Indicate by check mark if the registrant is
a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
¨
No
x
Indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
¨
No
x
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes
x
No
¨
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes
x
No
¨
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
x
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See the definitions of “
large accelerated filer,
” “
accelerated filer,
” “
smaller
reporting company,
” and “
emerging growth company
” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Act). Yes
¨
No
x
The aggregate market value of the registrant's
common stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in such
calculation is an affiliate), computed by reference to the closing sale price of such shares on the Nasdaq Stock Market LLC on
June 30, 2017 was $26,336,000.
As of March 15, 2018, 26,581,067 shares of the registrant's common stock are outstanding.
The following documents (or parts thereof)
are incorporated by reference into the following parts of this Annual Report on Form 10-K: Certain information required in Part
III of this Annual Report on Form 10-K is incorporated from the Registrant’s Proxy Statement for the 2018 Annual Meeting
of Stockholders.
These risks and uncertainties, many of which
are beyond our control, include:
All references in this Annual Report on Form
10-K to “we,” “us” and “our” refer to
XpresSpa Group, Inc. (prior to January 5, 2018, known
as “FORM Holdings Corp.”)
, a Delaware corporation, and its consolidated subsidiaries unless the context requires
otherwise.
PART I
ITEM 1. BUSINESS
Overview
On January 5, 2018, we changed our name to
XpresSpa Group, Inc. (“XpresSpa Group” or the “Company”) from FORM Holdings Corp. Our common stock, par
value $0.01 per share, which had previously been listed under the trading symbol “FH” on the Nasdaq Capital Market,
has been listed under the trading symbol “XSPA” since January 8, 2018.
Rebranding to XpresSpa Group aligned our
corporate strategy to build a pure-play health and wellness services company, which we commenced following our acquisition of XpresSpa
Holdings, LLC (“XpresSpa”) on December 23, 2016. In 2017, we recruited employees for positions in both corporate and
field teams, accelerated unit growth, reinvested in certain locations and extended leases, significantly streamlined operations,
and engaged in new exclusive partnerships that offer XpresSpa customers innovative products and services.
We currently have two operating segments:
wellness and intellectual property.
Our wellness operating segment consists
of XpresSpa, which is a leading airport retailer of spa services. XpresSpa is a well-recognized airport spa brand with 56 locations,
consisting of 51 domestic and 5 international locations, as of December 31, 2017. XpresSpa offers travelers premium spa services,
including massage, nail and skin care, as well as spa and travel products. During 2017 and 2016, our wellness operating segment
generated $48,373,000 and $811,000 of revenue, respectively (2016 results include eight days of operations from the acquisition
on December 23, 2016 to December 31, 2016). In 2017, approximately 81% of XpresSpa’s total revenue was generated by services,
primarily massage and nailcare, 18% was generated by retail products, primarily travel accessories, and 1% was related to cryotherapy
and loungers.
Our intellectual property operating segment
is engaged in the monetization of patents related to content and ad delivery, remote monitoring and computing technologies. During
2017 and 2016, this operating segment generated $450,000 and $11,175,000 of revenue, respectively.
In October 2017, we completed the sale
of FLI Charge, Inc. (“FLI Charge”) and in March 2018, we completed the sale of Group Mobile Int’l LLC (“Group
Mobile”). These two entities previously comprised our technology operating segment. The results of operations for FLI Charge
and Group Mobile are presented in the consolidated statements of operations and comprehensive loss as consolidated net loss from
discontinued operations. The carrying amounts of assets and liabilities belonging to Group Mobile as of December 31, 2017, and
FLI Charge and Group Mobile as of December 31, 2016, are presented in the consolidated balance sheets as assets held for disposal
and liabilities held for disposal, respectively.
Our Strategy and Outlook
Wellness
XpresSpa is a leading airport retailer
of spa services and related products. It is a well-recognized and popular airport spa brand with an approximately 50% market share
in the United States and nearly three times the number of domestic locations as its closest competitor. It provides approximately
one million services per year. As of December 31, 2017, XpresSpa operated 56 total locations in 23 airports in three countries:
the United States, Netherlands and United Arab Emirates. XpresSpa also sells wellness and travel products through its internet
site, www.xpresspa.com. Key services and products offered include:
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massage services for the neck, back, feet and whole body;
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nail care, such as pedicures, manicures and polish changes;
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travel products, such as neck pillows, blankets and massage tools; and
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new offerings, such as cryotherapy services, NormaTec compression services, and Dermalogica personal care services and retail
products.
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For over 15 years, increased security requirements
have led travelers to spend more time at the airport. In addition, in anticipation of the long and often stressful security lines,
travelers allow for more time to get through security and, as a result, often experience increased downtime prior to boarding.
Consequently, travelers at large airport hubs have idle time in the terminal after passing through security.
XpresSpa was developed to address the
stress and idle time spent at the airport, allowing travelers to spend this time productively, by relaxing and focusing on personal
care and wellness. We believe that XpresSpa is well positioned to benefit from consumers’ growing interest in health and
wellness and increasing demand for spa services and related wellness products.
Intellectual Property
Our intellectual property operating segment
is engaged in the monetization of patents related to content and ad delivery, remote monitoring and computing technologies.
Recent
Developments
Rebranding
On January 5, 2018, we changed our name
to XpresSpa Group, Inc. from FORM Holdings Corp, which aligned our corporate strategy to build a pure-play health and wellness
services company. Our common stock, par value $0.01 per share, which had previously been listed under the trading symbol “FH”
on the Nasdaq Capital Market, has been listed under the trading symbol “XSPA” since January 8, 2018.
Dispositions
On October 20, 2017, we sold FLI Charge to a group of private investors and FLI Charge management, who
now own and operate FLI Charge. On March 22, 2018, we sold Group Mobile to a third party. We will not be providing any continued
management or financing support to FLI Charge or Group Mobile.
Sale of Patents
In January 2018, we sold certain patents to Crypto Currency Patent Holdings Company LLC, a unit of Marathon
Patent Group, Inc. (“Marathon”), for approximately $1,250,000, comprised of $250,000 in cash and 250,000 shares of
Marathon common stock valued at approximately $1,000,000 at the time of the transaction. Pursuant to the sale, we cannot directly
or indirectly offer, sell, pledge or transfer, or otherwise dispose of, the Marathon common stock for a period of 180 days ending
on July 11, 2018.
Capital Raise
On July 26, 2017, we 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 our common stock, par value $0.01 per share (“XSPA 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 XSPA Common Stock from
us pursuant to the Underwriting Agreement at a purchase price of $1.023 per share. Our net proceeds from the Offering were approximately
$6,584,000 after deducting underwriting discounts and commissions and other estimated offering expenses.
Competition
Wellness
XpresSpa operated 56 locations, which includes 51 domestic locations and 5 international locations as
of December 31, 2017. Our domestic units operate within many of the largest and most heavily trafficked airports in the United
States. The balance of the North American market is highly fragmented and is represented largely by small, privately-owned
entities that operate one or two locations in a single airport. Only two other market participants operate 10 or more airport
locations in the United States. The largest domestic competitor operates 14 locations in seven airports. Outside of North
America, this same competitor operates 22 locations in eight international airports.
Intellectual Property
After a period of intense competition from
public and private companies for the acquisition of intellectual property assets, prices have dropped substantially. Due to the
many patent sales and divestments over the past few years, many companies continue to seek to monetize intellectual property by
licensing their patents to companies in a number of technology sectors. This has occurred in an increasingly challenging and changing
legal environment for monetizing patents.
Our Market
Airport retailers differ significantly
from traditional retailers. Unlike traditional retailers, airport retailers benefit from a steady and largely predictable flow
of traffic from a constantly changing customer base. Airport retailers also benefit from “dwell time,” the period after
travelers have passed through airport security and before they board an aircraft. For over 15 years, increased security requirements
have led travelers to spend more time at the airport. In addition, in anticipation of the long and often stressful security lines,
travelers allow for more time to get through security and, as a result, often experience increased downtime prior to boarding.
XpresSpa was developed to address the stress
and idle time spent at the airport, allowing travelers to spend this time productively, by relaxing and focusing on personal care
and wellness. We believe that XpresSpa is well positioned to benefit from consumers’ growing interest in health and wellness
and increasing demand for spa services and related wellness products. According to the Global Wellness Institute, global wellness
was a $3.7 trillion industry in 2015, which was an increase of 10.6% from $3.3 trillion in 2013. In addition, according to the
Global Wellness Institute, the global spa industry represented $98.6 billion in 2015 and the fitness, mind and body industry represented
$542 billion in 2015.
In addition, a confluence of microeconomic
events has created favorable conditions for the expansion of retail concepts at airports, in particular, retail concepts that attract
higher spending from air travelers. The competition for airplane landings has forced airports to lower landing fees, which in turn
has necessitated augmenting their retail offerings to offset budget shortfalls. Infrastructure projects at airports across the
country, again intended to make an airport more desirable to airlines, require funding from bond issuances that in turn rely upon,
in part, the expected minimum rent guarantees and expected income from concessionaires.
Equally as important to the industry growth
is XpresSpa’s flexible retail format. XpresSpa opens multiple locations annually, which have ranged in size from 200 square
feet to 2,600 square feet, with a typical size of approximately 1,200 square feet. XpresSpa is able to adapt its operating model
to almost any size location available in space constrained airports. This increased flexibility compared to other retail concepts
allows XpresSpa to operate multiple stores within an airport, from which it enjoys synergies due to shared labor between stores.
XpresSpa believes that its operating metrics represent an attractive return on invested capital and,
as a result, is pursuing new locations at airports and terminals around the country. Historically, XpresSpa has won approximately
four out of every five requests for proposal (“RFP”) in which it has participated.
Regulation
Our operations are subject to a range of laws and regulations adopted by national, regional and local
authorities from the various jurisdictions in which we operate, including those relating to, among others, licensing (e.g., massage,
nail, and cosmetology), public health and safety and fire codes. Failure to obtain or retain required licenses and approvals, including
those related to licensing, public health and safety and fire codes, would adversely affect our operations. Although we have not
experienced, and do not anticipate, significant problems obtaining required licenses, permits or approvals, any difficulties, delays
or failures in obtaining such licenses, permits or approvals could delay or prevent the opening, or adversely impact the viability,
of our operations.
Airport authorities in the United States frequently require that our airport concessions meet minimum
Airport Concession Disadvantaged Business Enterprise
("ACDBE") participation requirements. The Department of Transportation’s (“DOT”) ACDBE program is implemented
by recipients of DOT Federal Financial Assistance, including airport agencies that receive federal funding. The ACDBE program is
administered by the Federal Aviation Administration (“FAA”), state and local ACDBE certifying agencies and individual
airports. The ACDBE program is designed to help ensure that small firms owned and controlled by socially and economically disadvantaged
individuals can compete for airport contracting and concession opportunities in domestic passenger service airports. The ACDBE
regulations require that airport recipients establish annual ACDBE participation goals, review the scope of anticipated large prime
contracts throughout the year, and establish contract-specific ACDBE participation goals. We generally meet the contract specific
goals through an agreement providing for co-ownership of the retail location with a disadvantaged business enterprise. Frequently,
and within the guidelines issued by the FAA, we may lend money to ACDBEs in connection with concession agreements in order to help
the ACDBE fund the capital investment required under a concession agreement. The rules and regulations governing the certification
of ACDBE participation in airport concession agreements are complex, and ensuring ongoing compliance is costly and time consuming.
Further, if we fail to comply with the minimum ACDBE participation requirements in our concession agreements, we may be held responsible
for breach of contract, which could result in the termination of a concession agreement and monetary damages. See “Item 1A.
Risk Factors – Risks Related to our Business Operations – Failure to comply with minimum airport concession disadvantaged business enterprise participation goals
and requirements could lead to lost business opportunities or the loss of existing business.”
We are subject to the Fair Labor Standards Act, the Immigration Reform and Control Act of 1986, the Occupational
Safety and Health Act and various federal and state laws governing matters such as minimum wages, overtime, unemployment tax rates,
workers’ compensation rates, citizenship requirements and other working conditions. We are also subject to the Americans
with Disabilities Act, which prohibits discrimination on the basis of disability in public accommodations and employment, which
may require us to design or modify our concession locations to make reasonable accommodations for disabled persons.
We are also subject to certain truth-in-advertising,
general customs, consumer and data protection, product safety, workers’ health and safety and public health rules that govern
retailers in general, as well as the merchandise sold within the various jurisdictions in which we operate.
Employees
As of March 15, 2018, we had
697 full-time and 148 part-time employees. XpresSpa had 53 full-time employees in San Francisco International Airport, who are
represented by a labor union and are covered by a collective bargaining agreement. XpresSpa had 34 full-time employees in Los
Angeles International Airport, who are represented by a labor union and are covered by a collective bargaining agreement. We consider
our relationships with our employees to be good.
Corporate Information
We were incorporated in Delaware as a
corporation on January 9, 2006 and completed an initial public offering in June 2010. On January 5, 2018, we changed our
name to XpresSpa Group, Inc. from FORM Holdings Corp. as part of a rebranding that aligned our corporate strategy to build a pure-play
health and wellness services company. Our common stock, par value $0.01 per share, which was previously listed under the trading
symbol “FH” on the Nasdaq Capital Market, has been listed under the trading symbol “XSPA” since January
8, 2018. Our principal executive offices are located at 780 Third Avenue, 12
th
Floor, New York, New York 10017. Our
telephone number is (212) 309-7549 and our website address is
www.xpresspagroup.com
. We also operate the website
www.xpresspa.com
. References in this Annual Report on Form 10-K to our website address does not constitute incorporation
by reference of the information contained on the website. We make our filings with the Securities and Exchange Commission, or
the SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, other reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, and amendments to the foregoing reports, available
free of charge on or through our website as soon as reasonably practicable after we file these reports with, or furnish such reports
to, the SEC. In addition, we post the following information on our website:
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our corporate code of conduct and our insider trading compliance manual; and
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charters for our audit committee, compensation committee, and nominating and corporate governance committee.
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The public may read and copy any materials
that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may
obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains
an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including
us, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at
http://www.sec.gov
.
ITEM 1A. RISK FACTORS
Our business, financial condition, results
of operations and the trading price of our common stock could be materially adversely affected by any of the following risks as
well as the other risks highlighted elsewhere in this Annual Report on Form 10-K. 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 operations.
Risks Related to our Financial Condition
and Capital Requirements
We may not be able to raise additional
capital. Moreover, additional financing may have an adverse effect on the value of the equity instruments held by our stockholders.
We may choose to raise additional funds in
connection with any potential acquisition of operating businesses or other assets. In addition, we may also need additional funds
to respond to business opportunities and challenges, including our ongoing operating expenses, protection of our assets, development
of new lines of business and enhancement of our operating infrastructure. While we may need to seek additional funding, we may
not be able to obtain financing on acceptable terms, or at all. In addition, the terms of our financings may be dilutive to, or
otherwise adversely affect, holders of our common stock. We may also seek additional funds through arrangements with collaborators
or other third parties. We may not be able to negotiate arrangements on acceptable terms, if at all. If we are unable to obtain
additional funding on a timely basis, we may be required to curtail or terminate some or all of our business plans. Any such financing
that we undertake will likely be dilutive to our current stockholders.
Our ability to use our net operating
loss carryforwards and certain other tax attributes may be limited.
As of December 31, 2017, we had federal net operating loss carryforwards (“NOL”s) of $159,007,000
which expire 20 years from the respective tax years to which they relate. Our ability to utilize our NOLs may be limited under
Section 382 of the Internal Revenue Code. The limitations apply if an ownership change, as defined by Section 382, occurs. Generally,
an ownership change occurs when certain stockholders increase their aggregate ownership by more than 50 percentage points over
their lowest ownership percentage in a testing period (typically three years). Additionally, United States tax laws limit the time
during which these carryforwards may be utilized against future taxes. As a result, we may not be able to take full advantage of
these carryforwards for federal and state tax purposes. Future changes in stock ownership may also trigger an ownership change
and, consequently, a Section 382 limitation.
The recently passed comprehensive
federal tax reform bill could adversely affect our business and financial condition.
On December 22, 2017, President Trump signed
into law the “Tax Cuts and Jobs Act,” or TCJA, which significantly reforms the Internal Revenue Code of 1986, as amended,
or the Code. The TCJA, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations
on the deductibility of interest and net operating loss carryforwards, allows for the expensing of capital expenditures, and puts
into effect the migration from a “worldwide” system of taxation to a territorial system. Our net deferred tax assets
and liabilities will be revalued at the newly enacted U.S. corporate rate, and the impact, if any, will be recognized in our tax
expense in the year of enactment. We continue to examine the impact this tax reform legislation may have on our business. The overall
impact of the TCJA is uncertain and our business and financial condition could be adversely affected.
Global economic and market conditions
may adversely affect our business, financial condition and operating results.
Our business plan depends significantly on worldwide economic conditions and our success is dependent
on consumer spending, which is sensitive to economic downturns, inflation and any associated rise in unemployment, decline in consumer
confidence, adverse changes in exchange rates, increase in interest rates, increase in the price of oil, deflation, direct or indirect
taxes or increase in consumer debt levels. As a result, economic downturns may have a material adverse impact on our business,
financial condition and results of operations. Moreover, uncertainty about global economic conditions poses a risk as businesses
and individuals may postpone spending in response to tighter credit, negative financial news and declines in income or asset values.
This could have a negative effect on corporate and individual spending on health and wellness and travel. These factors, taken
together or individually, could cause material harm to our business, financial condition and results of operations.
Risks Related to our Business Operations
XpresSpa is reliant on international
and domestic airplane travel, and the time that airline passengers spend in United States airports post-security. A decrease in
airline travel, a decrease in the desire of customers to buy spa services and products, or decreased time spent in airports would
negatively impact XpresSpa’s operations.
XpresSpa depends upon a large number of
airplane travelers with the propensity for health and wellness, and in particular spa treatments and products, spending significant
time post- security clearance check points.
If the number of airline travelers decreases,
if the time that these travelers spend post-security decreases, and/or if travelers ability or willingness to pay for XpresSpa’s
products and services diminishes, this could have an adverse effect on XpresSpa’s growth, business activities, cash flow,
financial condition and results of operations. Some reasons for these events could include:
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terrorist activities (including cyber-attacks), pandemics and outbreaks of contagious diseases, such as the Zika or Ebola crises, impacting either domestic or international travel through airports where XpresSpa operates, causing fear of flying, flight cancellations, or an economic downturn, or any other event of a similar nature, even if not directly affecting the airline industry, may lead to a significant reduction in the number of airline passengers;
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a decrease in business spending that impacts business travel, such as a recession;
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a decrease in consumer spending that impacts leisure travel, such as a recession or a stock market downturn or a change in consumer lending regulations impacting available credit for leisure travel;
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an increase in airfare prices that impacts the willingness of air travelers to fly, such as an increase in oil prices or heightened taxation from federal or other aviation authorities;
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severe weather, ash clouds, airport closures, natural disasters, strikes or accidents (airplane or otherwise), causing travelers to decrease the amount that they fly and any of these events, or any other event of a similar nature, even if not directly affecting the airline industry, may lead to a significant reduction in the number of airline passengers;
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scientific studies that malign the use of spa services or the products used in spa services, such as the impact of certain chemicals and procedures on health and wellness; or
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streamlined security screening checkpoints, which could decrease the wait time at checkpoints and therefore the time air travelers budget for spending time at the airport.
