The accompanying notes form an integral part
of these condensed consolidated financial statements.
The accompanying notes form an integral part
of these condensed consolidated financial statements.
The accompanying notes form an integral part
of these condensed consolidated financial statements.
The accompanying notes form an integral part
of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(In thousands, except for share and per share
data)
Note 1. General
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
(“Nasdaq”), 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.
As a result of the transition to a pure-play
health and wellness services company, the Company currently has one operating segment that is also its sole reporting unit, which
is comprised of XpresSpa, a leading airport retailer of spa services. XpresSpa is a well-recognized airport spa brand with 57 locations,
consisting of 52 domestic and 5 international locations as of March 31, 2018. XpresSpa offers travelers premium spa services, including
massage, nail and skin care, as well as spa and travel products.
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 formerly comprised the Company’s technology operating segment, which
was eliminated following the disposition of Group Mobile. The results of operations for FLI Charge and Group Mobile are presented
in the condensed 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 are presented in the condensed consolidated balance sheets
as assets held for disposal and liabilities held for disposal, respectively, as of March 31, 2018 and December 31, 2017.
The Company owns certain patent portfolios,
which it looks to monetize through sales and licensing agreements. During the three-month period ended March 31, 2018, the Company
determined that its former intellectual property operating segment would no longer be an area of focus and, as such, will no longer
operate as a separate operating segment, as it is not expected to generate any material revenues.
As of March 31, 2018, the Company had
cash and cash equivalents of $3,554. In addition, the Company’s current assets were $6,321 and current liabilities were
$8,560 as of March 31, 2018.
On May 15, 2018, the Company entered into
a securities purchase agreement (the “Agreement”) with certain institutional investors (the “Investors”),
pursuant to which the Company agreed to sell up to (i) an aggregate principal amount of $4,438 in 5% Secured Convertible Notes
due 2019, which includes $88 to be issued to Palladium Capital Advisors as Placement Agent (the “Convertible Notes”),
convertible into shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”) at a conversion
price of $0.62 per share, (ii) Class A Warrants (the “Class A Warrants”) to purchase 7,157,259 shares of Common Stock
at an exercise price of $0.62 per share and (iii) Class B Warrants (the “Class B Warrants,” and together with the
Class A Warrants, the “Warrants”) to purchase 3,578,630 shares of Common Stock at an exercise price of $0.62 per share.
The Convertible Notes bear interest at a rate of 5% per annum. The Convertible Notes are senior secured obligations of the Company
and are secured by certain of its personal property. Unless earlier converted or redeemed, the Convertible Notes will mature in
November 2019. The Company expects to close the transaction as soon as possible following the filing of these financial statements.
The
Company’s management believes that its current cash balance, the issuance of the Convertible Notes and Warrants, and cash
provided by future operating activities will be sufficient to fund its planned operations and scheduled Convertible Notes principal
repayments for at least the next twelve months following the date of the filing of these financial statements.
Note 2. Accounting and Reporting Policies
(a) Basis of presentation and principles of consolidation
The accompanying interim condensed consolidated
financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America
(“U.S. GAAP”) for interim financial information and the instructions to Rule 10-01 of Regulation S-X, and should be
read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2017. The condensed 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 adjustments that, in the opinion of management, are necessary for a
fair presentation for the periods presented have been reflected by the Company. Such adjustments are of a normal, recurring nature.
The results of operations for the three-month period ended March 31, 2018 are not necessarily indicative of the results that may
be expected for the entire fiscal year or for any other interim period. All significant intercompany balances and transactions
have been eliminated in consolidation.
(b) Use of estimates
The preparation of the accompanying condensed
consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the
condensed consolidated financial statements and the reported amounts of revenues and expenses for the periods presented. Actual
results may differ from such estimates. Significant items subject to such estimates and assumptions include the Company’s
intangible assets, the useful lives of the Company’s intangible assets, the valuation of the Company’s derivative warrant
liabilities, the valuation of stock-based compensation, deferred tax assets and liabilities, income tax uncertainties, and other
contingencies.
(c) 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 five days. As of March
31, 2018, the Company held significant portions of its cash balance in overseas accounts, totaling $2,661, which is not insured
by the Federal Deposit Insurance Corporation (“FDIC”). If the Company were to distribute the amounts held overseas,
the Company would need to follow an approval process as defined in its operating and partnership agreements, which may delay the
availability of cash to the Company.
