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, 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 June 30, 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 discontinued 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 June 30, 2018 and December 31, 2017.
The Company owns certain patent portfolios,
which it looks to monetize through sales and licensing agreements. During the six-month period ended June 30, 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 or operating costs.
On April 19, 2018, Andrew D. Perlman resigned
as Chief Executive Officer of the Company and as a Director of the Company, effective as of that date. Mr. Perlman’s resignation
was not as a result of any disagreement with the Company on any matters related to the Company’s operations, policies or
practices.
Effective as of the same date, Edward Jankowski,
Senior Vice President and Chief Executive Officer of the Company’s wholly-owned subsidiary, XpresSpa, was appointed by the
Board of Directors as the Chief Executive Officer of the Company and as a Director of the Company.
On May 15, 2018, the Company entered into
a securities purchase agreement (the “Securities Purchase 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 November 16, 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 on November 16, 2019. The transaction closed on May 17, 2018, at which time the Company received $4,350 in gross proceeds
from the Investors.
On June 19, 2018, Anastasia Nyrkovskaya,
Chief Financial Officer, Principal Financial Officer and Principal Accounting Officer of the Company, resigned from her positions
at the Company to pursue other career interests. Ms. Nyrkovskaya has agreed to remain with the Company in a reduced capacity through
October 15, 2018, during which time she is expected to transition certain projects while the Company completes an ongoing search
for a new Chief Financial Officer. On June 19, 2018, the Company entered into a separation agreement with Ms. Nyrkovskaya, a copy
of which is attached as Exhibit 10.1 hereto and is incorporated herein by reference.
As of June 30, 2018, the Company’s
current assets were $6,235, which included cash and cash equivalents of $4,458. The Company’s current liabilities were $9,873
as of June 30, 2018, which included $1,754 of convertible notes classified as short-term for which principal repayments may be
made in the Company’s common stock at the Company’s election. In addition, included in total current liabilities is
approximately $1,762 which relates to obligations that will not settle in cash, and an additional $465 of liabilities that are
not expected to settle in the next twelve months.
The Company’s management believes
that its current cash balance, cash to be provided by future operating activities, and cash proceeds from the anticipated liquidation
of certain investments, will be sufficient to fund its planned operations and pay its liabilities as they become due, including
scheduled Convertible Note principal repayments for at least the next twelve months following the filing date of these financial
statements. At the Company’s election, principal repayments of the Convertible Notes may be made in cash or, subject to certain
conditions, in registered shares of the Company’s common stock. In addition, the Company has access to additional sources
of financing and may attempt to renegotiate terms of various contracts.
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 and six-month periods ended June 30, 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, investments classified as other 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 June 30, 2018,
the Company held significant portions of its cash balance in overseas accounts, totaling $1,232, 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 over, 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. 2017-11, Earnings Per Share (Topic 260); Distinguishing
Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815)
This standard provides new guidance to address
