Item 2.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
This Quarterly Report on Form 10-Q contains
“forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize
or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements.
The statements contained herein that are not purely historical are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements are often identified by the use of words such as, but not limited to, “anticipates,” “believes,”
“can,” “continues,” “could,” “estimates,” “expects,” “intends,”
“may,” “will be,” “plans,” “projects,” “seeks,” “should,”
“targets,” “will,” “would,” and similar expressions or variations intended to identify forward-looking
statements. These statements are based on the beliefs and assumptions of our management based on information currently available
to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause
actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking
statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below,
and those discussed in the section titled “Risk Factors” included in our Annual Report on Form 10-K for the year ended
December 31, 2015 filed on March 10, 2016 (the “2015 Annual Report”) and this Quarterly Report on Form 10-Q and any
future reports we file with the Securities and Exchange Commission (“SEC”). The forward-looking statements set forth
herein speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking
statements to reflect events or circumstances after the date of such statements, except as required by law.
All references in this Quarterly Report
on Form 10-Q to “we,” “us” and “our” refer to FORM Holdings Corp. (prior to May 5, 2016, known
as “Vringo, Inc.”), a Delaware corporation, and its consolidated subsidiaries.
Overview
On May 6, 2016, we changed the name of our
company from Vringo, Inc. to FORM Holdings Corp. (“FORM” or the “Company”) and concurrently announced
our repositioning as a holding company of small and middle market growth companies. Our focus is on acquiring and building companies
that would benefit from:
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exposure to visibility from the public markets;
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implementation of best practices.
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Our management team is committed to execute
on our strategy. We are industry agnostic, but limit the scope of our pipeline by looking only at companies with a clear path to
grow in excess of $100,000,000 in revenue.
Our common stock, par value $0.01 per share,
which was previously listed on The NASDAQ Capital Market under the trading symbol “VRNG,” has been listed under the
trading symbol “FH” since May 9, 2016.
We currently have three operating segments:
Prior to December 31, 2013, we operated a global
platform for the distribution of mobile social applications and services. On February 18, 2014, we sold our mobile social application
business to InfoMedia Services Limited (“InfoMedia”), receiving an 8.25% ownership interest in InfoMedia as consideration
and a seat on the board of directors of InfoMedia. As part of the transaction, we have the opportunity to license certain intellectual
property assets and work with InfoMedia to identify and protect new intellectual property.
Segments
We operate in three operating segments: Group Mobile, FLI Charge
and intellectual property.
Our Strategy and Outlook
Group Mobile is
a supplier of built-to-order rugged computers, mobile devices and accessories. We plan to increase Group Mobile’s revenue,
which we believe can be achieved by adding new products, exploring new distribution verticals, such as military and government,
and increasing the sales team’s geographic coverage.
In addition, we plan to continue to enhance our intellectual
property rights around our FLI Charge technology and products.
FLI Charge
plans to strengthen
and develop partnerships in numerous markets including automotive, education, office, healthcare, power tools and vaporizers. Our
strategy for our intellectual property operating segment is to continue to monetize our existing portfolio of intellectual property
through licensing and strategic partnerships.
Group Mobile
Group Mobile is a
growing and innovative full, end-to-end solution provider for project lifecycle services including system integration, hardware
service support, pre- and post-deployment and customer support helpdesk. Group Mobile provides total hardware solutions, including
rugged laptops, tablets, and handheld computers. Group Mobile also markets rugged mobile printers, vehicle computer docking and
mounting gear, power accessories, wireless communication products, antennas, carrying cases and other peripherals, accessories
and add-ons needed to maximize productivity in a mobile- or field-computing environment. Group Mobile’s professional service
offerings are evolving into project lifecycle services including technology consultations, development and deployment, project
and asset management, equipment installation, break-fix, hardware service technical support, 24-7 helpdesk and more.
Group Mobile is moving
aggressively to provide industry leading Law Enforcement In-Vehicle “Video and Body Worn” camera solutions to meet
the complex mobile technology demands of thousands of law enforcement agencies and officers in the United States (“U.S.”)
market. Key to the Group Mobile long-term strategy is the complete professional services, post deployment services and lifecycle
management of Group Mobile offerings to bring stability to the customer mobile technology platforms.
Group Mobile purchases
rugged mobile computing equipment and complementary products from its primary distribution and manufacturing partners and sells
them to enterprises, resellers, and retail customers. Our primary customers range from corporations to local governments, emergency
first responders and healthcare organizations. We believe that Group Mobile’s business is characterized by gross profits
as a percentage of revenue slightly higher than is commonly found in resellers of computing devices. The market for rugged mobile
computing products is trending towards an increase in the volume of unit sales combined with declining unit prices as the business
transitions from primarily being comprised of laptops to one primarily comprised of rugged tablets. As this transition has occurred,
Group Mobile is seeing shortened product life cycles and industry specific devices for segments such as healthcare. Group Mobile
sets sale prices based on the market supply and demand characteristics for each particular product. Group Mobile is highly dependent
on the end-market demand for rugged mobile computing products, which is influenced by many factors including the introduction of
new IT products by OEM, replacement cycles for existing rugged mobile computing products, overall economic growth, local and state
budgets, and general business activity.