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Further, any disruption to, or suspension
of services provided by, airlines and the travel industry as a result of financial difficulties, labor disputes, construction
work, increased security, changes to regulations governing airlines, mergers and acquisitions in the airline industry and challenging
economic conditions causing airlines to reduce flight schedules or increase the price of airline tickets could negatively affect
the number of airline passengers.
Additionally, the threat of terrorism and
governmental measures in response thereto, such as increased security measures, recent executive orders in the United States impacting
entry into the United States and changing attitudes towards the environmental impacts of air travel may in each case reduce demand
for air travel and, as a result, decrease airline passenger traffic at airports.
The effect that these factors would have
on our business depends on their magnitude and duration, and a reduction in airline passenger numbers will result in a decrease
in our sales and may have a materially adverse impact on our business, financial condition and results of operations.
Our success will depend in part on
relationships with third parties. Any adverse changes in these relationships could adversely affect our business, financial condition,
or results of operations.
Our success is dependent on our ability
to maintain and renew our 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.
We rely on a limited number of distributors
and suppliers for certain of our products, and events outside our control may disrupt our supply chain, which could result in an
inability to perform our obligations under our concession agreements and ultimately cause us to lose our concessions.
We rely on a small number of suppliers for our products. As a result, these distributors may have increased
bargaining power and we may be required to accept less favorable purchasing terms. In the event of a dispute with a supplier or
distributor, the delivery of a significant amount of merchandise may be delayed or cancelled, or we may be forced to purchase merchandise
from other suppliers on less favorable terms. Such events could cause turnover to fall or costs to increase, adversely affecting
our business, financial condition and results of operations. In particular, we have publicized our sale of certain brands of products
in our stores – our failure to sell these brands may adversely affect our business.
Further, damage or disruption to our supply
chain due to any of the following could impair our ability to sell our products: adverse weather conditions or natural disaster,
government action, fire, terrorism, cyber-attacks, the outbreak or escalation of armed hostilities, pandemic, industrial accidents
or other occupational health and safety issues, strikes and other labor disputes, customs or import restrictions or other reasons
beyond our control or the control of our suppliers and business partners. Failure to take adequate steps to mitigate the likelihood
or potential impact of such events, or to effectively manage such events if they occur, could adversely affect our business, financial
condition and results of operations, as well as require additional resources to restore our supply chain.
XpresSpa’s operating results
may fluctuate significantly due to certain factors, some of which are beyond its control.
XpresSpa’s operating results may
fluctuate from period to period significantly because of several factors, including:
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the timing and size
of new unit openings, particularly the launch of new terminals;
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passenger traffic and
seasonality of air travel;
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changes in the price
and availability of supplies;
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macroeconomic conditions,
both nationally and locally;
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changes in consumer
preferences and competitive conditions;
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expansion to new markets
and new locations; and
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increases in infrastructure costs, including those costs associated with the build-out of new concession
locations and renovating existing concession locations.
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XpresSpa’s operating results may
fluctuate significantly as a result of the factors discussed above. Accordingly, results for any period are not necessarily indicative
of results to be expected for any other period or for any year.
XpresSpa’s expansion into new
airports or off-airport locations may present increased risks due to its unfamiliarity with those areas.
XpresSpa’s growth strategy depends
upon expanding into markets where it has little or no meaningful operating experience. Those locations may have demographic characteristics,
consumer tastes and discretionary spending patterns that are different from those in the markets where its existing operations
are located. As a result, new airport terminal and/or off-airport operations may be less successful than existing concession locations
in current airport terminals. XpresSpa may find it more difficult in new markets to hire, motivate and keep qualified employees
who can project its vision, passion and culture. XpresSpa may also be unfamiliar with local laws, regulations and administrative
procedures, including the procurement of spa services retail licenses, in new markets which could delay the build-out of new concession
locations and prevent it from achieving its target revenues on a timely basis. Operations in new markets may also have lower average
revenues or enplanements than in the markets where XpresSpa currently operates. Operations in new markets may also take longer
to ramp up and reach expected sales and profit levels, and may never do so, thereby negatively affecting XpresSpa’s results
of operations.
XpresSpa’s growth strategy is
highly dependent on its ability to successfully identify and open new XpresSpa locations.
XpresSpa’s growth strategy primarily
contemplates expansion through procuring new XpresSpa locations and opening new XpresSpa stores and kiosks. Implementing this strategy
depends on XpresSpa’s ability to successfully identify new store locations. XpresSpa will also need to assess and mitigate
the risk of any new store locations, to open the stores on favorable terms and to successfully integrate their operations with
ours. XpresSpa may not be able to successfully identify opportunities that meet these criteria, or, if it does, XpresSpa may not
be able to successfully negotiate and open new stores on a timely basis. If XpresSpa is unable to identify and open new locations
in accordance with its operating plan, XpresSpa’s revenue growth rate and financial performance may fall short of our expectations.
Our profitability depends on the
number of airline passengers in the terminals in which we have concessions. Changes by airport authorities or airlines that lower
the number of airline passengers in any of these terminals could affect our business, financial condition and results of operations.
The number of airline passengers that visit the terminals in which we have concessions is dependent in
part on decisions made by airlines and airport authorities relating to flight arrivals and departures. A decrease in the number
of flights and resulting decrease in airline passengers could result in fewer sales, which could lower our profitability and negatively
impact our business, financial condition and results of operations. Concession agreements generally provide for a minimum annual
guaranteed payment (“MAG”) payable to the airport authority or landlord regardless of the amount of sales at the concession.
Currently, the majority of our concession agreements provide for a MAG that is either a fixed dollar amount or an amount that is
variable based upon the number of travelers using the airport or other location, retail space used, estimated sales, past results
or other metrics. If there are fewer airline passengers than expected or if there is a decline in the sales per airline passenger
at these facilities, we will nonetheless be required to pay the MAG or fixed rent and our business, financial condition and results
of operations may be materially adversely affected.
Furthermore, the exit of an airline from
a market or the bankruptcy of an airline could reduce the number of airline passengers in a terminal or airport where we operate
and have a material adverse impact on our business, financial condition and results of operations.
We may not be able to execute our
growth strategy to expand and integrate new concessions or future acquisitions into our business or remodel existing concessions.
Any new concessions, future acquisitions or remodeling of existing concessions may divert management resources, result in unanticipated
costs, or dilute the ownership of our stockholders.
Part of our growth strategy is to expand
and remodel our existing facilities and to seek new concessions through tenders, direct negotiations or other acquisition opportunities.
In this regard, our future growth will depend upon a number of factors, such as our ability to identify any such opportunities,
structure a competitive proposal and obtain required financing and consummate an offer. Our growth strategy will also depend on
factors that may not be within our control, such as the timing of any concession or acquisition opportunity.
We must also strategically identify which airport terminals and concession agreements to target based
on numerous factors, such as airline passenger numbers, airport size, the type, location and quality of available concession space,
level of anticipated competition within the terminal, potential future growth within the airport and terminal, rental structure,
financial return and regulatory requirements. We cannot provide assurance that this strategy will be successful.
In addition, we may encounter difficulties
integrating expanded or new concessions or any acquisitions. Such expanded or new concessions or acquisitions may not achieve anticipated
turnover and earnings growth or synergies and cost savings. Delays in the commencement of new projects and the refurbishment of
concessions can also affect our business. In addition, we will expend resources to remodel our concessions and may not be able
to recoup these investments. A failure to grow successfully may materially adversely affect our business, financial condition and
results of operations.
In particular, new concessions and acquisitions,
and in some cases future expansions and remodeling of existing concessions, could pose numerous risks to our operations, including
that we may:
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have difficulty integrating operations or personnel;
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incur substantial unanticipated integration costs;
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experience unexpected construction and development costs and project delays;
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face difficulties associated with securing required governmental approvals, permits and licenses (including
construction permits) in a timely manner and responding effectively to any changes in federal, state or local laws and regulations
that adversely affect our costs or ability to open new concessions;
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have challenges identifying and engaging local business partners to meet ACDBE requirements in concession
agreements;
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not be able to obtain construction materials or labor at acceptable costs;
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face engineering or environmental problems associated with our new and existing facilities;
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experience significant diversion of management attention and financial resources from our existing
operations in order to integrate expanded, new or acquired businesses, which could disrupt our ongoing business;
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lose key employees, particularly with respect to acquired or new operations;
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have difficulty retaining or developing acquired or new business customers;
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impair our existing business relationships with suppliers or other third parties as a result of
acquisitions;
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fail to realize the potential cost savings or other financial benefits and/or the strategic benefits of
acquisitions, new concessions or remodeling; and
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incur liabilities from the acquired businesses and we may not be successful in seeking indemnification
for such liabilities.
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In connection with acquisitions or other similar investments, we could incur debt or amortization expenses
related to intangible assets, suffer asset impairments, assume liabilities or issue stock that would dilute the percentage of ownership
of our then-current stockholders. We may not be able to complete acquisitions or integrate the operations, products, technologies
or personnel gained through any such acquisition, which may have a materially adverse impact on our business, financial condition
and results of operations.
If the estimates and assumptions
we use to determine the size of our market are inaccurate, our future growth rate may be impacted.
Market opportunity estimates and growth
forecasts are subject to uncertainty and are based on assumptions and estimates that may not prove to be accurate. The estimates
and forecasts in this annual report relating to the size and expected growth of the travel retail market may prove to be inaccurate.
Even if the market in which we compete meets our size estimates and forecasted growth, our business could fail to grow at similar
rates, if at all. The principal assumptions relating to our market opportunity include projected growth in the travel retail market
and our share of the market. If these assumptions prove inaccurate, our business, financial condition and results of operations
could be adversely affected.
Our business requires substantial
capital expenditures and we may not have access to the capital required to maintain and grow our operations.
Maintaining and expanding our operations in our existing and new retail locations is capital intensive.
Specifically, the construction, redesign and maintenance of our retail space in airport terminals where we operate, technology
costs, and compliance with applicable laws and regulations require substantial capital expenditures. We may require additional
capital in the future to fund our operations and respond to potential strategic opportunities, such as investments, acquisitions
and expansions.
We must continue to invest capital to maintain
or to improve the success of our concessions and to meet refurbishment requirements in our concessions. Decisions to expand into
new terminals could also affect our capital needs. Our actual capital expenditures in any year will vary depending on, among other
things, the extent to which we are successful in renewing existing concessions and winning additional concession agreements.
We cannot provide assurance that we will be able to maintain our operating performance, generate sufficient
cash flow, or have access to sufficient financing to continue our operations and development activities at or above our present
levels, and we may be required to defer all or a portion of our capital expenditures. Our business, financial condition and results
of operations may be materially adversely affected if we cannot make such capital expenditures.
XpresSpa currently relies on a skilled,
licensed labor force to provide spa services, and the supply of this labor force is finite. If XpresSpa cannot hire adequate staff
for its locations, it will not be able to operate.
As of March 15, 2018, XpresSpa had 697
full-time and 148 part-time employees in its locations. Excluding some dedicated retail staff, the majority of these employees
are licensed to perform spa services, and hold such licenses as masseuses, nail technicians, aestheticians, barbers and master
barbers. The demand for these licensed technicians has been increasing as more consumers gravitate to health and wellness treatments
such as spa services. XpresSpa competes not only with other airport-based spa companies but with spa companies outside of the airport
for this skilled labor force. In addition, all staff hired by XpresSpa must pass the background checks and security clearances
necessary to work in airport locations. If XpresSpa is unable to attract and retain qualified staff to work in its airport locations,
its ability to operate will be impacted negatively.
Our business is subject to various
laws and regulations, and changes in such laws and regulations, or failure to comply with existing or future laws and regulations,
could adversely affect us.
We are subject to various laws and regulations in the United States, Netherlands and United Arab Emirates
that affect the operation of our concessions. The impact of current laws and regulations, the effect of changes in laws or regulations
that impose additional requirements and the consequences of litigation relating to current or future laws and regulations, or our
inability to respond effectively to significant regulatory or public policy issues, could increase our compliance and other costs
of doing business and, therefore, have an adverse impact on our results of operations.
Failure to comply with the laws and regulatory
requirements of governmental authorities could result in, among other things, revocation of required licenses, administrative enforcement
actions, fines and civil and criminal liability. In addition, certain laws may require us to expend significant funds to make modifications
to our concessions in order to comply with applicable standards. Compliance with such laws and regulations can be costly and can
increase our exposure to litigation or governmental investigations or proceedings.
XpresSpa’s labor force could
unionize, putting upward pressure on labor costs.
Currently, XpresSpa stores in two airports
have a labor force which is unionized. Major players in labor organization, and in particular “Unite Here!” which represents
approximately 45,000 employees in the airport concessions and airline catering industries, could target XpresSpa locations for
its unionization efforts. In the event of the successful unionization of all of XpresSpa’s labor force, XpresSpa would likely
incur additional costs in the form of higher wages, more benefits such as vacation and sick leave, and potentially also higher
health care insurance costs.
XpresSpa competes for new locations
in airports and may not be able to secure new locations.
XpresSpa participates in the highly competitive
and lucrative airport concessions industry, and as a result competes for retail leases with a variety of larger, better capitalized
concessions companies as well as smaller, mid-tier and single unit operators. Frequently, an airport includes a spa concept within
its retail product set and, in those instances, XpresSpa competes primarily with BeRelax, Terminal Getaway, Massage Bar and 10
Minute Manicure.
We may not be able to predict accurately
or fulfill customer preferences or demands.
We derive a significant amount of our revenue
from the sale of massage, cosmetic and luxury products which are subject to rapidly changing customer tastes. The availability
of new products and changes in customer preferences has made it more difficult to predict sales demand for these types of products
accurately. Our success depends in part on our ability to predict and respond to quickly changing consumer demands and preferences,
and to translate market trends into appropriate merchandise offerings. Additionally, due to our limited sales space relative to
other retailers, the proper selection of salable merchandise is an important factor in revenue generation. We cannot provide assurance that our merchandise selection will correspond to actual sales demand. If we are unable to predict or rapidly respond to sales
demand or to changing styles or trends, or if we experience inventory shortfalls on popular merchandise, our revenue may be lower,
which could have a materially adverse impact on our business, financial condition and results of operations.
XpresSpa’s leases may be terminated,
either for convenience by the landlord or as a result of an XpresSpa default.
XpresSpa has store locations and kiosks
in a number of airports in which the landlord, with prior written notice to XpresSpa, can terminate XpresSpa’s lease, including
for convenience or as necessary for airport purposes or operations. If a landlord elects to terminate a lease at an airport, XpresSpa
may have to shut down one or more store locations at that airport.
Additionally, XpresSpa leases have numerous
provisions governing the operation of XpresSpa’s stores. Violation of one or more of these provisions, even unintentionally,
may result in the landlord finding that XpresSpa is in default of the lease. Violation of lease provisions may result in fines
and, in some cases, termination of a lease.
XpresSpa’s ability to operate
depends on the traffic patterns of the terminals in which it operates, and the cessation or disruption of air traveler traffic
in these terminals would negatively impact XpresSpa’s addressable market.
XpresSpa depends on a high volume of air
travelers in its terminals. It is possible that a terminal in which XpresSpa operates could become subject to a lower volume of
air travelers, which would significantly impact traffic near and around XpresSpa locations and therefore its total addressable
market. Lower volume in a terminal could be caused by:
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terminal construction that results in the temporary or permanent closure of a unit, or adversely impacts the volume or pattern
of traffic flows within an airport;
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an airline utilizing an airport in which XpresSpa operates could abandon that airport or an individual terminal in favor of
other airports or terminals, or because it is contracting operations; or
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adverse weather conditions could cause damage to the terminal or airport in which XpresSpa operates, resulting in the temporary
or permanent closure of a unit.
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We are dependent on our local partners.
Our local partners, including our ACDBE
partners, maintain ownership interests in certain of our locations. Our participation in these operating entities differs from
market to market. While the precise terms of each relationship vary, our local partners may have control over certain portions
of the operations of these concessions. The stores are operated pursuant to the applicable joint venture agreement governing the
relationship between us and our local partner. Generally, these agreements also provide that strategic decisions are to be made
by a committee comprised of us and our local partner. These concessions involve risks that are different from the risks involved
in operating a concession independently, and include the possibility that our local partners:
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are in a position to take action contrary to our instructions, our requests, our policies, our
objectives or applicable laws;
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take actions that reduce our return on investment;
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go bankrupt or are otherwise unable to meet their capital contribution obligations;
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have economic or business interests or goals that are or become inconsistent with our business
interests or goals; or
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take actions that harm our reputation or restrict our ability to run our business.
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Failure to comply with minimum airport
concession disadvantaged business enterprise participation goals and requirements could lead to lost business opportunities or
the loss of existing business.
Pursuant to ACDBE participation requirements, XpresSpa is often required to meet, or use good faith efforts
to meet, certain minimum ACDBE participation requirements when bidding on or submitting proposals for new concession contracts.
If XpresSpa is unable to find and/or partner with an appropriate ACDBE, XpresSpa may lose opportunities to open new locations.
In addition, a number of XpresSpa’s existing leases contain minimum ACDBE participation requirements which require the ACDBE
to own a significant portion of the business being operated under those leases. The level of ACDBE participation requirements may
affect XpresSpa’s profitability and/or its ability to meet financial forecasts.
Further, if XpresSpa fails to comply with the
minimum ACDBE participation requirements, XpresSpa may be held responsible for a breach of contract, which could result in the
termination of a lease and impairment of XpresSpa’s ability to bid on or obtain future concession contracts. To the extent
that XpresSpa leases are terminated and XpresSpa is required to shut down one or more store locations, there could be a material
adverse impact to its business and results of operations.
Continued minimum wage increases would
negatively impact XpresSpa’s cost of labor.
XpresSpa compensates its licensed technicians via a formula that includes commissions. As a result, an
increase in the minimum wage would increase XpresSpa’s cost of labor and have an adverse impact on our business, financial
condition and results of operations.
Our business and financial condition
could be constrained by XpresSpa’s outstanding debt.
XpresSpa is obligated under the Senior
Secured Note payable to Rockmore Investment Master Fund Ltd. (“Rockmore”), a related party, which has an outstanding
balance of approximately $6,500,000, with a maturity date of May 1, 2019. The Senior Secured Note accrues interest of 11.24% 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. The Senior Secured Note is an outstanding obligation of XpresSpa but is guaranteed
by us.
Information technology systems failure
or disruption, or changes to information technology related to payment systems, could impact our day-to-day operations.
