*Adjusted, where applicable, 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 condensed financial statements.
*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 condensed financial statements.
*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 condensed financial statements.
The accompanying notes form an integral
part of these consolidated condensed financial statements.
The accompanying notes form an integral
part of these consolidated condensed financial statements.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS
(Unaudited)
(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 “Parent”) from FORM Holdings Corp. The Company
rebranded to XpresSpa Group to align its corporate strategy to build a pure-play health and wellness services company, which commenced
following its 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, the Company currently has one operating segment that is also its 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.
Basis of Presentation and Principals
of Consolidation
The unaudited interim consolidated condensed
financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America
(“GAAP”) for interim financial information and the instructions to Article 8-03 of Regulation S-X, and should be read
in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2018. The unaudited interim consolidated
condensed financial statements for all 2018 periods presented have been derived from the audited financial statements. The financial
statements include the accounts of the Company, all entities that are wholly owned by the Company, and all entities in which the
Company has a controlling financial interest. All adjustments that, in the opinion of management, are necessary for a fair presentation
for the periods presented have been reflected by the Company. Such adjustments are of a normal, recurring nature. The results of
operations for the three and nine-month periods ended September 30, 2019 are not necessarily indicative of the results that may
be expected for the entire fiscal year or for any other interim period. All significant intercompany balances and transactions
have been eliminated in consolidation.
Recent Developments
Calm Private Placement
On July 8, 2019, the Company entered into
a securities purchase agreement (the “Calm 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 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 the Company’s common stock, par value $0.01 per share (the “Common
Stock”), at an exercise price of $2.00 per share (the “Calm Warrants”) (collectively, the “Calm Private
Placement”).
The Company received $2,500 in gross proceeds
from the Calm Private Placement.
Convertible Notes and Warrants
The Calm Note is an unsecured subordinated
obligation of the Company. 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 until the Calm Note is no longer outstanding, in whole
or in part, at the option of Calm into shares of Series E Preferred Stock at a conversion price equal to $3.10 per share, 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 during
the period beginning on the original issuance date and ending on, and including, the maturity date, when all amounts outstanding
under the Calm Note becomes due and payable in cash. The Company may elect to pay interest in cash, shares of Series E Preferred
Stock or a combination thereof.
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 $2.00 per share.
See Note 9. “Long-term Notes
and Convertible Notes”, for discussion of the accounting for the Calm Private Placement.
Calm Collaboration Agreement
On July 8, 2019, the Company 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, dated as of November 12, 2018. 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 the Company’s 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, the Company
and Calm entered into an amendment to the Amended and Restated Collaboration Agreement, which provides for the addition of certain
Calm branded products, which amendment is attached as Exhibit 10.8 to this Quarterly Report on Form 10-Q and incorporated by reference
herein.
Amendment to Certificate of Designation
of Series E Convertible Preferred Stock
On July 8, 2019, the Company 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 the Board of
Directors of the Company and the Company obtained shareholder approval of the Series E COD Amendment on October 2, 2019. See Note
10. “Stockholders’ Equity”.
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"). Notwithstanding the foregoing, until the earlier of (i) ninety days from the date of
the Credit Agreement Amendment or (ii) the date upon which shareholder approval is received, which approval was obtained on October
2, 2019 (the "Interest Deferment Date"), the Monthly Interest continued to accrue, compounded monthly, and all unpaid
amounts thereof became due and payable on the Interest Deferment Date. At the option of Holdings, all or any portion of the Monthly
Interest that is payable (i) on the Interest Deferment Date or (ii) after the Interest Deferment Date, but not more than twenty-one
days and not less than five trading days prior to the date on which each payment of Monthly Interest is due, may be paid in shares
of XpresSpa Group, Inc.’s Common Stock. At any time after receipt of shareholder approval until the B3D Note is no longer
outstanding, 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 XpresSpa Group, Inc.’s Common Stock at a conversion price equal to $2.00
per share.
See Note 9. "Long-term Notes and
Convertible Notes", for discussion of the accounting for the B3D Transaction and B3D Note.
On August 22, 2019, the Company 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
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, the Company 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 the Company’s Board and the Company obtained
shareholder approval on October 2, 2019.
December 2016 Warrant Amendment
On July 8, 2019, the Company entered into
an amendment to certain outstanding warrants issued in December 2016 (the “December 2016 Warrants”) to the holders
of its 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 the Company in its discretion. The Company 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 condensed 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, the Company 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 July 8, 2019, the Company entered
into an amendment (the “May 2018 SPA Amendment”) to its Securities Purchase Agreement, dated as of May 15, 2018,
by and between the Company 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, the Company 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. The Company 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 $1,154 (net of issuance
costs of approximately $123) in the Company’s consolidated condensed balance sheet as of September 30, 2019. See Note 10.
