Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§
232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files). Yes x No ¨
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate
by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of the registrant's
common stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in such
calculation is an affiliate), as of June 28, 2019, the last business day of the registrant’s most recently completed second
quarter, was $5,398,950 computed by reference to the closing sale price of $1.94 per share on the Nasdaq Stock Market LLC on June
28, 2019.
As of April 13, 2020, 86,500,160 shares of the registrant's
common stock are outstanding.
Certain information required by Part III will be included in
an amendment to this Annual Report on Form 10-K.
These risks and uncertainties, many of
which are beyond our control, include, but are not limited to, the following:
All references in this Annual Report on
Form 10-K to “we,” “us” and “our” refer to XpresSpa Group, Inc. (prior to January 5, 2018,
known as “FORM Holdings Corp.”), a Delaware corporation, and its consolidated subsidiaries unless the context requires
otherwise.
PART I
ITEM 1. BUSINESS
Overview
On January 5, 2018, we changed our name
to XpresSpa Group, Inc. (“XpresSpa Group” or the “Parent”) from FORM Holdings Corp. We rebranded to XpresSpa
Group to align our corporate strategy to build a pure-play health and wellness services company, which commenced following our
acquisition of XpresSpa Holdings, LLC (“Holdings” or “XpresSpa”) on December 23, 2016 (XpresSpa Group,
Inc. and Holdings consolidated is referred to as the “Company”).
As a result of the transition to a pure-play
health and wellness services company, we currently have one operating segment that is also our sole reporting unit, XpresSpa, the
leading airport retailer of spa services. XpresSpa offers travelers premium spa services, including massage, nail and skin care,
as well as spa and travel products. XpresSpa is a well-recognized airport spa brand with 51 locations, consisting of 46 domestic
and 5 international locations as of December 31, 2019. During 2019 and 2018, XpresSpa generated $48,515,000 and $50,094,000
in revenue, respectively. In 2019 and 2018, approximately 82% of XpresSpa’s total revenue in both years was generated by
services, primarily massage and nailcare. In 2019 and 2018, retail products and travel accessories accounted for 15% and 16%, respectively,
of revenue and 3% and 2%, respectively, was other revenue.
On July 8, 2019, we entered into an amended
and restated product sale and marketing agreement, with Calm, Inc. (“Calm”), a company that has developed the leading
app for sleep, meditation and relaxation. The agreement primarily allows for the display, marketing, promotion, offer for sale
and sale of Calm’s products in each of our branded stores worldwide. The agreement will remain in effect until July 31, 2021,
unless terminated earlier in accordance with the terms of the agreement, and automatically renews for successive terms of six months
unless either party provides written notice of termination no later than thirty days prior. On October 30, 2019, we entered into
the second amendment to the agreement with Calm, which provides for the addition of other Calm branded products available for sale
in XpresSpa spas.
On October 30, 2019, we signed a strategic
partnership with Persona™, a Nestlé Health Science company and leading personalized vitamin subscription program,
to offer Persona’s products in all of our domestic airport locations with our staff trained on the products by Persona’s
nutritionists. Customers are able to purchase three different nutrition packs designed especially for travelers to support relaxation,
immunity or jet lag, with customers receiving an exclusive discount on their first order. XpresSpa launched Persona in its
airport locations in December 2019.
We own certain patent portfolios, which,
in prior years we monetized through sales and licensing agreements. During the year ended December 31, 2018, we determined that
our intellectual property operating segment was no longer an area of focus for us and, as such, is no longer reflected as a separate
operating segment, as it has not generated any material revenues or operating costs.
In March 2018, we completed the sale of
Group Mobile Int’l LLC (“Group Mobile”). This entity was previously included in our technology operating segment.
The results of operations for Group Mobile are presented in the consolidated statements of operations and comprehensive loss as
consolidated net loss from discontinued operations.
Our Strategy and Outlook
XpresSpa is a leading airport retailer
of spa services and related products. XpresSpa was created for travelers to address the stress and idle time spent at the airport,
allowing travelers to spend this time relaxing and focusing on personal care and wellness. We believe that XpresSpa is well positioned
to benefit from consumers’ growing interest in health and wellness and increasing demand for spa services and related wellness
products. It is a well-recognized and popular airport spa brand with a dominant market share in the United States, nearly three
times the number of domestic locations as its closest competitor. Globally, it provides approximately one million services and
products per year to its customers. As of December 31, 2019, XpresSpa operated 51 total locations in 25 airports, in three countries
including the United States, Netherlands and United Arab Emirates. Key services and products offered include:
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massage services for the neck, back, feet and whole body;
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nail care, such as pedicures, manicures and polish changes;
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travel products, such as neck pillows, blankets and massage tools; and
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new offerings through its strategic partnerships, such as sleep, meditation and relaxation therapies with Calm.com, vitamin and nutrition products through Persona, cryotherapy services, NormaTec compression services, and Dermalogica personal care services and retail products.
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For over 15 years, increased security requirements
have led travelers to spend more time at the airport. In addition, in anticipation of the long and often stressful security lines,
travelers allow for more time to get through security and, as a result, often experience increased downtime prior to boarding.
Consequently, travelers at large airport hubs have idle time in the terminal after passing through security.
Recent Developments
Effects of Coronavirus on Business
On March 11, 2020, the World Health
Organization declared the outbreak of the Coronavirus (“COVID-19”), which continues to spread throughout the U.S.
and the world, as a pandemic. The outbreak is having an impact on the global economy, resulting in rapidly changing market
and economic conditions. Similar to many businesses in the travel sector, our business has been materially adversely impacted
by the recent COVID-19 outbreak and associated restrictions on travel that have been implemented. Effective March 24, 2020,
we temporarily closed all global spa locations, largely due to the categorization of our spa locations by local jurisdictions
as “non-essential services”. We intend to reopen our spa locations and resume normal operations once restrictions
on non-essential services are lifted and airport traffic returns to sufficient levels to support our operations.
On March 25, 2020, we announced that during such period as we
remain unable to reopen our spa locations for normal operations, we were advancing conversations with certain COVID-19 testing
partners to develop a model for testing in U.S. airports.
The temporary closing of our global spa
operations has had a materially adverse impact on our cash flows from operations and caused a liquidity crisis. As a result,
management has concluded that there was a long-lived asset impairment triggering event during the first quarter of 2020, which
will result in management performing an impairment evaluation of certain of our long-lived asset balances (primarily leasehold
improvements and right of use lease assets totaling approximately $16,318,000 as of December 31, 2019). This could lead to us recording
an impairment charge during the first quarter of 2020. The full extent to which COVID-19 will impact our results will depend on
future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning
the severity of the virus and the actions to contain or treat its impact.
We are currently seeking sources of capital to help fund our
business operations during the COVID-19 crisis. We have been able to secure financing during 2020 totaling gross proceeds
of approximately $9,440,000 by obtaining a cash advance on our accounts receivable balances, a loan from our senior secured lender,
B3D, LLC (“B3D”), and through common stock offerings (see further discussion below). Depending on the impact of the
COVID outbreak on our operations and cash position, we may need to obtain additional financing. If we need to obtain additional
financing in the future and are unsuccessful, we may be required to curtail or terminate some or all of our business operations
and cause our Board of Directors to possibly pursue a restructuring, which may include a reorganization or bankruptcy under Federal
bankruptcy laws, or a dissolution, liquidation and/or winding up of the Company.
CEO Transition
On February 8, 2019, Edward Jankowski resigned
as our Chief Executive Officer and as a director.
Effective as of February 11, 2019, Douglas Satzman was appointed
by our Board of Directors as our Chief Executive Officer and as a director to fill the position vacated by Mr. Jankowski.
Evaluation and Right Sizing of the Portfolio
Among the first initiatives of Mr. Satzman was a critical evaluation
of the profitability and strategic fit of the portfolio of spas. Consequently, a determination was made to close nine underperforming
and strategically mismatched spas, or approximately 20% of the spa portfolio, while focusing efforts and capital on the performing
spas, renovations of existing spas and expansion of the spa portfolio into new airports and terminals.
See “Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations - Recent Developments and Liquidity and Going Concern” sections
in this Annual Report on Form 10-K for further discussion.
Competition
XpresSpa operated 51 locations, which includes
46 domestic locations and 5 international locations as of December 31, 2019. Our domestic units operate within many of the largest
and most heavily trafficked airports in the United States. The balance of the domestic market is highly fragmented and is
represented largely by small, privately-owned entities. The largest domestic competitor operates 15 locations in nine
airports in the United States.
Our Market
Airport retailers differ significantly
from traditional retailers. Unlike traditional retailers, airport retailers benefit from a steady and largely predictable flow
of traffic from a constantly changing customer base. Airport retailers also benefit from “dwell time,” the period after
travelers have passed through airport security and before they board an aircraft. For over 15 years, increased security requirements
have led travelers to spend more time at the airport. In addition, in anticipation of the long and often stressful security lines,
travelers allow for more time to get through security and, as a result, often experience increased downtime prior to boarding.
XpresSpa was developed to address the
stressful and idle time spent at the airport, allowing travelers to spend this time productively, by relaxing and focusing on
personal care and wellness. We believe that XpresSpa is well positioned to benefit from consumers’ growing interest in health
and wellness and increasing demand for spa services and related wellness products.
In addition, a confluence of microeconomic
events has created favorable conditions for the expansion of retail concepts at airports, in particular, retail concepts that attract
higher spending from air travelers. The competition for airplane landings has forced airports to lower landing fees, which in turn
has necessitated augmenting their retail offerings to offset budget shortfalls. Infrastructure projects at airports across the
country, again intended to make an airport more desirable to airlines, require funding from bond issuances that in turn rely upon,
in part, the expected minimum rent guarantees and expected income from concessionaires.
Equally as important to the industry growth
is XpresSpa’s flexible, valuable and desirable retail format and footprint within the airport retail segment. XpresSpa opens
multiple locations annually, which have ranged in size from 200 square feet to 2,600 square feet, with a typical size of approximately
800 square feet. XpresSpa is able to adapt its operating model to almost any size location available in space constrained airports.
This increased flexibility compared to other retail concepts allows XpresSpa to operate multiple stores within an airport, from
which it enjoys synergies due to shared labor between stores.
XpresSpa believes that its operating metrics
represent an attractive return on invested capital and, as a result, is pursuing new locations at airports and terminals around
the country. Historically, XpresSpa has won the majority of all requests for proposal (“RFP”) in which it has participated.
Normal market conditions and behavior have been negatively impacted
by the recent outbreak of COVID-19. On March 11, 2020, the World Health Organization declared the outbreak a pandemic. The outbreak
is having an impact on the global economy, resulting in rapidly changing market and economic conditions. Similar to many businesses
in the travel sector, our business has been materially adversely impacted by the recent COVID-19 outbreak and associated restrictions
on travel that have been implemented. Effective March 24, 2020, we temporarily closed all global spa locations, largely due to
the categorization of our spa locations by local jurisdictions as “non-essential services”. We believe the market conditions
will return to normal and we intend to reopen our spa locations and resume normal operations once the restrictions on non-essential
services are lifted and airport traffic returns to sufficient levels to support our operations.
Regulation
Our operations are subject to a range of
laws and regulations adopted by national, regional and local authorities from the various jurisdictions in which we operate, including
those relating to, among others, licensing (e.g., massage, nail, and cosmetology), public health and safety and fire codes. Failure
to obtain or retain required licenses and approvals, including those related to licensing, public health and safety and fire codes,
would adversely affect our operations. Although we have not experienced, and do not anticipate, significant problems obtaining
required licenses, permits or approvals, any difficulties, delays or failures in obtaining such licenses, permits or approvals
could delay or prevent the opening, or adversely impact the viability, of our operations.
Airport authorities in the United States
frequently require that our airport concessions meet minimum Airport Concession Disadvantaged Business Enterprise ("ACDBE")
participation requirements. The Department of Transportation’s (“DOT”) ACDBE program is implemented by recipients
of DOT Federal Financial Assistance, including airport agencies that receive federal funding. The ACDBE program is administered
by the Federal Aviation Administration (“FAA”), state and local ACDBE certifying agencies and individual airports.
The ACDBE program is designed to help ensure that small firms owned and controlled by socially and economically disadvantaged individuals
can compete for airport contracting and concession opportunities in domestic passenger service airports. The ACDBE regulations
require that airport recipients establish annual ACDBE participation goals, review the scope of anticipated large prime contracts
throughout the year, and establish contract specific ACDBE participation goals. We generally meet the contract specific goals through
an agreement providing for co-ownership of the retail location with a disadvantaged business enterprise. Frequently, and within
the guidelines issued by the FAA, we may lend money to ACDBEs in connection with concession agreements in order to help the ACDBE
fund the capital investment required under a concession agreement. The rules and regulations governing the certification of ACDBE
participation in airport concession agreements are complex, and ensuring ongoing compliance is costly and time consuming. Further,
if we fail to comply with the minimum ACDBE participation requirements in our concession agreements, we may be held responsible
for breach of contract, which could result in the termination of a concession agreement and monetary damages. See “Item 1A.
Risk Factors – Risks Related to our Business Operations – Failure to comply with minimum airport concession disadvantaged
business enterprise participation goals and requirements could lead to lost business opportunities or the loss of existing business.”
We are subject to the Fair Labor Standards
Act, the Immigration Reform and Control Act of 1986, the Occupational Safety and Health Act, the Family and Medical Leave Act,
the Affordable Care Act, the Healthcare Insurance Portability and Accountability Act and various federal and state laws governing
matters such as minimum wages, overtime, unemployment tax rates, workers’ compensation rates, citizenship requirements and
other working conditions. We are also subject to the Americans with Disabilities Act, which prohibits discrimination on the basis
of disability in public accommodations and employment, which may require us to design or modify our concession locations to make
reasonable accommodations for disabled persons.
We are also subject to certain truth-in-advertising,
general customs, consumer and data protection, product safety, workers’ health and safety and public health rules that govern
retailers in general, as well as the merchandise sold within the various jurisdictions in which we operate.
The continued listing standards of Nasdaq provide, among other
things, that a company may be delisted if the bid price of its stock drops below $1.00 for a period of 30 consecutive business
days or if stockholders’ equity is less than $2,500,000. As of December 31, 2019, our stockholders’ equity balance was
in a deficit position. On January 2, 2020, we received a deficiency letter from The Nasdaq Stock Market which provided us a grace
period of 180 calendar days, or until June 30, 2020, to regain compliance with the minimum bid price requirement.
Employees
As of
March 15, 2020, we had approximately 507 full-time and 221 part-time employees. XpresSpa had approximately 10
employees in San Francisco International Airport, who are represented by a labor union and are covered by a collective
bargaining agreement. XpresSpa had approximately 24 employees in Los Angeles International Airport, who are represented by a
labor union and are covered by a collective bargaining agreement. We consider our relationships with our employees to be
good.
Effective March 24, 2020, we temporarily
closed all global locations and furloughed the majority of its employees, largely due to the categorization of our spa locations
by local jurisdictions as “non-essential services” in connection with the outbreak of COVID-19. We intend on reinstating
the furloughed employees when restrictions related to non-essential services are relaxed and/or eliminated.
Corporate Information
On January 5, 2018, we changed our name to XpresSpa Group, Inc.
from FORM Holdings Corp. as part of a rebranding that aligned our corporate strategy to build a pure-play health and wellness services
company. Our Common Stock, par value $0.01 per share, which was previously listed under the trading symbol “FH” on
the Nasdaq Capital Market, has been listed under the trading symbol “XSPA” since January 8, 2018. Our principal executive
offices are located at 254 West 31st Street, 11th Floor, New York, New York 10001. Our telephone number is
(212) 309-7549 and our website address is www.xpresspagroup.com. We also operate the website www.xpresspa.com.
References in this Annual Report on Form 10-K to our website address does not constitute incorporation by reference of the information
contained on the website. We make our filings with the Securities and Exchange Commission, or the SEC, including our annual reports
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, other reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act, and amendments to the foregoing reports, available free of charge on or through our website
as soon as reasonably practicable after we file these reports with, or furnish such reports to, the SEC. In addition, we post the
following information on our website:
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our corporate code of conduct and our insider trading compliance manual; and
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charters for our audit committee, compensation committee, and nominating and corporate governance committee.
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The public may read and copy any materials
that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may
obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains
an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including
us, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at http://www.sec.gov.
ITEM
1A. RISK FACTORS
Our
business, financial condition, results of operations and the trading price of our Common Stock could be materially adversely affected
by any of the following risks as well as the other risks highlighted elsewhere in this Annual Report on Form 10-K. Additional
risks and uncertainties not presently known to us or that we currently deem immaterial also may materially affect our business,
financial condition and results of operations.
Risks
Related to our Financial Condition and Capital Requirements
Our independent registered public
accounting firm has expressed substantial doubt as to our ability to continue as a going concern.
The audited financial statements included in this Annual Report
on Form 10-K have been prepared assuming that we will continue as a going concern and do not include any adjustments that might
result if we cease to continue as a going concern. The report of our independent registered public accounting firm on our financial
statements for the years ended December 31, 2019 and 2018 included an explanatory paragraph indicating that there is substantial
doubt about our ability to continue as a going concern. Our auditors’ doubts are based on our recurring losses from operations
and working capital deficiency. The inclusion of a going concern explanatory paragraph in future reports of our independent auditors
may make it more difficult for us to secure additional financing or enter into strategic relationships on terms acceptable to us,
if at all, and may materially and adversely affect the terms of any financing that we might obtain.
The recent COVID-19 outbreak was
declared a pandemic by the World Health Organization on March 11, 2020 and has rapidly spread to the United States and many other
parts of the world and may continue to adversely affect our business operations, employee availability, financial condition,
liquidity and cash flow for an extended period of time.
The COVID-19 outbreak is having an impact
on the global economy, resulting in rapidly changing market and economic conditions. Similar to many businesses in the travel sector,
our business has been materially adversely impacted by the recent COVID-19 outbreak due to the restrictions on travel that have
been implemented. Effective March 24, 2020, we temporarily closed all global spa locations, largely due to the categorization of
our spa locations by local jurisdictions as “non-essential services” in connection with the outbreak of COVID-19. This
has had a materially adverse impact on our cash flows from operations and caused a liquidity crisis. Ongoing significant reductions in
business related activities could result in further loss of sales and profits and other material adverse effects. The
extent of the impact of COVID-19 on our business, financial results, liquidity and cash flows will depend largely on future developments,
including new information that may emerge concerning the severity and action taken to contain or prevent further spread within
the U.S. and the related impact on consumer confidence and spending, all of which are highly uncertain and cannot be predicted.
As the outbreak of COVID-19 continues to spread rapidly in the U.S. and globally, related government and private sector responsive
actions may continue to adversely affect our business operations. It is impossible to predict the effect and ultimate
impact of the COVID-19 pandemic as the situation is rapidly evolving. If the COVID-19 outbreak continues and persists for
an extended period of time, we expect there will be significant and material disruptions to our operations,
which will have a material adverse effect on our business, financial condition and results of operations.
If our process to identify and evaluate
potential business alternatives, including identifying appropriate financing, is not successful, our Board of Directors may decide
to pursue a restructuring, which may include a reorganization or bankruptcy under Federal bankruptcy laws, or a dissolution, liquidation
and/or winding up of our Company.
There can be no assurance that the process to identify and evaluate
potential business alternatives, including identifying appropriate financing, will result in a successful alternative for our business.
If no transactions with respect to potential business alternatives are identified and completed, our Board of Directors may decide
to pursue a restructuring, which may include a reorganization or bankruptcy under Federal bankruptcy laws, or a dissolution, liquidation
and/or winding up of the Company. If our Board of Directors were to approve and recommend, and our stockholders were to approve,
a dissolution and liquidation of our Company, we would be required under Delaware corporate law to pay our outstanding obligations,
as well as to make reasonable provisions for contingent and unknown obligations, prior to making any distributions in liquidation
to our stockholders. Our commitments and contingent liabilities may include (i) obligations under our employment agreements with
certain members of management that provide for severance and other payments following a termination of employment occurring for
various reasons, including a change in control of our Company, (ii) various claims and legal actions arising in the ordinary course
of business and (iii) non-cancelable lease obligations. As a result of this requirement, a portion of our assets may need to be
reserved pending the resolution of such obligations. In addition, we may be subject to litigation or other claims related to a
dissolution and liquidation of our Company. If a dissolution and liquidation were pursued, our Board of Directors, in consultation
with its advisors, would need to evaluate these matters and make a determination about a reasonable amount to reserve. Accordingly,
holders of our secured and unsecured debt and our Common Stock may lose their entire investment in the event of a reorganization,
bankruptcy, liquidation, dissolution or winding up of our Company.
In connection with the preparation
of our annual financial statements for the year ended December 31, 2019, we identified a material weakness in our internal control
over financial reporting. Any failure to maintain effective internal control over financial reporting could have a material adverse
effect on our results of operations and financial position.
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance
with U.S. generally accepted accounting principles. In connection with our audit of the year ended December 31, 2019, we identified
a material weakness in our internal controls over our financial close and reporting process. A material weakness is a deficiency,
or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a
material misstatement of annual or interim financial statements will not be prevented or detected and corrected on a timely basis.
Our management has concluded that additional formal procedures need to be put in place in the financial close and reporting process
to ensure that appropriate reviews occur on all financial reporting analysis in a timely manner. We also concluded that we did
not maintain a sufficient complement of corporate employee personnel with appropriate levels of accounting and controls knowledge
and experience commensurate with our financial reporting requirements to appropriately analyze, record and disclose accounting
matters completely and accurately. As this deficiency created a reasonable possibility that a material misstatement would not have
been prevented or detected in a timely basis, management concluded that the control deficiency represented a material weakness
and accordingly our internal control over financial reporting was not effective as of December 31, 2019.
We are still considering the full extent
of the procedures to implement in order to remediate the material weakness described above. Our preliminary remediation plan, complimented
by our existing outsourced internal audit procedures, includes implementing a more robust review process, an increase in the supervision
and monitoring of the financial reporting processes and our accounting personnel, and implementing better controls over calculations,
analysis and conclusions associated with non-routine transactions at a more precise level.
We cannot assure you that any of our remedial
measures will be effective in resolving this material weakness. If our management is unable to conclude that we have effective
internal control over financial reporting, or to certify the effectiveness of such controls, or if additional material weaknesses
in our internal controls are identified in the future, we could be subject to regulatory scrutiny and a loss of public confidence,
which could have a material adverse effect on our business and our stock price. In addition, if we do not maintain adequate financial
and management personnel, processes and controls, we may not be able to manage our business effectively or accurately report our
financial performance on a timely basis, which could adversely affect our results of operations and financial condition.
Our business and financial condition
could be constrained by XpresSpa’s outstanding debt, including the impact of the receipt of an explanatory paragraph with
respect to our financial statements for the years ended December 31, 2019 and 2018, indicating that there is substantial doubt
about our ability to continue as a going concern.
XpresSpa
is obligated under a credit agreement and convertible secured promissory note payable to B3D, LLC (“B3D”) of
approximately $3,547,000 as of April 13, 2020, with a maturity date of May 31, 2021 (the “Senior Secured
Note”). The Senior Secured Note accrues interest of 9.0% per annum. XpresSpa is obligated to make periodic interest
payments on such debt obligations in cash, shares of our Common Stock, or a combination thereof. While we do not anticipate
failing to make any such payments, the failure to do so may result in the default of loan obligations, leading to financial
and operational hardship. XpresSpa has granted B3D a security interest in all of its tangible and intangible personal
property to secure its obligations under the Senior Secured Note. The Senior Secured Note is an outstanding obligation of
XpresSpa but is guaranteed by us.
As discussed above and elsewhere in this
Annual Report on Form 10-K, the report of our independent registered public accounting firm on our financial statements for the
years ended December 31, 2019 and 2018 includes an explanatory paragraph indicating that there is substantial doubt about our ability
to continue as a going concern. The receipt of this explanatory paragraph with respect to our financial statements for the years
ended December 31, 2019 and 2018 will result in a breach of a covenant under the Senior Secured Note which, if unremedied for a
period of 30 days after the date hereof, will constitute an event of default under the Senior Secured Note. Upon the occurrence
of an event of default under the Senior Secured Note, B3D may, among other things, declare the Senior Secured Note and all accrued
and unpaid interest thereon and all other amounts owing under the Senior Secured Note to be due and payable.
The Company is also obligated under an unsecured subordinated
note to Calm of approximately $2,500,000. The Calm Note will mature on May 31, 2022, and bears interest at a rate of 5% per annum,
subject to increase in the event of default. The Calm Note is convertible at any time, in whole or in part, at the option of Calm
into shares of Series E Preferred Stock at a conversion price equal to $0.27125 per share after giving effect to certain anti-dilution
adjustments. Interest on the Calm Note is payable in arrears and may be paid in cash, shares of Series E Preferred Stock or a combination
thereof.
If we fail to meet certain conditions under the terms of our
outstanding indebtedness, we will be obligated to repay in cash any principal amount, interest and any other sum that remains outstanding.
If the maturity date of our indebtedness is accelerated as a result of an event of default, the outstanding principal amount, liquidated
damages and other amounts owing in respect thereof through the date of acceleration, shall become, at the holder’s election,
immediately due and payable in cash.
We may not be able to raise additional
capital. Moreover, additional financing may have an adverse effect on the value of the equity instruments held by our stockholders.
We will need additional funds to respond
to business opportunities and challenges, including our ongoing operating expenses, protection of our assets, development of new
lines of business and enhancement of our operating infrastructure. While we will need to seek additional funding, we may not be
able to obtain financing on acceptable terms, or at all. In addition, the terms of our financings may be dilutive to, or otherwise
adversely affect, holders of our Common Stock. We may also seek additional funds through arrangements with collaborators or other
third parties. We may not be able to negotiate arrangements on acceptable terms, if at all. If we are unable to obtain additional
funding on a timely basis, we may be required to curtail or terminate some or all of our business plans. Any such financing that
we undertake will likely be dilutive to our current stockholders.
Our ability to use our net operating
loss carryforwards and certain other tax attributes may be limited.
As of December 31, 2019, our estimated
aggregate total net operating loss carryforwards (“NOLs”) were $182,327,000 for U.S. federal purposes, expiring 20
years from the respective tax years to which they relate, and $31,401,000 for U.S. federal purposes with an indefinite life due
to new regulations in the Tax Cuts and Jobs Act of 2017. Our ability to utilize our NOLs may be limited under Section 382 of the
Internal Revenue Code. The limitations apply if an ownership change, as defined by Section 382, occurs. Generally, an ownership
change occurs when certain stockholders increase their aggregate ownership by more than 50 percentage points over their lowest
ownership percentage in a testing period (typically three years). Additionally, the Tax Reform Act of 1986 imposed substantial
restrictions on the utilization of NOL and tax credits in the event of an ownership change of a corporation. Thus, the Company’s
ability to utilize all such NOL and credit carryforwards may be limited. Future changes in stock ownership may also trigger an
ownership change and, consequently, a Section 382 limitation.
The Coronavirus Aid, Relief, and Economic
Security Act (the “CARES Act”) was enacted on March 27, 2020 and includes favorable changes to tax law and incentives
for businesses impacted by COVID-19. However, we do not anticipate the income tax law changes and incentives will have a material
impact on our results of operations or financial position.
Global economic and market conditions
may adversely affect our business, financial condition and operating results.
Our business plan depends significantly
on worldwide economic conditions and our success is dependent on consumer spending, which is sensitive to economic downturns, inflation
and any associated rise in unemployment, decline in consumer confidence, adverse changes in exchange rates, increase in interest
rates, increase in the price of oil, deflation, direct or indirect taxes or increase in consumer debt levels. As a result, economic
downturns may have a material adverse impact on our business, financial condition and results of operations. Moreover, uncertainty
about global economic conditions poses a risk as businesses and individuals may postpone spending in response to tighter credit,
negative financial news and declines in income or asset values. This could have a negative effect on corporate and individual spending
on health and wellness and travel. These factors, taken together or individually, could cause material harm to our business, financial
condition and results of operations.
Risks Related to our Business Operations
XpresSpa is reliant on international
and domestic airplane travel, and the time that airline passengers spend in United States airports post-security. A decrease in
airline travel, a decrease in the desire of customers to buy spa services and products, or decreased time spent in airports would
negatively impact XpresSpa’s operations.
XpresSpa depends upon a large number of airplane travelers with
the propensity for health and wellness, and in particular spa treatments and products, spending significant time post-security
clearance check points.
If the number of airline travelers decreases,
if the time that these travelers spend post-security decreases, and/or if travelers ability or willingness to pay for XpresSpa’s
products and services diminishes, this could have an adverse effect on XpresSpa’s growth, business activities, cash flow,
financial condition and results of operations. Some reasons for these events could include:
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the impact of a public health epidemic, including the novel coronavirus (“COVID-19”),
which has interfered and may continue to interfere with our ability, or the ability of our employees, workers, contractors, suppliers
and other business partners to perform our and their respective responsibilities and obligations relative to the conduct of our
business. A public health epidemic, including the coronavirus, poses the risk of disruptions from the temporary closure
of third-party suppliers and manufacturers, restrictions on the shipment of our products, restrictions on our employees' and other
service providers' ability to travel, the decreased willingness or ability of our customers to travel or to utilize our services
and shutdowns that may be requested or mandated by governmental authorities. The extent to which the coronavirus impacts
our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which
may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its
impact, among others;
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the temporary closure of our spa locations, largely due to the
categorization of such spa locations by local jurisdictions as “non-essential services” in connection with the recent
outbreak of COVID-19;
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terrorist activities (including cyber-attacks) impacting either domestic or international travel through airports where XpresSpa operates, causing fear of flying, flight cancellations, or an economic downturn, or any other event of a similar nature, even if not directly affecting the airline industry, may lead to a significant reduction in the number of airline passengers;
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a decrease in business spending that impacts business travel, such as a recession;
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a decrease in consumer spending that impacts leisure travel, such as a recession or a stock market downturn or a change in consumer lending regulations impacting available credit for leisure travel;
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an increase in airfare prices that impacts the willingness of air travelers to fly, such as an increase in oil prices or heightened taxation from federal or other aviation authorities;
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severe weather, ash clouds, airport closures, natural disasters, strikes or accidents (airplane or otherwise), causing travelers to decrease the amount that they fly and any of these events, or any other event of a similar nature, even if not directly affecting the airline industry, may lead to a significant reduction in the number of airline passengers;
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scientific studies that malign the use of spa services or the products used in spa services, such as the impact of certain chemicals and procedures on health and wellness; or
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streamlined security screening checkpoints, which could decrease the wait time at checkpoints and therefore the time air travelers budget for spending time at the airport.
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Further, any disruption to, or suspension
of services provided by airlines and the travel industry as a result of financial difficulties, labor disputes, construction work,
increased security, changes to regulations governing airlines, mergers and acquisitions in the airline industry and challenging
economic conditions causing airlines to reduce flight schedules or increase the price of airline tickets could negatively affect
the number of airline passengers.
Additionally, the threat of terrorism and
governmental measures in response thereto, such as increased security measures, recent executive orders in the United States impacting
entry into the United States and changing attitudes towards the environmental impacts of air travel may in each case reduce demand
for air travel and, as a result, decrease airline passenger traffic at airports.
The effect that these factors would have
on our business depends on their magnitude and duration, and a reduction in airline passenger numbers will result in a decrease
in our sales and may have a materially adverse impact on our business, financial condition and results of operations.
Our success will depend in part on
relationships with third parties. Any adverse changes in these relationships could adversely affect our business, financial condition,
or results of operations.
Our success is dependent on our ability
to maintain and renew our existing business relationships and to establish new business relationships. There can be no assurance
that our management will be able to maintain such business relationships or enter into or maintain new business contracts and other
business relationships, on acceptable terms, if at all. The failure to maintain important business relationships could have a material
adverse effect on our business, financial condition, or results of operations.
We rely on a limited number of distributors
and suppliers for certain of our products, and events outside our control may disrupt our supply chain, which could result in an
inability to perform our obligations under our concession agreements and ultimately cause us to lose our concessions.
We rely on a small number of suppliers
for our products. As a result, these distributors may have increased bargaining power and we may be required to accept less favorable
purchasing terms. In the event of a dispute with a supplier or distributor, the delivery of a significant amount of merchandise
may be delayed or cancelled, or we may be forced to purchase merchandise from other suppliers on less favorable terms. Such events
could cause turnover to fall or costs to increase, adversely affecting our business, financial condition and results of operations.
In particular, we have publicized our sale of certain brands of products in our stores – our failure to sell these brands
may adversely affect our business.
Further, damage or disruption to our supply
chain due to any of the following could impair our ability to sell our products: adverse weather conditions or natural disaster,
government action, fire, terrorism, cyber-attacks, the outbreak or escalation of armed hostilities, pandemics, industrial accidents
or other occupational health and safety issues, strikes and other labor disputes, customs or import restrictions or other reasons
beyond our control or the control of our suppliers and business partners. Failure to take adequate steps to mitigate the likelihood
or potential impact of such events, or to effectively manage such events if they occur, could adversely affect our business, financial
condition and results of operations, as well as require additional resources to restore our supply chain.
XpresSpa’s operating results
may fluctuate significantly due to certain factors, some of which are beyond its control.
XpresSpa’s operating results may
fluctuate from period to period significantly because of several factors, including:
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the timing and size of new unit openings, particularly the launch of new terminals;
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passenger traffic and seasonality of air travel;
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changes in the price and availability of supplies;
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macroeconomic conditions, nationally locally and internationally;
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changes in consumer preferences and competitive conditions;
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expansion to new markets and new locations; and
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increases in infrastructure costs, including those costs associated with the build-out of new concession locations and renovating existing concession locations.
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XpresSpa’s operating results may
fluctuate significantly as a result of the factors discussed above. Accordingly, results for any period are not necessarily indicative
of results to be expected for any other period or for any year.
XpresSpa’s expansion into new
airports or off-airport locations may present increased risks due to its unfamiliarity with those areas.
XpresSpa’s growth strategy depends
upon expanding into markets where it has little or no meaningful operating experience. Those locations may have demographic characteristics,
consumer tastes and discretionary spending patterns that are different from those in the markets where its existing operations
are located. As a result, new airport terminal and/or off-airport operations may be less successful than existing concession locations
in current airport terminals. XpresSpa may find it more difficult in new markets to hire, motivate and keep qualified employees
who can project its vision, passion and culture. XpresSpa may also be unfamiliar with local laws, regulations and administrative
procedures, including the procurement of spa services retail licenses, in new markets which could delay the build-out of new concession
locations and prevent it from achieving its target revenues on a timely basis. Operations in new markets may also have lower average
revenues or enplanements than in the markets where XpresSpa currently operates. Operations in new markets may also take longer
to ramp up and reach expected sales and profit levels, and may never do so, thereby negatively affecting XpresSpa’s results
of operations.
