UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended SeptemberJune 30, 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

 

FORM Holdings Corp.

(formerly Vringo, Inc.)

(Exact Name of Registrant as Specified in its Charter)

 

Delaware 20-4988129
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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 className of each exchange on which registered
Common Stock, par value $0.01 per shareThe 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.    Yesx     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).    Yesx     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¨ (Do not check if a smaller reporting company)Smaller reporting companyx

 

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¨     Nox

 

As of November 9, 2016, 15,804,881August 7, 2017, 26,483,467 shares of the registrant’s common stock were outstanding.

 

 

 

 

FORM Holdings Corp.

 

Table of Contents

 

  Page
   
PART I. FINANCIAL INFORMATION3
   
Item 1.Condensed Consolidated Financial Statements3
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations2019
Item 3.Quantitative and Qualitative Disclosures About Market Risk2926
Item 4.Controls and Procedures2926
   
PART II. OTHER INFORMATION3026
   
Item 1.Legal Proceedings3026
Item 1A.Risk Factors3026
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds3528
Item 3.Defaults Upon Senior Securities3528
Item 4.Mine Safety Disclosures3528
Item 5.Other Information3528
Item 6.Exhibits29

 362

Part I - FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements

 

FORM Holdings Corp. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

  

 September 30,
2016 
(Unaudited)		 December 31,
2015
(see Note 2)		  June 30,
2017
(Unaudited)		 December 31,
2016		 
Current assets          
Cash and cash equivalents $21,679 $24,951  $7,958 $17,910 
Deposits with courts — 1,930 
Accounts receivable, net 1,833 246  2,216 404 
Inventory 408 379  4,327 2,890 
Other current assets  342  698  935 2,150 
Investment in XpresSpa  1,734  — 
Assets held for disposal  467  1,507 
Total current assets 25,996 28,204  15,903 24,861 
          
Restricted cash 476 638 
Property and equipment, net 14,377 16,284 
Intangible assets, net 3,315 16,476  14,475 15,233 
Goodwill 4,863 4,863  25,821 24,409 
Other assets  1,143  916   1,330  1,382 
Total assets $35,317 $50,459  $72,382 $82,807 
          
Current liabilities          
Accounts payable, accrued expenses and other current liabilities $7,421 $5,855  $11,437 $11,434 
Deferred revenue 453 175  201 133 
Senior secured notes  —  3,111 
Liabilities held for disposal  97  206 
Total current liabilities 7,874 9,141  11,735 11,773 
          
Long-term liabilities          
Debt 6,500 6,500 
Derivative warrant liabilities 601 416  100 259 
Other liabilities  119  386   794  106 
Total liabilities  8,594  9,943   19,129  18,638 
Commitments and contingencies (see Note 14)     
Commitments and contingencies (see Note 11)     
          
Stockholders’ equity     
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 shares 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 — —  — — 
Common stock, $0.01 par value per share 150,000,000 shares authorized; 15,799,881 and 13,220,050 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively 158 132 

Series D Convertible Preferred Stock, $0.01 par value per share; 500,000 shares authorized; 475,208 issued and 429,948 outstanding with a liquidation value of $20,638 as of June 30, 2017; 491,427 issued and outstanding with a liquidation value of $23,588 as of December 31, 2016

 4 5 
Common stock, $0.01 par value per share; 150,000,000 shares authorized; 19,565,531 and 18,304,881 issued and outstanding as of June 30, 2017 and December 31, 2016, respectively 196 183 
Additional paid-in capital 243,450 237,246  282,603 280,221 
Accumulated deficit  (216,885)  (196,862) (234,303) (220,868)
Total stockholders’ equity  26,723  40,516 
Total liabilities and stockholders’ equity $35,317 $50,459 
Accumulated other comprehensive loss  (164)  (13)
Total equity attributable to the Company 48,336 59,528 
Noncontrolling interests  4,917  4,641 
Total equity  53,253  64,169 
Total liabilities and equity $72,382 $82,807 

The accompanying notes form an integral part of these condensed consolidated financial statements.


FORM Holdings Corp. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except share and per share data)

  Three months ended September 30,  Nine months ended September 30, 
  2016  2015  2016  2015 
Revenue                
Licensing revenue $1,350  $—  $11,025  $150 
Product revenue  1,755   —   5,486   — 
Total revenue  3,105   —   16,511   150 
                 
Costs and expenses*                
Cost of goods sold  1,560   —   4,866   — 
Operating legal costs  894   6,776   2,469   15,341 
Inventor royalties  270   —   3,658   — 
Amortization and impairment of intangible assets  203   819   13,404   2,436 
General and administrative  3,955   2,095   10,212   7,391 
Total operating expenses  6,882   9,690   34,609   25,168 
Operating loss  (3,777)  (9,690)  (18,098)  (25,018)
Gain (loss) on revaluation of warrants and conversion feature  (272)  716   97   1,411 
Interest expense  (949)  (1,708)  (1,697)  (2,173)
Extinguishment of debt  (262)  (1,044)  (472)  (1,254)
Non-operating income (expense), net  (1)  (145)  147   (322)
Net loss $(5,261) $(11,871) $(20,023) $(27,356)
Loss per share:                
Basic net loss per share $(0.34) $(1.16) $(1.35) $(2.82)
Diluted net loss per share $(0.34) $(1.16) $(1.35) $(2.82)
Weighted-average number of shares outstanding during the period:                
Basic  15,473,895   10,246,624   14,880,925   9,688,744 
Diluted  15,473,895   10,246,624   14,880,925   9,688,744 
                 
* Includes stock-based compensation expense, as follows:                
Operating legal costs $59  $130  $191  $631 
General and administrative  426   936   1,256   3,560 
  $485  $1,066  $1,447  $4,191 

The accompanying notes form an integral part of these condensed consolidated financial statements.


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 
Vesting of restricted stock units (“RSUs”)  1   (1)  —   — 
Issuance of common stock for repayment of convertible debt and related interest  18   3,031   —   3,049 
Sale of shares of common stock from subscription agreement  7   1,727   —   1,734 
Stock-based compensation  —   1,447   —   1,447 
Net loss for the period  —   —   (20,023)  (20,023)
Balance as of September 30, 2016 $158   243,450   (216,885)  26,723 

  Common 
stock		  Additional
paid-in capital		  Accumulated 
deficit		  Total 
Balance as of December 31, 2014 $93  $216,792  $(185,705) $31,180 
Reclassification of derivative Reload Warrants and Series 1 Warrants to equity warrants  —   175   —   175 
Issuance of common stock for repayment of debt and interest  17   8,495       8,512 
Stock-based compensation  —   4,191   —   4,191 
Net loss for the period  —   —   (27,356)  (27,356)
Balance as of September 30, 2015 $110  $229,653  $(213,061) $16,702 

 

The accompanying notes form an integral part of these condensed consolidated financial statements.

 

3

5 

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 June 30,  Six months ended June 30, 
  2017  2016  2017  2016 
Revenue                
Wellness $12,927  $—  $23,911  $— 
Technology  3,450   2,450   6,941   3,727 
Intellectual property  —   8,900   100   9,650 
Total revenue  16,377   11,350   30,952   13,377 
                 
Cost of sales                
Wellness  10,401   —   19,236   — 
Technology  2,690   2,180   5,618   3,304 
Intellectual property*  118   4,243   217   4,963 
Total cost of sales  13,209   6,423   25,071   8,267 
Depreciation, amortization and impairment  3,094   12,329   4,955   13,159 
General and administrative*  5,204   2,316   11,539   4,495 
Total operating expenses  21,507   21,068   41,565   25,921 
Operating loss from continuing operations  (5,130)  (9,718)  (10,613)  (12,544)
Non-operating income (expense), net  (50)  181   61   518 
Interest expense  (178)  (272)  (367)  (748)
Extinguishment of debt  —   —   —   (210)
Loss from continuing operations before income taxes  (5,358)  (9,809)  (10,919)  (12,984)
Income tax expense  —   —   (227)  — 
Consolidated net loss from continuing operations  (5,358)  (9,809)  (11,146)  (12,984)
Loss from discontinued operations before income taxes  (1,552)  (998)  (2,113)  (1,778)
Income tax expense  —   —   —   — 
Net loss from discontinued operations  (1,552)  (998)  (2,113)  (1,778)
Consolidated net loss  (6,910)  (10,807)  (13,259)  (14,762)
Net income attributable to noncontrolling interests  (100)  —   (176)  — 
Net loss attributable to the Company $(7,010) $(10,807) $(13,435) $(14,762)
                 
Consolidated net loss from continuing operations $(5,358) $(9,809) $(11,146) $(12,984)
Other comprehensive loss from continuing operations: foreign currency translations  (107)  —   (151)  — 
Comprehensive loss from continuing operations  (5,465)  (9,809)  (11,297)  (12,984)
Consolidated net loss from discontinued operations  (1,552)  (998)  (2,113)  (1,778)
Other comprehensive loss from discontinued operations: foreign currency translations  —   —   —   — 
Comprehensive loss from discontinued operations  (1,552)  (998)  (2,113)  (1,778)
Comprehensive loss $(7,017) $(10,807) $(13,410) $(14,762)
                 
Loss per share:                
Basic and diluted net loss per share                
Loss per share from continuing operations $(0.28) $(0.65) $(0.59) $(0.89)
Loss per share from discontinued operations  (0.08)  (0.07)  (0.11)  (0.12)
Total basic and diluted net loss per share $(0.36) $(0.72) $(0.70) $(1.01)
Weighted-average number of shares outstanding during the period:                
Basic  19,310,994   14,993,686   19,178,769   14,576,183 
Diluted  19,310,994   14,993,686   19,178,769   14,576,183 
                 
*Includes stock-based compensation expense, as follows:                
Intellectual property $—  $64  $—  $132 
General and administrative  732   435   1,473   830 
Total stock-based compensation expense $732  $499  $1,473  $962 

The accompanying notes form an integral part of these condensed consolidated financial statements.

4

FORM Holdings Corp. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

(In thousands)

  Common
stock		  Preferred
stock		  Additional
paid-
in capital		  Accumulated
deficit		  Accumulated
other
comprehensive
loss		  Total
FORM
equity		  Non
controlling
interests		  Total
equity		 
December 31, 2016 $183  $5  $280,221  $(220,868) $(13) $59,528  $4,641  $64,169 
Issuance of common stock for services  —   —   20   —   —   20   —   20 
Shares of common stock issued for the acquisition of Excalibur  9   —   1,800   —   —   1,809   —   1,809 
Decrease in shares of preferred stock issued to XpresSpa sellers  —   —   (908)  —   —   (908)  —   (908)
Conversion of preferred stock to common stock  4   (1)  (3)  —   —   —   —   — 
Stock-based compensation  —   —   1,473   —   —   1,473   —   1,473 
Net loss for the period  —   —   —   (13,435)  —   (13,435)  176   (13,259)
Foreign currency translation  —   —   —   —   (151)  (151)  —   (151)
Contributions from
noncontrolling interests		  —   —   —   —   —   —   100   100 
June 30, 2017 $196  $4  $282,603  $(234,303) $(164) $48,336  $4,917  $53,253 

  Common
stock		  Preferred
stock		  Additional
paid-
in capital		  Accumulated
deficit		  Accumulated
other
comprehensive
loss		  Total
FORM
equity		  Non
controlling
interests		  Total
equity		 
December 31, 2015 $132  $—  $237,246  $(196,862) $—  $40,516  $—  $40,516 
Issuance of common stock forrepayment of convertible debt and related interest  18   —   2,978   —   —   2,996   —   2,996 
Stock-based compensation  —   —   962   —   —   962   —   962 
Net loss for the period  —   —   —   (14,762)  —   (14,762)  —   (14,762)
June 30, 2016 $150  $—  $241,186  $(211,624) $—  $29,712  $—  $29,712 

The accompanying notes form an integral part of these condensed consolidated financial statements.

5

 

 

FORM Holdings Corp. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

  Nine months ended September 30, 
  2016  2015 
Cash flows from operating activities        
Net loss $(20,023) $(27,356)
Adjustments to reconcile net loss to net cash used in operating activities:        
Items not affecting cash flows        
Depreciation and amortization  1,467   2,657 
Impairment of intangible assets  11,937   — 
Amortization of debt discount and debt issuance costs  1,871   1,839 
Stock-based compensation  1,447   4,191 
Amendment to warrants as part of debt modification  (281)  — 

Issuance of shares for extinguishment of debt

  356   1,409 
Issuance of shares  53   — 
Change in fair value of warrants and conversion feature  185   (1,411)
Exchange rate loss (gain)  (76)  361 
Changes in operating assets and liabilities        
Increase in accounts receivable  (1,587)  — 
Increase in inventory  (29)  — 
Decrease (increase) in other current assets and other assets  129   (466)
Increase in accounts payable, accrued expenses and other current liabilities  1,571   5,223 
Increase in deferred revenue  278   — 
Decrease in other liabilities  (267)  — 
Net cash used in operating activities  (2,969)  (13,553)
Cash flows from investing activities        
Acquisition of property, equipment and technology  (243)  — 
Decrease (increase) in deposits  2,001   (272)
Increase in investments  (1,734)  — 
Net cash provided by (used in) investing activities  24   (272)
Cash flows from financing activities        
Proceeds from commitments to issue common stock under subscription agreement  1,734   — 
Net proceeds from senior secured notes and warrants  —   12,425 
Repayment of debt  (2,011)  — 
Debt issuance costs  (50)  (218)
Net cash provided by (used in) financing activities  (327)  12,207 
         
Effect of exchange rate changes on cash and cash equivalents  —   (3)
Decrease in cash and cash equivalents  (3,272)  (1,621)
Cash and cash equivalents at beginning of period  24,951   16,023 
Cash and cash equivalents at end of period $21,679  $14,402 
         
Cash paid during the period for        
Interest $40  $— 
         
Non-cash investing and financing transactions        
Change in classification of derivative warrants to equity warrants  —   175 
Issuance of common stock to repay debt and interest  2,996   8,512 
Debt discount  —   2,961 

  Six months ended June 30, 
  2017  2016 
Cash flows from operating activities        
Consolidated net loss $(13,259) $(14,762)
Adjustments to reconcile consolidated net loss to net cash provided by (used in) operating activities:        
Items not affecting cash flows        
Depreciation and amortization  4,955   1,222 
Impairment of intangible assets  —   11,937 
Amortization of debt discount and debt issuance costs  —   660 
Stock-based compensation  1,473   962 
Amendment to warrants as part of debt modification  —   (281)
Extinguishment of debt  —   356 
Issuance of shares of common stock for services  20   — 
Change in fair value of derivative warrant liabilities and conversion feature  (159)  (87)
Exchange rate loss (gain), net  —   (75)
Changes in current assets and liabilities net of effects of acquisition        
Increase in accounts receivable  (1,277)  (139)
Increase in inventory  (1,386)  (32)
Decrease in other current assets and other assets  1,473   443 
Increase (decrease) in accounts payable, accrued expenses and other current liabilities  (557)  375 
Increase (decrease) in deferred revenue  (52)  146 
Decrease in other liabilities  (15)  (246)
Net cash provided by (used in) operating activities – continuing operations  (8,784)  479 
Net cash provided by operating activities - discontinued operations  931   219 
Net cash provided by (used in) operating activities  (7,853)  698 
Cash flows from investing activities        
Cash acquired as part of acquisition  26   — 
Acquisition of property and equipment  (1,565)  (151)
Acquisition of software  (148)  — 
Decrease in deposits  —   2,001 
Net cash provided by (used in) investing activities  (1,687)  1,850 
Cash flows from financing activities        
Repayment of line of credit  (361)  — 
Net contributions from noncontrolling interests  100   — 
Debt issuance costs  —   (50)
Net cash used in financing activities  (261)  (50)
Effect of exchange rate changes on cash and cash equivalents  (151)  — 
Increase (decrease) in cash and cash equivalents  (9,952)  2,498 
Cash and cash equivalents at beginning of period  17,910   24,951 
Cash and cash equivalents at end of period $7,958  $27,449 
Cash paid during the period for        
Interest $430  $40 
         
Noncash investing and financing transactions        
Issuance of common stock to repay debt and interest  —   2,996 

     

The accompanying notes form an integral part of these condensed consolidated financial statements.

 

6 

6

 

 

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

On May 6, 2016, Vringo, Inc. changed its name to FORM Holdings Corp. (“FORM” or the “Company”) has three operating segments: wellness, technology and concurrently announced its repositioning as a holding company of small and middle market growth companies. The Company’s focus is on acquiring and building companies that would benefit from:

additional capital;

exposure to visibility from the public markets;

talent recruiting;

rebranding; and

implementation of best practices.

The Company’s management team is committed to execute on its strategy. The Company is industry agnostic, but limits the scope of its pipeline by looking only at companies with a clear path to grow in excess of $100,000 in revenue.intellectual property.

 

The Company’s common stock, par value $0.01 per share,wellness operating segment consists of XpresSpa, which was previously listed on the NASDAQ Capital Market under the trading symbol “VRNG,” has been listed under the trading symbol “FH” since May 9, 2016.

The Company currently has three operating segments:

Group Mobile

FLI Charge

Intellectual property

Group Mobile is a growing premier supplierleading airport retailer of innovativespa services. XpresSpa is a well-recognized airport spa brand with 52 locations, including 48 domestic and full-service mobile technology solutions,4 international, as of June 30, 2017. XpresSpa offers travelers premium spa services, including rugged computers, tablets, mobile devices, accessories, a full suite of professional servicesmassage, nail and other related products geared toward emergency first responders, municipalities and corporations. In addition, Group Mobile specializes in high-quality customer service and support for those products.

FLI Charge owns a patented conductive wireless charging technology and focuses on the development and commercialization of its technology through the direct-to-consumer sale ofconductive charging pads, phone cases, charging adaptors and other enablements,hair as well as partnershipsspa and licensing agreements in various industries. FLI Charge is currently working with partnersto implement FLI Charge technologyin various fields such as furniture and automotive. FLI Charge’s business model is based on manufacturing and commercializing its own conductive charging pads, phone cases,charging adaptors and other enablements as well as licensing its technology in exchange for recurring licensing revenue.

The intellectual property operating segment is focused on the innovation, development and monetization of intellectual property. The Company’s portfolio consists of over 600 patents and patent applications covering a range of technologies including telecom infrastructure, mobile devices, remote monitoring and ad-insertion.

Prior to December 31, 2013, the Company 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”), 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, the Company has the opportunity to license certain intellectual property assets and work with InfoMedia to identify and protect new intellectual property.

On August 8, 2016, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with FHXMS, LLC, a Delaware limited liability company and wholly-owned subsidiary of the Company (the “Merger Sub”), XpresSpa Holdings, LLC, a Delaware limited liability company (“XpresSpa”), the unitholders of XpresSpa who are parties thereto (the “Unitholders”) and Mistral XH Representative, LLC, as representative of the Unitholders (the “Representative”), pursuant to which the Merger Sub will merge with and into XpresSpa, with XpresSpa being the surviving entity and a wholly-owned subsidiary of the Company (the “Surviving Entity”) and the Unitholders becoming stockholders of FORM (the “Merger”).travel products. The Company is holding its annual meeting of stockholders on November 28, 2016 to approve, among other things, the Merger and the issuance of shares of FORM Common Stock, FORM Preferred Stock and warrants to the Unitholders in connection with the Merger. Assuming stockholder approval is received, the Company expects to complete the Merger shortly after the stockholders vote.