“Stockholders’ Equity” for further discussion.
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.
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
is receiving 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.
Liquidity and Going Concern
As of September 30, 2019, the Company had
cash and cash equivalents of $2,432, total current assets of $3,976, total current liabilities of $7,761, and a working capital
deficiency of $3,785, compared to a working capital deficiency of $10,899 as of December 31, 2018.
The Company is exploring valuable strategic
partnerships, right-sizing its corporate structure, and stream-lining spa operations. The Company expects that these actions will
be executed in alignment with the anticipated timing of its long-term liquidity needs. There can be no assurance, however, that
any such opportunities will materialize.
The Company has also reduced operating
expenses with net cash used in operating activities decreasing from $6,129 for the nine months ended September 30, 2018 to $782
for the nine months ended September 30, 2019. While the Company continues to focus on its overall profitability; the Company expects
to incur net losses in the foreseeable future.
The report of the
Company’s independent registered public accounting firm on its financial statements for the year ended December 31,
2018 included an explanatory paragraph indicating that there is substantial doubt about the Company’s ability to
continue as a going concern. In addition to the transactions that have already occurred, the Company believes it is probable
that it will generate additional liquidity through other actions it expects to undertake in the near future. The
Company’s management believes it will successfully mitigate the substantial doubt raised by its historical operating
results and will satisfy its liquidity needs for at least twelve months from the issuance of these financial statements.
However, the Company cannot reasonably predict with any certainty that the results of its actions will generate the liquidity
required to satisfy its liquidity needs.
If the Company continues to experience
operating losses, and the Company is not able to generate additional liquidity through the actions described above or through some
combination of other actions, while not expected, the Company may not be able to access additional funds and the Company might
need to secure additional sources of funds, which may or may not be available. Additionally, a failure to generate additional
liquidity could negatively impact its access to inventory or services that are important to the continued operation of the business.
Note 2. Accounting and Reporting Policies
(a) Right of use asset and lease
liability
The right of use asset on our
consolidated condensed 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.
The addition of these items on the balance
sheet is in accordance with new lease accounting standard Topic 842-Leases issued by the FASB. 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.
(b) Revenue recognition
The Company recognizes revenue from the
sale of XpresSpa products at the time the goods are purchased at our stores or online (usually by credit card) and services when
they are rendered at our stores, 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 condensed balance sheets until
remitted to the respective state agencies.
Other revenue relates to one-time intellectual
property licenses as well as the sale of certain of the Company’s intellectual property. Revenue from patent licensing is
recognized when the Company transfers promised intellectual property rights to customers in an amount that reflects the consideration
to which the Company expects to be entitled in exchange for those intellectual property rights.
(c) 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 twelve months or less. See Note 8. “Leases” for further discussion. The Company recorded right
of use assets and lease liabilities for its operating leases of $9,565 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.
(d) 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.
(e) Presentation
Certain items in the 2018 financial statements
have been reclassified to conform to the presentation in the 2019 financial statements. Such reclassifications did not have a material
impact on the presentation of the overall financial statements.
Note 3. Potentially Dilutive Securities
Loss per share attributable to common shareholders
data for each period presented excludes from the calculation of diluted net loss the following potentially dilutive securities
(reflecting the impact of the 1:20 reverse stock split that became effective on February 22, 2019) as they had an anti-dilutive
impact:
|
|
As of September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Both vested and unvested options to purchase an equal number of shares of Common Stock of the Company
|
|
|
178,229
|
|
|
|
114,250
|
|
Unvested RSUs to issue an equal number of shares of Common Stock of the Company
|
|
|
37,500
|
|
|
|
22,750
|
|
Warrants to purchase an equal number of shares of Common Stock of the Company
|
|
|
1,462,224
|
|
|
|
703,670
|
|
Preferred stock on an as converted basis
|
|
|
862,035
|
|
|
|
163,216
|
|
Convertible notes on an as converted basis
|
|
|
—
|
|
|
|
217,500
|
|
Total number of potentially dilutive securities excluded from the calculation of loss per share attributable to common shareholders
|
|
|
2,539,988
|
|
|
|
1,221,386
|
|
The 5% Secured Convertible Notes were converted
into Common Stock in June 2019. See Note 9. “Long-term Notes and Convertible Notes.”
On October 2, 2019, the Company obtained
shareholder approval of the reduction in the conversion price of the Company’s Series D Preferred Stock to Common Stock.
