UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 20162017
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___to ___
Commission file number: 001-34785
VRINGO, INC.FORM Holdings Corp.
(Exact Name of Registrant as Specified in its Charter)
Delaware | 20-4988129 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
780 Third Avenue, 12th Floor, New York, NY | 10017 | |
(Address of principal executive offices) | (Zip Code) |
(212) 309-7549
(Registrant’s Telephone Number, Including Area Code):(212) 309-7549
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, par value $0.01 per share | The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | ¨ |
Non-accelerated filer | ¨ | Smaller reporting company | x |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of May 5, 2016, 14,993,68615, 2017, 19,565,531 shares of the registrant’s common stock were outstanding.
VRINGO, INC.FORM Holdings Corp. and Subsidiaries
Table of Contents
Page | |||
PART I. FINANCIAL INFORMATION | 3 | ||
Item 1. | Condensed Consolidated Financial Statements | 3 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | ||
Item 4. | Controls and Procedures | ||
PART II. OTHER INFORMATION | |||
Item 1. | Legal Proceedings | ||
Item 1A. | Risk Factors | ||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | ||
Item 3. | Defaults Upon Senior Securities | ||
Item 4. | Mine Safety Disclosures | ||
Item 5. | Other Information | ||
Item 6. | Exhibits |
Item 1. | Condensed Consolidated Financial Statements |
Vringo, Inc.FORM Holdings Corp. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
March 31, 2016 (Unaudited) | December 31, (see Note 2) | |||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 20,560 | $ | 24,951 | ||||
Deposits with courts | 831 | 1,930 | ||||||
Accounts receivable, net | 1,060 | 246 | ||||||
Other current assets | 934 | 1,077 | ||||||
Total current assets | 23,385 | 28,204 | ||||||
Intangible assets, net | 15,711 | 16,476 | ||||||
Goodwill | 4,863 | 4,863 | ||||||
Other assets | 916 | 916 | ||||||
Total assets | $ | 44,875 | $ | 50,459 | ||||
Current liabilities | ||||||||
Accounts payable, accrued expenses and other current liabilities | $ | 3,721 | $ | 6,030 | ||||
Senior secured notes | — | 3,111 | ||||||
Total current liabilities | 3,721 | 9,141 | ||||||
Long-term liabilities | ||||||||
Senior secured notes | 554 | — | ||||||
Derivative warrant liabilities | 428 | 416 | ||||||
Other liabilities | 152 | 386 | ||||||
Commitments and contingencies (see Note 14) | ||||||||
Stockholders’ equity* | ||||||||
Series A Convertible Preferred stock, $0.01 par value per share; 500,000 shares authorized; none issued and outstanding | — | — | ||||||
Series B Convertible Preferred stock, $0.01 par value per share, 5,000,000 shares authorized; 1,666,667 shares issued and none outstanding | — | — | ||||||
Common stock, $0.01 par value per share 150,000,000 shares authorized; 14,993,686 and 13,220,050 shares issued and outstanding as of March 31, 2016 and December 31, 2015, respectively | 150 | 132 | ||||||
Additional paid-in capital | 240,687 | 237,246 | ||||||
Accumulated deficit | (200,817 | ) | (196,862 | ) | ||||
Total stockholders’ equity | 40,020 | 40,516 | ||||||
Total liabilities and stockholders’ equity | $ | 44,875 | $ | 50,459 |
*Adjusted to reflect the impact of the 1:10 reverse stock split that became effective on November 27, 2015.
March 31, 2017 (Unaudited) | December 31, 2016 | |||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 11,673 | $ | 17,910 | ||||
Accounts receivable, net | 1,726 | 449 | ||||||
Inventory | 2,918 | 2,943 | ||||||
Other current assets | 1,379 | 2,242 | ||||||
Total current assets | 17,696 | 23,544 | ||||||
Restricted cash | 476 | 638 | ||||||
Property and equipment, net | 16,226 | 16,467 | ||||||
Intangible assets, net | 15,488 | 15,610 | ||||||
Goodwill | 27,486 | 25,166 | ||||||
Other assets | 1,330 | 1,382 | ||||||
Total assets | $ | 78,702 | $ | 82,807 | ||||
Current liabilities | ||||||||
Accounts payable, accrued expenses and other current liabilities | $ | 10,497 | $ | 11,630 | ||||
Deferred revenue | 328 | 143 | ||||||
Total current liabilities | 10,825 | 11,773 | ||||||
Long-term liabilities | ||||||||
Debt | 6,500 | 6,500 | ||||||
Derivative warrant liabilities | 233 | 259 | ||||||
Other liabilities | 807 | 106 | ||||||
Total liabilities | 18,365 | 18,638 | ||||||
Commitments and contingencies (see Note 10) | ||||||||
Stockholders’ equity | ||||||||
Series A Convertible Preferred stock, $0.01 par value per share; 500,000 shares authorized; 6,968 issued and none outstanding | — | — | ||||||
Series B Convertible Preferred stock, $0.01 par value per share; 5,000,000 shares authorized; 1,666,667 issued and none outstanding | — | — | ||||||
Series C Junior Preferred stock, $0.01 par value per share; 300,000 shares authorized; none issued and outstanding | — | — | ||||||
Series D Convertible Preferred Stock, $0.01 par value per share; 500,000 shares authorized; 491,427 issued and outstanding; liquidation value of $23,588 | 5 | 5 | ||||||
Common stock, $0.01 par value per share; 150,000,000 shares authorized; 19,198,454 and 18,304,881 issued and outstanding as of March 31, 2017 and December 31, 2016, respectively | 192 | 183 | ||||||
Additional paid-in capital | 282,773 | 280,221 | ||||||
Accumulated deficit | (227,293 | ) | (220,868 | ) | ||||
Accumulated other comprehensive loss | (57 | ) | (13 | ) | ||||
Total stockholders’ equity attributable to the Company | 55,620 | 59,528 | ||||||
Noncontrolling interests | 4,717 | 4,641 | ||||||
Total stockholders’ equity | 60,337 | 64,169 | ||||||
Total liabilities and stockholders’ equity | $ | 78,702 | $ | 82,807 |
The accompanying notes form an integral part of these condensed consolidated financial statements.
Vringo, Inc.FORM Holdings Corp. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(In thousands, except share and per share data)
Three months ended March 31, | ||||||||
2016 | 2015 | |||||||
Revenue | ||||||||
Licensing revenue | $ | 750 | $ | 150 | ||||
Product revenue | 1,294 | — | ||||||
Total revenue | 2,044 | 150 | ||||||
Costs and expenses** | ||||||||
Cost of goods sold | 1,127 | — | ||||||
Operating legal costs | 720 | 3,101 | ||||||
Amortization of intangible assets | 851 | 804 | ||||||
General and administrative | 2,952 | 2,998 | ||||||
Total operating expenses | 5,650 | 6,903 | ||||||
Operating loss | (3,606 | ) | (6,753 | ) | ||||
Non-operating income (expense), net | 67 | (223 | ) | |||||
Gain on revaluation of warrants and conversion feature | 270 | — | ||||||
Interest expense | (476 | ) | — | |||||
Extinguishment of debt | (210 | ) | — | |||||
Net loss | $ | (3,955 | ) | $ | (6,976 | ) | ||
Loss per share*: | ||||||||
Basic net loss per share | $ | (0.28 | ) | $ | (0.75 | ) | ||
Diluted net loss per share | $ | (0.28 | ) | $ | (0.75 | ) | ||
Weighted-average number of shares outstanding during the year*: | ||||||||
Basic | 14,158,680 | 9,340,490 | ||||||
Diluted | 14,158,680 | 9,340,490 | ||||||
** Includes stock-based compensation expense, as follows: | ||||||||
Operating legal costs | $ | 68 | $ | 318 | ||||
General and administrative | 395 | 1,554 | ||||||
Total stock-based compensation expense | $ | 463 | $ | 1,872 |
Three months ended March 31, | ||||||||
2017 | 2016 | |||||||
Revenue | ||||||||
Wellness | $ | 10,984 | $ | — | ||||
Technology | 3,525 | 1,294 | ||||||
Intellectual property | 100 | 750 | ||||||
Total revenue | 14,609 | 2,044 | ||||||
Cost of sales | ||||||||
Wellness | 8,835 | — | ||||||
Technology | 2,960 | 1,127 | ||||||
Intellectual property* | 99 | 720 | ||||||
Total cost of sales | 11,894 | 1,847 | ||||||
Depreciation and amortization | 1,899 | 851 | ||||||
General and administrative* | 6,860 | 2,952 | ||||||
Total expenses | 20,653 | 5,650 | ||||||
Operating loss | (6,044 | ) | (3,606 | ) | ||||
Non-operating income, net | 111 | 337 | ||||||
Interest expense | (189 | ) | (476 | ) | ||||
Extinguishment of debt | — | (210 | ) | |||||
Loss before income tax expense | (6,122 | ) | (3,955 | ) | ||||
Income tax expense | (227 | ) | — | |||||
Consolidated net loss | (6,349 | ) | (3,955 | ) | ||||
Net income attributable to noncontrolling interests | (76 | ) | — | |||||
Net loss attributable to the Company | $ | (6,425 | ) | $ | (3,955 | ) | ||
Consolidated net loss | $ | (6,349 | ) | $ | (3,955 | ) | ||
Other comprehensive loss: foreign currency translation | (44 | ) | — | |||||
Comprehensive loss | $ | (6,393 | ) | $ | (3,955 | ) | ||
Loss per share: | ||||||||
Basic net loss per share | $ | (0.34 | ) | $ | (0.28 | ) | ||
Diluted net loss per share | $ | (0.34 | ) | $ | (0.28 | ) | ||
Weighted-average number of shares outstanding during the period: | ||||||||
Basic | 18,862,715 | 14,158,680 | ||||||
Diluted | 18,862,715 | 14,158,680 | ||||||
*Includes stock-based compensation expense, as follows: | ||||||||
Intellectual property costs | $ | — | $ | 68 | ||||
General and administrative | 741 | 395 | ||||||
Total stock-based compensation expense | $ | 741 | $ | 463 |
*Adjusted to reflect the impact of the 1:10 reverse stock split that became effective on November 27, 2015
The accompanying notes form an integral part of these condensed consolidated financial statements.
Vringo, Inc.FORM Holdings Corp. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(In thousands)
Common stock | Additional paid-in capital | Accumulated deficit | Total | |||||||||||||
Balance as of December 31, 2015 | $ | 132 | $ | 237,246 | $ | (196,862 | ) | $ | 40,516 | |||||||
Issuance of common stock for repayment of convertible debt and related interest | 18 | 2,978 | — | 2,996 | ||||||||||||
Stock-based compensation | — | 463 | — | 463 | ||||||||||||
Net loss for the period | — | — | (3,955 | ) | (3,955 | ) | ||||||||||
Balance as of March 31, 2016 | $ | 150 | $ | 240,687 | $ | (200,817 | ) | $ | 40,020 |
Common stock | Preferred stock | Additional paid- in capital | Accumulated deficit | Accumulated other comprehensive loss | Total FORM equity | Non- controlling interest | Total equity | |||||||||||||||||||||||||
December 31, 2016 | $ | 183 | $ | 5 | $ | 280,221 | $ | (220,868 | ) | $ | (13 | ) | $ | 59,528 | $ | 4,641 | $ | 64,169 | ||||||||||||||
Issuance of common stock for services | — | — | 11 | — | — | 11 | — | 11 | ||||||||||||||||||||||||
Shares of common stock issued for the acquisition of Excalibur | 9 | — | 1,800 | — | — | 1,809 | — | 1,809 | ||||||||||||||||||||||||
Stock-based compensation | — | — | 741 | — | — | 741 | — | 741 | ||||||||||||||||||||||||
Net loss for the period | — | — | — | (6,425 | ) | — | (6,425 | ) | — | (6,425 | ) | |||||||||||||||||||||
Foreign currency translation | — | — | — | — | (44 | ) | (44 | ) | — | (44 | ) | |||||||||||||||||||||
Noncontrolling interests | — | — | — | — | — | — | 76 | 76 | ||||||||||||||||||||||||
March 31, 2017 | $ | 192 | $ | 5 | $ | 282,773 | $ | (227,293 | ) | $ | (57 | ) | $ | 55,620 | $ | 4,717 | $ | 60,337 |
Common stock* | Additional paid-in capital* | Accumulated deficit | Total | |||||||||||||
Balance as of December 31, 2014, as adjusted | $ | 93 | $ | 216,792 | $ | (185,705 | ) | $ | 31,180 | |||||||
Reclassification of derivative warrants to equity warrants | — | 175 | — | 175 | ||||||||||||
Stock-based compensation | — | 1,872 | — | 1,872 | ||||||||||||
Net loss for the period | — | — | (6,976 | ) | (6,976 | ) | ||||||||||
Balance as of March 31, 2015, as adjusted | $ | 93 | $ | 218,839 | $ | (192,681 | ) | $ | 26,251 |
*Adjusted to reflect the impact of the 1:10 reverse stock split that became effective on November 27, 2015.
Common stock | Preferred stock | Additional paid- in capital | Accumulated deficit | Accumulated other comprehensive loss | Total FORM equity | Non- controlling interest | Total equity | |||||||||||||||||||||||||
December 31, 2015 | $ | 132 | $ | — | $ | 237,246 | $ | (196,862 | ) | $ | — | $ | 40,516 | $ | — | $ | 40,516 | |||||||||||||||
Issuance of common stock for repayment of convertible debt and related interest | 18 | — | 2,978 | — | — | 2,996 | — | 2,996 | ||||||||||||||||||||||||
Stock-based compensation | — | — | 463 | — | — | 463 | — | 463 | ||||||||||||||||||||||||
Net loss for the period | — | — | — | (3,955 | ) | — | (3,955 | ) | — | (3,955 | ) | |||||||||||||||||||||
March 31, 2016 | $ | 150 | $ | — | $ | 240,687 | $ | (200,817 | ) | $ | — | $ | 40,020 | $ | — | $ | 40,020 |
The accompanying notes form an integral part of these condensed consolidated financial statements.
