UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2017March 31, 2018

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___ to ___

Commission file number: 001-34785

 

FORM Holdings Corp.XpresSpa Group, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware 20-4988129

(State or other jurisdiction of

incorporation or organization)

 (I.R.S. Employer
incorporation or organization)
Identification No.)
   
780 Third Avenue, 12th Floor, New York, NY 10017
(Address of principal executive offices) (Zip Code)

 

(Registrant’s Telephone Number, Including Area Code):(212) 309-7549

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Name of each exchange on which registered
Common Stock, par value $0.01 per share The NASDAQNasdaq Stock Market LLC

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x     No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site,Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  x     No  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer¨Accelerated filer¨
Non-accelerated filer¨ (DoSmaller reporting companyx
(Do not check if a smaller reporting company)Smaller reportingEmerging growth companyx¨

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨     No  x

 

As of August 7, 2017, 26,483,467May 15, 2018, 26,634,475 shares of the registrant’s common stock were outstanding.

 

 

 

 

  

FORM Holdings Corp.XpresSpa Group, Inc. and Subsidiaries

 

Table of Contents

 

  Page
 Page
PART I. FINANCIAL INFORMATION3
   
Item 1.Condensed Consolidated Financial Statements3
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations1920
Item 3.Quantitative and Qualitative Disclosures About Market Risk2624
Item 4.Controls and Procedures2624
   
PART II. OTHER INFORMATION2625
   
Item 1.Legal Proceedings2625
Item 1A.Risk Factors2625
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds2825
Item 3.Defaults Upon Senior Securities2825
Item 4.Mine Safety Disclosures2825
Item 5.Other Information2825
Item 6.Exhibits2928

2


Part I- FINANCIAL INFORMATION

Item 1.Condensed Consolidated Financial Statements

 

Item 1. Condensed Consolidated Financial Statements

FORM Holdings Corp.XpresSpa Group, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

 

  

March 31,

2018
(Unaudited)

  December 31,
2017		 
Current assets        
Cash and cash equivalents $3,554  $6,368 
Inventory  1,050   1,159 
Other current assets  1,000   2,120 
Assets held for disposal  717   6,446 
Total current assets  6,321   16,093 
         
Restricted cash  487   487 
Property and equipment, net  15,928   15,797 
Intangible assets, net  11,007   11,547 
Goodwill  —   19,630 
Other assets  3,765   1,686 
Total assets $37,508  $65,240 
         
Current liabilities        
Accounts payable, accrued expenses and other current liabilities $8,560  $8,736 
Liabilities held for disposal  —   3,761 
Total current liabilities  8,560   12,497 
         
Debt  6,500   6,500 
Other liabilities  433   404 
Total liabilities  15,493   19,401 
Commitments and contingencies (see Note 12)        
         
Stockholders’ equity        
Series A Convertible Preferred stock, $0.01 par value per share; 500,000 shares authorized; 6,968 issued and none outstanding  —   — 
Series B Convertible Preferred stock, $0.01 par value per share; 5,000,000 shares authorized; 1,666,667 issued and none outstanding  —   — 
Series C Junior Preferred stock, $0.01 par value per share; 300,000 shares authorized; none issued and outstanding  —   — 
Series D Convertible Preferred Stock, $0.01 par value per share; 500,000 shares authorized; 475,208 shares issued and 420,541 shares outstanding with a liquidation value of $20,186 as of March 31, 2018 and December 31, 2017  4   4 
Common stock, $0.01 par value per share; 150,000,000 shares authorized; 26,634,475 and 26,545,690 issued and outstanding as of March 31, 2018 and December 31, 2017, respectively  266   265 
Additional paid-in capital  290,707   290,396 
Accumulated deficit  (273,641)  (249,708)
Accumulated other comprehensive loss  (140)  (74)
Total stockholders’ equity attributable to the Company  

17,196

   40,883 
Noncontrolling interests  4,819   4,956 
Total stockholders’ equity  

22,015

   45,839 
Total liabilities and stockholders’ equity $37,508  $65,240 

The accompanying notes form an integral part of these condensed consolidated financial statements.


XpresSpa Group, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(In thousands, except share and per share data)

  June 30,
2017
(Unaudited)		  December 31,
2016		 
Current assets        
Cash and cash equivalents $7,958  $17,910 
Accounts receivable, net  2,216   404 
Inventory  4,327   2,890 
Other current assets  935   2,150 
Assets held for disposal  467   1,507 
Total current assets  15,903   24,861 
         
Restricted cash  476   638 
Property and equipment, net  14,377   16,284 
Intangible assets, net  14,475   15,233 
Goodwill  25,821   24,409 
Other assets  1,330   1,382 
Total assets $72,382  $82,807 
         
Current liabilities        
Accounts payable, accrued expenses and other current liabilities $11,437  $11,434 
Deferred revenue  201   133 
Liabilities held for disposal  97   206 
Total current liabilities  11,735   11,773 
         
Long-term liabilities        
Debt  6,500   6,500 
Derivative warrant liabilities  100   259 
Other liabilities  794   106 
Total liabilities  19,129   18,638 
Commitments and contingencies (see Note 11)        
         