Our information technology systems are used to record and process transactions at our point-of-sale interfaces
and to manage our operations. These systems provide information regarding most aspects of our financial and operational performance,
statistical data about our customers, our sales transactions and our inventory management. Fire, natural disasters, power-loss,
telecommunications failure, break-ins, terrorist attacks (including cyber-attacks), computer viruses, electronic intrusion attempts
from both external and internal sources and similar events or disruptions may damage or impact our information technology systems
at any time. These events could cause system interruption, delays or loss of critical data and could disrupt our acceptance and
fulfillment of customer orders, as well as disrupt our operations and management. For example, although our point-of-sales systems
are programmed to operate and process customer orders independently from the availability of our central data systems and even
of the network, if a problem were to disable electronic payment systems in our stores, credit card payments would need to be processed
manually, which could result in fewer transactions. Significant disruption to systems could have a material adverse impact on our
business, financial condition and results of operations.
We also continually enhance or modify the
technology used for our operations. We cannot be sure that any enhancements or other modifications we make to our operations will
achieve the intended results or otherwise be of value to our customers. Future enhancements and modifications to our technology
could consume considerable resources. We may be required to enhance our payment systems with new technology, which could require
significant expenditures. If we are unable to maintain and enhance our technology to process transactions, we may experience a
materially adverse impact on our business, financial condition and results of operations.
If XpresSpa is unable to protect
its customers’ credit card data and other personal information, XpresSpa could be exposed to data loss, litigation and liability,
and its reputation could be significantly harmed.
Privacy protection is increasingly demanding,
and the use of electronic payment methods and collection of other personal information, including order history, travel history
and other preferences, exposes XpresSpa to increased risk of privacy and/or security breaches as well as other risks. The majority
of XpresSpa’s sales are by credit or debit cards. Additionally, XpresSpa collects and stores personal information from individuals,
including its customers and employees.
In the future, XpresSpa may experience
security breaches in which credit and debit card information or other personal information is stolen. Although XpresSpa uses secure
private networks to transmit confidential information, third parties may have the technology or know-how to breach the security
of the customer information transmitted in connection with credit and debit card sales, and its security measures and those of
technology vendors may not effectively prohibit others from obtaining improper access to this information. The techniques used
to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and are often difficult to detect
for long periods of time, which may cause a breach to go undetected for an extensive period of time. Advances in computer and software
capabilities, new tools, and other developments may increase the risk of such a breach. Further, the systems currently used for
transmission and approval of electronic payment transactions, and the technology utilized in electronic payments themselves, all
of which can put electronic payment at risk, are determined and controlled by the payment card industry, not by XpresSpa. In addition,
contractors, or third parties with whom XpresSpa does business or to whom XpresSpa outsources business operations may attempt to
circumvent its security measures in order to misappropriate such information and may purposefully or inadvertently cause a breach
involving such information. If a person is able to circumvent XpresSpa’s security measures or those of third parties, he
or she could destroy or steal valuable information or disrupt XpresSpa’s operations. XpresSpa may become subject to claims
for purportedly fraudulent transactions arising out of the actual or alleged theft of credit or debit card information, and XpresSpa
may also be subject to lawsuits or other proceedings relating to these types of incidents. Any such claim or proceeding could cause
XpresSpa to incur significant unplanned expenses, which could have an adverse effect on its business or results of operations.
Further, adverse publicity resulting from these allegations could significantly harm its reputation and may have a material adverse
effect on it. Although XpresSpa carries cyber liability insurance to protect against these risks, there can be no assurance that
such insurance will provide adequate levels of coverage against all potential claims.
Negative social media regarding XpresSpa
could result in decreased revenues and impact XpresSpa’s ability to recruit workers.
XpresSpa’s affinity among consumers
is highly dependent on their positive feelings about the brand, its customer service and the range and quality of services and
products that it offers. A negative customer experience that is posted to social media outlets and is distributed virally could
tarnish XpresSpa’s brand and its customers may opt to no longer engage with the brand.
XpresSpa employs people in multiple
different jurisdictions, and the employment laws of those jurisdictions are subject to change. In addition, its services are regulated
through government-issued operating licenses. Noncompliance with applicable laws could result in employee lawsuits or legal action
taken by government authorities.
XpresSpa must comply with a variety of
employment and business practices laws across the United States, Netherlands and United Arab Emirates. XpresSpa monitors the laws
governing its activities, but in the event it does not become aware of a new regulation or fails to comply with a regulation,
it could be subject to disciplinary action by governing bodies and potentially employee lawsuits.
XpresSpa is not currently cash flow
positive and will depend on funding to open new locations. In the event that capital is unavailable, XpresSpa will not be able
to open new locations.
Throughout its operating history, XpresSpa
has not generated sufficient cash from operations to fund its new store development. As a result, it will be dependent upon additional
funding for its new location growth until such time as it can produce enough cash to profitably fund its own location growth.
XpresSpa sources, develops and sells
products that may result in product liability defense costs and product liability payments.
The ingredients in XpresSpa’s products
contain ingredients that are deemed to be safe by the United States Federal Drug Administration and the Federal Food, Drug and
Cosmetics Act. However, there is no guarantee that these ingredients will not cause adverse health effects to some consumers given
the wide range of ingredients and allergies amongst the general population. XpresSpa may face substantial product liability exposure
for products it sells to the general public or that is uses in its services. Product liability claims, regardless of their merits,
could be costly and divert management’s attention, and adversely affect XpresSpa’s reputation and the demand for its
products and services. XpresSpa to date has not been named as a defendant in any product liability action.
We have commenced legal proceedings and/or
licensing discussions with security, content distribution and/or telecommunications companies. We expect that licensing discussions
may be time consuming and may either, absent any litigation we initiate, fail to lead to a license, or may result in litigations
commenced by the potential licensee.
To license or otherwise monetize the patent
assets that we own, we have commenced legal proceedings and/or attempted to commence licensing discussions with a number of companies,
during the course of which we allege that such companies infringe one or more of our patents. The future viability of our licensing
program is highly dependent on the outcome of these discussions, and there is a risk that we may be unable to achieve the results
we desire from such negotiations and be forced either to accept minimal royalties or commence litigations against the alleged infringer.
In addition, the recipients of our licensing overtures have substantially more resources than we do, which could make our licensing
efforts more difficult. Furthermore, due to changes in the approach to patent laws around the world it has become much easier for
potential licensees to commence proceedings to revoke or otherwise nullify our patents in lieu of engaging in bona fide licensing
discussions. There is a real risk that any potential licensee we approach would rather commence proceedings to revoke our patents
than engage in any licensing discussions whatsoever.
We anticipate that any legal proceedings could
continue for several years. While we endeavor, where possible, to engage counsel on a full or partial contingency basis, proceedings
may commence that fall outside of contingency arrangements with counsel and may require significant expenditures for legal fees
and other expenses. Disputes regarding the assertion of patents and other intellectual property rights are highly complex and technical.
Once initiated, we may be forced to litigate against other parties in addition to the originally named defendants. Our adversaries
may allege defenses and/or file counterclaims for, among other things, revocation of our patents or file collateral litigations
in an effort to avoid or limit liability and damages for patent infringement. If such actions by our adversaries are successful,
they may preclude our ability to derive licensing revenue from the patents being asserted.
There is a risk that we may be unable to achieve
the results we desire from such litigation, which may harm our business. In addition, the defendants in these litigations have
substantially more resources than we do, which could make our litigation efforts more difficult.
There is a risk that a court will find
our patents invalid, not infringed or unenforceable and/or that the USPTO or other relevant patent offices in various countries
will either invalidate the patents or materially narrow the scope of their claims during the course of a reexamination, opposition
or other such proceeding. In addition, even with a positive trial court verdict, the patents may be invalidated, found not infringed
or rendered unenforceable on appeal. This risk may occur either presently or from time to time in connection with future litigations
we may bring.
Patent litigation is inherently risky and the
outcome is uncertain. Some of the parties that we believe infringe on our patents are large and well-financed companies with substantially
greater resources than ours. We believe that these parties may devote a substantial amount of resources in an attempt to avoid
or limit a finding that they are liable for infringing on our patents or, in the event liability is found, to avoid or limit the
amount of associated damages. In addition, there is a risk that these parties may file reexaminations or other proceedings with
the USPTO or other government agencies in the United States or abroad in an attempt to invalidate, narrow the scope or render unenforceable
the patents we own. In addition, as part of our ongoing legal proceedings, the validity and/or enforceability of our patents-in-suit
is often challenged in a court or an administrative proceeding.
We may not be able to successfully monetize
our patents and, thus, we may fail to realize all of the anticipated benefits of acquisitions from third parties.
There is no assurance that we will be able
to successfully monetize the patent portfolios that we acquired from third parties. The patents we acquired could fail to produce
anticipated benefits or could have other adverse effects that we currently do not foresee.
In addition, the acquisition of a patent portfolio
is subject to a number of risks, including, but not limited to the following:
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There is a significant time lag between acquiring a patent portfolio and recognizing revenue from
those patent assets, if at all. During that time lag, material costs are likely to be incurred that would have a negative effect
on our results of operations, cash flows and financial position.
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The integration of a patent portfolio is a time consuming and expensive process that may disrupt
our operations. If our integration efforts are not successful, our results of operations could be harmed. In addition, we may not
achieve anticipated synergies or other benefits from such acquisition.
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Therefore, there is no assurance that we will
be able to monetize an acquired patent portfolio and recoup our investment.
We and our subsidiaries have been,
are, and may become involved in litigation that could divert management’s attention and harm our businesses.
Litigation often is expensive and diverts
management’s attention and resources, which could adversely affect our businesses. We may be exposed to claims against us
even if no wrongdoing has occurred. Responding to such claims, regardless of their merit, can be time-consuming, costly to
defend, disruptive to our management’s attention and to our resources, damaging to our reputation and brand, and may
cause us to incur significant expenses. Even if we are indemnified against such costs, the indemnifying party may be unable to
uphold its contractual obligations.
New legislation, regulations or court
rulings related to enforcing patents could harm our business and operating results.
Intellectual property is the subject of intense
scrutiny by the courts, legislatures and executive branches of governments around the world. Various patent offices, governments
or intergovernmental bodies may implement new legislation, regulations or rulings that impact the patent enforcement process or
the rights of patent holders and such changes could negatively affect licensing efforts and/or litigations. For example, limitations
on the ability to bring patent enforcement claims, limitations on potential liability for patent infringement, lower evidentiary
standards for invalidating patents, increases in the cost to resolve patent disputes and other similar developments could negatively
affect our ability to assert our patent or other intellectual property rights.
It is impossible to determine the extent of
the impact of any new laws, regulations or initiatives that may be proposed, or whether any of the proposals will become enacted
as laws. Compliance with any new or existing laws or regulations could be difficult and expensive, affect the manner in which we
conduct our business and negatively impact our business, prospects, financial condition and results of operations.
Our failure or inability to protect
the trademarks or other proprietary rights we use, or claims of infringement by us of rights of third parties, could adversely affect
our competitive position or the value of our brands.
We believe that our trademarks and other proprietary rights are important to our success and our competitive
position. However, any actions that we take to protect the intellectual property we use may not prevent unauthorized use or imitation
by others, which could have an adverse impact on our image, brand or competitive position. If we commence litigation to protect
our interests or enforce our rights, we could incur significant legal fees. We also cannot provide assurance that third parties
will not claim infringement by us of their proprietary rights. Any such claim, whether or not it has merit, could be time consuming
and distracting for our management, result in costly litigation, cause changes to existing retail concepts or delays in introducing
retail concepts, or require us to enter into royalty or licensing agreements. As a result, any such claim could have a material
adverse impact on our business, financial condition and results of operations.
Future acquisitions or business opportunities
could involve unknown risks that could harm our business and adversely affect our financial condition and results of operations.
We have in the past, and may in the future,
acquire businesses or make investments, directly or indirectly through our subsidiaries, that involve unknown risks, some of which
will be particular to the industry in which the investment or acquisition targets operate, including risks in industries with which
we are not familiar or experienced. Although we intend to conduct appropriate business, financial and legal due diligence in connection
with the evaluation of future investment or acquisition opportunities, there can be no assurance that our due diligence investigations
will identify every matter that could have a material adverse effect on us. We may be unable to adequately address the financial,
legal and operational risks raised by such investments or acquisitions, especially if we are unfamiliar with the relevant industry.
The realization of any unknown risks could expose us to unanticipated costs and liabilities and prevent or limit us from realizing
the projected benefits of the investments or acquisitions, which could adversely affect our financial condition, liquidity, results
of operations, and trading price.
Anti-takeover provisions of Delaware
law, provisions in our charter and bylaws, and our stockholder rights plan could prevent or frustrate attempts by stockholders
to change our Board of Directors or current management and could delay, discourage or make more difficult a third-party acquisition
of control of us.
We are a Delaware corporation and, as such, certain provisions of Delaware law could prevent or frustrate
attempts by stockholders to change the Board of Directors or current management, or could delay, discourage or make more difficult
a third-party acquisition of control of us, even if the change in control would be beneficial to stockholders or the stockholders
regard it as such. We are subject to the provisions of Section 203 of the Delaware General Corporation Law (“DGCL”),
which prohibits certain “business combination” transactions (as defined in Section 203) with an “interested
stockholder” (defined in Section 203 as a 15% or greater stockholder) for a period of three years after a stockholder becomes
an “interested stockholder,” unless the attaining of “interested stockholder” status or the transaction
is pre-approved by our Board of Directors, the transaction results in the attainment of at least an 85% ownership level by an
acquirer or the transaction is later approved by our Board of Directors and by our stockholders by at least a 66 2/3 percent
vote of our stockholders other than the “interested stockholder,” each as specifically provided in Section 203.
Our certificate of incorporation and our
bylaws, each as currently in effect, also contain certain provisions that may delay, discourage or make more difficult a third-party
acquisition of control of us. Such provisions include a provision that any vacancies on our Board of Directors may only be filled
by a majority of the directors then serving, although not a quorum, and not by the stockholders and the ability of our Board of
Directors to issue preferred stock, without stockholder approval, that could dilute the stock ownership of a potential unsolicited
acquirer and hinder an acquisition of control of us that is not approved by our Board of Directors, including through the use of
preferred stock in connection with a stockholder rights plan.
We have also adopted a stockholder rights plan in the form of a Section 382 Rights Plan, designed to help
protect and preserve our substantial tax attributes primarily associated with our NOLs under Section 382 of the Internal Revenue
Code and research tax credits under Sections 382 and 383 of the Internal Revenue Code and related United States Treasury regulations,
which was approved by our stockholders in December 2016 and expires in March 2019. Although this is not the purpose of the Section
382 Rights Plan, it could have the effect of making it uneconomical for a third party to acquire us on a hostile basis.
These provisions of the DGCL, our certificate
of incorporation and bylaws, and our Section 382 Rights Plan may delay, discourage or make more difficult certain types of transactions
in which our stockholders might otherwise receive a premium for their shares over the current market price, and might limit the
ability of our stockholders to approve transactions that they think may be in their best interest.
Our confidential information may
be disclosed by other parties.
We routinely enter into non-disclosure
agreements with other parties, including but not limited to vendors, law firms, parties with whom we are engaged in negotiations,
and employees. However, there exists a risk that those other parties will not honor their contractual obligations to not disclose
our confidential information. This may include parties who breach such obligations in the context of confidential settlement offers
and/or negotiations. In addition, there exists a risk that, upon such breach and subsequent dissemination of our confidential information,
third parties and potential licensees may seek to use such confidential information to their advantage and/or to our disadvantage including
in legal proceedings in which we are involved. Our ability to act against such third parties may be limited, as we may not be in
privity of contract with such third parties.
Risks Related to our Capital Stock
Stock prices can be volatile, and this
volatility may depress the price of our common stock.
The stock market has experienced significant
price and volume fluctuations, which have affected the market price of many companies in ways that may have been unrelated to those
companies’ operating performance. Furthermore, we believe that our stock price may reflect certain future growth and profitability
expectations. If we fail to meet these expectations, then our stock price may significantly decline, which could have an adverse
impact on investor confidence. We believe that various factors may cause the market price of our common stock to fluctuate, perhaps
substantially, including, among others, the following:
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additions to or departures of our key personnel;
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announcements of innovations by us or our competitors;
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announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, capital commitments,
or new technologies;
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new regulatory pronouncements and changes in regulatory guidelines;
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developments or disputes concerning our patents and efforts in licensing and/or enforcing our patents;
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lawsuits, claims, and investigations that may be filed against us, and other events that may adversely affect our reputation;
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changes in financial estimates or recommendations by securities analysts; and
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general and industry-specific economic conditions.
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Future sales of our shares of common
stock by our stockholders could cause the market price of our common stock to drop significantly, even if our business is otherwise
performing well.
As of March 15, 2018, we have 26,581,067 shares of common stock issued and outstanding, excluding shares
of common stock issuable upon exercise of warrants, options or restricted stock units, or preferred stock on an as-converted basis.
As shares saleable under Rule 144 are sold or as restrictions on resale lapse, the market price of our common stock could drop
significantly if the holders of shares of restricted stock sell them or are perceived by the market as intending to sell them.
This decline in our stock price could occur even if our business is otherwise performing well.
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.
Our executive officers and directors
beneficially own or control approximately 26% of our common stock on a fully diluted basis. Accordingly, these executive
officers and directors, acting individually or as a group, 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.
The exercise of a substantial number
of warrants or options by our security holders may have an adverse effect on the market price of our common stock.
Should our warrants outstanding as of March
15, 2018 be exercised, there would be an additional 3,087,500 shares of common stock eligible for trading in the public market.
The incentive equity instruments granted to our management, employees, directors and consultants are subject to acceleration of
vesting of 75% and 100% (according to the agreement signed with each grantee) upon a subsequent change of control. Such securities,
if exercised, will increase the number of issued and outstanding shares of our common stock. Therefore, the sale of the shares
of common stock underlying the warrants and options could have an adverse effect on the market price for our securities and/or
on our ability to obtain future financing.
We have no current plans to pay dividends
on our common stock, and our investors may not receive funds without selling their common stock.
We have not declared or paid any cash dividends
on our common stock, nor do we expect to pay any cash dividends on our common stock for the foreseeable future. Investors seeking
cash dividends should not invest in our common stock for that purpose. We currently intend to retain any additional future earnings
to finance our operations and growth and, therefore, we have no plans to pay cash dividends on our common stock at this time.
Any future determination to pay cash dividends on our common stock will be at the discretion of our Board of Directors and will
be dependent on our earnings, financial condition, operating results, capital requirements, any contractual restrictions, and
other factors that our Board of Directors deems relevant.
Accordingly, our investors may have to sell
some or all of their common stock in order to generate cash from their investment. You may not receive a gain on your investment
when you sell our common stock and may lose the entire amount of your investment.
We may fail to meet publicly announced
financial guidance or other expectations about our business, which would cause our stock to decline in value.