5
Vringo, Inc.FORM Holdings Corp. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three months ended March 31, | Three months ended March 31, | |||||||||||||||
2016 | 2015 | 2017 | 2016 | |||||||||||||
Cash flows from operating activities | ||||||||||||||||
Net loss | $ | (3,955 | ) | $ | (6,976 | ) | ||||||||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||
Consolidated net loss | $ | (6,349 | ) | $ | (3,955 | ) | ||||||||||
Adjustments to reconcile consolidated net loss to net cash used in operating activities: | ||||||||||||||||
Items not affecting cash flows | ||||||||||||||||
Depreciation and amortization | 851 | 1,025 | 1,899 | 851 | ||||||||||||
Amortization of debt discount and debt issuance costs | 414 | — | — | 414 | ||||||||||||
Stock-based compensation | 463 | 1,872 | 741 | 463 | ||||||||||||
Amendment to warrants as part of debt modification | (281 | ) | — | — | (281 | ) | ||||||||||
Loss on extinguishment of debt | 356 | — | — | 356 | ||||||||||||
Change in fair value of warrants and conversion feature | 11 | — | ||||||||||||||
Exchange rate loss, net | (86 | ) | 226 | |||||||||||||
Changes in current assets and liabilities | ||||||||||||||||
Issuance of shares of common stock for services | 11 | — | ||||||||||||||
Change in fair value of derivative warrant liabilities and conversion feature | (26 | ) | 11 | |||||||||||||
Exchange rate gain, net | — | (86 | ) | |||||||||||||
Changes in current assets and liabilities net of effects of acquisition | ||||||||||||||||
Increase in accounts receivable | (814 | ) | — | (742 | ) | (814 | ) | |||||||||
Decrease in other current assets | 143 | 120 | ||||||||||||||
Increase (decrease) in payables and accruals | (2,531 | ) | 231 | |||||||||||||
Decrease (increase) in inventory | 76 | (96 | ) | |||||||||||||
Decrease in other current assets and other assets | 1,121 | 239 | ||||||||||||||
Decrease in accounts payable, accrued expenses and other current liabilities | (1,693 | ) | (2,490 | ) | ||||||||||||
Increase in deferred revenue | 65 | 193 | ||||||||||||||
Decrease in other liabilities | (2 | ) | (234 | ) | ||||||||||||
Net cash used in operating activities | (5,429 | ) | (3,502 | ) | (4,899 | ) | (5,429 | ) | ||||||||
Cash flows from investing activities | ||||||||||||||||
Cash acquired as part of acquisition(1) | 26 | — | ||||||||||||||
Acquisition of property and equipment | (895 | ) | — | |||||||||||||
Acquisition of software | (86 | ) | — | (64 | ) | (86 | ) | |||||||||
Decrease (increase) in deposits | 1,173 | (278 | ) | |||||||||||||
Decrease in deposits | — | 1,173 | ||||||||||||||
Net cash provided by (used in) investing activities | 1,087 | (278 | ) | (933 | ) | 1,087 | ||||||||||
Cash flows from financing activities | ||||||||||||||||
Repayment of line of credit | (361 | ) | — | |||||||||||||
Debt issuance costs | (50 | ) | — | — | (50 | ) | ||||||||||
Net cash used in financing activities | (50 | ) | — | (361 | ) | (50 | ) | |||||||||
Effect of exchange rate changes on cash and cash equivalents | 1 | (4 | ) | |||||||||||||
Effect of exchange rate changes and foreign currency translation | (44 | ) | 1 | |||||||||||||
Decrease in cash and cash equivalents | (4,391 | ) | (3,784 | ) | (6,237 | ) | (4,391 | ) | ||||||||
Cash and cash equivalents at beginning of period | 24,951 | 16,023 | 17,910 | 24,951 | ||||||||||||
Cash and cash equivalents at end of period | $ | 20,560 | $ | 12,239 | $ | 11,673 | $ | 20,560 | ||||||||
Cash paid during the period for | ||||||||||||||||
Interest | $ | 150 | $ | — | ||||||||||||
Noncash investing and financing transactions | ||||||||||||||||
Change in classification of derivative warrant liabilities into equity warrants | $ | — | $ | 175 | ||||||||||||
Issuance of common stock to repay $2,786 of debt and interest | $ | 2,996 | $ | — | ||||||||||||
Issuance of common stock to repay debt and interest | — | 2,996 | ||||||||||||||
(1) Cash acquired as part of acquisition | ||||||||||||||||
Working capital (excluding cash and cash equivalents) | 79 | — | ||||||||||||||
Property and equipment | (21 | ) | — | |||||||||||||
Intangible assets | (556 | ) | — | |||||||||||||
Goodwill | (2,320 | ) | — | |||||||||||||
Deferred tax assets | (29 | ) | — | |||||||||||||
Line of credit with interest | 361 | — | ||||||||||||||
Other liabilities | 387 | — | ||||||||||||||
Fair value of shares of common stock issued | 1,809 | — | ||||||||||||||
Fair value of contingent liability | 316 | — | ||||||||||||||
26 | — |
The accompanying notes form an integral part of these condensed consolidated financial statements.
6
Vringo, Inc.FORM Holdings Corp. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except for share and per share data)
Note 1. General
Overview
Vringo, Inc.FORM Holdings Corp. (“Vringo”FORM” or the “Company”) is engaged in the innovation, development and monetizationa holding company of intellectual property, as well as the commercialization and distribution of wire-free power and rugged computing devices.small to middle market growth companies. The Company has three operating segments: wellness, technology and intellectual property.
The Company was incorporatedCompany’s wellness operating segment consists of XpresSpa, which is a leading airport retailer of spa services. XpresSpa is a well-recognized airport spa brand with 53 locations in Delaware on January 9, 200640 terminals and completed an initial public offering22 airports in June 2010. On July 19, 2012, Vringo closed a merger with Innovate/Protect, Inc. On August 9, 2012, the United States, Netherlands, and United Arab Emirates. XpresSpa offers travelers premium spa services, including massage, nail and hair as well as spa and travel products. The Company acquired a patent portfolio from Nokia, comprisedXpresSpa in the fourth quarter of 124 patent families with counterparts in certain jurisdictions worldwide, for $22,000. Under the terms of the purchase agreement, to the extent that the gross revenue as defined by the agreement exceeds $22,000, the Company is obligated to pay a royalty of 35% of such excess.2016.
On October 15, 2015, the Company acquired 100% of International Development Group Limited (“IDG”), a holding company consisting of two subsidiaries, Fli Charge and Group Mobile. IDG owned 70% of Fli Charge and 100%
The Company’s technology operating segment consists of Group Mobile. The acquisition was a stock purchase whereby Vringo acquired its entire interest in IDG in exchange for shares in Vringo. The total value of the consideration was $5,571. On December 28, 2015, Vringo acquired the remaining 30% of FliMobile and FLI Charge from third party shareholders in exchange for shares in Vringo.
Fli Charge owns a patented conductive wire-free charging technology and is focused on the development and commercialization of its technology through the direct-to-consumer sale of enablements, as well as partnerships and licensing agreementsan 11% equity interest in various industries. Fli Charge is currently working with partners that are interested in implementing Fli Charge technology for smart furniture, Original Equipment Manufacturers “OEM” and after-market automobiles, and vaporizers. Fli Charge’s business model is to license its technology in exchange for recurring licensing revenue as well as to manufacture and commercialize its own conductive charging pads and associated cases for phones, tablets and laptops.
Group Mobile is a full-service reseller of rugged computers, rugged tablets, rugged mobile devices, accessories and other related products geared toward emergency first responders, municipalities and corporations. In addition, Group Mobile specializes in high-quality customer support for those products.
Prior to December 31, 2013, Vringo operated a global platform for the distribution of mobile social applications and services. On February 18, 2014, the Company sold its mobile social application business to InfoMedia Services Limited (“InfoMedia”). Group Mobile offers rugged hardware and software solutions, including laptops, tablets, and mobile printers, as well as installation and deployment services. FLI Charge offers wireless conductive charging and power solutions for electronic devices. The Company acquired Group Mobile and FLI Charge in the fourth quarter of 2015 and Excalibur Integrated Systems Inc. (“Excalibur”), receiving an 8.25% ownershipwhich was merged with Group Mobile, in the first quarter of 2017. The Company’s equity interest in InfoMedia as consideration andincreased from 8.25% to 11% in the first quarter of 2017 due to a seat on the boardrealignment of directors of InfoMedia. As part of the transaction, the Company has the opportunity to license certain intellectual property assets and work with InfoMedia to identify and protect new intellectual property.
Each of the Company’s operating segments are described below.ownership interests.
Fli Charge
Fli Charge is a wire-free 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, Fli Charge is improving the powering and charging experience for all battery and DC powered devices.
Fli Charge designs, develops, licenses, manufactures and markets wire-free 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, Fli Charge has not yet generated any substantial revenue from its products. The Company believes that Fli Charge’s patented technology is the only wire-free power solution that is fully interoperable between different mobile devices ranging from smartphones to power tools, and many more. Fli Charge’s wire-free 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.
Group Mobile
Group Mobile is a provider of rugged, mobile and field-use computing products, serving customers worldwide. 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 operates a full-service e-commerce website with live chat, up-to-date product information, and computer system configuration capabilities. Group Mobile’s goal is to ensure that its customers purchase the best product for their specific requirements.
Group Mobile purchases rugged mobile computing equipment and complementary products from its primary distribution and manufacturing partners and sells them to enterprise, reseller, and retail customers. Group Mobile’s primary customers range from corporations to local governments, emergency first responders and healthcare organizations. Group Mobile believes that its 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., Xplore Technologies Corporation, Flextronics International Ltd. and Trimble Navigation Ltd., which combined represent approximately 80% of Group Mobile’s inventory purchases. Group Mobile has reseller agreements with most of its 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 Group Mobile or their supplier 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.
Intellectual Property
Vringo’s Intellectual PropertyCompany’s intellectual property operating segment is engaged in the innovation, development and monetization of intellectual property. The Company’s portfolio consists of over 600 patents related to content and patent applications covering telecom infrastructure, internet search, ad-insertionad delivery, remote monitoring and mobile technologies.
Vringo is currently focused on monetizing its technology portfolio through a variety of value enhancing initiatives, including, but not limited to licensing, litigation and strategic partnerships.
Recent Developments
Senior Secured Convertible Notes
On March 9, 2016, the Company and the holders (the “Investors”) of the Company’s $12,500 Senior Convertible Notes (the “Notes”), which were originally issued by the Company in a registered direct offering on May 4, 2015, entered into an exchange note agreement (the “Exchange Note Agreement”). Pursuant to the Exchange Note Agreement, the Company issued to the Investors an aggregate of 703,644 shares of its common stock, par value $0.01 per share, in exchange for the reduction of $1,267 of the outstanding aggregate principal amount of the Notes and $49 of accrued interest. As a result, the outstanding aggregate principal amount under the Notes was reduced from $3,016 to $1,749 as of March 9, 2016.
In addition, on March 9, 2016, the Company, with the consent of each of the Investors, 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 the Company’s common stock and will be payable by the Company 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) the Company 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) the Company will pay to the Investors on the Maturity Date 102% of the outstanding aggregate principal amount of the Amended Notes. The Company also agreed to maintain a cash balance (including cash equivalents) of not less than $2,900.
In addition, the Company agreed to reduce the exercise price of the warrants to purchase an aggregate of 537,500 shares of the Company’s 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, the Company paid a restructuring fee of $50 to the Investors.
Shareholder Rights Plan
On March 18, 2016, the Company announced that the Company’s Board of Directors adopted a shareholder rights plan in the form of a Section 382 Rights Agreement designed to preserve the Company’s tax assets. As a part of the plan, the Company’s Board of Directors declared a dividend of one preferred-share-purchase right for each share of the Company’s common stock outstanding as of March 29, 2016. Effective on March 18, 2016, if any group or person acquires 4.99% or more of the Company’s outstanding shares of common stock, or if a group or person that already owns 4.99% or more of the Company’s common stock acquires additional shares representing 0.5% or more of the Company’s common stock, then, subject to certain exceptions, there would be a triggering event under the plan. The rights would then separate from the Company’s common stock and would be adjusted to become exercisable to purchase shares of the Company’s 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. The Company’s Board of Directors has the discretion to exempt any acquisition of the Company’s 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, the Company filed a Certificate of Designation of Series C Junior Preferred Stock with the Secretary of State of the State of Delaware on March 18, 2016.
Reverse Stock Split
On November 27, 2015, the Company implemented a one-for-ten reverse split of its issued and outstanding shares of common stock (the "Reverse Stock Split"), as authorized at a special meeting of the Company’s stockholders held on November 16, 2015. The Reverse Stock Split became effective at the opening of trading on NASDAQ on November 27, 2015. As of November 27, 2015, every 10 shares of the Company’s issued and outstanding common stock were combined into one share of its common stock, except to the extent that the Reverse Stock Split resulted in any of the Company’s stockholders owning a fractional share, which was rounded up to the next highest whole share. In connection with the Reverse Stock Split, there was no change in the nominal par value per share of $0.01.
Financial condition
As of March 31, 2016, the Company had a cash balance of $20,560, accounts receivable of $1,060, and deposits with courts of $831. In February 2016, $1,173 of deposits with courts and $192 of court fees were returned back to the Company.
Note 2. Accounting and Reporting Policies
(a) Basis of presentation and principles of consolidation
The accompanying interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and the instructions to Rule 10-01 of Regulation S-X, and should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2015.2016. All adjustments that, in the opinion of management, are necessary for a fair presentation for the periods presented have been reflected by the Company. Such adjustments are of a normal, recurring nature. The results of operations for the three monththree-month period ended March 31, 20162017 are not necessarily indicative of the results that may be expected for the entire fiscal year or for any other interim period. All significant intercompany balances and transactions have been eliminated in consolidation.
(b) Use of estimates
The preparation of the accompanying condensed consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses for the periods presented. Actual results may differ from such estimates. Significant items subject to such estimates and assumptions include the Company’s intangible assets, the useful lives of the Company’s intangible assets, the valuation of the Company’s derivative warrants, the valuation of stock-based compensation, deferred tax assets and liabilities, income tax uncertainties, and other contingencies.
(c) Accounting guidance adopted in 2016Revenue recognition
The Company recognizes revenue for the wellness operating segment from the sale of XpresSpa products and services at the point of sale, net of discounts and applicable sales taxes. Revenues from the XpresSpa wholesale and e-commerce businesses are recorded at the time goods are shipped. The Company excludes all sales taxes assessed to its customers. Sales taxes assessed on revenues are included in accounts payable, accrued expenses and other current liabilities in the condensed consolidated balance sheets until remitted to the state agencies.
The Company records revenue from product sales in the technology operating segment when title and risk of loss are passed to the customer, there is persuasive evidence of an arrangement for sale, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. The Company’s shipping terms typically specify F.O.B. destination, at which time title and risk of loss have passed to the customer. At the time of sale of hardware products, the Company records an estimate for sales returns and allowances based on historical experience. Hardware products sold by the Company are warranted by the vendor.
The Company has drop-shipment arrangements with many of its hardware vendors and suppliers to deliver products directly to customers. Revenue for drop-shipment arrangements is recorded on a gross basis upon delivery to the customer with contract terms that typically specify F.O.B. destination. Revenue is recognized on a gross basis, as the Company is the principal in the transaction, as the primary obligor in the arrangement, assumes the inventory risk if the product is returned by the customer, sets the price of the product to the customer, assumes credit risk for the amounts invoiced, and works closely with the customers to determine their hardware specifications.
Freight billed to customers is recognized as net product revenue and the related freight costs as a cost of sales.
On certain occasions, the Company’s technology operating segment will enter into a bill and hold arrangement with a customer. When this occurs, the Company makes a determination as to when it will be the proper time to recognize revenue. In doing so, the Company takes the following into consideration:
For multiple-element arrangements in the Company’s technology operating segment that include hardware products, services and maintenance, the Company allocates revenue to all deliverables based on their relative selling prices. In such circumstances, the Company uses a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”) and (iii) best estimate of selling price (“ESP”). VSOE generally exists only when the Company sells the deliverable separately and is the price actually charged by the Company for that deliverable. ESPs reflect the Company’s best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis. The Company allocates revenue to all deliverables based on the VSOE of each element, and if VSOE does not exist revenue is recognized when elements lacking VSOE are delivered.