Equity        
Series A Convertible Preferred stock, $0.01 par value per share; 500,000 shares authorized; 6,968 issued and none outstanding  —   — 
Series B Convertible Preferred stock, $0.01 par value per share; 5,000,000 shares authorized; 1,666,667 issued and none outstanding  —   — 
Series C Junior Preferred stock, $0.01 par value per share; 300,000 shares authorized; none issued and outstanding  —   — 

Series D Convertible Preferred Stock, $0.01 par value per share; 500,000 shares authorized; 475,208 issued and 429,948 outstanding with a liquidation value of $20,638 as of June 30, 2017; 491,427 issued and outstanding with a liquidation value of $23,588 as of December 31, 2016

  4   5 
Common stock, $0.01 par value per share; 150,000,000 shares authorized; 19,565,531 and 18,304,881 issued and outstanding as of June 30, 2017 and December 31, 2016, respectively  196   183 
Additional paid-in capital  282,603   280,221 
Accumulated deficit  (234,303)  (220,868)
Accumulated other comprehensive loss  (164)  (13)
Total equity attributable to the Company  48,336   59,528 
Noncontrolling interests  4,917   4,641 
Total equity  53,253   64,169 
Total liabilities and equity $72,382  $82,807 
  Three months ended
March 31,		 
  2018  2017 
Revenue        
Products and services $11,800  $10,984 
Other  800   100 
Total revenue  12,600   11,084 
         
Cost of sales        
Labor  6,210   5,309 
Occupancy  2,060   1,771 
Products and other operating costs  1,507   1,854 
Total cost of sales  9,777   8,934 
Depreciation and amortization  1,653   1,726 
Goodwill impairment  19,630   — 
General and administrative*  4,596   4,993 
Total operating expenses  35,656   15,653 
Operating loss from continuing operations  (23,056)  (4,569)
Interest expense  (183)  (189)
Other non-operating income (expense), net  (90)  114 
Loss from continuing operations before income taxes  (23,329)  (4,644)
Income tax benefit (expense)  84   (227)
Consolidated net loss from continuing operations  (23,245)  (4,871)
Loss from discontinued operations before income taxes*  (605)  (1,478)
Income tax benefit (expense)  —   — 
Consolidated net loss from discontinued operations  (605)  (1,478)
Consolidated net loss  (23,850)  (6,349)
Net income attributable to noncontrolling interests  (83)  (76)
Net loss attributable to the Company $(23,933) $(6,425)
         
Consolidated net loss from continuing operations $(23,245) $(4,871)
Other comprehensive loss from continuing operations  (66)  (44)
Comprehensive loss from continuing operations  (23,311)  (4,915)
Consolidated net loss from discontinued operations  (605)  (1,478)
Other comprehensive loss from discontinued operations  —   — 
Comprehensive loss from continuing operations  (605)  (1,478)
Comprehensive loss $(23,916) $(6,393)
         
Loss per share        
Loss per share from continuing operations $(0.88) $(0.26)
Loss per share from discontinued operations  (0.02)  (0.08)
Total basic and diluted net loss per share $(0.90) $(0.34)
Weighted-average number of shares outstanding during the period        
Basic  26,592,781   18,862,715 
Diluted  26,592,781   18,862,715 
         
*Includes stock-based compensation expense, as follows:        
General and administrative $312  $547 
Discontinued operations  —   194 
Total stock-based compensation expense $312  $741 

The accompanying notes form an integral part of these condensed consolidated financial statements.


XpresSpa Group, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(Unaudited)

(In thousands)

  Preferred
stock		  Common
stock		  Additional
paid-
in capital		  Accumulated
deficit		  Accumulated
other
comprehensive
loss		  Total
Company
equity		  Non-
controlling
interest		  Total
equity		 
December 31, 2017 $4  $265  $290,396  $(249,708) $(74) $40,883  $4,956  $45,839 
Vesting of restricted stock units (“RSUs”)  —   1   (1)  —   —   —   —   — 
Stock-based compensation  —   —   312   —   —   312   —   312 
Net loss for the period  —   —   —   (23,933)  —   (23,933)  83   (23,850)
Foreign currency translation  —   —   —   —   (66)  (66)  —   (66)
Distributions to noncontrolling interests  —   —   —   —   —   —   (220)  (220)
March 31, 2018 $4  $266  $290,707  $(273,641) $(140) $

17,196

  $4,819  $

22,015

 

  Preferred
stock		  Common
stock		  Additional
paid-
in capital		  Accumulated
deficit		  Accumulated
other
comprehensive
loss		  Total
Company
equity		  Non-
controlling
interest		  Total
equity		 
December 31, 2016 $5  $183  $280,221  $(220,868) $(13) $59,528  $4,641  $64,169 
Issuance of common stock for services  —   —   11   —   —   11   —   11 
Shares of common stock issued for the acquisition of Excalibur  —   9   1,800   —   —   1,809   —   1,809 
Stock-based compensation  —   —   741   —   —   741   —   741 
Net loss for the period  —   —   —   (6,425)  —   (6,425)  76   (6,349)
Foreign currency translation  —   —   —   —   (44)  (44)  —   (44)
March 31, 2017 $5  $192  $282,773  $(227,293) $(57) $55,620  $4,717  $60,337 

 

The accompanying notes form an integral part of these condensed consolidated financial statements.