(d) 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 condensed consolidated balance sheets until remitted to the state agencies.
Other revenue relates to one-time intellectual
property licenses as well as the sale of certain of the Company’s intellectual property. Revenue from patent licensing is
recognized when the Company transfers promised intellectual property rights to customers in an amount that reflects the consideration
to which the Company expects to be entitled in exchange for those intellectual property rights. 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, receipt of the
upfront fee, and transfer of the promised intellectual property rights.
(e) Cost of sales
Cost of sales 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 related to the Company’s
intellectual property 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.
(f) Investments
The Company accounts for its investments
in other entities using the cost method of accounting when the Company has no substantial influence and the investment is less
than 20% of the investee entity. Under the cost method, the investment is recorded at cost, which approximates fair value, on the
date of acquisition. The Company performs an assessment for impairment on at least an annual basis, or when there is an indication
that cost exceeds fair value.
(g) 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.
(h) Recently issued accounting pronouncements
ASU No. 2014-09, Revenue from Contracts
with Customers (Topic 606)
The core principle of this 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. Adoption of this ASU did not have
a material impact on the Company’s condensed consolidated financial statements.
ASU No. 2016-01, Financial Instruments
– Overall (Topic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
This standard amends various aspects of
the recognition, measurement, presentation, and disclosure for financial instruments. With respect to the Company’s condensed
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. Adoption of this ASU did not have a material
impact on the Company’s condensed consolidated financial statements.
ASU No. 2016-02, Leases (Topic 842)
This standard provides new guidance related
to accounting for leases and supersedes U.S. 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
condensed consolidated financial statements, but the Company expects that it will result in a significant increase in its long-term
assets and liabilities.
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 early adopted this standard effective
January 1, 2018. Adoption of this ASU did not have a material impact on the Company’s condensed 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 accumulated other comprehensive income to retained earnings in the period in which
the effects of the change in the United States 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 of this standard on its condensed consolidated financial statements.
(i) Reclassification
Certain balances have been reclassified
to conform to presentation requirements, including the presentation of discontinued operations and the consistent presentation
of the allocation of cost of sales and general and administrative expenses between store locations and corporate in the condensed
consolidated statements of operations and comprehensive loss.
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:
|
|
Three months ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Basic numerator:
|
|
|
|
|
|
|
|
|
Net loss from continuing operations attributable to shares of common stock
|
|
$
|
(23,328
|
)
|
|
$
|
(4,947
|
)
|
Net loss from discontinued operations attributable to shares of common stock
|
|
|
(605
|
)
|
|
|
(1,478
|
)
|
Net loss attributable to the Company
|
|
$
|
(23,933
|
)
|
|
$
|
(6,425
|
)
|
Basic denominator:
|
|
|
|
|
|
|
|
|
Basic shares of common stock outstanding
|
|
|
26,592,781
|
|
|
|
18,862,715
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share of common stock from continuing operations
|
|
$
|
(0.88
|
)
|
|
$
|
(0.26
|
)
|
Basic loss per share of common stock from discontinued operations
|
|
|
(0.02
|
)
|
|
|
(0.08
|
)
|
Basic net loss per share of common stock
|
|
$
|
(0.90
|
)
|
|
$
|
(0.34
|
)
|
|
|
|
|
|
|
|
|
|
Diluted numerator:
|
|
|
|
|
|
|
|
|
Net loss from continuing operations attributable to shares of common stock
|
|
$
|
(23,328
|
)
|
|
$
|
(4,947
|
)
|
Net loss from discontinued operations attributable to shares of common stock
|
|
|
(605
|
)
|
|
|
(1,478
|
)
|
Net loss attributable to the Company
|
|
$
|
(23,933
|
)
|
|
$
|
(6,425
|
)
|
Diluted denominator:
|
|
|
|
|
|
|
|
|
Diluted shares of common stock outstanding
|
|
|
26,592,781
|
|
|
|
18,862,715
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share of common stock from continuing operations
|
|
$
|
(0.88
|
)
|