Revenue from patent licensing is recognized if collectability is reasonably assured, persuasive evidence of an arrangement exists, the sales price is fixed or determinable and delivery of the service has been rendered. Currently, revenue arrangements related to intellectual property provide for the payment of contractually determined fees and other consideration for the grant of certain intellectual property rights related to the Company’s patents. These rights typically include some combination of the following: (i) the grant of a non-exclusive, retroactive and future license to manufacture and/or sell products covered by patents, (ii) the release of the licensee from certain claims, and (iii) the dismissal of any pending litigation. The intellectual property rights granted typically extend until the expiration of the related patents. Pursuant to the terms of these agreements, the Company has no further obligation with respect to the grant of the non-exclusive retroactive and future licenses, covenants-not-to-sue, releases, and other deliverables, including no express or implied obligation on the Company’s part to maintain or upgrade the related technology, or provide future support or services. Generally, the agreements provide for the grant of the licenses, covenants-not-to-sue, releases, and other significant deliverables upon execution of the agreement, or upon receipt of the upfront payment. As such, the earnings process is complete and revenue is recognized upon the execution of the agreement, upon receipt of the upfront fee, and when all other revenue recognition criteria have been met.
(d) Cost of sales
Cost of sales for the Company’s wellness operating segment consists of store-level costs. Store-level costs include all costs that are directly attributable to the store operations and include:
Cost of sales for the Company’s technology operating segment includes costs to acquire or manufacture goods for inventory.
Cost of sales for the Company’s intellectual property segment mainly includes expenses incurred in connection with the Company’s patent licensing and enforcement activities, patent-related legal expenses paid to external patent counsel (including contingent legal fees), licensing and enforcement related research, consulting and other expenses paid to third parties, as well as related internal payroll expenses.
(e) Recently adopted accounting pronouncements
ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business
In January 2017, the FASB issued Accounting Standards Update No. 2017-01 (“ASU 2017-01”) “Business Combinations (Topic 805): Clarifying the Definition of a Business.” ASU 2017-01 provides guidance to evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. If substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single asset or a group of similar assets, the assets acquired (or disposed of) are not considered a business. The Company adopted ASU 2017-01 as of January 1, 2017 on a prospective basis.
(f) Recent issued accounting pronouncements not yet adopted
ASU No. 2015-03, Imputation of Interest (Subtopic 835-30)2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the PresentationTest for Goodwill Impairment
In January 2017, the FASB issued Accounting Standards Update No. 2017-04 (“ASU 2017-04”) “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates step two of Debt Issuance Costs
During the three month period ended March 31, 2016,goodwill impairment test and specifies that goodwill impairment should be measured by comparing the Company adopted guidance onfair value of a retrospective basis that requires debt issuance costs relatedreporting unit with its carrying amount. Additionally, the amount of goodwill allocated to each reporting unit with a recognized debt liability to be presented in the consolidated balance sheet as a deduction from thezero or negative carrying amount of such debt. As a result of thisnet assets should be disclosed. ASU 2017-04 is effective for annual or interim goodwill impairment tests performed in fiscal years beginning after December 15, 2019; early adoption theis permitted. The Company reclassified $73 of debt issuance costs as of December 31, 2015 from other current assets to senior secured notes.
ASU No. 2014-15, Presentation of Financial Statements (Topic 205): Going Concern
Duringcurrently anticipates that the three month period ended March 31, 2016, the Company adopted the standard that provides guidance around management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The adoption of this guidance didASU 2017-04 will not have a material effectimpact on the Company’sits consolidated financial statements.
ASU 2014-16, DerivativesNo. 2017-09, Stock Compensation (Topic 718): Scope of Modification Accounting
In May 2017, the FASB issued Accounting Standards Update No. 2017-09 (“ASU 2017-09”) “Stock Compensation (Topic 718): Scope of Modification Accounting.” ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment aware require an entity to apply modification accounting in Topic 718. The current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in this update. ASU 2017-09 is effective for annual periods, and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issuedinterim periods within those annual periods, beginning after December 15, 2017; early adoption is permitted. The Company is currently in the Formprocess of a Share is More Akin to Debt or to Equity
During the three month period ended March 31, 2016, the Company adopted the standard that clarifies how current U.S. GAAP should be interpreted in evaluating the economic characteristics and riskspotential impact of a host contract in a hybrid financial instrument that is issued in the form of a share. The adoption of this guidance did not have a material effect on the Company’sits consolidated financial statements.
(d)(g) Reclassification
On November 27, 2015, the Company implemented the Reverse Stock Split, which became effective at the opening of trading on the NASDAQ on that date. As of November 27, 2015, every 10 shares of the Company’s issued and outstanding common stock were combined into one share of its common stock, except to the extent that the Reverse Stock Split resulted in any of the Company’s stockholders owning a fractional share, which was rounded up to the next highest whole share. In connection with the Reverse Stock Split, there was no change in the nominal par value per share of $0.01.
Certain balances have been reclassified to conform to presentation requirements, including consistent presentation of cost of sales and general and administrative expenses to retroactively present the effect of the Reverse Stock Split. All references to the number of shares of common stock, price per share and weighted average shares of common stock have been adjusted to reflect the Reverse Stock Split on a retroactive basisalign presentation for all periods presented, unless otherwise noted.operating segments.
As a result of the adoption by the Company ofASU No. 2015-03on a retrospective basis, during the three month period ended March 31, 2016, the Company reclassified $73 of debt issuance costs as of December 31, 2015 from other current assets to senior secured notes.
Note 3. Net Loss per Share of Common ShareStock
Basic net loss per share is computed by dividing the net loss for the period by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted-average number of shares of common stock plus dilutive potential common stock considered outstanding during the period. However, as the Company generated net losses in all periods presented, some potentially dilutive securities, including certain warrants and stock options, were not reflected in diluted net loss per share because the impact of such instruments was anti-dilutive.
The table below presents the computation of basic and diluted net losses per share of common share:stock:
Three months ended March 31, | ||||||||
2016 | 2015 | |||||||
Basic Numerator: | ||||||||
Net loss attributable to shares of common stock | $ | (3,955 | ) | $ | (6,976 | ) | ||
Basic Denominator: | ||||||||
Weighted average number of shares of common stock outstanding during the period | 14,158,680 | 9,340,490 | ||||||
Basic common stock shares outstanding | 14,158,680 | 9,340,490 | ||||||
Basic net loss per common stock share | $ | (0.28 | ) | $ | (0.75 | ) | ||
Diluted Numerator: | ||||||||
Diluted net loss attributable to shares of common stock | $ | (3,955 | ) | $ | (6,976 | ) | ||
Diluted Denominator: | ||||||||
Basic common stock shares outstanding | 14,158,680 | 9,340,490 | ||||||
Diluted common stock shares outstanding | 14,158,680 | 9,340,490 | ||||||
Diluted net loss per common stock share | $ | (0.28 | ) | $ | (0.75 | ) | ||
Net loss per share data presented excludes from the calculation of diluted net loss the following potentially dilutive securities, as they had an anti-dilutive impact: | ||||||||
Both vested and unvested options to purchase an equal number of shares of common stock of the Company | 862,484 | 920,235 | ||||||
Unvested RSUs to issue an equal number of shares of common stock of the Company | 25,620 | 67,656 | ||||||
Warrants to purchase an equal number of shares of common stock of the Company | 1,006,679 | 1,740,265 | ||||||
Conversion feature of Notes | 318,924 | — | ||||||
Total number of potentially dilutive instruments, excluded from the calculation of net loss per share | 2,213,707 | 2,728,156 |
Three months ended March 31, | ||||||||
2017 | 2016 | |||||||
Basic numerator: | ||||||||
Net loss attributable to shares of common stock | $ | (6,425 | ) | $ | (3,955 | ) | ||
Basic denominator: | ||||||||
Basic shares of common stock outstanding | 18,862,715 | 14,158,680 | ||||||
Basic net loss per share of common stock | $ | (0.34 | ) | $ | (0.28 | ) | ||
Diluted numerator: | ||||||||
Diluted net loss attributable to shares of common stock | $ | (6,425 | ) | $ | (3,955 | ) | ||
Diluted denominator: | ||||||||
Diluted shares of common stock outstanding | 18,862,715 | 14,158,680 | ||||||
Diluted net loss per share of common stock | $ | (0.34 | ) | $ | (0.28 | ) | ||
Net loss per share data presented excludes from the calculation of diluted net loss the following potentially dilutive securities, as they had an anti-dilutive impact: | ||||||||
Both vested and unvested options to purchase an equal number of shares of common stock of the Company | 5,138,732 | 862,484 | ||||||
Unvested restricted stock units (“RSUs”) to issue an equal number of shares of common stock of the Company | 400,942 | 25,620 | ||||||
Warrants to purchase an equal number of shares of common stock of the Company | 3,430,877 | 1,006,679 | ||||||
Preferred stock on an as converted basis | 3,931,416 | — | ||||||
Conversion feature of notes | — | 318,924 | ||||||
Total number of potentially dilutive instruments excluded from the calculation of net loss per share of common stock | 12,901,967 | 2,213,707 |
Note 4. Business Combination
On October 15, 2015,February 2, 2017, the Company acquired IDG. Pursuant toExcalibur, which is an end-to-end solutions provider of mobile hardware devices, wireless network security, data networking, telephony and mobile application development and software solutions. Following the Purchase Agreement, the Company acquired 100% of the capital stock of IDG. Fli Charge, in which IDG owned 70% of the capital stock and control of its operations, and the wholly-ownedacquisition, Excalibur was merged with Group Mobile were also acquired throughwithin the purchase of IDG. Fli Charge owns patented conductive wire-free chargingCompany’s technology and is focused on innovation, sales, manufacturing and licensing its technology in various industries, such as automotive, furniture and others. Group Mobile is a company with full-service customer support in rugged computers, mobile devices and accessories.operating segment.
As
In consideration for the acquisition, the Company issued an equivalent of 1,666,667 common shares (after giving effect to the Reverse Stock Split), which were issued as follows: (i) 1,604,167 shares of the Company’s newly designated Series B Convertible Preferred Stock (“Series B Preferred”), convertible into 1,604,167888,573 unregistered shares of the Company’s common stock, , (ii) 57,500 sharespar value $0.01 per share, to the former stockholders of Excalibur (the “Excalibur Sellers”). In addition, the Company’s unregistered common stock issued to oneExcalibur Sellers will, in the three years following the closing of the sellers, who isthis transaction, also receive $500 for each $2,000 of gross profit generated by a former Chief Executive Officerspecified list of Excalibur accounts annually, until such cumulative gross profit reaches $6,000, and Director,an additional $500 when such cumulative profit reaches $10,000, such amounts are payable in consideration of his forgiveness of debt and (iii) 5,000 shares ofeither cash or the Company’s common stock, for transaction related services. A total of 240,625 Series B Preferred shares were placed in escrow to secure certainat the election of the sellers’ indemnity obligations under the Purchase Agreement for a period of up to 12 months. On November 27, 2015, all Series B Preferred outstanding shares were converted into unregistered common stockCompany.
The fair value of the Company, resulting in the 1,604,167 sharestotal purchase price is $2,125 and includes a fair value of common stock. On April 20, 2016, 85,121contingent consideration of $316 and fair value of unregistered shares of common stock were released from escrow.issued of $1,809.
Purchase consideration value was determined based on the market value of the Company’s common shares at the date of the transactions, discounted for the fact that the shares are restricted as to their marketability for a period of six months from the issuance date.
The transaction has been accounted for as a business combination. Assets acquired and liabilities assumed were recorded at their fair values atas of the closingacquisition date. The purchase price consideration was as follows:
October 15, 2015 Acquisition: | Fair Value | |||
Series B Preferred Stock | $ | 5,378 | ||
Debt assumed, settled in shares | 193 | |||
Total share value issued | $ | 5,571 |
The purchase price for the acquisition was allocated to the net tangible and intangible assets based on their fair values as of the closingacquisition date. The excess of the purchase price over the net tangible assets and intangible assets was recorded as goodwill. The table below presents preliminary allocation of the purchase price allocation was as follows:
price:
Fair Value | ||||
Assets: | ||||
Cash and cash equivalents | $ | 144 | ||
Accounts receivable | 245 | |||
Inventory | 234 | |||
Prepaid expenses | 18 | |||
Current Assets | 641 | |||
Intangible assets | 2,146 | |||
Goodwill | 4,863 | |||
Total Assets | 7,650 | |||
Liabilities: | ||||
Accounts payable | 464 | |||
Credit line | 270 | |||
Accrued expenses | 44 | |||
Other current liabilities | 173 | |||
Deferred tax liabilities | 866 | |||
Total liabilities | 1,817 | |||
Noncontrolling interest in Fli Charge | 262 | |||
Total | $ | 5,571 |
Fair Value | ||||
Assets | ||||
Current assets (including cash of $26) | $ | 628 | ||
Deferred tax assets | 29 | |||
Property and equipment | 21 | |||
Intangible assets | 556 | |||
Goodwill | 2,320 | |||
Total assets | 3,554 | |||
Liabilities | ||||
Accounts payable and accrued expenses | 1,214 | |||
Deferred tax liabilities | 215 | |||
Total liabilities | 1,429 | |||
Net assets, fair value | $ | 2,125 |
The allocation of the purchase price was based upon a preliminary valuation andperformed using the Company's estimates and assumptions, which are subject to change within the measurement period (up to one year from the acquisition dates)date). The principal area of potential purchase price adjustments relate to the shares placed in escrow.
In connection with the acquisition, the Company also entered into a Consulting Agreement with IDG’s former Chief Executive Officer and director for a term of six months and payment of $9 per month. The Company also issued to a finder a warrant to purchase up to an aggregate of 50,000 shares of common stock of the Company, at an exercise price of $5.00 per share, expiring on April 15, 2021. The fair value of the warrant was $114 and was recorded as an expense in general and administrative expenses.
On December 28, 2015, the Company acquired the remaining 30% interest in Fli Charge from third parties. In conjunction with the transaction, the Company issued 110,000 shares of its unregistered common stock for total consideration of $262. The fair value of the consideration for financial reporting purposes was determined based on the market value of the shares at the date of the transaction, discounted due to the restricted nature of the shares and the effect this has on their marketability. The issuance of these shares have no impact on the allocation of the purchase consideration pursuant to FASB ASC 810 and was recorded as an equity transaction.
Note 5. Intangible Assets
The following table provides information regarding the Company’s intangible assets, which consist of the following:
March 31, 2016 | December 31, 2015 | |||||||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted average amortization period (years) | ||||||||||||||||||||||
Patents | $ | 28,213 | $ | (14,512 | ) | $ | 13,701 | $ | 28,213 | $ | (13,782 | ) | $ | 14,431 | 8.60 | |||||||||||||
Customer relationships | 1,163 | (136 | ) | 1,027 | 1,163 | (62 | ) | 1,101 | 3.91 | |||||||||||||||||||
Trade name | 504 | (47 | ) | 457 | 504 | (21 | ) | 483 | 4.90 | |||||||||||||||||||
Technology | 479 | (39 | ) | 440 | 479 | (18 | ) | 461 | 5.68 | |||||||||||||||||||
Additions during the year: | ||||||||||||||||||||||||||||
Software | 86 | — | 86 | — | — | — | ||||||||||||||||||||||
Total intangible assets | $ | 30,445 | $ | (14,734 | ) | $ | 15,711 | $ | 30,359 | $ | (13,883 | ) | $ | 16,476 |
The Company’s patents consist of three major patent portfolios, which were acquired from third parties, as well as a number of internally-developed patents. The costs related to internally-developed patents are expensed as incurred. The Company recorded customer relationships, trade name and technology as part of the acquisition of Group Mobile and Fli Charge that was completed on October 15, 2015.