Each of the Company’s operating segments are described below.

Group Mobile

Group Mobile is a growing and innovative full, end-to-end solution provider for project lifecycle services including system integration, hardware service support, pre- and post-deployment and customer support helpdesk. Group Mobile provides total hardware solutions, including rugged laptops, tablets and handheld computers. Group Mobile also markets rugged mobile printers, vehicle computer docking and mounting gear, power accessories, wireless communication products, antennas, carrying cases, and other peripherals, accessories and add-ons needed to maximize productivity in a mobile- or field-computing environment.

Group Mobile 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 products and services 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 enterprises, resellers, 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 Group Mobile’s single largest expense and product inventory is one of the largest working capital investments for Group Mobile. Group Mobile’s primary suppliers include Synnex Corporation, Ingram Micro Inc., and Xplore Technologies Corporation, which, combined, represent approximately 80% of Group Mobile’s inventory purchases. 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 the 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. 

FLI Charge

FLI Charge is a wireless power company dedicated to simplifying the way people 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 currently existing battery and DC powered devices.

FLI Charge designs, develops, licenses, manufactures and markets wireless conductive power and charging solutions. FLI Charge is currently working with partners in several verticals to bring products to market. These verticals include education, office, hospitality, automotive and consumer electronics among others. To date, FLI Charge has not yet generated any substantial revenue from its product sales. The Company believes that FLI Charge’s patented technology is the only wireless power solution that is fully interoperable between different mobile devices ranging from smartphones to power tools, and many more. FLI Charge’s wireless power solution can simultaneously power multiple devices on the same pad no matter their power requirements or positions on the pad.

FLI Charge’s product line 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 “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.

FLI Charge launched its consumer product line on Indiegogo, a crowdfunding platform, on June 15, 2016; the campaign was completed on August 15, 2016. The Company accounts for funds raised from crowdfunding campaigns and presales, which were approximately $224, as deferred revenue on the condensed consolidated balance sheets. FLI Charge expects to deliver products to the participantsacquired XpresSpa in the fourth quarter of 2016.

The Company’s technology operating segment consists of Group Mobile 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. The Company acquired Group Mobile in the fourth quarter of 2015 and Excalibur Integrated Systems Inc. (“Excalibur”), which was merged with Group Mobile, in the first quarter of 2017. The Company’s equity interest in InfoMedia increased from 8.25% to 11% in the first quarter of 2017 due to a realignment of ownership interests.

 

Intellectual Property

The intellectual property operating segment is focused onAs further detailed in Note 10 “Discontinued Operations and Assets and Liabilities Held for Disposal,” during June 2017, the innovation, development and monetizationCompany concluded that the requirement to report the results of intellectual property. The Company’s portfolio consists of over 600 patents and patent applications coveringa range of technologies includingtelecom infrastructure,mobile devices, remote monitoring and ad-insertion.FLI Charge as discontinued operations was triggered.

 

The Company is currently focused on monetizing its technology portfolio throughevaluating strategic alternatives with respect to Group Mobile in an attempt to enhance stockholder value. These strategic alternatives may include a varietypossible sale, merger, spin-off or other separation of value enhancing initiatives including, but not limited to, licensing, litigation andGroup Mobile or other forms of business combinations or strategic partnerships.

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Recent Developments

XpresSpa

On August 8, 2016, the Company entered into the Merger Agreement with the Merger Sub, XpresSpa, the Unitholders and the Representative, pursuant to which the Merger Sub will merge with and into XpresSpa, with XpresSpa being the surviving entity and the Surviving Entity and the Unitholders becoming stockholders of FORM.

XpresSpa is a leading airport retailer of spa services and related products. It is a well-recognized and popular airport spa brand with nearly three times the number of U.S. locations as its closest competitor. It provides nearly 900,000 services per year. As of October 18, 2016, XpresSpa operated 51 total locations in 44 terminals and 21 airports in three countries. XpresSpa also sells wellness and travel products through its internet site,www.xpresspa.com. Services and products include:

massage services for the neck, back, feet and whole body;

nail care, such as pedicures, manicures and polish changes;

beauty care services such as waxing and facials;

hair care, such as haircuts and blow outs;

wellness products such as massagers, lotions and aromatherapy aids; and

travel products such as neck pillows, blankets, massage tools, travel kits and eye masks.

Upon completion of the Merger, (i) the then-outstanding common units of XpresSpa (other than those held by the Company, which will be cancelled without any consideration) and (ii) the then-outstanding preferred units of XpresSpa (other than those held by the Company, which will be cancelled without any consideration) will be automatically converted into the right to receive an aggregate of:

(a)2,500,000 shares of FORM common stock, par value $0.01 per share (“FORM Common Stock”),

(b)494,792 shares of newly designated Series D Convertible Preferred Stock, par value $0.01 per share, of FORM (“FORM Preferred Stock”) with an aggregate initial liquidation preference of $23,750, and

(c)five-year warrants to purchase an aggregate of 2,500,000 shares of FORM Common Stock, at an exercise price of $3.00 per share, each subject to adjustment in the event of a stock split, dividend or similar events.

The FORM Preferred Stock shall be initially convertible into an aggregate of 3,958,336 shares of FORM Common Stock, which equals a $6.00 per share conversion price, and each holder of FORM Preferred Stock shall be entitled to vote on an as converted basis. The FORM Preferred Stock is senior to the FORM Common Stock and the terms of the FORM Preferred Stock contain no restrictions on the Company’s ability to issue additional senior preferred securities or the Company’s ability to issue additional preferred securities in the future. The Company has the right, but not the obligation, upon ten trading days’ notice to convert the outstanding shares of FORM Preferred Stock into FORM Common Stock at the then applicable conversion ratio, at any time or from time to time, if the volume weighted average price per share of the FORM Common Stock exceeds $9.00 for over any 20 days in a 30 consecutive trading day period. The term of the FORM Preferred Stock is seven years, after which time FORM can repay the holders in shares of FORM Common Stock or cash at the Company’s election. If the Company elects to make a payment, or any portion thereof, in shares of FORM Common Stock, the number of shares deliverable (the “Base Shares”) will be based on the volume weighted average price per share of the FORM Common Stock for the 30 trading days prior to the date of calculation (the “Base Price”) plus an additional number of shares of FORM Common Stock (the “Premium Shares”), calculated as follows: (i) if the Base Price is greater than $9.00, no Premium Shares shall be issued, (ii) if the Base Price is greater than $7.00 and equal to or less than $9.00, an additional number of shares equal to 5% of the Base Shares shall be issued, (iii) if the Base Price is greater than $6.00 and equal to or less than $7.00, an additional number of shares equal to 10% of the Base Shares shall be issued, (iv) if the Base Price is greater than $5.00 and equal to or less than $6.00, an additional number of shares equal to 20% of the Base Shares shall be issued and (v) if the Base Price is less than or equal to $5.00, an additional number of shares equal to 25% of the Base Shares shall be issued. The FORM Preferred Stock will accrue interest at 9% per annum, or $4.32 per share of FORM Preferred Stock.

In addition, the Company entered into subscription agreements to sell 750,574 shares of its unregistered FORM Common Stock to certain holders of XpresSpa, at a purchase price of $2.31 per share, for an aggregate purchase price of $1,734.

On August 8, 2016, FORM purchased from XpresSpa an aggregate of 1,733,826 of Series C Preferred Units of XpresSpa, at a per unit purchase price of $1.00 per unit, for an aggregate purchase price of $1,734, which is included in other current assetsin the condensed consolidated balance sheets. The Series C Preferred Units of XpresSpa will have a preference in the amount of its initial investment and shall bear 12% interest until the closing of the anticipated merger agreement.

transactions. The Company is holding its annual meetingseeking to enter into one or more strategic transactions involving Group Mobile in the first quarter of stockholders on November 28, 2016 to approve, among other things, the Merger and the issuance of shares of FORM Common Stock, FORM Preferred Stock and warrants to the Unitholders in connection with the Merger. Assuming stockholder approval is received, the Company expects to complete the Merger shortly after the stockholders vote. Immediately following the completion of the Merger (without taking into account any shares of FORM Common Stock held by XpresSpa equity holders prior to the completion of the Merger), the former Unitholders of XpresSpa are expected to own approximately 18% of the outstanding FORM Common Stock (or 33% of the outstanding FORM Common Stock calculated on a fully diluted basis) and the current stockholders of the Company are expected to own approximately 82% of the outstanding FORM Common Stock (or 67% of the outstanding FORM Common Stock calculated on a fully diluted basis). 


Impairment of Patents2018.

 

The Company’s name change and repositioning as a holding company was deemed a triggering event, which required the Company’s patent assets to be tested for impairment. In performing this impairment test, the Company determined that the patent portfolios, which together represent an asset group, were subject to impairment testing. In the first step of the impairment test, the Company utilized its projections of future undiscounted cash flows based on its existing plans for the patents. As a result, it was determined that the Company’s projections of future undiscounted cash flows were less than the carrying value of the asset group. Accordingly, the Company performed the second step of the impairment test to measure the potential impairment by calculating the asset group’s fair value as of May 6, 2016. As a result, following amortization for the month of April, the Company recorded an impairment charge of $11,937, which resulted in a new carrying value of $1,526 on May 6, 2016. Following the impairment, the Company reevaluated the remaining useful life and concluded that there were no changesintellectual property operating segment is engaged in the estimated useful life.

Stockholder Rights Planmonetization of patents related to content and ad delivery, remote monitoring and mobile technologies.

 

On March 18, 2016, the Company announced that the Company’s Board of Directors adopted a stockholder 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 Delaware on March 18, 2016.

Senior Secured Notes

On March 9, 2016, the Company and the holders (the “Investors”) of the Company’s $12,500 Senior Secured 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 pursuant to 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.

On July 1, 2016, the Company repaid in full its Amended Notes that were due on June 30, 2017. As required by the terms of the Amended Notes, notice of repayment was delivered to the Investors on June 30, 2016. The Company repaid the Amended Notes in full, including a 15% fee for early repayment. The Company used an aggregate of $2,011 of cash on hand for repayment of the Amended Notes. As a result of the repayment in full of the Amended Notes, all liens on the Company’s assets, including intellectual property, were released by the Investors.


Reverse Stock Split

Unless otherwise noted, the information contained in these condensed consolidated financial statements gives effect to a one-for-ten reverse stock split of our common stock effected on November 27, 2015 (the “Reverse Stock Split”) on a retroactive basis for all periods presented.

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 as required by Regulation S-X, Rule 10-01.Company. Such adjustments are of a normal, recurring nature. The results of operations for the nine-month periodthree and six-month periods ended SeptemberJune 30, 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 valuation of 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

ASU No. 2015-03, ImputationThe Company recognizes revenue for the wellness operating segment from the sale of Interest (Subtopic 835-30): SimplifyingXpresSpa products and services at the Presentationpoint of Debt Issuance Costs

Duringsale, net of discounts and applicable sales taxes. Revenues from the nine-month period ended September 30, 2016,XpresSpa wholesale and e-commerce businesses are recorded at the time goods are shipped. The Company adopted guidanceexcludes all sales taxes assessed to its customers. Sales taxes assessed on a retrospective basis that requires debt issuance costs related to a recognized debt liability to be presentedrevenues 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.

7

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 deductioncost 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:

whether the risks of ownership have passed to the customer;

the customer must have made a fixed commitment to purchase the goods;

the customer must request and have a substantial business purpose for ordering on a bill and hold basis;

there must be a fixed schedule for delivery that is reasonable and consistent with the customer’s business purpose;

the Company cannot retain any specific performance obligations that would make the earnings process incomplete;

the goods must be segregated from remaining inventory (i.e., they cannot be used to fill orders for others); and

the goods must be complete and ready for shipment.

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.

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(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:

payroll and related benefits for store operations and store-level management;

rent, percentage rent and occupancy costs;

the cost of merchandise;

freight, shipping and handling costs;

production costs;

inventory shortage and valuation adjustments, including purchase price allocation increase in fair values which was recorded as part of acquisition; and

costs associated with sourcing operations.

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 operating 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. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test 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 the goodwill impairment test and specifies that goodwill impairment should be measured by comparing the fair value of a reporting unit with its carrying amount. Additionally, the amount of goodwill allocated to each reporting unit with a zero 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 nine-month period ended September 30, 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’s condensedits 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 award 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 nine-month period ended September 30, 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’s condensedits 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 and the Company’s authorized shares.

Certain balances have been reclassified to conform to presentation requirements, including to retroactively present the effectpresentation of the Reverse Stock Split. All referencesdiscontinued operations and assets and liabilities held for disposal with respect to the number of shares of common stock, price per share and weighted average shares of common stock have been adjustedCompany’s FLI Charge business (refer to reflect the Reverse Stock Split on a retroactive basis for all periods presented, unless otherwise noted.

As a result of the adoption by the Company ofASU No. 2015-03on a retrospective basis, during the nine-month period ended September 30, 2016, the Company reclassified $73 of debt issuance costs as of December 31, 2015 from other current assets to senior secured notes.

(e) Intangible assets

Intangible assets include purchased patents, which are recorded based on the cost to acquire them,Note 10), as well as trade names, customer relationshipsconsistent presentation of cost of sales and technology, which were acquired as part of the acquisition of International Development Group Limited (“IDG”) in the fourth quarter of 2015general and are recorded based on the estimated fair value in purchase price allocation. The intangible assets are amortized over their estimated useful lives, which are periodically evaluatedadministrative expenses to align presentation for reasonableness.operating segments.

The Company’s intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In assessing the recoverability of the Company’s intangible assets, the Company must make estimates and assumptions regarding future cash flows and other factors to determine the fair value of the respective assets. These estimates and assumptions could have a significant impact on whether an impairment charge is recognized and also the magnitude of any such charge. Fair value estimates are made at a specific point in time, based on relevant information. These estimates are subjective in nature and involve uncertainties and matters of significant judgments and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. If these estimates or material related assumptions change in the future, the Company may be required to record impairment charges related to its intangible assets.


(f) Deferred revenue

Deferred revenue includes (i) payments received from customers in advance of providing the product and (ii) amounts deferred if other conditions of revenue recognition have not been met. The Company accounts for funds raised from crowdfunding campaigns and pre-sales as deferred revenue.

 

Note 3. Net Loss per Share of Common Stock

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 a net loss 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.

 

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The table below presents the computation of basic and diluted net loss per share of common stock:

 

  Three months ended September 30,  Nine months ended September 30, 
  2016  2015  2016  2015 
Basic Numerator:                
Net loss attributable to shares of common stock $(5,261) $(11,871) $(20,023) $(27,356)
Net loss attributable to shares of common stock $(5,261) $(11,871) $(20,023) $(27,356)
Basic Denominator:                
Weighted average number of shares of common stock outstanding during the period  15,473,895   10,246,624   14,880,925   9,688,744 
Basic common stock shares outstanding  15,473,895   10,246,624   14,880,925   9,688,744 
Basic net loss per common stock share $(0.34) $(1.16) $(1.35) $(2.82)
                 
Diluted Numerator:                
Net loss attributable to shares of common stock $(5,261) $(11,871) $(20,023) $(27,356)
Diluted net loss attributable to shares of common stock $(5,261) $(11,871) $(20,023) $(27,356)
                 
Diluted Denominator:                
Basic common stock shares outstanding  15,473,895   10,246,624   14,880,925   9,688,744 
Diluted common stock shares outstanding  15,473,895   10,246,624   14,880,925   9,688,744 
Diluted net loss per common stock share $(0.34) $(1.16) $(1.35) $(2.82)
                 
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:                
Vested and unvested options outstanding to purchase an equal number of shares of common stock of the Company  1,492,434   871,484   1,492,434   871,484 
Unvested RSUs to issue an equal number of shares of common stock of the Company  —   54,323   —   54,323 
Warrants to purchase an equal number of shares of common stock of the Company  1,006,679   956,679   1,006,679   956,679 
Conversion feature of senior secured notes  —   1,130,952   105,920   1,250,000 
Total number of potentially dilutive instruments, excluded from the calculation of net loss per share  2,499,113   3,013,438   2,605,033   3,132,486 
  Three months ended June 30,  Six months ended June 30, 
  2017  2016  2017  2016 
Basic numerator:                
Net loss from continuing operations attributable to shares of common stock $(5,458) $(9,809) $(11,322) $(12,984)
Net loss from discontinued operations attributable to shares of common stock  (1,552)  (998)  (2,113)  (1,778)
Net loss attributable to shares of common stock $(7,010) $(10,807) $(13,435) $(14,762)
Basic denominator:                
Basic shares of common stock outstanding  19,310,994   14,993,686   19,178,769   14,576,183 
Basic loss per share of common stock from continuing operations $(0.28) $(0.65) $(0.59) $(0.89)
Basic loss per share of common stock from discontinued operations  (0.08)  (0.07)  (0.11)  (0.12)
Basic net loss per share of common stock $(0.36) $(0.72) $(0.70) $(1.01)
                 
Diluted numerator:                
Net loss from continuing operations attributable to shares of common stock $(5,458) $(9,809) $(11,322) $(12,984)
Net loss from discontinued operations attributable to shares of common stock  (1,552)  (998)  (2,113)  (1,778)
Net loss attributable to shares of common stock $(7,010) $(10,807) $(13,435) $(14,762)
Diluted denominator:                
Diluted shares of common stock outstanding  19,310,994   14,993,686   19,178,769   14,576,183 
Diluted loss per share of common stock from continuing operations $(0.28) $(0.65) $(0.59) $(0.89)
Diluted loss per share of common stock from discontinued operations  (0.08)  (0.07)  (0.11)  (0.12)
Diluted net loss per share of common stock $(0.36) $(0.72) $(0.70) $(1.01)
                 
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  5,135,399   1,492,434   5,135,399   1,492,434 
Unvested restricted stock units (“RSUs”) to issue an equal number of shares of common stock of the Company  400,942   7,808   400,942   7,808 
Warrants to purchase an equal number of shares of common stock of the Company  3,430,877   1,006,679   3,430,877   1,006,679 
Preferred stock on an as converted basis  3,439,587   —   3,620,626   — 
Conversion feature of senior secured notes  —   —   —   159,462 
Total number of potentially dilutive instruments, excluded from the calculation of net loss per share  12,406,805   2,506,921   12,587,844   2,666,383 

  

Note 4. Business CombinationCombinations

XpresSpa

During the three months ended June 30, 2017, the Company learned new information about legal and other professional costs which existed as of the acquisition date of XpresSpa. As a result, the Company and the sellers of XpresSpa (the “XpresSpa Sellers”) agreed to reduce the total amount of Series D Convertible Preferred Stock (“FORM Preferred Stock”), which was previously issued to the XpresSpa Sellers in conjunction with the acquisition of XpresSpa. The Company reduced the number of the FORM Preferred Stock by 16,219 shares and estimated that the fair value of the reduction of the consideration was $908, which was recorded as a reduction of preferred equity and goodwill.