Effective October 2, 2019, the Series D Preferred Stock converted into 10,964,460 shares of Common Stock and 1,408,050 warrants
to purchase Common Stock. As of November 12, 2019, 570,035 of the warrants have been exercised and converted into Common Stock.
Note 4. Cash, Cash Equivalents, and
Restricted Cash
Cash, cash equivalents, and restricted
cash in the consolidated condensed balance sheets are comprised of the following as of September 30, 2019 and December 31, 2018:
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
Cash denominated in United States dollars
|
|
$
|
480
|
|
|
$
|
2,000
|
|
Cash denominated in currency other than United States dollars
|
|
|
1,605
|
|
|
|
1,143
|
|
Restricted cash
|
|
|
451
|
|
|
|
487
|
|
Credit and debit card receivables
|
|
|
347
|
|
|
|
260
|
|
Total cash, cash equivalents, and restricted cash
|
|
$
|
2,883
|
|
|
$
|
3,890
|
|
Cash denominated in Unites States dollars
decreased from December 31, 2018 primarily due to increased capital expenditures to renovate spas and to open new spas, distributions
to the Company’s noncontrolling interest investees and payments made on the Senior Secured Notes.
Restricted cash represents balances at
financial institutions to secure bonds and letters of credit as required by the Company’s various lease agreements.
Note 5. Other Current Assets
As of September 30, 2019, and December
31, 2018, the Company’s other current assets were comprised of the following:
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
Cash in escrow
|
|
$
|
254
|
|
|
$
|
—
|
|
Prepaid expenses
|
|
|
222
|
|
|
|
1,204
|
|
Other
|
|
|
214
|
|
|
|
370
|
|
Total other current assets
|
|
$
|
690
|
|
|
$
|
1,574
|
|
Cash in escrow is the amount the Company
was required to put into escrow to fund the renovation of one of its spa locations. Prepaid expenses are predominantly comprised
of prepaid insurance policies which have terms of one year or less. The balance decreased from December 31, 2018 due to the timing
of payments and amortization of the year end prepaid insurance balance.
Note 6. Other Assets
Other assets in the consolidated condensed
balance sheets are comprised of the following as of September 30, 2019 and December 31, 2018:
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
Cost method investments
|
|
$
|
1,294
|
|
|
$
|
2,482
|
|
Lease deposits
|
|
|
894
|
|
|
|
894
|
|
Other
|
|
|
306
|
|
|
|
—
|
|
Total other assets
|
|
$
|
2,494
|
|
|
$
|
3,376
|
|
The Company recorded an impairment loss
on its FLI Charge cost method investment of approximately $47 which is included in “Impairment of assets” on the Company’s
consolidated condensed statements of operations and comprehensive loss for the three and nine months ended September 30, 2019.
As of September 30, 2019, the Company’s cost method investments consist primarily of a $787 investment in InfoMedia Services
Limited which the Company acquired in 2014 and the remaining investment in Route1 of $484, which it received as part of the disposition
of Group Mobile in March 2018.
In the second quarter of 2019, the Company
impaired its investment in Route1, due to an under performance of operating results. The Company recorded an impairment charge
of $1,141 in the second quarter of 2019, which is included in “Other non-operating income (expense), net” on the consolidated
condensed statement of operations and comprehensive loss for the nine months ended September 30, 2019.
The Company has not identified any other
events or changes in circumstances that could have a significant adverse effect on the carrying value of its remaining cost method
investments.
Note 7. Intangible Assets and Goodwill
The following table provides information
regarding the Company’s intangible assets subject to amortization, which consist of the following:
|
|
September 30, 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
|
|
|
$
|
(6,149
|
)
|
|
$
|
7,160
|
|
|
$
|
13,309
|
|
|
$
|
(4,485
|
)
|
|
$
|
8,824
|
|
Customer relationships
|
|
|
312
|
|
|
|
(312
|
)
|
|
|
—
|
|
|
|
312
|
|
|
|
(312
|
)
|
|
|
—
|
|
Software
|
|
|
312
|
|
|
|
(114
|
)
|
|
|
198
|
|
|
|
312
|
|
|
|
(69
|
)
|
|
|
243
|
|
Patents
|
|
|
26,897
|
|
|
|
(26,897
|
)
|
|
|
—
|
|
|
|
26,897
|
|
|
|
(26,797
|
)
|
|
|
100
|
|
Total intangible assets
|
|
$
|
40,830
|
|
|
$
|
(33,472
|
)
|
|
$
|
7,358
|
|
|
$
|
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’s intangible assets are
amortized over their expected useful lives. During the three and nine months ended September 30, 2019 and 2018, the Company recorded
amortization expense of $583 and $510, respectively, and $1,727 and $1,901, respectively.