XpresSpa’s growth strategy
is highly dependent on its ability to successfully identify and open new XpresSpa locations.
XpresSpa’s growth strategy primarily
contemplates expansion through procuring new XpresSpa locations and opening new XpresSpa stores and kiosks. Implementing this strategy
depends on XpresSpa’s ability to successfully identify new store locations. XpresSpa will also need to assess and mitigate
the risk of any new store locations, to open the stores on favorable terms and to successfully integrate their operations with
ours. XpresSpa may not be able to successfully identify opportunities that meet these criteria, or, if it does, XpresSpa may not
be able to successfully negotiate and open new stores on a timely basis. If XpresSpa is unable to identify and open new locations
in accordance with its operating plan, XpresSpa’s revenue growth rate and financial performance may fall short of our expectations.
Our profitability depends on the
number of airline passengers in the terminals in which we have concessions. Changes by airport authorities or airlines that lower
the number of airline passengers in any of these terminals could affect our business, financial condition and results of operations.
The number of airline passengers that visit
the terminals in which we have concessions is dependent in part on decisions made by airlines and airport authorities relating
to flight arrivals and departures. A decrease in the number of flights and resulting decrease in airline passengers could result
in fewer sales, which could lower our profitability and negatively impact our business, financial condition and results of operations.
Concession agreements generally provide for a minimum annual guaranteed payment (“MAG”) payable to the airport authority
or landlord regardless of the amount of sales at the concession. Currently, the majority of our concession agreements provide for
a MAG that is either a fixed dollar amount or an amount that is variable based upon the number of travelers using the airport or
other location, retail space used, estimated sales, past results or other metrics. If there are fewer airline passengers than expected
or if there is a decline in the sales per airline passenger at these facilities, we will nonetheless be required to pay the MAG
or fixed rent and our business, financial condition and results of operations may be materially adversely affected.
Furthermore, the exit of an airline from
a market or the bankruptcy of an airline could reduce the number of airline passengers in a terminal or airport where we operate
and have a material adverse impact on our business, financial condition and results of operations.
We may not be able to execute our
growth strategy to expand and integrate new concessions or future acquisitions into our business or remodel existing concessions.
Any new concessions, future acquisitions or remodeling of existing concessions may divert management resources, result in unanticipated
costs, or dilute the ownership of our stockholders.
Part of our growth strategy is to expand
and remodel our existing facilities and to seek new concessions through tenders, direct negotiations or other acquisition opportunities.
In this regard, our future growth will depend upon a number of factors, such as our ability to identify any such opportunities,
structure a competitive proposal and obtain required financing and consummate an offer. Our growth strategy will also depend on
factors that may not be within our control, such as the timing of any concession or acquisition opportunity.
We
must also strategically identify which airport terminals and concession agreements to target based on numerous factors, such as
airline passenger numbers, airport size, the type, location and quality of available concession space, level of anticipated competition
within the terminal, potential future growth within the airport and terminal, rental structure, financial return and regulatory
requirements. We cannot provide assurance that this strategy will be successful.
In addition, we may encounter difficulties
integrating expanded or new concessions or any acquisitions. Such expanded or new concessions or acquisitions may not achieve anticipated
turnover and earnings growth or synergies and cost savings. Delays in the commencement of new projects and the refurbishment of
concessions can also affect our business. In addition, we will expend resources to remodel our concessions and may not be able
to recoup these investments. A failure to grow successfully may materially adversely affect our business, financial condition and
results of operations.
In particular, new concessions and acquisitions, and in some
cases future expansions and remodeling of existing concessions, could pose numerous risks to our operations, including that we
may:
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have difficulty
integrating operations or personnel;
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incur substantial
unanticipated integration costs;
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experience unexpected
construction and development costs and project delays;
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face difficulties
associated with securing required governmental approvals, permits and licenses (including construction permits) in a timely
manner and responding effectively to any changes in federal, state or local laws and regulations that adversely affect our
costs or ability to open new concessions;
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have challenges
identifying and engaging local business partners to meet ACDBE requirements in concession agreements;
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not be able to obtain
construction materials or labor at acceptable costs;
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face engineering
or environmental problems associated with our new and existing facilities;
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experience significant
diversion of management attention and financial resources from our existing operations in order to integrate expanded, new
or acquired businesses, which could disrupt our ongoing business;
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lose key employees,
particularly with respect to acquired or new operations;
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have difficulty
retaining or developing acquired or new business customers;
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impair our existing
business relationships with suppliers or other third parties as a result of acquisitions;
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fail to realize
the potential cost savings or other financial benefits and/or the strategic benefits of acquisitions, new concessions or remodeling;
and
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incur liabilities
from the acquired businesses and we may not be successful in seeking indemnification for such liabilities.
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In
connection with acquisitions or other similar investments, we could incur debt or amortization expenses related to intangible
assets, suffer asset impairments, assume liabilities or issue stock that would dilute the percentage of ownership of our then-current
stockholders. We may not be able to complete acquisitions or integrate the operations, products, technologies or personnel gained
through any such acquisition, which may have a materially adverse impact on our business, financial condition and results of operations.
If
the estimates and assumptions we use to determine the size of our market are inaccurate, our future growth rate may be impacted.
Market opportunity estimates and growth forecasts are subject
to uncertainty and are based on assumptions and estimates that may not prove to be accurate. The estimates and forecasts in this
Annual Report on Form 10-K relating to the size and expected growth of the travel retail market may prove to be inaccurate. Even
if the market in which we compete meets our size estimates and forecasted growth, our business could fail to grow at similar rates,
if at all. The principal assumptions relating to our market opportunity include projected growth in the travel retail market and
our share of the market. If these assumptions prove inaccurate, our business, financial condition and results of operations could
be adversely affected.
Our
business requires substantial capital expenditures and we may not have access to the capital required to maintain and grow our
operations.
Maintaining
and expanding our operations in our existing and new retail locations is capital intensive. Specifically, the construction, redesign
and maintenance of our retail space in airport terminals where we operate, technology costs, and compliance with applicable laws
and regulations require substantial capital expenditures. We may require additional capital in the future to fund our operations
and respond to potential strategic opportunities, such as investments, acquisitions and expansions.
We
must continue to invest capital to maintain or to improve the success of our concessions and to meet refurbishment requirements
in our concessions. Decisions to expand into new terminals could also affect our capital needs. Our actual capital expenditures
in any year will vary depending on, among other things, the extent to which we are successful in renewing existing concessions
and winning additional concession agreements.
We
cannot provide assurance that we will be able to maintain our operating performance, generate sufficient cash flow, or have access
to sufficient financing to continue our operations and development activities at or above our present levels, and we may be required
to defer all or a portion of our capital expenditures. Our business, financial condition and results of operations may be materially
adversely affected if we cannot make such capital expenditures.
XpresSpa
currently relies on a skilled, licensed labor force to provide spa services, and the supply of this labor force is finite. If
XpresSpa cannot hire adequate staff for its locations, it will not be able to operate.
As of March 15, 2020, XpresSpa had approximately 507 full-time
and 221 part-time employees in its locations. Excluding some dedicated retail staff, the majority of these employees are licensed
to perform spa services, and hold such licenses as masseuses, nail technicians, aestheticians, barbers and master barbers. The
demand for these licensed technicians has been increasing as more consumers gravitate to health and wellness treatments such as
spa services. XpresSpa competes not only with other airport-based spa companies but with spa companies outside of the airport for
this skilled labor force. In addition, all staff hired by XpresSpa must pass the background checks and security clearances necessary
to work in airport locations. If XpresSpa is unable to attract and retain qualified staff to work in its airport locations, its
ability to operate will be impacted negatively.
Effective March 24, 2020, we temporarily closed all global locations
and furloughed the majority of our employees, largely due to the categorization of such spa locations by local jurisdictions as
“non-essential services” in connection with the outbreak of COVID-19. We intend on reinstating the furloughed employees
when restrictions related to non-essential services are relaxed and/or eliminated, but there can be no assurances that such employees
will return to our locations in a timely manner or at all.
Our
business is subject to various laws and regulations, and changes in such laws and regulations, or failure to comply with existing
or future laws and regulations, could adversely affect us.
We
are subject to various laws and regulations in the United States, Netherlands and United Arab Emirates that affect the operation
of our concessions. The impact of current laws and regulations, the effect of changes in laws or regulations that impose additional
requirements and the consequences of litigation relating to current or future laws and regulations, or our inability to respond
effectively to significant regulatory or public policy issues, could increase our compliance and other costs of doing business
and, therefore, have an adverse impact on our results of operations.
Failure
to comply with the laws and regulatory requirements of governmental authorities could result in, among other things, revocation
of required licenses, administrative enforcement actions, fines and civil and criminal liability. In addition, certain laws may
require us to expend significant funds to make modifications to our concessions in order to comply with applicable standards.
Compliance with such laws and regulations can be costly and can increase our exposure to litigation or governmental investigations
or proceedings.
XpresSpa’s
labor force could unionize, putting upward pressure on labor costs.
Currently,
XpresSpa stores in two airports have a labor force which is unionized. Major players in labor organization, and in particular
“Unite Here!” which represents approximately 45,000 employees in the airport concessions and airline catering industries,
could target XpresSpa locations for its unionization efforts. In the event of the successful unionization of all of XpresSpa’s
labor force, XpresSpa would likely incur additional costs in the form of higher wages, more benefits such as vacation and sick
leave, and potentially also higher health care insurance costs.
XpresSpa
competes for new locations in airports and may not be able to secure new locations.
XpresSpa
participates in the highly competitive and lucrative airport concessions industry, and as a result competes for retail leases
with a variety of larger, better capitalized concessions companies as well as smaller, mid-tier and single unit operators. Frequently,
an airport includes a spa concept within its retail product set and, in those instances, XpresSpa competes primarily with BeRelax,
Terminal Getaway, Massage Bar and 10 Minute Manicure.
We
may not be able to predict accurately or fulfill customer preferences or demands.
We
derive a significant amount of our revenue from the sale of massage, cosmetic and luxury products which are subject to rapidly
changing customer tastes. The availability of new products and changes in customer preferences has made it more difficult to predict
sales demand for these types of products accurately. Our success depends in part on our ability to predict and respond to quickly
changing consumer demands and preferences, and to translate market trends into appropriate merchandise offerings. Additionally,
due to our limited sales space relative to other retailers, the proper selection of salable merchandise is an important factor
in revenue generation. We cannot provide assurance that our merchandise selection will correspond to actual sales demand. If we
are unable to predict or rapidly respond to sales demand or to changing styles or trends, or if we experience inventory shortfalls
on popular merchandise, our revenue may be lower, which could have a materially adverse impact on our business, financial condition
and results of operations.
XpresSpa’s
leases may be terminated, either for convenience by the landlord or as a result of an XpresSpa default.
XpresSpa
has store locations and kiosks in a number of airports in which the landlord, with prior written notice to XpresSpa, can terminate
XpresSpa’s lease, including for convenience or as necessary for airport purposes or operations. If a landlord elects to
terminate a lease at an airport, XpresSpa may have to shut down one or more store locations at that airport.
Additionally,
XpresSpa leases have numerous provisions governing the operation of XpresSpa’s stores. Violation of one or more of these
provisions, even unintentionally, may result in the landlord finding that XpresSpa is in default of the lease. Violation of lease
provisions may result in fines and, in some cases, termination of a lease.
XpresSpa’s
ability to operate depends on the traffic patterns of the terminals in which it operates, and the cessation or disruption of air
traveler traffic in these terminals would negatively impact XpresSpa’s addressable market.
XpresSpa
depends on a high volume of air travelers in its terminals. It is possible that a terminal in which XpresSpa operates could become
subject to a lower volume of air travelers, which would significantly impact traffic near and around XpresSpa locations and therefore
its total addressable market. Lower volume in a terminal could be caused by:
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terminal construction
that results in the temporary or permanent closure of a unit, or adversely impacts the volume or pattern of traffic flows
within an airport;
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an airline utilizing
an airport in which XpresSpa operates could abandon that airport or an individual terminal in favor of other airports or terminals,
or because it is contracting operations; or
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adverse weather
conditions could cause damage to the terminal or airport in which XpresSpa operates, resulting in the temporary or permanent
closure of a unit.
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We
are dependent on our local partners.
Our
local partners, including our ACDBE partners, maintain ownership interests in certain of our locations. Our participation in these
operating entities differs from market to market. While the precise terms of each relationship vary, our local partners may have
control over certain portions of the operations of these concessions. The stores are operated pursuant to the applicable joint
venture agreement governing the relationship between us and our local partner. Generally, these agreements also provide that strategic
decisions are to be made by a committee comprised of us and our local partner. These concessions involve risks that are different
from the risks involved in operating a concession independently, and include the possibility that our local partners:
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are in a position
to take action contrary to our instructions, our requests, our policies, our objectives or applicable laws;
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take actions that
reduce our return on investment;
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go bankrupt or are
otherwise unable to meet their capital contribution obligations;
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have economic or
business interests or goals that are or become inconsistent with our business interests or goals; or
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take actions that
harm our reputation or restrict our ability to run our business.
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Failure
to comply with minimum airport concession disadvantaged business enterprise participation goals and requirements could lead to
lost business opportunities or the loss of existing business.
Pursuant
to ACDBE participation requirements, XpresSpa is often required to meet, or use good faith efforts to meet, certain minimum ACDBE
participation requirements when bidding on or submitting proposals for new concession contracts. If XpresSpa is unable to find
and/or partner with an appropriate ACDBE, XpresSpa may lose opportunities to open new locations. In addition, a number of XpresSpa’s
existing leases contain minimum ACDBE participation requirements which require the ACDBE to own a significant portion of the business
being operated under those leases. The level of ACDBE participation requirements may affect XpresSpa’s profitability and/or
its ability to meet financial forecasts.
Further,
if XpresSpa fails to comply with the minimum ACDBE participation requirements, XpresSpa may be held responsible for a breach of
contract, which could result in the termination of a lease and impairment of XpresSpa’s ability to bid on or obtain future
concession contracts. To the extent that XpresSpa leases are terminated and XpresSpa is required to shut down one or more store
locations, there could be a material adverse impact to its business and results of operations.
Continued minimum wage increases
could negatively impact XpresSpa’s cost of labor.
XpresSpa
compensates its licensed technicians via a formula that includes commissions. As a result, an increase in the minimum wage could
increase XpresSpa’s cost of labor and have an adverse impact on our business, financial condition and results of operations.
Information
technology systems failure or disruption, or changes to information technology related to payment systems, could impact our day-to-day
operations.
Our
information technology systems are used to record and process transactions at our point-of-sale interfaces and to manage our operations.
These systems provide information regarding most aspects of our financial and operational performance, statistical data about
our customers, our sales transactions and our inventory management. Fire, natural disasters, power-loss, telecommunications failure,
break-ins, terrorist attacks (including cyber-attacks), computer viruses, electronic intrusion attempts from both external and
internal sources and similar events or disruptions may damage or impact our information technology systems at any time. These
events could cause system interruption, delays or loss of critical data and could disrupt our acceptance and fulfillment of customer
orders, as well as disrupt our operations and management. For example, although our point-of-sales systems are programmed to operate
and process customer orders independently from the availability of our central data systems and even of the network, if a problem
were to disable electronic payment systems in our stores, credit card payments would need to be processed manually, which could
result in fewer transactions. Significant disruption to systems could have a material adverse impact on our business, financial
condition and results of operations.
We
also continually enhance or modify the technology used for our operations. We cannot be sure that any enhancements or other modifications
we make to our operations will achieve the intended results or otherwise be of value to our customers. Future enhancements and
modifications to our technology could consume considerable resources. We may be required to enhance our payment systems with new
technology, which could require significant expenditures. If we are unable to maintain and enhance our technology to process transactions,
we may experience a materially adverse impact on our business, financial condition and results of operations.
If
XpresSpa is unable to protect its customers’ credit card data and other personal information, XpresSpa could be exposed
to data loss, litigation and liability, and its reputation could be significantly harmed.
Privacy
protection is increasingly demanding, and the use of electronic payment methods and collection of other personal information,
including order history, travel history and other preferences, exposes XpresSpa to increased risk of privacy and/or security breaches
as well as other risks. The majority of XpresSpa’s sales are by credit or debit cards. Additionally, XpresSpa collects and
stores personal information from individuals, including its customers and employees.
In
the future, XpresSpa may experience security breaches in which credit and debit card information or other personal information
is stolen. Although XpresSpa uses secure private networks to transmit confidential information, third parties may have the technology
or know-how to breach the security of the customer information transmitted in connection with credit and debit card sales, and
its security measures and those of technology vendors may not effectively prohibit others from obtaining improper access to this
information. The techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently
and are often difficult to detect for long periods of time, which may cause a breach to go undetected for an extensive period
of time. Advances in computer and software capabilities, new tools, and other developments may increase the risk of such a breach.
Further, the systems currently used for transmission and approval of electronic payment transactions, and the technology utilized
in electronic payments themselves, all of which can put electronic payment at risk, are determined and controlled by the payment
card industry, not by XpresSpa. In addition, contractors, or third parties with whom XpresSpa does business or to whom XpresSpa
outsources business operations may attempt to circumvent its security measures in order to misappropriate such information and
may purposefully or inadvertently cause a breach involving such information. If a person is able to circumvent XpresSpa’s
security measures or those of third parties, he or she could destroy or steal valuable information or disrupt XpresSpa’s
operations. XpresSpa may become subject to claims for purportedly fraudulent transactions arising out of the actual or alleged
theft of credit or debit card information, and XpresSpa may also be subject to lawsuits or other proceedings relating to these
types of incidents. Any such claim or proceeding could cause XpresSpa to incur significant unplanned expenses, which could have
an adverse effect on its business or results of operations. Further, adverse publicity resulting from these allegations could
significantly harm its reputation and may have a material adverse effect on it. Although XpresSpa carries cyber liability insurance
to protect against these risks, there can be no assurance that such insurance will provide adequate levels of coverage against
all potential claims.
Negative
social media regarding XpresSpa could result in decreased revenues and impact XpresSpa’s ability to recruit workers.
XpresSpa’s
affinity among consumers is highly dependent on their positive feelings about the brand, its customer service and the range and
quality of services and products that it offers. A negative customer experience that is posted to social media outlets and is
distributed virally could tarnish XpresSpa’s brand and its customers may opt to no longer engage with the brand.
XpresSpa
employs people in multiple different jurisdictions, and the employment laws of those jurisdictions are subject to change. In addition,
its services are regulated through government-issued operating licenses. Noncompliance with applicable laws could result in employee
lawsuits or legal action taken by government authorities.
XpresSpa
must comply with a variety of employment and business practices laws across the United States, Netherlands and United Arab Emirates.
XpresSpa monitors the laws governing its activities, but in the event it does not become aware of a new regulation or fails to
comply with a regulation, it could be subject to disciplinary action by governing bodies and potentially employee lawsuits.
XpresSpa
is not currently cash flow positive and will depend on funding to open new locations. In the event that capital is unavailable,
XpresSpa will not be able to open new locations.
Throughout
its operating history, XpresSpa has not generated sufficient cash from operations to fund its new store development. As a result,
it will be dependent upon additional funding for its new location growth until such time as it can produce enough cash to profitably
fund its own location growth.
XpresSpa
sources, develops and sells products that may result in product liability defense costs and product liability payments.
XpresSpa’s
products contain ingredients that are deemed to be safe by the United States Federal Drug Administration and the Federal Food,
Drug and Cosmetics Act. However, there is no guarantee that these ingredients will not cause adverse health effects to some consumers
given the wide range of ingredients and allergies amongst the general population. XpresSpa may face substantial product liability
exposure for products it sells to the general public or that is uses in its services. Product liability claims, regardless of
their merits, could be costly and divert management’s attention, and adversely affect XpresSpa’s reputation and the
demand for its products and services. XpresSpa to date has not been named as a defendant in any product liability action.
We
have commenced legal proceedings and/or licensing discussions with security, content distribution and/or telecommunications companies.
We expect that licensing discussions may be time consuming and may either, absent any litigation we initiate, fail to lead to
a license, or may result in litigations commenced by the potential licensee.
To license or otherwise monetize the patent assets that we own,
we have commenced legal proceedings and/or attempted to commence licensing discussions with a number of companies, during the course
of which we allege that such companies infringe one or more of our patents. The future viability of our licensing program is highly
dependent on the outcome of these discussions, and there is a risk that we may be unable to achieve the results we desire from
such negotiations and be forced either to accept minimal royalties or commence litigations against the alleged infringer. In addition,
the recipients of our licensing overtures have substantially more resources than we do, which could make our licensing efforts
more difficult. Furthermore, due to changes in the approach to patent laws around the world it has become much easier for potential
licensees to commence proceedings to revoke or otherwise nullify our patents in lieu of engaging in bona fide licensing discussions.
There is a real risk that any potential licensee we approach would rather commence proceedings to revoke our patents than engage
in any licensing discussions whatsoever.
We
anticipate that any legal proceedings could continue for several years. While we endeavor, where possible, to engage counsel on
a full or partial contingency basis, proceedings may commence that fall outside of contingency arrangements with counsel and may
require significant expenditures for legal fees and other expenses. Disputes regarding the assertion of patents and other intellectual
property rights are highly complex and technical. Once initiated, we may be forced to litigate against other parties in addition
to the originally named defendants. Our adversaries may allege defenses and/or file counterclaims for, among other things, revocation
of our patents or file collateral litigations in an effort to avoid or limit liability and damages for patent infringement. If
such actions by our adversaries are successful, they may preclude our ability to derive licensing revenue from the patents being
asserted.
There
is a risk that we may be unable to achieve the results we desire from such litigation, which may harm our business. In addition,
the defendants in these litigations have substantially more resources than we do, which could make our litigation efforts more
difficult.
There
is a risk that a court will find our patents invalid, not infringed or unenforceable and/or that the USPTO or other relevant patent
offices in various countries will either invalidate the patents or materially narrow the scope of their claims during the course
of a reexamination, opposition or other such proceeding. In addition, even with a positive trial court verdict, the patents may
be invalidated, found not infringed or rendered unenforceable on appeal. This risk may occur either presently or from time to
time in connection with future litigations we may bring.
Patent litigation is inherently risky, and the outcome is uncertain.
Some of the parties that we believe infringe on our patents are large and well-financed by companies with substantially greater
resources than ours. We believe that these parties may devote a substantial amount of resources in an attempt to avoid or limit
a finding that they are liable for infringing on our patents or, in the event liability is found, to avoid or limit the amount
of associated damages. In addition, there is a risk that these parties may file reexaminations or other proceedings with the USPTO
or other government agencies in the United States or abroad in an attempt to invalidate, narrow the scope or render unenforceable
the patents we own. In addition, as part of our ongoing legal proceedings, the validity and/or enforceability of our patents-in-suit
is often challenged in a court or an administrative proceeding.
We
may not be able to successfully monetize our patents and, thus, we may fail to realize all of the anticipated benefits of acquisitions
from third parties.
There
is no assurance that we will be able to successfully monetize the patent portfolios that we acquired from third parties. The patents
we acquired could fail to produce anticipated benefits or could have other adverse effects that we currently do not foresee.
In
addition, the acquisition of a patent portfolio is subject to a number of risks, including, but not limited to the following:
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There is a significant
time lag between acquiring a patent portfolio and recognizing revenue from those patent assets, if at all. During that time
lag, material costs are likely to be incurred that would have a negative effect on our results of operations, cash flows and
financial position.
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The integration
of a patent portfolio is a time consuming and expensive process that may disrupt our operations. If our integration efforts
are not successful, our results of operations could be harmed. In addition, we may not achieve anticipated synergies or other
benefits from such acquisition.
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Therefore,
there is no assurance that we will be able to monetize an acquired patent portfolio and recoup our investment.
We
and our subsidiaries have been, are, and may become involved in litigation that could divert management’s attention and
harm our businesses.
Litigation often is expensive and diverts
management’s attention and resources, which could adversely affect our businesses. We may be exposed to claims against us
even if no wrongdoing has occurred. Responding to such claims, regardless of their merit, can be time consuming, costly to defend,
disruptive to our management’s attention and to our resources, damaging to our reputation and brand, and may cause us to
incur significant expenses. Even if we are indemnified against such costs, the indemnifying party may be unable to uphold its
contractual obligations.
New
legislation, regulations or court rulings related to enforcing patents could harm our business and operating results.
Intellectual
property is the subject of intense scrutiny by the courts, legislatures and executive branches of governments around the world.
Various patent offices, governments or intergovernmental bodies may implement new legislation, regulations or rulings that impact
the patent enforcement process, or the rights of patent holders and such changes could negatively affect licensing efforts and/or
litigations. For example, limitations on the ability to bring patent enforcement claims, limitations on potential liability for
patent infringement, lower evidentiary standards for invalidating patents, increases in the cost to resolve patent disputes and
other similar developments could negatively affect our ability to assert our patent or other intellectual property rights.
It
is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether
any of the proposals will become enacted as laws. Compliance with any new or existing laws or regulations could be difficult and
expensive, affect the manner in which we conduct our business and negatively impact our business, prospects, financial condition
and results of operations.
Our failure or inability to protect
the trademarks or other proprietary rights we use or claims of infringement by us of rights of third parties, could adversely affect
our competitive position or the value of our brands.
We
believe that our trademarks and other proprietary rights are important to our success and our competitive position. However, any
actions that we take to protect the intellectual property we use may not prevent unauthorized use or imitation by others, which
could have an adverse impact on our image, brand or competitive position. If we commence litigation to protect our interests or
enforce our rights, we could incur significant legal fees. We also cannot provide assurance that third parties will not claim
infringement by us of their proprietary rights. Any such claim, whether or not it has merit, could be time consuming and distracting
for our management, result in costly litigation, cause changes to existing retail concepts or delays in introducing retail concepts,
or require us to enter into royalty or licensing agreements. As a result, any such claim could have a material adverse impact
on our business, financial condition and results of operations.
Future
acquisitions or business opportunities could involve unknown risks that could harm our business and adversely affect our financial
condition and results of operations.
We
have in the past, and may in the future, acquire businesses or make investments, directly or indirectly through our subsidiaries,
that involve unknown risks, some of which will be particular to the industry in which the investment or acquisition targets operate,
including risks in industries with which we are not familiar or experienced. Although we intend to conduct appropriate business,
financial and legal due diligence in connection with the evaluation of future investment or acquisition opportunities, there can
be no assurance that our due diligence investigations will identify every matter that could have a material adverse effect on
us. We may be unable to adequately address the financial, legal and operational risks raised by such investments or acquisitions,
especially if we are unfamiliar with the relevant industry. The realization of any unknown risks could expose us to unanticipated
costs and liabilities and prevent or limit us from realizing the projected benefits of the investments or acquisitions, which
could adversely affect our financial condition, liquidity, results of operations, and trading price.
Anti-takeover
provisions of Delaware law, provisions in our charter and bylaws, and our stockholder rights plan could prevent or frustrate attempts
by stockholders to change our Board of Directors or current management and could delay, discourage or make more difficult a third-party
acquisition of control of us.
We
are a Delaware corporation and, as such, certain provisions of Delaware law could prevent or frustrate attempts by stockholders
to change the Board of Directors or current management, or could delay, discourage or make more difficult a third-party acquisition
of control of us, even if the change in control would be beneficial to stockholders or the stockholders regard it as such. We
are subject to the provisions of Section 203 of the Delaware General Corporation Law (“DGCL”), which prohibits certain
“business combination” transactions (as defined in Section 203) with an “interested stockholder” (defined
in Section 203 as a 15% or greater stockholder) for a period of three years after a stockholder becomes an “interested stockholder,”
unless the attaining of “interested stockholder” status or the transaction is pre-approved by our Board of Directors,
the transaction results in the attainment of at least an 85% ownership level by an acquirer or the transaction is later approved
by our Board of Directors and by our stockholders by at least a 662/3 percent vote of our stockholders other
than the “interested stockholder,” each as specifically provided in Section 203.
Our
certificate of incorporation and our bylaws, each as currently in effect, also contain certain provisions that may delay, discourage
or make more difficult a third-party acquisition of control of us. Such provisions include a provision that any vacancies on our
Board of Directors may only be filled by a majority of the directors then serving, although not a quorum, and not by the stockholders
and the ability of our Board of Directors to issue preferred stock, without stockholder approval, that could dilute the stock
ownership of a potential unsolicited acquirer and hinder an acquisition of control of us that is not approved by our Board of
Directors, including through the use of preferred stock in connection with a stockholder rights plan.
We
have also adopted a stockholder rights plan in the form of a Section 382 Rights Plan, designed to help protect and preserve our
substantial tax attributes primarily associated with our NOLs under Section 382 of the Internal Revenue Code and research tax
credits under Sections 382 and 383 of the Internal Revenue Code and related United States Treasury regulations, which was approved
by our stockholders in December 2016 and expires in March 2022. Although this is not the purpose of the Section 382 Rights Plan,
it could have the effect of making it uneconomical for a third party to acquire us on a hostile basis.
These
provisions of the DGCL, our certificate of incorporation and bylaws, and our Section 382 Rights Plan may delay, discourage or
make more difficult certain types of transactions in which our stockholders might otherwise receive a premium for their shares
over the current market price, and might limit the ability of our stockholders to approve transactions that they think may be
in their best interest.
Our
confidential information may be disclosed by other parties.
We
routinely enter into non-disclosure agreements with other parties, including but not limited to vendors, law firms, parties with
whom we are engaged in negotiations, and employees. However, there exists a risk that those other parties will not honor their
contractual obligations to not disclose our confidential information. This may include parties who breach such obligations in
the context of confidential settlement offers and/or negotiations. In addition, there exists a risk that, upon such breach and
subsequent dissemination of our confidential information, third parties and potential licensees may seek to use such confidential
information to their advantage and/or to our disadvantage including in legal proceedings in which we are involved. Our ability
to act against such third parties may be limited, as we may not be in privity of contract with such third parties.
Risks
Related to our Capital Stock
Stock
prices can be volatile, and this volatility may depress the price of our Common Stock.
The
stock market has experienced significant price and volume fluctuations, which have affected the market price of many companies
in ways that may have been unrelated to those companies’ operating performance. Furthermore, we believe that our stock price
may reflect certain future growth and profitability expectations. If we fail to meet these expectations, then our stock price
may significantly decline, which could have an adverse impact on investor confidence. We believe that various factors may cause
the market price of our Common Stock to fluctuate, perhaps substantially, including, among others, the following:
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the effects that COVID-19
might have on our results of operations and financial position;
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additions
to or departures of our key personnel;
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announcements of
innovations by us or our competitors;
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announcements by
us or our competitors of significant contracts, acquisitions, strategic partnerships, capital commitments, or new technologies;
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new regulatory pronouncements
and changes in regulatory guidelines;
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developments or
disputes concerning our patents and efforts in licensing and/or enforcing our patents;
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lawsuits, claims,
and investigations that may be filed against us, and other events that may adversely affect our reputation;
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changes in financial
estimates or recommendations by securities analysts; and
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general and industry-specific
economic conditions.
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Future sales of our shares of Common
Stock by our stockholders could cause the market price of our Common Stock to drop significantly, even if our business is otherwise
performing well.
As of April 13, 2020, we have 86,500,160
shares of Common Stock issued and outstanding, excluding shares of Common Stock issuable upon exercise of warrants, options or
restricted stock units, or preferred stock on an as-converted basis. As shares saleable under Rule 144 are sold or as restrictions
on resale lapse, the market price of our Common Stock could drop significantly if the holders of shares of restricted stock sell
them or are perceived by the market as intending to sell them. This decline in our stock price could occur even if our business
is otherwise performing well.
The exercise of a substantial number of warrants
or options by our security holders may have an adverse effect on the market price of our Common Stock.
Should our warrants outstanding as of April 13, 2020 be exercised,
there would be an additional 27,009,331 shares of Common Stock eligible for trading in the public market. The incentive equity
instruments granted to our management, employees, directors and consultants are subject to acceleration of vesting of 75% and 100%
(according to the agreement signed with each grantee) upon a subsequent change of control. Such securities, if exercised, will
increase the number of issued and outstanding shares of our Common Stock. Therefore, the sale of the shares of Common Stock underlying
the warrants and options could have an adverse effect on the market price for our securities and/or on our ability to obtain future
financing.
We have no current plans to pay dividends
on our Common Stock, and our investors may not receive funds without selling their stock.
We have not declared or paid any cash dividends
on our Common Stock, nor do we expect to pay any cash dividends on our Common Stock for the foreseeable future. Investors seeking
cash dividends should not invest in our Common Stock for that purpose. We currently intend to retain any additional future earnings
to finance our operations and growth and, therefore, we have no plans to pay cash dividends on our Common Stock at this time. Any
future determination to pay cash dividends on our Common Stock will be at the discretion of our Board of Directors and will be
dependent on our earnings, financial condition, operating results, capital requirements, any contractual restrictions, and other
factors that our Board of Directors deems relevant.
Accordingly, our investors may have to
sell some or all of their Common Stock in order to generate cash from their investment. You may not receive a gain on your investment
when you sell our Common Stock and may lose the entire amount of your investment.
We
may fail to meet publicly announced financial guidance or other expectations about our business, which would cause our stock to
decline in value.
From
time to time, we provide preliminary financial results or forward-looking financial guidance, to our investors. Such statements
are based on our current views, expectations and assumptions that may not prove to be accurate and may vary from actual results
and involve known and unknown risks and uncertainties that may cause actual results, performance, achievements or share prices
to be materially different from any future results, performance, achievements or share prices expressed or implied by such statements.
Such risks and uncertainties include the risk factors contained herein. If we fail to meet our projections and/or other financial
guidance for any reason, our stock price could decline.
The
market price of our Common Stock historically has been and likely will continue to be highly volatile.
The
market price for our shares of Common Stock historically has been highly volatile, and the market for our shares has from time
to time experienced significant price and volume fluctuations, based both on our operating performance and for reasons that appear
to be unrelated to our operating performance. The market price of our shares of Common Stock may fluctuate significantly in response
to a number of factors, including:
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the impact of COVID-19 on our business, financial condition,
results of operations and cash flows;
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the level of our
financial resources;
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our ability to develop
and introduce new products and services;
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developments concerning
our intellectual property rights generally or those of us or our competitors;
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our ability to raise
additional capital to fund our operations and business plan and the effects that such financing may have on the value of the
equity instruments held by our stockholders;
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our ability to retain
key personnel;
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general economic
conditions and level of consumer and corporate spending on health and wellness, and travel;
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our ability to hire
a skilled labor force and the costs associated;
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our ability to secure
new retail locations, maintain existing ones, and ensure continued customer traffic at those locations;
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changes in securities
analysts’ estimates of our financial performance or deviations in our business and the trading price of our Common Stock
from the estimates of securities analysts;
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our ability to protect
our customers’ financial data and other personal information;
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the loss of one
or more of our significant suppliers;
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unexpected trends
in the health and wellness and travel industries and potential technology and service obsolescence;
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market acceptance,
quality, pricing, availability and useful life of our products and/or services, as well as the mix of our products and services
sold; and
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lawsuits, claims,
and investigations that may be filed against us and other events that may adversely affect our reputation.