Additionally, during the three months ended June 30, 2017, certain XpresSpa Sellers converted 45,260 shares of their FORM Preferred Stock into 362,077 shares of the Company’s common stock, par value $0.01 per share.

As a result of these events, the total number of shares of FORM Preferred Stock was reduced from 491,427 as of December 31, 2016 to 429,948 shares as of June 30, 2017 and the face value (and liquidation preference) was reduced from $23,588 to $20,638.

Group Mobile

 

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.acquisition, Excalibur was merged with Group Mobile and 70% of FLI Charge were also acquired throughwithin the purchase of IDG. Group Mobile is a company with full-service customer support in rugged computers, mobile devices and accessories. FLI Charge owns patented conductive wireless chargingCompany’s technology and is focused on innovation, sales, manufacturing and licensing its technology in various industries, such as automotive, furniture and others.operating segment.

 

AsIn consideration for the acquisition, the Company issued an equivalent of 1,666,667 common stock (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 one of the sellers, who is a former chief executive officer and director of IDG, in consideration of his forgiveness of debt and (iii) 5,000 shares of the Company’s common stock for transaction related services. A total of 240,625 Series B Preferred shares were placed in escrow to secure certain 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 stock of the Company, resultingExcalibur Sellers will, in the issuancethree years following the closing of 1,604,167 sharesthis transaction, also receive $500 for each $2,000 of common stock. Shares heldgross profit generated by a specified list of Excalibur accounts annually, until such cumulative gross profit reaches $6,000, and an additional $500 when such cumulative profit reaches $10,000, such amounts are payable in escrow were released to the sellers in April and November 2016.

Purchase consideration value was determined based on the market value ofeither cash or the Company’s common stock, at the dateelection 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.Company.

 

The transaction has been accounted for asfair value of the total purchase price is $2,125 and includes a business combination. fair value of contingent consideration of $316 and fair value of unregistered shares of common stock issued of $1,809.

10

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 
Non-controlling 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 has no impact on the allocation of the purchase consideration pursuant toFASB 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:

  September 30, 2016  December 31, 2015    
  Gross
Carrying
Amount		  Accumulated
Amortization
and Impairment		  Net
Carrying
Amount		  Gross
Carrying
Amount		  Accumulated
Amortization
and Impairment		  Net
Carrying
Amount		  Weighted average
amortization period
(years)		 
Patents $28,213  $(26,822)  1,391  $28,213  $(13,782) $14,431   8.60 
Customer relationships  1,163   (285)  878   1,163   (62)  1,101   3.91 
Trade name  504   (99)  405   504   (21)  483   4.90 
Technology  479   (81)  398   479   (18)  461   5.68 
Additions:                            
Software  243   —   243   —   —   —   3.00 
Total intangible assets $30,602  $(27,287) $3,315  $30,359  $(13,883) $16,476     

The Company recorded customer relationships, trade name and technology as part of the acquisition of Group Mobile and FLI Charge completed on October 15, 2015. Additionally, during 2016, the Company has capitalized costs for software related to the build-out of Group Mobile’s new website. Amortization has not been recorded for the software as it has not yet been placed into service. The patent assets consist of several 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’s intangible assets are amortized over their expected useful lives. During the three-month periods ended September 30, 2016 and 2015, the Company recorded amortization expense of $203 and $819, respectively. During the nine-month periods ended September 30, 2016 and 2015, the Company recorded amortization expense of $1,467 and $2,436, respectively.

During the nine-month period ended September 30, 2016, the Company determined that there were impairment indicators related to certain of its patents. A significant factor considered when making this determination occurred on May 6, 2016, when “Vringo, Inc.” changed its name to “FORM Holdings Corp.” and concurrently announced its repositioning as a holding company of small and middle market growth companies. The Company concluded that this factor was deemed a “triggering” event, which required the related patent assets to be tested for impairment. In performing this impairment test, the Company determined that the patent portfolios, which together represent an asset group, were subject to impairment testing. In the first step of the impairment test, the Company utilized its projections of future undiscounted cash flows based on the Company’s existing plans for the patents. As a result, it was determined that the Company’s projections of future undiscounted cash flows were less than the carrying value of the asset group. Accordingly, the Company performed the second step of the impairment test to measure the impairment by calculating the asset group’s fair value as of May 6, 2016.

As a result, following amortization for the month of April, the Company recorded an impairment charge of $11,937, or 88.7% of the carrying value of the patents prior to impairment. This resulted in a new carrying value of $1,526 on May 6, 2016. The impairment charge is included in amortization and impairment of intangible assets in the condensed consolidated statements of operations. Following the impairment, the Company reevaluated the remaining useful life and concluded that there were no changes in the estimated useful life. There were no impairment indicators related to any of the Company’s other amortizable intangible assets during the nine-month period ended September 30, 2016.


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 of goodwill as of September 30, 2016.

Group Mobile $4,106 
FLI Charge  757 
Total Goodwill $4,863 

Note 6. General and administrative expenses

The Company’s general and administrative expenses grew significantly for both the three-month and nine-month periods ended September 30, 2016 as compared to the three-month and nine-month periods ended September 30, 2015. The increases were primarily due to two key factors: 1) merger and acquisition costs related to the Merger with XpresSpa and 2) general and administrative costs associated with Group Mobile and FLI Charge. During the three-month and nine-month periods ended September 30, 2016, the Company incurred $952 and $1,008 of merger and acquisition costs, respectively, associated with legal, diligence, valuation, and other costs pertaining to the Merger with XpresSpa. Following the acquisition of Group Mobile and FLI Charge during the fourth quarter of 2015, the Company experienced an increase in salaries and benefits due to the expanded workforce of the additional operating segments and incurred advertising and marketing costs for Group Mobile and FLI Charge’s product lines and product development costs as FLI Charge continued to develop and improve its product line. These increases in general and administrative expenses were offset by significant decreases in the stock-based compensation expense, which resulted from equity awards granted in 2012 and 2013 becoming fully vested during the latter half of 2015, as well as insurance, accounting, and audit fees.

The following table shows the breakout of key categories of general and administrative expenses for the three and nine months ended September 30, 2016 as compared to the three and nine months ended September 30, 2015.

  Three months ended September 30,  Nine months ended September 30, 
  2016  2015  2016  2015 
General and administrative expenses                
Salaries, commissions, and benefits $1,041  $419  $2,722  $1,504 
Stock-based compensation  426   936   1,256   3,560 
Legal, merger and acquisition, and financing  1,053   76   1,436   247 
Accounting and audit  99   150   387   446 
Advertising and marketing  110   —   856   — 
Product development  113   —   634   — 
Insurance  121   191   516   496 
Other general and administrative expenses  992   323   2,405   1,138 
Total general and administrative expenses $3,955  $2,095  $10,212  $7,391 

 

Note 7.5. Segment Information

 

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 currently hasconcluded that it conducts its business through three operating segments, Group Mobile, FLI Charge and intellectual property, which accumulate revenue and expenses. Additionally, the Company allocates certain expenses toare also its non-operating corporate segment. The corporate segment represents general and administrative expenses as well as net non-operating income (expense) that are not specific to any of FORM’s operating segments, but represent expenses incurred on behalf of the parent company, a holding company.reportable segments:

 

wellness (XpresSpa);

technology (Group Mobile); and

intellectual property

Segment operating results reflect losses before corporate and unallocated shared expenses, interest expense and income taxes. 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 September 30,  Nine months ended September 30,  Three months ended June 30,  Six months ended June 30, 
 2016  2015  2016  2015  2017  2016  2017  2016 
Revenue                         
Group Mobile $1,751  $—  $5,478  $— 
FLI Charge  4   —   33   — 
Wellness $12,927  $—  $23,911  $— 
Technology  3,450   2,450   6,941   3,727 
Intellectual property  1,350   —   11,000   150   —   8,900   100   9,650 
Total revenue $3,105  $—  $16,511  $150   16,377   11,350   30,952   13,377 
                                
Cost of sales                
Wellness  10,401   —   19,236   — 
Technology  2,690   2,180   5,618   3,304 
Intellectual property  118   4,243   217   4,963 
Total cost of sales  13,209   6,423   25,071   8,267 
                
Segment operating loss                                
Group Mobile $(565) $—  $(1,213) $— 
FLI Charge  (414)  —   (2,191)  — 
Wellness  (1,992)  —   (4,363)  — 
Technology  (742)  (327)  (1,656)  (648)
Intellectual property  113   (7,595)  (8,167)  (17,627)  (126)  (7,577)  (131)  (8,280)
Corporate  (2,911)  (2,095)  (6,527)  (7,391)  (2,270)  (1,814)  (4,463)  (3,616)
Total segment operating loss  (3,777)  (9,690)  (18,098)  (25,018)  (5,130)  (9,718)  (10,613)  (12,544)
                
Corporate non-operating income (expense), net  (1,484)  (2,181)  (1,925)  (2,338)
Net loss $(5,261) $(11,871) $(20,023) $(27,356)
Corporate non-operating expense, net  (228)  (91)  (306)  (440)
Loss from continuing operations before income taxes $(5,358) $(9,809) $(10,919) $(12,984)

 

 

  September 30,
2016		  December 31,
2015		 
Assets        
Group Mobile $6,635  $6,228 
FLI Charge  1,684   1,583 
Intellectual property  2,485   17,528 
Corporate  24,513   25,120 
Total assets $35,317  $50,459 
11

 

  June 30, 2017  December 31, 2016 
Assets        
Wellness $53,137  $57,527 
Technology  4,602   8,634 
Intellectual property  825   940 
Corporate  13,818   15,706 
Total assets $72,382  $82,807 

General and administrative costs are allocated among the operating segments and non-operating corporate segment. The non-operating corporate segment does not have any revenue, but does incur expenses such as compensation expenses, rent and infrastructure costs. The non-operating corporate segment’s assets are mainly comprised of cash and cash equivalents.


Note 8. Senior Secured Notescash.

 

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 paymentscurrently operates in sharestwo geographical regions: United States and all other countries. The following table represents the geographical revenue, regional operating loss, and total asset information as 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 in the condensed 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 Notesthree 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 tosix months ended June 30, 2017 (iii) the Company will discontinue the paymentand 2016. There were no concentrations of principal priorgeographical revenue, regional operating loss or total assets related to any single foreign country that were material 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.Company’s condensed consolidated financial statements.

 

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.


  Three months ended June 30,  Six months ended June 30, 
  2017  2016  2017  2016 
Revenue                
United States $15,115  $11,350  $28,574  $13,377 
All other countries  1,262   —   2,378   — 
Total revenue  16,377   11,350   30,952   13,377 
                 
Cost of sales                
United States  12,384   6,423   23,569   8,267 
All other countries  825   —   1,502   — 
Total cost of sales  13,209   6,423   25,071   8,267 
                 
Segment operating income (loss)                
United States  (5,636)  (9,713)  (11,309)  (12,541)
All other countries  506   (5)  696   (3)
Total segment operating income (loss)  (5,130)  (9,718)  (10,613)  (12,544)
Corporate non-operating expense, net  (228)  (91)  (306)  (440)
Loss from continuing operations before income taxes $(5,358) $(9,809) $(10,919) $(12,984)

On July 1, 2016, the Company repaid in full its Amended Notes that were due on June 30, 2017. As required by the terms of the Amended Notes, notice of repayment was delivered to the Investors on June 30, 2016. The Company repaid the Amended Notes in full, including a 15% fee for early repayment. The Company used an aggregate of $2,011 of cash on hand for repayment of the Amended Notes. As a result of the repayment in full of the Amended Notes, all liens on the Company’s assets, including its intellectual property, were released by the Investors.

  

The table below summarizes changes in the book value of the Notes from December 31, 2015 to September 30, 2016:

  June 30, 2017  December 31, 2016 
Assets        
United States $70,380  $80,053 
All other countries  2,002   2,754 
Total assets $72,382  $82,807 

 

Book value 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  1,253 
Early repayment fee of 15% of outstanding principal of $1,749  262 
Repayment of Amended Notes in full on July 1, 2016  (2,011)
Book value of Amended Notes as of September 30, 2016 $— 
12

 

Note 9.6. Fair Value Measurements

Derivative Warrant Liabilities

 

The following table presents the placement in the fair value hierarchy of derivate warrant liabilities measured at fair value on a recurring basis as of SeptemberJune 30, 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) 
September 30, 2016:                
May 2015 Warrants $601  $—  $—  $601 
                 
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) 
June 30, 2017:                
May 2015 Warrants $100  $—  $—  $100 
                 
December 31, 2016:                
May 2015 Warrants $259  $—  $—  $259 

 

The Company measures its derivative warrant liabilities at fair value. The May 2015 Warrants were classified within Level 3 because they were valued using the Black-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 SeptemberJune 30, 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 derivative warrant liabilities measured at fair value using significant unobservable inputs (Level 3) during the nine-month periodthree- and six-month periods ended SeptemberJune 30, 2016:2017:

 

  May 2015
Warrants		  Conversion
feature		 
December 31, 2015 $416  $1 
Decrease in fair value of the warrants and conversion feature  (96)  (1)
Increase in fair value as a result of debt modification  281   — 
September 30, 2016 $601  $— 
  May 2015
Warrants		 
December 31, 2016 $259 
Decrease in fair value of the derivative warrant liabilities  (159)
June 30, 2017 $100 

 

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.

 

SeptemberJune 30, 2017:

DescriptionValuation techniqueUnobservable inputsRange
May 2015 WarrantsBlack-Scholes-MertonVolatility42.12%
Risk free interest rate1.51%
Expected term, in years2.84
Dividend yield0.00%

December 31, 2016:

 

Description Valuation technique Unobservable inputs Range 
May 2015 Warrants Black-Scholes-Merton Volatility  60.7845.15%
    Risk-free interest rate  1.041.57%
    Expected term, in years  3.593.34 
    Dividend yield  0.00%

December 31, 2015:

Description Valuation technique Unobservable inputs Range 
Conversion feature Monte-Carlo model Volatility  82.46%
    Risk free interest rate  0.46%
    Expected term, in years  0.51 
    Conversion price $10.00 
         
May 2015 Warrants Black-Scholes-Merton Volatility  79.13%
    Risk free interest rate  1.68%
    Expected term, in years  4.34 
    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.

 

13

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.

Other Fair Value Measurements

 

The following table presents the placement in the fair value hierarchy of intangible assetsshares of the contingent consideration assumed by the Company following the acquisition of Excalibur, which is measured at fair value on a recurring basis, and the decrease in shares of FORM Preferred Stock issued to the XpresSpa Sellers, which was measured at fair value on a non-recurring basis as of September 30, 2016 dueApril 4, 2017 (the “Valuation Date”):

     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) 
June 30, 2017:                
Contingent consideration $316  $—  $—  $316 
FORM Preferred Stock $908  $—  $—  $908 

The purchase value of the contingent consideration assumed by the Company following the acquisition of Excalibur and the fair value of the decrease in shares of FORM Preferred Stock issued to impairment. There was no impairment of intangible assets for the period ended December 31, 2015XpresSpa Sellers were determined using the Monte-Carlo simulation and, as such, no fair value measurement was performed:

     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) 
September 30, 2016:                
Patents $1,391  $—  $—  $1,391 

During the nine-month period ended September 30, 2016, the Company recorded a noncash impairment charge of $11,937 to reduce the net carrying value of its patent assets to its estimated fair value of $1,526. Following the impairment charge, the net carrying value of the patent assets was reduced to $1,391 as of September 30, 2016 due to additional amortization expense during the period. The fair value of these assets were classified as Level 3 of the fair value hierarchy using an income-based approach.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.

 

Note 10. WarrantsValuation processes for Level 3 Fair Value Measurements

 

The following table summarizes information about warrant activity duringTo estimate the nine-month period ended September 30, 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  —   —   — 
September 30, 2016  1,006,679  $9.18   $3.00 - $17.60 


On March 9, 2016, the Company modified the exercise price of the May 2015 Warrants, 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 8). The change in fair value of the May 2015 Warrants as a resultdecrease in shares of FORM Preferred Stock, the Monte-Carlo simulation was performed using the following variables:

Description Valuation technique Variables Range 
FORM Preferred Stock Monte-Carlo Share price as of the Valuation Date $1.95 
    Volatility  46.0%
    Risk free interest rate  2.22%

Additionally, the Monte-Carlo simulation used the value of the exercise price modification was accounted for as a debt discountunderlying equity value issued to be amortized overXpresSpa Sellers on the remaining termdate of the Amended Notes.

CertainXpresSpa acquisition, December 23, 2016, which is comprised of the aggregation of the fair value of the shares of the Company’s outstanding warrants are classified as equity warrantscommon stock, shares of FORM Preferred Stock and certain are classified as derivative warrant liabilities. The Company’s outstanding equity warrants as of September 30, 2016 consist of the following:warrants.

  No. outstanding  Exercise price  Remaining
contractual life		 Expiration Date
Series 1 Warrants  149,025  $17.60  0.80 years July 19, 2017
Series 2 Warrants  194,352  $17.60  0.80 years July 19, 2017
Reload Warrants  75,802  $17.60  0.35 years February 6, 2017
October 2015 Warrants  50,000  $5.00  4.54 years April 15, 2021
Outstanding as of September 30, 2016  469,179         

The Company’s outstanding derivative warrants as of September 30, 2016 consist of the following:

  No. outstanding  Exercise price  Remaining 
contractual life		 Expiration Date
May 2015 Warrants  537,500  $3.00  3.59 years May 4, 2020

 

Note 11.7. Stock-based Compensation

 

The Company has a stock-based compensation plan available to grant stock options and RSUs toAs of June 30, 2017, 1,258,603 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 toPlan. Total stock-based compensation expense for the one-for-ten reverse stock split). In 2015, the Company amended its Plan, so that a maximum number of shares of common stock that may be awardedsix-month periods ended June 30, 2017 and 2016 was increased to 2,100,000 (the “Amended Plan”). As of September 30, 2016, 302,510 shares were available for future grants under the Plan.$1,473 and $962, respectively. Total stock-based compensation expense for the three-month periods ended SeptemberJune 30, 2017 and 2016 was $732 and 2015 was $485 and $1,066, respectively. Total stock-based compensation expense for the nine-month periods ended September 30, 2016 and 2015 was $1,447 and $4,191,$499, respectively.

 

The following table illustrates the stock options granted during the nine-monthsix-month period ended SeptemberJune 30, 2016.2017.