the complexity of accounting for certain financial instruments with down round features. The amendments of this ASU change the
classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. A down
round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s
own stock. A freestanding equity-linked financial instrument (or embedded conversion feature) no longer would be accounted for
as a derivative liability at fair value as a result of the existence of a down round feature. The new standard is effective
for the fiscal year beginning after December 15, 2018 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 loss per share of common stock:
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Basic numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations attributable to shares of common stock
|
|
$
|
(3,013
|
)
|
|
$
|
(4,713
|
)
|
|
$
|
(26,341
|
)
|
|
$
|
(9,660
|
)
|
Net loss from discontinued operations attributable to shares of common stock
|
|
|
(510
|
)
|
|
|
(2,297
|
)
|
|
|
(1,115
|
)
|
|
|
(3,775
|
)
|
Net loss attributable to the Company
|
|
$
|
(3,523
|
)
|
|
$
|
(7,010
|
)
|
|
$
|
(27,456
|
)
|
|
$
|
(13,435
|
)
|
Basic denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic shares of common stock outstanding
|
|
|
26,841,975
|
|
|
|
19,310,994
|
|
|
|
26,718,066
|
|
|
|
19,178,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share of common stock from continuing operations
|
|
$
|
(0.11
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.99
|
)
|
|
$
|
(0.50
|
)
|
Basic loss per share of common stock from discontinued operations
|
|
|
(0.02
|
)
|
|
|
(0.12
|
)
|
|
|
(0.04
|
)
|
|
|
(0.20
|
)
|
Basic net loss per share of common stock
|
|
$
|
(0.13
|
)
|
|
$
|
(0.36
|
)
|
|
$
|
(1.03
|
)
|
|
$
|
(0.70
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations attributable to shares of common stock
|
|
$
|
(3,013
|
)
|
|
$
|
(4,713
|
)
|
|
$
|
(26,341
|
)
|
|
$
|
(9,660
|
)
|
Net loss from discontinued operations attributable to shares of common stock
|
|
|
(510
|
)
|
|
|
(2,297
|
)
|
|
|
(1,115
|
)
|
|
|
(3,775
|
)
|
Net loss attributable to the Company
|
|
$
|
(3,523
|
)
|
|
$
|
(7,010
|
)
|
|
$
|
(27,456
|
)
|
|
$
|
(13,435
|
)
|
Diluted denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted shares of common stock outstanding
|
|
|
26,841,975
|
|
|
|
19,310,994
|
|
|
|
26,718,066
|
|
|
|
19,178,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share of common stock from continuing operations
|
|
$
|
(0.11
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.99
|
)
|
|
$
|
(0.50
|
)
|
Diluted loss per share of common stock from discontinued operations
|
|
|
(0.02
|
)
|
|
|
(0.12
|
)
|
|
|
(0.04
|
)
|
|
|
(0.20
|
)
|
Diluted net loss per share of common stock
|
|
$
|
(0.13
|
)
|
|
$
|
(0.36
|
)
|
|
$
|
(1.03
|
)
|
|
$
|
(0.70
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
3,102,500
|
|
|
|
5,135,399
|
|
|
|
3,102,500
|
|
|
|
5,135,399
|
|
Unvested RSUs to issue an equal number of shares of common stock of the Company
|
|
|
465,000
|
|
|
|
400,942
|
|
|
|
465,000
|
|
|
|
400,942
|
|
Warrants to purchase an equal number of shares of common stock of the Company
|
|
|
14,073,390
|
|
|
|
3,430,877
|
|
|
|
14,073,390
|
|
|
|
3,430,877
|
|
Preferred stock on an as converted basis
|
|
|
3,364,328
|
|
|
|
3,439,587
|
|
|
|
3,364,328
|
|
|
|
3,620,626
|
|
Convertible notes on an as converted basis
|
|
|
4,350,000
|
|
|
|
—
|
|
|
|
4,350,000
|
|
|
|
—
|
|
Total number of potentially dilutive instruments, excluded from the calculation of net loss per share
|
|
|
25,355,218
|
|
|
|
12,406,805
|
|
|
|
25,355,218
|
|
|
|
12,587,844
|
|
Note 4. Goodwill
On January 5, 2018, the Company changed
its name to XpresSpa Group as part of a rebranding effort to carry out 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. The Company
completed the sale of Group Mobile on March 22, 2018, which was the only remaining component of the Company’s technology
operating segment. Following the sale of Group Mobile, 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 be 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 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.