The Company’s intangible assets are amortized over their expected useful lives. During the three month periods ended March 31, 2016 and 2015, the Company recorded amortization expense of $851 and $804, respectively. There were no impairment indicators related to the Company’s amortizable intangible assets during the periods ended March 31, 2016 and 2015.
The following table provides information regarding the Company’s goodwill, which relates to the purchase of IDG completed on October 15, 2015. There were no indicators of impairment as of March 31, 2016.
Fli Charge | 757 | |||
Group Mobile | 4,106 | |||
Total Goodwill | $ | 4,863 |
Note 6.5. Segment Information
Three months ended March 31, | ||||||||
2016 | 2015 | |||||||
Revenue: | ||||||||
Intellectual Property | $ | 750 | $ | 150 | ||||
Fli Charge | 17 | — | ||||||
Group Mobile | 1,277 | — | ||||||
Total Revenue | $ | 2,044 | $ | 150 | ||||
Segment operating loss: | ||||||||
Intellectual Property | $ | (2,505 | ) | $ | (6,753 | ) | ||
Fli Charge | (779 | ) | — | |||||
Group Mobile | (322 | ) | — | |||||
Total segment operating loss | $ | (3,606 | ) | $ | (6,753 | ) | ||
Non-operating expense, net | (349 | ) | (223 | ) | ||||
Net loss | $ | (3,955 | ) | $ | (6,976 | ) |
March 31, 2016 | December 31, 2015 | |||||||
Assets: | ||||||||
Intellectual Property | $ | 36,864 | $ | 42,648 | ||||
Fli Charge | 1,286 | 1,583 | ||||||
Group Mobile | 6,725 | 6,228 | ||||||
Total Assets | $ | 44,875 | $ | 50,459 |
Prior to January 1, 2017, the Company had four operating segments: XpresSpa, which was acquired on December 23, 2016, Group Mobile, FLI Charge and intellectual property. Following the acquisitions of XpresSpa in December 2016 and Excalibur in February 2017, the Company re-evaluated the operating segments and roles within the executive team to better align financial and human capital resources. The Company’s operating segments are defined as components of an enterprise about which separate financial information is available that is regularly evaluated by the enterprise’s chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance. The Company concluded that it conducts its business through three operating segments, which are also its reportable segments: wellness, technology and intellectual property.
Segment operating results reflect losses before corporate and unallocated shared expenses, interest expense, income taxes and noncontrolling interests. Corporate and unallocated shared expenses principally consist of costs for corporate functions, rent for office space, stock-based compensation, executive management and certain unallocated administrative support functions.
Three months ended March 31, | ||||||||
2017 | 2016 | |||||||
Revenue | ||||||||
Wellness | $ | 10,984 | $ | — | ||||
Technology | 3,525 | 1,294 | ||||||
Intellectual property | 100 | 750 | ||||||
Total revenue | $ | 14,609 | $ | 2,044 | ||||
Cost of sales | ||||||||
Wellness | $ | 8,835 | $ | — | ||||
Technology | 2,960 | 1,127 | ||||||
Intellectual property | 99 | 720 | ||||||
Total cost of sales | $ | 11,894 | $ | 1,847 | ||||
Segment operating loss | ||||||||
Wellness | $ | (2,371 | ) | $ | — | |||
Technology | (1,475 | ) | (1,101 | ) | ||||
Intellectual property | (5 | ) | (703 | ) | ||||
Corporate | (2,193 | ) | (1,802 | ) | ||||
Total segment operating loss | (6,044 | ) | (3,606 | ) | ||||
Non-operating expense, net | (78 | ) | (349 | ) | ||||
Loss before income tax expense | $ | (6,122 | ) | $ | (3,955 | ) |
March 31, 2017 | December 31, 2016 | |||||||
Assets | ||||||||
Wellness | $ | 55,076 | $ | 57,527 | ||||
Technology | 12,838 | 8,634 | ||||||
Intellectual property | 765 | 940 | ||||||
Corporate | 10,023 | 15,706 | ||||||
Total assets | $ | 78,702 | $ | 82,807 |
General and administrative costs are allocated toamong the Intellectual Propertyoperating segments and non-operating corporate segment.
Note 7. Senior Secured Notes
On May 4, 2015 (the “Closing Date”), the Company entered into a securities purchase agreement with certain institutional investors (the “Investors”) in a registered direct offering of $12,500 of Senior Secured Convertible Notes (the “Notes”) and warrants (the “May 2015 Warrants”) to purchase 537,500 shares of the Company’s common stock (after giving effect to the Reverse Stock Split). On the Closing Date, the Company issued the Notes, which were convertible into shares of the Company’s common stock at $10.00 per share, had 8% interest and matured in 21 months from the date of issuance, unless earlier converted. In addition, the Company issued the May 2015 Warrants to purchase shares of the Company’s common stock, which were exercisable at $10.00 per share for a period of five years, beginning on November 4, 2015. In connection with the issuance of the Notes and the May 2015 Warrants, the Company received net cash proceeds of $12,425. The Company also incurred third party costs directly associated with the issuance of Notes of $218, which are capitalized as debt issuance costs and reported as a reduction in senior secured notes, and are amortized over the term of the Note. The Company’s obligations under the outstanding Notes are secured by a first priority perfected security interest in substantially all of the Company’s U.S. assets. In addition, stock of certain subsidiaries of the Company were pledged. The outstanding Notes contain customary events of default, as well as covenants which include restrictions on the assumption of new debt by the Company. As of December 31, 2015, all covenants were met and there were no events of default.
As of December 31, 2015, total outstanding principal was $4,206. Between January 1, 2016 and March 9, 2016, the Company made two principal payments in the aggregate amount of $1,190. The Company elected to make these principal payments in shares of the Company’s common stock, which are issued at a 15% discount to the market price data. As such, the Company issued 1,032,332 shares in lieu of principal payments and recorded $210 as extinguishment of debt expense on the consolidated statements of operations.
On March 9, 2016, the Company and the Investors entered into the Exchange Note Agreement. Pursuant to the Exchange Note Agreement, the Company issued to the Investors an aggregate of 703,644 shares of its common stock in exchange for the reduction of $1,267 of the outstanding aggregate principal amount of the Notes and $49 of accrued interest. As a result, the outstanding aggregate principal amount under the Notes was reduced from $3,016 to $1,749 as of March 9, 2016.
In addition, on March 9, 2016, the Company, with the consent of each of the Investors, agreed to amend the Notes. Pursuant to 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 the Second Supplemental Indenture dated March 9, 2016: (i) the Amended Notes are no longer convertible into shares of the Company’s common stock and will be payable by the Company on the Maturity Date in cash only, (ii) the Maturity Date of the Amended Notes will extend to June 30, 2017, (iii) the Company 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) the Company will pay to the Investors on the Maturity Date 102% of the outstanding aggregate principal amount of the Amended Notes. The Company also agreed to maintain a cash balance (including cash equivalents) of not less than $2,900.
In addition, the Company agreed to reduce the exercise price of 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, the Company paid a restructuring fee of $50 to the Investors.
The Company has concluded that the Exchange Note Agreementnon-operating corporate segment does not constitute a troubled debt restructuringhave any revenue, but does incur expenses such as it has not experienced financial difficulty. As such, the Company applied the guidance in ASC 470-50, Modificationscompensation expenses, rent and Extinguishments.infrastructure costs. The accounting treatment is determined by whether (1) the Investors remain the same and (2) the change in the debt terms is considered substantial.
Since the Investors remained the same before and after the Exchange Note Agreement, the Company has made a quantitative test, in order to determine whether the Amended Notesnon-operating corporate segment’s assets are substantially different from the original Notes. According to ASC 470-50-40-10, from the debtor’s perspective, an exchangemainly comprised of debt instruments between or a modification of a debt instrument by a debtor and a creditor is deemed to have been accomplished with debt instruments that are substantially different if the present value of the cash flows under the terms of the new debt instrument is at least 10 percent different from the present value of the remaining cash flows under the terms of the original instrument. If the terms of a debt instrument are changed or modified and the cash flow effect on a present value basis is less than 10 percent, the debt instruments are not considered to be substantially different.
Based on the accounting analysis performed and considering various scenarios for the cash flow test, the Company concluded that the Amended Notes were not substantially different from the original Notes and, as such, accounted for the Exchange Note Agreement as a modification:
cash.
The Company currently operates in two geographical segments: United States and all other countries. The following table below summarizes changes inrepresents the book valuegeographical revenue, segment operating loss, and total asset information as of and for the Notes from December 31, 2015 tothree months ended March 31, 2016:2017 and 2016. There were no concentrations of geographical revenue, segment operating loss or total assets related to any single foreign country that were material to the Company’s condensed consolidated financial statements.
Three months ended March 31, | ||||||||
2017 | 2016 | |||||||
Revenue | ||||||||
United States | $ | 13,493 | $ | 2,044 | ||||
All other countries | 1,116 | — | ||||||
Total revenue | $ | 14,609 | $ | 2,044 | ||||
Cost of sales | ||||||||
United States | $ | 11,217 | $ | 1,847 | ||||
All other countries | 677 | — | ||||||
Total cost of sales | $ | 11,894 | $ | 1,847 | ||||
Segment operating income (loss) | ||||||||
United States | $ | (6,234 | ) | $ | (3,606 | ) | ||
All other countries | 190 | — | ||||||
Total segment operating loss | $ | (6,044 | ) | $ | (3,606 | ) | ||
Non-operating expense, net | (78 | ) | (349 | ) | ||||
Loss before income tax expense | $ | (6,122 | ) | $ | (3,955 | ) |
Book value of Notes as of December 31, 2015 (net of unamortized portion of debt issuance costs of $73) | $ | 3,111 | ||
Debt repayments in January and February 2016 | (1,190 | ) | ||
Amortization of debt discount and debt issuance costs, included in interest expense | 356 | |||
Book value of Notes before the Exchange Note Agreement on March 9, 2016 | 2,277 | |||
Fair value of the considerations provided to the Investors, including: | ||||
Increase in fair value of May 2015 Warrants due to reduced exercise price | 281 | |||
Repayment of Notes in shares of common stock | 1,267 | |||
Repayment of $1,267 of Notes in shares of common stock at a discount to the market | 183 | |||
Restructuring fee paid to the Investors | 50 | |||
Total fair value of the considerations provided to the Investors | 1,781 | |||
Book value of Amended Notes after the Exchange Note Agreement on March 9, 2016 | 496 | |||
Amortization of debt discount and debt issuance costs, included in interest expense | 58 | |||
Book value of Amended Notes as of March 31, 2016 | $ | 554 |
March 31, 2017 | December 31, 2016 | |||||||
Assets | ||||||||
United States | $ | 77,073 | $ | 80,053 | ||||
All other countries | 1,629 | 2,754 | ||||||
Total assets | $ | 78,702 | $ | 82,807 |
Note 8.6. Fair Value Measurements
The following table presents the placement in the fair value hierarchy of liabilities measured at fair value on a recurring basis as of March 31, 20162017 and December 31, 2015:2016:
Fair value measurement at reporting date using | ||||||||||||||||
Quoted prices in | ||||||||||||||||
active markets | Significant other | Significant | ||||||||||||||
for identical | observable | unobservable | ||||||||||||||
Balance | assets (Level 1) | inputs (Level 2) | inputs (Level 3) | |||||||||||||
March 31, 2016: | ||||||||||||||||
May 2015 Warrants | $ | 428 | $ | — | $ | — | $ | 428 | ||||||||
December 31, 2015: | ||||||||||||||||
May 2015 Warrants | $ | 416 | $ | — | $ | — | $ | 416 | ||||||||
Conversion feature | $ | 1 | $ | — | $ | — | $ | 1 |
Fair value measurement at reporting date using | ||||||||||||||||
Quoted prices in | ||||||||||||||||
active markets | Significant other | Significant | ||||||||||||||
for identical | observable | unobservable | ||||||||||||||
Balance | assets (Level 1) | inputs (Level 2) | inputs (Level 3) | |||||||||||||
March 31, 2017: | ||||||||||||||||
May 2015 Warrants | $ | 233 | $ | — | $ | — | $ | 233 | ||||||||
December 31, 2016: | ||||||||||||||||
May 2015 Warrants | $ | 259 | $ | — | $ | — | $ | 259 |
The Company measures its derivative liabilities at fair value. The May 2015 Warrants were classified within Level 3 because they were valued using the Black-Sholes-MertonBlack-Scholes-Merton model, which utilizes significant inputs that are unobservable in the market. They are recorded asThese derivative warrant liabilities as they are freestanding instruments and there are several features within the warrants that may require the Company to cash settle or partially cash settle. In particular, the Company may have to cash settle, partially cash settle, or make cash payments to the Investors including cash settlement upon exercise when insufficient shares are authorized to be issued, and that the Company is obligated to issue registered shares when the warrants are exercised. The derivative warrant liabilities arewere initially measured at fair value and are marked to market at each balance sheet date.
In addition to the above, the Company’s financial instruments as of March 31, 20162017 and December 31, 20152016, consisted of cash and cash equivalents, receivables, accounts payable deposits and Notes.Debt. The carrying amounts of all the aforementioned financial instruments approximate fair value because of the short-term maturities of these instruments.
The following table summarizes the changes in the Company’s liabilities measured at fair value using significant unobservable inputs (Level 3) during the three month period ended March 31, 2016:2017:
May 2015 Warrants | Conversion feature | |||||||
December 31, 2015 | $ | 416 | $ | 1 | ||||
Decrease in fair value of the warrants and conversion feature | (269 | ) | (1 | ) | ||||
Increase in fair value as a result of debt modification | $ | 281 | — | |||||
March 31, 2016 | $ | 428 | $ | — |
May 2015 Warrants | ||||
December 31, 2016 | $ | 259 | ||
Decrease in fair value of the derivative warrant liabilities | (26 | ) | ||
March 31, 2017 | $ | 233 |
Valuation processes for Level 3 Fair Value Measurements
Fair value measurement of the derivative warrant liabilities falls within Level 3 of the fair value hierarchy. The fair value measurements are evaluated by management to ensure that changes are consistent with expectations of management based upon the sensitivity and nature of the inputs.
March 31, 2016:2017:
Description | Valuation technique | Unobservable inputs | Range | |||||
May 2015 Warrants | Black-Scholes-Merton | Volatility | % | |||||
Risk free interest rate | % | |||||||
Expected term, in years | ||||||||
Dividend yield | 0.00 | % |
December 31, 2015:2016:
Description | Valuation technique | Unobservable inputs | Range | |||||
Volatility | % | |||||||
% | ||||||||
Expected term, in years | ||||||||
Dividend yield | 0.00 | % |
Sensitivity of Level 3 measurements to changes in significant unobservable inputs
The inputs to estimate the fair value of the Company’s derivative warrant liabilities and conversion feature were the current market price of the Company’s common stock, the exercise price of the warrants and conversion feature,derivative warrant liabilities, their remaining expected term, the volatility of the Company’s common stock price and the risk-free interest rate over the expected term. Significant changes in any of those inputs in isolation can result in a significant change in the fair value measurement.