 

Title Grant date No. of
options		 Exercise
price		 Fair market value at
grant date		 Vesting terms Assumptions used in
Black-ScholesBlack-
Scholes option pricing
model
Directors, management, and employees April – June 2016January 2017 730,0001,545,000 $1.55 - $1.922.12 – $2.15 $0.82 - $1.040.89 – $0.96 Over 1 year for directors; Over 3 years for management and employees 

Volatility: 58.92% - 59.75%
44.27% – 44.90%

Risk free interest rate: 1.24% - 1.56%
1.95% – 2.16%

Expected term, in years: 5.31 - 5.81
5.29 – 5.79

Dividend yield: 0.00%

In addition to the stock options listed in the table above, on April 4, 2016, the Company's Board of Directors authorized another 2,260,000 stock options to be granted to management and employees. This amount of stock options granted was greater than the amount available under the Amended Plan and, as such, the stock options were not issued to management and employees as they require stockholder approval. These stock options are expected to be granted when stockholders’ approval is received in the fourth quarter of 2016.


 

The following table illustrates the RSUs granted during the nine-monthsix-month period ended SeptemberJune 30, 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  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 nine-monthsix-month period ended SeptemberJune 30, 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 at January 1, 2016  53,280  $36.31   871,484  $30.65  $5.10 - 55.00  $20.49 
Granted  10,000  $2.13   730,000  $1.66  $1.55 - 1.92  $0.89 
Vested/Exercised  (63,280) $30.91   —   —   —   — 
Forfeited  —   —   (100,050) $27.88  $5.90 – 41.00  $17.04 
Expired  —   —   (9,000) $55.00  $55.00  $26.20 
Outstanding at September 30, 2016  —  $—   1,492,434  $16.51  $1.55 – 55.00  $11.08 
Exercisable at September 30, 2016  —   —   995,767  $23.65  $1.55 – 55.00     

  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 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  —   —   (72,334) $24.80  $1.55 – 37.20  $16.81 
Expired  —   —   (16,368) $43.66  $9.94 – 55.00  $22.02 
Outstanding as of June 30, 2017  400,942  $2.12   5,135,399  $5.60  $1.55 – 41.00  $3.85 
Exercisable as of June 30, 2017  —      2,459,982  $9.72  $1.55 – 41.00     

15

On January 20, 2017, the Company entered into amended employment agreements with its named executive officers. Under the terms of certain 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 noncash 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 recordedrecorded.

Note 8. 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 six months ended June 30, 2017 reflect an estimated global annual effective tax rate of approximately -3.96% from continuing operations. Discontinued operations for the six months ended June 30, 2017 reflect an annual effective tax rate of 0.58%.

As of June 30, 2017, deferred tax assets.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.

Income tax expense for the six months ended June 30, 2017 of approximately $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 with the next year.

 

Note 12.9. Related Parties Transactions

 

On April 22, 2015, XpresSpa entered into a credit agreement and secured promissory note (the “Debt”) with Rockmore Investment Master Fund Ltd. (“Rockmore”) 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 both June 30, 2017 and December 31, 2016, which is included in long-term liabilities in the condensed consolidated balance sheets. During the six-month period ended June 30, 2017, XpresSpa paid $430 of interest and recorded $365 of interest expense. During May 2017, 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 modified.

In addition, the Company paid $212 to Mr. Bernstein in 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.

16

Note 10. Discontinued Operations and Assets and Liabilities Held For Disposal

During June 2017, the Company concluded that the requirement to report the results of FLI Charge, a wholly-owned subsidiary included in its technology operating segment, as discontinued operations was triggered. The Company engaged various third partiesis currently negotiating the terms of an agreement to perform valuations, legal, financial and tax due diligence associated with the XpresSpa Merger and other merger and acquisition projects. Among the service providers, the Company engaged RedRidge Lender Services LLC (“RedRidge”)sell FLI Charge to perform financial due diligence. The audit committee of the Company’s CEO and certain members of his family owna third-party investor in exchange for a minority equity position in RedRidge, which may be considered a related party. The audit committee of the Company’s Board of Directors reviewed and approved the engagement of RedRidge. The fee for the XpresSpa engagement was $101 and the fees for other engagements were $60, all of which, except for $10, were incurredinvestment in the three-month period ended Septemberform of shares of preferred stock in the newly created entity, which will own and operate FLI Charge. The Company will not be providing any continued management or financing support to FLI Charge. The transaction is expected to close in the third quarter of 2017. In connection with this agreement, a non-cash impairment loss of $1,092 relating to FLI Charge’s technology assets and goodwill was recorded as of June 30, 2016. These fees are reflected in general and administrative expenses for2017. The following table represents the three- and nine-month periods ended September 30, 2016components of operating results from discontinued operations, as presented in the condensed consolidated statements of operations.operations and comprehensive loss:

  Three months ended June 30,  Six months ended June 30, 
  2017  2016  2017  2016 
Revenue $19   13   53  $29 
Cost of sales  (36)  —   (68)  (2)
Depreciation, amortization and impairment  (1,130)  (21)  (1,168)  (42)
General and administrative  (405)  (990)  (930)  (1,763)
Loss from discontinued operations before income taxes  (1,552)  (998)  (2,113)  (1,778)
Income tax expense  —   —   —   — 
Net loss from discontinued operations $(1,552) $(998) $(2,113) $(1,778)

In addition, the following table presents the carrying amounts of the major classes of assets and liabilities held for sale as of June 30, 2017 and December 31, 2016, as presented in the condensed consolidated balance sheets.

 


Note 13. Income Taxes

As of September 30, 2016, deferred tax assets generated from the Company’s U.S. activities were fully 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 did not have any material unrecognized tax benefits as of September 30, 2016. The Company does not expect to record any additional material provisions for unrecognized tax benefits within the next year.

  June 30, 2017  December 31, 2016 
Accounts receivable, net $39  $45 
Inventory  208   53 
Other current assets  24   92 
Property and equipment, net  196   183 
Intangible assets, net  —   377 
Goodwill  —   757 
Assets held for disposal $467  $1,507 
         
Accounts payable, accrued expenses and other current liabilities $88  $196 
Deferred revenue  9   10 
Liabilities held for disposal $97  $206 

 

Note 14.11. Commitments and Contingencies

 

FLI Charge

Litigation and legal proceedings

FLI Charge launched its consumer product line on Indiegogo, a crowdfunding platform, on June 15, 2016;

Certain of the campaign was completed on August 15, 2016.Company’s outstanding legal matters include speculative claims for substantial or indeterminate amounts of damages. The Company regularly evaluates developments in its legal matters that could affect the amount of any potential liability and makes adjustments as appropriate. Significant judgment is required to determine both the likelihood of there being a liability and the estimated amount of a loss related to such matters.

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 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 accounts for funds raised from crowdfunding campaignspayable, accrued expenses, and presales, which were approximately $224, as deferred revenue onother current liabilities in the condensed consolidated balance sheets. FLI Charge expects to deliver products to the participantssheet as of June 30, 2017.

The Company expenses legal fees in the fourth quarter of 2016.period in which they are incurred.

17

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 April 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 17, 2017, XpresSpa filed a First Amended Complaint against the defendants. On June 2, 2017, the Ross Defendants filed their answer.

Both the Cordial Litigation and legal proceedingsRoss Litigation are pending before the respective courts.

 

ZTEIn re Chen et al.

 

On December 7,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 Company entered into a confidential settlement and license agreement (the “Settlement Agreement”) with ZTE Corporation and its affiliates (collectively, “ZTE”), pursuant to which the parties withdrew all pending litigations and proceedings against each other and the Company granted ZTE a non-exclusive, non-transferable, worldwide perpetual license to certain patents and patent applications owned by the Company.

In several jurisdictions, though ZTE requested that government organizations close proceedings against FORM, 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 FORM; however, it is not clear whether the NDRC has closed its investigation.

In addition, in China and the Netherlands, FORM 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 FORM’s appeals, though FORM must still plead its case before the respective adjudicatory body in each jurisdiction. No liability is expected or recordedUnited States District Court for the ZTE-related legal proceedings.

All depositsEastern District of New York, claiming that had been posted with the courts in connection with our litigation with ZTE have been returned.

ASUS

In Marchthey and other spa technicians were misclassified, and that overtime was unpaid. On September 23, 2016, the CompanyCourt conditionally certified the class. The parties held a mediation on February 28, 2017 and ASUSTeK Computer Inc. and its subsidiaries (collectively, “ASUS”) settled their disputes and ended all litigations between them.reached an agreement on a settlement in principle. The Company and Google, Inc. (“Google”), who intervened as a party in the Company’s litigation against ASUS in India, have agreed to withdraw their respective outstanding claims against one another. The Company and Googleparties are currently in the process of finalizing such withdrawals,a formal settlement agreement, and each party will cover its own costs.preparing a motion to the Court for preliminary approval of a classwide settlement.

Other

 

XpresSpa is involved in various other claims and legal actions that arise in the ordinary course of business. The Company isdoes 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 in discussions withanticipates, could materially and adversely affect the previous ownerCompany’s business, financial condition, results of some of its patents regarding whether the entirety of the payment received from ZTE in December 2015 is subject to the royalty rate under the Confidential Patent Purchase Agreement dated August 9, 2012.operations and cash flows.

The CompanyCompany’s intellectual property operating segment is also engaged in other litigation, for which no liability is recorded, as the Company does not expect anya material negative outcome.

 

LeasesNote 12. Subsequent Events

 

On July 26, 2017, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Roth Capital Partners, LLC, acting as the representative of the several underwriters named therein (collectively, the “Underwriters”), relating to the issuance and sale (the “Offering”) of 6,900,000 shares of the Company’s common stock, par value $0.01 per share (“FORM Common Stock”) including 900,000 shares subject to the Underwriters’ over-allotment option, which was exercised on August 2, 2017 and closed on August 4, 2017. The price to the public in the Offering was $1.10 per share and the Underwriters agreed to purchase the shares of FORM Common Stock from the Company leases office space in New York, NY for its corporate headquarters. Minimum annual lease payments arepursuant to the Underwriting Agreement at a purchase price of $1.023 per share. The net proceeds to the Company from the Offering were approximately $403 (subject to certain future escalations$6,700 after deducting underwriting discounts and adjustments). 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 2016commissions and extended until July 31, 2019. Rent expense for operating leases for the three and nine month periods ended September 30, 2016 were $109 and $327, respectively. Rent expense for operating leases for the three and nine month periods ended September 30, 2015 were $91 and $274, respectively.

other estimated offering expenses.

 

18


 

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 FORM Holdings Corp. (prior to May 5, 2016, known as “Vringo, Inc.”), a Delaware corporation, and its consolidated subsidiaries.

 

Overview

 

On May 6, 2016, we changed the name of our company from Vringo, Inc. to

FORM Holdings Corp. (“FORM” or the “Company”) and concurrently announced our repositioning as a holding company of small and middle market growth companies. Our focus is on acquiring and building companies that would benefit from: 

additional capital;

exposure to visibility from the public markets;

talent recruiting;

rebranding; and

implementation of best practices.

Our management team is committed to execute on our strategy. We are industry agnostic, but limit the scope of our pipeline by looking only at companies with a clear path to grow in excess of $100,000,000 in revenue.

Our common stock, par value $0.01 per share, which was previously listed on The NASDAQ Capital Market under the trading symbol “VRNG,” has been listed under the trading symbol “FH” since May 9, 2016.

We currently have three operating segments:

Group Mobile

FLI Charge

Intellectual property

Prior to December 31, 2013, we operated a global platform for the distribution of mobile social applications and services. On February 18, 2014, we sold our mobile social application business to InfoMedia Services Limited (“InfoMedia”), receiving an 8.25% ownership interest in InfoMedia as consideration and a seat on the board of directors of InfoMedia. As part of the transaction, we have the opportunity to license certain intellectual property assets and work with InfoMedia to identify and protect new intellectual property.

Segments

We operate in three operating segments: Group Mobile, FLI Charge wellness, technology and intellectual property.

 

Our Strategy and Outlook

Group Mobilewellness operating segment consists of XpresSpa, which is a supplierleading airport retailer of built-to-order rugged computers, mobile devices and accessories. We plan to increase Group Mobile’s revenue, which we believe can be achieved by adding new products, exploring new distribution verticals, such as military and government, and increasing the sales team’s geographic coverage.In addition, we plan to continue to enhance our intellectual property rights around our FLI Charge technology and products.FLI Charge plans to strengthen and develop partnerships in numerous markets including automotive, education, office, healthcare, power tools and vaporizers. Our strategy for our intellectual property operating segment is to continue to monetize our existing portfolio of intellectual property through licensing and strategic partnerships.

Group Mobile

Group Mobilespa services. XpresSpa is a growingwell-recognized airport spa brand with 52 locations, including 48 domestic and innovative full, end-to-end solution provider for project lifecycle4 international, as of June 30, 2017. XpresSpa offers travelers premium spa services, including system integration, hardware service support, pre-massage, nail and post-deployment and customer support helpdesk. Group Mobile provides total hardware solutions, including rugged laptops, tablets, and handheld computers. Group Mobile also markets rugged mobile printers, vehicle computer docking and mounting gear, power accessories, wireless communication products, antennas, carrying cases and other peripherals, accessories and add-ons needed to maximize productivity in a mobile- or field-computing environment. Group Mobile’s professional service offerings are evolving into project lifecycle services including technology consultations, development and deployment, project and asset management, equipment installation, break-fix, hardware service technical support, 24-7 helpdesk and more.


Group Mobile is moving aggressively to provide industry leading Law Enforcement In-Vehicle “Video and Body Worn” camera solutions to meet the complex mobile technology demands of thousands of law enforcement agencies and officers in the United States (“U.S.”) market. Key to the Group Mobile long-term strategy is the complete professional services, post deployment services and lifecycle management of Group Mobile offerings to bring stability to the customer mobile technology platforms.

Group Mobile purchases rugged mobile computing equipment and complementary products from its primary distribution and manufacturing partners and sells them to enterprises, resellers, and retail customers. Our primary customers range from corporations to local governments, emergency first responders and healthcare organizations. We believe that Group Mobile’s business is characterized by gross profits as a percentage of revenue slightly higher than is commonly found in resellers of computing devices. The market for rugged mobile computing products is trending towards an increase in the volume of unit sales combined with declining unit prices as the business transitions from primarily being comprised of laptops to one primarily comprised of rugged tablets. As this transition has occurred, Group Mobile is seeing shortened product life cycles and industry specific devices for segments such as healthcare. Group Mobile sets sale prices based on the market supply and demand characteristics for each particular product. Group Mobile is highly dependent on the end-market demand for rugged mobile computing products, which is influenced by many factors including the introduction of new IT products by OEM, replacement cycles for existing rugged mobile computing products, overall economic growth, local and state budgets, and general business activity.

Product costs represent the single largest expense and product inventory is one of the largest working capital investments for Group Mobile. Group Mobile’s primary suppliers include Synnex Corporation, Ingram Micro Inc., and Xplore Technologies Corporation, which, combined, represent approximately 80% of Group Mobile’s inventory purchases. We have reseller agreements with most of our OEM and distribution partners. These agreements usually provide for nonexclusive resale and distribution rights. The agreements are generally short-term, subject to periodic renewal, and often contain provisions permitting termination by either our supplier or us without cause upon relatively short notice. Furthermore, product procurement from the OEM suppliers is a highly complex process and, as such, efficient and effective purchasing operations are critical to Group Mobile’s success.

FLI Charge

FLI Charge is a wireless power company dedicated to making it easier for people to power and charge the multitude of mobile electronic devices they use on a daily basis. By eliminating the need to search and compete for outlets and charging cables, we are improving the powering and charging experience for all battery and DC powered devices.

FLI Charge designs, develops, licenses, manufactures and markets wireless conductive power and charging solutions. FLI Charge is currently working with partners in several verticals to bring products to market. These verticals include education, office, hospitality, automotive and consumer electronics among others. To date, we have not yet generated any substantial revenue from our products. We believe that FLI Charge’s patented technology is the only wireless power solution that is fully interoperable between different mobile devices ranging from smartphones to power tools, and many more. FLI Charge’s wireless power solution can simultaneously power multiple devices on the same pad no matter their power requirements or positions on the pad.

The FLI Charge ecosystem consists of power pads or surfaceshair as well as devices that are connected to or embedded with FLI Charge enabling technology. FLI Charge padsspa and surfaces are connected to a power source or battery. The surface of the pad has conductive contact strips that provide power and are constantly monitored by control circuitry that immediately halts power transfer if an unapproved load or short-circuit condition is detected. FLI Charge-enabled devices are embedded with the FLI Charge contact enablement that consists of four contact points, known as the FLI Charge “constellation.” The constellation is designed to make an immediate and continuous electrical connection with the contact strips regardless of the device’s orientation on the pad. The enablement monitors the power coming from the pad and ensures that the correct amount of power goes to the device. Once an approved FLI Charge device is placed on a pad, power is transferred immediately to charge or power the device.

There are several competing wireless charging technologies on the market or under development today. The most popular competing technology is inductive wireless charging, in which magnetic induction uses a magnetic coil to create resonance, which can transmit energy over a relatively short distance. The amount of power delivered is a function of the size of the coils, and the coils must be aligned and paired within a typical distance of less than one inch. Products utilizing magnetic induction have been available for 10+ years in products such as rechargeable electronic toothbrushes and pace makers. The leading inductive technologies deliver a maximum of 10-15 watts. Other competing technologies include magnetic resonance, RF harvesting, laser and ultrasound.

As compared to each of the competing wireless technologies above, we believe that our conductive technology exhibits many competitive advantages including:

charge rates/efficiency – FLI Charge pads charge devices nearly as fast as plugging them into a wall outlet;

multiple devices – FLI Charge pads can charge or power multiple devices at the same time without reducing the charging speed;

safety – FLI Charge’s technology is as safe as plugging devices into a wall outlet;

maximum power – FLI Charge pads can supply as much as 150 watts of power, which is enough to charge or power devices with relatively high power requirements such as power tool batteries and flat screen monitors;

positioning freedom – FLI Charge’s technology allows for devices to be placed in any orientation, anywhere on the pad, without sacrificing any charging speed; and

compatibility – all FLI Charge enabled electronic devices are compatible with all FLI Charge pads.

FLI Charge launched its consumer product line on Indiegogo, a crowdfunding platform, on June 15, 2016; the campaign was completed on August 15, 2016.travel products. We account for funds raised from crowdfunding campaigns and presales, which were approximately $224, as deferred revenue on the condensed consolidated balance sheets. FLI Charge expects to deliver products to the participantsacquired XpresSpa in the fourth quarter of 2016.

 

Our technology operating segment consists of Group Mobile 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. In the first quarter 2017, we completed the acquisition of Excalibur Integrated Systems, Inc. (“Excalibur”) 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 acquisition, Excalibur was merged with Group Mobile within our technology operating segment. Our equity interest in InfoMedia, which is accounted for under the cost method of investment, increased from 8.25% to 11% in the first quarter of 2017 due to a realignment of ownership interests.

As of June 30, 2017, our FLI Charge business is reflected as discontinued operations in our condensed consolidated statements of operations and comprehensive loss and assets held for disposal and liabilities held for disposal in our condensed consolidated balance sheets as a result of an offer from a third party to finance its ongoing operations.