Product costs represent the single largest
expense and product inventory is one of the largest working capital investments for Group Mobile. Group Mobile’s primary
suppliers include Synnex Corporation, Ingram Micro Inc., and Xplore Technologies Corporation, which, combined, represent approximately
80% of Group Mobile’s inventory purchases. We have reseller agreements with most of our OEM and distribution partners. These
agreements usually provide for nonexclusive resale and distribution rights. The agreements are generally short-term, subject to
periodic renewal, and often contain provisions permitting termination by either our supplier or us without cause upon relatively
short notice. Furthermore, product procurement from the OEM suppliers is a highly complex process and, as such, efficient and effective
purchasing operations are critical to Group Mobile’s success.
FLI Charge
FLI Charge is a wireless power company dedicated
to making it easier for people to power and charge the multitude of mobile electronic devices they use on a daily basis. By eliminating
the need to search and compete for outlets and charging cables, we are improving the powering and charging experience for all battery
and DC powered devices.
FLI Charge designs, develops, licenses, manufactures
and markets wireless conductive power and charging solutions. FLI Charge is currently working with partners in several verticals
to bring products to market. These verticals include education, office, hospitality, automotive and consumer electronics among
others. To date, we have not yet generated any substantial revenue from our products. We believe that FLI Charge’s patented
technology is the only wireless power solution that is fully interoperable between different mobile devices ranging from smartphones
to power tools, and many more. FLI Charge’s wireless power solution can simultaneously power multiple devices on the same
pad no matter their power requirements or positions on the pad.
The FLI Charge ecosystem consists of power
pads or surfaces as well as devices that are connected to or embedded with FLI Charge enabling technology. FLI Charge pads and
surfaces are connected to a power source or battery. The surface of the pad has conductive contact strips that provide power and
are constantly monitored by control circuitry that immediately halts power transfer if an unapproved load or short-circuit condition
is detected. FLI Charge-enabled devices are embedded with the FLI Charge contact enablement that consists of four contact points,
known as the FLI Charge “constellation.” The constellation is designed to make an immediate and continuous electrical
connection with the contact strips regardless of the device’s orientation on the pad. The enablement monitors the power coming
from the pad and ensures that the correct amount of power goes to the device. Once an approved FLI Charge device is placed on a
pad, power is transferred immediately to charge or power the device.
There are several competing wireless charging
technologies on the market or under development today. The most popular competing technology is inductive wireless charging, in
which magnetic induction uses a magnetic coil to create resonance, which can transmit energy over a relatively short distance.
The amount of power delivered is a function of the size of the coils, and the coils must be aligned and paired within a typical
distance of less than one inch. Products utilizing magnetic induction have been available for 10+ years in products such as rechargeable
electronic toothbrushes and pace makers. The leading inductive technologies deliver a maximum of 10-15 watts. Other competing technologies
include magnetic resonance, RF harvesting, laser and ultrasound.
As compared to each of the competing wireless
technologies above, we believe that our conductive technology exhibits many competitive advantages including:
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charge rates/efficiency
– FLI Charge pads charge devices nearly as fast as plugging them into a wall outlet;
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multiple devices –
FLI Charge pads can charge or power multiple devices at the same time without reducing the charging speed;
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safety – FLI Charge’s
technology is as safe as plugging devices into a wall outlet;
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maximum power –
FLI Charge pads can supply as much as 150 watts of power, which is enough to charge or power devices with relatively high power
requirements such as power tool batteries and flat screen monitors;
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positioning freedom
– FLI Charge’s technology allows for devices to be placed in any orientation, anywhere on the pad, without sacrificing
any charging speed; and
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compatibility –
all FLI Charge enabled electronic devices are compatible with all FLI Charge pads.
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FLI Charge launched its consumer product
line on Indiegogo, a crowdfunding platform, on June 15, 2016; the campaign was completed on August 15, 2016.
We
account for
funds raised from crowdfunding campaigns and presales, which were approximately $224, as deferred revenue on
the condensed consolidated balance sheets. FLI Charge expects to deliver products to the participants in the fourth quarter of
2016.
We are currently contemplating financing
the expansion of the FLI Charge operating segment through a direct investment in the FLI Charge subsidiary in the form of a convertible
preferred security, which may be exchangeable for our common stock under certain circumstances. No assurance can be made that such
financing will occur on the terms currently contemplated or at all.
Intellectual Property
Our intellectual property operating segment
is engaged in the innovation, development and monetization of intellectual property. Our portfolio consists of over 600 patents
and patent applications covering telecom infrastructure, internet search, ad-insertion and mobile technologies.
We are currently focused
on monetizing our technology portfolio through a variety of value enhancing initiatives including, but not limited to, licensing,
litigation and strategic partnerships. For further information regarding our intellectual property enforcement activities, refer
to Part II, Item 1, Legal Proceedings, in this Quarterly Report on Form 10-Q.
Recent Developments
XpresSpa
On August 8, 2016, we entered
into an Agreement and Plan of Merger (the “Merger Agreement”) with FHXMS, LLC, a Delaware limited liability company
and our wholly-owned subsidiary (the “Merger Sub”), XpresSpa Holdings, LLC, a Delaware limited liability company (“XpresSpa”),
the unitholders of XpresSpa who are parties thereto (the “Unitholders”) and Mistral XH Representative, LLC, as representative
of the Unitholders (the “Representative”), pursuant to which the Merger Sub will merge with and into XpresSpa, with
XpresSpa being the surviving entity and our wholly-owned subsidiary (the “Surviving Entity”) and the Unitholders becoming
our stockholders (the “Merger”).
XpresSpa is a leading airport retailer of spa
services and related products, and also sells spa products through its internet site. Services and products include: (i) massage
services for the neck, back, feet and whole body, (ii) nail care, such as pedicures, manicures and polish changes, (iii) beauty
care services such as waxing and facials, (iv) hair care, such as haircuts and blow outs, (v) spa products such as massagers, lotions
and aromatherapy aids and (vi) travel products such as neck pillows and eye masks.