|
$
|
(0.26
|
)
|
Diluted loss per share of common stock from discontinued operations
|
|
|
(0.02
|
)
|
|
|
(0.08
|
)
|
Diluted net loss per share of common stock
|
|
$
|
(0.90
|
)
|
|
$
|
(0.34
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share data presented excludes from the calculation of diluted net loss the following potentially dilutive securities, as they had an anti-dilutive impact:
|
|
|
|
|
|
|
|
|
Both vested and unvested options to purchase an equal number of shares of common stock of the Company
|
|
|
3,579,585
|
|
|
|
5,138,732
|
|
Unvested RSUs to issue an equal number of shares of common stock of the Company
|
|
|
330,188
|
|
|
|
400,942
|
|
Warrants to purchase an equal number of shares of common stock of the Company
|
|
|
3,087,500
|
|
|
|
3,430,877
|
|
Preferred stock on an as converted basis
|
|
|
3,364,328
|
|
|
|
3,931,416
|
|
Total number of potentially dilutive instruments excluded from the calculation of net loss per share of common stock
|
|
|
10,361,601
|
|
|
|
12,901,967
|
|
Note 4. Goodwill
On January 5, 2018, the Company changed
its name to XpresSpa Group as part of a rebranding effort to align its corporate strategy to build a pure-play health and wellness
services company, which the Company commenced following its acquisition of XpresSpa on December 23, 2016. Following the subsequent
sale of Group Mobile on March 22, 2018, which was the only remaining component of the Company’s technology operating segment,
the Company’s management made the decision that its intellectual property operating segment would no longer be an area of
focus and would no longer operate as a separate operating segment as it is not expected to generate any material revenues. This
completed the transition of the Company into a pure-play health and wellness company with only one operating segment, consisting
of its XpresSpa business.
The Company’s market capitalization
is sensitive to the volatility of its stock price. On January 2, 2018, the first trading day of the fiscal year 2018, the Company’s
stock price opened at $1.36 and closed at $1.45. The closing price of the Company’s stock on March 29, 2018, the last
trading day of the first quarter of fiscal 2018, was $0.72. The average closing stock price of the Company from January 2, 2018
through March 29, 2018 was approximately $1.02, ranging from $0.71 to $1.80 during that period.
Subsequent to the first quarter of fiscal
2018, on April 19, 2018, the Company entered into a separation agreement with its Chief Executive Officer regarding his resignation
as Chief Executive Officer and as a Director the Company. On that same date, the Company’s Senior Vice President and Chief
Executive Officer of XpresSpa was appointed by the Board of Directors as the Chief Executive Officer and as a Director of the Company.
These events were identified by the
Company’s management as triggering events requiring that goodwill be tested for impairment as of March 31, 2018. In
addition to the Company’s rebranding efforts to a pure-play health and wellness services company, its stock price continued
to decline even after the announcement of the new Chief Executive Officer. The Company’s stock price has averaged $0.67
following March 31, 2018. As the stock price has not rebounded, the Company determined that the impairment relates to the
three-month period ended March 31, 2018.
The Company performed a quantitative goodwill
impairment test, in which the Company compared the carrying value of the reporting unit to its estimated fair value, which was
calculated using an income approach. The key assumptions for this approach are projected future cash flows and a discount rate,
which is based on a weighted average cost of capital adjusted for the relevant risk associated with the characteristics of the
business and the projected future cash flows. As a result of the quantitative goodwill impairment test performed as of March 31,
2018, the Company determined that the fair value of the reporting unit did not exceed its carrying amount and, therefore, goodwill
of the reporting unit was considered impaired.
Based on the estimated fair value of goodwill,
the Company recorded an impairment charge of $19,630, to reduce the carrying value of goodwill to its fair value, which was determined
to be zero. This impairment charge is included in goodwill impairment in the condensed consolidated statements of operations and
comprehensive loss for the three-month period ended March 31, 2018.
The fair value measurement of goodwill
was classified within Level 3 of the fair value hierarchy because the income approach was used, which utilizes significant inputs
that are unobservable in the market. The Company believes it made reasonable estimates and assumptions to calculate the fair value
of the reporting unit as of the impairment test measurement date.