We are currently contemplating financing the expansionevaluating strategic alternatives with respect to Group Mobile in an attempt to enhance stockholder value. These strategic alternatives may include a possible sale, merger, spin-off or other separation of the FLI Charge operating segment through a direct investmentGroup Mobile or other forms of business combinations or strategic transactions. We are seeking to enter into one or more strategic transactions involving Group Mobile in the FLI Charge subsidiary in the formfirst quarter of a convertible preferred security, which may be exchangeable for our common stock under certain circumstances. No assurance can be made that such financing will occur on the terms currently contemplated or at all.

Intellectual Property2018.

 

Our intellectual property operating segment is engaged in the innovation, development and monetization of intellectual property. Our 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.

 

We are currently focused on monetizing

Subsequent to June 30, 2017, we completed a public offering of 6,900,000 shares of our technology portfolio through a varietycommon stock, at $1.10 per share, for net proceeds of value enhancing initiatives including, but not limited to, licensing, litigation and strategic partnerships. For further information regarding our intellectual property enforcement activities, refer to Part II, Item 1, Legal Proceedings, in this Quarterly Report on Form 10-Q.


Recent Developmentsapproximately $6.7 million.

XpresSpa

On August 8, 2016, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with FHXMS, LLC, a Delaware limited liability company and our wholly-owned subsidiary (the “Merger Sub”), XpresSpa Holdings, LLC, a Delaware limited liability company (“XpresSpa”), the unitholders of XpresSpa who are parties thereto (the “Unitholders”) and Mistral XH Representative, LLC, as representative of the Unitholders (the “Representative”), pursuant to which the Merger Sub will merge with and into XpresSpa, with XpresSpa being the surviving entity and our wholly-owned subsidiary (the “Surviving Entity”) and the Unitholders becoming our stockholders (the “Merger”).

XpresSpa is a leading airport retailer of spa services and related products, and also sells spa products through its internet site. Services and products include: (i) massage services for the neck, back, feet and whole body, (ii) nail care, such as pedicures, manicures and polish changes, (iii) beauty care services such as waxing and facials, (iv) hair care, such as haircuts and blow outs, (v) spa products such as massagers, lotions and aromatherapy aids and (vi) travel products such as neck pillows and eye masks.

Upon completion of the Merger, (i) the then-outstanding common units of XpresSpa (other than those held by us, which will be cancelled without any consideration) and (ii) the then-outstanding preferred units of XpresSpa (other than those held by us, which will be cancelled without any consideration) will be automatically converted into the right to receive an aggregate of:

(a)2,500,000 shares of our common stock, par value $0.01 per share (“FORM Common Stock”),

(b)494,792 shares of our newly designated Series D Convertible Preferred Stock, par value $0.01 per share, (“FORM Preferred Stock”) with an aggregate initial liquidation preference of $23,750,000, and

(c)five-year warrants to purchase an aggregate of 2,500,000 shares of FORM Common Stock, at an exercise price of $3.00 per share, each subject to adjustment in the event of a stock split, dividend or similar events.

 

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The FORM Preferred Stock shall be initially convertible into an aggregate of 3,958,336 shares of FORM Common Stock, which equals a $6.00 per share conversion price, and each holder of FORM Preferred Stock shall be entitled to vote on an as converted basis. The FORM Preferred Stock is senior to the FORM Common Stock and the terms of the FORM Preferred Stock contain no restrictions on our ability to issue additional senior preferred securities or our ability to issue additional preferred securities in the future. We have the right, but not the obligation, upon ten trading days’ notice to convert the outstanding shares of FORM Preferred Stock into FORM Common Stock at the then applicable conversion ratio, at any time or from time to time, if the volume weighted average price per share of the FORM Common Stock exceeds $9.00 for over any 20 days in a 30 consecutive trading day period. The term of the FORM Preferred Stock is seven years, after which time we can repay the holders in shares of FORM Common Stock or cash at our election. If we elect to make a payment, or any portion thereof, in shares of FORM Common Stock, the number of shares deliverable (the “Base Shares”) will be based on the volume weighted average price per share of FORM Common Stock for the 30 trading days prior to the date of calculation (the “Base Price”) plus an additional number of shares of FORM Common Stock (the “Premium Shares”), calculated as follows: (i) if the Base Price is greater than $9.00, no Premium Shares shall be issued, (ii) if the Base Price is greater than $7.00 and equal to or less than $9.00, an additional number of shares equal to 5% of the Base Shares shall be issued, (iii) if the Base Price is greater than $6.00 and equal to or less than $7.00, an additional number of shares equal to 10% of the Base Shares shall be issued, (iv) if the Base Price is greater than $5.00 and equal to or less than $6.00, an additional number of shares equal to 20% of the Base Shares shall be issued and (v) if the Base Price is less than or equal to $5.00, an additional number of shares equal to 25% of the Base Shares shall be issued. The FORM Preferred Stock will accrue interest at 9% per annum, or $4.32 per share of FORM Preferred Stock.

Second Quarter 2017 Highlights

 

In addition, we entered into subscription agreements to sell 750,574 shares of our unregistered Common Stock to certain holders of XpresSpa, at a purchase price of $2.31 per share, for an aggregate purchase price of $1,734,000.

  Three Months Ended June 30, 2017 
  Wellness  Technology  Intellectual
Property		  Corporate  Total 
Total revenue $12,927,000  $3,450,000  $—  $—  $16,377,000 
                     
Cost of sales                    
Products  1,124,000   2,690,000   —   —   3,814,000 
Labor  5,783,000   —   —   —   5,783,000 
Occupancy  1,983,000   —   —   —   1,983,000 
Other operating costs  1,511,000   —   118,000   —   1,629,000 
Total cost of sales  10,401,000   2,690,000   118,000   —   13,209,000 
                     
Gross profit  2,526,000   760,000   (118,000)  —   3,168,000 
Gross profit as a % of total revenue  19.6%  22.0%  —   —   19.3%
                     
Depreciation and amortization                    
Depreciation  2,327,000   14,000   —   7,000   2,348,000 
Amortization  592,000   148,000   6,000   —   746,000 
Total depreciation and amortization  2,919,000   162,000   6,000   7,000   3,094,000 
                     
General and administrative                    
Stock-based compensation  —   —   —   732,000   732,000 
Other general and administrative  1,599,000   1,340,000   2,000   1,531,000   4,472,000 
Total general and administrative  1,599,000   1,340,000   2,000   2,263,000   5,204,000 
                     
Operating loss from continuing operations $(1,992,000) $(742,000) $(126,000) $(2,270,000) $(5,130,000)

On August 8, 2016, we purchased from XpresSpa an aggregate of 1,733,826 of Series C Preferred Units of XpresSpa, at a per unit purchase price of $1.00 per unit, for an aggregate purchase price of $1,734,000, which is included in other current assetsin the condensed consolidated balance sheets. The Series C Preferred Units of XpresSpa will have a preference in the amount of its initial investment and shall bear 12% interest until the closing of the anticipated merger agreement.

 

We are holdinguse GAAP and non-GAAP measurements to assess the trends in our annual meeting of stockholders on November 28, 2016business. With respect to approve, among other things, the MergerXpresSpa, we review XpresSpa’s Adjusted EBITDA, a non-GAAP measure, which we define as earnings before interest, tax, depreciation and the issuance of shares of FORM Common Stock, FORM Preferred Stockamortization expense, excluding one-time costs (e.g., merger and warrants to the Unitholders in connection with the Merger. Assuming stockholder approval is received, we expect to complete the Merger shortly after the stockholders vote. Immediately following the completion of the Merger (without taking into account any shares of FORM Common Stock held by XpresSpa equity holders prior to the completion of the Merger), the former Unitholders of XpresSpa are expected to own approximately 18% of the outstanding FORM Common Stock (or 33% of the outstanding FORM Common Stock calculated on a fully diluted basis)acquisition and our current stockholders are expected to own approximately 82% of the outstanding FORM Common Stock (or 67% of the outstanding FORM Common Stock calculated on a fully diluted basis).integration related costs) and stock-based compensation.

 

Impairment of Patents

Our name change and repositioning as a holding company was deemed a triggering event, which required our patent assets to be tested for impairment. In performing this impairment test, we determined that the patent portfolios, which together represent an asset group, were subject to impairment testing. In the first step of the impairment test, we utilized our projections of future undiscounted cash flows based on our existing plans for the patents. As a result, it was determined that our projections of future undiscounted cash flows were less than the carrying value of the asset group. Accordingly, we performed the second step of the impairment test to measure the potential impairment by calculating the asset group’s fair value as of May 6, 2016. As a result, following amortization for the month of April, we recorded an impairment charge of $11,937,000, which resulted in a new carrying value of $1,526,000 on May 6, 2016. Following the impairment, we reevaluated the remaining useful life and concluded that there were no changes in the estimated useful life.


Stockholder Rights Plan

On March 18, 2016, we announced that our Board of Directors adopted a stockholder rights plan in the form of a Section 382 Rights Agreement designed to preserve our tax assets. As a part of the plan, our Board of Directors declared a dividend of one preferred-share-purchase right for each share of our common stock outstanding as of March 29, 2016. Effective on March 18, 2016, if any group or person acquires 4.99% or more of our outstanding shares of common stock, or if a group or person that already owns 4.99% or more of our common stock acquires additional shares representing 0.5% or more of our common stock, then, subject to certain exceptions, there would be a triggering event under the plan. The rights would then separate from our common stock and would be adjusted to become exercisable to purchase shares of our common stock having a market value equal to twice the purchase price of $9.50, resulting in significant dilution in the ownership interest of the acquiring person or group. Our Board of DirectorsAdjusted EBITDA has the discretion to exempt any acquisition of our common stock from the provisions of the plan and has the ability to terminate the plan prior to a triggering event. In connection with this plan, we filed a Certificate of Designation of Series C Junior Preferred Stock with the Secretary of State of Delaware on March 18, 2016.

Senior Secured Notes

On March 9, 2016, we entered into an exchange note agreement (the “Exchange Note Agreement”) with the holders (the “Investors”) of our $12,500,000 Senior Secured Notes (the “Notes”), which we originally issued in a registered direct offering on May 4, 2015. Pursuant to the Exchange Note Agreement, we issued to the Investors an aggregate of 703,644 shares of our common stock, par value $0.01 per share, in exchange for the reduction of $1,267,000 of the outstanding aggregate principal amount of the Notes and $49,000 of accrued interest. As a result, the outstanding aggregate principal amount under the Notes was reduced from $3,016,000 to $1,749,000 as of March 9, 2016.

In addition, on March 9, 2016, with the consent of each of the Investors, we agreed to amend the Notes. Pursuant to the Amended and Restated Senior Secured Notes (the “Amended Notes”) and the Indenture dated May 4, 2015, as supplemented by a First Supplemental Indenture dated May 4, 2015 and further supplemented by a Second Supplemental Indenture (the “Second Supplemental Indenture”) dated March 9, 2016: (i) the Amended Notes are no longer convertible into shares of our common stock and will be payable by us on the Maturity Date (as defined below) in cash only, (ii) the Maturity Date of the Amended Notes will extend to June 30, 2017 (the “Maturity Date”), (iii) we will discontinue the payment of principal prior to the Maturity Date (subject to certain exceptions), (iv) the interest rate increased from 8% to 10% per annum and will accrue on the outstanding aggregate principal amount of the Amended Notes, payable monthly, and (v) we will pay to the Investors on the Maturity Date 102% of the outstanding aggregate principal amount of the Amended Notes. We also agreed to maintain a cash balance (including cash equivalents) of not less than $2,900,000.

In addition, we agreed to reduce the exercise price of the warrants to purchase an aggregate of 537,500 shares of our common stock granted as part of the initial agreement (the “May 2015 Warrants”) from $10.00 to $3.00 per share and the parties also agreed to remove from the May 2015 Warrants certain anti-dilution features. Other terms of the May 2015 Warrants remained the same. Furthermore, in connection with the Amended Notes, we paid a restructuring fee of $50,000 to the Investors.

On July 1, 2016, we repaid in full our Amended Notes that were due on June 30, 2017. As required by the terms of the Amended Notes, notice of repayment was delivered to the Investors on June 30, 2016. We repaid the Amended Notes in full, including a 15% fee for early repayment. We used an aggregate of $2,011,000 of cash on hand for repayment of the Amended Notes. As a result of the repayment in full of the Amended Notes, all liens on our assets, including intellectual property, were released by the Investors.

Reverse Stock Split

Unless otherwise noted, the information containedbeen presented in this Quarterly Report on Form 10-Q gives effectand is a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP. We consider Adjusted EBITDA to be an important indicator for the performance of our business, but not a measure of performance or liquidity calculated in accordance with U.S. GAAP. We have included this non-GAAP financial measure because management utilizes this information for assessing our performance and liquidity, and as an indicator of our ability to make capital expenditures and finance working capital requirements. We believe that Adjusted EBITDA is a measurement that is commonly used by analysts and some investors in evaluating the performance and liquidity of companies such as us. In particular, we believe that it is useful for analysts and investors to understand this relationship because it excludes transactions not related to our core cash operating activities. We believe that excluding these transactions allows investors to meaningfully analyze the performance of our core cash operations. Adjusted EBITDA should not be considered in isolation or as an alternative to cash flow from operating activities or as an alternative to operating income or as an indicator of operating performance or any other measure of performance derived in accordance with GAAP. In evaluating our performance as measured by Adjusted EBITDA, we recognize and consider the limitations of this measurement. Adjusted EBITDA does not reflect our obligations for the payment of income taxes, interest expense, or other obligations such as capital expenditures. Accordingly, Adjusted EBITDA is only one of the measurements that management utilizes.

The following table provides a reconciliation of operating loss from continuing operations for our three operating segments and corporate to Adjusted EBITDA income (loss) for the three months ended June 30, 2017:

  Three Months Ended June 30, 2017 
  Wellness  Technology  Intellectual
Property		  Corporate  Total 
Operating loss from continuing operations $(1,992,000) $(742,000) $(126,000) $(2,270,000) $(5,130,000)
Plus:                    
Depreciation and amortization  2,919,000   162,000   6,000   7,000   3,094,000 
Stock-based compensation  —   —   —   732,000   732,000 
Merger and acquisition, integration and one-time costs  200,000   —   —   110,000   310,000 
Adjusted EBITDA income (loss) $1,127,000  $(580,000) $(120,000) $(1,421,000) $(994,000)

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”) 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: wellness, technology and intellectual property.

Segment operating results reflect losses before corporate and unallocated shared expenses, interest expense, income taxes and noncontrolling interests.

Wellness

Our wellness operating segment recognized revenue of $12,927,000 during the second 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. During the six-month period ended June 30, 2017, we opened three new flagship locations, consisting of one location at John F. Kennedy International Airport’s Terminal 4 and two locations at Phoenix Sky Harbor International Airport. We also closed two small temporary kiosks to better align our resources. During the second quarter of 2017, we also started a major renovation to another location in John F. Kennedy International Airport’s Terminal 4; this renovation is expected to be completed in the third quarter of 2017. A number of our stores will be undergoing maintenance or renovations during the third quarter of 2017. Wherever possible, we seek to receive lease extensions or other concessions when we undergo these processes. As of June 30, 2017, we operated a total of 52 XpresSpa locations.

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Store-level costs include all costs that are directly attributable to the store operations and include:

payroll and related benefits for our store operations and store-level management;

rent, percentage rent and occupancy costs;

the cost of merchandise;

freight, shipping and handling costs;

production costs;

inventory shortage and valuation adjustments, including purchase price allocation increase in fair values which was recorded as part of acquisition; and

costs associated with our sourcing operations.

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 XpresSpa as well as office consolidation and moving costs, which amounted to $310,000 during the second quarter of 2017.

Depreciation and amortization costs include the depreciation of leasehold improvements and 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 technology operating segment predominantly includes revenues and cost of sales generated by Group Mobile and Excalibur. During the second quarter of 2017, Group Mobile’s revenue increased 40.8% from $2,450,000 for the three-month period ended June 30, 2016 to $3,450,000 for the three-month period ended June 30, 2017, respectively. This was mainly due to the increased sales pipeline throughout 2016 and early 2017.

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.

Discontinued Operations

During June 2017, we concluded that the requirement to report the results of FLI Charge, a wholly-owned subsidiary included in our technology operating segment, as discontinued operations was triggered. We are currently negotiating the terms of an agreement to sell FLI Charge to a one-for-ten reversethird-party investor in exchange for a minority investment in the form of shares of preferred stock splitin the newly created entity which will own and operate FLI Charge. We will not be providing any continued management or financing support to FLI Charge. The transaction is expected to close in the third quarter of our common stock effected2017. In connection with this agreement, a non-cash impairment loss of $1,092,000 relating to FLI Charge’s technology assets and goodwill was recorded as of June 30, 2017. The results of operations for FLI Charge are presented on November 27, 2015the condensed consolidated statements of operations and comprehensive loss as consolidated net loss from discontinued operations, which totaled $1,552,000 and $2,113,000 for the three- and six-month periods ended June 30, 2017, respectively. In addition, the carrying amounts of assets and liabilities belonging to FLI Charge are presented on a retroactive basisthe condensed consolidated balance sheets as assets held for all periods presented.disposal and liabilities held for disposal, respectively.

 

Results of Operations

 

Three-month period ended SeptemberJune 30, 20162017 compared to the three-month period ended SeptemberJune 30, 20152016

 

Revenue

 

We generate revenue through our three operating segments:Group Mobile, FLI Charge and intellectual property.

  Three months ended June 30, 
  2017  2016  Change 
Revenue $16,377,000  $11,350,000  $5,027,000 

 

  Three months ended September 30, 
  2016  2015  Change 
Licensing revenue $1,350,000  $—  $1,350,000 
Product revenue  1,755,000   —   1,755,000 
Total revenue $3,105,000  $—  $3,105,000 

During the three-month period ended June 30, 2017, we recorded total revenue of $16,377,000, which represents an increase of $5,027,000 (or 44.3%) compared to the three-month period ended June 30, 2016. XpresSpa generated $12,927,000 of revenue in the second quarter of 2017. Our technology operating segment demonstrated 40.8% growth in quarterly revenues from $2,450,000 for the three-month period ended June 30, 2016 to $3,450,000 for the three-month period ended June 30, 2017.

 

During the three-month period ended SeptemberJune 30, 2016, we recorded total revenue of $3,105,000. There was no revenue recognized for the three-month period ended September 30, 2015. The increase was attributable to each of our operating segments. Group Mobile recognized $1,751,000 of product revenue, FLI Charge recognized $4,000 of product revenue, and our intellectual property operating segment recognized a one-time lump sum payment of $1,350,000$8,900,000 in connection with a settlementan executed confidential license agreement. We did not recognize any revenue generated by Group Mobile or FLI Charge prior to their acquisition on October 15, 2015.