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Our failure to meet the continued
listing requirements of The Nasdaq Capital Market could result in a delisting of our Common Stock.
The continued listing standards of Nasdaq
provide, among other things, that a company may be delisted if the bid price of its stock drops below $1.00 for a period of 30
consecutive business days or if stockholders’ equity is less than $2,500,000. As of December 31, 2019, our stockholders’
equity balance was in a deficit position. On January 2, 2020, we received a deficiency letter from The Nasdaq Stock Market which
provided us a grace period of 180 calendar days, or until June 30, 2020, to regain compliance with the minimum bid price requirement.
If we fail to regain compliance on or prior to June 30, 2020, we may be eligible for an additional 180-day compliance period. Additionally,
if we fail to comply with any other continued listing standards of Nasdaq, our Common Stock will also be subject to delisting.
If that were to occur, our Common Stock would be subject to rules that impose additional sales practice requirements on broker-dealers
who sell our securities. The additional burdens imposed upon broker-dealers by these requirements could discourage broker-dealers
from effecting transactions in our Common Stock. This would significantly and negatively affect the ability of investors to trade
our securities and would significantly and negatively affect the value and liquidity of our Common Stock. These factors could contribute
to lower prices and larger spreads in the bid and ask prices for our Common Stock. If we seek to implement a reverse stock split
in order to remain listed on The Nasdaq Capital Market, the announcement and/or implementation of a reverse stock split could significantly
negatively affect the price of our Common Stock.
While
we have exercised diligent efforts to maintain the listing of our Common Stock on Nasdaq, there can be no assurance that we will
be able to continue to meet the continuing listing requirements of The Nasdaq Capital Market. If we are unable to meet the continuing
listing requirements, Nasdaq may take steps to delist our Common Stock. Such a delisting would likely have a negative effect on
the price of our Common Stock and would impair your ability to sell or purchase our Common Stock when you wish to do so. Further,
if we were to be delisted from The Nasdaq Capital Market, our Common Stock would cease to be recognized as covered securities
and we would be subject to regulation in each state in which we offer our securities.
Delisting
from Nasdaq could adversely affect our ability to raise additional financing through the public or private sale of equity securities,
would significantly affect the ability of investors to trade our securities and would negatively affect the value and liquidity
of our Common Stock. Delisting could also have other negative results, including the potential loss of confidence by employees,
the loss of institutional investor interest and fewer business development opportunities.
Our Common Stock has historically
traded in low volumes. We cannot predict whether an active trading market for our Common Stock will ever develop. Even if an active
trading market develops, the market price of our Common Stock may be significantly volatile.
Historically, our Common Stock has experienced a lack of consistent
trading liquidity. In the absence of an active trading market you may have difficulty buying and selling our Common Stock at all
or at the price you consider reasonable; and market visibility for shares of our Common Stock may be limited, which may have a
depressive effect on the market price for shares of our Common Stock and on our ability to raise capital or make acquisitions by
issuing our Common Stock.
If
we raise additional capital in the future, stockholders’ ownership in us could be diluted.
Any
issuance of equity we may undertake in the future to raise additional capital could cause the price of our shares to decline or
require us to issue shares at a price that is lower than that paid by holders of our shares in the past, which would result in
previously issued shares being dilutive. If we obtain funds through a credit facility or through the issuance of debt or preferred
securities, these securities would likely have rights senior to rights as a holder of Common Stock, which could impair the value
of our shares.
If we exercise the option to repay the Series E preferred
stock (the “Series E Preferred Stock”) in Common Stock rather than cash, such repayment may result in the issuance
of a large number of shares of Common Stock which may have a negative effect on the trading price of our Common Stock as well
as a dilutive effect.
Pursuant to the terms of the shares of Series E Preferred Stock,
on the seven-year anniversary of the initial issuance date of the shares of Series E Preferred Stock (which is November 14, 2025
in the case the 645,161 shares of Series E Preferred Stock issued on November 14, 2018 and December 28, 2025 in the case of the
322,581 shares of Series E Preferred Stock issued on December 28, 2018), we may repay each share of Series E Preferred Stock,
at our option, in cash, by delivery of shares of Common Stock or through any combination thereof. If we elect to make a payment,
or any portion thereof, in shares of Common Stock, the Base Shares will be based on the Base Price plus the Premium Shares, calculated
as follows: (i) if the Base Price is greater than $180.00, no Premium Shares shall be issued, (ii) if the Base Price is greater
than $140.00 and equal to or less than $180.00, an additional number of shares equal to 5% of the Base Shares shall be issued,
(iii) if the Base Price is greater than $120.00 and equal to or less than $140.00, an additional number of shares equal to 10%
of the Base Shares shall be issued, (iv) if the Base Price is greater than $100.00 and equal to or less than $120.00, an additional
number of shares equal to 20% of the Base Shares shall be issued and (v) if the Base Price is less than or equal to $100.00, an
additional number of shares equal to 25% of the Base Shares shall be issued. Accordingly, if the volume weighted average price
per share of our Common Stock is below $180.00 per share as of the time of repayment and we exercise the option to make such repayment
in shares of our Common Stock, a large number of shares of our Common Stock may be issued to the holders of shares of Series E
Preferred Stock upon maturity which may have a negative effect on the trading price of our Common Stock.
On
November 14, 2025 or December 28, 2025, as applicable, upon the maturity of the Series E Preferred Stock, when determining whether
to repay the Series E Preferred Stock in cash or shares of Common Stock, we expect to consider a number of factors, including
our cash position, the price of our Common Stock and our capital structure at such time. Because we do not have to make a determination
as to which option to elect until 2023, it is impossible to predict whether it is more or less likely to repay in cash, stock
or a portion of each.
The potential issuance of a large
number of shares of Common Stock upon the conversion of our Series F Convertible Preferred Stock (the “Series F Preferred
Stock”) may have a negative effect on the trading price of our Common Stock as well as a dilutive effect.
Each share of Series F Preferred Stock
is convertible, at the option of the holder thereof, at any time and from time to time, and without the payment of additional
consideration by the holder thereof, into such number of fully paid and nonassessable shares of Common Stock as is determined
by dividing the stated value of the Series F Preferred Stock (plus any accrued but unpaid dividends) by the Series F conversion
price in effect at the time of conversion. The Series F conversion price was initially equal to $2.00 per share but was subsequently
reduced to $0.175 per share. As of April 13, 2020, there were 1,531 shares of Series F Preferred Stock outstanding, which
were convertible into 874,858 shares of Common Stock. The issuance of a large number of shares of Common Stock upon conversion
of the Series F Preferred Stock could cause substantial dilution to our existing stockholders and could depress the market price
of our Common Stock.
Having
availed ourselves of scaled disclosure available to smaller reporting companies, we cannot be certain if such reduced disclosure
will make our Common Stock less attractive to investors.
Under
Section 12b-2 of the Exchange Act, a “smaller reporting company” is a company that is not an investment company, an
asset-backed issuer, or a majority-owned subsidiary of a parent company that is not a smaller reporting company, and has a public
float of less than $250 million and annual revenues of less than $100 million during the most recently completed fiscal year.
Similar to emerging growth companies, smaller reporting companies are permitted to provide simplified executive compensation disclosure
in their filings; they are exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that independent registered
public accounting firms provide an attestation report on the effectiveness of internal controls over financial reporting; and
they have certain other decreased disclosure obligations in their SEC filings, including, among other things, only being required
to provide two years of audited financial statements in annual reports. Decreased disclosure in our SEC filings as a result of
our having availed ourselves of scaled disclosure may make it harder for investors to analyze our results of operations and financial
prospects.
ITEM
1B. UNRESOLVED STAFF COMMENTS
Not
applicable.
ITEM
2. PROPERTIES
As of December 31, 2019, XpresSpa had 51
Company-operated stores in 25 airports, in the United States, Netherlands and United Arab Emirates. All of the stores as of that
date were leased, typically with one or two renewal options after the initial term. Economic terms vary by type and location of
store and, on average, the lease terms are 5-8 years with several stores operating on a month-to-month basis.
In October 2019, we relocated our Global Support Center from
780 Third Avenue to 254 West 31st Street in New York City. The sublease expires in September 2023. The new Global Support
Center houses all corporate employees. We believe that our facility is adequate to accommodate our business needs.
ITEM
3. LEGAL PROCEEDINGS
Litigation
and legal proceedings
Certain of our outstanding legal matters
include speculative claims for substantial or indeterminate amounts of damages. We regularly evaluate developments in our legal
matters that could affect the amount of any potential liability and makes adjustments as appropriate. Significant judgment is required
to determine both the likelihood of there being any potential liability and the estimated amount of a loss related to our legal
matters.
With respect to our outstanding legal matters,
based on our current knowledge, our 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 our 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. We
evaluated the outstanding legal matters and assessed the probability and likelihood of the occurrence of liability. Based on management’s
estimates, we have recorded a liability of approximately $1,800,000 for all outstanding legal matters as of December 31, 2019 which
is included in “Accounts payable, accrued expenses and other current liabilities” in the consolidated balance
sheet.
Our 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 the City of 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, and on September 24, 2018, XpresSpa perfected its appellate rights and submitted a brief
to the Supreme Court of New York, First Department appellate court. Oral arguments on the appeal are expected to take place during
early 2019. Oral argument on the appeal went forward on March 20, 2019, and the Company expects the court to rule on the appeal
in the coming months.
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,
and thereafter provided another extension pending the Court’s consideration of XpresSpa’s Motion to Stay all action
in the Georgia lawsuit, pending resolution of the New York lawsuit and the FAA action. On October 29, 2018, XpresSpa’s Motion
to Stay was denied. Prior to resolution of the Motion to Stay, Cordial filed a Motion for Temporary Restraining Order (“TRO
Motion”), seeking to enjoin the defendants and specifically XpresSpa, from, among other things, distributing any cash flow,
net profits, or management fees, or otherwise expending resources beyond necessary operating expenses. XpresSpa filed an opposition
and, in a decision entered December 26, 2018, the Court denied Cordial’s TRO Motion entirely. Defendants filed a Motion
to Dismiss the Complaint in its entirety on November 20, 2018, which is pending decision by the Court.
A
Director’s Determination was issued by the FAA in connection with the Part 16 Complaint (“Part 16 Proceeding”)
filed by Cordial against the City of Atlanta (“City”) in 2017 (“Director’s Determination”). The
Company and Cordial were not parties to the FAA action, and had no opportunity to present evidence or otherwise be heard in such
action. The Director’s Determination concluded that the City was not in compliance with certain Federal obligations concerning
the federal government’s ACDBE program, including relating to the City’s oversight of the Joint Venture Operating
Agreement between Clients and Cordial, Cordial’s termination, and Cordial’s retaliation and harassment claims, and
the City was ordered to achieve compliance in accordance with the Director’s Determination. The Director’s Determination
does not constitute a Final Agency Decision and it is not subject to judicial review, pursuant to 14 CFR § 16.247(b)(2).
Because the Company is not a party to the Part 16 Proceeding, the Company would not be considered “a party adversely affected
by the Director’s Determination” with a right of appeal to the FAA Assistant Administrator for Civil Rights.
On
August 7, 2019, the Company filed a response, advising the U.S. District Court that: (i) the Company is not party to the FAA proceeding
and therefore had no opportunity to present evidence or otherwise be heard in such action; (ii) as non-party, the Company is not
bound by the Director’s Determination; and (iii) the FAA cannot dictate the interpretation or enforceability of the contract
between Cordial and the Company, which is the subject of the U.S. District Court action initiated by Cordial and the New York
State Court action initiated by the Company.
In
response to the numerous complaints it received from Cordial, the City of Atlanta required the parties to engage in mediation.
On November 22, 2019, a Mutual Release and Settlement Agreement
(the “Settlement Agreement”) and a Confidential Payment Agreement (the “Payment Agreement”) were executed
by the applicable parties, except the City of Atlanta, and are pending the requisite approval by the FAA of the terms of the Settlement
Agreement.
The
Settlement Agreement is ultimately expected to be executed in 2020, by and among Cordial Endeavor Concessions of Atlanta, LLC,
Shelia Edwards, Steven A. White, the City of Atlanta, XpresSpa Holdings, LLC, XpresSpa Atlanta Terminal A, LLC, Azure Services,
LLC, Adra Wilson, Meme Marketing & Communications LLC, Melanie Hutchinson, Kenja Parks, and Bernard Parks, Jr.
The
requisite approval from the FAA has been obtained and the Leases have been executed by the Company. However, the condition precedent
that an operating agreement between the Company and Cordial is finalized and executed has not yet been satisfied. Based on this,
management has determined that the matter may not be completely resolved, at least to the extent of one or more of the Settling
Parties seeking to enforce the terms of the Settlement Agreement, and thus resulting in a continuation of the litigation.
The
Company continues to be involved in settlement negotiations seeking to resolve all pending matters with Cordial and the city of
Atlanta, and those negotiations are continuing.
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.
On August 21, 2019, the Court issued an
Order denying the parties’ motion for preliminary approval of the revised settlement, as the Court still had concerns about
several of the settlement terms. At the December 6, 2019 Status Conference with the Court, the Court reiterated its denial
of preliminary approval of the proposed settlement agreement. The Court instructed a notice of pendency to be disseminated
to putative collective members, who will then have a 60-day window to decide whether to participate in the case. The notice
of pendency was sent out in February 2020 and putative collective members had until April 3, 2020 to return a Consent to Join the
case. As of April 3, 2020, 304 individuals had joined the case.
Binn et al v. FORM Holdings Corp. et al.
On
November 6, 2017, Moreton Binn and Marisol F, LLC, former stockholders of XpresSpa, filed a lawsuit against FORM Holdings Corp.
(“FORM) and its directors in the United States District Court for the Southern District of New York. The lawsuit alleged
violations of various sections of the Securities Exchange Act of 1934 (“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 sought 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. By March 30, 2018, the motion to dismiss was fully briefed. On August 7, 2018,
the Court ruled on the defendants’ motion, 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. On October 30, 2018, the Court ordered
that the plaintiffs could file an amended complaint, and, in response, the defendants could move for summary judgment. Consistent
with the Court’s Order, on November 16, 2018, the plaintiffs filed a second amended complaint, modifying their allegations,
and asserting claims pursuant to the Exchange Act and the Securities Act of 1933, as well as bringing a breach of contract claim.
On December 17, 2018, the defendants filed a motion for summary judgment seeking dismissal of all claims. On February 1, 2019,
the plaintiffs opposed defendant’s motion, requested discovery and cross-moved for partial summary judgement filed an opposition
to defendants’ motion and a counter motion for partial summary judgment. Defendants’ summary judgement motion and
plaintiff’s cross-motion for partial summary judgment were fully briefed as of March 15, 2019. On April 29, 2019, an emergency
hearing was held before the Court in which the plaintiff sought a temporary restraining order and preliminary injunction to preclude
acceleration of the maturity on the Senior Secured Note. The Court entered a temporary restraining order, while allowing parties
the opportunity to brief the issue.
On May 21, 2019, the Court granted the
defendant’s motion for summary judgement in full, dismissing all claims in the action. On July 3, 2019, the plaintiffs filed
a notice of appeal in the United States Court of Appeals for the second circuit. The Company and its directors continue to believe
that this action is without merit and intend to defend the appeal vigorously. On July 1, 2019, the Court held oral argument on
Binn’s motion for preliminary injunction. After hearing argument by both sides, the Court deferred action and ordered that
the temporary restraining order remain in place. On July 23, 2019, the Court denied the plaintiffs’ request for a preliminary
injunction and vacated the temporary restraining order. On September 13, 2019, plaintiffs filed their appellate brief in the Second
Circuit. As of December 13, 2019, plaintiffs’ appeal was fully briefed. Oral argument has been scheduled for May 4, 2020.
Binn,
et al. v. Bernstein et al.
On
June 3, 2019, a third suit was commenced in the United States District Court for the Southern District of New York against FORM,
five of its directors, as well as Rockmore, the Company’s previous senior secured lender and a senior executive of the lender.
Although this action is brought by Morton Binn and Marisol F, LLC, it is asserted derivatively on behalf of the Company. Plaintiffs
assert eight causes of action, including that certain individual defendants violated Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, by making false statements concerning, inter alia, the merger and the independence of FORM’s
board of directors and the valuation of the Company’s lease portfolio. Plaintiffs also assert common law claims for breach
of fiduciary duty, corporate waste, unjust enrichment, faithless servant doctrine, and aiding and abetting certain of the directors’
alleged breaches of fiduciary duty. The Company and its directors believe that this action is without merit and intend to file
a motion to dismiss and defend the action vigorously.
The
defendants filed a motion to dismiss on October 23, 2019. The court heard oral argument on the defendants’ motion to dismiss
on January 22, 2020 and has not yet ruled on the motion.
Kainz v. FORM Holdings Corp. et al.
On March 20, 2019, a second suit was commenced
in the United States District Court for the Southern District of New York against FORM, seven of its directors and former directors,
as well as a managing director of Mistral Equity Partners (“Mistral”). The individual plaintiff, a shareholder of XpresSpa
Holdings, LLC at the time of the merger in December 2016, alleges that the defendants violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 by making false statements concerning, inter alia, the merger and the independence
of FORM’s board of directors, violated Section 12(2) of the Securities Act of 1933, breached the merger agreement by making
false and misleading statements concerning the merger and fraudulently induced the plaintiff into signing the joinder agreement
related to the merger. On May 8, 2019, the Company and its directors and the managing director of Mistral filed a motion to dismiss
the complaint. On June 5, 2019, plaintiff opposed the motion and filed a cross-motion for a partial stay. Defendants’
motion to dismiss was fully briefed as of June 19, 2019.
On November 13, 2019, the matter was dismissed in its entirety.
On December 12, 2019, plaintiff filed a motion for reconsideration to vacate the order and judgment, dismissing the action, and
for leave to amend the complaint. The motion was fully briefed as of February 6, 2020. On April 1, 2020, the Court denied plaintiff’s
motion in full. Plaintiff had 30 days to file a notice of appeal. On April 10, 2020, plaintiff filed a notice of appeal to the
United States Court of Appeals for the Second Circuit. We and our directors continue to believe that this action is without merit
and intend to defend the appeal.
Route1
On
or about May 23, 2018, Route1 Inc., Route1 Security Corporation (together, “Route1”) and Group Mobile Int’l,
LLC (“Group Mobile”) commenced a legal proceeding against the Company in the Ontario Superior Court of Justice.
Route1
and Group Mobile seek damages in relation to alleged breaches of a Membership Purchase Agreement entered into between Route1 and
the Company on or about March 7, 2018, pursuant to which Route1 acquired the Company’s 100% membership interest in Group
Mobile. All capitalized terms not otherwise defined herein have the meanings ascribed to them in the Agreement.
The
Plaintiffs allege that the Company: (i) failed to ensure all Tax Returns were true, correct and compliant in all respects and
that all Taxes had been paid in full; (ii) failed to ensure that all inventory of Group Mobile had been priced in accordance with
GAAP and consisted of a quality and quantity that was materially usable and salable in the Ordinary Course of Business; (iii)
failed to ensure that Group Mobile’s Most Recent Balance Sheet was materially complete and correct and prepared in accordance
with GAAP; (iv) failed to record all liabilities on Group Mobile’s Most Recent Balance Sheet; and (v) failed to deliver
the agreed upon amount of Net Working Capital, and/or pay the Shortfall, to Route1. The litigation is at an early stage, and it
is not yet possible to assess the likelihood of success and/or liability.
The
Company counterclaimed against the Plaintiffs for amounts owed to the Company in relation to the sale of Excluded Inventory and
is seeking damages thereon.
The Company delivered a draft amended counterclaim to the Plaintiffs
on or around November 2019 seeking, among other things, damages. The Company is seeking the Plaintiffs’ consent to amend
its counterclaim. Examinations for discovery are scheduled to take place in Toronto, Canada on June 9th and 10th, 2020. The parties
currently expect to attend a one-day mediation in Toronto on May 7, 2020.
Rodger
Jenkins v. XpresSpa Group, Inc.
In
March 2019, Rodger Jenkins filed a lawsuit against the Company in the United States District Court for the Southern District of
New York. The lawsuit alleges breach of contract of the stock purchase agreement related to the Company’s acquisition of
Excalibur Integrated Systems, Inc. and seeks specific performance, compensatory damages and other fees, expenses and costs. On
or about January 3, 2020, the court granted the plaintiffs’ motion to amend their pleading to increase their total demand.
The
Company has denied the material allegations of the complaint and is currently defending the action. Efforts to settle the parties’
dispute at a court-ordered mediation in March 2020 were not successful. The action is currently scheduled for a bench trial on
May 18, 2020.
Intellectual
Property and Other Matters
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.
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.
ITEM 4. MINE
SAFETY DISCLOSURES
Not
applicable.
PART
II
ITEM 5. MARKET
FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our Common Stock, par value $0.01 per share,
has been listed under the trading symbol “XSPA” since January 8, 2018.
In February 2019, the Company filed a certificate
of amendment to its amended and restated certificate of incorporation with the Secretary of State of the State of Delaware to effect
a 1-for-20 reverse stock split of shares of our Common Stock.
Stockholders
As
of April 13, 2020, we had 115 stockholders of record of the 86,500,160 outstanding shares of our Common Stock. This does
not reflect persons or entities that hold their stock in nominee or "street" name through various brokerage firms.
Dividend Policy
We have never declared or paid any cash
dividends on our capital stock, and do not anticipate paying any cash dividends on our capital stock in the foreseeable future.
We currently intend to retain future earnings, if any, to finance our operations and to expand our business. Any future determination
to pay cash dividends will be at the discretion of our Board of Directors and will be dependent upon our financial condition, operating
results, capital requirements and other factors that our Board of Directors considers appropriate.
Issuer Purchases of Equity Securities
None.
Unregistered Sales of Equity Securities
None.
ITEM 6.
SELECTED FINANCIAL DATA
Not
required as we are a smaller reporting company as defined by Item 10 of Regulation S-K.
ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless otherwise stated, dollar amounts are provided
in thousands, except share and per share data.
The following discussion and analysis
of our financial condition and results of operations should be read in conjunction with, and is qualified in its entirety by, our
consolidated financial statements (including notes to the consolidated financial statements) and the other consolidated financial
information appearing elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following
discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Some of the information contained
in this discussion and analysis, including information with respect to our plans and strategy for our business, includes forward-looking
statements that involve risks and uncertainties. Actual results and timing of events could differ materially from the results described
in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
On
January 5, 2018, we changed our name to XpresSpa Group, Inc. (“XpresSpa Group” or the “Company”) from
FORM Holdings Corp. Our Common Stock, par value $0.01 per share, has been listed under the trading symbol “XSPA” on
the Nasdaq Capital Market since January 8, 2018. Rebranding to XpresSpa Group aligned our corporate strategy to build a pure-play
health and wellness services company, which we commenced following our acquisition of XpresSpa Holdings, LLC (“XpresSpa”)
on December 23, 2016.
As
a result of the transition to a pure-play health and wellness services company, we currently have one operating segment that is
also our sole reporting unit, XpresSpa, a leading airport retailer of spa services. XpresSpa is a well-recognized airport spa
brand with 51 locations, consisting of 46 domestic and 5 international locations as of December 31, 2019. XpresSpa offers travelers
premium spa services, including massage, nail and skin care, as well as spa and travel products. During 2019, approximately
82% of XpresSpa’s total revenue was generated by services, primarily massage and nailcare, 15% was generated by retail products,
primarily travel accessories and 3% other revenue.
We
own certain patent portfolios, which we, in prior years, monetized through sales and licensing agreements. During the year ended
December 31, 2018, we determined that our 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.
In
October 2017, we completed the sale of FLI Charge, Inc. (“FLI Charge”) and in March 2018, we completed the sale of
Group Mobile Int’l LLC (“Group Mobile”). These two entities previously comprised our technology operating segment.
The results of operations for FLI Charge and Group Mobile are presented in the consolidated statements of operations and comprehensive
loss as consolidated net loss from discontinued operations for the year ended December 31, 2018.
Recent
Developments
Effects
of Coronavirus on Business
On March 11, 2020, the World Health Organization declared the
outbreak of the novel coronavirus (“COVID-19”), which continues to spread throughout the U.S. and the world, as a pandemic.
The outbreak is having an impact on the global economy, resulting in rapidly changing market and economic conditions. Similar to
many businesses in the travel sector, our business has been materially adversely impacted by the recent COVID-19 outbreak and associated
restrictions on travel that have been implemented. Effective March 24, 2020, we temporarily closed all global spa locations, largely
due to the categorization of our spa locations by local jurisdictions as “non-essential services”. We intend to reopen
our spa locations and resume normal operations once restrictions on non-essential services are lifted and airport traffic returns
to sufficient levels to support our operations. On March 25, 2020, we announced that, during such period as we remain unable to
reopen our spa locations for normal operations, we were advancing conversations with certain COVID-19 testing partners to develop
a model for testing in U.S. airports.
The temporary closing of our global spa
operations has had a materially adverse impact on our cash flows from operations and caused a liquidity crisis. As a result,
management has concluded that there was a long-lived asset impairment triggering event during the first quarter of 2020, which
will result in management performing an impairment evaluation of certain of its long-lived asset balances (primarily leasehold
improvements and right of use lease assets totaling approximately $16,318 as of December 31, 2019). This could lead to us recording
an impairment charge during the first quarter of 2020. The full extent to which COVID-19 will impact our results will depend on
future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning
the severity of the virus and the actions to contain or treat its impact.
We are currently seeking sources of capital to help fund our
business operations during the COVID-19 crisis. We have been able to secure financing during the first quarter of 2020 totaling
gross proceeds of approximately $9,440 by obtaining a cash advance on our accounts receivable balances, a loan from our senior
secured lender, B3D, LLC (“B3D”), and through common stock offerings (see discussion below). Depending on the impact
of the COVID-19 outbreak on our operations and cash position we may need to obtain additional financing. If we need to obtain additional
financing in the future and are unsuccessful, we may be required to curtail or terminate some or all of our business operations
and cause our Board of Directors to possibly pursue a restructuring, which may include a reorganization or bankruptcy under Federal
bankruptcy laws, or a dissolution, liquidation and/or winding up of the Company. Accordingly, holders of our secured and
unsecured debt and common stock may lose their entire investment in the event of a reorganization, bankruptcy, liquidation, dissolution
or winding up of the Company.
Liquidity and Going Concern
As of December 31, 2019, we had approximately $2,184 of cash
and cash equivalents, total current assets of approximately $3,933. Our total current liabilities balance, which includes primarily
accounts payable, accrued expenses, and the current portion of operating lease liabilities was $16,220 as of December 31, 2019.
The working capital deficiency was $12,287 as of December 31, 2019, compared to a working capital deficiency of $10,899 as of December
31, 2018. The increase in the working capital deficiency was primarily due to the reduction in cash and other current asset balances
from 2018 and the inclusion of a portion of lease liability of $3,669 in current liabilities in 2019 but not in 2018, partially
offset by the refinancing and recapitalization transactions the Company completed in July of 2019, which are discussed in the notes
to the consolidated financial statements.
While we have aggressively reduced operating
and overhead expenses, and while we continue to focus on our overall profitability, we have continued to generate negative cash
flows from operations, and we expect to incur net losses for the foreseeable future, especially considering the negative impact
COVID-19 will have on our liquidity and financial position. As discussed elsewhere in this Annual Report on Form 10-K, the report
of our independent registered public accounting firm on our financial statements for the years ended December 31, 2019 and 2018
includes an explanatory paragraph indicating that there is substantial doubt about our ability to continue as a going concern.
The audited consolidated financial statements included in this Annual Report on Form 10-K have been prepared assuming that we will
continue as a going concern and do not include any adjustments that might result if we cease to continue as a going concern.
We have taken actions to improve our overall
cash position and access to liquidity through debt and equity financings, by exploring valuable strategic partnerships, right-sizing
our corporate structure, and stream-lining our operations. These actions improve our overall cash position and assist with our
liquidity needs; however, there can be no assurance that these actions will be sufficient.
Credit Cash Funding Advance
On January 9, 2020, fifteen of our wholly
owned subsidiaries (the “CC Borrowers”) entered into an accounts receivable advance agreement (the “CC Agreement”)
with CC Funding, a division of Credit Cash NJ, LLC (the “CC Lender”). Pursuant to the terms of the CC Agreement, the
CC Lender agreed to make an advance of funds in the amount of $1,000 for aggregate fees of $160, for a total repayment amount of
$1,160 (the “Collection Amount”). The Borrowers agreed to repay the Collection Amount on or before the 12-month anniversary
of the funding date of the advance by authorizing the CC Lender to retain a fixed daily repayment amount. The advance of funds
is secured by substantially all of the assets of the CC Borrowers, including CC Borrowers’ existing and future accounts receivable
and other rights to payment, including accounts receivable arising out of the CC Borrowers’ acceptance or other use of any
credit cards, charge cards, debit cards or similar forms of payments. The funds received from advances may be used in the ordinary
course of business consistent with past practices. The CC Agreement additionally includes certain stated events of default, upon
which the Lender is entitled to increase the fixed daily payments made to the Lender and to increase the interest rate. As a result
of the COVID-19 pandemic and closing of our spas on March 24, 2020, we have entered into a revised, reduced repayment amount equal
to $10 per week versus approximately $31 per week.
As compensation for the consent of existing
creditor B3D to the Agreement described above, on January 9, 2020, XpresSpa Holdings, LLC, (“XpresSpa Holdings”) our
wholly-owned subsidiary, entered into a fifth amendment (the “Fifth Credit Agreement Amendment”) to its existing Credit
Agreement with B3D in order to, among other provisions, (i) amend and restate its existing convertible promissory note (the “B3D
Note”) in order to increase the principal amount owed to B3D from $7,000 to $7,150, which additional $150 in principal and
any interest accrued thereon will be convertible, at B3D’s option, into shares of our Common Stock subject to receipt of
the approval of our stockholders in accordance with applicable law and the rules and regulations of the Nasdaq Stock Market and
(ii) provide for the advance payment of 291,669 shares of Common Stock in satisfaction of the interest payable pursuant to the
B3D Note for the months of October, November and December 2020.
B3D Senior Secured Loan
On March 6, 2020, XpresSpa Holdings, entered
into a sixth amendment (the “Sixth Credit Agreement Amendment”) to its existing credit agreement with B3D in order
to, among other provisions, (i) amend and restate the B3D Note in order to increase the principal amount owed to B3D from $7,150
to $7,900, which additional $750 in principal (consisting of $500 in new funding discussed below and $250 in unfunded principal)
and any interest accrued thereon will be convertible, at B3D’s option, into shares of our Common Stock; provided, however,
that the additional $750 in principal and any interest accrued thereon shall neither be convertible into Common Stock or interest
payable in Common Stock prior to receipt of the approval of our stockholders in accordance with applicable law and the rules and
regulations of the Nasdaq Stock Market and (ii) decrease the conversion rate under the B3D Note from $2.00 per share to $0.56 per
share, pursuant to the authority of our Board of Directors to voluntarily reduce the conversion rate in its discretion, which was
previously approved by our stockholders on October 2, 2019.
In connection with the Sixth Credit Agreement
Amendment and B3D Note, B3D agreed to provide us with $500 in additional funding and to submit conversion notices to convert (i)
an aggregate of $375 in principal to Common Stock on March 6, 2020 and (ii) an additional aggregate of $375 in principal to Common
Stock on or prior to March 27, 2020.
Common Stock Offerings and Warrant
Exchange
On March 19, 2020, we entered into a Securities
Purchase Agreement (the “First Purchase Agreement”) with certain purchasers named therein, pursuant to which we agreed
to issue and sell, in a registered direct offering, (i) 4,153,383 shares of our Common Stock, at an offering price of $0.175 per
share and (ii) an aggregate of 2,132,333 pre-funded warrants exercisable for shares of Common Stock (the “First Pre-Funded
Warrants”) at an offering price of $0.165 per First Pre-Funded Warrant (the offering of the shares of Common Stock and the
First Pre-Funded Warrants, the “First Offering”). We received gross proceeds of approximately $1,100 in connection
with the First Offering, before deducting financial advisory consultant fees and related offering expenses. The First Pre-Funded
Warrants were sold to the purchasers to the extent that a purchaser’s subscription of shares of Common Stock in the First
Offering would otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning
more than 4.99% of our outstanding Common Stock immediately following the consummation of the Offering, in lieu of shares of Common
Stock. Each First Pre-Funded Warrant represented the right to purchase one share of Common Stock at an exercise price of
$0.01 per share. The First Pre-Funded Warrants were exercised in full in March 2020.
On March 19, 2020, we entered into separate
Warrant Exchange Agreements (the “Exchange Agreements”) with the holders of certain existing warrants (the “Exchanged
Warrants”) to purchase shares of Common Stock. The Exchanged Warrants were originally issued (i) pursuant to a securities
purchase agreement, dated as of May 15, 2018, and in connection with a related consent and (ii) in connection with that certain
Agreement and Plan of Merger by and among the Company (formerly known as FORM Holdings Corp.), FHXMS, LLC, XpresSpa Holdings,
LLC and Mistral XH Representative, LLC, as representative of the unitholders, dated October 25, 2016, as subsequently amended.
Pursuant to the Exchange Agreements, on the closing date and subject to (i) the receipt of approval of our stockholders as required
by the applicable rules and regulations of the Nasdaq Stock Market and (ii) the receipt of approval of our stockholders to increase
our authorized shares, the holders of Exchanged Warrants would exchange each Exchanged Warrant for a number of shares of Common
Stock (the “New Shares”) equal to the product of (i) the number of shares of Common Stock underlying such Exchanged
Warrants (based on a formula related to the closing price of the Common Stock at the time of the closing of the Exchange as further
detailed in the Exchange Agreement) and (ii) 1.5 (the “Exchange”). To the extent any holder of Exchanged Warrants
would otherwise beneficially own in excess of any beneficial ownership limitation applicable to such holder after giving effect
to the Exchange, that holder’s Exchanged Warrants shall be exchanged for a number of New Shares issuable to the holder without
violating the applicable beneficial ownership limitation and the remainder of the holder’s Exchanged Warrants shall automatically
convert into pre-funded warrants to purchase the number of shares of Common Stock equal to the number of shares of Common Stock
in excess of the applicable beneficial ownership limitation. The closing is expected to take place on the first business day on
which the conditions to the closing are satisfied or waived, subject to satisfaction of customary closing conditions.