Upon completion of the Merger,
(i) the then-outstanding common units of XpresSpa (other than those held by us, which will be cancelled without any consideration)
and (ii) the then-outstanding preferred units of XpresSpa (other than those held by us, which will be cancelled without any consideration)
will be automatically converted into the right to receive an aggregate of:
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(a)
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2,500,000 shares of our common stock, par value $0.01
per share (“FORM Common Stock”),
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(b)
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494,792 shares of our newly designated Series D Convertible
Preferred Stock, par value $0.01 per share, (“FORM Preferred Stock”) with an aggregate initial liquidation preference
of $23,750,000, and
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(c)
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five-year warrants to purchase an aggregate of 2,500,000
shares of FORM Common Stock, at an exercise price of $3.00 per share, each subject to adjustment in the event of a stock split,
dividend or similar events.
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The FORM Preferred Stock shall be initially
convertible into an aggregate of 3,958,336 shares of FORM Common Stock, which equals a $6.00 per share conversion price, and each
holder of FORM Preferred Stock shall be entitled to vote on an as converted basis. The FORM Preferred Stock is senior to the FORM
Common Stock and the terms of the FORM Preferred Stock contain no restrictions on our ability to issue additional senior preferred
securities or our ability to issue additional preferred securities in the future. We have the right, but not the obligation, upon
ten trading days’ notice to convert the outstanding shares of FORM Preferred Stock into FORM Common Stock at the then applicable
conversion ratio, at any time or from time to time, if the volume weighted average price per share of the FORM Common Stock exceeds
$9.00 for over any 20 days in a 30 consecutive trading day period. The term of the FORM Preferred Stock is seven years, after which
time we can repay the holders in shares of FORM Common Stock or cash at our election. If we elect to make a payment, or any portion
thereof, in shares of FORM Common Stock, the number of shares deliverable (the “Base Shares”) will be based on the
volume weighted average price per share of FORM Common Stock for the 30 trading days prior to the date of calculation (the “Base
Price”) plus an additional number of shares of FORM Common Stock (the “Premium Shares”), calculated as follows:
(i) if the Base Price is greater than $9.00, no Premium Shares shall be issued, (ii) if the Base Price is greater than $7.00 and
equal to or less than $9.00, an additional number of shares equal to 5% of the Base Shares shall be issued, (iii) if the Base Price
is greater than $6.00 and equal to or less than $7.00, an additional number of shares equal to 10% of the Base Shares shall be
issued, (iv) if the Base Price is greater than $5.00 and equal to or less than $6.00, an additional number of shares equal to 20%
of the Base Shares shall be issued and (v) if the Base Price is less than or equal to $5.00, an additional number of shares equal
to 25% of the Base Shares shall be issued. The FORM Preferred Stock will accrue interest at 9% per annum, or $4.32 per share of
FORM Preferred Stock.
In addition, we entered
into subscription agreements to sell 750,574 shares of our unregistered Common Stock to certain holders of XpresSpa, at a purchase
price of $2.31 per share, for an aggregate purchase price of $1,734,000.
On August
8, 2016, we purchased from XpresSpa an aggregate of 1,733,826 of Series C Preferred Units of XpresSpa, at a per unit purchase price
of $1.00 per unit, for an aggregate purchase price of $1,734,000, which is included in other current assets
in the condensed
consolidated balance sheets
. The Series C Preferred Units of XpresSpa will have a preference in the
amount of its initial investment and shall bear 12% interest until the closing of the anticipated merger agreement.
We are holding our annual meeting of stockholders
on November 28, 2016 to approve, among other things, the Merger and the issuance of shares of FORM Common Stock, FORM Preferred
Stock and warrants to the Unitholders in connection with the Merger. Assuming stockholder approval is received, we expect to complete
the Merger shortly after the stockholders vote. Immediately following the completion of the Merger (without taking into account
any shares of FORM Common Stock held by XpresSpa equity holders prior to the completion of the Merger), the former Unitholders
of XpresSpa are expected to own approximately 18% of the outstanding FORM Common Stock (or 33% of the outstanding FORM Common Stock
calculated on a fully diluted basis) and our current stockholders are expected to own approximately 82% of the outstanding FORM
Common Stock (or 67% of the outstanding FORM Common Stock calculated on a fully diluted basis).
Impairment of Patents
Our name change and repositioning
as a holding company was deemed a triggering event, which required our patent assets to be tested for impairment. In performing
this impairment test, we determined that the patent portfolios, which together represent an asset group, were subject to impairment
testing. In the first step of the impairment test, we utilized our projections of future undiscounted cash flows based on our existing
plans for the patents. As a result, it was determined that our projections of future undiscounted cash flows were less than the
carrying value of the asset group. Accordingly, we performed the second step of the impairment test to measure the potential impairment
by calculating the asset group’s fair value as of May 6, 2016. As a result, following amortization for the month of April,
we recorded an impairment charge of $11,937,000, which resulted in a new carrying value of $1,526,000 on May 6, 2016. Following
the impairment, we reevaluated the remaining useful life and concluded that there were no changes in the estimated useful life.