From 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
assumptions that may not prove to be accurate and may vary from actual results and involve known and unknown risks and uncertainties
that may cause actual results, performance, achievements or share prices to be materially 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. If we fail to meet our projections and/or other financial guidance for any reason, our stock price could decline.
The market price of our common stock
historically has been and likely will continue to be highly volatile.
The market price for our shares of common stock
historically has been highly volatile, and the market for our shares has from time to time experienced significant price and volume
fluctuations, based both on our operating performance and for reasons that appear to us unrelated to our operating performance.
The market price of our shares of common stock may fluctuate significantly in response to a number of factors, including:
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our ability to realize the expected value and benefits of our recent business and asset acquisitions;
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the level of our financial resources;
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our ability to develop and introduce new products and/or develop intellectual property;
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developments concerning our intellectual property rights generally or those of us or our competitors;
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our ability to raise additional capital to fund our operations and business plan and the effects that such financing may have on the value of the equity instruments held by our stockholders;
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our ability to retain key personnel;
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general economic conditions and level of consumer and corporate spending on technology, consumer electronics, health and wellness, and travel;
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our ability to hire a skilled labor force and the costs associated;
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our ability to secure new retail locations, maintain existing ones, and ensure continued customer traffic
at those locations;
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changes in securities analysts’ estimates of our financial performance or deviations in our business and the trading price of our common stock from the estimates of securities analysts;
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our ability to protect our customers’ financial data and other personal information;
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the loss of one or more of our significant suppliers or vendors;
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unexpected trends in the health and wellness and travel industries and potential technology and service obsolescence;
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market acceptance, quality, pricing, availability and useful life of our products and/or services, as well as the mix of our products and services sold;
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lawsuits, claims, and investigations that may be filed against us and other events that may adversely affect our reputation; and
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our ability to license and monetize our patents, including litigation outcomes.
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Our common stock could be delisted from
Nasdaq, which could affect the market price of our common stock and its liquidity. Our listing on Nasdaq is contingent upon meeting
all the continued listing requirements of Nasdaq which include maintaining a minimum bid price of not less than $1.00 per share.
Nasdaq Listing Rules provide that a failure to meet the minimum bid price requirement exists if the deficiency continues for a
period of 30 consecutive business days.
On March 16, 2018, we received written
notice from the Listing Qualifications Department of The Nasdaq Stock Market LLC (“Nasdaq”) that for the preceding
30 consecutive business days (February 1, 2018 through March 15, 2018), our common stock did not maintain a minimum closing bid
price of $1.00 per share as required by Nasdaq Listing Rule 5550(a)(2). In accordance with Nasdaq Listing Rule 5810(c)(3)(A),
we were given an initial compliance period of 180 calendar days, or until September 12, 2018, to regain compliance with Nasdaq
Listing Rule 5550(a)(2). In addition, compliance can be achieved automatically and without further action if the closing bid price
of our common stock is at or above $1.00 for a minimum of ten consecutive business days at any time during the 180-day compliance
period, in which case Nasdaq will notify us of our compliance and the matter will be closed.
If our common stock is delisted from Nasdaq,
our ability to raise capital in the future may be limited. Delisting could also result in less liquidity for our stockholders and
a lower stock price. Such a delisting would likely have a negative effect on the price of our common stock and would impair your
ability to sell or purchase our common stock when you wish to do so. In the event of a delisting, we expect to take actions to
restore our compliance with Nasdaq’s listing requirements, but we can provide no assurance that any action taken by us would
result in our common stock becoming listed again, or that any such action would stabilize the market price or improve the liquidity
of our common stock.
Our common stock has traded in low volumes.
We cannot predict whether an active trading market for our common stock will ever develop. Even if an active trading market develops,
the market price of our common stock may be significantly volatile.
Historically, our common stock has experienced
a lack of trading liquidity. In the absence of an active trading market you may have difficulty buying and selling our common stock
at all or at the price you consider reasonable; and market visibility for shares of our common stock may be limited, which may
have a depressive effect on the market price for shares of our common stock and on our ability to raise capital or make acquisitions
by issuing our common stock.
If we raise additional capital in the
future, stockholders’ ownership in us could be diluted.
Any issuance of equity we may undertake in
the future to raise additional capital could cause the price of our shares to decline or require us to issue shares at a price
that is lower than that paid by holders of our shares in the past, which would result in previously issued shares being dilutive.
If we obtain funds through a credit facility or through the issuance of debt or preferred securities, these securities would likely
have rights senior to rights as a common stockholder, which could impair the value of our shares.
If we exercise the option to repay the
preferred stock issued in connection with the merger with XpresSpa (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 shares of
preferred stock issued in connection with the Merger (the “XSPA Preferred Stock”), on the seven-year anniversary of
the initial issuance date of the shares of XSPA Preferred Stock, December 23, 2024, we may repay each share of XSPA 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 as of 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 XSPA 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 XSPA 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 XSPA Preferred Stock.
On December 23, 2023, upon the maturity
of the XSPA Preferred Stock, when determining whether to repay the XSPA 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.
Having availed ourselves of scaled
disclosure available to smaller reporting companies, we cannot be certain if such reduced disclosure will make our common stock
less attractive to investors.
Under Section 12b-2 of the Exchange Act,
a "smaller reporting company" is a company that is not an investment company, an asset-backed issuer, or a majority-owned
subsidiary of a parent company that is not a smaller reporting company, and has a public float of less than $75 million and annual
revenues of less than $50 million during the most recently completed fiscal year. Similar to emerging growth companies, smaller
reporting companies are permitted to provide simplified executive compensation disclosure in their filings; they are exempt from
the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that independent registered public accounting firms provide
an attestation report on the effectiveness of internal controls over financial reporting; and they have certain other decreased
disclosure obligations in their SEC filings, including, among other things, only being required to provide two years of audited
financial statements in annual reports. Decreased disclosure in our SEC filings as a result of our having availed ourselves of
scaled disclosure may make it harder for investors to analyze our results of operations and financial prospects.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
As of December 31, 2017, XpresSpa had 56 company-operated stores in the United States, Netherlands and
United Arab Emirates. All of the stores as of that date were located in airports and are leased, typically with one or two renewal
options after the initial term. Economic terms vary by type and location of store and, on average, the lease terms are 5-8 years.
Our New York office, which serves as our
corporate office, as well as XpresSpa’s office, is located at 780 Third Avenue, 12
th
Floor, New York, New York.
The annual rental fee for this space is approximately $409,000 and the lease expires in October 2019. We believe that our facility
is adequate to accommodate our business needs.
ITEM 3. LEGAL PROCEEDINGS
Wellness
Cordial
Effective October 2014, our wholly owned-subsidiary,
XpresSpa, terminated its former ACDBE partner, Cordial Endeavor Concessions of Atlanta, LLC (“Cordial”), in its Atlanta
Terminal A (and future Terminals D, E and F) store locations.
Cordial filed a series of complaints with the
City of Atlanta, both before and after the termination, in which Cordial alleged, among other things, that the termination was
not valid and that XpresSpa unlawfully retaliated against Cordial when Cordial raised concerns about the joint venture. In response
to the numerous complaints it received from Cordial, the City of Atlanta required the parties to engage in two mediations.
After the termination of the relationship with
Cordial, XpresSpa sought to substitute two new ACDBE partners in place of Cordial.
In April 2015, Cordial filed a complaint
with the United States Federal Aviation Administration (“FAA”), which oversees the City of Atlanta with regard to
airport ACDBE programs, and, in December 2015, the FAA instructed that the City of Atlanta review XpresSpa’s request to
substitute new partners in lieu of Cordial and Cordial’s claims of retaliation. In response to the FAA instruction, pursuant
to a corrective action plan approved by the FAA, the City of Atlanta held a hearing in February 2016 and ruled in favor of XpresSpa
such substitution and claims of retaliation. Cordial submitted a further complaint to the FAA claiming that the City of Atlanta
was biased against Cordial and that the City of Atlanta’s decision was wrong. In August 2016, the parties met with the FAA.
On October 4, 2016, the FAA sent a letter to the City of Atlanta directing that the City of Atlanta retract previous findings
on Cordial’s allegations and engage an independent third party to investigate issues previously decided by Atlanta. The
FAA also directed that Atlanta determine monies potentially due to Cordial.
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. XpresSpa is seeking damages, declaratory judgment, rescission/termination of certain
agreements, disgorgement of revenue, fees and costs and various other relief. On February 21, 2017, the defendants filed a motion
to dismiss. On March 3, 2017, XpresSpa filed a first amended complaint against defendants. On April 5, 2017, Cordial filed a motion
to dismiss. On September 12, 2017, the Court held a hearing on the motion to dismiss. On November 2, 2017, the Court granted the
motion to dismiss which was entered on November 13, 2017. On December 22, 2017, XpresSpa filed a notice of appeal.
In re Chen et al.
In March 2015, four former XpresSpa employees
who worked at XpresSpa locations in John F. Kennedy International Airport and LaGuardia Airport filed a putative class and collective
action wage-hour litigation in the United States District Court, Eastern District of New York.
In re Chen et al.
, CV 15-1347
(E.D.N.Y.). Plaintiffs claim that they and other spa technicians around the country were misclassified as exempt commissioned salespersons
under Section 7(i) of the federal Fair Labor Standards Act (“FLSA”). Plaintiffs also assert class claims for unpaid
overtime on behalf of New York spa technicians under the New York Labor Law, and discriminatory employment practices under New
York State and City laws. On July 1, 2015, the plaintiffs moved to have the court authorize notice of the FLSA misclassification
claim sent to all employees in the spa technician job classification at XpresSpa locations around the country in the last three
years. Defendants opposed the motion. On February 16, 2016, the Magistrate Judge assigned to the case issued a Report & Recommendation,
recommending that the District Court Judge grant the plaintiffs’ motion. On March 1, 2016, the defendants filed Opposition
to the Magistrate Judge’s Report & Recommendation, arguing that the District Court Judge should reject the Magistrate
Judge’s findings. On September 23, 2016, the court ruled in favor of the plaintiffs and conditionally certified the class.
The parties held a mediation on February 28, 2017 and reached an agreement on a settlement in principle. On September 6, 2017,
the parties entered into a settlement agreement. On September 15, 2017, the parties filed a motion for settlement approval with
the Court; this motion is pending. In October 2017, XpresSpa paid the agreed-upon settlement amount to the settlement claims administrator
to be held in escrow pending a fairness hearing and final approval by the Court.
Intellectual Property
Our intellectual property operating segment
is engaged in litigation, for which no liability is recorded, as we do not expect a material negative outcome.
Corporate
Binn v. FORM Holdings Corp. et al.
On November 6, 2017, Moreton Binn and Marisol F, LLC, former stockholders of XpresSpa, filed a lawsuit
against the Company and its directors in the United States District Court for the Southern District of New York. The lawsuit alleges
violations of various sections of the Exchange Act, material omissions and misrepresentations (negligent and fraudulent), fraudulent
omission, expropriation, breach of fiduciary duties, aiding and abetting, and unjust enrichment in the defendants’ conduct
related to the Company’s acquisition of XpresSpa, and seeks rescission of the transaction, damages, equitable and injunctive
relief, fees and costs, and various other relief. On January 17, 2018, the defendants filed a motion to dismiss the complaint.
On February 7, 2018, the plaintiffs amended their complaint. On February 28, 2018, the defendants filed a motion to dismiss the
amended complaint. On March 21, 2018, the plaintiffs filed an opposition to the motion to dismiss the amended complaint. The defendants’
reply in further support of the motion to dismiss the amended complaint is due March 30, 2018.
In addition to those matters specifically set
forth herein, the Company and its subsidiaries are involved in various other claims and legal actions that arise in the ordinary
course of business. The Company does not believe that the ultimate resolution of these actions will have a material adverse effect
on the Company’s financial position, results of operations, liquidity, or capital resources. However, a significant increase
in the number of these claims, or one or more successful claims under which the Company incurs greater liabilities than the Company
currently anticipates, could materially adversely affect the Company’s business, financial condition, results of operations
and cash flows.
In the event that an action is brought against
us or one of our subsidiaries, we will investigate the allegation and vigorously defend ourselves.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
The accompanying notes form an integral
part of these consolidated financial statements.
The accompanying notes form an integral
part of these consolidated financial statements.
The accompanying notes form an integral
part of these consolidated financial statements.
The accompanying notes form an integral
part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for share and per
share data)
Note 1. General
Overview
On January 5, 2018, FORM Holdings Corp.
changed its name to XpresSpa Group, Inc. (“XpresSpa Group” or the “Company”). The Company’s common
stock, par value $0.01 per share, which had previously been listed under the trading symbol “FH” on the Nasdaq Capital
Market, has been listed under the trading symbol “XSPA” since January 8, 2018.
Rebranding to XpresSpa Group aligned the
Company’s corporate strategy to build a pure-play health and wellness services company, which the Company commenced following
its acquisition of XpresSpa Holdings, LLC (“XpresSpa”) on December 23, 2016. In 2017, the Company recruited employees
for positions in both corporate and field teams, accelerated unit growth, reinvested in certain locations and extended leases,
significantly streamlined operations, and engaged in new exclusive partnerships that offer XpresSpa customers innovative products
and services.
The Company currently has two operating
segments: wellness and intellectual property.
The Company’s wellness operating
segment consists of XpresSpa, which is a leading airport retailer of spa services. XpresSpa is a well-recognized airport spa brand
with 56 locations, consisting of 51 domestic and 5 international locations, as of December 31, 2017. XpresSpa offers travelers
premium spa services, including massage, nail and skin care, as well as spa and travel products. During 2017 and 2016, the wellness
operating segment generated $48,373 and $811 of revenue, respectively (2016 results include eight days of operations from the acquisition
on December 23, 2016 to December 31, 2016).
The Company’s intellectual property
operating segment is engaged in the monetization of patents related to content and ad delivery, remote monitoring and computing
technologies. During 2017 and 2016, this operating segment generated $450 and $11,175 of revenue, respectively.
In October 2017, the Company completed
the sale of FLI Charge, Inc. (“FLI Charge”) and in March 2018, the Company completed the sale of Group Mobile Int’l
LLC (“Group Mobile”). These two entities previously comprised the Company’s technology operating segment. The
results of operations for FLI Charge and Group Mobile are presented in the consolidated statements of operations and comprehensive
loss as consolidated net loss from discontinued operations. The carrying amounts of assets and liabilities belonging to Group Mobile
as of December 31, 2017, and FLI Charge and Group Mobile as of December 31, 2016, are presented in the consolidated balance sheets
as assets held for disposal and liabilities held for disposal, respectively.
Wellness
XpresSpa is a leading airport retailer
of spa services and related products. As of December 31, 2017, XpresSpa operated 56 total locations in 23 airports in three countries:
the United States, Netherlands and United Arab Emirates. Services and products include:
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massage services for the neck, back, feet and whole body;
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nail care, such as pedicures, manicures and polish changes;
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travel products, such as neck pillows, blankets and massage tools; and
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new offerings, such as cryotherapy services, NormaTec compression services, and Dermalogica personal care services and retail products.
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For over 15 years, increased security requirements
have led travelers to spend more time at the airport. In addition, in anticipation of the long and often stressful security lines,
travelers allow for more time to get through security and, as a result, often experience increased downtime prior to boarding.
Consequently, travelers at large airport hubs have idle time in the terminal after passing through security.
XpresSpa was developed to address the stress
and idle time spent at the airport, allowing travelers to spend this time productively, by relaxing and focusing on personal care
and wellness. XpresSpa is well positioned to benefit from consumers’ growing interest in health and wellness and increasing
demand for spa services and related wellness products.
In addition, a confluence of microeconomic
events has created favorable conditions for the expansion of retail concepts at airports, in particular retail concepts that attract
higher spending from air travelers. The competition for airplane landings has forced airports to lower landing fees, which in turn
has necessitated augmenting their retail offerings to offset budget shortfalls. Infrastructure projects at airports across the
country, intended to make an airport more desirable to airlines, require funding from bond issuances that in turn rely upon, in
part, the expected minimum rent guarantees and expected income from concessionaires.
Intellectual Property
The intellectual property operating segment
is engaged in the monetization of patents related to content and ad delivery, remote monitoring and computing technologies.
Recent Developments
Rebranding
On January 5, 2018, the Company changed
its name to XpresSpa Group, Inc. from FORM Holdings Corp, which aligned its corporate strategy to build a pure-play health and
wellness services company. The Company’s common stock, par value $0.01 per share, which had previously been listed under
the trading symbol “FH” on the Nasdaq Capital Market, has been listed under the trading symbol “XSPA”
since January 8, 2018.
Dispositions
On October 20, 2017, the Company sold FLI Charge to a group of private investors and FLI Charge management,
who now own and operate FLI Charge. On March 22, 2018, the Company sold Group Mobile to a third party. The Company will not be
providing any continued management or financing support to FLI Charge or Group Mobile.
Sale of Patents
In January 2018, the Company sold certain patents to Crypto Currency Patent Holdings Company LLC, a unit
of Marathon Patent Group, Inc. (“Marathon”), for approximately $1,250, comprised of $250 in cash and 250,000 shares
of Marathon common stock valued at approximately $1,000 at the time of the transaction. Pursuant to the sale, the Company cannot
directly or indirectly offer, sell, pledge or transfer, or otherwise dispose of, the Marathon common stock for a period of 180
days ending on July 11, 2018.
Capital Raise
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 (“XSPA 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 XSPA Common Stock from the Company pursuant to the Underwriting Agreement at a purchase price of $1.023
per share. The net proceeds to the Company from the Offering were approximately $6,584 after deducting underwriting discounts and
commissions and other estimated offering expenses.
Note 2. Accounting and Reporting Policies
(a) Basis of presentation and
principles of consolidation
The accompanying consolidated financial
statements have been prepared in accordance with United States GAAP. The consolidated financial statements include the accounts
of the Company, all entities that are wholly-owned by the Company, and all entities in which the Company has a controlling financial
interest. All significant intercompany balances and transactions have been eliminated in consolidation.
(b) Use of estimates
The preparation of the accompanying consolidated
financial statements in conformity with United States 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
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 intangibles
assets, the useful lives of the Company’s intangible assets, the valuation of the Company’s derivative warrant liabilities,
the valuation of stock-based compensation, deferred tax assets and liabilities, income tax uncertainties, and other contingencies.
(c) Translation into United States
dollars
The Company conducts certain transactions
in foreign currencies, which are recorded at the exchange rate as of the transaction date. All exchange gains and losses occurring
from the remeasurement of monetary balance sheet items denominated in non-dollar currencies are included in non-operating income
(expense) in the consolidated statements of operations and comprehensive loss.
Accounts of the foreign subsidiaries of
XpresSpa are translated into United States dollars. Assets and liabilities have been translated at year end exchange rates and
revenues and expenses have been translated at average monthly rates for the year. The translation adjustments arising from the
use of different exchange rates are included as foreign currency translation within the consolidated statements of operations and
comprehensive loss and consolidated statements of changes in stockholders’ equity.