Generally, an increase in the market price of the Company’s shares of common stock, an increase in the volatility of the Company’s shares of common stock, and an increase in the remaining term of the warrants and conversion featurederivative warrant liabilities would each result in a directionally similar change in the estimated fair value of the Company’s warrants.derivative warrant liabilities. Such changes would increase the associated liability while decreases in these assumptions would decrease the associated liability. An increase in the risk-free interest rate or a decrease in the differential between the warrants’ and conversion feature’sderivative warrant liabilities’ exercise pricesprice and the market price of the Company’s shares of common stock would result in a decrease in the estimated fair value measurement and thus a decrease in the associated liability. The Company has not, and does not plan to, declare dividends on its common stock, and as such, there is no change in the estimated fair value of the warrants and conversion featurederivative warrant liabilities due to the dividend assumption.
Note 9. Warrants
The following table summarizes information about warrant activity duringpresents the three month period ended March 31, 2016:
No. of warrants | Weighted average exercise price | Exercise price range | ||||||||||
December 31, 2015 | 1,006,679 | $ | 12.92 | $5.00 - $17.60 | ||||||||
Granted | — | — | — | |||||||||
Exercised | — | — | — | |||||||||
Expired | — | — | — | |||||||||
March 31, 2016 | 1,006,679 | $ | 9.18 | $3.00 - $17.60 |
On March 9, 2016,placement in the fair value hierarchy of shares of the contingent liability assumed by the Company modifiedfollowing the exercise priceacquisition of the May 2015 Warrants,Excalibur on February 2, 2017, which are recorded as derivative warrant liabilities, from $10.00 to $3.00. There were no changes to other terms of the May 2015 Warrants (see Note 7). The change inwas measured at fair value of the May 2015 Warrants ason a result of the exercise price modification was accounted for as a debt discount to be amortized over the remaining term of the Amended Notes.
Certain of the Company’s outstanding warrants are classified as equity warrants and certain are classified as derivative warrant liabilities. The Company’s outstanding equity warrantsnon-recurring basis as of March 31, 2016 consist of the following:2017:
No. outstanding | Exercise price | Remaining contractual life | Expiration Date | |||||||||
Series 1 Warrants | 149,025 | $ | 17.60 | 1.30 years | July 19, 2017 | |||||||
Series 2 Warrants | 194,352 | $ | 17.60 | 1.30 years | July 19, 2017 | |||||||
Reload Warrants | 75,802 | $ | 17.60 | 0.85 years | February 6, 2017 | |||||||
October 2015 Warrants | 50,000 | $ | 5.00 | 5.04 years | April 15, 2021 | |||||||
Outstanding as of March 31, 2016 | 469,179 |
Fair value measurement at reporting date using | ||||||||||||||||
Quoted prices in | ||||||||||||||||
active markets | Significant other | Significant | ||||||||||||||
for identical | observable | unobservable | ||||||||||||||
Balance | assets (Level 1) | inputs (Level 2) | inputs (Level 3) | |||||||||||||
March 31, 2017: | ||||||||||||||||
Contingent liability | $ | 316 | $ | — | $ | — | $ | 316 |
The Company’s outstanding derivative warrants as of March 31, 2016 consistpurchase consideration value of the following:contingent liability assumed by the Company following the acquisition of Excalibur on February 2, 2017 was determined using the Monte-Carlo simulation and, as such, was classified as Level 3 of the fair value hierarchy.
No. outstanding | Exercise price | Remaining contractual life | Expiration Date | |||||||||
May 2015 Warrants | 537,500 | $ | 3.00 | 4.09 years | May 4, 2020 |
Note 10.7. Stock-based Compensation
The Company has a stock-based compensation plan available to grant stock options and restricted stock units (“RSUs”) to
As of March 31, 2017, 1,255,270 shares of the Company’s directors, employees and consultants. Undercommon stock were available for future grants under the Company’s 2012 Employee, Director and Consultant Equity Incentive Plan (the “Plan”), a maximum of 1,560,000 shares of common stock may be awarded (after giving effect to the one-for-ten reverse stock split). In 2015, the Company amended its Plan, so that a maximum of shares of common stock that may be awarded was increased to 2,100,000. As of March 31, 2016, 932,460 shares were available for future grants under the Plan. Total stock-based compensation expense for the periods ended March 31, 2017 and 2016 was $741 and 2015 was $463, and $1,872, respectively.
The following table illustrates the options granted during the three-month period ended March 31, 2017.
Title | Grant date | No. of options | Exercise price | Fair value at grant date | Vesting terms | Assumptions used in Black-Scholes option pricing model | ||||||||
Directors, management, and employees | January 2017 | 1,545,000 | $2.12 – $2.15 | $0.89 – $0.96 | Over 1 year for directors; Over 3 years for management and employees | Volatility: 44.27% – 44.90% Risk free interest rate: 1.95% – 2.16% Expected term, in years: 5.29 – 5.79 Dividend yield: 0.00% |
The following table illustrates the RSUs granted during the three monththree-month period ended March 31, 2016. There were no stock options granted during the three month period ended March 31, 2016.2017.
Title | Grant date | No. of RSUs | Exercise price | Fair market value at grant date | Vesting term | |||||||||||
Consultant | March 9, 2016 | 10,000 | — | $ | 2.13 | Over 0.33 years |
Title | Grant date | No. of RSUs | Fair value at grant date | Vesting term | ||||||||
Management and employees | January 2017 | 400,942 | $ | 2.12 | Over 1 year period, vesting on 1 year anniversary of grant date |
The activity related to stock options and RSUs during the three monththree-month period ended March 31, 20162017 consisted of the following:
RSUs | Options | |||||||||||||||||||||||
No. of RSUs | Weighted average grant date fair value | No. of options | Weighted average exercise price | Exercise price range | Weighted average grant date fair value | |||||||||||||||||||
Outstanding as of January 1, 2017 | — | — | 3,679,101 | $ | 7.60 | $ | 1.55 – 55.00 | $ | 5.41 | |||||||||||||||
Granted | 400,942 | $ | 2.12 | 1,545,000 | $ | 2.12 | $ | 2.12 – 2.15 | $ | 0.93 | ||||||||||||||
Vested/Exercised | — | — | — | — | — | — | ||||||||||||||||||
Forfeited | — | — | (69,001 | ) | $ | 25.92 | $ | 1.90 – 37.20 | $ | 17.58 | ||||||||||||||
Expired | — | — | (16,368 | ) | $ | 43.66 | $ | 9.94 – 55.00 | $ | 22.02 | ||||||||||||||
Outstanding as of March 31, 2017 | 400,942 | $ | 2.12 | 5,138,732 | $ | 5.59 | $ | 1.55 – 41.00 | $ | 3.85 | ||||||||||||||
Exercisable as of March 31, 2017 | — | — | 2,028,941 | $ | 11.39 | $ | 1.55 – 41.00 |
RSUs | Options | |||||||||||||||||||||||
No. of RSUs | Weighted average grant date fair value | No. of options | Weighted average exercise price | Exercise price range | Weighted average grant date fair value | |||||||||||||||||||
Outstanding at January 1, 2016 | 53,280 | $ | 36.31 | 871,484 | $ | 30.65 | $ | 5.10 - 55.00 | $ | 20.49 | ||||||||||||||
Granted | 10,000 | $ | 2.13 | — | — | — | ||||||||||||||||||
Vested/Exercised | (37,660 | ) | $ | 35.94 | — | — | — | |||||||||||||||||
Forfeited | — | — | — | — | — | |||||||||||||||||||
Expired | — | — | (9,000 | ) | $ | 55.00 | $ | 55.00 | $ | 26.20 | ||||||||||||||
Outstanding at March 31, 2016 | 25,620 | $ | 23.51 | 862,484 | $ | 30.40 | $ | 5.10 - 55.00 | $ | 20.43 | ||||||||||||||
Exercisable at March 31, 2016 | — | — | 819,358 | $ | 31.13 | $ | 5.10 - 55.00 |
On January 20, 2017, the Company entered into amended employment agreements with its named executive officers. Under the terms of some of these agreements, certain of these officers are entitled to a percentage of the amount equal to the total amount of cash and the fair market value of all non-cash consideration paid or payable to the Company or its stockholders in connection with an initial public offering or a change of control of certain subsidiaries of the Company. The amended employment agreements also allow for the granting of equity awards to certain officers in connection with an initial public offering of certain subsidiaries of the Company.
The Company did not recognize tax benefits related to its stock-based compensation as there is a full valuation allowance recorded.
Note 11. Other Current Assets8. Income Taxes
The Company’s provision for income taxes consists of federal, state, local, and foreign taxes in amounts necessary to align the Company’s year-to-date provision for income taxes with the effective tax rate that the Company expects to achieve for the full year. Each quarter, the Company updates its estimate of the annual effective tax rate and records cumulative adjustments as deemed necessary. The income tax provisions for the quarter ended March 31, 2017 reflect an estimated global annual effective tax rate of approximately -7.27%. As of March 31, 2016 and December 31, 2015, the Company’s other current assets were comprised of the following:
March 31, 2016 | December 31, 2015 | |||||||
Prepaid expenses | $ | 439 | $ | 674 | ||||
Inventory | 475 | 379 | ||||||
Other | 20 | 24 | ||||||
$ | 934 | $ | 1,077 |
Note 12. Accounts Payable, Accrued Expenses and Other Current Liabilities
As of March 31, 2016 and December 31, 2015, the Company’s accounts payable, accrued expenses and other current liabilities were comprised of the following:
March 31, 2016 | December 31, 2015 | |||||||
Accounts payable and accrued liabilities | $ | 2,503 | $ | 4,885 | ||||
Tax liabilities | 538 | 538 | ||||||
Other | 680 | 607 | ||||||
$ | 3,721 | $ | 6,030 |
On July 12, 2015, Group Mobile amended its existing loan agreement with Oklahoma Fidelity Bank, a division of Fidelity Bank. The total amount of the loan is $300 and it bears a variable interest, which is the lower of the Wall Street Journal prime rate plus 1% or 5% annually. The maturity date of the loan is July 12, 2016. The outstanding balance on the loan as of March 31, 2016 and December 31, 2015 was $266 and $268, respectively, and is included in accounts payable, accrued expenses and other current liabilities on the consolidated balance sheets.
Note 13. Income Taxes
As of March 31, 2016,2017, deferred tax assets generated from the Company’s U.S. activities were offset by a valuation allowance because realization depends on generating future taxable income, which, in the Company’s estimation, is not more likely than not to be generated before such net operating loss carryforwards expire. The Company expects its effective tax rate for its current fiscal year to be significantly lower than the statutory rate as a result of a full valuation allowance; therefore, any loss before income taxes does not generate a corresponding income tax benefit.
The Company did not have any material unrecognizedIncome tax benefits as ofexpense for the quarter ended March 31, 2016.2017 of $227 was attributable primarily to tax deductions related to goodwill, for which there is no corresponding financial statement amortization expense, partially offset by the reduction in the valuation allowance needed following the acquisition of Excalibur's deferred tax liability. The final annual tax rate cannot be determined until the end of the fiscal year; therefore, the actual tax rate could differ from current estimates. Although the Company has an immaterial amount of uncertain tax positions, the Company does not expect to record any additional material provisions for unrecognized tax benefits withinwith the next year.
Note 9. Related Parties Transactions
XpresSpa entered in a credit agreement and secured promissory note (the “Debt”) with Rockmore Investment Master Fund Ltd. (“Rockmore”) on April 22, 2015 that was amended on August 8, 2016. Rockmore is an investment entity controlled by the Company’s board member, Bruce T. Bernstein. The Debt had an outstanding balance of $6,500 as of March 31, 2017 and December 31, 2016, included in long-term liabilities in the condensed consolidated balance sheets. During the quarter ended March 31, 2017, XpresSpa paid $150 of interest and recorded $189 of interest expense. During May 2017, as per the original agreement and with Rockmore’s consent, the Company elected to extend the maturity date of the Debt from May 1, 2018 to May 1, 2019. No other material terms of the Debt were amended.
In addition, the Company paid $212 to Mr. Bernstein during March 2017 for the legal costs incurred in conjunction with the acquisition of XpresSpa and certain legal proceedings related to litigation with Amiral Holdings SAS (“Amiral”) prior to the completion of such acquisition, as Mr. Bernstein was indemnified by XpresSpa and was a defendant in the Amiral legal proceedings. These costs are included in accounts payable, accrued expenses and other current liabilities in the condensed consolidated balance sheet as of December 31, 2016.
Note 14.10. Commitments and Contingencies
Litigation and legal proceedings
ZTE
On December 7, 2015,Certain of the Company’s outstanding legal matters include speculative claims for substantial or indeterminate amounts of damages. The Company entered intoregularly evaluates developments in its legal matters that could affect the Settlement Agreement with ZTE, pursuantamount of any potential liability and makes adjustments as appropriate. Significant judgment is required to whichdetermine both the parties withdrew all pending litigations and proceedings against each otherlikelihood of there being a liability and the Company granted ZTEestimated amount of a non-exclusive, non-transferable, worldwide perpetual licenseloss related to certain patents and patent applications owned by the Company.
Pursuant to the Settlement Agreement, the parties have taken steps to withdraw all pending litigations and proceedings against one another. To date, proceedings in Romania have yet to be formally closed, though the parties are currently working together to cause those proceedings to be formally closed.
In several jurisdictions, though ZTE requested that government organizations close proceedings against Vringo, those organizations make such determinations on their own volition. In China, ZTE requested that the National Developmental and Reform Commission (“NDRC”) conclude its investigation against Vringo; however, the NDRC has not yet closed its investigation. In addition, ZTE requested that the European Commission close its file on Vringo following ZTE’s withdrawal of its complaint against Vringo. On February 1, 2016, the European Commission confirmed that it would close its file on ZTE’s complaint against Vringo.
In addition, in China and the Netherlands, Vringo continues to appeal patent invalidity rulings issued in connection with proceedings originally brought by ZTE. In each instance, ZTE has indicated that it will not oppose Vringo’s appeals, though Vringo must still plead its case before the respective adjudicatory body in each jurisdiction. In addition, the European Patent Office has not yet dismissed an opposition action filed on one of Vringo’s recently issued European patents, and has requested that Vringo defend this action even though ZTE has indicated that it would not continue to pursue the action. No contingent liability is expected or recorded for the ZTE related legal proceedings.
ASUSmatters.
Vringo had filed patent infringement lawsuits against ASUSTeK Computer Inc.With respect to the Company’s outstanding legal matters, based on its current knowledge, the Company’s management believes that the amount or range of a potential loss will not, either individually or in the aggregate, have a material adverse effect on its business, consolidated financial position, results of operations or cash flows. However, the outcome of such legal matters is inherently unpredictable and its subsidiaries (collectively, “ASUS”)subject to significant uncertainties. The Company evaluated the matters described below, and assessed the probability and likelihood of the occurrence of liability. Based on management’s estimates, the Company recorded $650, which is included in Germany, India,accounts payable, accrued expenses, and Spain. In March 2016,other current liabilities in the parties settled their disputes and ended all litigations between them. As such,condensed consolidated balance sheet as of March 31, 2016, the Company had reversed $222 of contingent liabilities related to potential legal fees that were previously accrued for proceedings.2017.
The Company expenses legal fees in the period in which they are incurred.