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. As the stock price had not rebounded, the Company determined that the impairment
related 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 were projected future cash flows and a discount rate,
which was 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 six-month period ended June 30, 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 June 30, 2018 and December 31, 2017:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Cost method investments
|
|
$
|
2,802
|
|
|
$
|
834
|
|
Lease deposits
|
|
|
856
|
|
|
|
852
|
|
Other assets
|
|
$
|
3,658
|
|
|
$
|
1,686
|
|
As of June 30, 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;
|
|
·
|
$787
cost method investment in InfoMedia Services Limited (“InfoMedia”), which
the Company acquired in 2014;
|
|
·
|
$343 cost method investment in Marathon Patent Group, Inc. (“Marathon”), which the Company acquired in January 2018 with an acquisition date fair value of $450. Based on the Company’s evaluation of the investment, it was determined that certain unrealized losses represented an other-than-temporary impairment as of June 30, 2018 and the Company recognized an impairment charge of $107 for the three and six months ended June 30, 2018, equal to the excess of cost basis over fair value;
|
|
·
|
$47 cost method investment in FLI Charge, which the Company received from the disposition of FLI Charge in October 2017; and
|
|
|
|
|
·
|
$856 deposits made pursuant to various lease agreements, which will be returned to the Company at the end of the leases.
|
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,
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- and six-month periods ended June 30, 2018 and 2017 and total asset information as of June 30, 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 June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
11,738
|
|
|
$
|
11,665
|
|
|
$
|
22,997
|
|
|
$
|
21,633
|
|
All other countries
|
|
|
1,300
|
|
|
|
1,262
|
|
|
|
2,641
|
|
|
|
2,378
|
|
Total revenue
|
|
|
13,038
|
|
|
|
12,927
|
|
|
|
25,638
|
|
|
|
24,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
9,478
|
|
|
|
9,694
|
|
|
|
18,468
|
|
|
|
17,951
|
|
All other countries
|
|
|
881
|
|
|
|
825
|
|
|
|
1,668
|
|
|
|
1,502
|
|
Total cost of sales
|
|
|
10,359
|
|
|
|
10,519
|
|
|
|
20,136
|
|
|
|
19,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
(3,099
|
)
|
|
|
(4,893
|
)
|
|
|
(26,375
|
)
|
|
|
(9,652
|
)
|
All other countries
|
|
|
31
|
|
|
|
506
|
|
|
|
251
|
|
|
|
696
|
|
Operating loss from continuing operations
|
|
|
(3,068
|
)
|
|
|
(4,387
|
)
|
|
|
(26,124
|
)
|
|
|
(8,956
|
)
|
Other non-operating expense, net
|
|
|
184
|
|
|
|
(226
|
)
|
|
|
(89
|
)
|
|
|
(301
|
)
|
Loss from continuing operations before income taxes
|
|
$
|
(2,884
|
)
|
|
$
|
(4,613
|
)
|
|
$
|
(26,213
|
)
|
|
$
|
(9,257
|
)
|
|
|
June
30, 2018
|
|
|
December 31,
2017
|
|
Assets
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
33,355
|
|
|
$
|
55,152
|
|
All
other countries
|
|
|
2,899
|
|
|
|
3,642
|
|
Assets
held for disposal
|
|
|
109
|
|
|
|
6,446
|
|
Total
assets
|
|
$
|
36,363
|
|
|
$
|
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 June 30, 2018, May 17, 2018 and December 31, 2017:
May
2015 Warrants
|
|
|
|
|
Fair value measurement at reporting date using
|
|
|
|
Balance
|
|
|
Quoted prices in
active markets
for identical
assets (Level 1)
|
|
|
Significant other
observable
inputs (Level 2)
|
|
|
Significant
unobservable
inputs (Level 3)
|
|
June 30, 2018:
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017:
|
|
$
|
34
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
34
|
|
May 2018 Warrants
|
|
|
|
|
Fair value measurement at reporting date using
|
|
|
|
|
|
|
Quoted prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
active markets
|
|
|
Significant other
|
|
|
Significant
|
|
|
|
|
|
|
for identical
|
|
|
observable
|
|
|
unobservable
|
|
|
|
Balance
|
|
|
assets (Level 1)
|
|
|
inputs (Level 2)
|
|
|
inputs (Level 3)
|
|
June 30,2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A Warrants
|
|
$
|
1,091
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,091
|
|
B Warrants
|
|
|
6
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6
|
|
Total
|
|
$
|
1,097
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 17, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A Warrants
|
|
$
|
1,827
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,827
|
|
B Warrants
|
|
|
135
|
|
|
|
—
|
|
|
|
—
|
|
|
|
135
|
|
Total
|
|
$
|
1,962
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,962
|
|
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. The derivative warrant liabilities
are included in other liabilities in the condensed consolidated balance sheets and the revaluation of the derivative warrants
liabilities is included in other non-operating income (expense) in the condensed consolidated statements of operations and comprehensive
loss.