Note 5. Other Assets
Other assets in the condensed consolidated
balance sheets are comprised of the following as of March 31, 2018 and December 31, 2017:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Cost method investments
|
|
$
|
2,909
|
|
|
$
|
834
|
|
Lease deposits
|
|
|
856
|
|
|
|
852
|
|
Other assets
|
|
$
|
3,765
|
|
|
$
|
1,686
|
|
As of March 31, 2018, the Company’s
other assets included:
|
·
|
$1,625 cost method investment in Route1 Inc. (“Route1”), which the Company received from the disposition of Group Mobile in March 2018;
|
|
·
|
$856 deposits made pursuant to various lease agreements, which will be returned to the Company at the end of the leases;
|
|
·
|
$787 cost method investment in InfoMedia Services Limited (“InfoMedia”), which the Company acquired in 2014;
|
|
·
|
$450 cost method investment in Marathon Patent Group, Inc. (“Marathon”), that the Company received in January 2018; and
|
|
·
|
$47 cost method investment in FLI Charge, which the Company received from the disposition of FLI Charge in October 2017.
|
Note 6. Segment Information
As a result of the Company’s transition
to a pure-play health and wellness services company, it currently has one operating segment that is also its sole reporting unit,
which is comprised of XpresSpa.
The Company currently operates in two
geographical segments: the United States and all other countries. The following table represents the geographical revenue and
segment operating loss for the three-month periods ended March 31, 2018 and 2017, and total asset information as of March 31,
2018 and December 31, 2017. There were no concentrations of geographical revenue, segment operating loss or total assets related
to any single foreign country that were material to the Company’s condensed consolidated financial statements.
|
|
Three months ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Revenue
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
11,259
|
|
|
$
|
9,968
|
|
All other countries
|
|
|
1,341
|
|
|
|
1,116
|
|
Total revenue
|
|
$
|
12,600
|
|
|
$
|
11,084
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
8,990
|
|
|
$
|
8,257
|
|
All other countries
|
|
|
787
|
|
|
|
677
|
|
Total cost of sales
|
|
$
|
9,777
|
|
|
$
|
8,934
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
(23,276
|
)
|
|
$
|
(4,759
|
)
|
All other countries
|
|
|
220
|
|
|
|
190
|
|
Operating loss from continuing operations
|
|
|
(23,056
|
)
|
|
|
(4,569
|
)
|
Other non-operating expense, net
|
|
|
(273
|
)
|
|
|
(75
|
)
|
Loss from continuing operations before income taxes
|
|
$
|
(23,329
|
)
|
|
$
|
(4,644
|
)
|
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Assets
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
32,567
|
|
|
$
|
55,152
|
|
All other countries
|
|
|
4,224
|
|
|
|
3,642
|
|
Assets held for disposal
|
|
|
717
|
|
|
|
6,446
|
|
Total assets
|
|
$
|
37,508
|
|
|
$
|
65,240
|
|
Note 7. Fair Value Measurements
Derivative Warrant Liabilities
The following table presents the placement
in the fair value hierarchy of derivative warrant liabilities measured at fair value on a recurring basis as of March 31, 2018
and December 31, 2017:
|
|
|
|
|
Fair value measurement at reporting date using
|
|
|
|
|
|
|
Quoted prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
active markets
|
|
|
Significant other
|
|
|
Significant
|
|
|
|
|
|
|
for identical
|
|
|
observable
|
|
|
unobservable
|
|
|
|
Balance
|
|
|
assets (Level 1)
|
|
|
inputs (Level 2)
|
|
|
inputs (Level 3)
|
|
March
31, 2018:
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017:
|
|
$
|
34
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
34
|
|
The Company measures its derivative warrant
liabilities at fair value. The derivative warrant liabilities were classified within Level 3 because they were valued using the
Black-Scholes-Merton model, which utilizes significant inputs that are unobservable in the market. 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 March 31, 2018 and December 31, 2017, consisted of cash and cash equivalents, trade and loan receivables,
inventory, accounts payable and other current liabilities. 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 three-month period ended March 31, 2018:
December 31, 2017
|
|
$
|
34
|
|
Decrease in fair value of the derivative warrant liabilities
|
|
|
(33
|
)
|
March 31, 2018
|
|
$
|
1
|
|
Valuation processes for Level 3 Fair Value
Measurements
Fair value measurement of the derivative warrant
liabilities falls within Level 3 of the fair value hierarchy. The fair value measurements are evaluated by management to ensure
that
changes are consistent with expectations of management based upon
the sensitivity and nature of the inputs.