(d) Cash and cash equivalents
The Company maintains cash in checking accounts with financial institutions. The Company has established
guidelines relating to diversification and maturities of its investments in order to minimize credit risk and maintain high liquidity
of funds. Cash equivalents include amounts due from third party financial institutions for credit and debit card transactions.
These items typically settle in less than 5 days.
(e) Derivative instruments
The Company recognizes all derivative instruments
as either assets or liabilities in the consolidated balance sheets at their respective fair values. The Company's derivative instruments
have been recorded as liabilities at fair value, and are revalued at each reporting date, with changes in the fair value of the
instruments included in the consolidated statements of operations and comprehensive loss as non-operating income (expense). The
Company reviews the terms of features embedded in non-derivative instruments to determine if such features require bifurcation
and separate accounting as derivative financial instruments. Equity-linked derivative instruments are evaluated in accordance with
FASB Accounting Standard Codification 815-40, “
Contracts in an Entity’s Own Equity”
to determine if such
instruments are indexed to the Company’s own stock and qualify for classification in equity.
(f) Accounts receivable
Accounts receivable are recorded net of an allowance for doubtful accounts for estimated losses resulting
from the inability of customers to make required payments. In developing the allowance, the Company considers historical loss experience,
the overall quality of the receivable portfolio and specifically identified customer risks. The Company periodically reviews the
adequacy of the allowance and the factors used in the estimation making adjustments to the estimate as necessary. Accounts receivable
pertaining to continuing operations are included in other current assets in the consolidated balance sheets. As of December 31,
2017 and 2016, there was no allowance for doubtful accounts.
(g) Inventory
All inventory is valued at the lower of cost or net realizable value. Cost is determined using a weighted-average
cost method. Inventory is included in current assets in the consolidated balance sheets.
(h) Intangible assets
Intangible assets include trade names,
customer relationships, and technology, which were acquired as part of the acquisition of XpresSpa in December 2016 and are recorded
based on the estimated fair value in purchase price allocation. Intangible assets also include purchased patents. The intangible
assets are amortized over their estimated useful lives, which are periodically evaluated for reasonableness. Gain or loss on dispositions
of intangible assets is
reflected in general and administrative expense in the consolidated statements
of operations
and comprehensive loss.
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.
(i) Property and equipment
Property and equipment is recorded at
historical cost and primarily consists of leasehold improvements, furniture and fixtures, and other operating equipment. Depreciation
is calculated on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are depreciated over
the lesser of the lease term or economic useful life. Maintenance and repairs are charged to expense, and renovations or improvements
that extend the service lives of the Company’s assets are capitalized over the lesser of the extension period or life of
the improvement. Gain or loss on dispositions of property and equipment
is reflected in the consolidated
net loss from discontinued operations in the consolidated statements of operations
and comprehensive loss.
(j) Goodwill
Goodwill is an asset representing the future
economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognized.
Goodwill is reviewed for impairment at least annually, and when triggering events occur, in accordance
with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
Topic 350, Intangibles – Goodwill and Other
. The Company has two reporting units for purposes of evaluating goodwill
impairment and performing its annual goodwill impairment test on December 31. The Company has the option to perform a qualitative
assessment to determine if an impairment is more likely than not to have occurred. If the Company can support the conclusion that
it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the Company would
not need to perform the two-step impairment test for the reporting unit. If the Company cannot support such a conclusion or does
not elect to perform the qualitative assessment, then the first step of the goodwill impairment test is used to identify potential
impairment by comparing the fair value of the reporting unit with its carrying amount, including goodwill.
If the fair value of the reporting unit
exceeds its carrying value, then the second step of the impairment test (measurement) does not need to be performed. If the fair
value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit
and the Company must perform the second step of the impairment test. Under the second step, an impairment loss is recognized for
any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied
fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to an acquisition price
allocation and the residual fair value after this allocation is the implied fair value of the reporting unit goodwill. A significant
amount of judgment is required in performing goodwill impairment tests including estimating the fair value of a reporting unit
and the implied fair value of goodwill.
There were no indications of impairment as of December 31, 2017 for the Company’s continuing operations.
See “Note 17 –
Discontinued Operations and Assets and Liabilities Held for Disposal
”
for impairment charges pertaining to discontinued operations for the year-ended December 31, 2017.
(k) Restricted cash and other assets
Restricted cash, which is listed as its own line item in the consolidated balance sheets, represents balances
at financial institutions to secure bonds and letters of credit as required by the Company’s various lease agreements.
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. The Company’s equity interest increased
from 8.25% to 11% in the first quarter of 2017 due to a realignment of ownership interests. The Company’s investment in InfoMedia
is included in other assets in the consolidated balance sheets for the years ended December 31, 2017 and December 31, 2016.
(l) Revenue recognition
The Company recognizes revenue from the
sale of XpresSpa products and services at the point of sale, net of discounts and applicable sales taxes. Revenues from the XpresSpa
wholesale and e-commerce businesses are recorded at the time goods are shipped. The Company excludes all sales taxes assessed to
its customers. Sales taxes assessed on revenues are included in accounts payable, accrued expenses and other current liabilities
in the consolidated balance sheets until remitted to the state agencies.
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.
(m) Gift cards and customer rewards
program
XpresSpa offers no-fee, non-expiring gift
cards to its customers. No revenue is recognized upon issuance of a gift card and a liability is established for the gift card’s
cash value. The liability is relieved and revenue is recognized upon redemption by the customer. As the gift cards have no expiration
date, there is no provision for reduction in the value of unused card balances.
In addition, XpresSpa maintains a rewards
program in which customers earn loyalty points, which can be redeemed for future services. Loyalty points are rewarded upon joining
the loyalty program, for customer birthdays, and based upon customer spending. When a customer redeems loyalty points, the
Company recognizes revenue for the redeemed cash value and reduces the related loyalty program liability.
The costs associated with gift cards and
reward points are accrued as the rewards are earned by the cardholder and are included in accounts payable, accrued expenses and
other current liabilities in the consolidated balance sheets until remitted to the state agencies.
(n) Segment reporting
The Company operates in two operating segments: wellness and intellectual property. The Company’s
wellness operating segment is comprised of XpresSpa, a leading airport retailer of spa services and related travel products that
has 56 locations as of December 31, 2017. The Company’s intellectual property operating segment is engaged in the monetization
of patents related to content and ad delivery, remote monitoring and computing technologies. The Company previously had a third
operating segment, technology, which was comprised of its FLI Charge and Group Mobile businesses. The technology operating segment
was discontinued due to the sale of FLI Charge in October 2017 and sale of Group Mobile in March 2018. The results of operations
for FLI Charge and Group Mobile are presented in the consolidated statements of operations and comprehensive loss as consolidated
net loss from discontinued operations.
(o) Rent expense
Minimum rent expense is recognized over
the term of the lease, starting when possession of the property is taken from the landlord, which normally includes a construction
period prior to the store opening. When a lease contains a predetermined fixed escalation of the minimum rent, the Company recognizes
the related rent expense on a straight-line basis and records the difference between the recognized rent expense and the amounts
payable under the lease as a short-term or long-term deferred rent liability. Costs related to common area maintenance, insurance,
real estate taxes, and other occupancy costs the Company is obligated to pay are excluded from minimum rent expense.
Certain leases provide for contingent rents
that are not measurable at inception. These contingent rents are primarily based on a percentage of sales that are in excess of
a predetermined level and/or rent increase based on a change in the consumer price index or fair market value. These amounts are
excluded from minimum rent and are included in the determination of rent expense when it is probable that the expense has been
incurred and the amount can be reasonably estimated.
(p) Pre-opening costs
Pre-opening and start-up activity costs,
which include rent and occupancy, supplies, advertising, and other direct expenses incurred prior to the opening of a new store,
are expensed in the period in which they occur.
(q) 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;
|
|
·
|
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 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.
(r) Stock-based compensation
Stock-based compensation is recognized as an expense in the consolidated statements of operations and
comprehensive loss and such cost is measured at the grant-date fair value of the equity-settled award. The fair value of stock
options is estimated as of the date of grant using the Black-Scholes-Merton (“Black-Scholes”) option-pricing model.
The fair value of RSUs is calculated as of the date of grant using the grant date closing share price multiplied by the number
of RSUs granted. The expense is recognized on a straight-line basis, over the requisite service period. The Company uses the simplified
method to estimate the expected term of options due to insufficient history and high turnover in the past. Expected volatility
is estimated based on a weighted average historical volatility of the Company and comparable entities with publicly traded shares.
The risk-free rate for the expected term of the option is based on the United States Treasury yield curve as of the date of grant.
(s) Income taxes
Income taxes are accounted for under the
asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases
and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment
date. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not more likely
than not to be realized. Tax benefits related to excess deductions on stock-based compensation arrangements are recognized when
they reduce taxes payable.
On December 22, 2017, the United States government enacted comprehensive tax reform, commonly referred
to as the Tax Cuts and Jobs Act of 2017 (“Tax Act”). The Tax Act makes changes to the corporate tax rate, business-related
deductions and taxation of foreign earnings, among other changes, that will generally be effective for tax years beginning after
December 31, 2017.
In assessing the need for a valuation allowance,
the Company looks at cumulative losses in recent years, estimates of future taxable earnings, feasibility of tax planning strategies,
the ability to realize tax benefit carryforwards, and other relevant information. Valuation allowances related to deferred tax
assets can be impacted by changes to tax laws, changes to statutory tax rates and future taxable earnings. Ultimately, the actual
tax benefits to be realized will be based upon future taxable earnings levels, which are very difficult to predict. In the event
that actual results differ from these estimates in future periods, the Company will be required to adjust the valuation allowance.
Significant judgment is required in evaluating
the Company's federal, state, local, and foreign tax positions and in the determination of its tax provision. Despite management's
belief that the Company's liability for unrecognized tax benefits is adequate, it is often difficult to predict the final outcome
or the timing of the resolution of any particular tax matters. The Company may adjust these accruals as relevant circumstances
evolve, such as guidance from the relevant tax authority, its tax advisors, or resolution of issues in the courts. The Company's
tax expense includes the impact of accrual provisions and changes to accruals that it considers appropriate. These adjustments
are recognized as a component of income tax expense entirely in the period in which new information is available. The Company records
interest related to unrecognized tax benefits in interest expense and penalties in the consolidated statements of operations and
comprehensive loss as general and administrative expenses.
The Company recognizes the effect of income
tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured
at the largest amount that is greater than 50% of being realized. Changes in recognition or measurement are reflected in the period
in which the change in judgment occurs.
(t) Noncontrolling interests
Noncontrolling interests represent the
noncontrolling holders’ percentage share of earnings or losses from the subsidiaries, in which the Company holds a majority,
but less than 100 percent, ownership interest and the results of which are included in the Company’s consolidated statements
of operations and comprehensive loss. Net earnings attributable to noncontrolling interests represents the proportionate share
of the noncontrolling holders' ownership in certain subsidiaries of XpresSpa.
(u) Net loss per common share
Basic net loss per share is computed by
dividing the net loss attributable to the Company 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 attributable to the Company for the period by
the weighted-average number of shares of common stock plus dilutive potential common stock considered outstanding during the period.
However, as the Company generated net losses in all periods presented, some potentially dilutive securities that relate to the
continuing operations, including certain warrants and stock options, were not reflected in diluted net loss per share because the
impact of such instruments was anti-dilutive.
(v) Commitments and contingencies
Liabilities for loss contingencies arising
from assessments, estimates or other sources are to be recorded when it is probable that a liability has been incurred and the
amount can be reasonably estimated. Legal costs expected to be incurred in connection with a loss contingency are expensed as incurred.
(w) Reclassification
Certain balances have been reclassified to conform to presentation requirements, including presentation
of discontinued operations and assets and liabilities held for disposal with respect to the Company’s FLI Charge and Group
Mobile businesses, as well as consistent presentation of cost of sales and general and administrative expenses to align the presentation
for operating segments.
(x) Fair value measurements
The Company measures fair value in accordance
with FASB ASC 820-10,
Fair Value Measurements and Disclosures
. FASB ASC 820-10 clarifies that fair value is an
exit price, representing the amount that would be received by selling an asset or paid to transfer a liability in an orderly transaction
between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that
market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, FASB ASC 820-10
establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1
: Unadjusted quoted
prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
Level 2
: Other than quoted
prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially
the full term of the asset or liability.
Level 3
: Unobservable inputs
for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing
for situations in which there is little, if any, market activity for the asset or liability at measurement date.
The fair value hierarchy also requires
an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
(y) Recently issued accounting pronouncements
ASU No. 2014-09, Revenue from Contracts
with Customers (Topic 606)
The core principle of the new standard
is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance was amended
in July 2015 and is effective for annual reporting periods beginning after December 15, 2017. The Company is currently in the
final stage of assessing the impact of the adoption on its consolidated financial statements. The Company does not expect for
there to be an impact on revenue recognition for its wellness operating segment, as the revenue is recognized when the service
is performed and payment is collected from the customer. The Company does not expect for there to be an impact on revenue recognition for its intellectual property
operating segment, as revenue is recognized upon execution of a settlement and/or licensing agreement, receipt of an upfront fee,
and when all other revenue recognition criteria have been met, as
the
Company has no further obligation, including no express or implied obligation on our part to maintain or upgrade the related technology,
or provide future support or services.
ASU No. 2015-11, Inventory (Topic
330): Simplifying the Measurement of Inventory
This standard requires an entity to measure
in-scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary
course of business, less reasonably predictable costs of completion, disposal and transportation. The new standard is effective
for fiscal years and interim periods within those years beginning after December 15, 2016. Adoption of this ASU did not have a
material impact on the Company’s consolidated financial statements.
ASU No. 2015-17, Income Taxes (Topic
740): Balance Sheet Classification of Deferred Taxes
This standard simplifies the presentation
of deferred income taxes by eliminating the separate classification of deferred income tax liabilities and assets into current
and noncurrent amounts in the consolidated balance sheet. The amendments in the update require that all deferred tax liabilities
and assets be classified as noncurrent in the consolidated balance sheet. The amendments in this update are effective for annual
periods beginning after December 15, 2016, and interim periods within those fiscal years and may be applied either prospectively
or retrospectively to all periods presented. Early adoption is permitted. The Company adopted ASU No. 2015-17 prospectively
effective December 31, 2016. Adoption of this ASU did not result in any adjustment to the consolidated balance sheet as the Company
records a full valuation allowance of its total deferred tax assets.
ASU No. 2016-01, Financial Instruments
– Overall (Topic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
This standard which amends various aspects
of the recognition, measurement, presentation, and disclosure for financial instruments. With respect to the Company’s consolidated
financial statements, the most significant impact relates to the accounting for equity investments. It will impact the disclosure
and presentation of financial assets and liabilities. The amendments in this update are effective for annual reporting periods,
and interim periods within those years beginning after December 15, 2017. Early adoption by public entities is permitted only for
certain provisions. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial
statements.
ASU No. 2016-02, Leases (Topic 842)
This standard provides new guidance related
to accounting for leases and supersedes United States GAAP on lease accounting with the intent to increase transparency. This standard
requires operating leases to be recorded on the balance sheet as assets and liabilities and requires disclosure of key information
about leasing arrangements. Leases will be classified as either finance or operating, with classification affecting the pattern
of expense recognition in the statement of operations and comprehensive loss. The adoption will require a modified retrospective
approach as of the beginning of the earliest period presented. The new standard is effective for the fiscal year beginning after
December 15, 2018, with early adoption permitted. The Company is currently in the process of evaluating the impact of the adoption
on its consolidated financial statements, but the Company expects that it will result in a significant increase in its long-term
assets and liabilities.
ASU No. 2016-06, Derivatives and Hedging:
Contingent Put and Call Options in Debt Instruments
This standard clarifies the steps required
to assess whether a call or put option meets the criteria for bifurcation as an embedded derivative. The ASU is effective for
fiscal years and interim periods within those years beginning after December 15, 2016. Adoption of this ASU did not have a material
impact on the Company’s consolidated financial statements.
ASU No. 2016-09, Compensation-Stock
Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
This standard provides new guidance to
simplify the accounting for stock-based payments and addresses the treatment of income tax consequences including classification
of awards as either equity or liabilities, and classification on the statement of cash flows in financing or operating cash flows,
respectively. The standard permits the Company to elect a policy whereby forfeitures are accounted for as they occur rather than
on an estimated basis. The new standard is effective for the fiscal year beginning after December 15, 2016, with early adoption
permitted. Adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
ASU No. 2016-13, Financial Instruments
-
Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
This standard changes the impairment model
for most financial assets that are measured at amortized cost and certain other instruments, including trade receivables, from
an incurred loss model to an expected loss model and adds certain new required disclosures. Under the expected loss model, entities
will recognize estimated credit losses to be incurred over the entire contractual term of the instrument rather than delaying recognition
of credit losses until it is probable the loss has been incurred. The new standard is effective for the fiscal year beginning after
December 15, 2019, with early adoption permitted. The Company is currently in the process of evaluating the potential impact of
the adoption on its consolidated financial statements.
ASU No. 2016-15, Statement of Cash
Flows (Topic 230): Classification of Certain Cash Receipts, Cash Payments, and Restricted Stock
This standard provides new guidance to help clarify whether certain items should be categorized as operating,
investing, or financing in the statement of cash flows. This ASU No. 2016-15 provides guidance on eight specific cash flow issues.
The new standard is effective for the fiscal year beginning after December 15, 2017, with early adoption permitted. Adoption of
this ASU did not have a material impact on the Company’s consolidated financial statements.
ASU No. 2017-01, Business Combinations
(Topic 805): Clarifying the Definition of a Business
This standard provides new guidance to
clarify the definition of a business by providing guidance to assist entities with evaluating whether transactions should be accounted
for as acquisitions of assets or businesses. Under the new standard, to classify the acquisition of assets as a business, there
must be an input, a substantive process that results in outputs, with outputs being defined as the key elements of the business.
If substantially all the fair value of the assets acquired is concentrated in a single identifiable asset or group of similar identifiable
assets, this would not qualify as a business. The new standard is effective for the fiscal year beginning after December 15, 2017,
with early adoption permitted. The Company is currently in the process of evaluating the potential impact of the adoption on its
consolidated financial statements.
ASU No. 2017-04, Intangibles-Goodwill
and Other (Topic 350): Simplifying the Test for Goodwill Impairment
This standard provides new guidance to
eliminate the requirement to calculate the implied fair value of goodwill, or the Step 2 test, to measure a goodwill impairment
charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over
its fair value. The loss recognized should not exceed the total goodwill allocated to the reporting unit. The new standard is effective
for the fiscal year beginning after December 15, 2019, with early adoption permitted. The Company is currently in the process of
evaluating the potential impact of the adoption on its consolidated financial statements.