In addition to the above, the Company’s
financial instruments as of June 30, 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 and six-month periods ended June 30, 2018:
December 31, 2017
|
|
$
|
34
|
|
Issuance of warrants May 17, 2018
|
|
|
1,962
|
|
Decrease in fair value of the derivative warrant liabilities
|
|
|
(898
|
)
|
June 30, 2018
|
|
$
|
1,098
|
|
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.
May 2015 Warrants
June 30, 2018:
Description
|
|
Valuation technique
|
|
Unobservable inputs
|
|
Range
|
|
Derivative warrant liabilities
|
|
Black-Scholes-Merton
|
|
Volatility
|
|
|
68.14
|
%
|
|
|
|
|
Risk free interest rate
|
|
|
2.46
|
%
|
|
|
|
|
Expected term, in years
|
|
|
1.84
|
|
|
|
|
|
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
|
%
|
May 2018 Warrants
June 30, 2018:
Description
|
|
Valuation technique
|
|
Unobservable inputs
|
|
Range
|
|
Derivative warrant liabilities –
A Warrants
|
|
Black-Scholes-Merton
|
|
Volatility
|
|
|
72.23
|
%
|
|
|
|
|
Risk free interest rate
|
|
|
2.77
|
%
|
|
|
|
|
Expected term, in years
|
|
|
4.88
|
|
|
|
|
|
Dividend yield
|
|
|
0.00
|
%
|
Description
|
|
Valuation technique
|
|
Unobservable inputs
|
|
Range
|
|
Derivative warrant liabilities –
B Warrants
|
|
Black-Scholes-Merton
|
|
Volatility
|
|
|
72.14
|
%
|
|
|
|
|
Risk free interest rate
|
|
|
1.81
|
%
|
|
|
|
|
Expected term, in years
|
|
|
0.38
|
|
|
|
|
|
Dividend yield
|
|
|
0.00
|
%
|
May 17, 2018:
Description
|
|
Valuation technique
|
|
Unobservable inputs
|
|
Range
|
|
Derivative warrant liabilities –
A Warrants
|
|
Black-Scholes-Merton
|
|
Volatility
|
|
|
71.13
|
%
|
|
|
|
|
Risk-free interest rate
|
|
|
2.98
|
%
|
|
|
|
|
Expected term, in years
|
|
|
5.00
|
|
|
|
|
|
Dividend yield
|
|
|
0.00
|
%
|
Description
|
|
Valuation technique
|
|
Unobservable inputs
|
|
Range
|
|
Derivative warrant liabilities –
B Warrants
|
|
Black-Scholes-Merton
|
|
Volatility
|
|
|
72.88
|
%
|
|
|
|
|
Risk-free interest rate
|
|
|
1.99
|
%
|
|
|
|
|
Expected term, in years
|
|
|
0.50
|
|
|
|
|
|
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 was
subject to a Lockup Period (the “Lockup Period”) commencing on the Transaction Date which, subject to a leak-out
provision, ended on July 11, 2018.
The Marathon Common Stock is recognized
as a cost method investment and, as such, was required to be measured at cost on the date of acquisition, which, as of the Transaction
Date, approximated 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
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
$
|
343
|
|
|
$
|
—
|
|
|
$
|
343
|
|
|
$
|
—
|
|
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. The fair value of the consideration as of the Transaction Date was determined to be $450. Based
on the Company’s evaluation of the investment, it was determined that certain unrealized losses represented an other-than-temporary
impairment as of June 30, 2018 and the Company recognized an impairment charge of $107 for the three and six months ended June
30, 2018, equal to the excess of cost basis over fair value. The fair value of the Marathon Common Stock as of June 30, 2018 was
determined to be $343, which is included in other assets in the condensed consolidated balance sheet as of June 30, 2018.