During the three months ended
September 30, 2019, 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 of assets” for the three and nine months
ended September 30, 2019 on the Company’s consolidated condensed statement of operations and comprehensive
loss.
Based on the intangible assets balance
as of September 30, 2019, the estimated amortization expense for the remainder of the calendar year and each of the succeeding
calendar years is as follows:
Calendar Years ending December 31,
|
|
Amount
|
|
Remainder of 2019
|
|
$
|
463
|
|
2020
|
|
|
2,275
|
|
2021
|
|
|
2,275
|
|
2022
|
|
|
2,275
|
|
2023
|
|
|
70
|
|
Total
|
|
$
|
7,358
|
|
There were no impairment indicators related
to any of the Company’s amortizable intangible assets during the nine months ended September 30, 2019.
Goodwill Impairment
During the first quarter of fiscal year
2018, the Company’s stock price declined from an opening price of $1.36 on January 2, 2018 to $0.72 on March 29, 2018. Subsequently,
on April 19, 2018, the Company entered into a separation agreement with its Chief Executive Officer regarding his resignation as
Chief Executive Officer and Director. These events were identified by the Company’s management as triggering events
requiring that goodwill be tested for impairment as of March 31, 2018. As the stock price had not rebounded, the Company
determined that there was an impairment of the goodwill. The Company performed a quantitative goodwill impairment test, in which
the Company compared the carrying value of the reporting unit to its estimated fair value, which was calculated using an income
approach. The key assumptions for this approach were projected future cash flows and a discount rate, which was based on a weighted
average cost of capital adjusted for the relevant risk associated with the characteristics of the business and the projected future
cash flows. As a result of the quantitative goodwill impairment test performed as of March 31, 2018, the Company determined that
the fair value of the reporting unit was less than its’ carrying amount and, therefore, goodwill of the reporting unit was
considered impaired. 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. The impairment to goodwill was a result of the structural changes to the Company, including
completion of the transition from a holding company to a pure-play health and wellness company, the change in Chief Executive Officer
and the reduction in the Company’s stock price.
Note 8. Leases
The
Company leases its retail space at various domestic and international airports. Additionally, the Company leases its
corporate office in New York. Certain leases entered into by the Company fall under ASU No. 2016-02, Leases (“Topic
842”) discussed in Note 2 (b) “Recently adopted accounting pronouncements”. The Company determines
if an arrangement is a lease at inception and if it qualifies under Topic 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 existing lease agreements and to assess
if any agreements should be accounted for pursuant to the guidance in Topic 842. The option to extend the term of one existing
lease contract was exercised during the current period. The Company recalculated the right of use asset and lease liability based
on the modified lease term and adjusted both balances. There were no other lease modifications during the period. The Company entered
into two new lease arrangements that are included in the balances of its right of use asset and lease liability as of September
30, 2019.
The following is a summary of the activity
in the Company’s operating lease liabilities for the nine months ended September 30, 2019:
Operating lease liabilities, January 1, 2019
|
|
$
|
10,809
|
|
New leases entered
|
|
|
1,531
|
|
Termination of existing qualifying leases
|
|
|
(421
|
)
|
Amortization of lease obligation
|
|
|
(2,101
|
)
|
Operating lease liabilities, September 30, 2019
|
|
$
|
9,818
|
|
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 of assets”
in the consolidated condensed 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 balance in the right of use assets and the lease
liabilities by approximately $421 in June 2019 to write off the balances related to the leases for this location.
The Company expensed approximately $210
of costs capitalized in anticipation of opening new spas that the Company later determined would not be realized. This charge is
included in the “Impairment of assets” line in the consolidated condensed statement of operations and comprehensive
loss for the nine months ended September 30, 2019.
As of September 30, 2019, operating leases
contain the following future minimum commitments:
Calendar Years ending December 31,
|
|
Amount
|
|
Remainder of 2019
|
|
$
|
922
|
|
2020
|
|
|
3,441
|
|
2021
|
|
|
2,897
|
|
2022
|
|
|
2,196
|
|
2023
|
|
|
1,282
|
|
Thereafter
|
|
|
1,495
|
|
Total future lease payments
|
|
|
12,233
|
|
Less: interest expense at incremental borrowing rate
|
|
|
(2,415
|
)
|
Net present value of lease liabilities
|
|
$
|
9,818
|
|
Other assumptions and pertinent information
related to the Company’s accounting for operating leases are:
Weighted average remaining lease term:
|
|
|
5.1 years
|
|
Weighted average discount rate used to determine present value of operating lease liability:
|
|
|
11.01
|
%
|
Cash paid for lease obligations during the nine months ended September 30, 2019:
|
|
$
|
2,827
|
|
Variable lease payments calculated monthly
as a percentage of a product and services revenue, was $794 and $2,291 for the three and nine months ended September 30, 2019.