Stockholder Rights Plan
On March 18, 2016, we announced that our
Board of Directors adopted a stockholder rights plan in the form of a Section 382 Rights Agreement designed to preserve our tax
assets. As a part of the plan, our Board of Directors declared a dividend of one preferred-share-purchase right for each share
of our common stock outstanding as of March 29, 2016. Effective on March 18, 2016, if any group or person acquires 4.99% or more
of our outstanding shares of common stock, or if a group or person that already owns 4.99% or more of our common stock acquires
additional shares representing 0.5% or more of our common stock, then, subject to certain exceptions, there would be a triggering
event under the plan. The rights would then separate from our common stock and would be adjusted to become exercisable to purchase
shares of our common stock having a market value equal to twice the purchase price of $9.50, resulting in significant dilution
in the ownership interest of the acquiring person or group. Our Board of Directors has the discretion to exempt any acquisition
of our common stock from the provisions of the plan and has the ability to terminate the plan prior to a triggering event. In connection
with this plan, we filed a Certificate of Designation of Series C Junior Preferred Stock with the Secretary of State of Delaware
on March 18, 2016.
Senior Secured Notes
On March 9, 2016, we entered into an exchange
note agreement (the “Exchange Note Agreement”) with the holders (the “Investors”) of our $12,500,000 Senior
Secured Notes (the “Notes”), which we originally issued in a registered direct offering on May 4, 2015. Pursuant to
the Exchange Note Agreement, we issued to the Investors an aggregate of 703,644 shares of our common stock, par value $0.01 per
share, in exchange for the reduction of $1,267,000 of the outstanding aggregate principal amount of the Notes and $49,000 of accrued
interest. As a result, the outstanding aggregate principal amount under the Notes was reduced from $3,016,000 to $1,749,000 as
of March 9, 2016.
In addition, on March 9, 2016, with the consent
of each of the Investors, we agreed to amend the Notes. Pursuant to the Amended and Restated Senior Secured Notes (the “Amended
Notes”) and the Indenture dated May 4, 2015, as supplemented by a First Supplemental Indenture dated May 4, 2015 and further
supplemented by a Second Supplemental Indenture (the “Second Supplemental Indenture”) dated March 9, 2016: (i) the
Amended Notes are no longer convertible into shares of our common stock and will be payable by us on the Maturity Date (as defined
below) in cash only, (ii) the Maturity Date of the Amended Notes will extend to June 30, 2017 (the “Maturity Date”),
(iii) we will discontinue the payment of principal prior to the Maturity Date (subject to certain exceptions), (iv) the interest
rate increased from 8% to 10% per annum and will accrue on the outstanding aggregate principal amount of the Amended Notes, payable
monthly, and (v) we will pay to the Investors on the Maturity Date 102% of the outstanding aggregate principal amount of the Amended
Notes. We also agreed to maintain a cash balance (including cash equivalents) of not less than $2,900,000.
In addition, we agreed to reduce the exercise
price of the warrants to purchase an aggregate of 537,500 shares of our common stock granted as part of the initial agreement (the
“May 2015 Warrants”) from $10.00 to $3.00 per share and the parties also agreed to remove from the May 2015 Warrants
certain anti-dilution features. Other terms of the May 2015 Warrants remained the same. Furthermore, in connection with the Amended
Notes, we paid a restructuring fee of $50,000 to the Investors.
On July 1, 2016, we repaid in full our
Amended Notes that were due on June 30, 2017. As required by the terms of the Amended Notes, notice of repayment was delivered
to the Investors on June 30, 2016. We repaid the Amended Notes in full, including a 15% fee for early repayment. We used an aggregate
of $2,011,000 of cash on hand for repayment of the Amended Notes. As a result of the repayment in full of the Amended Notes, all
liens on our assets, including intellectual property, were released by the Investors.
Reverse Stock Split
Unless otherwise noted, the information contained
in this Quarterly Report on Form 10-Q gives effect to a one-for-ten reverse stock split of our common stock effected on November
27, 2015 on a retroactive basis for all periods presented.
Results of Operations
Three-month period ended September 30, 2016 compared to the
three-month period ended September 30, 2015
Revenue
We generate revenue through our three operating
segments:
Group Mobile, FLI Charge and intellectual property
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Three months ended September 30,
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2016
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2015
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Change
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Licensing revenue
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$
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1,350,000
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$
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—
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$
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1,350,000
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Product revenue
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|
1,755,000
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—
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1,755,000
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Total revenue
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$
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3,105,000
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$
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—
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$
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3,105,000
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During the three-month period ended September
30, 2016, we recorded total revenue of $3,105,000. There was no revenue recognized for the three-month period ended September 30,
2015. The increase was attributable to each of our operating segments. Group Mobile recognized $1,751,000 of product revenue, FLI
Charge recognized $4,000 of product revenue, and our intellectual property operating segment recognized a one-time lump sum payment
of $1,350,000 in connection with a settlement agreement. We did not recognize any revenue generated by Group Mobile or FLI Charge
prior to their acquisition on October 15, 2015.
We believe that
growth in Group Mobile’s revenue can be achieved by adding new products, exploring new distribution verticals, such as military
and government, and increasing the sales team’s geographic coverage.
In addition, we plan to enhance our intellectual
property rights around our FLI Charge technology and products.
FLI Charge
plans to strengthen
and develop partnerships in numerous markets including automotive, education, office, healthcare, power tools and vaporizers. We
intend to continue to monetize our existing portfolio of intellectual property through licensing and strategic partnerships.
Cost of goods sold
We incur cost of goods sold through two of
our operating segments:
Group Mobile and FLI Charge
.