On March 25, 2020, we entered into a Securities
Purchase Agreement (the “Second Purchase Agreement”) with certain purchasers, pursuant to which we agreed to issue
and sell, in a registered direct offering, (i) 7,450,000 shares of our Common Stock, at an offering price of $0.20 per share and
(ii) an aggregate of 1,500,000 pre-funded warrants exercisable for shares of Common Stock (the “Second Pre-Funded Warrants”)
at an offering price of $0.19 per Second Pre-Funded Warrant (the offering of the shares of Common Stock and the Second Pre-Funded
Warrants, the “Second Offering”). We received gross proceeds of approximately $1,790 in connection with the Second
Offering, before deducting financial advisory consultant fees and related offering expenses. The Second Pre-Funded Warrants are
being sold to the purchasers to the extent that a purchaser’s subscription of shares of Common Stock in the Second Offering
would not otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more
than 4.99% (or, in certain cases, 9.99%) of our outstanding Common Stock immediately following the consummation of the Second Offering,
in lieu of shares of Common Stock. Each Second Prefunded Warrant represented the right to purchase one share of Common Stock at
an exercise price of $0.01 per share. The Second Pre-Funded Warrants were exercised in full in March 2020.
On March 27, 2020, we entered into a Securities
Purchase Agreement (the “Third Purchase Agreement”) with certain purchasers named therein, pursuant to which we agreed
to issue and sell, in a registered direct offering, (i) 7,895,000 shares of our Common Stock, at an offering price of $0.20 per
share and (ii) an aggregate of 2,105,000 pre-funded warrants exercisable for shares of Common Stock (the “Third Pre-Funded
Warrants”) at an offering price of $0.19 per Third Pre-Funded Warrant (the offering of the shares of Common Stock and the
Pre-Funded Warrants, the “Offering”). We received gross proceeds of approximately $2,000 in connection with the Third
Offering, before deducting financial advisory consultant fees and related offering expenses. The Third Pre-Funded Warrants are
being sold to the purchasers to the extent that a purchaser’s subscription of shares of Common Stock in the Offering would
otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99%
(or, in certain cases, 9.99%) of our outstanding Common Stock immediately following the consummation of the Third Offering, in
lieu of shares of Common Stock. Each Third Prefunded Warrant represents the right to purchase one share of Common Stock at an exercise
price of $0.01 per share. The Third Pre-Funded Warrants were exercised in full in March and April 2020.
On April 6, 2020, we entered into a Securities
Purchase Agreement (the “Fourth Purchase Agreement”) with certain purchasers named therein, pursuant to which we agreed
to issue and sell, in a registered direct offering, (i) 12,418,179 shares of Common Stock, at an offering price of $0.22 per share
and (ii) an aggregate of 1,445,454 pre-funded warrants exercisable for shares of Common Stock (the “Fourth Pre-Funded Warrants”)
at an offering price of $0.21 per Fourth Pre-Funded Warrant (the offering of the shares of Common Stock and the Fourth Pre-Funded
Warrants, the “Fourth Offering”). We received gross proceeds of approximately $3,050 in connection with the Fourth
Offering, before deducting financial advisory consultant fees and related offering expenses. The Fourth Pre-Funded Warrants were
sold to the purchasers to the extent that a purchaser’s subscription of shares of Common Stock in the Fourth Offering would
otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99%
(or, in certain cases, 9.99%) of our outstanding Common Stock immediately following the consummation of the Fourth Offering, in
lieu of shares of Common Stock. Each Fourth Prefunded Warrant represented the right to purchase one share of Common Stock at an
exercise price of $0.01 per share.
Calm Private Placement and Collaboration
Agreement
Calm Private Placement
On July 8, 2019, we entered into a securities
purchase agreement (the “Calm Purchase Agreement”) with Calm.com (“Calm”) pursuant to which we agreed to
sell (i) an aggregate principal amount of $2,500 in an unsecured convertible note due 2022 (the “Calm Note”), which
is convertible into shares of Series E Convertible Preferred Stock (the “Series E Preferred Stock”) and (ii) warrants
to purchase 937,500 shares of our Common Stock, at an exercise price of $2.00 per share (the “Calm Warrants”) (collectively,
the “Calm Private Placement”).
The Calm Note is an unsecured subordinated
obligation of ours. Unless earlier converted or redeemed, the Calm Note will mature on May 31, 2022. The Calm Note bears interest
at a rate of 5% per annum, subject to increase in the event of default to the lesser of 18% per annum or the maximum rate permitted
under applicable law. The Calm Note is convertible at any time, in whole or in part, at the option of Calm into shares of Series
E Preferred Stock at a conversion price equal to $0.27125 per share, after giving effect to certain anti-dilution adjustments,
except that no shares of Series E Preferred Stock could be issued as payment of interest or in connection with anti-dilution protection
or voluntary reduction of the conversion price until receipt of shareholder approval, which approval was obtained on October 2,
2019. Interest on the Calm Note is payable in arrears beginning on the last day of each February, May, August and November. We
may elect to pay interest in cash, shares of Series E Preferred Stock or a combination thereof.
On April 17, 2020, we entered into an amended and restated the
Calm Note in order to provide, among other items, that Calm shall not have the right to convert the shares of Series E Preferred
Stock issued in connection with the Calm Note into shares of Common Stock to the extent that such conversion would cause Calm to
beneficially own in excess of the Beneficial Ownership Limitation, initially defined as 4.99% of the number of shares of the Common
Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon conversion of the Series
E Preferred Stock.
The Calm Warrants entitle Calm to purchase
an aggregate of 937,500 shares of Common Stock. The Calm Warrants are exercisable beginning six months from the date of issuance,
have a term of five years and feature an exercise price equal to $0.175 per share after giving effect to certain anti-dilution
adjustments.
See Note 10, “Long-term Notes
and Convertible Notes”, to the consolidated financial statements for discussion of the accounting for the Calm Private
Placement.
Calm Collaboration Agreement
On July 8, 2019, we entered into an Amended and Restated Product
Sale and Marketing Agreement with Calm (the “Amended and Restated Collaboration Agreement”), which replaced the parties’
previous Product Sale and Marketing Agreement. The Amended and Restated Collaboration Agreement primarily relates to the display,
marketing, promotion, offer for sale and sale of Calm’s products in each of our branded stores worldwide. The Amended and
Restated Collaboration Agreement will remain in effect until July 31, 2021, unless terminated earlier in accordance with the Amended
and Restated Collaboration Agreement, and automatically renews for successive terms of six months unless either party provides
written notice of termination no later than thirty days prior to any such automatic renewal of the Amended and Restated Collaboration
Agreement. On October 30, 2019, we and Calm entered into an amendment to the Amended and Restated Collaboration Agreement which
provides for the addition of certain Calm branded products.
Amendment to Certificate of Designation
of Series E Convertible Preferred Stock
On July 8, 2019, we filed a certificate of amendment to the
Certificate of Designation of Series E Convertible Preferred Stock (the “Series E COD Amendment”) with the State of
Delaware to (i) increase the number of authorized shares of Series E Preferred Stock to 2,397,060 and (ii) upon receipt of Shareholder
Approval, reduce the conversion price to $2.00. The Series E COD Amendment was approved by our Board of Directors and we obtained
shareholder approval of the Series E COD Amendment on October 2, 2019. See Note 11, “Preferred Stock and Warrants”
to the consolidated financial statements for further discussion.
B3D Transaction and Senior Secured
Note
On July 8, 2019, Holdings entered into
the fourth amendment (the “Credit Agreement Amendment”) to its existing Credit Agreement with B3D, LLC (“B3D”)
(the “Senior Secured Note” or the “B3D Note”) in order to, among other provisions, (i) extend the maturity
date to May 31, 2021, (ii) reduce the applicable interest rate to 9.0%, and (iii) to amend and restate certain other provisions
relating to its 11.24% Senior Secured Note. As consideration for these and other modifications the principal amount owed to B3D
was increased to $7.0 million. Principal and any interest accrued thereon are convertible, at B3D’s option, into Common Stock
subject to receipt of shareholder approval, which was obtained on October 2, 2019 (the “B3D Transaction”).
B3D Note
The B3D Note is a senior secured and guaranteed
obligation of Holdings, secured by the personal property of the parent company of Holdings (XpresSpa Group, Inc.) and Holdings’
wholly owned subsidiaries. Unless earlier converted or redeemed, the B3D Note will mature on May 31, 2021. The B3D Note bears interest
at a rate of 9.00% per annum, calculated on a monthly basis. Interest only is payable in arrears on the last business date of each
month (the "Monthly Interest"). At the option of Holdings, under certain conditions all or any portion of the Monthly
Interest that is payable may be paid in shares of our Common Stock. At the option of B3D, all or any portion of the outstanding
principal amount of the B3D Note, plus any accrued and unpaid interest thereon, shall be convertible into our Common Stock at a
conversion price equal to $0.175 per share after giving effect to certain anti-dilution adjustments.
See Note 10, "Long-term Notes and
Convertible Notes", to the consolidated financial statements for discussion of the accounting for the B3D Transaction
and B3D Note.
On August 22, 2019, we entered into an
amendment to the B3D Note. Among other provisions, the amendment provided that B3D shall not have the right to convert the B3D
Note into shares of Common Stock to the extent that such conversion would cause B3D to beneficially own in excess of the applicable
beneficial ownership limitation initially defined as 4.99% of the number of shares of Common Stock outstanding immediately after
giving effect to the issuance of shares of Common Stock issuable upon conversion of the B3D Note.
Series D Convertible Preferred Stock
Amendment and December 2016 Warrant Amendment
Series D Convertible Preferred Stock
Amendment
On July 8, 2019, we filed a certificate of amendment to the
Certificate of Designation of Series D Convertible Preferred Stock (the “Series D COD Amendment”) with the State of
Delaware to, upon receipt of shareholder approval, reduce the conversion price to $2.00 and provide for automatic conversion of
the Series D Convertible Preferred Stock (the “Series D Preferred Stock”) into shares of Common Stock. The Series D
COD Amendment was approved by our Board and we obtained shareholder approval on October 2, 2019. In
connection with the approval of the Series D COD Amendment, on October 4, 2019 all issued and outstanding shares of our Series
D Preferred Stock were converted into 12,772,500 shares of our Common Stock except to the extent that any holder of Series D Preferred
Stock would otherwise beneficially own in excess any beneficial ownership limitation applicable to such holder after giving effect
to the conversion, in which case such holder’s Series D Preferred Stock converted automatically into warrants to purchase
the number of shares of our Common Stock equal to the number of shares of Common Stock into which the holder’s Series D Preferred
Stock would otherwise have converted.
December 2016 Warrant Amendment
On July 8, 2019, we entered into an amendment to certain outstanding
warrants issued in December 2016 (the “December 2016 Warrants”) to the holders of our Series D Preferred Stock (the
“December 2016 Warrant Amendment”) to provide for (i) a reduction in the price to convert to Common Stock to $2.00,
(ii) certain anti-dilution price protection and (iii) voluntary reduction of the conversion price by us in our discretion. We obtained
shareholder approval in connection with the December 2016 Warrant Amendment on October 2, 2019. The December 2016 Warrants were
recorded as an equity instrument at December 31, 2016. As such, no adjustment to the consolidated financial statements was made
as a result of the change in the conversion price.
May 2018 SPA Amendment, Series F
Preferred Stock and Series B Preferred Stock
May 2018 SPA Amendment
On May 15, 2018, in a private placement
offering, we issued (i) 5% Secured Convertible Notes (the “5% Secured Convertible Notes”) convertible into Common Stock
at $12.40 per share, due November 2019, (ii) May 2018 Class A Warrants to purchase 357,863 shares of Common Stock (the “May
2018 Class A Warrants”) and (iii) Class B Warrants to purchase 178,932 shares of Common Stock (the “May 2018 Class
B Warrants”).
On June 27, 2019, we entered into the Third Amendment Agreement
to the 5% Secured Convertible Notes (the “Third Amendment”) whereby the holders of the 5% Convertible Notes agreed
to convert their notes then held into Common Stock. The Third Amendment reduced the conversion price of the 5% Convertible Notes
to Common Stock from $12.40 per share to $2.48 per share. As a result of the reduction in the conversion price, we recorded debt
conversion expense of $1,584 to account for the additional consideration paid over what was agreed to in the original 5% Secured
Convertible Notes agreement. The expense is reflected in “Other non-operating income (expense), net” in the
consolidated statement of operations and comprehensive loss. The 5% Secured Convertible Notes holders converted their remaining
outstanding principal balances plus accrued interest into 586,389 shares of Common Stock and 356 ,772 Class A Warrants (the
“June 2019 Class A Warrants”). The June 2019 Class A Warrants had an exercise price of $0.01 and are otherwise identical
in form and substance to our existing May 2018 Class A Warrants.
We had an independent third party perform
an appraisal of the June 2019 Class A Warrants as of June 30, 2019. The June 2019 Class A Warrants were assigned an initial appraised
value of $689. The value of these warrants was recorded as a derivative liability on the consolidated balance sheet and is marked
to market at the end of each reporting period. The expense of $689 is included in “Other non-operating income (expense),
net” in the consolidated statement of operations and comprehensive loss in the second quarter of 2019 and is included
in our current period year end results.
The June 2019 Class A Warrants were converted
into 354,502 shares of Common Stock in July 2019.
On July 8, 2019, we entered into an amendment
(the “May 2018 SPA Amendment”) to our Securities Purchase Agreement, dated as of May 15, 2018, by and between us and
the purchasers party thereto (the “May 2018 SPA”), to provide for, among other provisions, (i) an update to certain
definitions, including the definition of an “Exempt Issuance,” (ii) the waiver of certain provisions regarding restrictions
on subsequent equity sales and participation in subsequent financings, (iii) the removal of certain of such provisions upon receipt
of shareholder approval (obtained on October 2, 2019), (iv) the amendment to certain provisions of the May 2018 Class A Warrants
issued pursuant to the May 2018 SPA to modify certain provisions in connection with a Notice Failure (as such term is defined in
the May 2018 Class A Warrants), and the reduction in the exercise price of the May 2018 Class A Warrants issuable pursuant to anti-dilution
price protection contained in such May 2018 Class A Warrants to $2.00 per share following receipt of shareholder approval, which
approval was obtained on October 2, 2019, (v) the cancellation of all outstanding May 2018 Class B Warrants and (vi) the establishment
of a new class of preferred stock, designated Series F Convertible Preferred Stock, par value $0.01 per share (the “Series
F Preferred Stock”) and the issuance of 8,996 shares of such Series F Preferred Stock to the parties to the May 2018 SPA
Amendment, which are convertible into Common Stock upon receipt of shareholder approval, which approval was obtained on October
2, 2019.
Certificate of Designation of Series
F Preferred Stock
In connection with the May 2018 SPA
Amendment, on July 8, 2019, we filed with the Secretary of State of the State of Delaware a Certificate of Designation of
Preferences, Rights and Limitations of Series F Convertible Preferred Stock (the “Series F Certificate of
Designation”) establishing and designating the rights, powers and preferences of the Series F Preferred Stock. We
designated 9,000 shares of Series F Preferred Stock. The Series F Convertible Preferred Stock was recorded at its fair value
on July 8, 2019 of $1,131 in our consolidated balance sheet. See Note 11. “Preferred Stock and Warrants”
for further discussion.
Material
Weakness in Internal Controls over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance
with U.S. generally accepted accounting principles. In connection with our audit of the year ended December 31, 2019, we identified
a material weakness in our internal controls over our financial close and reporting process. A material weakness is a deficiency,
or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a
material misstatement of annual or interim financial statements will not be prevented or detected and corrected on a timely basis.
Our management has concluded that the financial close and reporting process needs additional formal procedures to ensure that appropriate
reviews occur on all financial reporting analysis in a timely manner. We also concluded that we did not maintain a sufficient complement
of corporate personnel with appropriate levels of accounting and controls knowledge and experience commensurate with our financial
reporting requirements to appropriately analyze, record and disclose accounting matters completely and accurately. As these deficiencies
created a reasonable possibility that a material misstatement would not be prevented or detected in a timely basis, management
concluded that the control deficiencies represented a material weakness and, accordingly, our internal control over financial reporting
was not effective as of December 31, 2019.
We
are still considering the full extent of the procedures to implement in order to remediate the material weakness described above.
Our preliminary remediation plan includes implementing a more robust review process, and an increase in the supervision and monitoring
of the financial reporting processes and our accounting personnel. We will ensure that corporate accounting personnel have the
level of accounting and controls knowledge and experience commensurate with our financial reporting requirements by instituting
a training program for all accounting personnel on a regular basis on proper internal control procedures over financial reporting.
The preliminary remediation plan also includes implementing controls over calculations, analysis and conclusions associated with
non-routine transactions at a more precise level. We will also allocate additional resources to the corporate accounting function,
which may include the use of independent consultants with sufficient expertise to assist in the preparation and review of certain
non-recurring transactions, timely review of the account reconciliations and the preparation of quarterly and year end reporting.
Lastly we will automate, where possible and practical, account analysis and calculations currently being done manually by better
utilizing our current general ledger accounting system. Where cost effective, we will outsource any manual processes that are
time consuming and complex so as to free up accounting personnel to spend more time preparing and reviewing account analysis.
CEO
Transition
On February 8, 2019, Edward Jankowski resigned
as Chief Executive Officer of the Company and as a director of the Company. Mr. Jankowski’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. Mr. Jankowski
received termination benefits including $375 payable in equal installments over a twelve-month term which commenced on February
13, 2019 and COBRA continuation coverage paid in full by the Company for up to a maximum of twelve months.
Effective as of February 11, 2019, Douglas
Satzman was appointed by the Company’s Board of Directors as the Chief Executive Officer of the Company and as a director
of the Company to fill the position vacated by Mr. Jankowski.
Among the first initiatives of Mr. Satzman
was a critical evaluation of the profitability and strategic fit of the portfolio of spas. Consequently, a determination was made
to close nine underperforming and strategically mismatched spas, or approximately 20% of the spa portfolio, while focusing efforts
and capital on the performing spas, renovations of existing spas and expansion of the spa portfolio into new airports and terminals.
Relocation of Corporate Headquarters
and Global Support Team
On October 21, 2019, the Company relocated its corporate office
functions and its Global Support Center in New York City from 780 Third Avenue to 254 W 31st Street. The new XpresSpa
Global Support Center houses all corporate employees and the move yielded a cost reduction in occupancy expenses of approximately
$360 annually.
Reverse
Stock Split
On
February 22, 2019, we filed a certificate of amendment to our amended and restated certificate of incorporation with the Secretary
of State of the State of Delaware to effect a 1-for-20 reverse stock split of our shares of Common Stock. Such amendment and ratio
were previously approved by our stockholders and board of directors, respectively.
As
a result of the reverse stock split, every twenty (20) shares of our pre-reverse split Common Stock were combined and reclassified
into one (1) share of Common Stock. Proportionate voting rights and other rights of Common Stockholders were affected by the reverse
stock split. Stockholders who would have otherwise held a fractional share of Common Stock received payment in cash in lieu of
any such resulting fractional shares of Common Stock as the post-reverse split amounts of Common Stock were rounded down to the
nearest full share. Such cash payment in lieu of a fractional share of Common Stock was calculated by multiplying such fractional
interest in one share of Common Stock by the closing trading price of our Common Stock on February 22, 2019 and rounded to the
nearest cent. No fractional shares were issued in connection with the reverse stock split.
Our
Common Stock began trading on the Nasdaq Capital Market on a post-reverse split basis at the open of business on February 25,
2019.
Dispositions
On
October 20, 2017, we sold FLI Charge to a group of private investors and FLI Charge management, who now own and operate FLI Charge.
In February 2019, the Company entered into an agreement to release FLI Charge’s obligation to pay any royalties on FLI Charge’s
perpetual gross revenues with regard to conductive wireless charging, power, or accessories, and to cancel its warrants exercisable
in FLI Charge in exchange for cash proceeds of $1,100 which were received in full on February 15, 2019 and is included in Other
revenue in the consolidated statement of operations and comprehensive loss for the year ended December 31, 2019.
On
March 22, 2018, we sold Group Mobile to a third party. We have not provided any continued management or financing support to FLI
Charge or Group Mobile. See Note 17, “Discontinued Operations”, to the consolidated financial statements for
further discussion.
Rebranding
On
January 5, 2018, we changed our name to XpresSpa Group, Inc. from FORM Holdings Corp, which aligned our corporate strategy to
build a pure-play health and wellness services company. Our Common Stock, par value $0.01 per share, which had previously been
listed under the trading symbol “FH” on the Nasdaq Capital Market, has been listed under the trading symbol “XSPA”
since January 8, 2018.
Sale
of Patents
In January 2018, we sold certain patents
to Crypto Currency Patent Holdings Company LLC, a unit of Marathon Patent Group, Inc. (“Marathon”), for approximately
$1,250 comprised of $250 in cash and 250,000 shares of Marathon Common Stock valued at approximately $1,000 (the “Marathon
Common Stock”) at the time of the transaction. The Marathon Common Stock was subject to a lockup period (the “Lockup
Period”) which commenced on the Transaction Date and ended on July 11, 2018, subject to a leak-out provision. On December
31, 2018, the Company determined based on its evaluation of its investment that certain of Marathon’s unrealized losses represented
an other-than-temporary impairment and the Company recognized an impairment charge of $148 for the year ended December 31, 2018,
equal to the excess of carrying value over fair value. Also, during the year ended December 31, 2018, the Company sold 205,646
shares of Marathon Common Stock, with a carrying value of $279, for net proceeds of $200. During the year ended December 31, 2019,
the Company sold its remaining shares of Marathon Common Stock of $23, for net proceeds of $14.
Our Strategy and Outlook
XpresSpa regularly measures comparable
store sales, which it defines as current period sales from stores opened more than 12 months compared to those same stores’
sales in the prior year period (“Comp Store Sales”). The measurement of Comp Store Sales on a daily, weekly, monthly,
quarterly and year-to-date basis provides an additional perspective on XpresSpa’s total sales growth when considering the
influence of new unit contribution. A reconciliation between Comp Store Sales and total revenue as reported on the financial statements
is presented below:
|
|
2019
|
|
2018
|
|
%
|
|
|
|
Comp Store
|
|
|
Non-Comp
Store
|
|
|
Total
|
|
|
Comp Store
|
|
|
Non-Comp
Store
|
|
|
Total
|
|
|
|
Revenue
|
|
$
|
46,254
|
|
|
$
|
2,261
|
|
|
$
|
48,515
|
|
|
$
|
44,959
|
|
|
$
|
5,135
|
|
|
$
|
50,094
|
|
|
|
2.9
|
%
|
Comp
Store Sales increased 2.9% during the year ended December 31, 2019 as compared to the same period in 2018. As of December 31,
2019, XpresSpa had 51 open locations; during the year, XpresSpa opened four new locations, and closed nine underperforming locations
while having 56 open locations as of December 31, 2018. The increase in Comp Store sales was due to an increase in traffic, an
increase in average ticket price per customer and an increase in the sale of new products (Calm products, and Persona subscriptions
and vitamin packs).
We
plan to grow XpresSpa by continuing to focus on spa-level productivity and leveraging retail partnerships to increase units per
transaction, which will contribute to the growth of the Comp Store Sales and through the opening of new locations. On March 25,
2020, we announced that, during such period as we remain unable to reopen our spa locations for normal operations due to the COVID-19
outbreak, we were advancing conversations with certain COVID-19 testing partners to develop a model for testing in U.S. airports.
Full-Year
2019 and 2018 Adjusted EBITDA Loss
|
|
Years ended December 31,
|
|
Revenue:
|
|
2019
|
|
|
2018
|
|
Services
|
|
$
|
39,989
|
|
|
$
|
41,163
|
|
Products
|
|
|
7,320
|
|
|
|
8,131
|
|
Other
|
|
|
1,206
|
|
|
|
800
|
|
Total revenue
|
|
|
48,515
|
|
|
|
50,094
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
Labor
|
|
|
22,847
|
|
|
|
24,369
|
|
Occupancy
|
|
|
7,831
|
|
|
|
8,118
|
|
Product and other operating costs
|
|
|
7,176
|
|
|
|
6,964
|
|
Total cost of sales
|
|
|
37,854
|
|
|
|
39,451
|
|
|
|
|
|
|
|
|
|
|
Store margin
|
|
|
10,661
|
|
|
|
10,643
|
|
Store margin as a % of total revenue
|
|
|
22.0
|
%
|
|
|
21.2
|
%
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
6,124
|
|
|
|
7,398
|
|
Impairment/disposal of assets
|
|
|
6,090
|
|
|
|
2,100
|
|
Goodwill impairment
|
|
|
—
|
|
|
|
19,630
|
|
General and administrative
|
|
|
14,319
|
|
|
|
16,240
|
|
Total operating expenses
|
|
|
64,387
|
|
|
|
84,819
|
|
Loss from continuing operations
|
|
|
(15,872
|
)
|
|
|
(34,725
|
)
|
Interest expense
|
|
|
(2,900
|
)
|
|
|
(1,827
|
)
|
Other non-operating income (expense), net
|
|
|
(1,904
|
)
|
|
|
643
|
|
Loss from continuing operations before income taxes
|
|
|
(20,676
|
)
|
|
|
(35,909
|
)
|
Income tax benefit
|
|
|
146
|
|
|
|
(278
|
)
|
Net loss from continuing operations
|
|
|
(20,530
|
)
|
|
|
(35,631
|
)
|
Loss from discontinued operations, net of income taxes
|
|
|
—
|
|
|
|
(1,115
|
)
|
Net loss
|
|
|
(20,530
|
)
|
|
|
(36,746
|
)
|
Net income attributable to noncontrolling interests
|
|
|
(693
|
)
|
|
|
(459
|
)
|
Net loss attributable to common shareholders
|
|
$
|
(21,223
|
)
|
|
$
|
(37,205
|
)
|
Loss from continuing operations
|
|
$
|
(15,872
|
)
|
|
$
|
(34,725
|
)
|
Add back:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
6,124
|
|
|
|
7,398
|
|
Impairment/disposal of assets
|
|
|
6,090
|
|
|
|
2,100
|
|
Goodwill impairment
|
|
|
—
|
|
|
|
19,630
|
|
One-time costs
|
|
|
—
|
|
|
|
2,018
|
|
Stock-based compensation expense
|
|
|
335
|
|
|
|
916
|
|
Adjusted EBITDA loss
|
|
$
|
(3,323
|
)
|
|
$
|
(2,663
|
)
|
We
use GAAP and non-GAAP measurements to assess the trends in our business. With respect to XpresSpa, we review its Adjusted EBITDA,
a non-GAAP measure, which we define as earnings before interest, tax, depreciation and amortization expense, excluding merger
and acquisition, integration and one-time costs and stock-based compensation.
Adjusted
EBITDA is a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP. Reconciliations
of operating loss from continuing operations for the Company for the years ended December 31, 2019 and 2018 to Adjusted EBITDA
loss are presented in the tables above.
We
consider Adjusted EBITDA to be an important indicator for the performance of our business, but not a measure of performance or
liquidity calculated in accordance with U.S. GAAP. We have included this non-GAAP financial measure because management utilizes
this information for assessing our performance and liquidity, and as an indicator of our ability to make capital expenditures
and finance working capital requirements. We believe that Adjusted EBITDA is a measurement that is commonly used by analysts and
some investors in evaluating the performance and liquidity of companies such as us. In particular, we believe that it is useful
for analysts and investors to understand this indicator because it excludes transactions not related to our core cash operating
activities. We believe that excluding these transactions allows investors to meaningfully analyze the performance of our core
cash operations. Adjusted EBITDA should not be considered in isolation or as an alternative to cash flow from operating activities
or as an alternative to operating income or as an indicator of operating performance or any other measure of performance derived
in accordance with GAAP. In evaluating our performance as measured by Adjusted EBITDA, we recognize and consider the limitations
of this measurement. Adjusted EBITDA does not reflect our obligations for the payment of income taxes, interest expense, or other
obligations such as capital expenditures. Accordingly, Adjusted EBITDA is only one of the measurements that management utilizes.
Results
of Operations
Revenue
We
recognize revenue from the sale of XpresSpa products and services when the services are rendered at our stores and from the sale
of products at the time products are purchased at our stores or online (usually by credit card), net of discounts and applicable
sales taxes. Accordingly, we recognize revenue for our single performance obligation related to both in-store and online sales
at the point at which the service has been performed or the control of the merchandise has passed to the customer. Revenues from
the XpresSpa retail and e-commerce businesses are recorded at the time goods are shipped. We exclude all sales taxes assessed
to our customers. Sales taxes assessed on revenues are included in accounts payable, accrued expenses and other current liabilities
in the consolidated balance sheets until remitted to state agencies.
Other revenue includes one-time intellectual property licenses
as well as the sale of certain of our intellectual property. Revenue from patent licensing is recognized when we transfer promised
intellectual property rights to purchasers in an amount that reflects the consideration to which we expect to be entitled in exchange
for those intellectual property rights. During the year ended December 31, 2018, we determined that our intellectual property operating
segment was no longer an area of focus for us and, as such, is no longer reflected as a separate operating segment, as it is not
expected to generate any material revenues or operating costs.
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 associated with revenue from 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.
Depreciation
and amortization
Property
and equipment is stated at cost, net of accumulated depreciation. Depreciation is calculated on a straight-line basis over the
estimated useful lives of the assets. The useful lives of our property and equipment is based on estimates of the period over
which we expect the assets to be of economic benefit to us. Our property and equipment assets primarily consist of leasehold improvements
to our stores and are amortized over the shorter of the useful life of the asset or the term of the lease.
Amortization
of our intangible assets are recognized on a straight-line basis over the remaining useful life of the intangible assets.
Impairment/disposal
of assets
We test our long-lived assets (which primarily includes property
and equipment and right of use lease asset) for impairment on at least an annual basis or whenever circumstances indicate that
the carrying amount may not be recoverable. Long-lived assets are tested for impairment at the lowest level at which there are
identifiable operating cash flows. An impairment loss is recognized if the carrying amount of a fixed asset (asset group) is not
recoverable and exceeds its fair value.
Impairment
charges related to our amortized, intangible assets are recorded when an impairment indicator exists and the carrying amount of
the related asset exceeds its fair value.
General
and administrative
General
and administrative expenses include management and administrative personnel, public and investor relations, overhead/office costs,
insurance legal fees, accounting fees and various other professional fees, as well as sales and marketing costs and stock-based
compensation for management and administrative personnel.
Non-operating
income (expense)
Non-operating income (expense) includes
transaction gains (losses) from foreign exchange rate differences, bank charges, as well as fair value adjustments related to our
derivative liabilities. The value of these derivative liabilities is highly influenced by assumptions used in its valuation, as
well as by our stock price as of the period end (revaluation date).
Income
taxes
As
of December 31, 2019, deferred tax assets generated from our activities in the United States were offset by a valuation allowance
because realization depends on generating future taxable income, which, in our estimation, is not more likely than not to be generated
before such net operating loss carryforwards expire.
Year
ended December 31, 2019 compared to the year ended December 31, 2018
Revenue
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
Services
|
|
$
|
39,989
|
|
|
$
|
41,163
|
|
|
$
|
(1,174
|
)
|
Products
|
|
|
7,320
|
|
|
|
8,131
|
|
|
|
(811
|
)
|
Other
|
|
|
1,206
|
|
|
|
800
|
|
|
|
406
|
|
Total revenue
|
|
$
|
48,515
|
|
|
$
|
50,094
|
|
|
$
|
(1,579
|
)
|
During the year ended December 31, 2019, total revenues decreased
$1,579, or 3.2%, mainly due to the decrease in the number of spas open during the year as compared to the comparable prior year
period. The Company closed nine stores during the year ended December 31, 2019, all of which were unprofitable. During 2019, we
generated 82% of our revenues from services, 15% of our revenues from retail sales and 3% from other revenue. We plan to grow XpresSpa’s
revenue through a combination of increases in sales at our existing XpresSpa locations and the addition of new locations.
In 2017, we sold FLI Charge, a wholly-owned subsidiary, to a
group of private investors and FLI Charge management. In February 2019, we entered into an agreement to release FLI Charge’s
obligation to pay any royalties on FLI Charge’s perpetual gross revenues with regard to conductive wireless charging, power,
or accessories, and to cancel its warrants exercisable in FLI Charge in exchange for cash proceeds of $1,100, which were received
in full on February 15, 2019 and is included in “Other revenue” in the consolidated statement of operations
and comprehensive loss for the year ended December 31, 2019.
During the year ended December 31, 2018, we sold certain of
our patents for consideration which included $250 and 250,000 shares of Common Stock in Marathon Patent Group, Inc. that were fair
valued at $450, which amounts were included in Other revenue in our consolidated statement of operations and comprehensive
loss for the year ended December 31, 2018.
Cost
of sales
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
Cost of sales
|
|
$
|
37,854
|
|
|
$
|
39,451
|
|
|
$
|
(1,597
|
)
|
The decrease in cost of sales of $1,597, or 4.0%, was due to
the decrease in revenues, as we have experienced a decrease associated with labor and benefits. We had 51 open locations as of
December 31, 2019, and 56 open locations as of December 31, 2018. The largest component in the cost of sales are labor costs at
the store-level, as our associates receive commission-based compensation as well as additional incentives based on individual and
store performance. Cost of sales also includes rent and related occupancy costs, which are primarily also a percentage of sales,
as well as product costs directly associated with the procurement of retail inventory and other operating costs.
Cost of sales also decreased as a result of the impact
of initiatives taken by management to streamline processes and reduce store-level costs.
Depreciation
and amortization
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
Depreciation and amortization
|
|
$
|
6,124
|
|
|
$
|
7,398
|
|
|
$
|
(1,274
|
)
|
During the year ended December 31, 2019, depreciation and amortization
expense decreased $1,277, or 17.2%, compared to the depreciation and amortization expense recorded during the year ended December
31, 2018. The decrease was primarily due to the decrease in the number of stores open during the year ended December 31, 2019 compared
to the year ended December 31, 2018. Fewer locations resulted in lower amortization of leasehold improvements. Depreciation and
amortization expense also decreased as a result of the impairment and disposal of fixed assets during the year ended December 31,
2019.
Impairment/disposal
of assets
|
|
|
Year ended December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
Impairment/disposal of assets
|
|
|
$
|
6,090
|
|
|
$
|
2,100
|
|
|
$
|
3,990
|
|
We completed an assessment of our property and equipment and
right of use lease assets for impairment as of December 31, 2019. Based upon the results of the impairment test, we recorded an
impairment expense of approximately $3,060. The expense was primarily related to the impairment of leasehold improvements made
to certain locations and right of use lease assets where management determined that the locations discounted future cash flow was
not enough to support the carrying value of the leasehold improvements and right of use lease assets over the remaining lease term.
The impairment expense represents the excess of the carrying value of the leasehold improvements and right of use lease assets
over the estimated future discounted cash flows. Management calculated the future cash flow of each location using a present value
income approach. The sum of expected cash flow for the remainder of the lease term for each location was present valued at a discount
rate of 9.0%, which represents the current borrowing rate of our note payable to B3D. We believe that this rate incorporates the
time value of money and an appropriate risk premium.