Note 9. Long-term Notes and Convertible
Notes
Total Debt as of September 30, 2019 and
December 31, 2018 is comprised of the following:
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
B3D Note, net of $2,847 in unamortized debt issuance costs and fair value adjustments as of September 30, 2019
|
|
$
|
4,153
|
|
|
$
|
6,500
|
|
5% Secured Convertible Notes, net
|
|
|
—
|
|
|
|
1,986
|
|
Calm Note, net of $1,454 in unamortized debt issuance costs and fair value adjustments
|
|
|
1,046
|
|
|
|
—
|
|
Total debt
|
|
$
|
5,199
|
|
|
$
|
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 as discussed in Note 1 “General” under Recent
Developments. 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. A fair value of $2,774 was assigned to the conversion option, which is included in “Derivative Liabilities”
on the consolidated condensed balance sheet and the B3D Note was assigned a fair value of $4,226 as of July 8, 2019. The conversion
option was marked to market as of September 30, 2019 and as a result, the Company recorded a revaluation gain of approximately
$479 that is included in “Other income (expense), net” for the three and nine months ended September 30, 2019.
During the three and nine months ended September 30, 2019 the Company recorded $362 of 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 condensed
financial statements as of September 30, 2019, 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 condensed balance sheet as of September 30, 2019.
The Company agreed upon 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 $435 as of September 30, 2019 and is presented as a
reduction of the B3D Note balance in the Company’s consolidated condensed balance sheet. Amortization expense from July
8, 2019 through September 30, 2019 was $65 and is included in “Interest expense” in the consolidated condensed
statements of operations and comprehensive loss. Amortization of debt issuance costs for the three and nine months ended
September 30, 2018 was $394 and $589, respectively, also included in “Interest expense”.
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 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
condensed financial statements for the nine months ended September 30, 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 $1,547 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 condensed 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 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 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 in the second quarter of 2019 and
is included in our current period year to date results.
The June 2019 Class A Warrants were converted
into 354,502 shares of Common Stock in July 2019.
Calm Note
The Calm Note is an unsecured
subordinated obligation of the Company. 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 $3.10 per share. 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.
The Company engaged an independent third
party 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 as of July 8, 2019. The conversion option and the Calm Warrants were marked to market as of September 30,
2019 and, as a result, the Company recorded a revaluation gain of approximately $185 that is included in “Other income
(expense), net” in the consolidated condensed statements of operations and comprehensive loss for the three and nine
months ended September 30, 2019.
The Company capitalized approximately $220
of costs related to the issuance of the Calm Note and recorded amortization expense of approximately $19 from the date the debt
was issued on July 8, 2019 through September 30, 2019. The net balance of the deferred issuance costs is $201 as of September 30,
2019 and is presented as a reduction of the Calm Note balance in the Company’s consolidated condensed balance sheet. Amortization
expense is included in “Interest expense” in the Company’s consolidated condensed statements of operations
and comprehensive loss for the three- and nine-month periods ended September 30,2019. During the three and nine months ended September
30, 2019, the Company recorded $116 of accretion expense that increased the carrying value of the Calm Note.
Note 10. Stockholders’ Equity
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.
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 an independent third party 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 ten percent). Therefore, the Company did not record an adjustment
to the Series D Preferred 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.
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 ten percent). 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 an independent third party 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 $1,254, which was recorded as a charge to “Other income (expense), net” in the Company’s
consolidated condensed financial statements for the three and nine months ended September 30, 2019.
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. 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.
No fractional shares were issued in connection with the reverse stock split.
Note 11. Derivative Liabilities and
Fair Value Measurements
Fair value measurements are determined
based on assumptions that a market participant would use in pricing an asset or a 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 Company’s financial instruments
as of September 30, 2019 and December 31, 2018 consisted of cash and cash equivalents, trade receivables, retail inventory, accounts
payable, accrued expenses and other current liabilities. The carrying amounts of all the aforementioned financial instruments approximate
fair value because of the short-term nature of these instruments.
Derivative Liabilities
In connection with the Calm Private Placement,
the Company granted warrants to purchase 937,500 shares of the Company’s Common Stock, at an exercise price of $2.00 per
share.
The Calm Warrants issued
in connection with the Calm Private Placement 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 can be exercised
for shares of Common Stock at an exercise price of $2.00 per share.