14
Wellness
Cordial
Effective October 2014, XpresSpa terminated its former Airport Concession Disadvantaged Business Enterprise (“ACDBE”) partner, Cordial Endeavor Concessions of Atlanta, LLC (“Cordial”), in several store locations at Hartsfield-Jackson Atlanta International Airport.
On January 3, 2017, XpresSpa filed a lawsuit in the Supreme Court of the State of New York, County of New York against Cordial and several related parties. The lawsuit alleges breach of contract, unjust enrichment, breach of fiduciary duty, fraudulent inducement, fraudulent concealment, tortious interference, and breach of good faith and fair dealing related to XpresSpa’s former partnership with Cordial as XpresSpa’s ACDBE partner in several store locations at Hartsfield-Jackson Atlanta International Airport (the “Cordial Litigation”). On March 3, 2017, XpresSpa filed a first amended complaint against Cordial. On March 5, 2017, Cordial filed a motion to dismiss the Cordial Litigation.
On January 4, 2017, XpresSpa filed a lawsuit in the United States District Court for the Southern District of New York against its former attorney, Kevin Ross, and his law firm, alleging malpractice, unjust enrichment, breach of fiduciary duty, fraudulent inducement, fraudulent concealment, tortious interference, and promissory estoppel related to XpresSpa’s former partnership with Cordial, as well as XpresSpa’s engagement of Kevin Ross as its attorney (the “Ross Litigation”). On March 2, 2017, the defendants filed a letter with the Court requesting a pre-motion conference in anticipation of the defendants’ filing of a motion to dismiss. On March 17, 2017, XpresSpa filed a First Amended Complaint against the defendants.
Both the Cordial Litigation and Ross Litigation are pending before the respective courts; no schedule has been set in either matter.
In re Chen et al.
On March 16, 2015, four former employees of XpresSpa who worked at locations in John F. Kennedy International Airport and LaGuardia Airport filed a putative class and collective action wage-hour litigation in the United States District Court for the Eastern District of New York, claiming that they and other spa technicians were misclassified, and that overtime was unpaid. On September 23, 2016, the Court conditionally certified the class. The parties held a mediation on February 28, 2017 and reached an agreement on a settlement in principle. The parties are in the process of drafting a formal settlement agreement incorporating the agreed-upon terms.
Other
XpresSpa is involved in various other claims and legal actions that arise in the ordinary course of business. The Company does not believe that the ultimate resolution of these actions will have a material adverse effect on XpresSpa’s financial position, results of operations, liquidity, or capital resources. However, a significant increase in the number of these claims, or one or more successful claims under which the Company incurs greater liabilities than the Company currently anticipates, could materially and adversely affect the Company’s business, financial condition, results of operations and cash flows.
Intellectual Property
The Company’s intellectual property operating segment is also engaged in additional litigation, for which no contingent liability is recorded, as the Company does not expect anya material negative outcome.
Deposits with courts
The Company made deposits with courts during 2015 and 2014, related to its proceedings in Germany, Brazil, Romania and Malaysia. Deposits with courts paid in local currency are remeasured on the balance sheet date based on the related foreign exchange rate on that date. As of March 31, 2016 and December 31, 2015, deposits with courts, which are recorded as current assets, totaled $831 and $1,930, respectively. During the three month period ended March 31, 2016, $1,173 of the deposits with courts and $192 of court fees were returned back to the Company. As of May 5, 2016, all deposits that had been posted with the courts in connection with its litigation with ZTE have been returned to the Company.
Leases
In January 2014, the Company entered into an amended lease agreement for its corporate executive office in New York for the lease of a different office space within the same building. The initial annual rental fee for this new office is approximately $403 (subject to certain future escalations and adjustments) beginning on August 1, 2014, which was the date when the new office space was available. This lease will expire in October 2019. Group Mobile has a lease for its office space in Chandler, AZ. The annual rental fee is approximately $72; the current lease, which originally was due to expire on June 30, 2016, was amended in February 2016 and extended until July 31, 2019. Rent expense for operating leases for the three month periods ended March 31, 2016 and 2015 were $109 and $91, respectively.
Note 15. Subsequent Events
On April 25, 2016, the Company entered into a Confidential License Agreement (the “License Agreement”). Pursuant to the terms of the License Agreement, the Licensee will pay the Company a one-time lump sum payment of $8,900 within 30 days following the execution of the License Agreement and the Company will grant to the Licensee a non-exclusive, non-transferable, worldwide perpetual license to certain patents and patent applications owned by the Company.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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, 20152016 filed on March 10, 201630, 2017 (the “2015“2016 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 Vringo, Inc.FORM Holdings Corp., a Delaware corporation, and its condensed consolidated subsidiaries.
Overview
Vringo, Inc.
FORM Holdings Corp. (“Vringo”FORM” or the “Company”) is engageda holding company of small to middle market growth companies. We have three operating segments: wellness, technology and intellectual property.
Our wellness operating segment consists of XpresSpa, which is a leading airport retailer of spa services. XpresSpa is a well-recognized airport spa brand with 53 locations in 40 terminals and 22 airports in the innovation, developmentUnited States, Netherlands, and monetization of intellectual property,United Arab Emirates. XpresSpa offers travelers premium spa services, including massage, nail and hair as well as spa and travel products. We acquired XpresSpa in the commercialization and distributionfourth quarter of wire-free power and rugged computing devices. Our company has three operating segments:2016.
and FLI Charge as well as an 11% equity interest in InfoMedia Services Limited (“InfoMedia”). Group Mobile offers rugged hardware and software solutions, including laptops, tablets, and mobile printers, as well as installation and deployment services. FLI Charge offers wireless conductive charging and power solutions for electronic devices. We acquired Group Mobile and FLI Charge in the fourth quarter of 2015. Our equity interest in InfoMedia increased from 8.25% to 11% in the first quarter of 2017 due to a realignment of ownership interests.
On July 19, 2012, we consummated a merger with Innovate/Protect, Inc., then a privately held Delaware corporation.
On August 9, 2012,February 2, 2017, we acquired a patent portfolio from Nokia Corporationcompleted the acquisition of Excalibur Integrated Systems, Inc. (“Nokia”Excalibur”), comprised of 124 patent families with counterparts in certain jurisdictions worldwide, for $22,000,000. Under the terms of the purchase agreement, to the extent. On that the gross revenue as defined by agreement exceeds $22,000,000, we are obligated to pay a royalty of 35% of such excess.
On October 15, 2015,date, we acquired 100% of International Development Group Limited (“IDG”), a holding company including its two subsidiaries: fliCharge International Ltd. (“Fli Charge”)the capital stock of Excalibur, an end-to-end solutions provider of mobile hardware devices, wireless network security, data networking, telephony and mobile application development and software solutions. Following the acquisition, Excalibur was merged with Group Mobile International LLC (“Group Mobile”). IDG owned 70% of Fli Charge and 100% of Group Mobile. The purchase was a stock purchase whereby we acquired the entire interest in IDG in exchange for shares in Vringo. The total value of the consideration was $5,571,000. On December 28, 2015, we acquired the remaining 30% of Fli Charge from third party shareholders in exchange for 110,000 shares in Vringo.within our technology operating segment.
Prior to December 31, 2013, we operated a global platformIn consideration 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: Intellectual Property, Fli Charge and Group Mobile.
Our Strategy and Outlook
Our strategy for our Intellectual Property operating segment is to continue to monetize our existing portfolio of intellectual property through licensing and strategic partnerships. 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.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.
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.
Fli Charge
Fli Charge is a wire-free 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 wire-free 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 wire-free power solution that is fully interoperable between different mobile devices ranging from smartphones to power tools, and many more. Fli Charge’s wire-free 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 wire-free 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 wire-free technologies above, we believe that our conductive technology exhibits many competitive advantages including:
Group Mobile
Group Mobile is a provider of rugged, mobile and field-use computing products, serving customers worldwide. Group Mobile provides total hardware solutions, carrying 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 all the peripherals, accessories, and add-ons needed to maximize productivity in a mobile- or field-computing environment. Group Mobile operates a full-service e-commerce website with live chat, up-to-date product information, and computer system configuration capabilities.
Group Mobile purchases rugged mobile computing equipment and complementary products from its primary distribution and manufacturing partners and sells them to enterprise, reseller, 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., Xplore Technologies Corporation, Flextronics International Ltd. and Trimble Navigation Ltd., 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.
Recent Developments
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 Convertible Notes (the “Notes”), which we originally issued in a registered direct offering on May 4, 2015. Pursuant to the Exchange Note Agreement,acquisition, we issued to the Investorsformer stockholders of Excalibur (the “Excalibur Sellers”) an aggregate of 703,644888,573 unregistered shares of our common stock, par value $0.01 per share,share. The Excalibur Sellers will, in exchangethe three years following the closing of this transaction, also receive $500,000 for the reductioneach $2,000,000 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 supplementedgross profit generated by a First Supplemental Indenture dated May 4, 2015specified list of Excalibur accounts annually, until such cumulative gross profit reaches $6,000,000, and further supplemented by a Second Supplemental Indenture (the “Second Supplemental Indenture”) dated March 9, 2016: (i) the Amended Notes are no longer convertible intoan additional $500,000 when such cumulative profit reaches $10,000,000, such amounts payable in either cash or shares of our common stock, at our election.
Our intellectual property operating segment is engaged in the monetization of patents related to content 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, ad delivery, remote monitoring and mobile technologies.
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.Highlights
Three Months Ended March 31, 2017 | ||||||||||||||||||||
Corporate | Wellness | Technology | Intellectual Property | Total | ||||||||||||||||
Total revenue | $ | — | $ | 10,984,000 | $ | 3,525,000 | $ | 100,000 | $ | 14,609,000 | ||||||||||
Cost of sales | ||||||||||||||||||||
Products | — | 912,000 | 2,960,000 | — | 3,872,000 | |||||||||||||||
Labor | — | 5,309,000 | — | — | 5,309,000 | |||||||||||||||
Occupancy | — | 1,771,000 | — | — | 1,771,000 | |||||||||||||||
Other operating costs | — | 843,000 | — | 99,000 | 942,000 | |||||||||||||||
Total cost of sales | — | 8,835,000 | 2,960,000 | 99,000 | 11,894,000 | |||||||||||||||
Gross profit | — | 2,149,000 | 565,000 | 1,000 | 2,715,000 | |||||||||||||||
Gross profit as a % of total revenue | — | 19.6 | % | 16.0 | % | 1.0 | % | 18.6 | % | |||||||||||
Depreciation and amortization | ||||||||||||||||||||
Depreciation | 5,000 | 1,129,000 | 23,000 | — | 1,157,000 | |||||||||||||||
Amortization | — | 586,000 | 150,000 | 6,000 | 742,000 | |||||||||||||||
Total depreciation and amortization | 5,000 | 1,715,000 | 173,000 | 6,000 | 1,899,000 | |||||||||||||||
Stock-based compensation | 741,000 | — | — | — | 741,000 | |||||||||||||||
Merger and acquisition and integration costs | 42,000 | 484,000 | — | — | 526,000 | |||||||||||||||
Other general and administrative | 1,405,000 | 2,321,000 | 1,867,000 | — | 5,593,000 | |||||||||||||||
Total general and administrative | 2,188,000 | 2,805,000 | 1,867,000 | — | 6,860,000 | |||||||||||||||
Operating loss | $ | (2,193,000 | ) | $ | (2,371,000 | ) | $ | (1,475,000 | ) | $ | (5,000 | ) | $ | (6,044,000 | ) |
In addition,Prior to January 1, 2017, 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.
Shareholder Rights Plan
On March 18, 2016, we announced that our Board of Directors adopted a shareholder 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 the State of Delaware on March 18, 2016.
Reverse Stock Split
On November 27, 2015, we implemented a one-for-ten reverse split of our issued and outstanding shares of common stock (the "Reverse Stock Split"), as authorized at a special meeting of our stockholders held on November 16, 2015. The Reverse Stock Split became effective at the opening of trading on NASDAQ on November 27, 2015. As of November 27, 2015, every 10 shares of our issued and outstanding common stock were combined into one share of our common stock, except to the extent that the Reverse Stock Split resulted in any of our stockholders owning a fractional share,had four operating segments: XpresSpa, which was rounded up to the next highest whole share. In connection with the Reverse Stock Split, there was no change in the nominal par value per share of $0.01.
All references to number of shares of common stock, price per share and weighted average shares of common stock have been adjusted to reflect the Reverse Stock Splitacquired on a retroactive basis for all periods presented, unless otherwise noted.
Results of Operations
Revenue
Revenue from patent licensing and enforcement is recognized if collectability is reasonably assured, persuasive evidence of an arrangement exists, the sales price is fixed or determinable and delivery of the service has been rendered. We use management's best estimate of selling price for individual elements in multiple-element arrangements, where vendor specific evidence or third party evidence of selling price is not available.
Currently, revenue arrangements related to intellectual property provide for the payment of contractually-determined fees and other consideration for the grant of certain intellectual property rights related to our patents. These rights typically include some combination of the following: (i) the grant of a non-exclusive, retroactive and future license to manufacture and/or sell products covered by patents, (ii) the release of the licensee from certain claims, and (iii) the dismissal of any pending litigation. The intellectual property rights granted typically extend until the expiration of the related patents. Pursuant to the terms of these agreements, we have no further obligation with respect to the grant of the non-exclusive retroactive and future licenses, covenants-not-to-sue, releases, and other deliverables, including no express or implied obligation on our part to maintain or upgrade the related technology, or provide future support or services. Generally, the agreements provide for the grant of the licenses, covenants-not-to-sue, releases, and other significant deliverables upon execution of the agreement, or upon receipt of the upfront payment. As such, the earnings process is complete and revenue is recognized upon the execution of the agreement, upon receipt of the upfront fee, and when all other revenue recognition criteria have been met.
We record revenue from the product sales of FliDecember 23, 2016, Group Mobile, FLI Charge and Group Mobile when titleintellectual property. Following the acquisitions of XpresSpa in December 2016 and risk of loss are passed toExcalibur in February 2017, we re-evaluated the customer, there is persuasive evidence of an arrangement for sale, delivery has occurred, the sales price is fixed or determinable,operating segments and collectability is reasonably assured. Our shipping terms typically specify F.O.B. destination, at which time title and risk of loss have passed to the customer. At the time of sale of hardware products, we record an estimate for sales returns and allowances based on historical experience. Hardware products sold by us are warranted by the vendor.
Group Mobile uses drop-shipment arrangements with many of its hardware vendors and suppliers to deliver products directly to customers. Revenue for drop-shipment arrangements is recorded on a gross basis upon delivery to the customer with contract terms that typically specify F.O.B. destination. Revenue is recognized on a gross basis as Group Mobile is the principal in the transaction as the primary obligor in the arrangement, assumes the inventory risk if the product is returned by the customer, sets the price of the product to the customer, assumes credit risk for the amounts invoiced, and works closely with the customers to determine their hardware specifications.
Freight billed to customers is recognized as net product revenue and the related freight costs as a cost of goods sold.
Deferred revenue includes payments received from customers in advance of providing the product.
Operating legal costs
Operating legal costs mainly include expenses incurred in connection with our patent licensing and enforcement activities, patent-related legal expenses paid to external patent counsel (including contingent legal fees), licensing and enforcement related research, consulting and other expenses paid to third parties, as well as related internal payroll expenses and stock-based compensation. In addition, amounts received by us for reimbursements of legal fees in connection with our litigation campaigns are recorded in operating legal costs as an offset to legal expense.