In the second quarter of 2019, we impaired
our investment in Route1, which we received from the disposition of Group Mobile in March 2018, due to an under performance of
operating results. We recorded an impairment charge of $1,141, which is included in “Impairment/disposal of assets”
on the consolidated statement of operations and comprehensive loss for the year ended December 31, 2019.
In July 2019, the lease for our location
in the World Trade Center in New York was terminated. As a result, we disposed of all assets (primarily leasehold improvements)
at that location, which resulted in a charge of approximately $620, included in “Impairment/disposal of assets”
on the consolidated statement of operations and comprehensive loss for the year ended December 31, 2019.
In the third quarter of 2019, we recorded
an impairment loss on our FLI Charge cost method investment, which we received from the disposition of FLI Charge in October 2017,
of approximately $47 which is included in “Impairment/disposal of assets” on our consolidated statements of
operations and comprehensive loss for the year ended December 31, 2019.
We assessed our investment in
InfoMedia Services Limited (“InfoMedia”) for impairment at December 31, 2019 as InfoMedia was to have obtained
financing to fund continuing operations and a new product during 2019 but was unable to obtain the financing. We believe this
represents a triggering event and determined we should write off our investment in InfoMedia and recorded an impairment
expense of $787, which is included in “Impairment/disposal of assets” on our statement of operations and
comprehensive loss for the year ended December 31, 2019.
We expensed approximately $231 of
pre-opening costs incurred during 2019 that had been capitalized in anticipation of opening new spas, that we later
determined were not viable. We also wrote off approximately $109 related to a previous asset disposition, which was ultimately deemed not realizable as of December 31, 2019. These charges are included in the “Impairment/disposition
of assets” line in the consolidated statement of operations and comprehensive loss for the year ended December 31,
2019.
During the year ended December 31, 2019,
the impairment/disposal of assets balance also includes an $85 write down of patent assets that were no longer expected to generate
cash flow for us.
During the year ended December 31, 2018,
we recorded a $2,100 expense for impairment of fixed assets in locations where we have obligations under long-term leases.
Goodwill
impairment
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
Goodwill impairment
|
|
$
|
—
|
|
|
$
|
19,630
|
|
|
$
|
(19,630
|
)
|
During the year ended December 31, 2018,
we recorded of goodwill impairment expense.
On
January 5, 2018, we changed our name to XpresSpa Group as part of a rebranding effort to align our corporate strategy to build
a pure-play health and wellness services company, which we commenced following our 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 our technology operating
segment, our management made the decision that our 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
our transition into a pure-play health and wellness company with only one operating segment, consisting of our XpresSpa business.
During
the first quarter of fiscal year 2018, our stock price declined from an opening price of $27.20 on January 2, 2018 to $14.40 on
March 29, 2018. Subsequently, on April 19, 2018, we entered into a separation agreement with our Chief Executive Officer regarding
his resignation as Chief Executive Officer and as our Director.
These
events were identified by our management as triggering events requiring that goodwill be tested for impairment as of March
31, 2018. In addition to our rebranding efforts to become a pure-play health and wellness services company, our stock price
continued to decline even after the announcement of the new Chief Executive Officer. As the stock price had not rebounded,
we determined that the impairment related to the three-month period ended March 31, 2018.
We
performed testing on the estimated fair value of goodwill and, as a result, we recorded an impairment charge of $19,630 to reduce
the carrying value of goodwill to its fair value, which was determined to be zero.
The
impairment to goodwill was a result of the structural changes to the Company, including completion of the transition from a holding
company to become a pure-play health and wellness company and the change in executive management.
General
and administrative
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
General and administrative
|
|
$
|
14,319
|
|
|
$
|
16,240
|
|
|
$
|
(1,921
|
)
|
During the year ended December 31, 2019, general and administrative
expenses decreased by $1,921, or 11.8%. This decrease was due primarily to a reduction in management personnel salaries and benefits
of approximately $2,400, an overall reduction in corporate overhead expenses and lower professional fees compared to the 2018
period where we incurred professional fees related to the sale of our Group Mobile division in March 2018 of approximately $500,
and a reduction in stock-based compensation expense of $581 from $916 for the year ended December 31, 2018 to $335 for the year
ended December 31, 2019. The reduction was partially offset by a litigation accrual of $1,400 related to ongoing legal disputes.
See Note 19, “Commitments and Contingencies,” to the consolidated financial statements for further discussion.
The decrease in salaries and benefits included severance costs of $350 recorded in 2018, and the decrease in professional fees
included one-time project costs of $359 related to the buildout and implementation of a business analytics tool recorded in 2018,
both of which did not recur in 2019.
Interest
expense
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
Interest expense
|
|
$
|
2,900
|
|
|
$
|
1,827
|
|
|
$
|
1,073
|
|
Interest expense increased $1,073, or 58.7%, due primarily to
an increase in the accretion of interest expense associated with the Calm Note and the B3D Note of approximately $1,000.
Non-operating
income (expense), net
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
Non-operating income (expense), net
|
|
$
|
(1,904
|
)
|
|
$
|
643
|
|
|
$
|
(2,547
|
)
|
Non-operating (expense), net primarily
includes, gain or loss on the revaluation of derivative liabilities, certain bank transaction fees and related costs and other
non-operating income and expenses.
The following is a summary of the transactions included in non-operating
income (expense), net for the years ended December 31, 2019 and 2018:
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Gain on revaluation of warrants and conversion options
|
|
$
|
2,170
|
|
|
$
|
1,520
|
|
Debt conversion expense related to conversion of 5% Secured Convertible Notes
|
|
|
(1,584
|
)
|
|
|
—
|
|
Issuance of Series F Preferred Stock, net of issuance costs
|
|
|
(1,131
|
)
|
|
|
—
|
|
Issuance of warrants
|
|
|
(689
|
)
|
|
|
(64
|
)
|
Bank fees and other financing expenses
|
|
|
(408
|
)
|
|
|
(594
|
)
|
Issuance of common stock in lieu of cash payments on debt
|
|
|
(105
|
)
|
|
|
(145
|
)
|
Other
|
|
|
(157
|
)
|
|
|
(74
|
)
|
Total non-operating income (expense), net
|
|
$
|
(1,904
|
)
|
|
$
|
643
|
|
Included in non-operating income (expense),
net for the year ended December 31, 2019 is expense (net of issuance costs) of $1,131 for the issuance of 8,996 shares of Series
F Convertible Preferred Stock, which represents the fair value of the shares as of the date issued.
On June 27, 2019, we entered into the Third Amendment Agreement
to the 5% Secured Convertible Notes (the “Third Amendment”) whereby the holders of the 5% Secured Convertible Notes
agreed to convert their notes then held into Common Stock.
The Third Amendment reduced the conversion
price of the 5% Secured Convertible Notes to Common Stock from $12.40 per share to $2.48 per share. As a result of the reduction
in the conversion price, we recorded a debt conversion expense of $1,584 to account for the additional consideration paid over
what was agreed to in the original note agreement.
The non-operating expenses for the year
ended December 31, 2019, were partially offset by a $2,170 gain on the revaluation of the conversion feature and warrants related
to the Calm Private Placement and the revaluation of the conversion feature related to the issuance of the B3D Note.
See the notes to the consolidated financial
statements for additional information on the above transactions.
Non-operating income (expense) will be
affected by the adjustments to the fair value of our derivative instruments, which could fluctuate materially from period to period.
Fair value of these derivative instruments depends on a variety of assumptions, such as estimations regarding triggering of down-round
protection and estimated future share price. An estimated increase in the price of our Common Stock would increase the value of
the warrants and thus result in a loss on our statements of operations.
Discontinued Operations
In March 2018, we completed the sale of
Group Mobile, which was previously a component of our technology operating segment. The results of operations for Group Mobile
are presented in the consolidated statements of operations and comprehensive loss as consolidated net loss from discontinued operations.
Income Taxes
As of December 31, 2019, our estimated
aggregate total NOLs were $182,327 for U.S. federal purposes, expiring 20 years from the respective tax years to which they relate,
and $31,401 for U.S. federal purposes with an indefinite life due to new regulations in the Tax Act of 2017. The NOL amounts are
presented before Internal Revenue Code, Section 382 limitations. The Tax Reform Act of 1986 imposed substantial restrictions
on the utilization of NOL and tax credits in the event of an ownership change of a corporation. Thus, our ability to utilize all
such NOL and credit carryforwards may be limited. The CARES Act was enacted on March 27, 2020 and provides favorable changes to
tax law for businesses impacted by COVID-19. However, we do not anticipate the income tax law changes will materially benefit
us.
We did not have
any material unrecognized tax benefits as of December 31, 2019. We do not expect to record any additional material provisions for
unrecognized tax benefits within the next year.
Liquidity and Capital Resources
Effective March 24, 2020, we temporarily
closed all global spa locations, largely due to the categorization of such spa locations by local jurisdictions as “non-essential
services” in connection with the recent COVID-19 outbreak. We intend to reopen our spa locations and resume normal operations
once such restrictions are lifted and airport traffic returns to sufficient levels to support such operations. On March 25, 2020,
we announced that, during such period as we remain unable to reopen our spa locations for normal operations, we were advancing
conversations with certain COVID-19 testing partners to develop a model for testing in U.S. airports.
Similar to many businesses in the travel
sector, our business has been materially adversely impacted by the recent coronavirus outbreak and associated restrictions on travel
that have been implemented. The extent to which the coronavirus continues to impact our results will depend on future developments,
which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus
and the actions to contain the coronavirus or treat its impact, among others.
As the coronavirus has spread, we have
seen a material decline in demand across all our locations and this has resulted in a materially adverse impact on our cash flows
from operations and has caused an immediate liquidity crisis. We are currently seeking sources of capital to help fund our business
operations during the COVID-19 crisis. We have been able to secure financing in the first quarter of 2020 totaling approximately
$9,440 by obtaining a cash advance on our accounts receivable balances, an additional loan from our senior secured lender, B3D
and through common stock offerings (See Recent Developments above). Depending on the impact of the COVID-19 outbreak on our operations
and cash position we may need to obtain additional financing. If we need to obtain additional financing in the future and are unsuccessful,
we may be required to curtail or terminate some or all of our business operations and cause our Board of Directors to decide to
pursue a restructuring, which may include a reorganization or bankruptcy under Federal bankruptcy laws, or a dissolution, liquidation
and/or winding up of the Company. Accordingly, holders of our common stock may lose their entire investment in the event
of a reorganization, bankruptcy, liquidation, dissolution or winding up of the Company.
As of December 31, 2019, we had approximately $2,184 of cash
and cash equivalents and total current assets of $3,933. Our total current liabilities balance, which primarily includes accounts
payable, accrued expenses, and the current portion of operating lease liabilities was $16,220 as of December 31, 2019. The working
capital deficiency was $12,287 as of December 31, 2019, compared to a working capital deficiency of $10,899 as of December 31,
2018. The increase in the working capital deficiency was primarily due to the reduction in cash and other current asset balances
from 2018 and the classification of a current portion of lease liability of $3,669 in current liabilities in 2019 but not in 2018,
partially offset by the refinancing and recapitalization transactions the Company completed in July of 2019, which are discussed
in detail in Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Annual
Report on Form 10-K and disclosed in the notes to the consolidated financial statements.
Our primary liquidity and capital requirements
are for current and new XpresSpa locations. During the year ended December 31, 2019, we incurred $2,275 of capital expenditures,
paid $714 in debt issuance costs associated with the B3D Note and the Calm Note, paid $735 of interest on the debt, distributed
$1,197 to noncontrolling interests, and used $113 in operations. This was offset by the receipt of $2,500 in gross proceeds from
the Calm Private Placement. We expect to utilize our cash and cash equivalents, along with cash flows from operations, to provide
capital to support the growth of our business, primarily through opening new XpresSpa locations, maintaining our existing XpresSpa
locations and supporting corporate functions.
While we aggressively reduced operating
and corporate overhead expenses in order to stream-line our operations, improve our cash position, and improve our overall profitability,
we continue to generate negative cash flows from operations, and we expect to continue to incur net losses in the foreseeable
future. We have begun to take other actions to improve our access to liquidity by exploring strategic partnerships and identifying
and evaluating potential business alternatives; however, there can be no assurance that these actions will be sufficient. The
audited consolidated financial statements included in this Annual Report on Form 10-K have been prepared assuming that we will
continue as a going concern and do not include any adjustments that might result if we cease to continue as a going concern.
As discussed above and elsewhere in this
Annual Report on Form 10-K, the report of our independent registered public accounting firm on our financial statements for the
years ended December 31, 2019 and 2018 includes an explanatory paragraph indicating that there is substantial doubt about our ability
to continue as a going concern. The audited financial statements included in this Annual Report on Form 10-K have been prepared
assuming that we will continue as a going concern and do not include any adjustments that might result if we cease to continue
as a going concern.
We expect that the actions taken in 2019
and during the first quarter of 2020 will enhance our liquidity and financial position. If we continue to experience operating
losses, and we are not able to generate additional liquidity through the actions described above or through some combination of
other actions, we may not be able to access additional funds and we might need to secure additional sources of funds, which may
or may not be available to us. Additionally, a failure to generate additional liquidity could negatively impact our access
to inventory or services that are important to the operation of our business. We cannot reasonably predict with any certainty that
the results of actions already taken in 2019 and during the first quarter of 2020 will be successful. If the actions already taken
are not successful and if no transactions with respect to potential business alternatives are identified and completed, our Board
of Directors may possibly pursue a restructuring, which may include a reorganization or bankruptcy under Federal bankruptcy laws,
or a dissolution, liquidation and/or winding up of the Company. If our Board of Directors were to approve and recommend, and our
stockholders were to approve, a dissolution and liquidation of our Company, we would be required under Delaware corporate law to
pay our outstanding obligations, as well as to make reasonable provisions for contingent and unknown obligations, prior to making
any distributions in liquidation to our stockholders. Our commitments and contingent liabilities may include (i) obligations under
our employment agreements with certain members of management that provide for severance and other payments following a termination
of employment occurring for various reasons, including a change in control of our Company, (ii) various claims and legal actions
arising in the ordinary course of business and (iii) non-cancelable lease obligations. As a result of this requirement, a portion
of our assets may need to be reserved pending the resolution of such obligations. In addition, we may be subject to litigation
or other claims related to a dissolution and liquidation of our Company. If a dissolution and liquidation were pursued, our Board
of Directors, in consultation with its advisors, would need to evaluate these matters and make a determination about a reasonable
amount to reserve. Accordingly, holders of our Common Stock may lose their entire investment in the event of a reorganization,
bankruptcy, liquidation, dissolution or winding up of our Company.
Cash flows
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
Net cash used in operating activities
|
|
$
|
(113
|
)
|
|
$
|
(6,566
|
)
|
|
$
|
6,453
|
|
Net cash used in investing activities
|
|
$
|
(2,275
|
)
|
|
$
|
(1,866
|
)
|
|
$
|
(409
|
)
|
Net cash provided by financing activities
|
|
$
|
1,165
|
|
|
$
|
5,644
|
|
|
$
|
(4,479
|
)
|
Operating activities
During the year ended December 31, 2019, net cash used in operating
activities was $113, as compared to net cash used in operating activities in 2018 of $6,566. The decrease in net cash used in operating
activities was primarily due to the timing of payments of accounts payable and certain accrued expenses and to our cost cutting
measures and reduced cash used in our daily operations.
Investing activities
During the year ended December 31, 2019, net cash used in investing
activities totaled $2,275, compared to net cash used in investing activities during the year ended December 31, 2018 of $1,866.
Cash used in 2019 was used to acquire primarily leasehold improvements for new store openings and renovations to existing stores.
In 2018, the cash used was partially reduced by $800 received in January 2018 related to the sale of FLI Charge, $250 received
from the sale of one of our patents, and $200 received from the sale of 205,646 shares of Marathon Common Stock.
We expect that net cash used in investing
activities will increase as we intend to continue to open new stores and develop supporting infrastructure and systems.
Financing activities
During the year ended December 31, 2019, net cash provided by
financing activities totaled $1,165 compared to $5,644 during the comparable prior year period. Included in the net cash provided
by financing activities in 2019 were the proceeds from the issuance of the Calm Note of $2,500 that was partially offset by distributions
to noncontrolling interests and payments of debt issuance costs. During the year ended December 31, 2018, the Company received
proceeds from the issuance of convertible notes and warrants of $4,350 and proceeds from the sale of our Series E Preferred Stock
of $3,000.
Off-Balance Sheet Arrangements
We have no obligations, assets or liabilities
that would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated
entities or financial partnerships, often referred to as variable interest entities, which would have been established for the
purpose of facilitating off-balance sheet arrangements.
Critical Accounting Estimates
We believe the following accounting estimates
to be the most critical estimates we used in preparing our consolidated financial statements for the year ended December 31, 2019.
Long-lived assets (not including
amortizable intangible assets)
Long-lived
assets are tested for impairment at the lowest level at which there are identifiable operating cash flows, which is at the
individual spa location for the XpresSpa business. The Company’s long-lived assets consist primarily of leasehold
improvements and right to use lease assets for each of its locations (considered the asset group). The Company reviews its
long-lived assets for recoverability yearly or sooner if events or changes in circumstances indicate that the carrying value
of long-lived assets may not be recoverable. If indicators are present, the Company performs a recoverability test by
comparing the sum of the estimated undiscounted future cash flows attributable to the asset group in question to its carrying
amount. An impairment loss is recognized if it is determined that the long-lived asset group is not recoverable and is
calculated based on the excess of the carrying amount of the long-lived asset group over the long-lived asset groups fair
value. The Company estimates the fair value of long-lived assets using a present value income approach. Future cash flow was
calculated based on forecasts over the estimated remaining useful life of the asset group, which for each of the
Company’s spa locations, is the remaining term of the operating lease. The Company uses its existing borrowing rate as
the discount rate since it expects that this rate incorporates not only the time value of money but also the expectations
regarding future cash flows and an appropriate risk premium.
The estimates used to calculate future cash flows are subjective
in nature and involve uncertainties and matters of significant judgments and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimated fair value of each asset group. The Company will calculate the future cash
flow using what it believes to be the most predictable of several scenarios. Typically, the changes in assumptions run under different
business scenarios would not result in a material change in the assessment of the potential impairment or the impairment amount
of a locations long-lived asset group. But if these estimates or related assumptions were to change materially the Company may
be required to record an impairment charge (see Note 6, Property and Equipment and Note 9, Leases to the consolidated
financial statements for the impairment assessment performed as of December 31, 2019).
Intangible
assets
Intangible assets include trade names,
customer relationships, and technology, which were acquired as part of the acquisition of XpresSpa in December 2016 and are recorded
based at the estimated fair value in purchase price allocation. Intangible assets also include purchased patents. The intangible
assets are amortized over their estimated useful lives, which are periodically evaluated for reasonableness. The balance of intangible
assets was approximately $6,800 as of December 31, 2019, which primarily represents the balance of trade names acquired as part
of the acquisition of XpresSpa.
Our
intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. In assessing the recoverability of our intangible assets, we must make estimates and assumptions
regarding future cash flows and other factors to determine the fair value of the respective assets. These estimates and assumptions
could have a significant impact on whether an impairment charge is recognized and also the magnitude of any such charge. Fair
value estimates are made at a specific point in time, based on relevant information. These estimates are subjective in nature
and involve uncertainties and matters of significant judgments and therefore cannot be determined with precision. Changes in assumptions
could significantly affect the estimates. If these estimates or material related assumptions change in the future, we may be required
to record impairment charges related to its intangible assets.
Fair
value measurements
Our
derivative liabilities are measured at fair value. Such liabilities are classified within Level 3 of the fair value hierarchy
because they are valued using the Monte-Carlo model (as these warrants include down-round protection clauses), which utilize significant
inputs that are unobservable in the market. The inputs to estimate the fair value of our derivative liabilities are the current
market price of our Common Stock, the exercise price of the warrant, the warrants’ remaining expected term, the volatility
of our Common Stock price, our assumptions regarding the probability and timing of a down-round protection triggering event and
the risk-free interest rate.
The
fair value measurements of the derivative warrant liabilities are evaluated by management to ensure that changes are consistent
with expectations of management based upon the sensitivity and nature of the related inputs. 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 our Common Stock, an increase in the volatility of our Common Stock, an increase in the remaining term of the warrants,
or an increase of a probability of a down-round triggering event would each result in a directionally similar change in the estimated
fair value of our 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 positive
differential between the warrants’ exercise price and the market price of our Common Stock would result in a decrease in
the estimated fair value measurement of the warrants and thus a decrease in the associated liability. We have not, and do
not plan to, declare dividends on our Common Stock and, as such, there is no change in the estimated fair value of the derivative
warrant liabilities due to the dividend assumption. Had we made different assumptions about the inputs noted above, the recorded
gain or loss, our net loss and net loss per share amounts could have been significantly different.
Income
taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for the
amount of deferred tax assets that, based on available evidence, are not more likely than not to be realized. Tax benefits
related to excess deductions on stock-based compensation arrangements are recognized when they reduce taxes
payable.
In
assessing the need for a valuation allowance, we look at cumulative losses in recent years, estimates of future taxable earnings,
feasibility of tax planning strategies, the ability to realize tax benefit carryforwards, and other relevant information. Valuation
allowances related to deferred tax assets can be impacted by changes to tax laws, changes to statutory tax rates and future taxable
earnings. Ultimately, the actual tax benefits to be realized will be based upon future taxable earnings levels, which are very
difficult to predict. In the event that actual results differ from these estimates in future periods, we will be required to adjust
the valuation allowance.
Significant
judgment is required in evaluating our federal, state and foreign tax positions and in the determination of our tax provision.
Despite management's belief that our liability for unrecognized tax benefits is adequate, it is often difficult to predict the
final outcome or the timing of the resolution of any particular tax matters. We may adjust these accruals as relevant circumstances
evolve, such as guidance from the relevant tax authority, our tax advisors, or resolution of issues in the courts. Our tax expense
includes the impact of accrual provisions and changes to accruals that it considers appropriate. These adjustments are recognized
as a component of income tax expense entirely in the period in which new information is available. We record interest related
to unrecognized tax benefits in interest expense and penalties in the accompanying consolidated statements of operations and comprehensive
loss as general and administrative expenses.
We recognize the effect of income tax positions only if those
positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that
is greater than 50% of being realized. Changes in recognition or measurement are reflected in the period in which the change in
judgment occurs.
Recently
adopted accounting pronouncements
ASU
No. 2016-02, Leases (Topic 842), as amended
This
standard and its amendments provide new guidance related to accounting for leases and supersedes 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.
On January 1, 2019, the Company adopted ASU 2016-02 on a prospective
basis, beginning on January 1, 2019, using the optional transition method. The Company applied the transition options permitted
by ASU 2018-11 and elected the package of practical expedients to alleviate certain operational and reporting complexities related
to the adoption, one of which was not to recognize a right of use asset or lease liability for leases with a term of 12 months
or less. See Note 9. “Leases” for further discussion. The Company recorded right of use assets and lease liabilities
for its operating leases of $10,809 upon adoption of ASU 2016-02.
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 U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recorded. The new standard is effective for the fiscal
year beginning after December 15, 2018. The Company adopted this standard on January 1, 2019. Adoption of this standard did not
have a material impact on the Company’s consolidated financial statements.
Recently
issued accounting pronouncements
ASU
No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
This
standard changes the impairment model for most financial assets that are measured at amortized cost and certain other instruments,
including trade receivables, from an incurred loss model to an expected loss model and adds certain new required disclosures.
Under the expected loss model, entities will recognize estimated credit losses to be incurred over the entire contractual term
of the instrument rather than delaying recognition of credit losses until it is probable the loss has been incurred. The new standard
is effective for the fiscal year beginning after December 15, 2019, with early adoption permitted. Based upon the outstanding
balance of the Company’s trade receivables and its positive collection history, the Company’s management does not
believe that the adoption of this standard will have a material impact on its consolidated financial position and results of operations.
ASU
No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value
Measurement
This
amendment provides updates to the disclosure requirements on fair value measures in Topic 820 which includes the changes in unrealized
gains and losses in other comprehensive income for recurring Level 3 fair value measurements, the option of additional quantitative
information surrounding unobservable inputs and the elimination of disclosures around the valuation processes for Level 3 measurements.
The new standard is effective for the fiscal year beginning after December 15, 2019. The Company’s management does not believe
that the adoption of this standard will have a material impact on its consolidated financial position and results of results of
operations.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
required as we are a smaller reporting company.
ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
Our
consolidated financial statements required by this Item are set forth in Item 15 beginning on page F-1 of this Annual
Report on Form 10-K.
ITEM 9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Exchange Act that are designed
to ensure that information required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer (Principal Financial and Accounting Officer), as appropriate, to allow timely
decisions regarding required disclosure.
Report
of Management on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules
13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal
executive officer and principal financial and accounting officer and effected by our Board of Directors, management, and other
personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with GAAP and includes those policies and procedures that:
|
●
|
pertain
to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our
assets;
|
|
●
|
provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and
|
|
●
|
provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets
that could have a material effect on the financial statements.
|
Because
of our inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. Therefore,
even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation
and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our
management assessed the effectiveness of our internal control over financial reporting as of December 31, 2019. In making this
assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in Internal Control – Integrated Framework (2013 Framework).
Based
on our evaluation, management concluded that our internal control over financial reporting was not effective as of December 31,
2019 due to a material weakness in our internal controls over our financial close and reporting process. A material weakness is
a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility
that a material misstatement of annual or interim financial statements will not be prevented or detected and corrected on a timely
basis. As this deficiency created a reasonable possibility that a material misstatement would not be prevented or detected in
a timely basis, management concluded that the control deficiency represented a material weakness and accordingly our internal
control over financial reporting was not effective as of December 31, 2019. Management concluded that additional formal procedures
should be implemented in the financial close and reporting process to ensure that appropriate and timely reviews occur on all
financial reporting analysis. Management also concluded that we did not have a sufficient complement of corporate personnel with
appropriate levels of accounting and controls knowledge and experience commensurate with our financial reporting requirements
to appropriately analyze, record and disclose accounting matters completely and accurately.
The material weakness in our internal control over financial
reporting resulted in proposed audit adjustments to the Company’s consolidated financial statements in the areas of lease
accounting, long-lived asset impairment and accrued liabilities accounting as of and for the year ended December 31, 2019.
Remediation Plan for Material Weakness
in Internal Control over Financial Reporting
We are still considering the full extent of the procedures to
implement in order to remediate the material weakness described above. The current remediation plan includes a more robust review
process, and an increase in the supervision and monitoring of the financial reporting processes and our accounting personnel. We
will ensure that accounting personnel have the level of accounting and controls knowledge and experience commensurate with our
financial reporting requirements by instituting a formal training program for all accounting personnel on a regular basis on internal
control procedures over financial reporting. The current remediation plan also includes implementing controls over calculations,
analysis and conclusions associated with non-routine transactions at a more precise level. We will also allocate additional resources
to the corporate accounting function, which may include the use of independent consultants with sufficient expertise to assist
in the preparation and review of certain non-recurring transactions and timely review of the account reconciliations
Lastly we will automate, where possible and practical, all account
analysis and calculations currently being done manually by better utilizing our current general ledger accounting system. Where
cost effective, we will outsource any manually processes that are time consuming to free up accounting personnel to spend more
time preparing and reviewing account analysis.
We cannot assure you that any of our remedial measures will
be effective in resolving this material weakness. If our management is unable to conclude that we have effective internal control
over financial reporting, or to certify the effectiveness of such controls, or if additional material weaknesses in our internal
controls are identified in the future, which could result in material misstatements of future annual or interim consolidated financial
statements that may not be prevented or detected. We could also be subject to regulatory scrutiny and a loss of public confidence,
which could have a material adverse effect on our business and our stock price. In addition, if we do not maintain adequate financial
and management personnel, processes and controls, we may not be able to manage our business effectively or accurately report our
financial performance on a timely basis, which could cause a decline in our common stock price and adversely affect our results
of operations and financial condition
Changes in Internal Control over Financial Reporting
Based on our evaluation, management
concluded that our internal control over financial reporting was not effective as of December 31, 2019 due to a material
weakness in our internal control over our financial close and reporting process. Management concluded that we did not have a
sufficient complement of corporate personnel with appropriate levels of accounting and controls knowledge and experience
commensurate with our financial reporting requirements to appropriately analyze, record and disclose accounting matters
completely and accurately. As a result of this evaluation, the Principal Accounting Officer extensively used outside
consultants who possessed the appropriate levels of accounting and controls knowledge.
ITEM 9B.
OTHER INFORMATION
None.
*2018 per share and weighted-average number of shares were adjusted
to reflect the impact of the 1:20 reverse stock split that became effective on February 22, 2019.
The accompanying notes form an integral part of these consolidated
financial statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except for share and per share data)
Note
1. General
Overview
On
January 5, 2018, the Company changed its name to XpresSpa Group, Inc. (“XpresSpa Group” or the “Company”)
from FORM Holdings Corp. The Company’s common stock, par value $0.01 per share (the “Common Stock”), which had
previously been listed under the trading symbol “FH” on the Nasdaq Capital Market, has been listed under the trading
symbol “XSPA” since January 8, 2018. Rebranding to XpresSpa Group aligned the Company’s corporate strategy to
build a pure-play health and wellness services company, which the Company commenced following its acquisition of XpresSpa Holdings,
LLC (“XpresSpa”) on December 23, 2016.
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. XpresSpa is a well-recognized, leading airport retailer of spa services and related products. As of
December 31, 2019, XpresSpa operated 51 total locations in 25 airports, in three countries including the United States,
Netherlands and United Arab Emirates. Services and products include:
|
•
|
massage
services for the neck, back, feet and whole body;
|
|
•
|
nail
care, such as pedicures, manicures and polish changes;
|
|
•
|
travel
products, such as neck pillows, blankets and massage tools; and
|
|
|
|
•
|
new
offerings, such as cryotherapy services, NormaTec compression services, and Dermalogica personal care services and retail
products.
|
During 2019 and 2018, XpresSpa generated
$48,515 and $50,094 of revenue, respectively. In 2019 and 2018, approximately 82% of XpresSpa’s total revenue was generated
by services, primarily massage and nailcare, 15% and 16%, respectively, was generated by retail products, primarily luxury travel
products and accessories and 3% and 2%, respectively, was other revenue.
For over 15 years, increased security requirements
have led travelers to spend more time at the airport. In addition, in anticipation of the long and often stressful security lines,
travelers allow for more time to get through security and, as a result, often experience increased downtime prior to boarding.
Consequently, travelers at large airport hubs have idle time in the terminal after passing through security.
XpresSpa was developed to address the stress
and idle time spent at the airport, allowing travelers to spend this time productively, by relaxing and focusing on personal care
and wellness. XpresSpa is well positioned to benefit from consumers’ growing interest in health and wellness and increasing
demand for spa services and related wellness products.
In addition, a confluence of microeconomic
events has created favorable conditions for the expansion of retail concepts at airports, in particular retail concepts that attract
higher spending from air travelers. The competition for airplane landings has forced airports to lower landing fees, which in turn
has necessitated augmenting their retail offerings to offset budget shortfalls. Infrastructure projects at airports across the
country, intended to make an airport more desirable to airlines, require funding from bond issuances that in turn rely upon, in
part, the expected minimum rent guarantees and expected income from concessionaires.
The Company owns certain patent portfolios,
which, in prior years, it monetized through sales and licensing agreements. During the year ended December 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 no longer generates any material revenues or operating costs.
In March 2018, the Company completed the
sale of Group Mobile Int’l LLC (“Group Mobile”). This entity was previously included in the Company’s technology
operating segment. The results of operations for Group Mobile are presented in the consolidated statements of operations and comprehensive
loss as net loss from discontinued operations.
Recent
Developments
Effects of Coronavirus on Business
On March 11, 2020, the World Health Organization
declared the outbreak of the Coronavirus (“COVID-19”), which continues to spread throughout the U.S. and the world,
a pandemic. The outbreak is having an impact on the global economy, resulting in rapidly changing market and economic conditions.
Similar to many businesses in the travel sector, our business has been materially adversely impacted by the recent COVID-19 outbreak
and associated restrictions on travel that have been implemented. Effective March 24, 2020, the Company temporarily closed all
global spa locations, largely due to the categorization of its spa locations by local jurisdictions as “non-essential services”.
The Company intends to reopen its spa locations and resume normal operations once restrictions on non-essential services are lifted
and airport traffic returns to sufficient levels to support its operations. On March 25, 2020, the Company announced that, during
such period as it remains unable to reopen its spa locations for normal operations, it was advancing conversations with certain
COVID-19 testing partners to develop a model for testing in U.S. airports.
The temporary closing of the Company’s
global spa operations has had a materially adverse impact on its cash flows from operations and caused a liquidity crisis.
As a result, management has concluded that there was a long-lived asset impairment triggering event during the first quarter of
2020, which will result in management performing an impairment evaluation of certain of its long-lived asset balances (primarily
leasehold improvements and right of use lease assets totaling approximately $16,318 as of December 31, 2019). This could lead to
the Company recording an impairment charge during the first quarter of 2020. The full extent to which COVID-19 will impact the
Company’s results will depend on future developments, which are highly uncertain and cannot be predicted, including new information
which may emerge concerning the severity of the virus and the actions to contain or treat its impact.
The Company is currently seeking sources
of capital to help fund its business operations during the COVID-19 crisis. It has been able to secure financing during the
first quarter of 2020 totaling gross proceeds of approximately $9,440 by obtaining a cash advance on its accounts receivable balances,
a loan from its senior secured lender, B3D, LLC (“B3D”), and through common stock offerings (see Note 20, Subsequent
Events). Depending on the impact of the COVID outbreak on the Company’s operations and cash position, it may need to
obtain additional financing. If the Company needs to obtain additional financing in the future and is unsuccessful, it may be required
to curtail or terminate some or all of its business operations and cause its Board of Directors to possibly pursue a restructuring,
which may include a reorganization or bankruptcy under Federal bankruptcy laws, or a dissolution, liquidation and/or winding up
of the Company. Accordingly, holders of the Company’s secured and unsecured debt and common stock may lose their entire
investment in the event of a reorganization, bankruptcy, liquidation, dissolution or winding up of the Company.
Liquidity and Going Concern
As of December
31, 2019, the Company had approximately $2,184 of cash and cash equivalents, and total current assets of approximately $3,933.
The Company’s total current liabilities balance, which includes primarily accounts payable, accrued expenses, and the current
portion of operating lease liabilities was approximately $16,220 as of December 31, 2019. The working capital deficiency was $12,287
as of December 31, 2019, compared to a working capital deficiency of $10,899 as of December 31, 2018. The increase in the working
capital deficiency was primarily due to the reduction in cash and other current asset balances from 2018 and the classification
of a current portion of lease liability of $3,669 in current liabilities in 2019 but not in 2018, partially offset by the refinancing
and recapitalization transactions the Company completed in July of 2019, which are discussed in in the notes to these consolidated
financial statements.