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Three months ended September 30,
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2016
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2015
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Change
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Cost of goods sold
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$
|
1,560,000
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|
$
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—
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$
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1,560,000
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During the three-month period ended September
30, 2016, we recorded total cost of goods sold of $1,560,000, which represents the costs of products sold by Group Mobile for the
period. We did not recognize any cost of goods sold for FLI Charge during the three-month period ended September 30, 2016 and we
did not recognize any expenses incurred by Group Mobile or FLI Charge prior to their acquisition on October 15, 2015. We expect
the cost of goods sold to increase over time as our product revenue increases.
Operating legal costs
Operating legal costs relate to our intellectual
property operating segment.
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Three months ended September 30,
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2016
|
|
|
2015
|
|
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Change
|
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Operating legal costs
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|
$
|
1,164,000
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$
|
6,776,000
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$
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(5,612,000
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)
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During the three-month period ended September
30, 2016, our operating legal costs were $1,164,000, which represents a decrease of $5,612,000 (or 82.8%) from operating legal
costs recorded for the three-month period ended September 30, 2015. This decrease was primarily due to the timing and nature of
consulting and patent litigation costs related to legal proceedings against ZTE and ASUS, especially as costs pertaining to our
ZTE campaign declined significantly following the execution of the confidential settlement and license agreement in December 2015.
We expect that our legal costs will continue to decrease over
time.
Inventor royalties
Inventor royalties relate to royalties
owed to the inventors of certain of our patent portfolios owned by our intellectual property operating segment.
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Three months ended September 30,
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2016
|
|
|
2015
|
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|
Change
|
|
|
Inventor royalties
|
|
$
|
270,000
|
|
|
$
|
—
|
|
|
$
|
270,000
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|
|
|
|
|
|
|
|
|
|
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Inventor
royalties fluctuate period to period, based on the amount of licensing revenue we recognize each period, the terms and conditions
of agreements executed each period and the mix of specific patent portfolios with varying economic terms and obligations generating
revenues each period.
During the three-month period ended September 30, 2016, our inventor royalty expense totaled $270,000,
which relates to the royalties owed to the inventor of the patent portfolio, for which a settlement agreement was entered into
during September 2016. We did not recognize any inventor royalty expense during the three-month period ended September 30, 2015.
Amortization and impairment of intangible assets
|
|
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Three months ended September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
Amortization and impairment of intangible assets
|
|
$
|
203,000
|
|
|
$
|
819,000
|
|
|
$
|
(616,000
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)
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|
|
|
|
|
|
|
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|
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During the three-month period ended September
30, 2016, amortization expenses related to our intangible assets totaled $203,000, which represents a decrease of $616,000 (or
75.2%) compared to the amortization expense recorded during the three-month period ended September 30, 2015. The decrease was due
to an impairment taken on our patents asset group on May 6, 2016, which significantly reduced the carrying value of our patents
and resulted in a sharp decline from the previous amortization of the patents. There was no impairment expense recorded during
either three-month period.
General and administrative
|
|
|
Three months ended September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
General and administrative
|
|
$
|
3,955,000
|
|
|
$
|
2,095,000
|
|
|
$
|
1,860,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three-month period ended September
30, 2016, general and administrative expenses increased by $1,860,000 (or 88.8%), to $3,955,000, compared to $2,095,000 that was
recorded during the three-month period ended September 30, 2015. The overall increase was primarily due to two key factors: 1)
merger and acquisition costs related to the Merger with XpresSpa and 2) general and administrative costs associated with Group
Mobile and FLI Charge, which were acquired on October 15, 2015 and, as such, were not included in the three-month period ended
September 30, 2015. During the three-month period ended September 30, 2016, we incurred $952,000 of merger and acquisition costs
associated with legal, diligence, valuation, and other costs pertaining to the Merger with XpresSpa. Following the acquisition
of Group Mobile and FLI Charge, we experienced increases in salaries and benefits due to our expanded workforce and we incurred
advertising and marketing costs for Group Mobile and FLI Charge’s product lines and product development costs as we continued
to develop and improve FLI Charge’s product line. These increases in general and administrative expenses were offset by a
significant decrease in stock-based compensation expense, which was a result of equity awards granted in 2012 and 2013 becoming
fully vested during the latter half of 2015, as well as insurance, accounting, and audit fees.
Non-operating expense, net
|
|
|
Three months ended September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
Non-operating expense, net
|
|
$
|
(1,484,000
|
)
|
|
$
|
(2,181,000
|
)
|
|
$
|
697,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three-month period ended September
30, 2016, we recorded net non-operating expense in the amount of $1,484,000 compared to net non-operating expense in the amount
of $2,181,000 recorded during the three-month period ended September 30, 2015.
For the three-month period ended September
30, 2016, we recorded interest expense of $949,000 for the amortization of the debt discount and debt issuance costs and $262,000
of loss on extinguishment of debt for the 15% early debt repayment fee on July 1, 2016. We also recognized a $272,000 loss on the
revaluation of the derivative warrant liabilities related to the Amended Notes and a $1,000 foreign exchange loss for the period.
The net non-operating expense recognized
in the three-month period ended September 30, 2015 was driven by various factors. Installment payments made to holders of the Notes
resulted in an increase in interest expense of $1,708,000 for the three-month period ended September 30, 2015. The interest expense
was calculated using the effective interest method. In addition, we elected to repay the installments in registered shares, which
were issued at a discount of 15% to market prices. This resulted in a $1,044,000 loss on the extinguishment of debt. The expense
also includes foreign exchange losses in connection with deposits with courts.
The expenses reported during the three-month
period ended September 30, 2015 were offset by a gain on the revaluation of derivative liability warrants and conversion feature
related to the Notes. On May 4, 2015, the net proceeds received were allocated amongst the Notes, the conversion feature, and the
warrants issued to the holders of the Notes. The warrants and conversion feature were then revalued and marked to market as of
each balance sheet date, which resulted in a gain of $716,000 for the three-month period ended September 30, 2015.