At September 30, 2019, the
Company had outstanding its May 2018 Class A Warrants and the Calm Warrants which are classified as liabilities and are
included in “Derivative liabilities” on the consolidated condensed balance sheet. Both the May 2018 Class
A Warrants and the Calm Warrants were fair valued as of September 30, 2019 and market to market as of that date (see Note
9. Long-term Notes and Convertible Notes for further discussion).
The May 2018 Class B Warrants were cancelled
in July 2019. Holders of these warrants were granted Class A Warrants and shares of the Company’s Series F Preferred Stock
(see Note 10. “Stockholders’ Equity” for further discussion regarding the Series F Preferred Stock).
The fair value of the conversion options
related to the issuance of the B3D Note of $2,295 and the Calm Note of $324 are included in “Derivative liabilities”
on the consolidated condensed balance sheet as of September 30, 2019.
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 September
30, 2019 and December 31, 2018:
|
|
|
|
|
Quoted prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
active markets
|
|
|
Significant other
|
|
|
Significant
|
|
|
|
|
|
|
for identical
|
|
|
observable
|
|
|
unobservable
|
|
|
|
Balance
|
|
|
assets (Level 1)
|
|
|
inputs (Level 2)
|
|
|
inputs (Level 3)
|
|
September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 2018 Class A Warrants
|
|
$
|
2,609
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,609
|
|
B3D conversion option
|
|
|
2,295
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,295
|
|
Calm Warrants
|
|
|
860
|
|
|
|
—
|
|
|
|
—
|
|
|
|
860
|
|
Calm conversion option
|
|
|
324
|
|
|
|
—
|
|
|
|
—
|
|
|
|
324
|
|
Total
|
|
$
|
6,088
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 2018 Class A Warrants
|
|
$
|
476
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
476
|
|
May 2018 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 liabilities are recorded shown as “Derivative
liabilities” in the consolidated condensed balance sheets and the revaluation of the derivative liabilities is included
in “Other non-operating income (expense), net” in the consolidated condensed statements of operations and comprehensive
loss.
The
following table summarizes the changes in the Company’s derivative warrant liabilities measured at fair value using significant
unobservable inputs (Level 3) during the nine months ended September 30, 2019:
December 31, 2018
|
|
$
|
476
|
|
Fair value ascribed to embedded derivative conversion options and warrants
|
|
|
4,143
|
|
Issuance of June 2019 Class A Warrants
|
|
|
689
|
|
Conversion of June 2019 Class A Warrants into Common Stock
|
|
|
(689
|
)
|
Revaluation of derivative conversion options and warrants at September 30, 2019
|
|
|
1,469
|
|
September 30, 2019
|
|
$
|
6,088
|
|
Valuation Processes for Level 3
Fair Value Measurements
Fair value measurement of the derivative
warrant liabilities falls within Level 3 of the fair value hierarchy. The fair value measurements are evaluated by management to
ensure that changes are consistent with expectations of management based upon the sensitivity and nature of the inputs.
September 30, 2019:
Description
|
|
Valuation technique
|
|
Unobservable inputs
|
|
Range
|
|
Calm Warrants
|
|
Monte Carlo Model
|
|
Volatility
|
|
|
67.1
|
%
|
|
|
|
|
Risk-free interest rate
|
|
|
1.60
|
%
|
|
|
|
|
Expected term, in years
|
|
|
4.77
|
|
|
|
|
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
Calm conversion option
|
|
Monte Carlo Model
|
|
Volatility
|
|
|
67.2
|
%
|
|
|
|
|
Risk-free interest rate
|
|
|
1.63
|
%
|
|
|
|
|
Expected term, in years
|
|
|
2.67
|
|
|
|
|
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
B3D conversion option
|
|
Monte Carlo Model
|
|
Volatility
|
|
|
67.6
|
%
|
|
|
|
|
Risk-free interest rate
|
|
|
1.73
|
%
|
|
|
|
|
Expected term, in years
|
|
|
1.67
|
|
|
|
|
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
May 2018 Class A Warrants
|
|
Monte Carlo Model
|
|
Volatility
|
|
|
42.5
|
%
|
|
|
|
|
Risk-free interest rate
|
|
|
1.60
|
%
|
|
|
|
|
Expected term, in years
|
|
|
3.63
|
|
|
|
|
|
Dividend yield
|
|
|
0.00
|
%
|
December 31, 2018:
Description
|
|
Valuation technique
|
|
Unobservable inputs
|
|
Range
|
|
Class A Warrants
|
|
Monte Carlo Model
|
|
Volatility
|
|
|
70.61
|
%
|
|
|
|
|
Risk-free interest rate
|
|
|
2.53
|
%
|
|
|
|
|
Expected term, in years
|
|
|
4.38
|
|
|
|
|
|
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 liabilities were the current market price of the Company’s Common Stock, the exercise price
of the derivative of the conversion options and the warrants, their remaining expected term, the volatility of the Company’s
Common Stock price and the risk-free interest rate over the expected term. Significant changes in any of those inputs in isolation
can result in a significant change in the fair value measurement.