While the Company
has aggressively reduced operating and overhead expenses, and while it continues to focus on its overall profitability, it has
continued to generate negative cash flows from operations, and it expects to incur net losses for the foreseeable future, especially
considering the negative impact COVID-19 will have on its liquidity and financial position. As discussed elsewhere in this Annual
Report on Form 10-K, the report of the Company’s independent registered public accounting firm on the Company’s financial
statements for the years ended December 31, 2019 and 2018 includes an explanatory paragraph indicating that there is substantial
doubt about the Company’s ability to continue as a going concern.
The Company has taken actions to improve
its overall cash position and access to liquidity through debt and equity financings, by exploring valuable strategic partnerships,
right sizing its corporate structure and streamlining its operations. These actions are intended to improve the Company’s
overall cash position and assist with its liquidity needs, however there can be no assurance that these actions will be sufficient.
These audited financial statements have
been prepared assuming that the Company will continue as a going concern and do not include any adjustments that might result if
we cease to continue as a going concern.
Material Weakness in Internal Controls
over Financial Reporting
Based on management’s evaluation
under the framework in Internal Control-Integrated Framework, the Company’s Chief Executive Officer and Principal Financial
Officer concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2019
due to a material weakness in its internal controls over its financial close and reporting process and have concluded that the
financial close and reporting process needs additional formal procedures to ensure that appropriate reviews occur on all financial
reporting analysis. Management also concluded that the Company did not maintain a sufficient complement of corporate personnel
with appropriate levels of accounting and controls knowledge and experience commensurate with its financial reporting requirements
to appropriately analyze, record and disclose accounting matters completely and accurately. This deficiency created a reasonable
possibility that a material misstatement would not be prevented or detected in a timely basis. Management concluded that the control
deficiency represented a material weakness and, accordingly, that the Company’s internal control over financial reporting
was not effective as of December 31, 2019.
The material weakness in our internal control
over financial reporting resulted in proposed audit adjustments to the Company’s consolidated financial statements in the
areas of lease accounting, long-lived asset impairment and accrued liabilities accounting as of and for the year ended December
31, 2019.
The Company is still considering the full
extent of the procedures to implement in order to remediate the material weakness described above. The current remediation plan
includes a more robust review process, and an increase in the supervision and monitoring of the financial reporting processes and
the Company’s accounting personnel.
Note 2. Accounting and Reporting Policies
(a) Basis of presentation and principles
of consolidation
The accompanying consolidated financial
statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S.
GAAP”). The consolidated financial statements include the accounts of the Company, all entities that are wholly owned by
the Company, and all entities in which the Company has a controlling financial interest. All significant intercompany balances
and transactions have been eliminated in consolidation.
(b) Use of estimates
The preparation of the accompanying consolidated
financial statements in conformity with 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 consolidated
financial statements and the reported amounts of revenues and expenses for the periods presented. Actual results may differ from
such estimates. Significant items subject to such estimates and assumptions include the Company’s intangibles assets, the
useful lives of the Company’s intangible assets, the valuation of the Company’s derivative warrant liabilities, the
valuation of stock-based compensation, deferred tax assets and liabilities, income tax uncertainties, and other contingencies.
(c) Translation into United States
dollars
The Company conducts certain transactions
in foreign currencies, which are recorded at the exchange rate as of the transaction date. All exchange gains and losses occurring
from the remeasurement of monetary balance sheet items denominated in non-dollar currencies are included in non-operating income
(expense) in the consolidated statements of operations and comprehensive loss.
Accounts of the foreign subsidiaries of
XpresSpa are translated into United States dollars. Assets and liabilities have been translated primarily at year end exchange
rates and revenues and expenses have been translated at average monthly rates for the year. The translation adjustments arising
from the use of different exchange rates are included as foreign currency translation within the consolidated statements of operations
and comprehensive loss and consolidated statements of changes in stockholders’ equity (deficit).
(d) Cash and cash equivalents
The Company maintains cash in checking
accounts with financial institutions. The Company has established guidelines relating to diversification and maturities of its
investments in order to minimize credit risk and maintain high liquidity of funds. Cash equivalents include amounts due from third-party
financial institutions for credit and debit card transactions which typically settle in less than five days.
(e) Derivative instruments
The Company recognizes all derivative instruments as either
assets or liabilities in the consolidated balance sheets at their respective fair values. The Company's derivative instruments
are revalued at each reporting date, with changes in the fair value of the instruments included in the consolidated statements
of operations and comprehensive loss as non-operating income (expense). The Company reviews the terms of features embedded in non-derivative
instruments to determine if such features require bifurcation and separate accounting as derivative financial instruments. Equity-linked
derivative instruments are evaluated in accordance with FASB Accounting Standard Codification (“ASC”) 815-40, “Contracts
in an Entity’s Own Equity,” to determine if such instruments are indexed to the Company’s own stock and qualify
for classification in equity.
(f) Inventory
All inventory is valued at the lower of
cost or net realizable value. Cost is determined using a weighted-average cost method. Inventory is included in current assets
in the consolidated balance sheets.
(g) Intangible assets
Intangible assets include trade names,
customer relationships, and technology, which were acquired as part of the acquisition of XpresSpa in December 2016 and were recorded
based on the estimated fair value in purchase price allocation. The intangible assets are amortized over their estimated useful
lives, which are periodically evaluated for reasonableness. Gain or loss on dispositions of intangible assets is reflected
in general and administrative expense in the consolidated statements of operations and comprehensive loss.
The Company’s intangible assets are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
In assessing the recoverability of the Company’s intangible assets, the Company must make estimates and assumptions regarding
future cash flows and other factors to determine the fair value of the respective assets. These estimates and assumptions could
have a significant impact on whether an impairment charge is recognized and also the magnitude of any such charge. Fair value estimates
are made at a specific point in time, based on relevant information. These estimates are subjective in nature and involve uncertainties
and matters of significant judgments and therefore cannot be determined with precision. Changes in assumptions could significantly
affect the estimates. If these estimates or material related assumptions change in the future, the Company may be required to record
impairment charges related to its intangible assets.
(h) Long-lived assets (other than
intangible assets)
Property and equipment is recorded at historical
cost and primarily consists of leasehold improvements, furniture and fixtures, and other operating equipment. Depreciation is calculated
on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are depreciated over the lesser
of the lease term or economic useful life. Maintenance and repairs are charged to expense, and renovations or improvements that
extend the service lives of the Company’s assets are capitalized over the lesser of the extension period or life of the improvement.
The right of use asset on the Company’s
consolidated balance sheet represents a lessee's right to use an asset over the life of a lease. The asset is calculated as the
initial amount of the lease liability, plus any lease payments made to the lessor before the lease commencement date, plus any
initial direct costs incurred, minus any lease incentives received. The amortization period for the right of use asset is from
the lease commencement date to the earlier of the end of the lease term or the end of the useful life of the asset.
Long-lived assets are tested for impairment
at the lowest level at which there are identifiable operating cash flows, which is at the individual spa location for the XpresSpa
business. The Company’s long-lived assets consist primarily of leasehold improvements and right to use lease assets for each
of its locations (considered the asset group). The Company reviews its long-lived assets for recoverability yearly or sooner if
events or changes in circumstances indicate that the carrying value of long-lived assets may not be recoverable. If indicators
are present, the Company performs a recoverability test by comparing the sum of the estimated undiscounted future cash flows attributable
to the asset group in question to its carrying amount. An impairment loss is recognized if it is determined that the long-lived
asset group is not recoverable and is calculated based on the excess of the carrying amount of the long-lived asset group over
the long-lived asset groups fair value. The Company estimates the fair value of long-lived assets using present value income approach.
Future cash flow was calculated based on forecasts over the estimated remaining useful life of the asset group, which for each
of the Company’s spa locations, is the remaining term of the operating lease. The Company uses its existing borrowing rate
as the discount rate since it expects that this rate incorporates not only the time value of money but also the expectations regarding
future cash flows and an appropriate risk premium.
The estimates used to calculate future
cash flows are subjective in nature and involve uncertainties and matters of significant judgments and therefore cannot be determined
with precision. Changes in assumptions could significantly affect the estimated fair value of each asset group. The Company will
calculate the future cash flow using what it believes to be the most predictable of several scenarios. Typically, the changes in
assumptions run under different business scenarios would not result in a material change in the assessment of the potential impairment
or the impairment amount of a locations long-lived asset group. But if these estimates or related assumptions were to change materially,
the Company may be required to record an impairment charge (see Note 6, Property and Equipment and Note 9, Leases),
for the impairment assessment performed related to those long-lived assets as of December 31, 2019).
(i)
Goodwill
Goodwill
is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not
individually identified and separately recognized.
Goodwill
is reviewed for impairment at least annually, and when triggering events occur, in accordance with the provisions of Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, Intangibles
– Goodwill and Other. The Company evaluates goodwill impairment at the reporting unit level and performs its annual
goodwill impairment test as of December 31.
As of December 31, 2018, the Company’s goodwill was fully
impaired. See Note 8. Intangible Assets and Goodwill for further details on the assessment and conclusion on the goodwill
impairment recorded during the year ended December 31, 2018.
(j) Lease liabilities
The Company’s lease liabilities are
determined by calculating the present value of all future lease payments using the rate implicit in the lease if it can be readily
determined, or the lessee’s incremental borrowing rate. The Company uses it incremental borrowing rate to determine the present
value of future lease payments as the rate implicit in its leases could not be readily determined.
Certain leases provide for contingent rents
that are not measurable at inception. These contingent rents are primarily based on a percentage of sales that are in excess of
a predetermined level and/or rent increase based on a change in the consumer price index or fair market value. These amounts are
excluded from the calculation of the right of use asset and lease liability under ASC 842. Minimum rent under these leases is included
in the determination of rent expense when it is probable that the expense has been incurred and the amount can be reasonably estimated.
(k) Restricted cash and other assets
Restricted cash, which is listed as a separate
line item in the consolidated balance sheets, represents balances at financial institutions to secure bonds and letters of credit
as required by the Company’s various lease agreements. Other assets include cost basis investments.
(l) Revenue recognition
The Company recognizes revenue from the
sale of XpresSpa products and services at the point of sale, net of discounts and applicable sales taxes. Revenues from the XpresSpa
wholesale and e-commerce businesses are recorded at the time goods are shipped. Accordingly, the Company recognizes revenue for
its single performance obligation related to both in-store and online sales at the point at which the service has been performed
or the control of the merchandise has passed to the customer. The Company excludes all sales taxes assessed to its customers. Sales
taxes assessed on revenues are included in accounts payable, accrued expenses and other current liabilities in the consolidated
balance sheets until remitted to the state agencies.
Other revenue includes one-time intellectual property licenses
as well as the sale of certain of our intellectual property. Revenue from patent licensing is recognized when the Company transfers
promised intellectual property rights to purchasers in an amount that reflects the consideration to which it expects to be entitled
in exchange for those intellectual property rights. During the year ended December 31, 2018, the Company determined that its intellectual
property operating segment will no longer be an area of focus and, as such, will no longer be reflected as a separate operating
segment, as it was not expected to generate any material revenues or operating costs.
(m)
Gift cards and customer rewards program
XpresSpa
offers no-fee, non-expiring gift cards to its customers. No revenue is recognized upon issuance of a gift card and a liability
is established for the gift card’s cash value. The liability is relieved, and revenue is recognized upon redemption by the
customer. As the gift cards have no expiration date, there is no provision for reduction in the value of unused card balances.
In
addition, XpresSpa maintains a rewards program in which customers earn loyalty points, which can be redeemed for future
services. Loyalty points are rewarded upon joining the loyalty program, for customer birthdays, and based upon customer
spending. When a customer redeems loyalty points, the Company recognizes revenue for the redeemed cash value and reduces
the related loyalty program liability. On June 1, 2018, the Company adopted a formal expiration policy whereby any loyalty
members with inactivity for an 18-month period will forfeit any unused loyalty rewards. The costs associated with gift cards
and reward points are accrued as the rewards are earned by the cardholder and are included in accounts payable, accrued
expenses and other current liabilities in the consolidated balance sheets until remitted to the state agencies.
(n)
Segment reporting
The
Company’s continuing operating segments are defined as components of an enterprise about which separate financial information
is available that is regularly evaluated by the enterprise’s chief operating decision maker (“CODM”) in deciding
how to allocate resources and in assessing performance. 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.
During
the year ended December 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 or operating costs.
(o)
Pre-opening costs
Pre-opening
and start-up activity costs, which include rent and occupancy, supplies, advertising, and other direct expenses incurred prior
to the opening of a new store, are expensed in the period in which they are incurred.
(p)
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.
|
(q)
Stock-based compensation
Stock-based compensation is recognized
as an expense in the consolidated statements of operations and comprehensive loss and such cost is measured at the grant-date
fair value of the equity-settled award. The fair value of stock options is estimated as of the date of grant using the Black-Scholes-Merton
(“Black-Scholes”) option-pricing model. The fair value of Restricted Stock Units (“RSUs”) is calculated
as of the date of grant using the grant date closing share price multiplied by the number of RSUs granted. The expense is recognized
on a straight-line basis, over the requisite service period. The Company uses the simplified method to estimate the expected term
of options due to insufficient history and high turnover in the past. Expected volatility is estimated based on a weighted average
historical volatility of the Company and comparable entities with publicly traded shares. The risk-free rate for the expected term
of the option is based on the United States Treasury yield curve as of the date of grant.
(r)
Income taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. A valuation allowance is provided for the amount of deferred tax assets that, based
on available evidence, are not more likely than not to be realized. Tax benefits related to excess deductions on stock-based compensation
arrangements are recognized when they reduce taxes payable.
In
assessing the need for a valuation allowance, the Company looks at cumulative losses in recent years, estimates of future taxable
earnings, feasibility of tax planning strategies, the ability to realize tax benefit carryforwards, and other relevant information.
Valuation allowances related to deferred tax assets can be impacted by changes to tax laws, changes to statutory tax rates and
future taxable earnings. Ultimately, the actual tax benefits to be realized will be based upon future taxable earnings levels,
which are very difficult to predict. In the event that actual results differ from these estimates in future periods, the Company
will be required to adjust the valuation allowance.
Significant
judgment is required in evaluating the Company's federal, state, local, and foreign tax positions and in the determination of
its tax provision. Despite management's belief that the Company's liability for unrecognized tax benefits is adequate, it is often
difficult to predict the final outcome or the timing of the resolution of any particular tax matters. The Company may adjust these
accruals as relevant circumstances evolve, such as guidance from the relevant tax authority, its tax advisors, or resolution of
issues in the courts. The Company's tax expense includes the impact of accrual provisions and changes to accruals that it considers
appropriate. These adjustments are recognized as a component of income tax expense entirely in the period in which new information
is available. The Company records interest related to unrecognized tax benefits in interest expense and penalties in the consolidated
statements of operations and comprehensive loss as general and administrative expenses.
The
Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized
income tax positions are measured at the largest amount that is greater than 50% of being realized. Changes in recognition or
measurement are reflected in the period in which the change in judgment occurs.
(s)
Noncontrolling interests
Noncontrolling
interests represent the noncontrolling holders’ percentage share of earnings or losses from the subsidiaries, in which the
Company holds a majority, but less than 100%, ownership interest and the results of which are included in the Company’s
consolidated statements of operations and comprehensive loss. Net earnings attributable to noncontrolling interests represents
the proportionate share of the noncontrolling holders' ownership in certain subsidiaries of XpresSpa.
(t)
Net loss per common share
Basic
net loss per share is computed by dividing the net loss attributable to common shareholders for the period by the weighted-average
number of shares of Common Stock outstanding during the period. Diluted net loss per share is computed by dividing the net loss
attributable to the Company for the period by the weighted-average number of shares of Common Stock plus dilutive potential Common
Stock considered outstanding during the period. However, as the Company generated net losses in all periods presented, some potentially
dilutive securities that relate to the continuing operations, including certain warrants and stock options, were not reflected
in diluted net loss per share because the impact of such instruments was anti-dilutive.
(u)
Commitments and contingencies
Liabilities
for loss contingencies arising from assessments, estimates or other sources are recorded when it is probable that a liability
has been incurred and the amount can be reasonably estimated. Legal costs expected to be incurred in connection with a loss contingency
are expensed as incurred.
(v)
Reclassification
Certain balances have been reclassified
to conform to the current year presentation, including impairment/disposal of assets, presentation of discontinued operations and
assets and liabilities held for disposal with respect to the Company’s Group Mobile business.
(w)
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.
(x)
Recently adopted accounting pronouncements
ASU
No. 2016-02, Leases (Topic 842), as amended
This
standard and its amendments provide new guidance related to accounting for leases and supersedes 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.
On January 1, 2019, the Company adopted
ASU 2016-02 on a retrospective basis, beginning on January 1, 2019, using the optional transition method. The Company applied the
transition options permitted by ASU 2018-11 and elected the package of practical expedients to alleviate certain operational and
reporting complexities related to the adoption, one of which was not to recognize a right of use asset or lease liability for leases
with a term of 12 months or less. See Note 9, Leases for further discussion. The Company recorded right of use assets and
lease liabilities for its operating leases of $10,809 upon adoption of ASU 2016-02.
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 U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recorded. The new standard
is effective for the fiscal year beginning after December 15, 2018. The Company adopted this standard on January 1, 2019. Adoption
of this standard did not have a material impact on the Company’s consolidated condensed financial statements.
(y)
Recently issued accounting pronouncements
ASU
No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
This
standard changes the impairment model for most financial assets that are measured at amortized cost and certain other instruments,
including trade receivables, from an incurred loss model to an expected loss model and adds certain new required disclosures.
Under the expected loss model, entities will recognize estimated credit losses to be incurred over the entire contractual term
of the instrument rather than delaying recognition of credit losses until it is probable the loss has been incurred. The new standard
is effective for the fiscal year beginning after December 15, 2019, with early adoption permitted. Based upon the outstanding
balance of the Company’s trade receivables and its positive collection history, the Company’s management does not
believe that the adoption of this standard will have a material impact on its consolidated financial position and results of operations.
ASU
No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value
Measurement
This
amendment provides updates to the disclosure requirements on fair value measures in Topic 820 which includes the changes in unrealized
gains and losses in other comprehensive income for recurring Level 3 fair value measurements, the option of additional quantitative
information surrounding unobservable inputs and the elimination of disclosures around the valuation processes for Level 3 measurements.
The new standard is effective for the fiscal year beginning after December 15, 2019. The Company’s management does not believe
that the adoption of this standard will have a material impact on its consolidated financial position and results of results of
operations.
Note
3. Net Loss per Share of Common Stock
The
table below presents the computation of basic and diluted net losses per common share:
|
|
For the years ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Basic numerator:
|
|
|
|
|
|
|
|
|
Net loss from continuing operations attributable to common shareholders
|
|
$
|
(21,223)
|
|
|
$
|
(36,090
|
)
|
Net loss from discontinued operations attributable to common shareholders
|
|
|
—
|
|
|
|
(1,115
|
)
|
Net loss attributable to common shareholders
|
|
$
|
(21,223)
|
|
|
$
|
(37,205
|
)
|
Basic denominator:
|
|
|
|
|
|
|
|
|
Basic shares of Common Stock outstanding*
|
|
|
4,903,331
|
|
|
|
1,453,635
|
|
Basic loss per share of Common Stock from continuing operations
|
|
$
|
(4.33
|
)
|
|
$
|
(24.83
|
)
|
Basic loss per share of Common Stock from discontinued operations
|
|
|
—
|
|
|
|
(0.77
|
)
|
Basic net loss per share of Common Stock
|
|
$
|
(4.33
|
)
|
|
$
|
(25.60
|
)
|
|
|
|
|
|
|
|
|
|
Diluted numerator:
|
|
|
|
|
|
|
|
|
Net loss from continuing operations attributable to shares of Common Stock
|
|
$
|
(21,223)
|
|
|
$
|
(36,090
|
)
|
Net loss from discontinued operations attributable to shares of Common Stock
|
|
|
—
|
|
|
|
(1,115
|
)
|
Net loss attributable to the Company
|
|
$
|
(21,223)
|
|
|
$
|
(37,205
|
)
|
|
|
|
|
|
|
|
|
|
Diluted denominator:
|
|
|
|
|
|
|
|
|
Diluted shares of Common Stock outstanding*
|
|
|
4,903,331
|
|
|
|
1,453,635
|
|
Diluted loss per share of Common Stock from continuing operations
|
|
$
|
(4.33
|
)
|
|
$
|
(24.83
|
)
|
Diluted loss per share of Common Stock from discontinued operations
|
|
|
—
|
|
|
|
(0.77
|
)
|
Diluted net loss per share of Common Stock
|
|
$
|
(4.33
|
)
|
|
$
|
(25.60
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share data presented excludes from the calculation of diluted net loss the following potentially dilutive securities, as they had an anti-dilutive impact*:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Both vested and unvested options outstanding to purchase an equal number of shares of Common Stock of the Company
|
|
|
137,892
|
|
|
|
101,979
|
|
Vested and unvested RSUs to issue an equal number of shares of Common Stock of the Company
|
|
|
—
|
|
|
|
17,750
|
|
Warrants to purchase an equal number of shares of Common Stock of the Company
|
|
|
3,388,115
|
|
|
|
703,670
|
|
Preferred stock on an as converted basis
|
|
|
1,965,491
|
|
|
|
6,364,328
|
|
Conversion feature of debt
|
|
|
4,750,000
|
|
|
|
217,500
|
|
Total number of potentially dilutive instruments, excluded from the calculation of net loss per share
|
|
|
10,241,498
|
|
|
|
7,405,227
|
|
Reverse
Stock Split
On February 22, 2019, the Company filed
a certificate of amendment to its amended and restated certificate of incorporation with the Secretary of State of the State of
Delaware to effect a 1-for-20 reverse stock split of the Company’s shares of Common Stock. Such amendment and ratio were
previously approved by the Company’s stockholders and Board of Directors.
As a result of the reverse stock split,
every twenty (20) shares of the Company’s pre-reverse split Common Stock were combined and reclassified into one (1) share
of Common Stock. Stockholders who would have otherwise held a fractional share of Common Stock received payment in cash in lieu
of any such resulting fractional shares of Common Stock as the post-reverse split amounts of Common Stock were rounded down to
the nearest full share. No fractional shares were issued in connection with the reverse stock split.
*All
December 31, 2018 share amounts have been adjusted to reflect the impact of the 1:20 reverse stock split.
Note
4. Cash, Cash Equivalents, and Restricted Cash
|
|
December
31,
|
|
|
|
2019
|
|
|
2018
|
|
Cash
denominated in United States dollars
|
|
$
|
890
|
|
|
$
|
2,000
|
|
Cash
denominated in currency other than United States dollars
|
|
|
1,048
|
|
|
|
1,143
|
|
Credit
and debit card receivables
|
|
|
246
|
|
|
|
260
|
|
|
|
$
|
2,184
|
|
|
$
|
3,403
|
|
As of December 31, 2019 and 2018, cash
and cash equivalents included $246 and $260 of credit card receivables, respectively. As of December 31, 2019, and 2018, the Company
held cash balances in overseas accounts, totaling $1,048 and $1,143, respectively, 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 and distribution process as defined in its operating and partnership agreements, which may delay and/or reduce
the availability of that cash to the Company. In addition, as of December 31, 2019 and 2018, there was $451 and $487, respectively,
of restricted cash balances at financial institutions to secure bonds and letters of credit as required by the Company’s
various lease agreements, which is included in Other assets on the Company’s consolidated balance sheets. The aggregate
cash, cash equivalents, and restricted cash is $2,635 and $3,890 as of December 31, 2019 and 2018.
Cash denominated in United States dollars
decreased $1,110 from December 31, 2018 to December 31, 2019 primarily due to cash proceeds received by the Company in 2018 from
the issuance of preferred stock and from the issuance of convertible debt securities and warrants, which the Company did not receive
in 2019.
Note
5. Other Current Assets
As of December 31, 2019, and 2018, the Company’s other
current assets were comprised of the following:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Prepaid expenses
|
|
$
|
984
|
|
|
$
|
1,204
|
|
Other
|
|
|
118
|
|
|
|
370
|
|
Total other current assets
|
|
$
|
1,102
|
|
|
$
|
1,574
|
|
Prepaid expenses are predominantly comprised
of financed and prepaid insurance policies which have terms of one year or less.
Note
6. Property and Equipment
Property
and equipment is comprised of three categories: leasehold improvements, furniture and fixtures, and other operating equipment
as of December 31, 2019 and 2018 as follows:
|
|
December 31,
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Useful Life
|
Leasehold improvements
|
|
$
|
16,102
|
|
|
$
|
18,932
|
|
|
Average 5-8 years
|
Furniture and fixtures
|
|
|
863
|
|
|
|
1,264
|
|
|
3-4 years
|
Other operating equipment
|
|
|
1,305
|
|
|
|
2,322
|
|
|
Maximum 5 years
|
|
|
|
18,270
|
|
|
|
22,518
|
|
|
|
Accumulated depreciation
|
|
|
(10,206
|
)
|
|
|
(10,723
|
)
|
|
|
Total property and equipment, net
|
|
$
|
8,064
|
|
|
$
|
11,795
|
|
|
|
Depreciation is computed using the straight-line
method over the estimated useful lives of the related assets. Leasehold improvements are depreciated over the shorter of remaining
lease term or economic useful life (which is on average 5-8 years).
The Company did an assessment of its property and equipment
for impairment as of December 31, 2019 and 2018. Based upon the results of the impairment tests, the Company recorded an impairment
expense of approximately $1,844 and $2,100, respectively, which is included in “Impairment/disposal of assets”
in the consolidated statements of operations and comprehensive loss. The expense was primarily related to the impairment of leasehold
improvements made to certain locations where management determined that the location’s discounted future cash flow was not
enough to support the carrying value of the leasehold improvements over the remaining lease term. The impairment expense represents
the excess of the carrying value of the leasehold improvements over the estimated future discounted cash flows. Management calculated
the future cash flow of each location using a present value income approach. The sum of expected cash flow for the remainder of
the lease term for each location was present valued at a discount rate of 9.0% and 11.24%, for 2019 and 2018 respectively, which
represent the then borrowing rate of the Company’s note payable to B3D. The Company believes that this rate incorporates
the time value of money and an appropriate risk premium.
In July 2019, as a result of an early termination
of a lease for one of its locations that was closed, the Company assessed all assets at the closed location (primarily leasehold
improvements) for impairment. This resulted in a charge of approximately $620, which was included in “Impairment/disposal
of assets” in the consolidated statements of operations and comprehensive loss that was recorded in June 30, 2019 and
is reflected in the current period year to date results. The Company also reduced the remaining right of use asset and the lease
liability balances by approximately $421 in June 2019 related to the leases for this location.
The Company expensed approximately $231
of costs incurred during 2019 that had been capitalized in anticipation of opening new spas, that the Company later determined
were not viable. The Company also wrote off approximately $109 related to a previous asset disposition that had originally been
classified as held for sale, were reclassified to continuing operations, but were ultimately deemed not realizable as of December
31, 2019. These charges are included in the “Impairment/disposition of assets” line in the consolidated statement
of operations and comprehensive loss for the year ended December 31, 2019.
During the years ended December 31, 2019
and 2018, the Company recorded $3,821 and $4,945, respectively, of depreciation expense from continuing operations.
Note 7. Other Assets
Other assets in the consolidated balance
sheets are comprised of the following as of December 31, 2019 and 2018:
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
Cost method investments
|
|
$
|
484
|
|
|
$
|
2,482
|
|
Lease deposits
|
|
|
755
|
|
|
|
894
|
|
Other assets
|
|
$
|
1,239
|
|
|
$
|
3,376
|
|
In the second quarter of 2019, the Company
impaired its investment in Route1, which the Company received from the disposition of Group Mobile in March 2018; due to an under
performance of operating results. The Company recorded an impairment charge of $1,141, which is included in “Impairment/disposal
of assets” account balance on the consolidated statement of operations and comprehensive loss for the year ended December
31, 2019. As of December 31, 2019, the balance in the Company’s investment in Route 1 was $484.
In the third quarter of 2019, the Company
recorded an impairment loss on its FLI Charge cost method investment, which the Company received from the disposition of FLI Charge
in October 2017, of approximately $47, which is included in “Impairment/disposal of assets” on the Company’s
consolidated statements of operations and comprehensive loss for the year ended December 31, 2019.
The Company assessed its investment in
InfoMedia Services Limited (“InfoMedia”) for impairment at December 31, 2019 as InfoMedia was to have obtained financing
to fund continuing operations and a new product during 2019 but was unable to obtain the financing. The Company believes this represents
a triggering event and determined it should write off its investment in InfoMedia and recorded an impairment expense of $787, which
is included in “Impairment/disposal of assets” on the Company's statement of operations and comprehensive loss
for the year ended December 31, 2019.
The Company had an investment in Marathon
Patent Group, Inc. (“Marathon”), which the Company acquired in January 2018, with an acquisition date fair value of
$450. The Company determined based on its evaluation of its investment that certain unrealized losses represented an other-than-temporary
impairment as of December 31, 2018 and the Company recognized an impairment charge of $148 for the year ended December 31, 2018,
equal to the excess of carrying value over fair value. During the year ended December 31, 2018, the Company sold 205,646 shares
of Marathon Common Stock, with a carrying value of $279, for net proceeds of $200. The Company sold its remaining investment in
Marathon of $23 in December of 2019 for net proceeds of $14.
Also included in “Other assets”
as of December 31, 2019 were $755 deposits made pursuant to various lease agreements, which will be returned to the Company at
the end of the leases.
The Company has not identified any other events or changes in
circumstances that occurred during 2019 that had a significant adverse effect on the carrying value of its remaining cost method
investments. See Note 20, Subsequent Events for discussion pertaining to the impact of COVID-19 on our operations.
Note
8. Intangible Assets and Goodwill
Intangible
assets
The
following table provides information regarding the Company’s intangible assets, which consist of the following:
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
and
Impairment
|
|
|
Net
Carrying
Amount
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
and Impairment
|
|
|
Net
Carrying
Amount
|
|
Trade name
|
|
$
|
13,309
|
|
|
$
|
(6,709
|
)
|
|
$
|
6,600
|
|
|
$
|
13,309
|
|
|
$
|
(4,485
|
)
|
|
$
|
8,824
|
|
Customer relationships
|
|
|
312
|
|
|
|
(312
|
)
|
|
|
—
|
|
|
|
312
|
|
|
|
(312
|
)
|
|
|
—
|
|
Software
|
|
|
312
|
|
|
|
(129
|
)
|
|
|
183
|
|
|
|
312
|
|
|
|
(69
|
)
|
|
|
243
|
|
Patents
|
|
|
26,897
|
|
|
|
(26,897
|
)
|
|
|
—
|
|
|
|
26,897
|
|
|
|
(26,797
|
)
|
|
|
100
|
|
Total intangible assets
|
|
$
|
40,830
|
|
|
$
|
(34,047
|
)
|
|
$
|
6,783
|
|
|
$
|
40,830
|
|
|
$
|
(31,663
|
)
|
|
$
|
9,167
|
|
The Company’s trade name relates
to the value of the XpresSpa trade name, customer relationships represent the value of loyalty customers, software relates to certain
capitalized third-party costs related to a new point-of-sale system, and patents consist of intellectual property portfolios acquired
from third parties.
The Company wrote off the net book value
of certain patents that were no longer generating cash flow totaling approximately $85, which is included in “Impairment/disposal
of assets” on the Company’s consolidated statement of operations and comprehensive loss for the year ended December
31, 2019.
The Company’s intangible assets are
amortized over their expected useful lives, which is six years for tradenames and five years for software. During the years ended
December 31, 2019 and 2018, the Company recorded amortization expense of $2,303 and $2,453, respectively, related to its intangible
assets.
Estimated amortization expense for
the Company’s intangible assets at December 31, 2019 is as follows:
Years ending December 31,
|
|
Amount
|
|
2020
|
|
$
|
2,278
|
|
2021
|
|
|
2,278
|
|
2022
|
|
|
2,227
|
|
Total
|
|
$
|
6,783
|
|
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 was 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.
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 an other than temporary impairment was incurred during 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, 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
consolidated statements of operations and comprehensive loss for the year ended December 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 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
9. Leases
The
Company leases its retail space at various domestic and international airports. Additionally, the Company leases its corporate
office in New York City. Certain leases entered into by the Company are accounted for in accordance with ASC 842. The Company
determines if an arrangement is a lease at inception and if it qualifies under ASC 842. Some of the Company’s lease arrangements
contain fixed payments throughout the term of the lease. Others involve a variable component to determine the lease obligation
where a certain percentage of sales is used to calculate the lease payments. The Company enters into certain leases that expire
and are then extended on a month-to-month basis. These leases are not included in the calculation of the total lease liability
and the right of use asset after they convert to month-to-month.
All
qualifying leases held by the Company are classified as operating leases. Operating lease assets represent the Company’s
right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising
from the lease. Operating lease assets and liabilities are recognized at commencement date based on the present value of lease
payments over the lease term. The Company records its operating lease assets and liabilities based on required guaranteed payments
under each lease agreement. The Company uses its incremental borrowing rate, which approximates the rate at which the Company
can borrow funds on a secured basis, using the information available at commencement date of the lease in determining the present
value of guaranteed lease payments. The interest rate implicit in the lease is generally not determinable in transactions where
a company is the lessee.
The
Company reviews all of its existing lease agreements on a quarterly basis to determine whether there were any modifications to
lease agreements and to assess if any agreements should be accounted for pursuant to the guidance in ASC 842. The Company has
continued to use 11.24% as its incremental borrowing rate for majority of its leases as there have been no modifications to them
since the adoption of ASC 842. The Company did exercise its option to extend the term of two existing lease contracts during the
year. Since the existing lease liability did not originally consider the extension of the lease term for these two leases, the
Company reassessed the incremental borrowing rate used to calculate the lease liability. The Company renegotiated terms of its
senior secured notes during 2019. The borrowing rate was reduced from 11.24% to 9.0%. Therefore, the Company has determined that
it should use 9.0% as its incremental borrowing rate for the two lease extensions and recalculated the right of use asset and
lease liability based on the revised borrowing rate and the modified lease terms. There were no other lease modifications during
the year ended December 31, 2019. The Company entered into two new lease arrangements during 2019 that are included in the balances
of its right of use asset and lease liability as of December 31, 2019. The Company used 9.0% as its incremental borrowing rate
in calculating the present value of future lease payments.