Nine-month period ended September 30,
2016 compared to the nine-month period ended September 30, 2015
Revenue
We generate revenue through our three operating
segments:
Group Mobile, FLI Charge and intellectual property
.
|
|
|
Nine months ended September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
Licensing revenue
|
|
$
|
11,025,000
|
|
|
$
|
150,000
|
|
|
$
|
10,875,000
|
|
|
Product revenue
|
|
|
5,486,000
|
|
|
|
—
|
|
|
|
5,486,000
|
|
|
Total Revenue
|
|
$
|
16,511,000
|
|
|
$
|
150,000
|
|
|
$
|
16,361,000
|
|
During the nine-month period ended September
30, 2016, we recorded total revenue of $16,511,000, which represents an increase of $16,361,000 as compared to $150,000 recorded
in the nine-month period ended September 30, 2015. The increase was attributable to each of our operating segments. Group Mobile
recognized $5,478,000 and FLI Charge recognized $8,000 of product revenue, FLI Charge also recognized $25,000 of licensing revenue
in connection with an ongoing license agreement with a customer, and our intellectual property operating segment recognized $11,000,000
of revenue for the amounts received in connection with two separate executed confidential license agreements and an additional
settlement agreement. We did not recognize any revenue generated by Group Mobile or FLI Charge prior to their acquisition on October
15, 2015. Revenue during the nine-month period ended September 30, 2015 of $150,000 was due to a one-time payment in connection
with a license and settlement agreement for certain of our owned intellectual property.
We believe that
growth in Group Mobile’s revenue can be achieved by adding new products, exploring new distribution verticals, such as military
and government, and increasing the sales team’s geographic coverage.
In addition, we plan to enhance our intellectual
property rights around our FLI Charge technology and products.
FLI Charge
plans to strengthen
and develop partnerships in numerous markets including automotive, education, office, healthcare, power tools and vaporizers. We
intend to continue to monetize our existing portfolio of intellectual property through licensing and strategic partnerships.
Cost of goods sold
We incur cost of goods sold through two of
our operating segments:
Group Mobile and FLI Charge
.
|
|
|
Nine months ended September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
Cost of goods sold
|
|
$
|
4,866,000
|
|
|
$
|
—
|
|
|
$
|
4,866,000
|
|
During the nine-month period ended September
30, 2016, we recorded total cost of goods sold of $4,866,000, which mainly represents the costs of products sold by Group Mobile
during the period. We did not recognize any cost of goods sold for Group Mobile or FLI Charge prior to their acquisition on October
15, 2015. We expect the cost of goods sold to increase over time as our product revenue increases.
Operating legal costs
Operating legal costs relate to our intellectual
property operating segment.
|
|
|
Nine months ended September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
Operating legal costs
|
|
$
|
6,127,000
|
|
|
$
|
15,341,000
|
|
|
$
|
(9,214,000
|
)
|
During the nine-month period ended September
30, 2016, our operating legal costs were $6,127,000, which represents a decrease of $9,214,000 (or 60.1%) from operating legal
costs recorded for the nine months ended September 30, 2015. This decrease was primarily due to the timing and nature of consulting
and patent litigation costs related to legal proceedings against ZTE and ASUS, especially as costs pertaining to our ZTE campaign
declined significantly following the execution of the confidential settlement and license agreement in December 2015. Costs in
2016 also include royalty expenses to a previous owner of some of our patents.
We expect that our legal costs will continue
to decrease over time.
Inventor royalties
Inventor royalties relate to royalties
owed to the inventors of certain of our patent portfolios owned by our intellectual property operating segment.
|
|
|
Nine months ended September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
Inventor royalties
|
|
$
|
3,658,000
|
|
|
$
|
—
|
|
|
$
|
3,658,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventor
royalties fluctuate period to period, based on the amount of licensing revenue we recognize each period, the terms and conditions
of agreements executed each period and the mix of specific patent portfolios with varying economic terms and obligations generating
revenues each period.
During the nine-month period ended September 30, 2016, our inventor royalty expense totaled $3,658,000,
which relates to the royalties owed to the inventors of our patent portfolios, for which license and settlement agreements were
entered into during 2016. We did not recognize any inventor royalty expense during the nine-month period ended September 30, 2015.
Amortization and impairment of intangible
assets
|
|
|
Nine months ended September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
Amortization and impairment of intangible assets
|
|
$
|
13,404,000
|
|
|
$
|
2,436,000
|
|
|
$
|
10,968,000
|
|
During the nine-month period ended September
30, 2016, amortization and impairment expenses related to our intangible assets totaled $13,404,000, which represents an increase
of $10,968,000 (or 450.2%) compared to the amortization expense of $2,436,000 recorded during the nine-month period ended September
30, 2015. There was no impairment expense recorded during the nine-month period ended September 30, 2015. The increase was due
to the impairment of our patents asset group during the current period.
During the nine-month period ended September
30, 2016, we determined that there were impairment indicators related to certain of our patents. A significant factor considered
when making this determination occurred on May 6, 2016, when we changed the name of our company from “Vringo, Inc.”
to “FORM Holdings Corp.” and concurrently announced our repositioning as a holding company of small and middle market
growth companies. We concluded that this factor was deemed a “triggering” event, which required the related patent
assets to be tested for impairment. In performing this impairment test, we determined that the patent portfolios, which together
represent an asset group, were subject to impairment testing. In the first step of the impairment test, we utilized our projections
of future undiscounted cash flows based on our existing plans for the patents. As a result, it was determined that our projections
of future undiscounted cash flows were less than the carrying value of the asset group. Accordingly, we performed the second step
of the impairment test to measure the potential impairment by calculating the asset group’s fair value as of May 6, 2016.
