges to validity or enforceability could impair returns.
- FORM reported $138.915 million of tax net operating loss carryforwards, but their use may be restricted under Section 382. A stockholder rights plan was adopted to help preserve tax attributes and may deter or complicate a change of control.
- The 2016 audit opinion was unqualified. Management assessed internal control over financial reporting as effective, but excluded XpresSpa from its assessment; the auditors were not engaged to express an opinion on internal-control effectiveness.
Important facts for investors to verify
- Confirm the issuer and corporate-name history: this 2016 filing is for FORM Holdings Corp.; the filing text does not establish the XWELL name.
- Review the full-year 2017 XpresSpa results and cash generation, since FY2016 included only the post-acquisition period.
- Track cash burn, expansion spending, liquidity, and the terms, security and repayment capacity associated with the $6.5 million Rockmore debt.
- Assess the preferred-stock accrual, conversion and maturity provisions, the 2.5 million acquisition warrants, and potential dilution from outstanding options and warrants.
- Verify the progress and cost of airport openings, lease consents, RFP awards, and the disclosed litigation and settlement matters.
- Evaluate whether intellectual-property revenue can recur after the exceptional prior-year ZTE payment, and whether management’s stated funding outlook is borne out by subsequent cash flows.