The following table summarizes the changes
in the Company’s investment in Marathon Common Stock, measured at fair value using significant other observable inputs (Level
2) during the three and six-month periods ended June 30, 2018:
January 11, 2018
|
|
$
|
450
|
|
Decrease in fair value of the Marathon Common Stock
|
|
|
(107
|
)
|
June 30, 2018
|
|
$
|
343
|
|
On July 11, 2018, the Lockup Period concluded
and the Company was permitted to begin trading the Marathon Common Stock, subject to a leak-out provision whereby the shares were
released from Lockup in equal increments over a twenty-day period.
Other Fair Value Measurements
The Company is also required to measure the
fair value of the contingent consideration it assumed following the acquisition of Excalibur Integrated Systems, Inc. (“Excalibur”)
on February 2, 2017 on a recurring basis. The Company determined that there was no change in the fair value of the contingent
consideration of $316 between December 31, 2017 and June 30, 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 June 30, 2018, 2,658,470 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 three-month periods ended June 30, 2018 and 2017 was $259
and $732, respectively, the latter of which included stock-based compensation expense of $189 included in discontinued operations.
Total stock-based compensation expense for the six-month periods ended June 30, 2018 and 2017 was $571 and $1,090, respectively,
the latter of which included stock-based compensation expense of $383 included in discontinued operations.
The following table summarizes the RSUs granted
to employees and consultants during the six-month period ended June 30, 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
|
April 19, 2018
|
|
|
150,000
|
|
|
$
|
0.60
|
|
|
Vesting immediately upon grant
|
May 15, 2018
|
|
|
465,000
|
|
|
$
|
0.60
|
|
|
Over one year, vesting on one-year anniversary of grant date
|
No options were granted during the six-month
period ended June 30, 2018.
The activity related to RSUs and stock options
during the six-month period ended June 30, 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
|
|
|
|
668,408
|
|
|
$
|
0.63
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Vested/Exercised
|
|
|
|
(568,973
|
)
|
|
$
|
1.61
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,163,125
|
)
|
|
$
|
5.43
|
|
|
|
$
1.55 – 37.20
|
|
|
$
|
3.55
|
|
|
Expired
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(52,316
|
)
|
|
$
|
16.24
|
|
|
|
$
9.60 – 16.50
|
|
|
$
|
9.71
|
|
|
Outstanding
as of June 30, 2018
|
|
|
|
465,000
|
|
|
$
|
0.60
|
|
|
|
3,102,501
|
|
|
$
|
5.58
|
|
|
|
$
1.10 – 41.00
|
|
|
$
|
3.72
|
|
|
Exercisable
as of June 30, 2018
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,590,000
|
|
|
$
|
6.30
|
|
|
|
$
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. Debt and Convertible Notes
Debt
On April 22, 2015, XpresSpa entered into
a credit agreement and secured promissory note (the “Debt”) with Rockmore Investment Master Fund Ltd. (“Rockmore”),
a related party, 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 June 30, 2018 and December 31, 2017, which is included
in long-term liabilities in the condensed consolidated balance sheets. During the six-month period ended June 30, 2018, XpresSpa
paid $430 of interest and recorded $365 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. As consideration for the agreement to extend the maturity date of the Debt and the consent to the Securities Purchase
Agreement, the Company issued to Rockmore 250,000 Class A Warrants. These Class A Warrants were issued on the same terms and conditions
as the Class A Warrants issued under the Securities Purchase Agreement. The warrants issued to Rockmore were classified as equity
warrants in the condensed consolidated balance sheet as of June 30, 2018.
Convertible Notes
On May 15, 2018, the Company entered into
the Securities Purchase 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 on November 16, 2019. The Company intends to use the proceeds of this financing primarily for working capital
and new store openings. The transaction closed on May 17, 2018.