Amortization of intangibles
Amortization of our acquired patent portfolios and other intangible assets is recognized on a straight-line basis over the remaining useful life of the intangible assets (i.e., through the expiration date of the patent).
General and administrative expenses
General and administrative expenses include management and administrative personnel, public and investor relations, overhead/office costs and various professional fees, as well as insurance, non-operational depreciation and amortization.
Non-operating income (expenses)
Non-operating income (expenses) includes transaction gains (losses) from foreign exchange rate differences, interest on the Notes, deposits, bank charges, as well as fair value adjustments related to our derivative warrant liabilities and conversion feature. The value of such derivative liabilities is highly influenced by assumptions used in its valuation, as well as by our stock price at the period end (revaluation date).
Income taxes
As of March 31, 2016, deferred tax assets generated from our U.S. activities were offset by a valuation allowance because realization depends on generating future taxable income, which, in our estimation, is not more likely than not to be generated before such net operating loss carryforwards expire.
We did not have any material unrecognized tax benefits as of March 31, 2016. We do not expect to record any additional material provisions for unrecognized tax benefitsroles within the next year.
Segment Reporting
Operatingexecutive team to better align financial and human capital resources. Our operating segments are defined as components of an enterprise about which separate financial information is available that is regularly evaluated by the enterprise’s chief operating decision maker ("CODM"(“CODM”), or decision making group, in deciding how to allocate resources and in assessing performance. We concluded that we conduct our business through three operating segments, which are also our reportable segments: Intellectual Property, Fli Chargewellness, technology and Group Mobile.intellectual property.
Organizing our business through threeSegment operating segments allows usresults reflect losses before corporate and unallocated shared expenses, interest expense, income taxes and noncontrolling interests.
Wellness
Our wellness operating segment recognized revenue of $10,984,000 during the first quarter of 2017, which was generated by XpresSpa for services provided and health and beauty products sold. We acquired XpresSpa on December 23, 2016 and are actively integrating its corporate functions and optimizing the operating segment’s performance. Since the acquisition, we opened two new flagship locations, the first opening in John F. Kennedy International Airport’s Terminal 4 during the first quarter of 2017 and the second in Phoenix Sky Harbor International Airport’s Terminal 4 during the second quarter of 2017. We also closed two small temporary kiosks to better align our resourcesresources. As of March 31, 2017, we operated 53 total XpresSpa locations.
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Store-level costs include all costs that are directly attributable to the store operations and manage include:
General and administrative costs include insurance, infrastructure, payroll and benefits, inventory planning, marketing and other costs. Also included in general and administrative costs are expenses related to the integration of factors our management usesXpresSpa as well as office consolidation and moving costs, which amounted to evaluate$484,000 during the first quarter of 2017.
Depreciation and run our business operations, including similaritiesamortization costs include the depreciation of customers, productsleasehold improvements and technology. equipment and the amortization of the brand and customer relationship intangible assets, which were recorded at fair value as of the acquisition date.
Technology
Our Chief Executive Officer is our CODM, who regularly reviewstechnology operating segment revenuepredominantly includes revenues and operating income (loss) when assessing financial results of operating segments and allocating resources.
We measure the performance of our operating segments based upon operating segment revenue and operating income (loss). Operating segment operating income (loss) includes revenue and expenses incurred directly by the operating segment, including material legal costs, cost of goods sold, selling, marketing,sales generated by Group Mobile and administrative expenses. All corporate overhead expenses have been allocated intoExcalibur. During the Intellectual Property operating segment. Nofirst quarter of 2017, Group Mobile’s revenue increased 173.4% from transactions between our operating segments was recorded.
Three month$1,277,000 for the three-month period ended March 31, 2016 compared to $3,491,000 for the three monththree-month period ended March 31, 20152017, respectively. This was mainly due to the increased sales pipeline throughout 2016 and early 2017. In addition, this operating segment includes costs associated with the development of FLI Charge’s technology and products.
Intellectual Property
The intellectual property operating segment includes revenues from one-time patent licenses as well as expenses incurred in connection with our patent licensing and related internal payroll expenses.
Corporate
Corporate and unallocated shared expenses principally consist of costs for corporate functions, rent for office space, stock-based compensation, executive management and certain unallocated administrative support functions.
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Results of Operations
Three-month period ended March 31, 2017 compared to the three-month period ended March 31, 2016
Revenue
We generate revenue through our three operating segments: Intellectual Property,Fli Charge and Group Mobile.
Three months ended March 31, | ||||||||||||
2017 | 2016 | Change | ||||||||||
Revenue | $ | 14,609,000 | $ | 2,044,000 | $ | 12,565,000 |
Three months ended March 31, | ||||||||||||
2016 | 2015 | Change | ||||||||||
Intellectual Property | $ | 750,000 | $ | 150,000 | $ | 600,000 | ||||||
Fli Charge | 17,000 | — | 17,000 | |||||||||
Group Mobile | 1,277,000 | — | 1,277,000 | |||||||||
Total Revenue | $ | 2,044,000 | $ | 150,000 | $ | 1,894,000 |
During the three monththree-month period ended March 31, 2017, we recorded total revenue of $14,609,000, which represents an increase of $12,565,000 (or 614.7%) compared to the three-month period ended March 31, 2016. The three-month period ended March 31, 2017 is the first full quarter that includes XpresSpa revenues and operating results. Our technology operating segment demonstrated 172.4% growth in quarterly revenues from $1,294,000 for the three-month period ended March 31, 2016 we recorded total revenue of $2,044,000, which represents an increase of $1,894,000 (or 1,262.7%) compared to $3,525,000 for the three monththree-month period ended March 31, 2015. The increase was attributable to each of our operating segments. Our Intellectual Property operating segment experienced a $600,000 increase for the amount received in connection with an executed confidential license agreement for a total of $750,000 and our Fli Charge and Group Mobile operating segments combined for total product revenue of $1,294,000.2017, respectively. We did not recognize any revenue from Fli Charge or Group Mobilegenerated by Excalibur prior to theirits acquisition on October 15, 2015. February 2, 2017 or XpresSpa prior to its acquisition on December 23, 2016.
Cost of sales
Three months ended March 31, | ||||||||||||
2017 | 2016 | Change | ||||||||||
Cost of sales | $ | 11,894,000 | $ | 1,847,000 | $ | 10,047,000 |
During the three monththree-month period ended March 31, 2015, we recorded total licensing revenue of $150,000 for our Intellectual Property segment, which was due to a one-time payment in connection with a settlement and license agreement for certain of our owned intellectual property.
We intend to continue to monetize our existing portfolio of intellectual property through licensing and strategic partnerships. 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 also 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.
Cost of goods sold
We incur cost of goods sold through two of our operating segments:Fli Charge and Group Mobile.
Three months ended March 31, | ||||||||||||
2016 | 2015 | Change | ||||||||||
Fli Charge | $ | 3,000 | — | 3,000 | ||||||||
Group Mobile | 1,124,000 | — | 1,124,000 | |||||||||
Total cost of goods sold | $ | 1,127,000 | — | 1,127,000 |
During the three month period ended March 31, 2016,2017, we recorded total cost of goods soldsales of $1,127,000,$11,894,000, which represents an increase of $10,047,000 (or 544.0%) compared to the coststhree-month period ended March 31, 2016. The three-month period ended March 31, 2017 is the first full quarter that includes XpresSpa cost of products sold by Fli Charge and Group Mobile for the period.sales. We did not recognize any cost of goods sold for Fli Charge or Group Mobilesales generated by Excalibur prior to theirits acquisition on October 15, 2015.February 2, 2017 or XpresSpa prior to its acquisition on December 23, 2016. We expect the cost of goods soldsales to increase over time as we incur the full results of operations of bothFli ChargeXpresSpa and Group Mobile inExcalibur.
During the periods subsequentthree-month period ended March 31, 2016, cost of sales related only to our technology and intellectual property operating segments, as this was prior to our acquisition of XpresSpa and the acquisition. establishment of a wellness operating segment.
We expect our cost of goods sold to increasesales will grow as our revenues increase. As a percentage of revenue, cost of sales were 81.4% in the first quarter of 2017 and 90.4% in first quarter of 2016. This decrease is primarily driven by new product revenue increases.and services offerings by our technology operating segment. In addition, the first quarter of 2016 included $720,000 of intellectual property costs related to enforcement efforts against ZTE Corporation and ASUSTeK Computer Inc. as compared to $99,000 of intellectual property costs incurred during the first quarter of 2017, which mostly relates to internal payroll expenses. We expect that total cost of sales will continue to decline as a percentage of sales over time through the improvement of store-level performance by our wellness operating segment and as our technology operating segment implements new offerings, made possible due to the integration of Excalibur into Group Mobile.
18
Depreciation and amortization
Operating legal costs
Three months ended March 31, | ||||||||||||
2017 | 2016 | Change | ||||||||||
Depreciation and amortization | $ | 1,899,000 | $ | 851,000 | $ | 1,048,000 |
We incur operating legal costs through our Intellectual Property operating segment only.
Three months ended March 31, | ||||||||||||
2016 | 2015 | Change | ||||||||||
Operating legal costs | $ | 720,000 | $ | 3,101,000 | $ | (2,381,000 | ) |
During the three monththree-month period ended March 31, 2016, our operating legal costs were $720,000, which represents a decrease of $2,381,000 (or 76.8%) from operating legal costs recorded for the three month period ended March 31, 2015. This decrease was primarily due to the timing2017, depreciation 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 significantly decrease over time.
Amortization of intangibles
Three months ended March 31, | ||||||||||||
2016 | 2015 | Change | ||||||||||
Amortization of intangibles | $ | 851,000 | $ | 804,000 | $ | 47,000 |
During the three month period ended March 31, 2016, amortization expense related to our intangible assets totaled $851,000,$1,899,000, which represents an increase of $47,000$1,048,000 (or 5.8%123.1%), compared to the amortization expense recorded during the three monththree-month period ended March 31, 2015.2016. There was no depreciation expense recorded for the three-month period ended March 31, 2016. The increase in amortization expense was due tois driven by the additiondepreciation of leasehold improvements and equipment of $1,129,000 and the amortization of newly acquiredthe brand and customer relationship intangible assets identified inof $585,000, which were acquired as part of our acquisition of IDG on October 15, 2015.XpresSpa within our wellness operating segment in December 2016. Additionally, we experienced a decline in amortization of our patents of $724,000 in our intellectual property operating segment. We expect depreciation and amortization expense will increase gradually over time as we open more stores in our wellness operating segment and new locations and will remain somewhat constant in our technology operating segment.
General and administrative
Three months ended March 31, | ||||||||||||
2016 | 2015 | Change | ||||||||||
General and administrative | $ | 2,952,000 | $ | 2,998,000 | $ | (46,000 | ) |
Three months ended March 31, | ||||||||||||
2017 | 2016 | Change | ||||||||||
General and administrative | $ | 6,860,000 | $ | 2,952,000 | $ | 3,908,000 |
During the three monththree-month period ended March 31, 2016,2017, general and administrative expenses decreasedincreased by $46,000$3,908,000 (or 1.5%132.4%), to $2,952,000, compared to $2,998,000 that was recorded during the three monththree-month period ended March 31, 2015. 2016. The three-month period ended March 31, 2017 is the first full quarter that includes XpresSpa general and administrative expenses. As a percentage of revenue, total general and administrative expenses were 47.0% and 144.4% during the first quarter of 2017 and 2016, respectively.
The overall decreaseincrease in general and administrative expenses was primarily due to a decreaseour acquisitions of XpresSpa in December 2016 and Excalibur in February 2017, as they incurred general and administrative expenses of $2,321,000 and $105,000 during the first quarter of 2017, respectively. We did not recognize any general and administrative expenses generated by Excalibur prior to its acquisition on February 2, 2017 or XpresSpa prior to its acquisition on December 23, 2016. Additionally, there was an increase in stock-based compensation expense of approximately $1,159,000,$278,000, which was a result of many of the equity awards granted in 2012 and 2013 becoming fully vested during the latter half of 2015. The decrease in stock-based compensation expense was offset by increases in other general and administrative expenses, which were a direct result of our acquisition of IDG on October 15, 2015, such as increases in salaries and benefits due to our expanded workforce, advertisingdirectors, management and marketing for our Fli Chargeemployees in April 2016 and Group Mobile operating segments, and product development as we continue to develop and improve Fli Charge’s product line.January 2017.
Non-operating expense, net
Three months ended March 31, | ||||||||||||
2017 | 2016 | Change | ||||||||||
Non-operating expense, net | $ | (78,000 | ) | $ | (349,000 | ) | $ | 271,000 |
Non-operating expense, net
Three months ended March 31, | ||||||||||||
2016 | 2015 | Change | ||||||||||
Non-operating income (expense), net | $ | (349,000 | ) | $ | (223,000 | ) | $ | (126,000 | ) |
During the three monththree-month period ended March 31, 2016,2017, we recorded total net non-operating expense in the amount of $78,000 compared to total net non-operating expense in the amount of $349,000 compared to total non-operating expense, net, in the amount of $223,000 recorded during the three monththree-month period ended March 31, 2015.
2016.
For the three monththree-month period ended March 31, 2017, we recorded interest expense of $189,000 mainly related to XpresSpa’s Debt. This was reduced by a gain of $26,000 on the revaluation of the derivative warrant liabilities and additional non-operating gains of $85,000.
For the three-month period ended March 31, 2016, we recorded interest expense of $476,000 for the interest recorded related to the Notes, which includes amortization of the debt discount, amortization of debt issuance costs, and coupon interest calculated using the effective interest method. In addition, weoutstanding notes. We elected to repay principal installments for January and February 2016on the notes in shares of our common stock, which were issued at a discount of 15% to market prices. Thisprices, which resulted in $210,000 recorded as a loss on the extinguishment of debt.
The non-operating These expenses reported during the three month period ended March 31, 2016 were reduced by a gain of $270,000 on the revaluation of the derivative warrant liabilities and conversion feature related to the Notes. Also reducing the current period expense werenotes and foreign exchange gains in connection with our deposits with courts.
The total non-operating expense, net, of $223,000 for the three month period ended March 31, 2015 was primarily related to foreign exchange losses in connection with our deposits with courts.
Liquidity and Capital Resources
Our primary liquidity and capital requirements are for new XpresSpa locations for our wellness operating segment, as well as working capital for our technology operating segment. As of March 31, 2016,2017, we had a cash balanceand cash equivalents of $20,560,000, which represents a decrease$11,673,000 that we expect to utilize, along with cash flows from operations, to provide capital to support the growth of $4,391,000 comparedour business, primarily through opening new XpresSpa locations, maintaining our existing XpresSpa locations, purchasing inventory for Group Mobile to support the growth in sales and maintaining corporate functions. In addition, we have approximately $6,023,000 of trade receivables, inventory and other current assets to support our working capital needs.