March
31, 2018:
Description
|
|
Valuation
technique
|
|
Unobservable
inputs
|
|
Range
|
|
Derivative warrant
liabilities
|
|
Black-Scholes-Merton
|
|
Volatility
|
|
|
39.56
|
%
|
|
|
|
|
Risk free interest rate
|
|
|
2.21
|
%
|
|
|
|
|
Expected term, in years
|
|
|
2.09
|
|
|
|
|
|
Dividend yield
|
|
|
0.00
|
%
|
December
31, 2017:
Description
|
|
Valuation technique
|
|
Unobservable inputs
|
|
Range
|
|
Derivative
warrant liabilities
|
|
Black-Scholes-Merton
|
|
Volatility
|
|
|
39.64
|
%
|
|
|
|
|
Risk-free interest
rate
|
|
|
1.88
|
%
|
|
|
|
|
Expected term, in
years
|
|
|
2.34
|
|
|
|
|
|
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.
Marathon Common Stock
On January 11, 2018 (the “Transaction
Date”), the Company entered into a Patent Rights Purchase and Assignment Agreement (the “Agreement”) with Crypto
Currency Patent Holding Company LLC (the “Buyer”) and its parent company, Marathon, pursuant to which the Buyer agreed
to purchase certain of the Company’s patents. As consideration for the patents, the Buyer paid $250 and Marathon issued 250,000
shares of Marathon common stock (the “Marathon Common Stock”) to the Company. The Marathon Common Stock is subject
to a lockup period commencing on the Transaction Date and ending on July 11, 2018 (the “Lockup Period”).
The Marathon Common Stock is recognized
as a cost method investment and, as such, must be measured at cost on the date of acquisition, which, as of the Transaction Date,
approximates fair value. The following table presents the placement in the fair value hierarchy of the Marathon Common Stock measured
at fair value on a nonrecurring basis as of the Transaction Date:
|
|
|
|
|
Fair value measurement at reporting date using
|
|
|
|
|
|
|
Quoted prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
active markets
|
|
|
Significant other
|
|
|
Significant
|
|
|
|
|
|
|
for identical
|
|
|
observable
|
|
|
unobservable
|
|
|
|
Balance
|
|
|
assets (Level 1)
|
|
|
inputs (Level 2)
|
|
|
inputs (Level 3)
|
|
January 11, 2018
|
|
$
|
450
|
|
|
$
|
—
|
|
|
$
|
450
|
|
|
$
|
—
|
|
The fair value of the Marathon Common
Stock was estimated by multiplying the number of shares as they become tradeable by the price per share as of the Transaction
Date, information that falls within Level 1 of the fair value hierarchy, quoted prices in active markets for identical assets;
however, due to the fact that the Marathon Common Stock is restricted during the Lockup Period, the Company applied a discount
on the lack of marketability to estimate the fair value at the measurement date, which is a significant other observable input
resulting in placement in Level 2 of the fair value hierarchy.
Other Fair Value Measurements
The Company is also required to measure
the fair value on a recurring basis of the contingent consideration it assumed following the acquisition of Excalibur Integrated
Systems, Inc. (“Excalibur”) on February 2, 2017. The Company determined that there was no change in the fair value
of the contingent consideration of $316 between December 31, 2017 and March 31, 2018. Although the Company disposed of Excalibur
as part of the Group Mobile disposition, the contingent consideration remained due to the remnant of the earn-out provision due
to the former stockholders of Excalibur, which is what first led to the recognition of a contingent consideration upon the acquisition
of Excalibur. The contingent consideration is included in other liabilities in the condensed consolidated balance sheets.
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 in 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 8. Stock-Based Compensation
As of March 31, 2018, 2,796,386 shares
of the Company’s common stock were available for future grants under the Company’s 2012 Employee, Director and Consultant
Equity Incentive Plan. Total stock-based compensation expense for the periods ended March 31, 2018 and 2017 was $312 and $741,
respectively, the latter of which included stock-based compensation expense of $194 included in discontinued operations.
The following table summarizes the RSUs
granted to a consultant during the three-month period ended March 31, 2018.
Grant date
|
|
No. of RSUs
|
|
|
Fair market
value at grant date
|
|
|
Vesting term
|
February 28, 2018
|
|
|
53,408
|
|
|
$
|
0.94
|
|
|
Vesting immediately upon grant
|
No options were granted during the three-month
period ended March 31, 2018.