The following is a summary of the activity
in the Company’s current and long-term operating lease liabilities for the year ended December 31, 2019:
Operating lease liabilities, January 1, 2019
|
|
$
|
10,809
|
|
New leases entered into
|
|
|
770
|
|
Extension of term of existing lease obligations
|
|
|
986
|
|
Termination of existing qualifying leases
|
|
|
(447
|
)
|
Amortization of lease obligation
|
|
|
(2,623
|
)
|
Operating lease liabilities, December 31, 2019
|
|
$
|
9,495
|
|
As
of December 31, 2019, future minimum operating leases commitments are as follows:
Calendar Years ending December 31,
|
|
|
Amount
|
|
2020
|
|
|
$
|
3,476
|
|
2021
|
|
|
|
2,952
|
|
2022
|
|
|
|
2,236
|
|
2023
|
|
|
|
1,314
|
|
2024
|
|
|
|
664
|
|
Thereafter
|
|
|
|
625
|
|
Total future lease payments
|
|
|
|
11,267
|
|
Less: interest expense at incremental borrowing rate
|
|
|
|
(1,772
|
)
|
Net present value of lease liabilities
|
|
|
$
|
9,495
|
|
Other
assumptions and pertinent information related to the Company’s accounting for operating leases are:
Weighted average remaining lease term:
|
|
|
4.8 years
|
|
Weighted average discount rate used to determine present value of operating lease liability:
|
|
|
11.0%
|
|
Cash paid for lease obligations during the year ended December 31, 2019:
|
|
$
|
3,867
|
|
Variable lease payments calculated monthly
as a percentage of a product and services revenue were $3,025 and $2,769 for the years ended December 31, 2019 and 2018, respectively.
Rent expense from continuing operations
for operating leases for years ended December 31, 2019 and 2018 were $8,175 and $8,405, respectively.
The Company did an assessment of its right
of use lease assets for impairment as of December 31, 2019. Based upon the results of the impairment test, the Company recorded
an impairment expense of approximately $1,217, which is included in Impairment/disposal of assets on the consolidated statement
of operations and comprehensive loss for the year ended December 31, 2019. The expense was primarily related to the impairment
of right of use lease assets where management determined that the location’s discounted future cash flow was not enough to
support the carrying value of the assets over the remaining lease term. The impairment expense represents the excess of the carrying
value of the right of use lease assets over the estimated future discounted cash flows. Management calculated the future cash flow
of each location using a present value income approach. The sum of expected cash flow for the remainder of the lease term for each
location was present valued at a discount rate of 9.0%, which represents the current borrowing rate of the Company’s note
payable to B3D. The Company believes that this rate incorporates the time value of money and an appropriate risk premium.
The fair value measurement of long-lived assets is classified within Level 3 of the fair value hierarchy
because the income approach was used, which utilizes inputs that are unobservable in the market. The Company believes it made reasonable
estimates and assumptions to calculate the fair value of its long-lived assets as of the impairment test measurement date.
Note
10. Long-term Notes and Convertible Notes
Total
debt as of December 31, 2019 and 2018 is comprised of the following:
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
B3D Note, net of unamortized debt discount of $2,420 at December 31, 2019
|
|
$
|
4,580
|
|
|
$
|
6,500
|
|
5% Secured Convertible Notes
|
|
|
—
|
|
|
|
1,986
|
|
Calm Note, net of unamortized debt discount of $1,318
|
|
|
1,182
|
|
|
|
—
|
|
Total debt
|
|
$
|
5,762
|
|
|
$
|
8,486
|
|
B3D Note
On July 8, 2019, the Company entered into
the fourth amendment to its existing credit agreement (the “Amendment to the Credit Agreement”) with B3D, to renegotiate
the terms of its 11.24 %, $6,500 senior secured note. The Amendment to the Credit Agreement, among other provisions, (i) extended
the maturity date to May 31, 2021, (ii) reduced the applicable interest rate to 9.0%, and (iii) amended and restated certain other
provisions. As consideration for these and other modifications, the principal amount owed to B3D was increased to $7,000.
The Company engaged an independent third
party to assess the fair value of each of the derivative instruments included in the B3D Note. The results of the appraisal were
that the conversion feature and the B3D Note should be bifurcated, and that the conversion option should be treated as a separate
derivative liability. An initial fair value of $2,774 was assigned to the conversion option, which is included in “Derivative
Liabilities” on the consolidated balance sheet and the B3D Note was assigned a fair value of $4,226 as of July 8, 2019.
The conversion option is marked to market at the end of each reporting period. The Company recorded a revaluation gain of approximately
$1,012 that is included in “Other income (expense), net” for the year ended December 31, 2019 for the change
in the fair value of the conversion option. During the year ended December 31, 2019, the Company recorded $724 of debt discount
accretion expense that increased the carrying value of the B3D Note.
The modification to the terms included
in the Credit Agreement Amendment were accounted for as a troubled debt restructuring in the Company’s consolidated financial
statements, in accordance with ASC 470-60 “Troubled Debt Restructurings by Debtors”. A debtor in a troubled
debt restructuring involving only a modification of terms of a payable should account for the effects of the restructuring prospectively
from the time of restructuring and not change the carrying amount of the payable at the time of the restructuring. The Company
will pay interest monthly at the revised 9.0% rate over the life of the B3D Note. Since the future cash payments for principal
and interest under the restructured B3D Note will be greater than the carrying value of the original note, no gain was recorded.
As a result of the extension of the maturity
date to May 31, 2021, the balance of the B3D Note was reclassified from current liabilities as of December 31, 2018 to long-term
liabilities on the Company’s consolidated balance sheet as of December 31, 2019.
The Company agreed on a $500 increase in
the principal amount of the B3D Note, which will be amortized on a straight-line basis over the revised term of the B3D Note. The
net balance of the deferred issuance costs was $370 as of December 31, 2019 and is presented as a reduction of the B3D Note balance
in the Company’s consolidated balance sheet as of December 31, 2019. Amortization expense from July 8, 2019 through December
31, 2019 was $130 and is included in “Interest expense” in the consolidated statement of operations and comprehensive
loss.
The B3D Note is guaranteed on a full, unconditional,
joint, and several basis, by the parent Company, XpresSpa Group, Inc., and all wholly owned subsidiaries of Holdings (the “Guarantor
Subsidiaries”). Under the terms of a security and guarantee agreement dated July 8, 2019, XpresSpa Group, Inc. (the parent
company) and the Guarantor Subsidiaries each fully and unconditionally, jointly and severally, guarantee the payment of interest
and principal on the B3D Note. Holdings pledged and granted to B3D a first priority security interest in, among other things, all
of its equity interests in Holdings and all of its rights to receive distributions, cash or other property in connection with Holdings.
The Company has not presented separate consolidating financial statements of XpresSpa Group, Inc., Holdings and Holdings’
wholly-owned subsidiaries, as each entity has guaranteed the B3D Note, so each entity is responsible for the payment.
Convertible Notes
5% Secured Convertible Notes
On May 15, 2018, in a private placement
offering, the Company issued (i) 5% Secured Convertible Notes (the “5% Secured Convertible Notes”) convertible into
Common Stock at $12.40 per share, originally due November 2019, (ii) May 2018 Class A Warrants to purchase 357,863 shares of Common
Stock and (iii) May 2018 Class B Warrants to purchase 178,932 shares of Common Stock. The May 2018 Class A Warrants and May 2018
Class B Warrants were originally convertible into Common Stock at $12.40 per share. The Company received aggregate proceeds of
$4,438 from the May 2018 private placement. Debt issuance costs that had been capitalized related to the 5% Secured Convertible
Notes, were being amortized on a straight-line basis over their remaining term of the 5% Secured Convertible Notes. The Company
did not record amortization expense of the debt issuance costs related to the 5% Secured Convertible Notes after June 30, 2019
as the notes were converted into Common Stock on June 27, 2019. The balance of debt issuance costs of $135 was written off in June
2019 and was included in “Interest expense” in the consolidated financial statements for the year ended December 31,
2019.
During the second quarter of 2019, the
Company failed to make minimum monthly payments as required pursuant to the 5% Secured Convertible Notes, which failure constituted
an event of default. Pursuant to the terms of the 5% Secured Convertible Notes, upon an event of default, an investor may elect
to accelerate payment of the outstanding principal amount of such investor’s 5% Secured Convertible Notes, liquidated damages
and other amounts owing in respect thereof through the date of acceleration, which amounts become immediately due and payable in
cash. No investor provided notice to the Company electing to exercise its right to accelerate payment.
On June 27, 2019, the Company entered into
the Third Amendment Agreement to the 5% Secured Convertible Notes (the “Third Amendment”) whereby the holders of the
5% Convertible Notes agreed to convert their notes then held into Common Stock. The Third Amendment reduced the conversion price
of the 5% Convertible Notes to Common Stock from $12.40 per share to $2.48 per share. As a result of the reduction in the conversion
price, the Company recorded debt conversion expense of $1,584 to account for the additional consideration paid over what was agreed
to in the original 5% Secured Convertible Notes agreement. The expense is reflected in “Other non-operating income (expense),
net” in the consolidated statement of operations and comprehensive loss. The 5% Secured Convertible Notes holders converted
their remaining outstanding principal balances plus accrued interest into 586,389 shares of Common Stock and 356,772 Class A Warrants
(the “June 2019 Class A Warrants”). The June 2019 Class A Warrants had an exercise price of $0.01 and are otherwise
identical in form and substance to the Company's existing May 2018 Class A Warrants.
The Company had a valuation expert perform
an appraisal of the June 2019 Class A Warrants as of June 30, 2019. The June 2019 Class A Warrants were assigned an original appraised
value of $689. The value of these warrants was recorded as a derivative liability on the consolidated balance sheet and will be
marked to market at the end of each reporting period. The expense of $689 is included in “Other non-operating income (expense),
net” in the consolidated condensed statements of operations and comprehensive loss.
The June 2019 Class A Warrants were converted
into 354,502 shares of Common Stock in July 2019.
Calm Note
On July 8, 2019, the Company entered into
a securities purchase agreement with Calm.com, Inc. (“Calm”) pursuant to which the Company agreed to sell (i) an aggregate
principal amount of $2,500 in an unsecured convertible note (the “Calm Note”), which is convertible into shares of
Series E Convertible Preferred Stock at a conversion price of $3.10 per share (the “Series E Preferred Stock”) and
(ii) warrants to purchase 937,500 shares of the Company’s Common Stock. The Calm Note will mature on May 31, 2022, and bears
interest at a rate of 5% per annum, subject to increase in the event of default, and is payable in arrears and may be paid in cash,
shares of Series E Preferred Stock or a combination thereof. The Company made interest payments of $19 in cash and $31 in the form
of Series E Preferred Stock in 2019.
On April 17, 2020, we entered into an amended
and restated the Calm Note in order to provide, among other items, that Calm shall not have the right to convert the shares of
Series E Preferred Stock issued in connection with the Calm Note into shares of Common Stock to the extent that such conversion
would cause Calm to beneficially own in excess of the Beneficial Ownership Limitation, initially defined as 4.99% of the number
of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon
conversion of the Series E Preferred Stock.
The Company engaged a valuation expert
to assess the fair value of each of the derivative instruments included in the Calm Note. The results of the appraisal were that
the conversion feature and the Calm Warrants should be bifurcated, and both treated as derivative liabilities. A fair value of
$351 was assigned to the conversion option, a fair value of $1,018 was assigned to the Calm Warrants and the Calm Note was assigned
a fair value of $1,131, net of issuance cost, as of July 8, 2019. The conversion option and the Calm Warrants are marked to market
at the end of each reporting period. The assessment of the fair value of the conversion option and Calm Warrants resulted in a
gain of $771 as of December 31, 2019, which is reflected as a revaluation gain in that is included in “Other income (expense),
net” in the consolidated statements of operations and comprehensive loss for the year ended December 31, 2019.
The Company capitalized direct issuance
costs of approximately $222 related to the issuance of the Calm Note and recorded amortization of debt issuance costs of $235 from
the date the debt was issued on July 8, 2019 through December 31, 2019. The net balance of the deferred issuance costs is $184
as of December 31, 2019 and is presented as a reduction of the Calm Note balance on the Company’s consolidated balance sheet.
Amortization expense is included in “Interest expense” in the Company’s consolidated statement of operations
and comprehensive loss for the year ended December 31, 2019. During the year ended December 31, 2019, the Company recorded $235
of debt discount accretion expense that increased the carrying value of the Calm Note.
Note 11. Preferred Stock and Warrants
Certificate of Elimination of Series
B Preferred Stock
On July 8, 2019, the Company filed a Certificate
of Elimination of Shares of Series B Preferred Stock (the “Certificate of Elimination”) to the Company’s
amended and restated certificate of incorporation. The Certificate of Elimination reduced, pursuant to Section 151(g) of the Delaware
General Corporation Law, the number of authorized shares of Series B Convertible Preferred Stock of the Company, par
value $0.01 per share (the “Series B Preferred Stock”) from 1,609,167 shares
to zero shares. Pursuant to the provisions of Section 151(g) of the Delaware General Corporation Law, the 1,609,167 authorized shares
of Series B Preferred Stock were eliminated pursuant to the reduction return to the available undesignated preferred stock of
the Company and may be re-designated into another series of preferred stock.
Series D Convertible Preferred Stock
Amendment and December 2016 Warrant Amendment
On July 8, 2019, the Company filed the
Series D COD Amendment with the State of Delaware to reduce the conversion price of Series D Convertible Preferred Stock to Common
Stock to $2.00 and to then provide for automatic conversion of the Series D Convertible Preferred Stock into shares of Common Stock.
Also, on July 8, 2019, the Company entered
into an amendment to the December 2016 Warrants to provide for (i) a reduction in the exercise price into Common Stock to $2.00,
(ii) certain anti-dilution price protection and (iii) a voluntary reduction at a future date of the exercise price by the Company
in its discretion.
When a reporting entity changes the terms
of its preferred stock, it must assess whether the changes should be accounted for as either a modification or extinguishment.
The Company engaged a valuation expert to perform an appraisal to determine the fair value of the Series D Preferred Stock before
and after the changes were made. The results of the fair value assessment indicated that the fair values before and after the change
in the provisions and characteristics of the Series D Preferred Shares were not substantially different (in practice, substantially
different has been interpreted to be greater than 10%). Therefore, the Company did not record an adjustment to the Series D Preferred
Stock.
Series
E Convertible Preferred Stock
On July 8, 2019, the Company filed the
Series E COD Amendment with the State of Delaware to (i) increase the number of authorized shares of Series E Preferred Stock to
2,397,060 and (ii) reduce the conversion price to $2.00. The Series E COD Amendment was approved by the Board of Directors of the
Company and the Company obtained shareholder approval of the Series E COD Amendment on October 2, 2019.
When a reporting entity changes the terms of its outstanding
preferred stock, it must assess whether the changes should be accounted for as either a modification or an extinguishment. The
Company engaged an independent third party to perform an appraisal to determine the fair value of the Series E Preferred Stock
before and after the changes were made. The results of the fair value assessment indicated that the fair values before and after
the change in the provisions and characteristics of the Series E Preferred Stock were not substantially different (in practice,
substantially different has been interpreted to be greater than 10%). Therefore, the Company did not record an adjustment
to the Series E Preferred Stock.
Series F Convertible Preferred Stock
In connection with the May 2018 SPA Amendment, the Company issued
8,996 shares of Series F Convertible Preferred Stock to the parties to the May 2018 SPA Amendment. The Company engaged a valuation
expert to perform an appraisal to determine the fair value of the Series F Preferred Stock. The Series F Preferred Stock has a
par value of $0.01 per share and a stated value of $100 per share. The Series F Preferred Stock was appraised at a fair value of
$1,154, $1,131 net of issuance costs, which was recorded as a charge to “Other income (expense), net” in the
Company’s consolidated financial statements as of the date of issuance of the Series F Convertible Preferred Stock.
Warrants
The Calm Warrants entitle Calm to purchase
an aggregate of 937,500 shares of Common Stock at an original exercise price of $2.00 per share, exercisable beginning six months
from the date of issuance, and have a term of five years. In March 2020, the conversion price was reduced to $0.175 per share,
due to the effect of certain anti-dilution adjustments,
In June 2019, the Company’s 5% Secured Convertible Notes
holders converted their remaining outstanding principal balances plus accrued interest into 586,389 shares of Common Stock and
356,772 June 2019 Class A Warrants. The June 2019 Class A Warrants had an exercise price of $0.01 and are otherwise identical in
form and substance to the Company's existing May 2018 Class A Warrants.
The June 2019 Class A Warrants were converted
into 354,502 shares of Common Stock in July 2019. The Class B Warrants were cancelled in July 2019.
The following table summarizes information
about all warrant activity during the year ended December 31, 2019:
|
|
No. of warrants*
|
|
|
Exercise
price range*
|
|
|
December 31, 2018
|
|
|
703,669
|
|
|
$
|
12.40 - 100.00
|
|
Granted
|
|
|
4,628,195
|
|
|
$
|
.01 - 2.00
|
|
|
Exercised
|
|
|
(1,748,869
|
)
|
|
$
|
.01
|
|
|
Expired
|
|
|
(194,880
|
)
|
|
$
|
.01 - 12.40
|
|
|
December 31, 2019
|
|
|
3,388,115
|
|
|
$
|
2.00 - 100.00
|
|
|
The
Company’s outstanding equity warrants as of December 31, 2019 consist of the following:
|
|
No. outstanding*
|
|
|
Exercise price*
|
|
|
Remaining
contractual life
|
|
Expiration Date
|
October 2015 Warrants
|
|
|
2,500
|
|
|
$
|
5.00
|
|
|
1.29 years
|
|
April 15, 2021
|
December 2016 Warrants
|
|
|
124,990
|
|
|
$
|
3.00
|
|
|
1.98 years
|
|
December 23, 2021
|
Outstanding as of December 31, 2019
|
|
|
127,490
|
|
|
|
|
|
|
|
|
|
The
Company’s outstanding derivative warrants as of December 31, 2019 consist of the following:
|
|
No. outstanding*
|
|
|
Exercise price*
|
|
|
Remaining
contractual life
|
|
Expiration Date
|
May 2015 Warrants
|
|
|
26,875
|
|
|
$
|
3.00
|
|
|
.34 years
|
|
May 4, 2020
|
Class A Warrants
|
|
|
2,296,250
|
|
|
$
|
2.48
|
|
|
3.38 years
|
|
November 17, 2023
|
Calm Warrants
|
|
|
937,500
|
|
|
$
|
2.00
|
|
|
4.52 years
|
|
July 8, 2024
|
|
|
|
3,260,625
|
|
|
|
|
|
|
|
|
|
*Amounts
outstanding on or before December 31, 2018 were adjusted to reflect the impact of the 1:20 reverse stock split that became effective
on February 22, 2019.
Note
12. Fair Value Measurements
Fair value measurements are determined
based on assumptions that a market participant would use in pricing an asset or liability. A three-tiered hierarchy distinguishes
between market participant assumptions based on (i) observable inputs such as quoted prices in active markets (Level 1), (ii) inputs
other than quoted prices in active markets that are observable either directly or indirectly (Level 2) and (iii) unobservable inputs
that require us to use present value and other valuation techniques in the determination of fair value (Level 3).
The
following table presents the placement in the fair value hierarchy of the Company’s derivative liabilities measured at fair
value on a recurring basis as of December 31, 2019 and 2018:
|
|
|
|
|
|
|
Fair value measurement at reporting date using
|
|
|
|
|
|
|
|
|
Quoted prices in
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019:
|
|
|
|
|
|
|
active markets
|
|
|
|
Significant other
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
for identical
|
|
|
|
observable
|
|
|
|
unobservable
|
|
|
|
|
Balance
|
|
|
|
assets (Level 1)
|
|
|
|
inputs (Level 2)
|
|
|
|
inputs (Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Warrants
|
|
$
|
778
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
778
|
|
Calm Warrants
|
|
|
382
|
|
|
|
—
|
|
|
|
—
|
|
|
|
382
|
|
Calm Conversion Option
|
|
|
216
|
|
|
|
—
|
|
|
|
—
|
|
|
|
216
|
|
B3D Conversion Option
|
|
|
1,761
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,761
|
|
Total
|
|
$
|
3,137
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
3,137
|
|
As of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Warrants
|
|
$
|
476
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
476
|
|
Class B Warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
476
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
476
|
|
The Company measures its derivative liabilities
at fair value. The derivative liabilities were classified within Level 3 because they were valued using the Monte Carlo model,
which utilizes significant inputs that are unobservable in the market. These derivative liabilities were initially measured at
fair value and are marked to market at each balance sheet date. The derivative warrant and conversion option liabilities are recorded
as “Derivative liabilities” on the consolidated balance sheets and the revaluation of the derivative liabilities
is included in “Other non-operating income (expense)” in the consolidated statements of operations and comprehensive
loss.
In addition to the above, the Company’s
financial instruments as of December 31, 2019 and 2018 consisted of cash and cash equivalents, receivables, accounts payable and
debt. The carrying amounts of all the aforementioned financial instruments approximate fair value because of the short-term maturities
of these instruments.
The following table summarizes the changes
in the Company’s derivative liabilities measured at fair value using significant unobservable inputs (Level 3) during the
year ended December 31, 2019:
December 31, 2018
|
|
$
|
476
|
|
Fair value of derivative liabilities derived from issuance of Calm and B3D Notes
|
|
|
4,142
|
|
Issuance of warrants
|
|
|
689
|
|
Mark to market of warrants and conversion options
|
|
|
(2,170
|
)
|
December 31, 2019
|
|
$
|
3,137
|
|
Valuation
processes for Level 3 Fair Value Measurements
Fair value measurement of the derivative
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. The valuation
of the derivative liabilities is performed by a valuation expert at the end of each reporting period. The price of the Company’s
Common Stock as of December 31, 2019 used in the valuation calculations was $0.67. The conversion option of the Calm and B3D warrants
to Common Stock used in the valuation was $2.00 per share.
As
of December 31, 2019:
Description
|
|
Valuation technique
|
|
Unobservable inputs
|
|
Range
|
|
Class
A Warrants
|
|
Monte
Carlo Method
|
|
Volatility
|
|
|
65.20
|
%
|
|
|
|
|
Risk-free
interest rate
|
|
|
1.67
|
%
|
|
|
|
|
Expected
term, in years
|
|
|
3.38
|
|
|
|
|
|
Dividend
yield
|
|
|
0.00
|
%
|
Description
|
|
Valuation technique
|
|
Unobservable inputs
|
|
Range
|
|
Calm
Warrants
|
|
Monte
Carlo Method
|
|
Volatility
|
|
|
66.90
|
%
|
|
|
|
|
Risk-free
interest rate
|
|
|
1.62
|
%
|
|
|
|
|
Expected
term, in years
|
|
|
4.52
|
|
|
|
|
|
Dividend
yield
|
|
|
0.00
|
%
|
Description
|
|
Valuation technique
|
|
Unobservable inputs
|
|
Range
|
|
Calm
Conversion option
|
|
Monte
Carlo Method
|
|
Volatility
|
|
|
66.90
|
%
|
|
|
|
|
Risk-free
interest rate
|
|
|
1.75
|
%
|
|
|
|
|
Expected
term, in years
|
|
|
2.41
|
|
|
|
|
|
Dividend
yield
|
|
|
0.00
|
%
|
Description
|
|
Valuation technique
|
|
Unobservable inputs
|
|
Range
|
|
B3D
Conversion option
|
|
Monte
Carlo Method
|
|
Volatility
|
|
|
65.7
|
0%
|
|
|
|
|
Risk-free
interest rate
|
|
|
1.62
|
%
|
|
|
|
|
Expected
term, in years
|
|
|
1.42
|
|
|
|
|
|
Dividend
yield
|
|
|
0.0
|
0%
|
As
of December 31, 2018:
Description
|
|
Valuation
technique
|
|
Unobservable
inputs
|
|
Range
|
|
Class
A Warrants
|
|
Black-Scholes-Merton
|
|
Volatility
|
|
|
70.61
|
%
|
|
|
|
|
Risk-free
interest rate
|
|
|
2.53
|
%
|
|
|
|
|
Expected
term, in years
|
|
|
4.38
|
|
|
|
|
|
Dividend
yield
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
Class
B Warrants
|
|
Black-Scholes-Merton
|
|
Volatility
|
|
|
84.02
|
%
|
|
|
|
|
Risk-free
interest rate
|
|
|
2.98
|
%
|
|
|
|
|
Expected
term, in years
|
|
|
0,12
|
|
|
|
|
|
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 and conversion liabilities were the current market
price of the Company’s Common Stock, the exercise price of the derivative warrant liabilities, their remaining expected
term, anti-dilution provisions, 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 liabilities would each result in a directionally
similar change in the estimated fair value of the Company’s derivative 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”) which commenced on the Transaction
Date and ended on July 11, 2018, subject to a leak-out provision.
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
$
|
23
|
|
|
$
|
23
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
$
|
—
|
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
—
|
|
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 was 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 December 31, 2018 and the Company recognized an
impairment charge of $148 for the year ended December 31, 2018, equal to the excess of carrying value over fair value.
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 20-day period. As of December
31, 2018, the remaining 44,354 shares of Marathon Common Stock were no longer restricted pursuant to the Lockup Period and leak-out
provision, and the Company determined that the investments are classified within Level 1 of the fair value hierarchy.
During
the year ended December 31, 2018, the Company sold 205,646 shares of Marathon Common Stock, with a carrying value of $279, for
net proceeds of $200.
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) as of Transaction Date and measured at fair value using quoted prices in active
markets for identical assets (Level 1) during the year ended December 31, 2018:
January 11, 2018
|
|
$
|
450
|
|
Carrying value of Marathon Common Stock sold
|
|
|
(279
|
)
|
Decrease in fair value of the Marathon Common Stock
|
|
|
(148
|
)
|
December 31, 2018
|
|
$
|
23
|
|
December 31, 2018
|
|
$
|
23
|
|
Carrying value of Marathon Common Stock sold
|
|
|
(23
|
)
|
December 31, 2019
|
|
$
|
-
|
|
The
Company sold the remaining shares of the Marathon Common Stock during the year ended December 31, 2019.
Other
Fair Value Measurements
The
following table presents the placement in the fair value hierarchy of the contingent consideration assumed by the Company following
the acquisition of Excalibur Integrated Systems, Inc. (“Excalibur”), which is measured at fair value on a recurring
basis as of December 31, 2019 and 2018:
|
|
|
|
|
Fair value measurement at reporting date using
|
|
|
|
|
|
|
Quoted prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
active markets
|
|
|
Significant other
|
|
|
Significant
|
|
|
|
|
|
|
for identical
|
|
|
observable
|
|
|
unobservable
|
|
|
|
Balance
|
|
|
assets (Level 1)
|
|
|
inputs (Level 2)
|
|
|
inputs (Level 3)
|
|
December
31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent
consideration
|
|
$
|
315
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
315
|
|
December
31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent
consideration
|
|
$
|
315
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
315
|
|
The
purchase value of the contingent consideration assumed by the Company following the acquisition of Excalibur was determined using
the Monte-Carlo simulation and, as such, was classified as Level 3 of the fair value hierarchy. The fair value measurements are
evaluated by management to ensure that changes are consistent with expectations of management based upon the sensitivity and nature
of the inputs. The contingent consideration expires in 2020.
Note
13. Stock-based Compensation*
The Company has a stock-based compensation plan available to
grant stock options and RSUs to the Company’s directors, employees and consultants. Under the 2012 Employee, Director and
Consultant Equity Incentive Plan, as amended (the “Plan”), a maximum of 2,520,000 shares of Common Stock may be awarded.
As of December 31, 2019, 2,286,156 shares were available for future grants under the Plan.
Awards granted under the Plan remain in effect pursuant to their
terms. Generally, stock options are granted with exercise prices equal to the fair market value on the date of grant, vest in four
equal quarterly installments, and expire 10 years from the date of grant. RSUs granted generally vest over a period of one year.
In February 2019, the Company granted a
total of 32,500 stock options to members of its Board of Directors and 75,000 stock options to the Company’s newly elected
Chief Executive Officer at an exercise price of $4.20 per share. The options vest over a period of one year.
The Company also granted 37,500
restricted shares of Common Stock to its newly elected Chief Executive Officer. The
restricted shares vest in full on February 10, 2020.
The fair value of stock options is estimated
as of the date of grant using the Black-Scholes-Merton (“Black-Scholes”) option-pricing model. The Company uses the
simplified method to estimate the expected term of options due to insufficient history and high turnover in the past.
The following variables were used as inputs
in the model:
Share price of the Company’s Common Stock on the grant date:
|
|
$
|
4.20
|
|
Exercise price:
|
|
$
|
4.20
|
|
Expected volatility:
|
|
|
72
|
%
|
Expected dividend yield:
|
|
|
0
|
%
|
Annual average risk-free rate:
|
|
|
2.5
|
%
|
Expected term:
|
|
|
5.25-6.25 years
|
|
Total stock-based compensation expense
for the years ended December 31, 2019 and 2018 was $335 and $916, respectively.
The following tables summarize information
about stock options and RSU activity during the year ended December 31, 2019:
|
|
RSUs
|
|
|
Stock options
|
|
|
|
No. of
RSUs*
|
|
|
Weighted
average
grant date
fair value*
|
|
|
No. of
options*
|
|
|
Weighted
average
exercise
price*
|
|
|
Exercise
price
range*
|
|
Outstanding as of December 31, 2018
|
|
|
17,750
|
|
|
$
|
.60
|
|
|
|
101,979
|
|
|
$
|
99.80
|
|
|
$
|
22.00-820.00
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
|
|
107,500
|
|
|
$
|
4.20
|
|
|
$
|
4.20
|
|
Exercised
|
|
|
(14,750
|
)
|
|
$
|
.60
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Forfeited/Expired
|
|
|
(3,000
|
)
|
|
$
|
.60
|
|
|
|
(71,587
|
)
|
|
$
|
112.13
|
|
|
$
|
22.00-820.00
|
|
Outstanding as of December 31, 2019
|
|
|
—
|
|
|
$
|
—
|
|
|
|
137,892
|
|
|
$
|
275.79
|
|
|
$
|
4.20-820.00
|
|
Exercisable as of December 31, 2019
|
|
|
—
|
|
|
$
|
—
|
|
|
|
62,892
|
|
|
$
|
404.00
|
|
|
$
|
4.20-820.00
|
|
Expected to vest as of December 31, 2019
|
|
|
—
|
|
|
$
|
—
|
|
|
|
75,000
|
|
|
$
|
4.20
|
|
|
$
|
4.20
|
|
The weighted average remaining contractual
term for options outstanding as of December 31, 2019 was between 5.25 and 6.25 years.
As of December 31, 2019, there was
no aggregate intrinsic value associated with the options outstanding as the exercise price of the options was greater than the
Company’s Common Stock price. There was no unrecognized stock-based payment cost related to non-vested stock options as of
December 31, 2019.
*Balances
as of December 31, 2018 were adjusted to reflect the impact of the 1:20 reverse stock split that became effective on February
22, 2019.
Note
14. Segment Information
The
Company’s continuing operating segments are defined as components of an enterprise about which separate financial information
is available that is regularly evaluated by the enterprise’s CODM in deciding how to allocate resources and in assessing
performance. 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 regions: United States and all other countries, which primarily include Amsterdam,
and Dubai. The following table represents the geographical revenue, and total long-lived asset information as of and for the years
ended December 31, 2019 and 2018. There were no concentrations of geographical revenue and long-lived assets related to any single
foreign country that were material to the Company’s consolidated financial statements. Long-lived assets include property
and equipment, restricted cash, cost method investments, security deposits and right of use lease assets.
|
|
For the years ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Revenue
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
43,455
|
|
|
$
|
44,738
|
|
All other countries
|
|
|
5,060
|
|
|
|
5,356
|
|
Total revenue
|
|
$
|
48,515
|
|
|
$
|
50,094
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
15,122
|
|
|
$
|
14,331
|
|
All other countries
|
|
|
2,886
|
|
|
|
1,327
|
|
Total long-lived assets
|
|
$
|
18,008
|
|
|
$
|
15,658
|
|
Long-lived assets includes property and equipment, right of
use lease assets, security deposits, cost method investments and restricted cash.
Note
15. Related Parties Transactions
On April 14, 2018, the Company entered
into a consulting agreement with an employee of Mistral Equity Partners, which was a significant shareholder of the Company and
whose Chief Executive Officer was 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 consulting agreement was extended through
June 30, 2019. Pursuant to the agreement, the Company recorded consulting expense of $34 and $85 for the years ended December 31,
2019 and 2018, respectively.
In 2018, the Company entered into a collaboration agreement
with Calm to the display, market, promote, and offer for sale Calm’s products in each of the Company’s branded stores
worldwide. In connection with the collaboration agreement, the Company began selling Calm subscriptions and certain Calm-branded
retail products in its spas, beginning in November 2018. Also, Calm holds 937,500 warrants to purchase shares of Company’s
Common stock and holds a $2,500 unsecured note convertible into the Company’s Series E Convertible Preferred Stock. During
the years ended December 31, 2019 and 2018, the Company recorded revenue of $40 and $11, respectively from the sale of Calm’s
branded products in its spas which is included in products revenue in the consolidated statements of operations and comprehensive
loss for the years ended December 31, 2019 and 2018.
Note
16. Accounts Payable, Accrued Expenses and Other Current Liabilities
As
of December 31, 2019, and 2018, the Company’s accounts payable, accrued expenses and other current liabilities were comprised
of the following:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Accounts payable and accrued expenses
|
|
$
|
7,069
|
|
|
$
|
4,632
|
|
Litigation accrual
|
|
|
1,800
|
|
|
|
250
|
|
Accrued compensation
|
|
|
1,162
|
|
|
|
1,126
|
|
Accrued insurance
|
|
|
714
|
|
|
|
897
|
|
Other
|
|
|
1,806
|
|
|
|
1,267
|
|
Total accounts payable, accrued expenses and other current liabilities
|
|
$
|
12,551
|
|
|
$
|
8,172
|
|
XpresSpa carries several annual insurance
policies including indemnity, fire, umbrella, and workers’ compensation and financed a total of $910 of the total insurance
premiums with a third-party provider, at an average interest rate of approximately 5% per year payable in 10 monthly installments.
Note
17. Discontinued Operations
FLI Charge
Amendment to Royalty Agreement and Termination
of Warrant
In February 2019, the Company entered into
an agreement to release FLI Charge’s obligation to pay any royalties on FLI Charge’s perpetual gross revenues with
regard to conductive wireless charging, power, or accessories, and to cancel its warrants exercisable in FLI Charge in exchange
for cash proceeds of $1,100, which were received in full on February 15, 2019 and is included in “Other revenue”
in the consolidated financial statements as of December 31, 2019.
Group Mobile
In December 2017, the Company concluded
that the requirement to report the results of Group Mobile, a wholly-owned subsidiary included in its technology operating segment,
as discontinued operations was triggered.