The principal amount of the outstanding
Convertible Notes is to be repaid monthly in the amount of $296, beginning on September 17, 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%.
The table below summarizes the initial
fair value of the Convertible Notes as of May 17, 2018:
Class A Warrants
|
|
$
|
1,827
|
|
Class B Warrants
|
|
|
135
|
|
Convertible Notes
|
|
|
2,388
|
|
Total Fair Value as of June 30, 2018
|
|
$
|
4,350
|
|
The table below summarizes changes in
the book value of the Convertible Notes from May 17, 2018 to June 30, 2018:
Book value as of May 17, 2018
|
|
$
|
2,388
|
|
Debt issuance costs
|
|
|
(309
|
)
|
Book value as of May 17, 2018
|
|
|
2,079
|
|
Debt repayments in the period
|
|
|
—
|
|
Amortization of debt discount and debt issuance costs, included in interest expense
|
|
|
195
|
|
Book value as of June 30, 2018
|
|
$
|
2,274
|
|
The debt discount and debt issuance costs
will be amortized on a straight-line basis over the remaining term of the Convertible Notes. During the quarter ended June 30,
2018, the Company recorded $195 of amortization of debt discount and debt issuance costs, which was included in interest expense
for the three and six-month periods ended June 30, 2018. Additionally, the Company recorded $27 of interest expense related to
the Convertible Notes, which was included in interest expense for the three and six-month periods ended June 30, 2018.
Note 10. Related Party Transactions
On April 14, 2018, the Company entered
into a consulting agreement with an employee of Mistral Equity Partners, which is a significant shareholder of the Company and
whose Chief Executive Officer is a member of the Board of Directors of the Company, to consult on certain business-related matters.
The total consideration is approximately $10 per month through December 31, 2018. The agreement may be terminated by either party
at any time upon delivery of written notice. Pursuant to the agreement, the Company recorded consulting expense of $25 for the
three and six-month periods ended June 30, 2018.
Note 11. 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 “Group Mobile 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 Group
Mobile 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 June 30, 2018. The remaining inventory excluded from the transaction was subsequently determined to be obsolete
and unsalable and was fully written off as of June 30, 2018. Assets held for disposal includes $109 of accounts receivable, net
of allowance, 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 Group Mobile 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 June 30, 2018. This resulted in a loss on disposal of $301, which is included in consolidated net loss from discontinued
operations in the condensed consolidated statement of operations and comprehensive loss for the three- and six-month periods ended
June 30, 2018.
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- and six-month periods ended June 30, 2018 for Group Mobile and June 30, 2017 for Group
Mobile and FLI Charge:
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Revenue
|
|
$
|
—
|
|
|
$
|
3,469
|
|
|
$
|
2,834
|
|
|
$
|
6,994
|
|
Cost of sales
|
|
|
—
|
|
|
|
(2,725
|
)
|
|
|
(2,305
|
)
|
|
|
(5,685
|
)
|
Depreciation and amortization
|
|
|
—
|
|
|
|
(199
|
)
|
|
|
(131
|
)
|
|
|
(372
|
)
|
Impairment
|
|
|
—
|
|
|
|
(1,092
|
)
|
|
|
—
|
|
|
|
(1,092
|
)
|
General and administrative
|
|
|
(510)
|
|
|
|
(1,748
|
)
|
|
|
(1,190
|
)
|
|
|
(3,616
|
)
|
Loss on disposal
|
|
|
—
|
|
|
|
—
|
|
|
|
(301
|
)
|
|
|
—
|
|
Non-operating income (expense), net
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
(22
|
)
|
|
|
(4
|
)
|
Loss from discontinued operations before income taxes
|
|
|
(510)
|
|
|
|
(2,297
|
)
|
|
|
(1,115
|
)
|
|
|
(3,775
|
)
|
Income tax benefit (expense)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consolidated net loss from discontinued operations
|
|
$
|
(510)
|
|
|
$
|
(2,297
|
)
|
|
$
|
(1,115
|
)
|
|
$
|
(3,775
|
)
|
In addition, the following table presents
the carrying amounts of Group Mobile’s major classes of assets and liabilities held for disposal as of June 30, 2018 and
December 31, 2017, as presented in the condensed consolidated balance sheets:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Cash
|
|
$
|
—
|
|
|
$
|
150
|
|