The activity related to RSUs and stock options
during the three-month period ended March 31, 2018 consisted of the following:
|
|
RSUs
|
|
|
Options
|
|
|
|
No. of
RSUs
|
|
|
Weighted
average
grant date
fair value
|
|
|
No. of
options
|
|
|
Weighted
average
exercise
price
|
|
|
Exercise
price
range
|
|
|
Weighted
average
grant date
fair value
|
|
Outstanding as of January 1, 2018
|
|
|
365,565
|
|
|
$
|
2.12
|
|
|
|
4,317,942
|
|
|
$
|
5.67
|
|
|
$
|
1.10 – 41.00
|
|
|
$
|
3.86
|
|
Granted
|
|
|
53,408
|
|
|
$
|
0.94
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Vested/Exercised
|
|
|
(88,785
|
)
|
|
$
|
1.41
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
(686,041
|
)
|
|
$
|
7.99
|
|
|
$
|
1.55 – 37.20
|
|
|
$
|
5.40
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
(52,316
|
)
|
|
$
|
16.24
|
|
|
$
|
9.60 – 16.50
|
|
|
$
|
9.71
|
|
Outstanding as of March 31, 2018
|
|
|
330,188
|
|
|
$
|
2.12
|
|
|
|
3,579,585
|
|
|
$
|
5.07
|
|
|
$
|
1.10 – 41.00
|
|
|
$
|
3.39
|
|
Exercisable as of March 31, 2018
|
|
|
—
|
|
|
|
—
|
|
|
|
2,505,417
|
|
|
$
|
6.45
|
|
|
$
|
1.10 – 41.00
|
|
|
|
|
|
The Company did not
recognize tax benefits related to its stock-based compensation as there is a full valuation allowance recorded.
Note 9. Related Party Transactions
On April 22, 2015, XpresSpa entered into a
credit agreement and secured promissory note (the “Debt”) with Rockmore Investment Master Fund Ltd. (“Rockmore”),
which was amended on August 8, 2016. Rockmore is an investment entity controlled by the Company’s board member, Bruce T.
Bernstein. The Debt had an outstanding balance of $6,500 as of March 31, 2018 and December 31, 2017, included in long-term liabilities
in the condensed consolidated balance sheets. During the quarter ended March 31, 2018, XpresSpa paid $150 of interest and recorded
$183 of interest expense related to the debt.
On May 14, 2018, the Company and Rockmore
agreed to extend the maturity date of the Debt from May 1, 2019 to December 31, 2019. No other material terms of the Debt were
modified.
Note 10. Discontinued Operations and Assets
and Liabilities Held for Disposal
FLI Charge
On October 20, 2017, the Company sold FLI Charge
to a group of private investors and FLI Charge management, to own and operate FLI Charge. Post-closing, the Company does not provide
any continued management or financing support to FLI Charge.
Group Mobile
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 pursuant to which
the Buyer agreed to acquire Group Mobile (the “Disposition”). The transaction closed on March 22, 2018 (the “Closing
Date”), after which the Company no longer had any involvement with Group Mobile.
In consideration for the Disposition, the Buyer
issued to the Company:
|
·
|
25,000,000 shares of Route1 common stock (the “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 retained certain inventory
with a value of $555 to be disposed of separately from the transaction with Route1 in the first half of 2018. Of this amount, $110
was sold as of March 31, 2018 resulting in $445 remaining in assets held for disposal in the condensed consolidated balance sheets
as of that date. Assets held for disposal also includes $272 of accounts receivable associated with the sale of the inventory excluded
from the transaction with Route1.
Post-closing, the Company owned approximately
6.7% of Route1 Common Stock. The Route1 Common Stock is not 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 Closing Date, 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 total consideration of the Disposition
is recognized as a cost method investment and, as such, must be measured at cost on the date of acquisition, which, as of the Closing
Date, approximates fair value. The fair value of the total consideration as of the Closing Date was determined to be $1,625, which
is less than the carrying value of the asset, and is included in other assets in the condensed consolidated balance sheet as of
March 31, 2018. This resulted in a loss on disposal of $301, which is included in consolidated net loss from discontinued operations
in the condensed consolidated statements of operations and comprehensive loss.
The value of the total consideration for
the Group Mobile disposition was determined using a combination of valuation methods including:
|
(i)
|
The value of the Route 1 Common Stock was determined to be $308, which was estimated by multiplying the number of shares as they become tradeable by the price per share as of the Closing Date.
|
|
(ii)
|
The value of the warrants
was determined to be $176, which was obtained using the Black-Scholes-Merton model.
|
|
(iii)
|
The value of the earn-out
provision was determined to be $1,141, which was estimated using a Monte-Carlo simulation analysis.
|
The value of the Route1 Common Stock was
classified within Level 2 of the fair value hierarchy because, although quoted prices in active markets for identical assets were
used, which is a Level 1 attribute, the Company applied a discount on the lack of marketability to estimate the fair value due
to the fact that the Route1 Common Stock will be restricted for different periods, which is a significant other observable input.