ASU No. 2017-09, Stock Compensation
(Topic 718): Scope of Modification Accounting
This standard provides guidance about which changes to the terms or conditions of a stock-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 interim periods within those annual periods, beginning after December 15, 2017; early adoption is permitted.
Adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
ASU No. 2017-12, Derivatives and Hedging
(Topic 815):
Targeted Improvements to Accounting for Hedging Activities
This standard was created to provide more
specific guidance and to simplify the application of hedge accounting in current U.S. GAAP to facilitate financial reporting that
more closely reflects an entity’s risk management activities. The new standard is effective for the fiscal year beginning
after December 15, 2018. The Company is currently in the process of evaluating the potential impact of the adoption on its consolidated
financial statements.
ASU No. 2018-02, Income Statement –
Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
This standard provides guidance on the
reclassification of certain tax effects from AOCI to retained earnings in the period in which the effects of the change in the
U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recorded. The new standard is effective for the fiscal year
beginning after December 15, 2018. The Company is currently in the process of evaluating the potential impact of the adoption on
its consolidated financial statements.
Note 3. Net Loss per Share of Common
Stock
The table below presents the computation
of basic and diluted net losses per share of common stock:
|
|
For the years ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Basic numerator:
|
|
|
|
|
|
|
|
|
Net loss from continuing operations attributable to shares of common stock
|
|
$
|
(16,563
|
)
|
|
$
|
(19,282
|
)
|
Net loss from discontinued operations attributable to shares of common stock
|
|
|
(12,277
|
)
|
|
|
(4,724
|
)
|
Net loss attributable to the Company
|
|
$
|
(28,840
|
)
|
|
$
|
(24,006
|
)
|
Basic denominator:
|
|
|
|
|
|
|
|
|
Basic shares of common stock outstanding
|
|
|
22,286,983
|
|
|
|
15,167,292
|
|
Basic loss per share of common stock from continuing operations
|
|
$
|
(0.74
|
)
|
|
$
|
(1.27
|
)
|
Basic loss per share of common stock from discontinued operations
|
|
|
(0.55
|
)
|
|
|
(0.31
|
)
|
Basic net loss per share of common stock
|
|
$
|
(1.29
|
)
|
|
$
|
(1.58
|
)
|
|
|
|
|
|
|
|
|
|
Diluted numerator:
|
|
|
|
|
|
|
|
|
Net loss from continuing operations attributable to shares of common stock
|
|
$
|
(16,563
|
)
|
|
$
|
(19,282
|
)
|
Net loss from discontinued operations attributable to shares of common stock
|
|
|
(12,277
|
)
|
|
|
(4,724
|
)
|
Net loss attributable to the Company
|
|
$
|
(28,840
|
)
|
|
$
|
(24,006
|
)
|
|
|
|
|
|
|
|
|
|
Diluted denominator:
|
|
|
|
|
|
|
|
|
Diluted shares of common stock outstanding
|
|
|
22,286,983
|
|
|
|
15,167,292
|
|
Diluted loss per share of common stock from continuing operations
|
|
$
|
(0.74
|
)
|
|
$
|
(1.27
|
)
|
Diluted loss per share of common stock from discontinued operations
|
|
|
(0.55
|
)
|
|
|
(0.31
|
)
|
Diluted net loss per share of common stock
|
|
$
|
(1.29
|
)
|
|
$
|
(1.58
|
)
|
|
|
|
|
|
|
|
|
|
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 outstanding to purchase an equal number of shares of common stock of the Company
|
|
|
4,317,942
|
|
|
|
3,679,101
|
|
Unvested RSUs to issue an equal number of shares of common stock of the Company
|
|
|
365,565
|
|
|
|
—
|
|
Warrants to purchase an equal number of shares of common stock of the Company
|
|
|
3,087,500
|
|
|
|
3,506,679
|
|
Preferred stock on an as converted basis
|
|
|
3,364,328
|
|
|
|
3,931,416
|
|
Conversion feature of senior secured notes
|
|
|
—
|
|
|
|
79,295
|
|
Total number of potentially dilutive instruments, excluded from the calculation of net loss per share
|
|
|
11,135,335
|
|
|
|
11,196,491
|
|
Note 4. Cash and Cash Equivalents
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cash denominated in United States dollars
|
|
$
|
3,924
|
|
|
$
|
16,981
|
|
Cash denominated in currency other than United States dollars
|
|
|
2,108
|
|
|
|
694
|
|
Credit and debit card receivables
|
|
|
336
|
|
|
|
235
|
|
|
|
$
|
6,368
|
|
|
$
|
17,910
|
|
Note 5. Business Combinations
XpresSpa acquisition
On August 8, 2016, the Company signed an
agreement to acquire XpresSpa.
On December 23, 2016, the Company completed the acquisition of XpresSpa
for a total purchase consideration of $37,400, which includes:
|
·
|
$1,734 in cash which was invested on August 8, 2016.
|
|
·
|
2,500,000 shares of the Company’s common stock, par value $0.01 per share (“XSPA Common Stock”).
|
|
·
|
494,792 shares of the Company’s Series
D convertible preferred stock (“XSPA Preferred Stock) with an aggregate initial liquidation preference of $23,750.
Pursuant to the terms of the agreement
governing the XpresSpa acquisition, in February 2017, the total number of shares of XSPA Preferred Stock was decreased from 494,792
shares to 491,427 shares with an aggregate initial liquidation preference of $23,588, which are initially convertible into 3,931,416
shares of XSPA Common Stock, at a conversion price of $6.00 per share. Each holder of XSPA Preferred Stock is entitled to vote
on an as converted basis.
|
|
·
|
five-year warrants to purchase 2,500,000 shares of XSPA 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.
|
Of the shares of XSPA Preferred Stock issued,
230,208 shares, with an estimated fair value of $11,050, were placed into an escrow that will be released over an 18-month period
once certain conditions are satisfied. The escrow will be used to obtain necessary lease consents from the airports and to cover
potential liabilities that may arise after the acquisition but pertain to the activities before the acquisition.
The fair value of the purchase consideration was determined based on the following:
|
·
|
The fair value of the shares of XSPA Common Stock was determined by multiplying the Company's closing
stock price of $2.09/share on the acquisition date by the number of shares of XSPA Common Stock issued.
|
|
·
|
The fair value of the warrants was determined using the Monte-Carlo simulation, which calculated
the fair value based on the difference between the projected share price, derived from the estimated future market cap, and
the exercise price of $3.00/share.
|
|
·
|
The fair value of XSPA Preferred Stock was also determined using the Monte-Carlo simulation, from
which the Company’s future market cap and derived share price in each year for the seven years following the acquisition
date were ascertained. The Company also determined the future market cap and derived share prices for periods prior to the end
of the seven-year term, assuming early conversion. The fair value was then calculated by multiplying the number of converted shares
by the Company’s closing stock price as of the time of conversion. In the scenario that the shares of XSPA Preferred Stock
will convert at the end of the seven-year term, the fair value was calculated by establishing the implied share price and the relevant
premium to the conversion ratio. The fair value is then discounted as of the acquisition date.
|
The transaction was accounted for using
the acquisition method of accounting in accordance with ASC 805, Business Combinations, which requires that one of the two companies
be designated as the acquirer for accounting purposes based on the evidence available. In this transaction, XpresSpa Group was
treated as the acquiring entity for accounting purposes. In identifying XpresSpa Group as the acquiring entity, the companies took
into account the composition of XpresSpa Group’s Board of Directors, the designation of certain senior management positions,
including its Chief Executive Officer and Chief Financial Officer, as well as the fact that XpresSpa Group’s existing stockholders
own approximately 67% of XpresSpa Group after completion of the acquisition on a fully diluted basis.
Assets acquired and liabilities assumed
were recorded at their fair values as of the acquisition date. The fair value of the purchase price consideration was allocated
as follows:
Acquisition of XpresSpa on December 23, 2016:
|
|
Fair
Value
|
|
Cash
|
|
$
|
1,734
|
|
XSPA Common Stock
|
|
|
5,225
|
|
December 2016 Warrants
|
|
|
2,689
|
|
XSPA Preferred Stock
|
|
|
27,752
|
|
Total fair value of the purchase consideration
|
|
$
|
37,400
|
|
The purchase price for the acquisition
was allocated to the net tangible and intangible assets based on their fair values as of the acquisition date. The excess of the
purchase price over the net tangible assets and intangible assets was recorded as goodwill. The fair value of the purchase price
was allocated as follows
|
|
Fair Value
|
|
Assets
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,114
|
|
Accounts receivable
|
|
|
71
|
|
Inventory
|
|
|
2,580
|
|
Prepaid expenses
|
|
|
1,216
|
|
Restricted cash
|
|
|
638
|
|
Property and equipment
|
|
|
16,308
|
|
Intangible assets
|
|
|
13,620
|
|
Goodwill
|
|
|
20,303
|
|
Security deposits for leases
|
|
|
392
|
|
Total assets
|
|
|
57,242
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Accounts payable
|
|
|
4,118
|
|
Accrued expenses
|
|
|
4,586
|
|
Debt
|
|
|
6,500
|
|
Total liabilities
|
|
|
15,204
|
|
|
|
|
|
|
Net assets
|
|
|
42,038
|
|
Noncontrolling interests
|
|
|
(4,638
|
)
|
Total fair value
|
|
$
|
37,400
|
|
The fair value of the noncontrolling interests
as of the acquisition date of $4,638 was estimated based on the business enterprise value analysis of XpresSpa as of the acquisition
date. The analysis was performed using the income approach and the implied internal rate of return from the fair value of the total
purchase consideration of $37,400 and was based on the proportionate share of each individual location’s business enterprise
value of the total business enterprise value of XpresSpa.
The allocation of the purchase price was
based upon a valuation performed using the Company's estimates and assumptions, which are subject to change within the measurement
period (up to one year from the acquisition date). The principal area of potential purchase price adjustments relates to the consideration
placed in escrow. Acquisition costs representing direct legal, accounting, diligence and tax fees of $2,597 were expensed as incurred.
Of this amount, the Company incurred $1,353 of these costs, which are included in general and administrative expense in the consolidated
statements of operations and comprehensive loss. The remaining $1,244 of costs were incurred by XpresSpa prior to the acquisition.
In April 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 XSPA Preferred Stock, which
was previously issued to the XpresSpa Sellers in conjunction with the acquisition of XpresSpa. The Company reduced the number of
the XSPA 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 goodwill and equity.
In October 2017, the Company recorded
a $235 reduction of construction-in-progress within property and equipment and an increase to goodwill. This represents amounts
as of the acquisition date that were related to two old projects for stores that never actually opened. As such, these balances
should have been written-off prior to acquisition date, more specifically, when it was known that the related stores were not
going to open.
Note 6. Intangible Assets and Goodwill
Intangible assets
The following table provides information
regarding the Company’s intangible assets, which consist of the following:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
and Impairment
|
|
|
Net
Carrying
Amount
|
|
|
Weighted
average amortization period (years)
|
|
Trade name
|
|
$
|
13,309
|
|
|
$
|
(2,269
|
)
|
|
$
|
11,040
|
|
|
$
|
13,309
|
|
|
$
|
(49
|
)
|
|
$
|
13,260
|
|
|
|
6.00
|
|
Customer relationships
|
|
|
312
|
|
|
|
(156
|
)
|
|
|
156
|
|
|
|
312
|
|
|
|
—
|
|
|
|
312
|
|
|
|
2.00
|
|
Software
|
|
|
233
|
|
|
|
(4
|
)
|
|
|
229
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4.68
|
|
Patents
|
|
|
26,897
|
|
|
|
(26,775
|
)
|
|
|
122
|
|
|
|
27,026
|
|
|
|
(26,879
|
)
|
|
|
147
|
|
|
|
11.45
|
|
Total intangible assets
|
|
$
|
40,751
|
|
|
$
|
(29,204
|
)
|
|
$
|
11,547
|
|
|
$
|
40,647
|
|
|
$
|
(26,928
|
)
|
|
$
|
13,719
|
|
|
|
|
|
The Company’s trade name relates
to the value of the XpresSpa trade name, customer relationships represent the value of the loyalty customers, software relates
to certain capitalized third-party costs related to a new point-of-sale system, and patents consist of intellectual property portfolios
acquired from third parties.
The Company’s intangible assets are amortized over their expected useful lives. During the year-ended
December 31, 2017, the Company recorded amortization expense of $2,403. During the year-ended December 31, 2016, the Company recorded
amortization and impairment expense of $13,146 related to its intangible assets.
In May 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 the Company 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 depreciation,
amortization and impairment in the consolidated statements of operations and comprehensive loss. Following the impairment,
the Company reevaluated the remaining useful life and concluded that there were no changes in the estimated useful life.
On December 5, 2016, the Company entered
into an agreement with Nokia to assign Nokia rights related to certain patents previously purchased from Nokia. The carrying value
of the patents assigned to Nokia prior to the agreement was $1,186, which offset the $1,750 of royalty payable and resulted in
a gain of $564 on the disposal of assets, which is included in general and administrative expense in the consolidated statements
of operations and comprehensive loss. The Company retained selected patents previously purchased from Nokia with a carrying value
of $50 as of December 31, 2016 that are no longer subject to any royalty payments to Nokia.
There were no impairment indicators related to any of the Company’s amortizable intangible assets
during the year ended December 31, 2017 for the Company’s continuing operations.
See “Note
17 –
Discontinued Operations and Assets and Liabilities Held for Disposal
” for
impairment charges pertaining to discontinued operations for the year-ended December 31, 2017.
Estimated amortization expense for the
Company’s intangible assets for each of the five succeeding years and thereafter at December 31, 2017 is as follows:
Years ending December 31,
|
|
Amount
|
|
2018
|
|
$
|
2,438
|
|
2019
|
|
|
2,279
|
|
2020
|
|
|
2,275
|
|
2021
|
|
|
2,273
|
|
2022
|
|
|
2,219
|
|
Thereafter
|
|
|
63
|
|
Total
|
|
$
|
11,547
|
|
Goodwill
The following table provides information regarding the Company’s goodwill, which relates to the
acquisition of XpresSpa completed in December 2016. There were no indicators of impairment of goodwill as of December 31, 2017
for the Company’s continuing operations.
See “Note 17 –
Discontinued Operations
and Assets and Liabilities Held for Disposal
” for impairment charges pertaining to discontinued
operations for the year-ended December 31, 2017.
Goodwill as of December 31, 2015
|
|
$
|
—
|
|
Acquisition of XpresSpa
|
|
|
20,303
|
|
Goodwill as of December 31, 2016
|
|
|
20,303
|
|
Adjustments to XpresSpa goodwill
|
|
|
(673
|
)
|
Goodwill as of December 31, 2017
|
|
$
|
19,630
|
|
The adjustments to XpresSpa goodwill in
2017 are described in detail in “Note 5 – Business Combinations.”
Note 7. Segment Information
The Company’s continuing operating segments are defined as components of an enterprise about which
separate financial information is available that is regularly evaluated by the enterprise’s chief operating decision maker
(“CODM”) in deciding how to allocate resources and in assessing performance. The Company concluded that it conducts
its business through two operating segments, which are also its reportable segments: wellness 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.
|
|
For the years ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Revenue
|
|
|
|
|
|
|
|
|
Wellness
|
|
$
|
48,373
|
|
|
$
|
811
|
|
Intellectual property
|
|
|
450
|
|
|
|
11,175
|
|
Total revenue
|
|
|
48,823
|
|
|
|
11,986
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
Wellness
|
|
|
38,986
|
|
|
|
404
|
|
Intellectual property
|
|
|
357
|
|
|
|
6,334
|
|
Total cost of sales
|
|
|
39,343
|
|
|
|
6,738
|
|
|
|
|
|
|
|
|
|
|
Segment operating loss
|
|
|
|
|
|
|
|
|
Wellness
|
|
|
(7,250
|
)
|
|
|
(192
|
)
|
Intellectual property
|
|
|
9
|
|
|
|
(7,740
|
)
|
Corporate
|
|
|
(7,832
|
)
|
|
|
(9,776
|
)
|
Operating loss from continuing operations
|
|
|
(15,073
|
)
|
|
|
(17,708
|
)
|
Corporate non-operating expense, net
|
|
|
(928
|
)
|
|
|
(1,571
|
)
|
Loss from continuing operations before income taxes
|
|
$
|
(16,001
|
)
|
|
$
|
(19,279
|
)
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Wellness
|
|
$
|
53,414
|
|
|
$
|
57,527
|
|
Intellectual property
|
|
|
156
|
|
|
|
940
|
|
Corporate
|
|
|
5,224
|
|
|
|
15,894
|
|
Assets held for disposal
|
|
|
6,446
|
|
|
|
8,446
|
|
Total assets
|
|
$
|
65,240
|
|
|
$
|
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.
The Company currently operates in two geographical
regions: United States and all other countries. The following table represents the geographical revenue, regional operating loss,
and total asset information as of and for the years ended December 31, 2017 and 2016. There were no concentrations of geographical
revenue, regional operating loss or total assets related to any single foreign country that were material to the Company’s
consolidated financial statements.
|
|
For the years ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Revenue
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
43,555
|
|
|
$
|
11,887
|
|
All other countries
|
|
|
5,268
|
|
|
|
99
|
|
Total revenue
|
|
|
48,823
|
|
|
|
11,986
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
United States
|
|
|
36,201
|
|
|
|
6,697
|
|
All other countries
|
|
|
3,142
|
|
|
|
41
|
|
Total cost of sales
|
|
|
39,343
|
|
|
|
6,738
|
|
|
|
|
|
|
|
|
|
|
Segment operating loss
|
|
|
|
|
|
|
|
|
United States
|
|
|
(13,507
|
)
|
|
|
(17,781
|
)
|
All other countries
|
|
|
(1,566
|
)
|
|
|
73
|
|
Operating loss from continuing operations
|
|
|
(15,073
|
)
|
|
|
(17,708
|
)
|
Corporate non-operating expense, net
|
|
|
(928
|
)
|
|
|
(1,571
|
)
|
Loss from continuing operations before income taxes
|
|
$
|
(16,001
|
)
|
|
$
|
(19,279
|
)
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
55,152
|
|
|
$
|
71,607
|
|
All other countries
|
|
|
3,642
|
|
|
|
2,754
|
|
Assets held for disposal
|
|
|
6,446
|
|
|
|
8,446
|
|
Total assets
|
|
$
|
65,240
|
|
|
$
|
82,807
|
|
Note 8. Revenue from Settlements and
Licensing Agreements
On April 25, 2016, the Company entered
into a Confidential License Agreement (the “License Agreement”). Pursuant to the terms of the License Agreement, the
licensee paid the Company a one-time lump sum payment of $8,900 on May 30, 2016. As a result, the Company granted to the licensee
a non-exclusive, non-transferable, worldwide perpetual license to certain patents and patent applications.
In 2017, the Company continued to license its intellectual property through one-time licensing agreements
from which the Company earned revenue of $300. Additionally, the Company sold one of its patents to a third party for $150.