 

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We believe that growth in Group Mobile’s revenue can be achieved by adding new products, exploring new distribution verticals, such as military and government, and increasing the sales team’s geographic coverage.In addition, we plan to enhance our intellectual property rights around our FLI Charge technology and products.FLI Charge plans to strengthen and develop partnerships in numerous markets including automotive, education, office, healthcare, power tools and vaporizers. We intend to continue to monetize our existing portfolio of intellectual property through licensing and strategic partnerships.

Cost of goods soldsales

 

We incur

  Three months ended June 30, 
  2017  2016  Change 
Cost of sales $13,209,000  $6,423,000  $6,786,000 

During the three-month period ended June 30, 2017, we recorded total cost of goods sold through twosales of $13,209,000, which represents an increase of $6,786,000 (or 105.7%) compared to the three-month period ended June 30, 2016. XpresSpa recorded total cost of sales of $10,401,000, which represent direct costs incurred for store operations. As result, our wellness operating segments:Group Mobile and FLI Chargesegment’s gross profit for the quarter was 19.6%. Our technology operating segment recorded $2,690,000 of cost of sales, which is driven by the increase in sales during the quarter. As a result, our technology operating segment generated 22.0% gross margin during the quarter.  

  Three months ended September 30, 
  2016  2015  Change 
Cost of goods sold $1,560,000  $—  $1,560,000 

 

During the three-month period ended SeptemberJune 30, 2016, we recorded total costour intellectual property costs were $4,243,000, which include legal and consulting costs related to the confidential license agreement reached during the quarter and royalty expenses to a previous owner of goods soldsome of $1,560,000, which represents theour patents. These costs of products sold by Group Mobiledecreased to $118,000 for the period. We did not recognize any cost of goods sold for FLI Charge during the three-month period ended SeptemberJune 30, 2017.

As a percentage of total revenue, cost of sales were 80.7% in the second quarter of 2017 compared to 56.6% in the second quarter of 2016, and we did not recognize any expenses incurredwhich is driven by Group Mobile or FLI Charge prior to their acquisition on October 15, 2015. the direct cost of sales generated by XpresSpa.

We expect theour cost of goods sold to increasesales will grow over time as our product revenue increases.


revenues increase. We expect that total cost of sales as a percentage of sales will decline gradually over time as a result of the improvement of store-level performance by our wellness operating segment and as our technology operating segment implements new offerings.

 

Operating legal costsDepreciation, amortization and impairment

 

Operating legal costs relate to our intellectual property operating segment.

  Three months ended June 30, 
  2017  2016  Change 
Depreciation, amortization and impairment $3,094,000  $12,329,000  $(9,235,000)

 

  Three months ended September 30, 
  2016  2015  Change 
Operating legal costs $1,164,000  $6,776,000  $(5,612,000)

During the three-month period ended SeptemberJune 30, 2016, our operating legal costs were $1,164,000,2017, depreciation and amortization expense totaled $3,094,000, which represents a decrease of $5,612,000$9,235,000 (or 82.8%74.9%) from operating legal costs recorded for the three-month period ended September 30, 2015. This decrease was primarily due to the timing and nature of consulting and patent litigation costs related to legal proceedings against ZTE and ASUS, especially as costs pertaining to our ZTE campaign declined significantly following the execution of the confidential settlement and license agreement in December 2015.

We expect that our legal costs will continue to decrease over time.

Inventor royalties

Inventor royalties relate to royalties owed to the inventors of certain of our patent portfolios owned by our intellectual property operating segment.

  Three months ended September 30, 
  2016  2015  Change 
Inventor royalties $270,000  $—  $270,000 
             

Inventor royalties fluctuate period to period, based on the amount of licensing revenue we recognize each period, the terms and conditions of agreements executed each period and the mix of specific patent portfolios with varying economic terms and obligations generating revenues each period.During the three-month period ended September 30, 2016, our inventor royalty expense totaled $270,000, which relates to the royalties owed to the inventor of the patent portfolio, for which a settlement agreement was entered into during September 2016. We did not recognize any inventor royalty expense during the three-month period ended September 30, 2015.

Amortization and impairment of intangible assets

  Three months ended September 30, 
  2016  2015  Change 
Amortization and impairment of intangible assets $203,000  $819,000  $(616,000)
             

During the three-month period ended September 30, 2016, amortization expenses related to our intangible assets totaled $203,000, which represents a decrease of $616,000 (or 75.2%), compared to the amortization and impairment expense recorded during the three-month period ended SeptemberJune 30, 2015. The decrease was due to an impairment taken on our patents asset group on May 6, 2016, which significantly reduced the carrying value of our patents and resulted in a sharp decline from the previous amortization of the patents.2016. There was no impairment expense for the three-month period ended June 30, 2017 and no depreciation expense recorded during eitherfor the three-month period.period ended June 30, 2016. Amortization and impairment expense for the three months ended June 30, 2016 was significantly higher and was primarily attributed to an $11,937,000 impairment charge to our patents asset group.

The overall decrease in depreciation, amortization and impairment expense was partially offset by an increase in depreciation expense resulting from leasehold improvements and equipment of $2,327,000 and the amortization of the brand and customer relationship intangible assets of $592,000, which were acquired as part of our acquisition of XpresSpa within our wellness operating segment in December 2016. The depreciation expense of $2,327,000 is higher than the typical depreciation expense for the quarter due to a formal decision made in April 2017 to perform a complete renovation of our flagship JFK location, at which point useful lives were revised to fully depreciate all remaining assets by the store close date.

We expect depreciation and amortization expense will increase gradually over time as we open more stores in our wellness operating segment and will remain somewhat constant in our technology operating segment.

 

General and administrative

 

  Three months ended September 30, 
  2016  2015  Change 
General and administrative $3,955,000  $2,095,000  $1,860,000 
             

  Three months ended June 30, 
  2017  2016  Change 
General and administrative $5,204,000  $2,316,000  $2,888,000 

During the three-month period ended June 30, 2017, general and administrative expenses increased by $2,888,000 (or 124.7%) compared to the three-month period ended June 30, 2016. As a percentage of revenue, total general and administrative expenses were 31.8% and 20.4% during the second quarter of 2017 and 2016, respectively.

The results of the three-month period ended June 30, 2017 include incremental general and administrative expenses associated with our recent acquisitions of XpresSpa and Excalibur. The increase for the three-month period ended June 30, 2017 compared to the same period ended June 30, 2016 is primarily attributed to $1,599,000 of general and administrative expenses associated with XpresSpa. 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 $297,000, which was a result of equity awards granted to our directors, management and employees in January 2017.

Non-operating expense, net

  Three months ended June 30, 
  2017  2016  Change 
Non-operating expense, net $(228,000) $(91,000) $(137,000)


22

 

During the three-month period ended SeptemberJune 30, 2016, general and administrative expenses increased by $1,860,000 (or 88.8%), to $3,955,000, compared to $2,095,000 that was2017, we recorded during the three-month period ended September 30, 2015. The overall increase was primarily due to two key factors: 1) merger and acquisition costs related to the Merger with XpresSpa and 2) general and administrative costs associated with Group Mobile and FLI Charge, which were acquired on October 15, 2015 and, as such, were not included in the three-month period ended September 30, 2015. During the three-month period ended September 30, 2016, we incurred $952,000 of merger and acquisition costs associated with legal, diligence, valuation, and other costs pertaining to the Merger with XpresSpa. Following the acquisition of Group Mobile and FLI Charge, we experienced increases in salaries and benefits due to our expanded workforce and we incurred advertising and marketing costs for Group Mobile and FLI Charge’s product lines and product development costs as we continued to develop and improve FLI Charge’s product line. These increases in general and administrative expenses were offset by a significant decrease in stock-based compensation expense, which was a result of equity awards granted in 2012 and 2013 becoming fully vested during the latter half of 2015, as well as insurance, accounting, and audit fees.

Non-operating expense, net

  Three months ended September 30, 
  2016  2015  Change 
Non-operating expense, net $(1,484,000) $(2,181,000) $697,000 
             

During the three-month period ended September 30, 2016, we recordedtotal net non-operating expense in the amount of $1,484,000$228,000 compared to total net non-operating expense in the amount of $2,181,000$91,000 recorded during the three-month period ended SeptemberJune 30, 2015.2016.

 

For the three-month period ended SeptemberJune 30, 2017, we recorded interest expense of $178,000 mainly related to XpresSpa’s Debt. This was reduced by a gain of $133,000 on the revaluation of the derivative warrant liabilities and additional non-operating expense of $183,000.

For the three-month period ended June 30, 2016, we recorded interest expense of $949,000$272,000 for the amortization of the debt discount and debt issuance costs and $262,000associated with debt that was repaid during July 2016. The non-operating expenses reported during the three-month period ended June 30, 2016 were reduced by a gain of loss on extinguishment of debt for the 15% early debt repayment fee on July 1, 2016. We also recognized a $272,000 loss$99,000 on the revaluation of the derivative warrant liabilities related to the Amended Notes and a $1,000 foreign exchange loss for the period.liabilities.

 

The net non-operating expense recognized in the three-monthSix-month period ended SeptemberJune 30, 2015 was driven by various factors. Installment payments made to holders of the Notes resulted in an increase in interest expense of $1,708,000 for the three-month period ended September 30, 2015. The interest expense was calculated using the effective interest method. In addition, we elected to repay the installments in registered shares, which were issued at a discount of 15% to market prices. This resulted in a $1,044,000 loss on the extinguishment of debt. The expense also includes foreign exchange losses in connection with deposits with courts.

The expenses reported during the three-month period ended September 30, 2015 were offset by a gain on the revaluation of derivative liability warrants and conversion feature related to the Notes. On May 4, 2015, the net proceeds received were allocated amongst the Notes, the conversion feature, and the warrants issued to the holders of the Notes. The warrants and conversion feature were then revalued and marked to market as of each balance sheet date, which resulted in a gain of $716,000 for the three-month period ended September 30, 2015.


Nine-month period ended September 30, 20162017 compared to the nine-monthsix-month period ended SeptemberJune 30, 20152016

 

Revenue

 

  Six months ended June 30, 
  2017  2016  Change 
Revenue $30,952,000  $13,377,000  $17,575,000 

We generate revenue through our three operating segments:Group Mobile, FLI Charge and intellectual property.

  Nine months ended September 30, 
  2016  2015  Change 
Licensing revenue $11,025,000  $150,000  $10,875,000 
Product revenue  5,486,000   —   5,486,000 
Total Revenue $16,511,000  $150,000  $16,361,000 


During the nine-monthsix-month period ended SeptemberJune 30, 2016,2017, we recorded total revenue of $16,511,000,$30,952,000, which represents an increase of $16,361,000$17,575,000 (or 131.4%) as compared to $150,000$13,377,000 recorded in the nine-monthsix-month period ended SeptemberJune 30, 2015.2016. The increase was attributable to eachresults of the six-month period ended June 30, 2017 include incremental revenues associated with our operating segments. Group Mobile recognized $5,478,000recent acquisitions of XpresSpa and FLI Charge recognized $8,000 of product revenue, FLI Charge also recognized $25,000 of licensing revenue in connection with an ongoing license agreement with a customer, and our intellectual property operating segment recognized $11,000,000 of revenue for the amounts received in connection with two separate executed confidential license agreements and an additional settlement agreement.Excalibur. We did not recognize any revenue generated by Group Mobile or FLI ChargeExcalibur prior to theirits acquisition on October 15, 2015. Revenue duringFebruary 2, 2017 or XpresSpa prior to its acquisition on December 23, 2016. Our technology operating segment demonstrated 86.2% growth in revenue from $3,727,000 for the nine-monthsix-month period ended SeptemberJune 30, 2015 of $150,000 was due2016 to a one-time payment in connection with a license and settlement agreement$6,941,000 for certain of our owned intellectual property.

We believe that growth in Group Mobile’s revenue can be achieved by adding new products, exploring new distribution verticals, such as military and government, and increasing the sales team’s geographic coverage.In addition, we plan to enhance our intellectual property rights around our FLI Charge technology and products.FLI Charge plans to strengthen and develop partnerships in numerous markets including automotive, education, office, healthcare, power tools and vaporizers. We intend to continue to monetize our existing portfolio of intellectual property through licensing and strategic partnerships.three-month period ended June 30, 2017.

 

Cost of goods soldsales

 

We incur cost of goods sold through two of our operating segments:Group Mobile and FLI Charge.

  Nine months ended September 30, 
  2016  2015  Change 
Cost of goods sold $4,866,000  $—  $4,866,000 
  Six months ended June 30, 
  2017  2016  Change 
Cost of sales $25,071,000  $8,267,000  $16,804,000 

 

During the nine-monthsix-month period ended SeptemberJune 30, 2016,2017, we recorded total cost of goods soldsales of $4,866,000,$25,071,000, which mainly represents an increase of $16,804,000 (or 203.3%) compared to the costssix-month period ended June 30, 2016. The results of products sold by Group Mobile during the period.six-month period ended June 30, 2017 include incremental cost of sales associated with our recent acquisitions of XpresSpa and Excalibur. We did not recognize any cost of goods sold for Group Mobile or FLI Chargesales 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 our product revenue increases.we incur the full results of operations of XpresSpa and Excalibur.

 

Operating legal costsDepreciation, amortization and impairment

 

Operating legal costs relate to our intellectual property operating segment.

  Nine months ended September 30, 
  2016  2015  Change 
Operating legal costs $6,127,000  $15,341,000  $(9,214,000)
  Six months ended June 30, 
  2017  2016  Change 
Depreciation, amortization and impairment $4,955,000  $13,159,000  $(8,204,000)

 

During the nine-monthsix-month period ended SeptemberJune 30, 2016, our operating legal costs were $6,127,000,2017, depreciation and amortization expense totaled $4,955,000, which represents a decrease of $9,214,000$8,204,000 (or 60.1%62.3%) from operating legal costs, compared to the amortization and impairment expense recorded during the six-month period ended June 30, 2016. There was no impairment expense for the six-month period ended June 30, 2017 and no depreciation expense recorded for the nine months ended September 30, 2015. This decrease was primarily due to the timing and nature of consulting and patent litigation costs related to legal proceedings against ZTE and ASUS, especially as costs pertaining to our ZTE campaign declined significantly following the execution of the confidential settlement and license agreement in December 2015. Costs in 2016 also include royalty expenses to a previous owner of some of our patents.

We expect that our legal costs will continue to decrease over time.

Inventor royalties

Inventor royalties relate to royalties owed to the inventors of certain of our patent portfolios owned by our intellectual property operating segment.

  Nine months ended September 30, 
  2016  2015  Change 
Inventor royalties $3,658,000  $—  $3,658,000 
             

Inventor royalties fluctuate period to period, based on the amount of licensing revenue we recognize each period, the terms and conditions of agreements executed each period and the mix of specific patent portfolios with varying economic terms and obligations generating revenues each period.During the nine-monthsix-month period ended SeptemberJune 30, 2016, our inventor royalty expense totaled $3,658,000, which relates to the royalties owed to the inventors of our patent portfolios, for which license and settlement agreements were entered into during 2016. We did not recognize any inventor royalty expense during the nine-month period ended September 30, 2015.

 

Amortization and impairment of intangible assets

  Nine months ended September 30, 
  2016  2015  Change 
Amortization and impairment of intangible assets $13,404,000  $2,436,000  $10,968,000 

Duringexpense for the nine-month periodsix months ended SeptemberJune 30, 2016 amortizationwas significantly higher and was primarily attributed to an $11,937,000 impairment expenses relatedcharge to our intangible assets totaled $13,404,000, which represents an increase of $10,968,000 (or 450.2%) compared to the amortization expense of $2,436,000 recorded during the nine-month period ended September 30, 2015. There was no impairment expense recorded during the nine-month period ended September 30, 2015. The increase was due to the impairment of our patents asset group during the current period.

group. During the nine-monthsix-month period ended SeptemberJune 30, 2016, we determined that there were impairment indicators related to certain of our patents. A significant factor considered when making this determination occurred on May 6, 2016, when we changed the name of our company from “Vringo, Inc.” to “FORM Holdings Corp.” and concurrently announced our repositioning as a holding company of smallsmall- and middle marketmiddle-market growth companies. We concluded that this factor was deemed a “triggering” event, which required the related patent assets to be tested for impairment. In performing this impairment test, we determined that the patent portfolios, which together represent an asset group, were subject to impairment testing. In the first step of the impairment test, we utilized our projections of future undiscounted cash flows based on our existing plans for the patents. As a result, it was determined that our projections of future undiscounted cash flows were less than the carrying value of the asset group. Accordingly, we performed the second step of the impairment test to measure the potential impairment by calculating the asset group’s fair value as of May 6, 2016. As a result, following amortization for the month of April, we recorded an impairment charge of $11,937,000, or 88.7% of the carrying value of the patents prior to impairment, which resulted in a new carrying value of $1,526,000 on May 6, 2016. Following the impairment, we reevaluated the remaining useful life and concluded that there were no changes in the estimated useful life. There were no impairment indicators related to any of our other amortizable intangible assets during the nine-monthsix-month period ended SeptemberJune 30, 2017.

The overall decrease in depreciation, amortization and impairment expense, when comparing the six-month period ended June 30, 2017 to the six-month period ended June 30, 2016, was partially offset by an increase in depreciation expense resulting from leasehold improvements and equipment of $3,456,000 and the amortization of the brand and customer relationship intangible assets of $1,177,000, which were acquired as part of our acquisition of XpresSpa within our wellness operating segment in December 2016. The depreciation expense of $3,456,000 is higher than the typical depreciation expense for the six-month period due to a formal decision made in April 2017 to perform a complete renovation of our flagship JFK location which resulted in a revision to the useful lives. This resulted in an additional $1,100,000 of depreciation expense related to the JFK location.

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.

 


23

General and administrative

 

  Nine months ended September 30, 
  2016  2015  Change 
General and administrative $10,212,000  $7,391,000  $2,821,000 
  Six months ended June 30, 
  2017  2016  Change 
General and administrative $11,539,000  $4,495,000  $7,044,000 

 

During the nine-monthsix-month period ended SeptemberJune 30, 2016,2017, general and administrative expenses increased by $2,821,000$7,044,000 (or 38.2%156.7%), to $10,212,000, compared to $7,391,000 that was recorded during the nine-monthsix-month period ended SeptemberJune 30, 2015. The overall increase was primarily due to two key factors: 1) merger and acquisition costs related to the Merger with XpresSpa and 2) general and administrative costs associated with Group Mobile and FLI Charge, which were acquired on October 15, 2015 and, as such, were not included in the nine-month period ended September 30, 2015. During the nine-month period ended September 30, 2016, we incurred $1,008,0002016. As a percentage of merger and acquisition costs associated with legal, diligence, valuation, and other costs pertaining to the Merger with XpresSpa. Following the acquisition of Group Mobile and FLI Charge, we experienced increases in salaries and benefits due to our expanded workforce and we incurred advertising and marketing costs for Group Mobile and FLI Charge’s product lines and product development costs as we continued to develop and improve FLI Charge’s product line. These increases inrevenue, total general and administrative expenses were offset37.3% and 33.6% during the six-month periods ended June 30, 2017 and 2016, respectively.