Generally, an increase in the market price
of the Company’s shares of Common Stock, an increase in the volatility of the Company’s shares of Common Stock, and
an increase in the remaining term of the derivative liabilities would each result in a directionally similar change in their estimated
fair values Such changes would increase the associated liabilities while decreases in these assumptions would decrease the associated
liabilities. An increase in the risk-free interest rate or a decrease in the differential between the derivative 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 declared, 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 liabilities due to
the dividend assumption.
Note 12. Stock-based Compensation
The Company has a
stock-based compensation plan available to grant stock options and RSUs to the Company’s directors, employees and
consultants. Under the 2012 Employee, Director and Consultant Equity Incentive Plan (the “Plan”) a maximum of
355,000 shares of Common Stock may be awarded. 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 RSUs to its
newly elected Chief Executive Officer at an exercise price of $4.20 per share.
Total stock-based compensation expense
for the three and nine months ended September 30, 2019 was $35 and $266, respectively, and for the three and nine months ended
September 30, 2018, stock-based compensation expense was $194 and $570, respectively.
Note 13. Related Party Transactions
On April 14, 2018, the Company entered
into a consulting agreement with an employee of Mistral Equity Partners, which is a significant shareholder of the Company and
whose Chief Executive Officer is a member of the Board of Directors of the Company, to consult on certain business-related matters.
The total consideration was $10 per month through April 30, 2019, when it was terminated. The Company recorded consulting expense
of $40 up through the termination date of the agreement.
Note 14. Discontinued Operations
FLI Charge
On October 20, 2017 (the “Closing
Date”), the Company sold FLI Charge, a wholly owned subsidiary included in its discontinued technology operating segment,
to a group of private investors and FLI Charge management. As part of the sale, the Company received a perpetual royalty agreement
(the “Royalty Agreement”). The Company also received a warrant exercisable in shares of FLI Charge or an affiliate
of FLI Charge upon an initial public offering or certain defined events in connection with a change of control. The warrant has
a five-year life and is based on a valuation of the lesser of $30,000 or the financing valuation of FLI Charge preceding the initial
public offering or certain defined events.
In June 2019, the Company received a buyout from the Royalty Agreement and warrants in the amount of $1,100.
This is reflected in “Other” revenue on the consolidated condensed statement of operations and comprehensive
loss.
Group Mobile
On March 7, 2018, 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, a wholly-owned subsidiary included in the Company’s discontinued technology operating segment, (the
“Disposition”). The transaction closed on March 22, 2018 (the “Closing Date”), after which the Company
no longer had any involvement with Group Mobile.
In consideration for the Disposition, the
Buyer issued to the Company:
|
·
|
25,000,000 shares of common stock of Route1 (“Route1 Common Stock”);
|
|
·
|
warrants to purchase 30,000,000 shares of Route1 Common Stock, which had an exercise price of CAD 5 cents per share of Route 1 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.
|
Post-closing, the Company owned approximately
6.7% of Route1 common stock. The Route1 common stock is not tradable until a date no earlier than 12 months after the Closing
Date; 50%, or 12,500,000 shares of Route1 common stock are tradeable after 12 months plus an additional 2,083,333 shares of Route1
common stock are tradeable each month until 18 months after the Closing Date, subject to a change of control provision. The Company
has the ability to sell the Route1 common stock and warrants to qualified institutional investors. The Group Mobile Purchase Agreement
also contains representations, warranties, and covenants customary for transactions of this type.
The total consideration of the Disposition
was 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
was less than the carrying value of the asset. This resulted in a loss on disposal which is included in consolidated net loss from
discontinued operations in the consolidated condensed statement of operations and comprehensive loss that was recorded in the nine-month
period ended September 30, 2018 of $1,115.
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 calculated 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.
|
Due to the underperformance of operating
results by Group Mobile in the first period for which results were required to be reported to the Company, we determined that
the asset was impaired as of June 30, 2019 and recorded an impairment charge of $1,141, which is included in “Other non-operating
income (expense), net” on the consolidated condensed statement of operations and comprehensive loss for the nine months
ended September 30, 2019 (See Note 6. “Other Assets”).