Accounts receivable, net
|
|
|
109
|
|
|
|
2,920
|
|
Inventory
|
|
|
—
|
|
|
|
1,935
|
|
Other current assets
|
|
|
—
|
|
|
|
3
|
|
Property and equipment, net
|
|
|
—
|
|
|
|
874
|
|
Intangible assets, net
|
|
|
—
|
|
|
|
564
|
|
Assets held for disposal
|
|
$
|
109
|
|
|
$
|
6,446
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses and other current liabilities
|
|
$
|
40
|
|
|
$
|
3,142
|
|
Deferred revenue
|
|
|
—
|
|
|
|
619
|
|
Liabilities held for disposal
|
|
$
|
40
|
|
|
$
|
3,761
|
|
Note 12. Income Taxes
The Company’s provision for income
taxes consists of federal, state, local, and foreign taxes in amounts necessary to align the Company’s year-to-date provision
for income taxes with the effective tax rate that the Company expects to achieve for the full year. Each quarter, the Company updates
its estimate of the annual effective tax rate and records cumulative adjustments as deemed necessary. The income tax provisions
for the six-month period ended June 30, 2018 reflect an estimated global annual effective tax rate of approximately 0.48%.
As of June 30, 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 six-month period
ended June 30, 2018 of $132 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 13. 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 has accrued $290 for such potential losses, which
is included in accounts payable, accrued expenses, and other current liabilities in the condensed consolidated balance sheet as
of June 30, 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 moved the lawsuit to the United States District Court for the Northern District of Georgia. On June
5, 2018, the Court granted an extension of time for the defendants’ response until August 17, 2018. On August 9, 2018, the Court granted an additional extension of time for the defendants’ response
until September 7, 2018.
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 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 submitted such information to the Court on May 18, 2018 and are awaiting the Court’s ruling on the open issues.
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. On August 7, 2018, the Court ruled on the defendants’ motion to dismiss the amended
complaint, dismissing eight of the plaintiffs’ ten claims and denying the defendants’ motion to dismiss with respect
to the two remaining claims, related to the Exchange Act.
Route1
On May 23, 2018, Route1 and Group Mobile
filed a Statement of Claim against the Company in the Ontario (Canada) Superior Court of Justice seeking monetary damages based
on indemnity claims made by Route1 and Group Mobile pursuant to the Group Mobile Purchase Agreement, including an offset against
funds payable to the Company by Route1 and Group Mobile pursuant to the Group Mobile Purchase Agreement. On August 13, 2018, the
Company filed its Defence and Counterclaim, seeking the payment of such funds payable to the Company by Route1 and Group Mobile
pursuant to the Group Mobile Purchase Agreement.
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 the Company or one of its subsidiaries, the Company will investigate the allegation and vigorously defend itself.
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 14. Subsequent Events
On July 10, 2018, the Company named Janine
Canale, who currently serves as the Company’s Controller and Principal Accounting Officer, to the additional post of Principal
Financial Officer.
On August 14, 2018, the Company and each of the Investors entered into an Amendment Agreement to the Securities
Purchase Agreement and the Secured Convertible Notes due November 16, 2019 (the “Notes”) whereby (i) the Company will,
by August 15, 2018, make an initial payment of principal and interest on the Notes to the Investors in shares of the Company’s
common stock priced at $0.17 per share of Common Stock (resulting in the issuance of an aggregate of 2,067,353 shares of the Company’s
common stock) , and (ii) the Investors waived the Company’s obligation to make any payments of principal and interest for
the months of September 2018 through December 2018; provided, however, that any of the Investors, individually and for itself
only, can cause the Company to make up to three payments of principal and interest to such Investor in the form of shares of the
Company’s common stock priced at $0.17 per share.