The results of the six-month period ended June 30, 2017 include incremental general and administrative expenses associated with our recent acquisitions of XpresSpa and Excalibur. The increase for the six-month period ended June 30, 2017 compared to the same period ended June 30, 2016 is primarily attributed to $4,404,000 of general and administrative expenses associated with XpresSpa, of which $484,000 related to merger and acquisition and integration costs. We did not recognize any general and administrative expenses generated by a significant decreaseExcalibur 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 $643,000, which was a result of equity awards granted to our directors, management and employees in 2012 and 2013 becoming fully vested during the latter half of 2015, as well as insurance, accounting, and audit fees.

January 2017.

 


Non-operating income (expense),expense, net

 

  Nine months ended September 30, 
  2016  2015  Change 
Non-operating expense, net $(1,925,000) $(2,338,000) $413,000 
  Six months ended June 30, 
  2017  2016  Change 
Non-operating expense, net $(306,000) $(440,000) $134,000 

 

During the nine-monthsix-month period ended SeptemberJune 30, 2016,2017, we recorded total net non-operating expense in the amount of $1,925,000$306,000 compared to total net non-operating expense in the amount of $2,338,000$440,000 recorded during the nine-monthsix-month period ended SeptemberJune 30, 2015.2016.

For the six-month period ended June 30, 2017, we recorded interest expense of $367,000 mainly related to XpresSpa’s Debt. This was reduced by a gain of $159,000 on the revaluation of the derivative warrant liabilities and additional non-operating expense of $98,000.

 

For the nine-monthsix-month period ended SeptemberJune 30, 2016, we recorded interest expense of $1,697,000$748,000 for the interest recorded related to the monthly interest payments and the amortization of the debt discount and debt issuance costs as well as accrued interest calculated using the effective interest method.method associated with debt that was repaid during July 2016. In addition, we elected to repay principal installments for this debt for January and February 2016 in shares of our common stock, which were issued at a discount of 15% to market prices, which resulted in a $210,000 recorded as a loss on the extinguishment of debt. We also recorded $262,000 of loss on extinguishment of debt for the 15% early debt repayment fee on July 1, 2016.

 

The net non-operating expenses reported during the nine-monthsix-month period ended SeptemberJune 30, 2016 were reduced by a gain of $97,000$369,000 on the revaluation of the derivative warrant liabilities related to the Amended Notes and a $147,000 foreign exchange gain attributable to our deposits with courts prior to them being returned to us during the first half of 2016.liabilities.

 

The net non-operating expense recognized in the nine-month period ended September 30, 2015 was driven by various factors. Installment payments made to holders of the Notes resulted in interest expense of $2,173,000 for the nine-month period ended September 30, 2015. The interest expense was calculated using the effective interest method. In addition, we elected to repay the installments in registered shares, which were issued at a discount of 15% to market prices. This resulted in $1,254,000 recorded as a loss on the extinguishment of debt. The expense also relates to foreign exchange losses in connection with deposits with courts.

24

 

We expect that our non-operating income (expense) will remain highly volatile, and we may choose to fund our operations through additional financing. In particular, non-operating income (expense) will be affected by the adjustments to the fair value of our derivative instruments. Fair value of these derivative instruments depends on a variety of assumptions, such as estimations regarding triggering of down-round protection and estimated future share price. An estimated increase in the price of our common stock increases the value of the warrants and thus results in a loss on our statements of operations. In addition, high estimated probability of a down-round protection increases the value of the warrants and again results in a loss on our statements of operations.

 

Liquidity and Capital Resources

 

As of September 30, 2016, we had a cash balance of $21,679,000, which represents a decrease of $3,272,000 compared to our cash balance as of December 31, 2015. We anticipate that our needOur primary liquidity and capital requirements are for capital will continue to decline as project-based activities related to the improvement of systems and digital marketing attributed to Group Mobile and FLI Charge near completion which will be offset by the decline in litigation and licensing costsnew XpresSpa locations for our intellectual propertywellness operating segment. Cash expenditures during the nine-month period ended September 30, 2016 were offset by cash received for refunds of court fees and our deposits with the courts in Germany, Brazil, and Romania,segment, as well as working capital for our technology operating segment. As of June 30, 2017, we had cash received byand cash equivalents of $7,958,000 that we expect to utilize, along with cash flows from operations, to provide capital to support the growth of our business, primarily through opening new XpresSpa locations, maintaining our existing XpresSpa locations, purchasing inventory for Group Mobile to support the growth in sales and intellectual property operating segments during the normal course of business. All deposits that had been posted with the courts in connection with our litigation with ZTE have been returned.

On August 8, 2016, we entered into subscription agreements and received the proceeds from selling 750,574 shares of our unregistered common stock to certain holders of XpresSpa, at a purchase price of $2.31 per share, for an aggregate purchase price of $1,734,000. 

maintaining corporate functions. In addition, on August 8, 2016, we purchased from XpresSpa an aggregatehave approximately $7,478,000 of 1,733,826 of Series C Preferred Units of XpresSpa, at a per unit purchase price of $1.00 per unit, for an aggregate purchase price of $1,734,000, which is included intrade receivables, inventory and other current assetsin the condensed consolidated balance sheets. Assuming stockholder approval is received,the Merger is expected to be completedshortly after the stockholders vote.support our working capital needs.

On July 1, 2016,26, 2017, we repaid in full our Amended Notes that were due on June 30, 2017. As required byentered into an underwriting agreement (the “Underwriting Agreement”) with Roth Capital Partners, LLC, acting as the termsrepresentative of the Amended Notes, notice of repayment was deliveredseveral underwriters named therein (collectively, the “Underwriters”), relating to the Investors on June 30, 2016. We repaid the Amended Notes in full, including a 15% fee for early repayment. We used an aggregateissuance and sale (the “Offering”) of $2,011,000 of cash on hand for repayment of the Amended Notes. As a result of the repayment in full of the Amended Notes, all liens on our assets, including intellectual property, were released by the Investors.

On March 9, 2016, pursuant to the Exchange Note Agreement, we issued to the Investors an aggregate of 703,6446,900,000 shares of our common stock, par value $0.01 per share (“FORM Common Stock”) including 900,000 shares subject to the Underwriters’ over-allotment option, which was exercised on August 2, 2017 and closed on August 4, 2017. The price to the public in exchange for the reductionOffering was $1.10 per share and the Underwriters agreed to purchase the shares of $1,267,000FORM Common Stock from us pursuant to the Underwriting Agreement at a purchase price of $1.023 per share. Our net proceeds from the outstanding principal amount of the NotesOffering were approximately $6,700,000 after deducting underwriting discounts and $49,000 of accrued interest. As a result, the outstanding aggregate principal amount under the Notes was reducedcommissions and other estimated offering expenses.

Our total cash decreased from $3,016,000 to $1,749,000$17,910,000 as of March 9, 2016.December 31, 2016 to $7,958,000 as of June 30, 2017. Of the $9,952,000 decrease, approximately $6,697,000 was related either to non-recurring payments, capital expenditures or payments for inventory, the latter of which is reflected as a current asset in the condensed consolidated balance sheets.

Key payments and items from December 31, 2016 to June 30, 2017:

 

Our average monthly net cash used in operations for the nine-month period ended September 30, 2016 was approximately $330,000 compared to average monthly net cash used in operations of approximately $1,506,000 during the nine-month period ended September 30, 2015. This is driven by the increase in revenues derived from our Group Mobile and intellectual property operating segments.

Group Mobile and XpresSpa inventory $1,644,000 
Overdue payables acquired as part of XpresSpa  1,500,000 
Capital expenditures  1,263,000 
Merger and acquisition and integration-related professional fees  776,000 
Leases and tax-related matters  453,000 
Interest paid on Debt  430,000 
Repayment of line of credit upon Excalibur acquisition  361,000 
Severance  250,000 
  $6,677,000 

 

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.

Cash flows

  Nine months ended September 30, 
  2016  2015  Change 
Net cash used in operating activities $(2,969,000) $(13,553,000) $10,584,000 
Net cash provided by (used in) investing activities $24,000  $(272,000) $296,000 
Net cash provided by (used in) financing activities $(327,000) $12,207,000  $(12,534,000)

Operating activities

During the nine-month period ended September 30, 2016, net cash used in operating activities totaled $2,969,000 compared to net cash used in operating activities of $13,553,000 during the nine-month period ended September 30, 2015. The increase of $10,584,000 was mainly due to cash received from our Group Mobile and intellectual property operating segments during the normal course of business.

Our net cash used in operating activities could increase if we engage in future business development activities. As we expect to move towards greater revenue generation in the future, we expect that these amounts will be offset over time by operating expenses. There is no assurance that our licensing efforts will be successful in the future. Furthermore, there is no guarantee that we will generate sufficient revenue to offset future operating expenses and our ability to raise additional capital may be limited.


Investing activities

During the nine-month period ended September 30, 2016, net cash provided by investing activities totaled $24,000, mainly attributable to the refunds of our deposits with the German, Brazilian and Romanian courts. These proceeds were offset by $1,734,000 net cash invested in XpresSpa on August 8, 2016 and $243,000 net cash used to acquire software related to Group Mobile’s website. During the nine-month period ended September 30, 2015, net cash used in investing activities totaled $272,000, which represents the deposit we made to a Romanian court to enforce an injunction against ZTE in Romania and the deposit we made in Germany to enforce review of ZTE’s accounting records.

We expect that net cash used in investing activities will increase as we intend to continue to acquire and develop supporting infrastructure and systems for our operating segments.

Financing activities

During the nine-month period ended September 30, 2016, net cash used in financing activities totaled $327,000, which is comprised of the $2,011,000 net cash used to repay the Notes on July 1, 2016 and $50,000 net cash paid to the Investors related to their expenses incurred as a result of the debt modification. These cash outflows were offset by $1,734,000 proceeds received from certain holders of XpresSpa as a result of the subscription agreement entered into on August 8, 2016. During the nine-month period ended September 30, 2015, we received net proceeds of $12,207,000 from a securities purchase in a registered direct offering of $12,500,000 of Notes and warrants to purchase up to 537,500 shares of our common stock. This amount was offset by the $218,000 of debt issuance costs that were paid in relation to the agreement.

A significant portion of our issued and outstanding warrants, for which the underlying shares of common stock held by non-affiliates are freely tradable, are currently “out of the money.” Therefore, the potential of additional incoming funds from exercises by our warrant holders is currently very limited. To the extent that any of our issued and outstanding warrants were “in the money,” it could be used as a source of additional funding if the warrant holders choose to exercise their warrants for cash.

We may also choose to raise additional funds in connection with any acquisitions of patent portfolios or other assets or other businesses that we may pursue. There can be no assurance, however, that any such opportunity will materialize. Moreover, any such financing would most likely be dilutive to our current stockholders.

 

Off-Balance Sheet Arrangements

 

We have no obligations, assets or liabilities that would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.

 

Critical Accounting Estimates

 

These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC on March 10, 2016,30, 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.

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Item 3.Quantitative and Qualitative Disclosures About Market Risk.

 

Not required as we are a smaller reporting company.

 

Item 4.Controls and Procedures.

 

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of ourWe maintain disclosure controls and procedures pursuant to(as defined in Rule 13a-15(e) and 15d-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 September 30, 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 June 30, 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 IDG. DuringThe scope of management's assessment of the nine-month period ended September 30, 2016, we implemented relevant internal controls over financial reporting around Group Mobile and FLI Charge operating segments. We believe that our internal controls over financial reporting are overall effective.

There were no changes in oureffectiveness of internal control over financial reporting that occurred duringincludes all of our subsidiaries except XpresSpa and Excalibur, which were acquired on December 23, 2016 and February 2, 2017, respectively. Our consolidated revenue for the last fiscal quarter that have materially affected, or are reasonably likely to materially affect,six-month period ended June 30, 2017 was $30,952,000, of which XpresSpa and Excalibur represented $23,911,000 and $2,086,000, respectively, and our internal control over financial reporting.total assets as of June 30, 2017 were $72,382,000, of which XpresSpa and Excalibur represented $53,137,000 and $4,178,000, respectively.


Part IIPart II -– OTHER INFORMATION

 

Item 1.Legal Proceedings.

 

Infrastructure Patents

ZTE

On December 7, 2015, we entered into a confidential settlementFor information regarding legal proceedings, see Note 11 “Commitments and license agreement (the “Settlement Agreement”) with ZTE Corporation and its affiliates (collectively, “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 litigations and proceedings against each other including the litigations related to ZTE’s breach of its non-disclosure agreement with us; and (iii) we granted ZTE certain rights with respect to our patents including a non-exclusive, non-transferable, worldwide perpetual license to certain of our owned patents and patent applications.

In several jurisdictions, though ZTE requested that government organizations close proceedings against us, 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 us; however, it is not clear whether the NDRC has closed its investigation.

In addition, in China and the Netherlands, FORM 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 FORM’s appeals, though FORM must still plead its case before the respective adjudicatory body in each jurisdiction.

ASUS

In March 2016, we settled all disputes and ended all litigations with ASUSTeK Computer Inc. and its subsidiary (collectively, “ASUS”). Google, Inc. (“Google”), who intervened as a partyContingencies” in our litigation against ASUS in India, and us have agreed to withdraw our respective outstanding claims against one another. We are currently in the process of finalizing such withdrawals with Google, and each party will cover its own costs.

Confidential License Agreement

On April 25, 2016, we entered into a Confidential License Agreement (the “License Agreement”). Pursuantnotes to the terms of the License Agreement, the licensee paid us a one-time lump sum payment of $8,900,000 on May 30, 2016. As a result, we granted to the licensee a non-exclusive, non-transferable, worldwide perpetual license to certain patents and patent applications we own.

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, LLC (“DirecTV”)condensed consolidated financial statements included in the United States District Court for the Southern District of New York. As of September 30, 2016, the lawsuit between the parties has been resolved.“Item 1. Financial Statements.”

On May 25, 2016, Iron Gate Security, Inc. (“Iron Gate”), one of our subsidiaries, filed a Second Amended Complaint (the “Complaint”) against Lowe’s Companies, Inc. (“Lowe’s”) in the U.S. District Court for the Southern District of New York. During the fourth quarter of 2016, the parties successfully resolved the litigation.

 

Item 1A.Risk Factors.

 

We are holding our annual meeting of stockholders on November 28, 2016 to approve, among other things, the Merger and the issuance of shares of FORM Common Stock, FORM Preferred Stock and warrants to the Unitholders in connection with the Merger. Assuming stockholder approval is received, we expect to complete the Merger shortly after the stockholders vote. The risks described in our Registration Statement on Form S-4 (File No. 333-213566) (the “S-4 Registration Statement”) under the headings “Risk Factors – Risks Related to FORM’s Business” and “Risk Factors – Risks Related to XpresSpa’s Business” are incorporated by reference herein. Other than as set forth in the S-4 Registration Statement and as set forth below, 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.

The issuance of our securities to XpresSpa equity holders in connection with the Merger will dilute the voting power of current FORM stockholders.

Pursuant to the terms of the Merger Agreement, it is anticipated that we will issue to XpresSpa unit holders shares of our common stock and our preferred stock, and warrants to purchase shares of our common stock. After such issuance (without taking into account any shares of our common stock held by XpresSpa equity holders prior to the completion of the Merger but assuming that all shares held in escrow are released to the former equity holders of XpresSpa), the former equity holders of XpresSpa are expected to own approximately 18% of our outstanding common stock (or 33% of our outstanding common stock calculated on a fully diluted basis) and our current stockholders are expected to own approximately 82% of our outstanding common stock (or 67% of our outstanding common stock calculated on a fully diluted basis). In addition, the holders of our preferred stock will have voting rights as specified in the Certificate of Designation of Preferences, Rights and Limitations of Series D Convertible Preferred Stock, the form of which is filed herewith as Exhibit 3.1. Accordingly, the issuance of shares of our common stock and our preferred stock to XpresSpa equity holders in connection with the Merger will reduce the relative voting power of each share of our common stock held by our current stockholders.


If we exercise the option to repay the preferred stock to be issued in connection with the Merger in stock rather than cash, such repayment may result in the issuance of a large number of shares of common stock which may have a negative effect on the trading price of our common stock as well as a dilutive effect.

Pursuant to the terms of the Series D Convertible Preferred Stock to be issued in connection with the Merger, on the seven year anniversary of the initial issuance date of the shares of Series D Convertible Preferred Stock, we may repay each share of Series D Convertible Preferred Stock, at our option, in cash, by delivery of shares of common stock or through any combination thereof. If we elect to make a payment, or any portion thereof, in shares of common stock, the number of shares deliverable (the “Base Shares”) will be based on the volume weighted average price per share of our common stock for the thirty trading days prior to the date of calculation (the “Base Price”) plus an additional number of shares of common stock (the “Premium Shares”), calculated as follows: (i) if the Base Price is greater than $9.00, no Premium Shares shall be issued, (ii) if the Base Price is greater than $7.00 and equal to or less than $9.00, an additional number of shares equal to 5% of the Base Shares shall be issued, (iii) if the Base Price is greater than $6.00 and equal to or less than $7.00, an additional number of shares equal to 10% of the Base Shares shall be issued, (iv) if the Base Price is greater than $5.00 and equal to or less than $6.00, an additional number of shares equal to 20% of the Base Shares shall be issued and (v) if the Base Price is less than or equal to $5.00, an additional number of shares equal to 25% of the Base Shares shall be issued. Accordingly, if the volume weighted average price per share of our common stock is below $9.00 per share at the time of repayment and we exercise the option to make such repayment in shares of our common stock, a large number of shares of our common stock may be issued to the holders of the Series D Convertible Preferred Stock upon maturity which may have a negative effect on the trading price of our common stock. At the seven year maturity date of the Series D Convertible Preferred Stock (which shall be the date that is seven years from the closing date of the Merger), we, at our election, may decide to issue shares of our common stock based on the formula set forth above or to re-pay in cash all or any portion of the Series D Convertible Preferred Stock.

In 2023, upon the maturity date of the Series D Convertible Preferred Stock, when determining whether to repay the Series D Convertible Preferred Stock in cash or shares of common stock, we expect to consider a number of factors, including our cash position, the price of our common stock and our capital structure at such time. Because we do not have to make a determination as to which option to elect until 2023, it is impossible to predict whether it is more or less likely to repay in cash, stock or a portion of each.

For example, assuming the entire amount of the Series D Convertible Preferred Stock was outstanding at the seven year maturity date, and we opted to repay such Series D Convertible Preferred Stock entirely in shares of common stock, the number of shares of common stock to be issued at such repayment if the Base Price was $9.00 per share, $6.50 per share and $2.50 (slightly below the closing price on November 7, 2016) would be approximately 2,770,833 shares, 4,019,231 shares and 11,875,000, respectively.

The announcement and pendency of the Merger could have an adverse effect on our business prospects and/or XpresSpa and on our stock price and/orOur business, financial condition, or results of operations.