Our total cash balance as ofdecreased $6,237,000 to $11,673,000 from December 31, 2015. Of2016 to March 31, 2017. Included in our key payments that attributed to this decrease are payments related to the decrease in liquidity, 45% was due to payments made to litigation vendorsfollowing matters:
Acquisition and integration-related professional fees | $ | 776,000 | ||
Leases and tax-related matters | 453,000 | |||
Severance | 120,000 | |||
Capital expenditures, net | 933,000 | |||
Interest paid on Debt | 150,000 | |||
Repayment of line of credit upon Excalibur acquisition | 361,000 | |||
$ | 2,793,000 |
Our accounts payable, accrued expenses and other current liabilities, for costs incurred during 2015, 5% was due to payments made to general and administrative vendors for services provided during 2015, and approximately 50% was due to cash used in each of our three operating segments, Intellectual Property, Fli Charge, and Group Mobile, during the three month periodperiods ended March 31, 2016. We anticipate that our need for capital will continue to decline as litigation costs continue to decline2017 and project-based activities related to the improvement of systems and digital marketing attributed to Group Mobile near completion. Cash expenditures during the three month period ended MarchDecember 31, 2016, were offset by cash receivedas follows:
March 31, 2017 | December 31, 2016 | |||||||
Accounts payable | ||||||||
Wellness | $ | 3,374,000 | $ | 3,967,000 | ||||
Technology | 1,374,000 | 463,000 | ||||||
Intellectual Property | 88,000 | 213,000 | ||||||
Corporate | 518,000 | 844,000 | ||||||
Accrued expenses | 3,631,000 | 4,068,000 | ||||||
Accrued compensation | 635,000 | 1,356,000 | ||||||
Tax liabilities | 831,000 | 676,000 | ||||||
Other | 46,000 | 43,000 | ||||||
$ | 10,497,000 | $ | 11,630,000 |
Accounts payable are primarily comprised of trade payables to vendors, including amounts owed to vendors for refundsacquiring inventory in our wellness and technology operating segments.
Accounts payable related to our wellness operating segment relate to construction in progress, purchase of court feesinventory and our deposits with the courtother costs for operations in Germany, as well as cash received by Group Mobile during the normal course of business.
Accounts payable related to our technology operating segment consist of inventory purchased once there is a commitment from a customer.
Our average monthly net cash spent in operations for the three month periods endedAs of March 31, 20162017, accrued expenses were primarily comprised of accrued legal costs of $650,000, gift card and 2015 was approximately $1,838,000customer rewards expenses of $610,000, merchant financing arrangement costs of $466,000, accrued insurance costs of $298,000, and $1,167,000, respectively. Cash spent in operations for the three month period ended March 31, 2016 included payments of $3,000,000 for litigation activitiesother operations-related costs that have since been withdrawn or dismissed.
were accrued due to timing.
Based on our current operating plans, we expect to have sufficient funds for at least the next 12 months and beyond.of operations. In addition, we may choose to raise additional funds in connection with new store openings and potential acquisitions of operating assets, patent portfolios or other businesses that we may pursue.which will be complementary to our wellness operating segment. There can be no assurance, however, that any such opportunities will materialize.
In addition, we made deposits with courts during 2015 and 2014 related to our proceedings in Germany, Brazil, Romania and Malaysia. Deposits with courts paid in local currency are remeasured on the balance sheet date based on the related foreign exchange rate on that date. Following the execution of the confidential settlement and license agreement with ZTE on December 7, 2015, we began the process of working to receive refunds from the foreign courts. As of March 31, 2016, our remaining deposits with courts in Romania and Brazil totaled $831,000. As of May 5, 2016 all bonds posted with the courts in connection with our litigation with ZTE have been returned.
Our operating plans for our Intellectual Property operating segment include further monetization of our existing portfolio of intellectual property through licensing and strategic partnerships. 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.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.
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.
In addition, pursuant to the Exchange Note Agreement, the Amended Notes are no longer convertible into shares of our common stock and we will pay the outstanding aggregate principal amount on the Maturity Date, which was extended to June 30, 2017, in cash only and at rate of 102%, which is equal to $1,784,000. The interest rate was increased from 8% to 10% per annum and is payable monthly beginning on April 1, 2016. In addition, we agreed to reduce the exercise price of the May 2015 Warrants from $10.00 to $3.00 per share and the parties also agreed to certain anti-dilution features. Other terms of the May 2015 Warrants remained the same. Furthermore, in connection with the Exchange Note Agreement, we paid a restructuring fee of $50,000 to the Investors.
Cash flows
Three months ended March 31, | ||||||||||||
2016 | 2015 | Change | ||||||||||
Net cash used in operating activities | $ | (5,429,000 | ) | $ | (3,502,000 | ) | $ | (1,927,000 | ) | |||
Net cash provided by (used in) investing activities | $ | 1,087,000 | $ | (278,000 | ) | $ | 1,365,000 | |||||
Cash used in financing activities | $ | (50,000 | ) | $ | — | $ | (50,000 | ) |
Operating activities
During the three month period ended March 31, 2016, net cash used in operating activities totaled $5,429,000 compared to net cash used in operating activities of $3,502,000 during the three month period ended March 31, 2015. The increase of $1,927,000 was mainly due to payments made to vendors, which led to both a significant decrease in accounts payable and accrued liabilities and an increase in other current assets in the current period as compared to the prior period.
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 the collection of revenue. 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 three month period ended March 31, 2016, we received net proceeds of $1,173,000 from the refund of our deposits with the German court. These proceeds were offset by $86,000 net cash used to acquire software related to Group Mobile’s website. During the three month period ended March 31, 2015, net cash used in investing activities totaled $278,000 and represents the deposit we made to a Romanian court to enforce an injunction against ZTE in Romania.
We expect that net cash used in investing activities will increase as we intend to continue to acquire additional intellectual property assets and invest surplus cash, according to our investment policy.
Financing activities
During the three month period ended March 31, 2016, net cash used in financing activities totaled $50,000, which is the amount paid to the Investors related to their expenses incurred as a result of the debt modification. During the three month period ended March 31, 2015, there was no cash provided by or used in financing activities.
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, patent portfolios or other businesses that we may pursue. There can be no assurance, however, that any such opportunity will materialize. Moreover, any such financing would likely be dilutive to our current stockholders.
Off-Balance Sheet Arrangements
We have no obligations, assets or liabilities which 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, 2016,30, 2017, 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.
Item 3.Quantitative and Qualitative Disclosures About Market Risk.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
Not required as we are a smaller reporting company.
Item 4.Controls and Procedures.
Item 4. | Controls and Procedures. |
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our
We maintain disclosure controls and procedures pursuant to(as defined in Rule 13a-1513a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q.
Based on this evaluation, our chief executive officer and chief financial officer concluded) that as of March 31, 2016, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assuranceensure that information we are required to disclosebe disclosed in reports that we file or submit under the Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officerChief Executive Officer and chief financial officer, or persons performing similar functions,Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control OverAs of March 31, 2017, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial ReportingOfficer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
On October 15, 2015, we acquired International Development Group Limited (“IDG”). DuringThe scope of management's assessment of the three month period ended March 31, 2016, IDG's processes and systems did not significantly impacteffectiveness of internal control over financial reporting atincludes all of our other subsidiaries.subsidiaries except XpresSpa and Excalibur, which were acquired on December 23, 2016 and February 2, 2017, respectively. Our management performed due diligence procedures associated withconsolidated revenue for the acquisitionthree-month period ended March 31, 2017 was $14,609,000, of IDG.
which XpresSpa and Excalibur represented $11,682,000, and our total assets as of March 31, 2017 were $78,702,000, of which XpresSpa and Excalibur represented $58,507,000.
There were no changes in our internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.20
Item 1. | Legal Proceedings. |
Infrastructure Patents
ZTE
On December 7, 2015, we entered into the Settlement Agreement with ZTE, pursuant to which: (i) ZTE paid us a total of $21,500,000, net of all withholding, value added or other taxes; (ii) the parties withdrew all pending litigationsFor information regarding legal proceedings, see Note 10 “Commitments and proceedings against each other including the litigations related to ZTE’s breach of its non-disclosure agreement with Vringo; and (iii) we granted ZTE certain rights with respect toContingencies” in our patents including a non-exclusive, non-transferable, worldwide perpetual license to certain of our owned patents and patent applications.
Pursuantnotes to the Settlement Agreement, the parties have taken steps to withdraw all pending litigations and proceedings against one another. To date, proceedingscondensed consolidated financial statements included in Romania have yet to be formally closed, though the parties are currently working together to cause those proceedings to be formally closed.
In several jurisdictions, though ZTE requested that government organizations close proceedings against Vringo, those organizations make such determinations on their own volition. In China, ZTE requested that the National Developmental and Reform Commission (“NDRC”) conclude its investigation against Vringo; however, the NDRC has not yet closed its investigation. In addition, ZTE requested that the European Commission close its file on Vringo following ZTE’s withdrawal of its complaint against Vringo. On February 1, 2016, the European Commission confirmed that it would close its file on ZTE’s complaint against Vringo.
In addition, in China and the Netherlands, Vringo continues to appeal patent invalidity rulings issued in connection with proceedings originally brought by ZTE. In each instance, ZTE has indicated that it will not oppose Vringo’s appeals, though Vringo must still plead its case before the respective adjudicatory body in each jurisdiction. In addition, the European Patent Office has not yet dismissed an opposition action filed on one of Vringo’s recently issued European patents, and has requested that Vringo defend this action even though ZTE has indicated that it would not continue to pursue the action.
ASUS“Item 1. Financial Statements.”
Vringo had filed patent infringement lawsuits against ASUSTeK Computer Inc. and its subsidiaries (collectively, “ASUS”) in Germany, India, and Spain. In March 2016, the parties settled their disputes and ended all litigations between them.
In Germany, on January 22, 2015, the Düsseldorf Regional Court found that ASUS does not infringe either of the patents-in-suit. Vringo filed notices of appeal for each patent. ASUS filed nullity suits with respect to those patents-in-suit in the Federal Patents Court in Munich, Germany, during the second quarter of 2014. On January 28, 2016, the Court found one of the patents-in-suit invalid. In March 2016, the parties have withdrawn all cases rendering the nullity rulings without legal effect.
Vringo’s suit against ASUS has been settled and a formal dismissal is pending before the High Court of Delhi, New Delhi.
In Spain, Vringo awaits the ruling of the Commercial Court of Barcelona in Vringo’s lawsuit against ASUS, alleging infringement of one of same patents-in-suit in Vringo’s litigation against ASUS in Germany. On February 4, 2016, the Court held its hearing in ASUS’ lawsuit seeking to invalidate that same patent and on March 1, 2016, the Court found the patent invalid and later in March Vringo appealed the ruling. Both Vringo and ASUS withdrew all claims in Spain and ASUS will not be contesting Vringo’s appeal of the nullity finding.
Content Distribution
In 2012, we purchased a portfolio of patents invented by Tayo Akadiri relating to content distribution. The portfolio includes seven patents as well as several pending patent applications. As one of the means of realizing the value of these patents, on October 20, 2015, we filed suit against DirecTV in the United States District Court for the Southern District of New York.
Item 1A. | Risk Factors. |
There have been no material changes to the risk factors discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2015, except as follows:
Anti-takeover provisions of Delaware law, provisions in our charter and bylaws and our stockholder rights plan could delay, discourage or make more difficult a third-party acquisition of control of us.
We are a Delaware corporation and, as such, certain provisions of Delaware law could delay, discourage or make more difficult a third-party acquisition of control of us, even if the change in control would be beneficial to stockholders or the stockholders regard it as such. We are subject to the provisions of Section 203 of the Delaware General Corporation Law (the “DGCL”), which prohibits certain “business combination” transactions (as defined in Section 203) with an “interested stockholder” (defined in Section 203 as a 15% or greater stockholder) for a period of three years after a stockholder becomes an “interested stockholder,” unless the attaining of “interested stockholder” status or the transaction is pre-approved by our Board of Directors, the transaction results in the attainment of at least an 85% ownership level by an acquirer or the transaction is later approved by our Board of Directors and by our stockholders by at least a 66 2/3 percent vote of our stockholders other than the “interested stockholder,” each as specifically provided in Section 203. We have also adopted a shareholder rights plan in the form of a Section 382 Rights Agreement (the “NOL rights plan”), designed to help protect and preserve our substantial tax attributes primarily associated with our NOLs and research tax credits under Sections 382 and 383 of the Internal Revenue Code and related U.S. Treasury regulations. Although this is not the purpose of the NOL rights plan, it could have the effect of making it uneconomical for a third party to acquire us on a hostile basis.
These provisions of the DGCL, our certificate of incorporation and bylaws, and the NOL rights plan may delay, discourage or make more difficult certain types of transactions in which our stockholders might otherwise receive a premium for their shares over the current market price, and might limit the ability of our stockholders to approve transactions that they think may be in their best interest.
We may not be able to maintain compliance with NASDAQ’s continued listing requirements.
On March 16, 2016, we received a letter from NASDAQ advising that we are no longer in compliance with NASDAQ Listing Rule 5605(c)(2), which requires listed companies to have at least three audit committee members. NASDAQ has provided us with 45 calendar days, during which time we are required to submit a plan to regain compliance. Once the plan is accepted, NASDAQ can grant us an extension of up to 180 days from March 16, 2016 to regain compliance. If we are unsuccessful in maintaining our NASDAQ listing, then trading in our common stock after a delisting would likely be conducted in the over-the-counter markets and could also be subject to additional restrictions. There can be no assurance that we will meet the continued listing requirements for the NASDAQ Capital Market, or that we will not be delisted from the NASDAQ Capital Market in the future. The delisting of our common stock could have a material adverse effect on the trading price, liquidity, value and marketability of our common stock. We intend to regain compliance with the NASDAQ Listing Rule in the near term and retain two additional qualified independent directors to the audit committee.2016.
On April 29, 2016, we submitted to NASDAQ a plan detailing our strategy to regain compliance with their audit committee requirements for listed companies. As of May 5, 2016, we have yet to receive a response from NASDAQ as to whether or not our plan has been accepted.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
None.
Item 3. Defaults Upon Senior Securities.
Item 3. | Defaults Upon Senior Securities. |
None.
Item 4. Mine Safety Disclosures.
Item 4. | Mine Safety Disclosures. |
Not applicable.
Item 5. | Other Information. |
None.
21
Item 6. | Exhibits. |
Exhibit No. | Description | |
Third Amendment to Employment Agreement by and between FORM Holdings, Inc. and Clifford Weinstein, dated as of January 18, 2017. | ||
10.2* | Employment Agreement by and between FORM Holdings, Inc. and Edward Jankowski, dated as of January 20, 2017. | |
10.3* | Employment Agreement by and between FORM Holdings, Inc. and Andrew D. Perlman, dated as of January 18, 2017. | |
10.4* | Employment Agreement by and between FORM Holdings, Inc. and Anastasia Nyrkovskaya, dated as of January 17, 2017. | |
10.5* | Employment Agreement by and between FORM Holdings, Inc. and Jason Charkow, dated as of January 17, 2017. | |
10.6 | Form of | |
31.1* | Certification of Principal Executive Officer pursuant to Exchange Act, Rules 13a - 14(a) and 15d - 14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2* | Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a - 14(a) and 15d - 14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32** | Certifications of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS* | XBRL Instance Document | |
101.SCH* | XBRL Taxonomy Extension Schema Document | |
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB* | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document | |
* | Filed herewith. | |
** | Furnished herein. |
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on the 5th15th day of May 2016.2017.
By: | /s/ ANASTASIA NYRKOVSKAYA |
Anastasia Nyrkovskaya | |
Chief Financial Officer | |
(Principal Financial and Accounting Officer) |