The value of the warrants and earn-out provision were classified within Level 3 of the fair value hierarchy because they were valued
using the Black-Scholes-Merton model and a Mote-Carlo simulation analysis, respectively, each of which utilizes significant inputs
that are unobservable in the market.
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.
Operating Results and Assets and Liabilities
Held for Sale
The following table presents the components
of the consolidated net loss from discontinued operations, as presented in the condensed consolidated statements of operations
and comprehensive loss, for the three-month periods ended March 31, 2018 for Group Mobile and March 31, 2017 for Group Mobile and
FLI Charge:
|
|
Three months ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Revenue
|
|
$
|
2,834
|
|
|
$
|
3,525
|
|
Cost of sales
|
|
|
(2,305
|
)
|
|
|
(2,960
|
)
|
Depreciation and amortization
|
|
|
(131
|
)
|
|
|
(173
|
)
|
General and administrative
|
|
|
(680
|
)
|
|
|
(1,868
|
)
|
Loss on disposal
|
|
|
(301
|
)
|
|
|
—
|
|
Non-operating expense
|
|
|
(22
|
)
|
|
|
(2
|
)
|
Loss from discontinued operations before income taxes
|
|
|
(605
|
)
|
|
|
(1,478
|
)
|
Income tax expense
|
|
|
—
|
|
|
|
—
|
|
Consolidated net loss from discontinued operations
|
|
$
|
(605
|
)
|
|
$
|
(1,478
|
)
|
In addition, the following table presents the
carrying amounts of Group Mobile’s major classes of assets and liabilities held for disposal as of March 31, 2018 and December
31, 2017, as presented in the condensed consolidated balance sheets:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Cash
|
|
$
|
—
|
|
|
$
|
150
|
|
Accounts receivable, net
|
|
|
272
|
|
|
|
2,920
|
|
Inventory
|
|
|
445
|
|
|
|
1,935
|
|
Other current assets
|
|
|
—
|
|
|
|
3
|
|
Property and equipment, net
|
|
|
—
|
|
|
|
874
|
|
Intangible assets, net
|
|
|
—
|
|
|
|
564
|
|
Assets held for disposal
|
|
$
|
717
|
|
|
$
|
6,446
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses and other current liabilities
|
|
$
|
—
|
|
|
$
|
3,142
|
|
Deferred revenue
|
|
|
—
|
|
|
|
619
|
|
Liabilities held for disposal
|
|
$
|
—
|
|
|
$
|
3,761
|
|
Note 11. Income Taxes
The Company’s provision for income taxes
consists of federal, state, local, and foreign taxes in amounts necessary to align the Company’s year-to-date provision
for income taxes with the effective tax rate that the Company expects to achieve for the full year. Each quarter, the Company
updates its estimate of the annual effective tax rate and records cumulative adjustments as deemed necessary. The income tax provisions
for the quarter ended March 31, 2018 reflect an estimated global annual effective tax rate of approximately 0.57%. As of
March 31, 2018, deferred tax assets generated from the Company’s activities in the United States were offset by a valuation
allowance because realization depends on generating future taxable income, which, in the Company’s estimation, is not more
likely than not to be generated before such net operating loss carryforwards expire. The Company expects its effective tax rate
for its current fiscal year to be significantly lower than the statutory rate as a result of a full valuation allowance; therefore,
any loss before income taxes does not generate a corresponding income tax benefit.
Income tax benefit for the quarter ended March
31, 2018 of $84 was attributable primarily to the reduction to the valuation allowance as a result of the Tax Cuts and Jobs Act’s
impact on the lives of net operating losses. The final annual tax rate cannot be determined until the end of the fiscal year;
therefore, the actual tax rate could differ from current estimates. Although the Company has an immaterial amount of uncertain
tax positions, the Company does not expect to record any additional material provisions for unrecognized tax benefits in the next
year.
Note 12. 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 a liability and the estimated amount of a loss related to
such matters.