Operating Results of Discontinued
Operations
The following table presents the components
of the consolidated net loss from discontinued operations, as presented in the consolidated condensed statements of operations
and comprehensive loss for the nine-month period ended September 30, 2018:
|
|
Nine months
ended
September 30,
2018
|
|
Revenue
|
|
$
|
2,834
|
|
Cost of sales
|
|
|
(2,305
|
)
|
Depreciation and amortization
|
|
|
(131
|
)
|
General and administrative
|
|
|
(1,190
|
)
|
Loss on disposal
|
|
|
(301
|
)
|
Non-operating income (expense), net
|
|
|
(22
|
)
|
Loss from discontinued operations
|
|
$
|
(1,115
|
)
|
Note 15. Income Taxes
The Company’s provision for income
taxes consists of federal, state, local, and foreign taxes in amounts necessary to align the Company’s year-to-date provision
for income taxes with the effective tax rate that the Company expects to achieve for the full year. Each quarter, the Company updates
its estimate of the annual effective tax rate and records cumulative adjustments as deemed necessary. The income tax provisions
for the nine-month period ended September 30, 2019 reflect an estimated global annual effective tax benefit at the rate of approximately
1%.
As of September 30, 2019, deferred tax
assets generated from the Company’s activities in the United States were offset by a valuation allowance because realization
depends on generating future taxable income, which, in the Company’s estimation, is not more likely than not to be generated
before such net operating loss carryforwards expire. The Company expects its effective tax rate for its current fiscal year to
be significantly lower than the statutory rate as a result of a full valuation allowance; therefore, any loss before income taxes
does not generate a corresponding income tax benefit.
The Company recorded an income
tax benefit during the three and nine months ended September 30, 2019, which is comprised primarily of the release of a
liability for an uncertain tax position for which the statute of limitations expired in the third quarter of 2019 of $132,
partially offset by earnings generated by foreign subsidiaries. The final annual tax rate cannot be determined until the end
of the fiscal year therefore, the actual tax rate could differ from current estimates. The Company has an immaterial amount
of remaining liabilities for uncertain tax positions and does not expect to record any additional material provisions for
unrecognized tax benefits in the next year.
Note 16. 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 reserved $290 as of September 30, 2019
and December 31, 2018, which is included in “Accounts payable, accrued expenses and other current liabilities”
in the consolidated condensed 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 in 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.
The Company has
been involved in settlement negotiations seeking to resolve all pending matters, 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. The Court set a deadline of September 19, 2019 for the parties to
submit a revised proposal. The time to submit a revised settlement agreement for the Chen case has been further extended to
November 7, 2019.
Binn v. FORM Holdings Corp. et al.
On November 6, 2017, Moreton Binn and Marisol
F, LLC, former stockholders of XpresSpa, filed a lawsuit against 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.
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, plaintiffs 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. Plaintiff has 30 days to file a notice of appeal.
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 plaintiffs’ opposition brief is due December 6, 2019.
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.
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.
The Company has denied the material allegations
of the complaint and is currently defending the action. At this stage, we are unable to predict the outcome of this litigation.
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.
Note 17. Subsequent Events
Upon the approval by the Company’s
shareholders on October 2, 2019, on October 3, 2019 all issued and outstanding shares of the Company’s Series D Preferred
Stock were converted into shares of the Company’s Common Stock pursuant to Section 6.3.4 of the Certificate of Designation
of Preferences, Rights and Limitations of the Series D Preferred Stock, as amended on July 8, 2019, 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 the Company’s Common Stock equal to the number of shares of Common Stock
into which the holder’s Series D Preferred Stock would otherwise have converted.
On October 28, 2019, the Company entered
into a Consent Agreement (the “Consent Agreement”) between Holdings and B3D. The Consent Agreement was entered into
in order to postpone the interest payment on its B3D Note of $107, which was due on various dates through December 3, 2019 so
that the Company can make the payment in registered, unrestricted shares of its Common stock.
On October 1, 2019, the Company entered
into Amendment No. 3 to the Agreement and Plan of Merger (the “Merger Agreement”), by and among the Company (formerly
known as FORM Holdings Corp.), Holdings and Mistral XH Representative, LLC, as representative of the unitholders of Holdings, dated
as of August 8, 2016, as subsequently amended. The amendment to the Merger Agreement provided, among other things, for the release
from escrow of (i) certain shares of the Company’s Series D Preferred Stock to the unitholders of Holdings and (ii) certain
shares of Series D Preferred Stock to the Company in satisfaction of certain indemnification claims in connection with the Merger
Agreement.