As a result, following amortization for the month of April, we recorded an impairment charge of $11,937,000, or 88.7% of the carrying
value of the patents prior to impairment, which resulted in a new carrying value of $1,526,000 on May 6, 2016. Following the impairment,
we reevaluated the remaining useful life and concluded that there were no changes in the estimated useful life. There were no impairment
indicators related to any of our other amortizable intangible assets during the nine-month period ended September 30, 2016.
General and administrative
|
|
|
Nine months ended September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
General and administrative
|
|
$
|
10,212,000
|
|
|
$
|
7,391,000
|
|
|
$
|
2,821,000
|
|
During the nine-month period ended September
30, 2016, general and administrative expenses increased by $2,821,000 (or 38.2%), to $10,212,000, compared to $7,391,000 that was
recorded during the nine-month period ended September 30, 2015. The overall increase was primarily due to two key factors: 1) merger
and acquisition costs related to the Merger with XpresSpa and 2) general and administrative costs associated with Group Mobile
and FLI Charge, which were acquired on October 15, 2015 and, as such, were not included in the nine-month period ended September
30, 2015. During the nine-month period ended September 30, 2016, we incurred $1,008,000 of merger and acquisition costs associated
with legal, diligence, valuation, and other costs pertaining to the Merger with XpresSpa. Following the acquisition of Group Mobile
and FLI Charge, we experienced increases in salaries and benefits due to our expanded workforce and we incurred advertising and
marketing costs for Group Mobile and FLI Charge’s product lines and product development costs as we continued to develop
and improve FLI Charge’s product line. These increases in general and administrative expenses were offset by a significant
decrease in stock-based compensation expense, which was a result of equity awards granted in 2012 and 2013 becoming fully vested
during the latter half of 2015, as well as insurance, accounting, and audit fees.
Non-operating income (expense), net
|
|
|
Nine months ended September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
Non-operating expense, net
|
|
$
|
(1,925,000
|
)
|
|
$
|
(2,338,000
|
)
|
|
$
|
413,000
|
|
During the nine-month period ended September
30, 2016, we recorded net non-operating expense in the amount of $1,925,000 compared to net non-operating expense in the amount
of $2,338,000 recorded during the nine-month period ended September 30, 2015.
For the nine-month period ended September
30, 2016, we recorded interest expense of $1,697,000 for the interest recorded related to the monthly interest payments and the
amortization of the debt discount and debt issuance costs as well as accrued interest calculated using the effective interest method.
In addition, we elected to repay principal installments for January and February 2016 in shares of our common stock, which were
issued at a discount of 15% to market prices, which resulted in $210,000 recorded as a loss on the extinguishment of debt. We also
recorded $262,000 of loss on extinguishment of debt for the 15% early debt repayment fee on July 1, 2016.
The net non-operating expenses reported
during the nine-month period ended September 30, 2016 were reduced by a gain of $97,000 on the revaluation of the derivative warrant
liabilities related to the Amended Notes and a $147,000 foreign exchange gain attributable to our deposits with courts prior to
them being returned to us during the first half of 2016.
The net non-operating expense recognized
in the nine-month period ended September 30, 2015 was driven by various factors. Installment payments made to holders of the Notes
resulted in interest expense of $2,173,000 for the nine-month period ended September 30, 2015. The interest expense was calculated
using the effective interest method. In addition, we elected to repay the installments in registered shares, which were issued
at a discount of 15% to market prices. This resulted in $1,254,000 recorded as a loss on the extinguishment of debt. The expense
also relates to foreign exchange losses in connection with deposits with courts.
We expect that our non-operating income
(expense) will remain highly volatile, and we may choose to fund our operations through additional financing. In particular, non-operating
income (expense) will be affected by the adjustments to the fair value of our derivative instruments. Fair value of these derivative
instruments depends on a variety of assumptions, such as estimations regarding triggering of down-round protection and estimated
future share price. An estimated increase in the price of our common stock increases the value of the warrants and thus results
in a loss on our statements of operations. In addition, high estimated probability of a down-round protection increases the value
of the warrants and again results in a loss on our statements of operations.
Liquidity and Capital Resources
As of September 30, 2016, we had a cash
balance of $21,679,000, which represents a decrease of $3,272,000 compared to our cash balance as of December 31, 2015. We anticipate
that our need for capital will continue to decline as project-based activities related to the improvement of systems and digital
marketing attributed to Group Mobile and FLI Charge near completion which will be offset by the decline in litigation and licensing
costs for our intellectual property operating segment. Cash expenditures during the nine-month period ended September 30, 2016
were offset by cash received for refunds of court fees and our deposits with the courts in Germany, Brazil, and Romania, as well
as cash received by our Group Mobile and intellectual property operating segments during the normal course of business. All deposits
that had been posted with the courts in connection with our litigation with ZTE have been returned.
On August 8, 2016, we entered into subscription
agreements and received the proceeds from selling 750,574 shares of our unregistered common stock to certain holders of XpresSpa,
at a purchase price of $2.31 per share, for an aggregate purchase price of $1,734,000.