With respect to the Company’s outstanding
legal matters, based on its current knowledge, the Company’s management believes that the amount or range of a potential
loss will not, either individually or in the aggregate, have a material adverse effect on its business, consolidated financial
position, results of operations or cash flows. However, the outcome of such legal matters is inherently unpredictable and subject
to significant uncertainties. The Company evaluated the matters described below, and assessed the probability and likelihood of
the occurrence of liability. Based on management’s estimates, the Company recorded $250, which is included in accounts payable,
accrued expenses, and other current liabilities in the condensed consolidated balance sheet as of March 31, 2018.
The Company expenses legal fees in the period
in which they are incurred.
Cordial
Effective October 2014, XpresSpa terminated
its former Airport Concession Disadvantaged Business Enterprise (“ACDBE”) partner, Cordial Endeavor Concessions of
Atlanta, LLC (“Cordial”), in several store locations at Hartsfield-Jackson Atlanta International Airport.
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 the 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.
On March 30, 2018, Cordial filed a lawsuit
against XpresSpa, a subsidiary of XpresSpa, and several additional parties in the Superior Court of Fulton County, Georgia, alleging
the violation of Cordial’s civil rights, tortious interference, breach of fiduciary duty, civil conspiracy, conversion,
retaliation, and unjust enrichment. Cordial has threated to seek punitive damages, attorneys’ fees and litigation expenses,
accounting, indemnification, and declaratory judgment as to the status of the membership interests of XpresSpa and Cordial in
the joint venture and Cordial’s right to profit distributions and management fees from the joint venture. On May 3, 2018,
the Court issued an order extending the time for the defendants to respond to Cordial’s lawsuit until June 25, 2018. On
May 4, 2018, the defendants removed the lawsuit to the United States District Court for the Northern District of Georgia.
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. XpresSpa subsequently 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. On March 30, 2018 the Court entered a Memorandum and Order denying
the motion without prejudice to renewal due to questions and concerns the Court had about certain settlement terms. On April
24, 2018 the parties jointly submitted a supplemental letter to the Court advocating for the fairness and adequacy of the settlement,
and we appeared in Court on April 25, 2018 for a hearing to discuss the settlement terms in greater detail with the assigned Magistrate
Judge. At the conclusion of the hearing, the Court still had questions about the adequacy and fairness of the settlement
terms, and the Judge asked that the parties jointly submit additional information to the Court addressing the open issues. The
parties are in the process of preparing this submission for filing with the Court by the May 18, 2018 deadline.
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. On March 30, 2018, the defendants filed a reply in further support of the defendants’
motion to dismiss the amended complaint.
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.
Intellectual Property
The Company is engaged in litigation related
to certain of the intellectual property that it owns, for which no liability is recorded, as the Company does not expect a material
negative outcome.
Note 13. Subsequent Events
On May 15, 2018, the Company entered into
the Agreement with the Investors, pursuant to which the Company agreed to sell up to (i) an aggregate principal amount of $4,438
in the Convertible Notes, which includes $88 issued to Palladium Capital Advisors as Placement Agent, convertible into Common
Stock at a conversion price of $0.62 per share, (ii) Class A Warrants to purchase 7,157,259 shares of Common Stock at an exercise
price of $0.62 per share and (iii) Class B Warrants to purchase up to 3,578,630 shares of Common Stock at an exercise price of
$0.62 per share. The Convertible Notes bear interest at a rate of 5% per annum. The Convertible Notes are senior secured obligations
of the Company and are secured by certain of its personal property. Unless earlier converted or redeemed, the Convertible Notes
will mature in November 2019. The Company intends to use the proceeds of this financing primarily for working capital and new
store openings. The Company expects to close the transaction as soon as possible following the filing of these financial statements.
The
principal amount of the outstanding Convertible Notes is to be repaid monthly in the amount of $296, beginning in September 2018,
and the Company may make such payments and related interest payments in cash or, subject to certain conditions, in registered
shares of its common stock (or a combination thereof), at its election. If the Company chooses to repay the Convertible Notes
in shares of its common stock, the shares will be issued at a 10% discount to the volume weighted average price of the Company’s
common stock for the five (5) trading days commencing eight (8) days prior to the relevant repayment date and ending on the fourth
(4
th
) trading day prior to such repayment date, subject to a minimum floor price of not less than 20% of the conversion
price of the Convertible Notes on the issue date. The Company may also repay the Convertible Notes in advance of the maturity
schedule subject to early repayment penalties of 15%.