On
March 7, 2018 (the “Signing Date”), the Company entered into a membership purchase agreement (the “Purchase
Agreement”) with Route1 Security Corporation, a Delaware corporation (the “Buyer”), and Route1 Inc., an Ontario
corporation (“Route1”), pursuant to which the Buyer agreed to acquire Group Mobile (the “Disposition”).
The transaction closed on March 22, 2018 (the “Closing Date”), after which the Company no longer had any involvement
with Group Mobile.
In consideration for the Disposition, as
subsequently adjusted to reflect the 1:10 reverse stock split completed by Route 1 effective as of August 12, 2019, the Buyer issued
to the Company:
|
●
|
2,500,000
shares of common stock of Route1 (“Route1 common stock”);
|
|
●
|
warrants
to purchase 3,000,000 shares of Route1 common stock, which will feature an exercise price of CAD 50 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 during the
first half of 2018. Of this amount, $110 was sold and the remaining inventory excluded from the transaction was subsequently determined
to be obsolete and unsalable and was fully written off in June 2018.
Post-closing,
the Company owned approximately 6.7% of Route1 common stock. 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, was measured at cost on the date
of acquisition, which, as of the Closing Date, approximated 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. This resulted in a loss on disposal of $301,
which was included in consolidated net loss from discontinued operations in the consolidated statement of operations and comprehensive
loss for the year ended December 31, 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
sale of Group Mobile was completed on March 22, 2018, after which the Company had no further involvement with Group Mobile.
During
the second quarter of 2019, the Company impaired the earn out portion of its investment in Route1, due to an under performance
of operating results. The Company recorded an impairment charge of $1,141, which is included in “Other non-operating
income (expense), net” on the consolidated statement of operations and comprehensive loss for the year ended December
31, 2019. As of December 31, 2019, the balance in the Company’s investment in Route 1 was $484.
Operating
Results of Discontinued Operations
The
following table represents the components of operating results from discontinued operations, as presented in the consolidated
statements of operations and comprehensive loss for the years ended December 31, 2019 and 2018:
|
|
For the years ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Revenue
|
|
$
|
—
|
|
|
$
|
2,834
|
|
Cost of sales
|
|
|
—
|
|
|
|
(2,305
|
)
|
Depreciation and amortization
|
|
|
—
|
|
|
|
(131
|
)
|
Impairment
|
|
|
—
|
|
|
|
—
|
|
General and administrative
|
|
|
—
|
|
|
|
(1,190
|
)
|
Loss on disposal
|
|
|
—
|
|
|
|
(301
|
)
|
Non-operating expense
|
|
|
—
|
|
|
|
(22
|
)
|
Loss from discontinued operations before income taxes
|
|
|
|
|
|
|
(1,115
|
)
|
Income tax expense
|
|
|
—
|
|
|
|
—
|
|
Net loss from discontinued operations
|
|
$
|
—
|
|
|
$
|
(1,115
|
)
|
Note 18.
Income Taxes
For the years ended December 31,
2019 and 2018, the loss from continuing operations before income taxes consisted of the following:
|
|
2019
|
|
|
2018
|
|
Domestic
|
|
$
|
(21,567
|
)
|
|
$
|
(36,506
|
)
|
Foreign
|
|
|
891
|
|
|
|
597
|
|
|
|
$
|
(20,676
|
)
|
|
$
|
(35,909
|
)
|
Income tax expense attributable to continuing
operations for the years ended December 31, 2019 and 2018 consisted of the following:
|
|
For the years ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Continuing operations
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(167
|
)
|
|
$
|
(6
|
)
|
State
|
|
|
(6
|
)
|
|
|
22
|
|
Foreign
|
|
|
27
|
|
|
|
22
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
—
|
|
|
|
(316
|
)
|
|
|
$
|
(146
|
)
|
|
$
|
(278
|
)
|
The income tax benefit of $146 for the
year ended December 31, 2019 is comprised primarily of the release of a liability for an uncertain tax position for which the statute
of limitations expired in 2019, partially offset by the tax on earnings generated by foreign subsidiaries.
Income tax expense attributable to
discontinued operations was $12 for the year ended December 31, 2018.
Income tax expense attributable to continuing
operations differed from the amounts computed by applying the applicable United States federal income tax rate to loss from continuing
operations before taxes on income as a result of the following:
|
|
For the years ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Loss from continuing operations before income taxes
|
|
$
|
(20,676
|
)
|
|
$
|
(35,909
|
)
|
Tax rate
|
|
|
21
|
%
|
|
|
21
|
%
|
|
|
|
|
|
|
|
|
|
Computed “expected” tax benefit
|
|
|
(4,342
|
)
|
|
|
(7,541
|
)
|
State taxes, net of federal income tax benefit
|
|
|
(944
|
)
|
|
|
(1,422
|
)
|
Change in valuation allowance
|
|
|
3,039
|
|
|
|
7,539
|
|
Nondeductible expenses
|
|
|
607
|
|
|
|
242
|
|
Other items
|
|
|
1,494
|
|
|
|
904
|
|
Income tax benefit for continuing operations
|
|
$
|
(146
|
)
|
|
$
|
(278
|
)
|
Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 31,
2019 and 2018 are as follows:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Deferred income tax assets
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
41,985
|
|
|
$
|
39,972
|
|
Stock-based compensation
|
|
|
4,642
|
|
|
|
4,468
|
|
Intangible assets and other
|
|
|
5,161
|
|
|
|
4,308
|
|
Net deferred income tax assets
|
|
|
51,788
|
|
|
|
48,748
|
|
Less:
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(51,788
|
)
|
|
|
(48,748
|
)
|
Net deferred income tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
The Company assesses the need for a valuation
allowance related to its deferred income tax assets by considering whether it is more likely than not that some portion or all
of the deferred income tax assets will not be realized. A valuation allowance has been recorded against the Company’s deferred
income tax assets, as it is in the opinion of management that it is more likely than not that the net operating loss carryforwards
(“NOLs”) will not be utilized in the foreseeable future. The cumulative valuation allowance will be reduced if and
when the Company determines that the deferred income tax assets are more likely than not to be realized.
The following table presents the changes
to the valuation allowance during the years presented:
As of January 1, 2018
|
|
$
|
41,209
|
|
Charged to cost and expenses – continuing operations
|
|
|
8,300
|
|
Charged to cost and expenses – discontinued operations
|
|
|
342
|
|
Return to provision true-up and other
|
|
|
(1,103
|
)
|
As of December 31, 2018
|
|
|
48,748
|
|
Charged to cost and expenses – continuing operations
|
|
|
4,842
|
|
Return to provision true-up and other
|
|
|
(1,802
|
)
|
As of December 31, 2019
|
|
$
|
51,788
|
|
As of December 31, 2019, the Company’s
estimated aggregate total NOLs were $182,327, for U.S. federal purposes, expiring 20 years from the respective tax years to which
they relate, and $31,401 for U.S. federal purposes with an indefinite life due to new regulations in the Tax Act of 2017 (the “Tax
Act”). The NOL amounts are presented before Internal Revenue Code, Section 382 limitations ("Section 382").
The Tax Reform Act of 1986 imposed substantial restrictions on the utilization of NOL and tax credits in the event of an ownership
change of a corporation. Thus, the Company’s ability to utilize all such NOL and credit carryforwards may be limited. The
Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020 and provides favorable
changes to tax law for businesses impacted by COVID-19. However, the Company does not anticipate the income tax law changes will
materially benefit the Company.
The Company files its tax returns in the
U.S. federal jurisdiction, as well as in various state and local jurisdictions and has open tax years for 2015 through 2017.
On December 22, 2017, the U.S. government enacted comprehensive
tax reform, commonly referred to as the Tax Act. The Tax Act makes changes to the corporate tax rate, business-related deductions
and taxation of foreign earnings, among other changes, that will generally be effective for tax years beginning after December
31, 2017. After the one-year evaluation under SAB 118, the Company determined that there was no material impact from the Tax Act.
Note
19. Commitments and Contingencies
Litigation
and legal proceedings
Certain
of the Company’s outstanding legal matters include speculative claims for substantial or indeterminate amounts of damages.
The Company regularly evaluates developments in its legal matters that could affect the amount of any potential liability and
makes adjustments as appropriate. Significant judgment is required to determine both the likelihood of there being any potential
liability and the estimated amount of a loss related to the Company’s legal matters.
With respect to the Company’s outstanding
legal matters, based on its current knowledge, the Company’s management believes that the amount or range of a potential
loss will not, either individually or in the aggregate, have a material adverse effect on its business, consolidated financial
position, results of operations or cash flows. However, the outcome of such legal matters is inherently unpredictable and subject
to significant uncertainties. The Company evaluated the outstanding legal matters and assessed the probability and likelihood of
the occurrence of liability. Based on management’s estimates, the Company has recorded accruals of $1,800 and $250 as of
December 31, 2019 and December 31, 2018, respectively, which is included in “Accounts payable, accrued expenses and other
current liabilities” in the consolidated balance sheets.
The
Company expenses legal fees in the period in which they are incurred.
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 the City of 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, and on September 24, 2018, XpresSpa perfected its appellate rights and submitted a brief
to the Supreme Court of New York, First Department appellate court. Oral arguments on the appeal are expected to take place during
early 2019. Oral argument on the appeal went forward on March 20, 2019, and the Company expects the court to rule on the appeal
in the coming months.
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,
and thereafter provided another extension pending the Court’s consideration of XpresSpa’s Motion to Stay all action
in the Georgia lawsuit, pending resolution of the New York lawsuit and the FAA action. On October 29, 2018, XpresSpa’s Motion
to Stay was denied. Prior to resolution of the Motion to Stay, Cordial filed a Motion for Temporary Restraining Order (“TRO
Motion”), seeking to enjoin the defendants and specifically XpresSpa, from, among other things, distributing any cash flow,
net profits, or management fees, or otherwise expending resources beyond necessary operating expenses. XpresSpa filed an opposition
and, in a decision entered December 26, 2018, the Court denied Cordial’s TRO Motion entirely. Defendants filed a Motion
to Dismiss the Complaint in its entirety on November 20, 2018, which is pending decision by the Court.
A
Director's Determination was issued by the FAA in connection with the Part 16 Complaint ("Part 16 Proceeding") filed
by Cordial against the City of Atlanta ("City") in 2017 ("Director's Determination"). The Company and Cordial
were not parties to the FAA action, and had no opportunity to present evidence or otherwise be heard in such action. The Director's
Determination concluded that the City was not in compliance with certain Federal obligations concerning the federal government's
ACDBE program, including relating to the City's oversight of the Joint Venture Operating Agreement between Clients and Cordial,
Cordial's termination, and Cordial's retaliation and harassment claims, and the City was ordered to achieve compliance in accordance
with the Director's Determination. The Director's Determination does not constitute a Final Agency Decision and it is not subject
to judicial review, pursuant to 14 CFR § 16.247(b)(2). Because the Company is not a party to the Part 16 Proceeding, the
Company would not be considered "a party adversely affected by the Director's Determination" with a right of appeal
to the FAA Assistant Administrator for Civil Rights.
On August 7, 2019, the Company filed a response, advising the U.S. District Court that: (i) the Company is
not party to the FAA proceeding and therefore had no opportunity to present evidence or otherwise be heard in such action; (ii)
as non-party, the Company is not bound by the Director's Determination; and (iii) the FAA cannot dictate the interpretation or
enforceability of the contract between Cordial and the Company, which is the subject of the U.S. District Court action initiated
by Cordial and the New York State Court action initiated by the Company.
In response to the numerous complaints
it received from Cordial, the City of Atlanta required the parties to engage in mediation.
On November 22, 2019, a Mutual Release and Settlement Agreement
(the "Settlement Agreement") and a Confidential Payment Agreement (the “Payment Agreement”) were executed
by the applicable parties, except the City of Atlanta, and are pending the requisite approval by the FAA of the terms of the Settlement
Agreement.
The Settlement Agreement is ultimately
expected to be executed in 2020, by and among Cordial Endeavor Concessions of Atlanta, LLC, Shelia Edwards, Steven A. White, the
City of Atlanta, XpresSpa Holdings, LLC, XpresSpa Atlanta Terminal A, LLC, Azure Services, LLC, Adra Wilson, Meme Marketing &
Communications LLC, Melanie Hutchinson, Kenja Parks, and Bernard Parks, Jr.
The requisite approval from the FAA has
been obtained and the Leases have been executed by the Company. However, the condition precedent that an operating agreement between
the Company and Cordial is finalized and executed has not yet been satisfied. Based on this, management has determined that the
matter may not be completely resolved, at least to the extent of one or more of the Settling Parties seeking to enforce the terms
of the Settlement Agreement, and thus resulting in a continuation of the litigation.
The Company continues
to be involved in settlement negotiations seeking to resolve all pending matters with Cordial and the city of Atlanta, and those
negotiations are continuing.
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.
On August 21, 2019, the Court issued an
Order denying the parties’ motion for preliminary approval of the revised settlement, as the Court still had concerns about
several of the settlement terms. At the December 6, 2019 Status Conference with the Court, the Court reiterated its denial
of preliminary approval of the proposed settlement agreement. The Court instructed a notice of pendency to be disseminated
to putative collective members, who will then have a 60-day window to decide whether to participate in the case. The notice
of pendency was sent out in February 2020 and putative collective members had until April 3, 2020 to return a Consent to Join the
case. As of April 3, 2020, 304 individuals had joined the case.
Binn et al v. FORM Holdings Corp. et
al.
On November 6, 2017, Moreton Binn and Marisol
F, LLC, former stockholders of XpresSpa, filed a lawsuit against FORM Holdings Corp. (“FORM) and its directors in the United
States District Court for the Southern District of New York. The lawsuit alleged violations of various sections of the Securities
Exchange Act of 1934 (“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 sought 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. By March 30, 2018, the motion to dismiss was fully briefed. On August 7, 2018, the Court ruled on the defendants’
motion, 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. On October 30, 2018, the Court ordered that the plaintiffs could file an
amended complaint, and, in response, the defendants could move for summary judgment. Consistent with the Court’s Order, on
November 16, 2018, the plaintiffs filed a second amended complaint, modifying their allegations, and asserting claims pursuant
to the Exchange Act and the Securities Act of 1933, as well as bringing a breach of contract claim. On December 17, 2018, the defendants
filed a motion for summary judgment seeking dismissal of all claims. On February 1, 2019, the plaintiffs opposed defendant’s
motion, requested discovery and cross-moved for partial summary judgement filed an opposition to defendants’ motion and a
counter motion for partial summary judgment. Defendants’ summary judgement motion and plaintiff’s cross-motion for
partial summary judgment were fully briefed as of March 15, 2019. On April 29, 2019, an emergency hearing was held before the Court
in which the plaintiff sought a temporary restraining order and preliminary injunction to preclude acceleration of the maturity
on the Senior Secured Note. The Court entered a temporary restraining order, while allowing parties the opportunity to brief the
issue.
On May 21, 2019, the Court granted the
defendant’s motion for summary judgement in full, dismissing all claims in the action. On July 3, 2019, the plaintiffs filed
a notice of appeal in the United States Court of Appeals for the second circuit. The Company and its directors continue to believe
that this action is without merit and intend to defend the appeal vigorously. On July 1, 2019, the Court held oral argument on
Binn’s motion for preliminary injunction. After hearing argument by both sides, the Court deferred action and ordered that
the temporary restraining order remain in place. On July 23, 2019, the Court denied the plaintiffs’ request for a preliminary
injunction and vacated the temporary restraining order. On September 13, 2019, plaintiffs filed their appellate brief in the
Second Circuit. As of December 13, 2019, plaintiffs’ appeal was fully briefed. Oral argument has been scheduled for May 4,
2020.
Binn, et al. v. Bernstein et al.
On June 3, 2019, a third suit was commenced
in the United States District Court for the Southern District of New York against FORM, five of its directors, as well as Rockmore,
the Company’s previous senior secured lender and a senior executive of the lender. Although this action is brought by Morton
Binn and Marisol F, LLC, it is asserted derivatively on behalf of the Company. Plaintiffs assert eight causes of action, including
that certain individual defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, by making false statements
concerning, inter alia, the merger and the independence of FORM’s board of directors and the valuation of the Company’s
lease portfolio. Plaintiffs also assert common law claims for breach of fiduciary duty, corporate waste, unjust enrichment, faithless
servant doctrine, and aiding and abetting certain of the directors’ alleged breaches of fiduciary duty. The Company and its
directors believe that this action is without merit and intend to file a motion to dismiss and defend the action vigorously.
The defendants filed a motion to dismiss on October 23, 2019.
The court heard oral argument on the defendants’ motion to dismiss on January 22, 2020 and has not yet ruled on the
motion.
Kainz v. FORM Holdings Corp. et
al.
On March 20, 2019, a second suit was commenced
in the United States District Court for the Southern District of New York against FORM, seven of its directors and former directors,
as well as a managing director of Mistral Equity Partners (“Mistral”). The individual plaintiff, a shareholder of XpresSpa
Holdings, LLC at the time of the merger in December 2016, alleges that the defendants violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 by making false statements concerning, inter alia, the merger and the independence
of FORM’s board of directors, violated Section 12(2) of the Securities Act of 1933, breached the merger agreement by making
false and misleading statements concerning the merger and fraudulently induced the plaintiff into signing the joinder agreement
related to the merger. On May 8, 2019, the Company and its directors and the managing director of Mistral filed a motion to dismiss
the complaint. On June 5, 2019, plaintiff opposed the motion and filed a cross-motion for a partial stay. Defendants’ motion
to dismiss was fully briefed as of June 19, 2019.
On November 13, 2019, the matter was dismissed
in its entirety. On December 12, 2019, plaintiff filed a motion for reconsideration to vacate the order and judgment, dismissing
the action, and for leave to amend the complaint. The motion was fully briefed as of February 6, 2020. On April 1, 2020, the Court
denied plaintiff’s motion in full. Plaintiff has 30 days to file a notice of appeal. On April 10, 2020, plaintiff filed a
notice of appeal to the United States Court of Appeals for the Second Circuit. The Company and its directors continue to believe
that this action is without merit and intend to defend the appeal.
Route1
On or about May 23, 2018, Route1 Inc.,
Route1 Security Corporation (together, “Route1”) and Group Mobile Int’l, LLC (“Group Mobile”) commenced
a legal proceeding against the Company in the Ontario Superior Court of Justice.
Route1 and Group Mobile seek damages in
relation to alleged breaches of a Membership Purchase Agreement entered into between Route1 and the Company on or about March 7,
2018, pursuant to which Route1 acquired the Company’s 100% membership interest in Group Mobile. All capitalized terms not
otherwise defined herein have the meanings ascribed to them in the Agreement.
The Plaintiffs allege that the Company:
(i) failed to ensure all Tax Returns were true, correct and compliant in all respects and that all Taxes had been paid in full;
(ii) failed to ensure that all inventory of Group Mobile had been priced in accordance with GAAP and consisted of a quality and
quantity that was materially usable and salable in the Ordinary Course of Business; (iii) failed to ensure that Group Mobile’s
Most Recent Balance Sheet was materially complete and correct and prepared in accordance with GAAP; (iv) failed to record all liabilities
on Group Mobile’s Most Recent Balance Sheet; and (v) failed to deliver the agreed upon amount of Net Working Capital, and/or
pay the Shortfall, to Route1. The litigation is at an early stage, and it is not yet possible to assess the likelihood of success
and/or liability.
The Company counterclaimed against the Plaintiffs for amounts
owed to the Company in relation to the sale of Excluded Inventory and seek damages thereon.
As described further below, the Company delivered a draft amended
counterclaim to the Plaintiffs on or around November 2019 seeking, among other things, damages. The Company is seeking the Plaintiffs’
consent to amend its counterclaim. Examinations for discovery are scheduled to take place in Toronto, Canada on June 9th and 10th,
2020. The parties currently expect to attend a one-day mediation in Toronto on May 7, 2020.
Rodger Jenkins v. XpresSpa Group, Inc.
In March 2019, Rodger Jenkins filed a lawsuit
against the Company in the United States District Court for the Southern District of New York. The lawsuit alleges breach of contract
of the stock purchase agreement related to the Company’s acquisition of Excalibur Integrated Systems, Inc. and seeks specific
performance, compensatory damages and other fees, expenses and costs. On
or about January 3, 2020, the court granted the plaintiffs’ motion to amend their pleading to increase their total demand.
The Company has denied the material allegations
of the complaint and is currently defending the action. Efforts to settle the parties’ dispute at a court-ordered mediation
in March 2020 were not successful. The action is currently scheduled for a bench trial on May 18, 2020, although we believe that
the trial date is likely to be adjourned due to the COVID-19 pandemic.
EFP Capital Solutions LLC settlement
In March 2019, a complaint was filed against the Company by
EFP Capital Solutions LLC (“EFP”), the receivables factor of the Company’s vendor MobiPT, Inc. (“MobiPT”),
relating to payments made incorrectly by the Company to MobiPT for receivables MobiPT had sold to EFP. The ensuing mediation
resulted in the Company agreeing to pay EFP $165 for such payments, for which the Company recorded an expense that is included
in Accounts payable, accrued expenses and other current liabilities in the consolidated financial statements for the year
ended December 31, 2019. The Company intends to seek reimbursement of the $165 from MobiPT, but there is no assurance the
Company will be successful.
Regulatory Matters
The continued listing standards of Nasdaq
provide, among other things, that a company may be delisted if the bid price of its stock drops below $1.00 for a period of 30
consecutive business days or if stockholders’ equity is less than $2,500. On January 2, 2020, the Company received a deficiency
letter from Nasdaq which provided us a grace period of 180 calendar days, or until June 30, 2020, to regain compliance with the
minimum bid price requirement. If we fail to regain compliance on or prior to June 30, 2020, we may be eligible for an additional
180-day compliance period. Additionally, if we fail to comply with other continued listing standards of Nasdaq, our Common Stock
might be subject to delisting.
Intellectual Property and Other Matters
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.
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.
Leases
XpresSpa is contingently liable to a surety
company under certain general indemnity agreements required by various airports relating to its lease agreements. XpresSpa agrees
to indemnify the surety for any payments made on contracts of suretyship, guaranty, or indemnity. The Company believes that all
contingent liabilities will be satisfied by its performance under the specified lease agreements.
Note 20. Subsequent Events
On March 11,
2020, the World Health Organization declared the outbreak of the COVID-19, which continues to spread throughout the U.S. and the
world, as a pandemic. The outbreak is having an impact on the global economy, resulting in rapidly changing market and economic
conditions. Similar to many businesses in the travel sector the Company’s business has been materially adversely impacted
by the recent COVID-19 outbreak and associated restrictions on travel that have been implemented. Effective March 24, 2020, the
Company temporarily closed all global spa locations, largely due to the categorization of such spa locations by local jurisdictions
as “non-essential services” in connection with the outbreak of COVID-19. This has had a materially adverse impact on
the Company’s cash flows from operations and caused a liquidity crisis. As a result, management has concluded that
there was a long-lived asset impairment triggering event during the first quarter of 2020, which will result in management performing
an impairment evaluation of its long-lived asset balances (primarily leasehold improvements and right of use lease assets of approximately
$16,318 as of December 31, 2019). This could lead to the Company recording an impairment charge during the first quarter of 2020.
The full extent to which COVID-19 will impact the Company’s results will depend on future developments, which are highly
uncertain and cannot be predicted, including new information which may emerge concerning the severity of the virus and the actions
to contain or treat its impact.
The Company is currently seeking sources of capital to help
fund its business operations during the COVID-19 crisis and during 2020 raised approximately $9,440. If the Company is unable to
obtain additional funding in the immediate term , it may be required to curtail or terminate some or all of its business operations
and cause the Company’s Board of Directors to decide to pursue a restructuring, which may include a reorganization or bankruptcy
under Federal bankruptcy laws, or a dissolution, liquidation and/or winding up of the Company. Accordingly, holders of the Company’s
senior and unsecured debt and Common Stock may lose their entire investment in the event of a reorganization, bankruptcy, liquidation,
dissolution or winding up of the Company.
The Company has taken actions to improve
its overall cash position and access to liquidity. The Company expects that these actions discussed below will improve its overall
cash position and assist with its liquidity needs.
Credit Cash Funding Advance
On January 9, 2020, fifteen wholly owned subsidiaries (the “CC
Borrowers”) of the Company entered into an accounts receivable advance agreement (the “CC Agreement”) with CC
Funding, a division of Credit Cash NJ, LLC (the “CC Lender”). Pursuant to the terms of the CC Agreement, the CC Lender
agreed to make an advance of funds in the amount of $1,000 for aggregate fees of $160, for a total repayment amount of $1,160 (the
“Collection Amount”). The Borrowers agreed to repay the Collection Amount on or before the -12-month anniversary of
the funding date of the advance by authorizing the CC Lender to retain a fixed daily amount equal to $4 from a collection account
established for such purpose. The advance of funds is secured by substantially all of the assets of the CC Borrowers, including
CC Borrowers’ existing and future accounts receivables and other rights to payment, including accounts receivable arising
out of the CC Borrowers’ acceptance or other use of any credit cards, charge cards, debit cards or similar forms of payments.
The funds received from advances may be used in the ordinary course of business consistent with past practices. The CC Agreement
additionally includes certain stated events of default, upon which the Lender is entitled to increase the fixed daily payments
made to the Lender and to increase the interest rate to 18% per annum. As a result of the COVID-19 pandemic and closing of the
Company’s spas on March 24, 2020, the Company has entered into a revised repayment amount equal to $10 per week.
As compensation for the consent of existing
creditor B3D to the CC Agreement described above, on January 9, 2020, XpresSpa Holdings, LLC (“XpresSpa Holdings”),
a wholly-owned subsidiary of the Company, entered into a fifth amendment (the “Fifth Credit Agreement Amendment”) to
its existing Credit Agreement with B3D in order to, among other provisions, (i) amend and restate its existing convertible promissory
note (the “B3D Note”) in order to increase the principal amount owed to B3D from $7,000 to $7,150, which additional
$150 in principal and any interest accrued thereon will be convertible, at B3D’s option, into shares of the Company’s
Common Stock subject to receipt of the approval of the Company’s stockholders in accordance with applicable law and the rules
and regulations of the Nasdaq Stock Market and (ii) provide for the advance payment of 291,669 shares of Common Stock in satisfaction
of the interest payable pursuant to the B3D Note for the months of October, November and December 2020 in shares of Common Stock.
B3D Senior Secured Loan
On March 6, 2020, XpresSpa Holdings entered into a sixth amendment
(the “Sixth Credit Agreement Amendment”) to its existing credit agreement with B3D in order to, among other provisions,
(i) amend and restate the B3D Note in order to increase the principal amount owed to B3D from $7,150 to $7,900, which additional
$750 in principal ($500 in new funding and $250 in debt accretion) and any interest accrued thereon will be convertible, at B3D’s
option, into shares of the Company’s Common Stock; provided, however, that the additional $750 in principal and any interest
accrued thereon shall neither be convertible into Common Stock nor interest payable in Common Stock prior to receipt of the approval
of the Company’s stockholders in accordance with applicable law and the rules and regulations of the Nasdaq Stock Market
and (ii) decrease the conversion rate under the B3D Note from $2.00 per share to $0.56 per share, pursuant to the authority of
the Board of Directors of the Company to voluntarily reduce the conversion rate in its discretion, which was previously approved
by the Company’s stockholders on October 2, 2019. In connection with the Sixth Credit Agreement Amendment and B3D Note, B3D
agreed to provide the Company with $500 in additional funding and to submit conversion notices to convert (i) an aggregate of $375
in principal to Common Stock on March 6, 2020 and (ii) an additional aggregate of $375 in principal to Common Stock on or prior
to March 27, 2020.
Common Stock Offerings and Warrant
Exchange
On March 19, 2020, the Company entered into a Securities Purchase
Agreement (the “First Purchase Agreement”) with certain purchasers named therein, pursuant to which the Company issued
and sold in a registered direct offering, (i) 4,153,383 shares of the Company’s common stock, par value $0.01 per share (the
“Common Stock”) at an offering price of $0.175 per share and (ii) an aggregate of 2,132,333 pre-funded warrants exercisable
for shares of Common Stock (the “First Pre-Funded Warrants”) at an offering price of $0.165 per First Pre-Funded Warrant
(the offering of the shares of Common Stock and the First Pre-Funded Warrants, the “First Offering”). The Company
received gross proceeds of approximately $1,100 in connection with the First Offering, before deducting financial advisory consultant
fees and related offering expenses. The First Pre-Funded Warrants were sold to the purchasers to the extent that a purchaser’s
subscription of shares of Common Stock in the First Offering would otherwise result in the purchaser, together with its affiliates
and certain related parties, beneficially owning more than 4.99% of the Company’s outstanding Common Stock immediately following
the consummation of the First Offering, in lieu of shares of Common Stock. Each First Pre-Funded Warrant represented the
right to purchase one share of Common Stock at an exercise price of $0.01 per share and was ultimately exercised.
On March 19, 2020, the Company entered into separate Warrant
Exchange Agreements (the “Exchange Agreements”) with the holders of certain existing warrants (the “Exchanged
Warrants”) to purchase shares of Common Stock. The Exchanged Warrants were originally issued (i) pursuant to a securities
purchase agreement, dated as of May 15, 2018, and in connection with a related consent and (ii) in connection with that certain
Agreement and Plan of Merger by and among the Company, FHXMS, LLC, XpresSpa Holdings, LLC and Mistral XH Representative, LLC, as
representative of the unitholders, dated October 25, 2016, as subsequently amended. Pursuant to the Exchange Agreements, on the
closing date and subject to (i) the receipt of approval of the Company’s stockholders as required by the applicable rules
and regulations of the Nasdaq Stock Market and (ii) the receipt of approval of the Company’s stockholders to increase the
Company’s authorized shares, the holders of Exchanged Warrants would exchange each Exchanged Warrant for a number of shares
of Common Stock (the “New Shares”) equal to the product of (i) the number of shares of Common Stock underlying such
Exchanged Warrants (based on a formula related to the closing price of the Common Stock at the time of the closing of the Exchange
as further detailed in the Exchange Agreement) and (ii) 1.5 (the “Exchange”). To the extent any holder of Exchanged
Warrants would otherwise beneficially own in excess of any beneficial ownership limitation applicable to such holder after giving
effect to the Exchange, that holder’s Exchanged Warrants shall be exchanged for a number of New Shares issuable to the holder
without violating the applicable beneficial ownership limitation and the remainder of the holder’s Exchanged Warrants shall
automatically convert into pre-funded warrants to purchase the number of shares of Common Stock equal to the number of shares of
Common Stock in excess of the applicable beneficial ownership limitation. The closing is expected to take place on the first business
day on which the conditions to the closing are satisfied or waived, subject to satisfaction of customary closing conditions.
On March 25, 2020, the Company entered
into a Securities Purchase Agreement (the “Second Purchase Agreement”) with certain purchasers named therein, pursuant
to which the Company issued and sold in a registered direct offering, (i) 7,450,000 shares of the Company’s Common Stock
at an offering price of $0.20 per share and (ii) an aggregate of 1,500,000 pre-funded warrants exercisable for shares of Common
Stock (the “Second Pre-Funded Warrants”) at an offering price of $0.19 per Second Pre-Funded Warrant (the offering
of the shares of Common Stock and the Second Pre-Funded Warrants, the “Second Offering”). The Company received gross
proceeds of approximately $1,790 in connection with the Second Offering, before deducting financial advisory consultant fees and
related offering expenses. The Second Pre-Funded Warrants were sold to the purchasers to the extent that a purchaser’s subscription
of shares of Common Stock in the Second Offering would otherwise result in the purchaser, together with its affiliates and certain
related parties, beneficially owning more than 4.99% (or, in certain cases, 9.99%) of the Company’s outstanding Common Stock
immediately following the consummation of the Second Offering, in lieu of shares of Common Stock. Each Second Prefunded Warrant
represents the right to purchase one share of Common Stock at an exercise price of $0.01 per share. The Second Pre-Funded Warrants
were exercisable immediately and may be exercised at any time until the Second Pre-Funded Warrants are exercised in full. All of
the Second Pre-Funded Warrants have been exercised.
On March 27, 2020, the Company entered
into a Securities Purchase Agreement (the “Third Purchase Agreement”) with certain purchasers named therein, pursuant
to which the Company issued and sold, in a registered direct offering, (i) 7,895,000 shares of the Company’s Common Stock,
at an offering price of $0.20 per share and (ii) an aggregate of 2,105,000 pre-funded warrants exercisable for shares of Common
Stock (the “Third Pre-Funded Warrants”) at an offering price of $0.19 per Third Pre-Funded Warrant (the offering of
the shares of Common Stock and the Third Pre-Funded Warrants, the “Third Offering”). The Company received gross
proceeds of approximately $2,000 in connection with the Third Offering, before deducting financial advisory consultant fees and
related offering expenses. The Third Pre-Funded Warrants were sold to the purchasers to the extent that a purchaser’s subscription
of shares of Common Stock in the Third Offering would otherwise result in the purchaser, together with its affiliates and certain
related parties, beneficially owning more than 4.99% (or, in certain cases, 9.99%) of the Company’s outstanding Common Stock
immediately following the consummation of the Third Offering, in lieu of shares of Common Stock. Each Third Prefunded Warrant represents
the right to purchase one share of Common Stock at an exercise price of $0.01 per share. The Third Pre-Funded Warrants were exercisable
immediately and may be exercised at any time until the Third Pre-Funded Warrants are exercised in full. All of the Third Pre-Funded
Warrants have been exercised.
On April 6, 2020, the Company entered into
a Securities Purchase Agreement (the “Fourth Purchase Agreement”) with certain purchasers named therein, pursuant to
which the Company issued and sold, in a registered direct offering, (i) 12,418,179 shares of the Company’s Common Stock at
an offering price of $0.22 per share and (ii) an aggregate of 1,445,454 pre-funded warrants exercisable for shares of Common Stock
(the “Fourth Pre-Funded Warrants”) at an offering price of $0.21 per Pre-Funded Warrant (the offering of the shares
of Common Stock and the Pre-Funded Warrants, the “Fourth Offering”). The Company received gross proceeds of approximately
$3.05 million in connection with the Fourth Offering, before deducting financial advisory consultant fees and related offering
expenses. The Fourth Pre-Funded Warrants were sold to the purchasers to the extent that a purchaser’s subscription of shares
of Common Stock in the Fourth Offering would otherwise result in the purchaser, together with its affiliates and certain related
parties, beneficially owning more than 4.99% (or, in certain cases, 9.99%) of the Company’s outstanding Common Stock immediately
following the consummation of the Fourth Offering, in lieu of shares of Common Stock. Each Fourth Pre-Funded Warrant represents
the right to purchase one share of Common Stock at an exercise price of $0.01 per share. The Fourth Pre-Funded Warrants are exercisable
immediately and may be exercised at any time until the Fourth Pre-Funded Warrants are exercised in full.