Note 9. Debt and Senior Secured Notes
Debt
As part of the acquisition of XpresSpa,
which was completed on December 23, 2016, the Company recorded the debt described below.
XpresSpa entered into a credit agreement
and secured promissory note (the “Debt”) with Rockmore Investment Master Fund Ltd. (“Rockmore”) on April
22, 2015 that was amended on August 8, 2016. Rockmore is an investment entity controlled by the Company’s board member, Bruce
T. Bernstein.
The total principal of the Debt is $6,500
payable in full upon maturity on May 1, 2019. In 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.
The Debt bears 11.24% interest per year (based on 360 days in a year) that is payable as follows:
|
·
|
9.24% annual interest, calculated on a monthly basis, which is payable in arrears on the last business
day of each month plus
|
|
·
|
2% annual interest, calculated on a monthly basis, which accrues monthly and becomes due and payable
on the Debt anniversary dates.
|
Effective May 1, 2018, the interest decreases
to 10.5% per year (8.5% payable in monthly installments and 2% payable annually) after the Company extended the maturity date of
the Debt to May 1, 2019.
The Debt can be prepaid by XpresSpa at
a 4% penalty at any point at its election. The Debt is secured by substantially all of the assets of XpresSpa. In addition, XpresSpa
needs consent of Rockmore to incur any additional debt, except for:
|
·
|
debt to finance acquisition, construction, or improvement of fixed and capital assets;
|
|
·
|
performance bonds, bid bonds, appeal bonds, surety bonds, and similar;
|
|
·
|
pension fund and employee benefit plan obligations;
|
|
·
|
unsecured debt not exceeding $1,000;
|
|
·
|
convertible notes not exceeding $5,000; and
|
|
·
|
letters of credit, bank guarantees and others in the ordinary course of business.
|
In addition, Rockmore was entitled to certain
reporting rights and annual audited financial information, which Rockmore waived in March 2017.
The Debt had a fair value of $6,500 as
of the acquisition date, December 23, 2016, and a $6,500 carrying value included in long-term liabilities in the consolidated
balance sheet as of December 31, 2017 and December 31, 2016. 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.
During the year-ended December 31, 2017, XpresSpa paid and recorded $731 of interest expense. During the
period from the acquisition date to December 31, 2016, XpresSpa paid $100 of accrued interest for December 2016 and January 2017
and recorded $16 of interest expense.
Senior Secured Notes
In July 2016, the Company repaid in full
its Senior Secured Notes (the “Notes”) that were due in June 2017.
The table below summarizes changes in the
book value of the Notes from December 31, 2015 to December 31, 2016:
Book value as of December 31, 2015 (net of unamortized portion of debt issuance costs of $73)
|
|
$
|
3,111
|
|
Repayments in January and February 2016
|
|
|
(1,190
|
)
|
Amortization of discount and 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 in Exchange Note Agreement, 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
|
|
|
50
|
|
Total fair value of the considerations provided
|
|
|
1,781
|
|
|
|
|
|
|
Book value of Notes after the Exchange Note Agreement on March 9, 2016
|
|
|
496
|
|
Amortization of discount and issuance costs, included in interest expense
|
|
|
1,253
|
|
Early repayment fee of 15% of outstanding principal of $1,749
|
|
|
262
|
|
Repayment of Notes in full on July 1, 2016
|
|
|
(2,011
|
)
|
Book value of Notes as of December 31, 2016
|
|
$
|
—
|
|
In March 2016, the Company entered into
an Exchange Note Agreement. Pursuant to the Exchange Note Agreement, the Company issued an aggregate of 703,644 shares of its common
stock in exchange for the reduction of $1,267 of the outstanding aggregate principal amount of the Notes and $49 of accrued interest.
As a result, the outstanding aggregate principal amount under the Notes was reduced from $3,016 to $1,749 as of March 9, 2016.
In addition, in March 2016, the Company
agreed to amend the Notes and to maintain a cash balance (including cash equivalents) of not less than $2,900. The Company also
agreed to reduce the exercise price of the May 2015 Warrants from $10.00 to $3.00 per share and to remove from the May 2015 Warrants
certain anti-dilution features. Other terms of the May 2015 Warrants remained the same. Furthermore, the Company paid a restructuring
fee of $50.
In July 2016, the Company repaid in full
its Notes that were due in June 2017, including a 15% fee for early repayment. The Company used an aggregate of $2,011 of cash
on hand for repayment of the Notes. As a result of the repayment in full of the Notes, all liens on the Company’s assets
at the time, including its intellectual property, were released.
Note 10. Fair Value Measurements
The following table presents the placement
in the fair value hierarchy of liabilities measured at fair value on a recurring basis as of December 31, 2017 and December 31,
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)
|
|
December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 2015 Warrants
|
|
$
|
34
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 model, which utilizes significant inputs that are unobservable.
These derivative warrant liabilities were 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 December 31, 2017 and December 31, 2016 consisted of cash and cash equivalents, receivables, accounts
payable and 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 year ended December 31, 2017:
|
|
May 2015
Warrants
|
|
December 31, 2016
|
|
$
|
259
|
|
Decrease in fair value of the warrants
|
|
|
(225
|
)
|
December 31, 2017
|
|
$
|
34
|
|
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.
December 31, 2017:
Description
|
|
Valuation technique
|
|
Unobservable inputs
|
|
Range
|
|
May 2015 Warrants
|
|
Black-Scholes
|
|
Volatility
|
|
|
39.64
|
%
|
|
|
|
|
Risk-free interest rate
|
|
|
1.88
|
%
|
|
|
|
|
Expected term, in years
|
|
|
2.34
|
|
|
|
|
|
Dividend yield
|
|
|
0.00
|
%
|
December 31, 2016:
Description
|
|
Valuation technique
|
|
Unobservable inputs
|
|
Range
|
|
May 2015 Warrants
|
|
Black-Scholes
|
|
Volatility
|
|
|
45.15
|
%
|
|
|
|
|
Risk-free interest rate
|
|
|
1.57
|
%
|
|
|
|
|
Expected term, in years
|
|
|
3.34
|
|
|
|
|
|
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 were the current market price of the Company’s common stock, the exercise
price of the derivative warrant liabilities, their remaining expected term, the volatility of the Company’s common stock
price and the risk-free interest rate over the expected term. Significant changes in any of those inputs in isolation can result
in a significant change in the fair value measurement.
Generally, an increase in the market price
of the Company’s shares of common stock, an increase in the volatility of the Company’s shares of common stock, and
an increase in the remaining term of the derivative warrant liabilities would each result in a directionally similar change in
the estimated fair value of the Company’s 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 derivative warrant liabilities’ exercise price 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 derivative warrant liabilities due to the dividend assumption.
Other Fair Value Measurements
December 31, 2017:
The following table presents the placement in the fair value hierarchy of the contingent consideration
assumed by the Company following the acquisition of Excalibur Integrated Systems, Inc. (“Excalibur”), which is measured
at fair value on a recurring basis:
|
|
|
|
|
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)
|
|
December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
$
|
316
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
316
|
|
The purchase value of the contingent consideration
assumed by the Company following the acquisition of Excalibur was determined using the Monte-Carlo simulation and, as such, was
classified as 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.
Note 11. Warrants
The following table summarizes information
about warrant activity during the years ended December 31, 2017 and 2016:
|
|
No. of warrants
|
|
|
Weighted average
exercise price
|
|
|
Exercise
price range
|
|
December 31, 2016
|
|
|
3,506,679
|
|
|
$
|
4.77
|
|
|
$
|
3.00 – 17.60
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
3.00
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
(419,179
|
)
|
|
$
|
17.60
|
|
|
$
|
17.60
|
|
December 31, 2017
|
|
|
3,087,500
|
|
|
$
|
3.03
|
|
|
$
|
3.00 – 5.00
|
|
The Company’s outstanding equity
warrants as of December 31, 2017 consist of the following:
|
|
No. outstanding
|
|
|
Exercise price
|
|
|
Remaining
contractual life
|
|
Expiration Date
|
October 2015 Warrants
|
|
|
50,000
|
|
|
$
|
5.00
|
|
|
3.29 years
|
|
April 15, 2021
|
December 2016 Warrants
|
|
|
2,500,000
|
|
|
$
|
3.00
|
|
|
3.98 years
|
|
December 23, 2021
|
Outstanding as of December 31, 2017
|
|
|
2,550,000
|
|
|
|
|
|
|
|
|
|
The Company’s outstanding derivative
warrants as of December 31, 2017 consist of the following:
|
|
No. outstanding
|
|
|
Exercise price
|
|
|
Remaining
contractual life
|
|
Expiration Date
|
May 2015 Warrants
|
|
|
537,500
|
|
|
$
|
3.00
|
|
|
2.34 years
|
|
May 4, 2020
|
Note 12. Stock-based Compensation
The Company has a stock-based compensation
plan available to grant stock options and RSUs to the Company’s directors, employees and consultants. Under the 2012 Employee,
Director and Consultant Equity Incentive Plan (the “Plan”), a maximum of 1,560,000 shares of common stock may be awarded.
In 2015 and 2016, the Company amended the Plan so that a maximum number of shares of common stock that may be awarded was increased
to 7,100,000. As of December 31, 2017, 2,111,437 shares were available for future grants under the Plan.
Total stock-based compensation expense
for the years ended December 31, 2017 and 2016 was $2,745 and $2,570, respectively, of which stock-based compensation expense included
in the discontinued operations was $568 and $122, respectively.
The following table illustrates the stock
options granted during the year ended December 31, 2017:
Title
|
|
Grant date
|
|
No. of
options
|
|
|
Exercise
price
|
|
Fair market value at
grant date
|
|
Vesting terms
|
|
Assumptions used in
Black-Scholes option pricing
model
|
Directors, management, and employees
|
|
January 2017
|
|
|
1,545,000
|
|
|
$2.12 – $2.15
|
|
$0.89 – $0.96
|
|
Over one year for directors; Over three years for management
and employees
|
|
Volatility:
44.27% – 44.90%
Risk free interest rate:
1.95% – 2.16%
Expected term, in years:
5.29 – 5.79
Dividend yield: 0.00%
|
Consultant
|
|
December 2017
|
|
|
50,000
|
|
|
$1.10
|
|
$0.65
|
|
Over three years
|
|
Volatility:
48.33%
Risk free interest rate:
2.35%
Expected term, in years:
10.00
Dividend yield: 0.00%
|
The following table illustrates the RSUs
granted during the year ended December 31, 2017.
Title
|
|
Grant date
|
|
No. of RSUs
|
|
|
Fair market
value at grant date
|
|
|
Vesting term
|
Management and employees
|
|
January 2017
|
|
|
400,942
|
|
|
$
|
2.12
|
|
|
Over one year, vesting on one-year anniversary of grant date
|
The following tables summarize information
about stock options and RSU activity during the year ended December 31, 2017:
|
|
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
|
|
|
|
1,595,000
|
|
|
$
|
2.09
|
|
|
$
|
1.10 – 2.15
|
|
|
$
|
0.92
|
|
Vested/Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
(35,377
|
)
|
|
$
|
2.12
|
|
|
|
(939,791
|
)
|
|
$
|
6.52
|
|
|
$
|
1.55 – 41.00
|
|
|
$
|
4.29
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
(16,368
|
)
|
|
$
|
43.66
|
|
|
$
|
9.94 – 55.00
|
|
|
$
|
22.02
|
|
Outstanding as of December 31, 2017
|
|
|
365,565
|
|
|
$
|
2.12
|
|
|
|
4,317,942
|
|
|
$
|
5.67
|
|
|
$
|
1.10 – 41.00
|
|
|
$
|
3.86
|
|
Exercisable as of December 31, 2017
|
|
|
—
|
|
|
|
|
|
|
|
3,011,692
|
|
|
$
|
7.33
|
|
|
$
|
1.55 – 41.00
|
|
|
|
|
|
|
|
Non-vested stock options:
|
|
|
Non-vested RSU:
|
|
|
|
No. of options
|
|
|
Weighted average
grant date
fair value
|
|
|
No. of RSUs
|
|
|
Weighted average
grant date
fair value
|
|
Balance at January 1, 2017
|
|
|
2,011,667
|
|
|
$
|
1.78
|
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
|
1,595,000
|
|
|
$
|
0.92
|
|
|
|
400,942
|
|
|
$
|
2.12
|
|
Vested
|
|
|
(1,609,792
|
)
|
|
$
|
1.20
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
(690,625
|
)
|
|
$
|
1.33
|
|
|
|
(35,377
|
)
|
|
$
|
2.12
|
|
Balance at December 31, 2017
|
|
|
1,306,250
|
|
|
$
|
1.19
|
|
|
|
365,565
|
|
|
$
|
2.12
|
|
The following table summarizes information
about employee and non-employee stock options outstanding as of December 31, 2017:
Exercise price range
|
|
|
No. options outstanding
|
|
|
No. options exercisable
|
|
|
Weighted average remaining
contractual life (years)
|
|
$
|
0.01-10.00
|
|
|
|
3,786,376
|
|
|
|
2,480,126
|
|
|
|
5.92
|
|
$
|
10.00-20.00
|
|
|
|
65,566
|
|
|
|
65,566
|
|
|
|
0.20
|
|
$
|
20.00-30.00
|
|
|
|
40,000
|
|
|
|
40,000
|
|
|
|
5.57
|
|
$
|
30.00-40.00
|
|
|
|
369,500
|
|
|
|
369,500
|
|
|
|
5.35
|
|
$
|
40.00-50.00
|
|
|
|
56,500
|
|
|
|
56,500
|
|
|
|
6.14
|
|
|
|
|
|
|
4,317,942
|
|
|
|
3,011,692
|
|
|
|
|
|
As of December 31, 2017, the total
aggregate intrinsic value of options outstanding was $14 and there was no aggregate intrinsic value associated with the options
exercisable, as they were out-of-the-money. As of December 31, 2016, the total aggregate intrinsic values of options outstanding
and options exercisable were $1,636 and $514, respectively. There were no options exercised during the years ended December 31,
2017 and 2016.
The total fair value of stock options that
vested in the years ended December 31, 2017 and 2016 was $1,932 and $1,703, respectively. As of December 31, 2017, there was approximately
$1,558 of total unrecognized stock-based payment cost related to non-vested options, shares, and RSUs granted under the incentive
stock option plans. Overall, the cost is expected to be recognized over a weighted average of 1.32 years.
The Company did not recognize tax benefits
related to its stock-based compensation as there is a full valuation allowance recorded.
Note 13. Related Parties Transactions
On April 22, 2015, XpresSpa entered into
the Debt with 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 December 31, 2017 and December 31, 2016, which
is included in long-term liabilities in the consolidated balance sheets. During the year-ended December 31, 2017, XpresSpa paid
and recorded $731 of interest expense. During the period from acquisition of XpresSpa on December 23, 2016 to December 31, 2016,
XpresSpa paid $100 of interest for December 2016 and January 2017 and recorded $16 of interest expense. In 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 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 were included in
accounts payable, accrued expenses and other current liabilities in the consolidated balance sheet as of December 31,
2016.
During 2016, the Company engaged various parties to perform valuations, legal, financial and tax due diligence
associated with the XpresSpa acquisition and other merger and acquisition projects. Among the service providers, the Company engaged
RedRidge Lender Services LLC (“RedRidge”) to perform financial due diligence regarding the acquisition of XpresSpa.
Andrew Perlman, the Company’s Chief Executive Officer, and certain members of his family, own 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 were incurred during the year-ended December 31, 2016 and are reflected in the general and administrative expense
in the consolidated statements of operations and comprehensive loss.
Note 14. Property and Equipment
The following table summarizes information
about property and equipment activity during the years ended December 31, 2017 and 2016:
Balance of property and equipment as of December 31, 2015
|
|
$
|
—
|
|
Additions
|
|
|
75
|
|
Additions from XpresSpa acquisition
|
|
|
16,308
|
|
Depreciation expense
|
|
|
(117
|
)
|
Balance of property and equipment as of December 31, 2016
|
|
|
16,266
|
|
Additions
|
|
|
5,104
|
|
Depreciation expense
|
|
|
(5,573
|
)
|
Balance of property and equipment as of December 31, 2017
|
|
$
|
15,797
|
|
Property and equipment is comprised of
three categories: leasehold improvements, furniture and fixtures, and other operating equipment.
During the years ended December 31, 2017
and 2016, the Company recorded $5,573 and $117 of depreciation expense from continuing operations, respectively. Included in the
depreciation expense from continuing operations for the year-ended December 31, 2017 is $1,131 of accelerated depreciation related
to the closure of one of XpresSpa’s JFK locations in June 2017. The assets related to the JFK location are not included in
the net book value of property and equipment and accumulated depreciation, as noted in the table below.
In October 2017, the Company recorded a $235 reduction of construction-in-progress within property and
equipment and an increase to goodwill, which represents amounts as of the acquisition date of XpresSpa that were related to two
old projects for stores that never actually opened. As of December 31, 2017, the Company had capitalized $860 related to construction-in-progress
based on percentage of completion of each in-progress project.
|
|
December 31,
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Useful Life
|
Furniture and fixtures
|
|
$
|
1,164
|
|
|
$
|
716
|
|
|
3-4 years
|
Leasehold improvements
|
|
|
17,704
|
|
|
|
14,732
|
|
|
Average 5-8 years
|
Other operating equipment
|
|
|
1,488
|
|
|
|
935
|
|
|
Maximum 5 years
|
|
|
|
20,356
|
|
|
|
16,383
|
|
|
|
Accumulated depreciation
|
|
|
(4,559
|
)
|
|
|
(117
|
)
|
|
|
Total property and equipment, net
|
|
$
|
15,797
|
|
|
$
|
16,266
|
|
|
|
Depreciation is computed using the straight-line
method over the estimated useful lives of the related assets. Leasehold improvements are depreciated over the shorter of remaining
lease term or economic useful life (which is on average 5-8 years).
Note 15. Other Current Assets
As of December 31, 2017, and 2016, the
Company’s other current assets were comprised of the following:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Prepaid expenses
|
|
$
|
1,212
|
|
|
$
|
1,536
|
|
Notes receivable
|
|
|
800
|
|
|
|
—
|
|
Other
|
|
|
108
|
|
|
|
101
|
|
Total other current assets
|
|
$
|
2,120
|
|
|
$
|
1,637
|
|
Prepaid expenses are predominantly comprised
of prepaid insurance policies which have terms of one year or less. The note receivable, which relates to the sale of FLI Charge,
was collected in February 2018.