In addition, on August 8, 2016, we purchased
from XpresSpa an aggregate of 1,733,826 of Series C Preferred Units of XpresSpa, at a per unit purchase price of $1.00 per unit,
for an aggregate purchase price of $1,734,000
, which is included in other current assets
in
the condensed consolidated balance sheets. Assuming stockholder approval is received,
the Merger
is expected to be completed
shortly after the stockholders vote
.
On July 1, 2016, we repaid in full our
Amended Notes that were due on June 30, 2017. As required by the terms of the Amended Notes, notice of repayment was delivered
to the Investors on June 30, 2016. We repaid the Amended Notes in full, including a 15% fee for early repayment. We used an aggregate
of $2,011,000 of cash on hand for repayment of the Amended Notes. As a result of the repayment in full of the Amended Notes, all
liens on our assets, including intellectual property, were released by the Investors.
On March 9, 2016, pursuant to the Exchange
Note Agreement, we issued to the Investors an aggregate of 703,644 shares of our common stock, par value $0.01 per share, in exchange
for the reduction of $1,267,000 of the outstanding principal amount of the Notes and $49,000 of accrued interest. As a result,
the outstanding aggregate principal amount under the Notes was reduced from $3,016,000 to $1,749,000 as of March 9, 2016.
Our average monthly net cash used in operations
for the nine-month period ended September 30, 2016 was approximately $330,000 compared to average monthly net cash used in operations
of approximately $1,506,000 during the nine-month period ended September 30, 2015. This is driven by the increase in revenues derived
from our Group Mobile and intellectual property operating segments.
Based on current operating plans, we expect
to have sufficient funds for at least the next 12 months and beyond. In addition, we may choose to raise additional funds in connection
with potential acquisitions of operating assets, patent portfolios or other businesses that we may pursue. There can be no assurance,
however, that any such opportunities will materialize.
Cash flows
|
|
|
Nine months ended September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
Net cash used in operating activities
|
|
$
|
(2,969,000
|
)
|
|
$
|
(13,553,000
|
)
|
|
$
|
10,584,000
|
|
|
Net cash provided by (used in) investing activities
|
|
$
|
24,000
|
|
|
$
|
(272,000
|
)
|
|
$
|
296,000
|
|
|
Net cash provided by (used in) financing activities
|
|
$
|
(327,000
|
)
|
|
$
|
12,207,000
|
|
|
$
|
(12,534,000
|
)
|
Operating activities
During the nine-month period ended September
30, 2016, net cash used in operating activities totaled $2,969,000 compared to net cash used in operating activities of $13,553,000
during the nine-month period ended September 30, 2015. The increase of $10,584,000 was mainly due to cash received from our Group
Mobile and intellectual property operating segments during the normal course of business.
Our net cash used in operating activities could
increase if we engage in future business development activities. As we expect to move towards greater revenue generation in the
future, we expect that these amounts will be offset over time by operating expenses. There is no assurance that our licensing efforts
will be successful in the future. Furthermore, there is no guarantee that we will generate sufficient revenue to offset future
operating expenses and our ability to raise additional capital may be limited.
Investing activities
During the nine-month period ended September
30, 2016, net cash provided by investing activities totaled $24,000, mainly attributable to the refunds of our deposits with the
German, Brazilian and Romanian courts. These proceeds were offset by $1,734,000 net cash invested in XpresSpa on August 8, 2016
and $243,000 net cash used to acquire software related to Group Mobile’s website. During the nine-month period ended September
30, 2015, net cash used in investing activities totaled $272,000, which represents the deposit we made to a Romanian court to enforce
an injunction against ZTE in Romania and the deposit we made in Germany to enforce review of ZTE’s accounting records.
We expect that net cash used in investing activities
will increase as we intend to continue to acquire and develop supporting infrastructure and systems for our operating segments.
Financing activities
During the nine-month period ended September
30, 2016, net cash used in financing activities totaled $327,000, which is comprised of the $2,011,000 net cash used to repay the
Notes on July 1, 2016 and $50,000 net cash paid to the Investors related to their expenses incurred as a result of the debt modification.
These cash outflows were offset by $1,734,000 proceeds received from certain holders of XpresSpa as a result of the subscription
agreement entered into on August 8, 2016. During the nine-month period ended September 30, 2015, we received net proceeds of $12,207,000
from a securities purchase in a registered direct offering of $12,500,000 of Notes and warrants to purchase up to 537,500 shares
of our common stock. This amount was offset by the $218,000 of debt issuance costs that were paid in relation to the agreement.
A significant portion of our issued and outstanding
warrants, for which the underlying shares of common stock held by non-affiliates are freely tradable, are currently “out
of the money.” Therefore, the potential of additional incoming funds from exercises by our warrant holders is currently very
limited. To the extent that any of our issued and outstanding warrants were “in the money,” it could be used as a source
of additional funding if the warrant holders choose to exercise their warrants for cash.
We may also choose to raise additional funds
in connection with any acquisitions of patent portfolios or other assets or other businesses that we may pursue. There can be no
assurance, however, that any such opportunity will materialize. Moreover, any such financing would most likely be dilutive to our
current stockholders.
Off-Balance Sheet Arrangements
We have no obligations, assets or liabilities
that would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated
entities or financial partnerships, often referred to as variable interest entities, which would have been established for the
purpose of facilitating off-balance sheet arrangements.
Critical Accounting Estimates
These condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K filed
with the SEC on March 10, 2016, which includes a description of our critical accounting policies that involve subjective and complex
judgments that could potentially affect reported results. While there have been no material changes to our critical accounting
policies as to the methodologies or assumptions we apply under them, we continue to monitor such methodologies and assumptions.