While there have been no significant adverse effects to date, the announcement and pendency of the Merger could disrupt XpresSpa’s and/or our prospective and current businesses in the following ways, among others:

·third parties, including customers, suppliers and operators, may seek to terminate and/or renegotiate their relationships with us or XpresSpa or decide not to conduct business with either us or XpresSpa as a result of the Merger, whether pursuant to the terms of their existing agreements with us and/or XpresSpa or otherwise; and

·the attention of XpresSpa’s and/or our management may be directed toward the completion of the Merger and related matters and may be diverted from the day-to-day business operations of their respective companies, including from other opportunities that might otherwise be beneficial to us or XpresSpa. Should they occur, any of these matters could adversely affect our stock price or harm XpresSpa’s and/or our financial condition, results of operations, or business prospects.

Failure to complete the Merger or delays in completing the Merger could negatively impact our business, financial condition, or results of operations or our stock price.

The completion of the Merger is subject to a number of conditions and there can be no assurance that the conditions to the completion of the Merger will be satisfied at all or satisfied in a timely manner. If the Merger is not completed or is delayed, we will be subject to several risks, including:

·the current trading price of our common stock may reflect a market assumption that the Merger will occur, meaning that a failure to complete the Merger or delays in completing the Merger could result in a decline in the price of our common stock;

·certain of our executive officers and/or directors or XpresSpa’s may seek other employment opportunities, and the departure of any of our or XpresSpa’s executive officers and the possibility that we would be unable to recruit and hire experienced executives could negatively impact our future business;

·our board of directors will need to reevaluate our strategic alternatives, such alternatives will include other merger and acquisition opportunities;

·under certain circumstances, if the Merger is terminated by either us or XpresSpa in connection with or due to our entering into an alternate transaction constituting a superior proposal, then we are required to pay to XpresSpa a fee equal to $750,000, plus an amount in cash equal to XpresSpa’s reasonable out-of-pocket fees and expenses incurred in connection with the Merger, in an amount not to exceed $500,000;

·we are expected to incur substantial transaction costs in connection with the Merger whether or not the Merger is completed; and

·we would not realize any of the anticipated benefits of having completed the Merger.

If the Merger is not completed or is delayed, these risks may materialize and materially and adversely affect our business, financial condition, results of operations, and our stock price.

Any delay in completing the Merger may substantially reduce the benefits that we expect to obtain from the Merger.

In addition to obtaining the approval of our stockholders for the consummation of the Merger, the Merger is subject to a number of other conditions beyond our control that may prevent, delay, or otherwise materially adversely affect its completion. We cannot predict whether or when the conditions required to complete the Merger will be satisfied. The requirements for satisfying the closing conditions could delay the completion of the Merger for a significant period of time or prevent it from occurring. Any delay in completing the Merger may materially adversely affect the benefits that we expect to achieve if the Merger and the integration of the companies’ respective businesses are completed within the expected timeframe.

Some of our directors and executive officers have interests in the Merger that are different from, or in addition to, those of our other stockholders.

When considering the recommendation by our board of directors that our stockholders vote “for” the FORM Merger Proposal, our stockholders should be aware that certain of our directors and executive officers have arrangements that provide them with interests in the Merger that are different from, or in addition to, those of our stockholders. For instance, in connection with the Merger, (i) each of Andrew D. Perlman, John Engelman, Donald E. Stout, Salvatore Giardina, Bruce T. Bernstein and Richard K. Abbe, each a current director of our board of directors, will continue to serve as our director following the completion of the Merger, (ii) Andrew D. Perlman, Anastasia Nyrkovskaya and Clifford Weinstein, currently our executive officers, will remain our executive officers following the completion of the Merger and (iii) Rockmore Investment Master Fund Ltd. (“Rockmore”), an investment entity controlled by our board member Bruce T. Bernstein and a significant equity holder of XpresSpa, currently owns equity securities of XpresSpa that are expected to receive approximately 9.5% of the merger consideration and, following completion of the Merger, Rockmore will still be the holder of the senior secured note payable to Rockmore, with an outstanding balance of approximately $6,500,000 (the “Senior Secured Note”) and will hold approximately 4.7% of our outstanding common stock on a fully diluted basis (in each case, based on the assumptions used in the section entitled “Security Ownership of Certain Beneficial Owners and Management of FORM Following the Merger” in the S-4 Registration Statement). Pursuant to the terms of the Senior Secured Note, XpresSpa may not merge into or consolidate with any other person or entity or permit any other person or entity to merge into or consolidate with XpresSpa without the consent of Rockmore. Rockmore has provided its consent to the Merger. In addition, our directors and executive officers also have certain rights to indemnification and to directors’ and officers’ liability insurance that will be provided by us following the completion of the Merger. Our board of directors was aware of and considered these interests, among other matters, in evaluating and negotiating the Merger Agreement and in recommending that our stockholders approve the Merger.


XpresSpa can terminate the Merger Agreement for any reason or no reason upon payment of a termination fee and we will have no recourse against XpresSpa.

Pursuant to the Merger Agreement, XpresSpa can terminate the Merger Agreement, at any time, for any reason or no reason, upon payment to us of a termination fee equal to $750,000, plus an amount in cash equal to our reasonable out-of-pocket fees and expenses incurred in connection with the Merger, in an amount not to exceed $500,000. We will have no recourse against XpresSpa other than receiving such termination fee and would not realize any of the anticipated benefits of having completed the Merger.

Litigation has been instituted challenging the Merger and adverse judgments in this lawsuit (and any other lawsuits that may be instituted challenging the Merger) may prevent the Merger from becoming effective within the expected timeframe or at all.

As referenced below, Bruce Bernstein, a member of our Board of Directors, and XpresSpa have been named as defendants in a lawsuit challenging the Merger. If the plaintiffs in this case, or in any other cases challenging the Merger are successful, they may prevent the parties from completing the Merger in the expected timeframe, if at all. Even if the plaintiffs in the pending action or any potential actions are not successful, the costs of defending against such claims could adversely affect our and XpresSpa’s financial condition and the consummation of the Merger could be delayed or the Merger Agreement could be terminated. In August 2016, Amiral Holdings SAS (“Amiral”), the operator of BeRelax spas, filed a complaint for breach of contract against XpresSpa related to a potential strategic transaction between Amiral and XpresSpa.Amiral Holdings SAS v. XpresSpa Holdings LLC et al., Supreme Court of the State of New York, County of New York(Index No. 654051/2016). Among other things, Amiral seeks specific performance related to the contract; an injunction prohibiting the defendants from entering into or consummating a competing transaction; and a declaration with respect to Amiral’s right of first refusal and certain related matters. On October 4, 2016, Amiral filed an amended complaint and motion for a preliminary injunction. On October 14, 2016, XpresSpa filed its response to Amiral’s motion, and on October 20, 2016, Amiral filed a reply brief. A hearing on the preliminary injunction has been scheduled for December 5, 2016, although this date is subject to change by the court. If Amiral is successful in this lawsuit or its motion for a preliminary injunction, pending appeal, the completion of the Merger could be delayed or not occur at all. In addition, should Amiral’s motion for a preliminary injunction be granted after the closing of the Merger, the Court could force the Merger to become undone or award damages to Amiral, in which case we may not be indemnified by XpresSpa’s equity holders for losses incurred. There is no guarantee that XpresSpa will prevail in this (or any litigation) and the combined company’s business, financial condition or results of operations may be materially harmed as a result of such litigation, in addition to diverting management’s attention away from operations to attend to the litigation.

We may not realize the potential value and benefits created by the Merger.

The success of the Merger will depend, in part, on our ability to realize the expected potential value and benefits created from integrating our existing businesses with XpresSpa’s business, which includes the maximization of the economic benefits of our strategic vision after completion of the Merger and plans, cash balances (which, in the case of XpresSpa, would be used for the build-out of new airport locations), financial reporting and analysis functions and legal expertise. The integration process may be complex, costly, and time-consuming. The difficulties of integrating the operations of XpresSpa’s business could include, among others:

·failure to implement our business plan for the business after the completion of the Merger;

·unanticipated issues in integrating the business of both companies;

·loss of key employees with knowledge of our or XpresSpa’s historical business and operations;

·unanticipated changes in applicable laws and regulations; and

·other unanticipated issues, expenses, or liabilities that could impact, among other things, our ability to realize any expected benefits on a timely basis, or at all.

We may not accomplish the integration of XpresSpa’s business smoothly, successfully, or within the anticipated costs or time frame. The diversion of the attention of management from our current operations to the integration effort and any difficulties encountered in combining businesses could prevent us from realizing the full expected potential value and benefits to result from the Merger and could adversely affect our business. In addition, the integration efforts could divert the focus and resources of our and XpresSpa’s from other strategic opportunities and operational matters during the integration process. We will be dependent on certain key personnel, and the loss of these key personnel could have a material adverse effect on our business, financial conditions and results of operations. Our success and future prospects largely depend on the skills, experience and efforts of our and XpresSpa’s key personnel, including Andrew D. Perlman, our current Chief Executive Officer and a Director, and Edward Jankowski, XpresSpa’s Chief Executive Officer. The loss of Mr. Perlman or Mr. Jankowski or other of our or XpresSpa’s executives, or our failure to retain other key personnel, would jeopardize our ability to execute our strategic plan and materially harm our business.

Ownership of our common stock may be highly concentrated, and it may prevent our existing stockholders from influencing significant corporate decisions and may result in conflicts of interest that could cause our stock price to decline.

Upon completion of the Merger, our and XpresSpa’s executive officers and directors continuing with us are expected to beneficially own or control approximately 37.8% of us on a fully diluted basis (see the sections entitled “FORM Security Ownership of Certain Beneficial Owners and Management.” “XpresSpa Security Ownership of Certain Beneficial Owners and Management” and “Security Ownership of Certain Beneficial Owners and Management of FORM Following the Merger” each in the S-4 Registration Statement for more information on the estimated ownership of us following the Merger). Accordingly, these executive officers and directors, acting individually or as a group, will have substantial influence over the outcome of a corporate action requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transaction. These stockholders may also exert influence in delaying or preventing a change in control of us, even if such change in control would benefit our other stockholders. In addition, the significant concentration of stock ownership may adversely affect the market value of our common stock due to investors’ perception that conflicts of interest may exist or arise.


Our success will depend in part on relationships with third parties, which relationships may be affected by third-party preferences or public attitudes about the Merger. Any adverse changes in these relationships could adversely affect our business, financial condition, or results of operations.

Our success after the Merger will be dependent on our ability to maintain and renew our and XpresSpa’s business relationships and to establish new business relationships. There can be no assurance that our management will be able to maintain such business relationships, or enter into or maintain new business contracts and other business relationships, on acceptable terms, if at all. The failure to maintain important business relationships could have a material adverse effect on our business, financial condition, or results of operations. Our future results may be materially different from those shown in the unaudited pro forma consolidated and condensed financial statements presented in the S-4 Registration Statement, which show only a combination of our historical results and XpresSpa’s historical results prepared by us and XpresSpa in connection with discussions concerning the Merger. We expect to incur significant costs associated with the completion of the Merger and integrating the operations of the two companies. The exact magnitude of these costs is not yet known.

Our business and financial condition could be constrained by XpresSpa’s outstanding debt.

XpresSpa is obligated under the Senior Secured Note payable to Rockmore, which has an outstanding balance of approximately $6,500,000, with a maturity date of May 1, 2018, with an additional one-year extension if both we and Rockmore consent to such extension. The Senior Secured Note accrues interest of 9.24% per annum, payable monthly, plus an additional 2.0% per annum. XpresSpa has granted Rockmore a security interest in all of its tangible and intangible personal property to secure its obligations under the Senior Secured Note. After the completion of the Merger the debt will remain outstanding as an obligation of XpresSpa, but will be guaranteed by us.

The price of our common stock after the Merger is completed may be affected by factors different from those currently affecting our shares.

Our business differs from the business of XpresSpa and, accordingly, our results of operations and the trading price of our common stock following the completioncould be materially adversely affected by any of the Merger may be significantly affected by factors different from those currently affecting our independent results of operations because after the Merger we will be conducting activities not undertaken by us prior to the completion of the Merger. For a discussion of the businesses of FORM and XpresSpa and of certain factors to consider in connection with those businesses, see the sections entitled “FORM’s Business,” “FORM’s Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “XpresSpa’s Business,” “XpresSpa’s Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our and XpresSpa’s financial statements in the S-4 Registration Statement, including the notes thereto, which are included elsewhere in the S-4 Registration Statement, andfollowing risks as well as the other information containedrisks highlighted in the S-4 Registration Statement.

Material weaknesses may exist when we report on the effectiveness of its internal controls over financial reporting for purposes of our reporting requirements after the Merger.

Prior to the Merger, XpresSpa, as a private company, was not subject to Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”). Therefore, XpresSpa’s management and independent auditors were not required to perform an evaluation of XpresSpa’s internal controls over financial reporting as of December 31, 2015 in accordance with the provisions of Sarbanes-Oxley. Following the completion of the Merger within the expected timeframe, we will be required to provide management’s report on internal control over financial reporting in our Annual Report on Form 10-K for the year endingended December 31, 2016 as required by Section 404filed with the SEC on March 30, 2017. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may materially affect our business, financial condition and results of Sarbanes-Oxley. We have not yet assessed the effectiveness of the internal controls foroperations.

Risks Related to XpresSpa and material weaknesses may exist.

We do not expect to pay cash dividends on our common stock.

 

We anticipate that we will retain our earnings, if any, for futureOur growth and therefore do not anticipate paying cash dividendsstrategy is highly dependent on our common stock in the future. Investors seeking cash dividends should not invest in our common stock for that purpose. However, fromability to successfully identify and after the date of the issuance of any shares of our preferred stock, dividends at the rate per annum of $4.32 per share (which represents 9% per annum) will accrue on such shares (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the our preferred stock).

Anti-takeover provisions in our charter and bylaws may prevent or frustrate attempts by stockholders to change the board of directors or current management and could make a third-party acquisition of us difficult.open new XpresSpa locations.

 

Our certificategrowth strategy primarily contemplates expansion through procuring new XpresSpa locations and opening new XpresSpa stores and kiosks. Implementing this strategy depends on our ability to successfully identify new store locations. We will also need to assess and mitigate the risk of incorporationany new store locations, to open the stores on favorable terms and bylaws contain provisionsto successfully integrate their operations with ours. We may not be able to successfully identify opportunities that meet these criteria, or, if we do, we may discourage, delay or preventnot be able to successfully negotiate and open new stores on a merger, acquisition or other changetimely basis. If we are unable to identify and open new XpresSpa locations in control that stockholdersaccordance with our operating plan, our revenue growth rate and financial performance may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions could limit the price that investors might be willing to pay in the future for sharesfall short of our common stock.expectations.

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Risks Related to Our Common Stock

 

Because the lack of a public market for XpresSpa’s units makes it difficultWe may fail to evaluate the fairness of the Merger, XpresSpa’s equity holders may receive considerationmeet publicly announced financial guidance or other expectations about our business, which would cause our stock to decline in the Merger that is greater than or less than the fair market value of XpresSpa’s units.value.

 

The outstanding equity of XpresSpa is privately heldFrom time to time, we provide preliminary financial results or forward looking financial guidance, to our investors. Such statements are based on our current views, expectations and isassumptions that may not traded in any public market. The lack of a public market makes it difficult to determine the fair market value of XpresSpa. Since the amount of our common stock, preferred stock and warrantsprove to be issued to XpresSpa’s equity holders was determined based on negotiations between the parties, it is possibleaccurate and may vary from actual results and involve known and unknown risks and uncertainties that the value of the our common stock, preferred stock and warrantsmay cause actual results, performance, achievements or share prices to be issuedmaterially different from any future results, performance, achievements or share prices expressed or implied by such statements. Such risks and uncertainties include the risk factors contained herein and in connection withour Form 10-K for the Merger will be greater than the fair market value of XpresSpa. Alternatively, it is possible that the value of the shares ofyear ended December 31, 2016. If we fail to meet our common stock, preferred stock and warrants to be issued in connection with the Merger will be less than the fair market value of XpresSpa. If the Merger is not completed projections and/or is delayed, these risks may materialize and materially and adversely affect our business,other financial condition, results of operations, andguidance for any reason, our stock price.price could decline.

 


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If any of the events described in “Risks Related to FORM’s Business” or “Risks Related to XpresSpa’s Business” in the S-4 Registration Statement occur, those events could cause the potential benefits of the Merger not to be realized.

Following the completion of the Merger, our current executive officers and certain XpresSpa executive officers and certain of our and XpresSpa’s directors will direct our business and operations. Additionally, XpresSpa’s business is expected to be an important part of our business following the Merger. As a result, the risks described in the sections entitled “Risks Related to FORM’s Business” and “Risks Related to XpresSpa’s Business” in the S-4 Registration Statement are among the significant risks to us if the Merger is completed. To the extent any of the events described in either the section entitled “Risks Related to FORM’s Business” or “Risks Related to XpresSpa’s Business” occur, those events could cause the potential benefits of the Merger not to be realized and the market price of our common stock to decline.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

None.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On August 8, 2016, we entered into subscription agreements for the sale of 750,574 shares of our unregistered common stock to certain holders of XpresSpa, at a purchase price of $2.31 per share, for an aggregate purchase price of $1,734,000. The proceeds were used for the purchase of Series C Preferred Units of XpresSpa.This issuance was made in reliance upon an exemption from the registration requirements pursuant to Section 4(a)(2) under the Securities Act, and Rule 506 promulgated thereunder. 

Additionally, we issued 30,000 shares of our unregistered common stock to a third-party consultant for professional services. This issuance was made in reliance upon an exemption from the registration requirements pursuant to Section 4(a)(2) under the Securities Act, and Rule 506 promulgated thereunder.  

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.

Item 5.Other Information.

 

None.

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Item 6. Exhibits.

Item 6.Exhibits.

 

Exhibit

No.

 Description
   
2.110.1 Amendment No. 4 to the Employment Agreement and Plan of Mergerdated October 13, 2015, by and among FORM Holdings Corp., FHXMS, LLC, XpresSpa Holdings, LLC,between the unitholders of XpresSpa who are parties theretoCompany and Mistral XH Representative, LLC, as representative of the unitholders, dated as of August 8, 2016Clifford Weinstein (incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed with the SEC on August 8, 2016).
3.1Form of Certificate of Designation of Preferences, Rights and Limitations of Series D Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed with the SEC on August 8, 2016).
10.1Subscription Agreement, dated as of August 8, 2016, by and between FORM Holdings Corp. and Mistral Spa Holdings, LLC (incorporated by reference tofrom Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on August 8, 2016).
10.2Subscription Agreement and Joinder, dated as of August 8, 2016, by and between XpresSpa Holdings, LLC and FORM Holdings Corp (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed with the SEC on August 8, 2016)May 5, 2015).
   
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.


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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 9th day of November 2016.August 2017.

 

FORM Holdings Corp.
 
By:/s/ ANASTASIA NYRKOVSKAYA
 Anastasia Nyrkovskaya
 Chief Financial Officer
 (Principal Financial and Accounting Officer)


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