Note 16. Accounts Payable, Accrued Expenses
and Other Current Liabilities
As of December 31, 2017, and 2016, the
Company’s accounts payable, accrued expenses and other current liabilities were comprised of the following:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Accounts payable
|
|
$
|
3,362
|
|
|
$
|
5,170
|
|
Accrued expenses
|
|
|
3,160
|
|
|
|
3,175
|
|
Accrued compensation
|
|
|
1,074
|
|
|
|
1,324
|
|
Tax-related liabilities
|
|
|
615
|
|
|
|
673
|
|
Gift certificates and loyalty reward program liabilities
|
|
|
474
|
|
|
|
605
|
|
Other
|
|
|
51
|
|
|
|
43
|
|
Total accounts payable, accrued expenses and other current liabilities
|
|
$
|
8,736
|
|
|
$
|
10,990
|
|
Accrued liability for insurance
XpresSpa carries several annual insurance
policies including indemnity, fire, umbrella, and workers’ compensation. XpresSpa financed a total of $903, or 80%,
of the total insurance premiums with a third-party provider, at a rate of 4.50% per year payable in ten monthly installments.
As of December 31 2017, XpresSpa had an outstanding balance of its financing arrangement of approximately $722, which is included
in accounts payable, accrued expenses and other current liabilities on the consolidated balance sheets, scheduled to be repaid
in 2018.
Merchant financing
In April 2016, XpresSpa entered into a
merchant financing arrangement with a top tier credit card company for $1,000, which was provided in the form of an advance against
certain future credit card transactions. XpresSpa made repayments on a daily basis throughout 2016 from proceeds of certain credit
card transactions. As of December 31, 2016, the outstanding balance of the advance was $155. This balance was repaid in full
in February 2017. In February 2017, XpresSpa entered into a new merchant financing arrangement with the same party for $500. As
of December 31, 2017, the outstanding balance of the advance was $112. This balance was repaid in full in February 2018. No further
merchant financing has been obtained.
Note 17. Discontinued Operations and
Assets and Liabilities Held for Disposal
FLI Charge
In 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. As a result, a non-cash impairment
loss to discontinued operations of $1,092 relating to FLI Charge’s technology assets and goodwill was recorded during the
year-ended December 31, 2017.
On October 20, 2017 (the “Closing
Date”), the Company sold FLI Charge to a group of private investors and FLI Charge management, to own and operate FLI Charge.
The Company does not provide any continued management or financing support to FLI Charge after the Closing Date.
Total consideration for the sale of FLI
Charge is $1,250, payable in installments. The consideration is secured by a note and security agreement. Additionally, the Company
is entitled to a 5% royalty, in perpetuity, on the gross revenue of FLI Charge and of any affiliate of FLI Charge with regard to
conductive wireless charging, power, or accessories. The Company also received a warrant exercisable in FLI Charge or an affiliate
of FLI Charge upon an initial public offering or certain defined events in connection with a change of control. The warrant has
a five-year life and is based on a valuation of the lesser of $30,000 or the financing valuation of FLI Charge preceding the initial
public offering or certain defined events.
The fair value of the total consideration was determined to be $1,052, which resulted in a gain on disposal
of $629 in consolidated net loss from discontinued operations. The fair value of the consideration for the FLI Charge disposition
was determined using a combination of valuation methods including: (i) the face value of the upfront cash installment of $250;
(ii) the present value of the deferred cash installments was calculated by multiplying the face value of the installments by the
acquirer’s default probability and discounted by the risk-free rate; (iii) the Black-Scholes model was used to obtain the
value of the warrants; and (iv) the value of the 5% royalty was calculated using a discounted cash flow model. The Company’s
fair value measurements are evaluated by management to ensure that they are consistent with expectations of management based upon
the sensitivity and nature of the inputs.
Group Mobile
In December 2017, the Company concluded
that the requirement to report the results of Group Mobile, a wholly-owned subsidiary included in its technology operating segment,
as discontinued operations was triggered.
On March 7, 2018 (the “Signing Date”), the Company entered into a membership purchase agreement
(the “Purchase Agreement”) with Route1 Security Corporation, a Delaware corporation (the “Buyer”), and
Route1 Inc., an Ontario corporation (“Route1”), pursuant to which the Buyer agreed to acquire Group Mobile (the “Disposition”).
The transaction closed on March 22, 2018.
In consideration for the Disposition, the
Buyer has agreed to issue to the Company:
|
·
|
25,000,000 shares of common stock of Route1 (“Route1 Common Stock”);
|
|
·
|
warrants to purchase 30,000,000 shares of Route1 Common Stock, which will feature an exercise price
of CAD 5 cents per share of common stock and will be exercisable for a three-year period; and
|
|
·
|
certain other payments over the three-year period pursuant to an earn-out provision in the Purchase
Agreement.
|
The Company will retain certain inventory
with a value of $778, which is to be disposed of separately from the transaction with Route1 in the first half of 2018.
Post-closing, the Company owns approximately
6.7% of Route1 Common Stock. The Route1 Common Stock will not be tradable until a date no earlier than 12 months after the
closing date; 50%, or 12,500,000 shares, of Route1 Common Stock are tradeable after 12 months plus an additional 2,083,333 shares
of Route1 Common Stock are tradeable each month until 18 months after the date of closing, subject to a change of control provision.
The Company has the ability to sell the Route1 Common Stock and warrants to qualified institutional investors. The Purchase Agreement
also contains representations, warranties, and covenants customary for transactions of this type.
The fair value of the total consideration as of the Signing Date was estimated to be $1,925. As a result,
a non-cash impairment loss from discontinued operations of $7,485 relating to Group Mobile’s intangible assets and goodwill
was recorded as of December 31, 2017. The fair value of the consideration for the Group Mobile disposition was determined using
a combination of valuation methods including: (i) the value of the common stock was estimated by multiplying the number of shares
as they become tradeable by the price per share as of the Signing Date; (ii) the Black-Scholes model was used to obtain the value
of the warrants; and (iii) a Monte-Carlo simulation analysis was performed in order to estimate the value of the earn-out provision.
The Company’s fair value measurements are evaluated by management to ensure that they are consistent with expectations of
management based upon the sensitivity and nature of the inputs.
The sale of Group Mobile was completed
on March 22, 2018. The Company will not have any involvement with Group Mobile post transaction.
Operating Results and Assets and
Liabilities Held for Sale
The following table represents the components
of operating results from discontinued operations, as presented in the consolidated statements of operations and comprehensive
loss for the years ended December 31, 2017 and December 31, 2016:
|
|
For the years ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Revenue
|
|
$
|
15,454
|
|
|
$
|
6,988
|
|
Cost of sales
|
|
|
(12,373
|
)
|
|
|
(6,081
|
)
|
Depreciation and amortization
|
|
|
(770
|
)
|
|
|
(528
|
)
|
Impairment
|
|
|
(8,577
|
)
|
|
|
—
|
|
General and administrative
|
|
|
(5,986
|
)
|
|
|
(5,088
|
)
|
Non-operating expense
|
|
|
(13
|
)
|
|
|
(15
|
)
|
Loss from discontinued operations before income taxes
|
|
|
(12,265
|
)
|
|
|
(4,724
|
)
|
Income tax expense
|
|
|
(12
|
)
|
|
|
—
|
|
Consolidated net loss from discontinued operations
|
|
$
|
(12,277
|
)
|
|
$
|
(4,724
|
)
|
In addition, the following table presents
the carrying amounts of the major classes of assets and liabilities held for sale as of December 31, 2017 and December 31, 2016,
as presented in the consolidated balance sheets.
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cash
|
|
$
|
150
|
|
|
$
|
—
|
|
Accounts receivable, net
|
|
|
2,920
|
|
|
|
373
|
|
Inventory
|
|
|
1,935
|
|
|
|
437
|
|
Other current assets
|
|
|
3
|
|
|
|
681
|
|
Property and equipment, net
|
|
|
874
|
|
|
|
201
|
|
Intangible assets, net
|
|
|
564
|
|
|
|
1,891
|
|
Goodwill
|
|
|
—
|
|
|
|
4,863
|
|
Assets held for disposal
|
|
$
|
6,446
|
|
|
$
|
8,446
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses and other current liabilities
|
|
$
|
3,142
|
|
|
$
|
640
|
|
Deferred revenue
|
|
|
619
|
|
|
|
143
|
|
Liabilities held for disposal
|
|
$
|
3,761
|
|
|
$
|
783
|
|
Note 18. Income Taxes
For the years ended December 31, 2017
and 2016, the loss from continuing operations before income taxes consists of the following:
|
|
2017
|
|
|
2016
|
|
Domestic
|
|
$
|
(16,536
|
)
|
|
$
|
(19,318
|
)
|
Foreign
|
|
|
535
|
|
|
|
39
|
|
|
|
$
|
(16,001
|
)
|
|
$
|
(19,279
|
)
|
Income tax expense attributable to continuing
and discontinued operations for the years ended December 31, 2017 and 2016 consisted of the following:
|
|
2017
|
|
|
2016
|
|
Continuing operations
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
Foreign
|
|
|
62
|
|
|
|
—
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
49
|
|
|
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
Foreign
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
111
|
|
|
$
|
—
|
|
|
|
2017
|
|
|
2016
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
11
|
|
|
$
|
—
|
|
State
|
|
|
1
|
|
|
|
—
|
|
Foreign
|
|
|
—
|
|
|
|
—
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
—
|
|
|
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
Foreign
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
12
|
|
|
$
|
—
|
|
Income tax expense attributable to continuing
operations differed from the amounts computed by applying the applicable United States federal income tax rate to loss from continuing
operations before taxes on income as a result of the following:
|
|
For the years ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Loss from continuing operations before income taxes
|
|
$
|
(16,001
|
)
|
|
$
|
(19,279
|
)
|
Tax rate
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
|
|
|
|
|
|
|
Computed “expected” tax benefit
|
|
|
(5,600
|
)
|
|
|
(6,748
|
)
|
State taxes, net of federal income tax benefit
|
|
|
(647
|
)
|
|
|
—
|
|
Change in valuation allowance
|
|
|
(19,554
|
)
|
|
|
6,454
|
|
Nondeductible expenses
|
|
|
800
|
|
|
|
270
|
|
Tax Reform Rate impact
|
|
|
24,486
|
|
|
|
—
|
|
Other items
|
|
|
626
|
|
|
|
24
|
|
Income tax expense for continuing operations
|
|
$
|
111
|
|
|
$
|
—
|
|
Deferred income taxes reflect the net
tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities as
of December 31, 2017 and 2016 are as follows:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred income tax assets
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
35,743
|
|
|
$
|
49,433
|
|
Stock-based compensation
|
|
|
4,238
|
|
|
|
6,125
|
|
Intangible assets and other
|
|
|
1,020
|
|
|
|
3,356
|
|
Net deferred income tax assets
|
|
|
41,001
|
|
|
|
58,914
|
|
Less:
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(41,209
|
)
|
|
|
(58,914
|
)
|
Net deferred income tax assets
|
|
$
|
(208
|
)
|
|
$
|
—
|
|
The Company assesses the need for a valuation
allowance related to its deferred income tax assets by considering whether it is more likely than not that some portion or all
of the deferred income tax assets will not be realized. A valuation allowance has been recorded against the Company’s deferred
income tax assets, as it is in the opinion of management that it is more likely than not that the net operating loss carryforwards
(“NOL”s) will not be utilized in the foreseeable future.
The valuation allowance as of December
31, 2017 is $41,209, which will be reduced if and when the Company determines that the deferred income tax assets are more likely
than not to be realized.
The following table presents the changes
to the valuation allowance during the years presented:
As of January 1, 2016
|
|
$
|
50,807
|
|
Charged to cost and expenses – continuing operations
|
|
|
9,468
|
|
Charged to cost and expenses – discontinued operations
|
|
|
—
|
|
Return to provision true-up and other
|
|
|
(1,361
|
)
|
As of December 31, 2016
|
|
|
58,914
|
|
Charged to cost and expenses – continuing operations
|
|
|
(19,206
|
)
|
Charged to cost and expenses – discontinued operations
|
|
|
1,455
|
|
Return to provision true-up and other
|
|
|
46
|
|
As of December 31, 2017
|
|
$
|
41,209
|
|
As of December 31, 2017, the Company’s
estimated aggregate total NOLs were $159,007 for U.S. federal purposes, expiring 20 years from the respective tax years to which
they relate. The NOL amounts are presented before Internal Revenue Code, Section 382 limitations (“Section 382”).
The Tax Reform Act of 1986 imposed substantial restrictions on the utilization of NOL and tax credits in the event of an ownership
change of a corporation. Thus, the Company’s ability to utilize all such NOL and credit carryforwards may be limited. The
NOLs available post-merger that the Company completed in 2012 that are not subject to limitation amount to $119,406. The remaining
NOLs of $39,601 are subject to the limitation of Section 382. The annual limitation is approximately $2,000.
The Company files its tax returns in the
U.S. federal jurisdiction, as well as in various state and local jurisdictions. XpresSpa Group has open tax years for 2014
through 2016. As of December 31, 2017, all tax years for the Company’s subsidiary Innovate/Protect, Inc. are still open.
The Company’s Israeli subsidiary filed its income tax returns in Israel prior to closing the business in the first quarter
of 2014; there are no open tax years.
On December 22, 2017, the United States
government enacted the Tax Act, which makes changes to the corporate tax rate, business-related deductions and taxation of foreign
earnings, among other changes, that will generally be effective for tax years beginning after December 31, 2017.
As a result of the reduction to the corporate
tax rate, the Company was required to remeasure its deferred tax assets and liabilities and any associated adjustment to the valuation
allowance. As the Company was in a full valuation allowance in both 2017 and 2016, the net impact to the financial statements associated
with the rate change was immaterial.
In response to the Tax Act, the SEC staff
issued guidance (SAB 118) on accounting for the tax effects of the new legislation. The guidance provides a one-year measurement
period for companies to complete the accounting. The Company reflected the income tax effects of those aspects within the financial
statements as provisional amounts and will continue to evaluate the impact on its financial statements as it expects Treasury to
provide additional guidance and the Company will continue to pursue additional documentation to either confirm or further refine
the anticipated impact of the Tax Act on the organization's financial statements.
Note 19. Commitments and Contingencies
Litigation and legal proceedings
Certain of the 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 any potential liability and the estimated amount of a loss
related to the Company’s legal 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 outstanding legal matters and assessed the probability and likelihood
of the occurrence of liability. Based on management’s estimates, the Company recorded $250 as of December 31, 2017 and $671
as of December 31, 2016, which are included in accounts payable, accrued expenses and other current liabilities in the consolidated
balance sheets.
The Company expenses legal fees in the
period in which they are incurred.
Wellness
Cordial
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. On February 21, 2017, the defendants filed a motion to dismiss. On March 3, 2017, XpresSpa
filed a first amended complaint against defendants. On April 5, 2017, Cordial filed a motion to dismiss. On September 12, 2017,
the Court held a hearing on the motion to dismiss. On November 2, 2017, the Court granted the motion to dismiss which was entered
on November 13, 2017. On December 22, 2017, XpresSpa filed a notice of appeal.
In re Chen et al.
On March 16, 2015, four former employees
of XpresSpa who worked at locations in John F. Kennedy International Airport and LaGuardia Airport filed a putative class and collective
action wage-hour litigation in the United States District Court for the Eastern District of New York, claiming that they and other
spa technicians were misclassified, and that overtime was unpaid. On September 23, 2016, the Court conditionally certified the
class. The parties held a mediation on February 28, 2017 and reached an agreement on a settlement in principle. On September 6,
2017, the parties entered into a settlement agreement. On September 15, 2017, the parties filed a motion for settlement approval
with the Court; this motion is pending. In October 2017, XpresSpa paid the agreed-upon settlement amount to the settlement claims
administrator, to be held in escrow pending a fairness hearing and final approval by the Court.
Intellectual Property
The Company’s intellectual property
operating segment is engaged in litigation, for which no liability is recorded, as the Company does not expect a material negative
outcome.
Corporate
Binn v. FORM Holdings Corp. et al.
On November 6, 2017, Moreton Binn and Marisol
F, LLC, former stockholders of XpresSpa, filed a lawsuit against the Company and its directors in the United States District Court
for the Southern District of New York. The lawsuit alleges violations of various sections of the Securities Exchange Act of 1934,
material omissions and misrepresentations (negligent and fraudulent), fraudulent omission, expropriation, breach of fiduciary duties,
aiding and abetting, and unjust enrichment in the defendants’ conduct related to the Company’s acquisition of XpresSpa,
and seeks rescission of the transaction, damages, equitable and injunctive relief, fees and costs, and various other relief. On
January 17, 2018, the defendants filed a motion to dismiss the complaint. On February 7, 2018, the plaintiffs amended their complaint.
On February 28, 2018, the defendants filed a motion to dismiss the amended complaint. On March 21, 2018, the plaintiffs filed an
opposition to the motion to dismiss the amended complaint. The defendants’ reply in further support of the motion to dismiss
the amended complaint is due March 30, 2018.
The Company and its subsidiaries are involved
in various other claims and legal actions that arise in the ordinary course of business. The Company does not believe that the
ultimate resolution of these actions will have a material adverse effect on the Company’s financial position, results of
operations, liquidity, or capital resources. However, a significant increase in the number of these claims, or one or more successful
claims under which the Company incurs greater liabilities than the Company currently anticipates, could materially adversely affect
the Company’s business, financial condition, results of operations and cash flows.
Leases
The Company is obligated under multiple
lease agreements for its XpresSpa retail concessions. The lease agreements for the retail concessions have terms which expire at
varying dates through December 31, 2027 and primarily require payment of rent as a percentage of sales and a minimum annual guarantee
(“MAG”) rent payment. The MAG rent under the terms of the agreements range from $3 to $320 per year and are adjusted
on each anniversary date.
XpresSpa is contingently liable to a surety
company under certain general indemnity agreements required by various airports relating to its lease agreements. XpresSpa agrees
to indemnify the surety for any payments made on contracts of suretyship, guaranty, or indemnity. The Company believes that all
contingent liabilities will be satisfied by its performance under the specified lease agreements.
The Company’s corporate headquarters,
as well as XpresSpa’s, are located in New York, NY and its lease will expire in October 2019.
Rent expense from continuing operations
for operating leases for years ended December 31, 2017 and 2016, were $7,996 and $485, respectively.
As of December 31, 2017, future minimum
commitments under noncancelable lease agreements are as follows:
Years ending December 31,
|
|
Amount
|
|
2018
|
|
$
|
4,533
|
|
2019
|
|
|
3,380
|
|
2020
|
|
|
2,678
|
|
2021
|
|
|
2,046
|
|
2022
|
|
|
2,250
|
|
Thereafter
|
|
|
4,658
|
|
Total
|
|
$
|
19,545
|
|
Note 20. Subsequent Events
In January 2018, the Company sold certain patents to Crypto Currency Patent Holdings Company LLC, a unit
of Marathon, for approximately $1,250, comprised of $250 in cash and 250,000 shares of Marathon common stock valued at approximately
$1,000 at the time of the transaction.
Pursuant to the
sale, the Company cannot directly or indirectly offer, sell, pledge or transfer, or otherwise dispose of, the Marathon common stock
for a period of 180 days ending on July 11, 2018.
On March
22, 2018, the Company completed the sale of Group Mobile. See “Note 17 –
Discontinued Operations and Assets
and Liabilities Held for Disposal
.”