 

3

5 

 

  

FORM Holdings Corp.XpresSpa Group, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

CASH FLOWS

(Unaudited)

(In thousands, except share and per share data)thousands)

  

  Three months ended June 30,  Six months ended June 30, 
  2017  2016  2017  2016 
Revenue                
Wellness $12,927  $—  $23,911  $— 
Technology  3,450   2,450   6,941   3,727 
Intellectual property  —   8,900   100   9,650 
Total revenue  16,377   11,350   30,952   13,377 
                 
Cost of sales                
Wellness  10,401   —   19,236   — 
Technology  2,690   2,180   5,618   3,304 
Intellectual property*  118   4,243   217   4,963 
Total cost of sales  13,209   6,423   25,071   8,267 
Depreciation, amortization and impairment  3,094   12,329   4,955   13,159 
General and administrative*  5,204   2,316   11,539   4,495 
Total operating expenses  21,507   21,068   41,565   25,921 
Operating loss from continuing operations  (5,130)  (9,718)  (10,613)  (12,544)
Non-operating income (expense), net  (50)  181   61   518 
Interest expense  (178)  (272)  (367)  (748)
Extinguishment of debt  —   —   —   (210)
Loss from continuing operations before income taxes  (5,358)  (9,809)  (10,919)  (12,984)
Income tax expense  —   —   (227)  — 
Consolidated net loss from continuing operations  (5,358)  (9,809)  (11,146)  (12,984)
Loss from discontinued operations before income taxes  (1,552)  (998)  (2,113)  (1,778)
Income tax expense  —   —   —   — 
Net loss from discontinued operations  (1,552)  (998)  (2,113)  (1,778)
Consolidated net loss  (6,910)  (10,807)  (13,259)  (14,762)
Net income attributable to noncontrolling interests  (100)  —   (176)  — 
Net loss attributable to the Company $(7,010) $(10,807) $(13,435) $(14,762)
                 
Consolidated net loss from continuing operations $(5,358) $(9,809) $(11,146) $(12,984)
Other comprehensive loss from continuing operations: foreign currency translations  (107)  —   (151)  — 
Comprehensive loss from continuing operations  (5,465)  (9,809)  (11,297)  (12,984)
Consolidated net loss from discontinued operations  (1,552)  (998)  (2,113)  (1,778)
Other comprehensive loss from discontinued operations: foreign currency translations  —   —   —   — 
Comprehensive loss from discontinued operations  (1,552)  (998)  (2,113)  (1,778)
Comprehensive loss $(7,017) $(10,807) $(13,410) $(14,762)
                 
Loss per share:                
Basic and diluted net loss per share                
Loss per share from continuing operations $(0.28) $(0.65) $(0.59) $(0.89)
Loss per share from discontinued operations  (0.08)  (0.07)  (0.11)  (0.12)
Total basic and diluted net loss per share $(0.36) $(0.72) $(0.70) $(1.01)
Weighted-average number of shares outstanding during the period:                
Basic  19,310,994   14,993,686   19,178,769   14,576,183 
Diluted  19,310,994   14,993,686   19,178,769   14,576,183 
                 
*Includes stock-based compensation expense, as follows:                
Intellectual property $—  $64  $—  $132 
General and administrative  732   435   1,473   830 
Total stock-based compensation expense $732  $499  $1,473  $962 
  

Three months ended

March 31,

 
  2018  2017 
Cash flows from operating activities        
Consolidated net loss $(23,850) $(6,349)
Consolidated net loss from discontinued operations  (605)  (1,478)
Consolidated net loss from continuing operations  (23,245)  (4,871)
Adjustments to reconcile consolidated net loss from continuing operations to net cash used in operating activities:        
Items not affecting cash flows        
Depreciation and amortization  1,653   1,726 
Goodwill impairment  19,630   — 
Stock-based compensation  312   741 
Issuance of shares of common stock  —   1,820 
Change in fair value of derivative warrant liabilities  (33)  (26)
Contingent liability assumed from acquisition  —   316 
Gain on the sale of patents  (450)  — 
Changes in current assets and liabilities net of effects of acquisition        
Decrease in inventory  109   219 
Decrease (increase) in other current assets and other assets  (1,559)  421 
Decrease in accounts payable, accrued expenses and other current liabilities  (176)  (2,336)
Increase in other liabilities  62   169 
Net cash used in operating activities – continuing operations  (3,697)  (1,821)
Net cash provided by (used in) operating activities – discontinued operations  1,363   (3,078)
Net cash used in operating activities  (2,334)  (4,899)
Cash flows from investing activities        
Acquisition of property and equipment  (1,178)  (808)
Acquisition of software  (66)  — 
Proceeds from the sale of patents  250   — 
Cash received from note receivable  800   — 
Net cash used in investing activities – continuing operations  (194)  (808)
Net cash used in investing activities – discontinued operations  —   (125)
Net cash used in investing activities  (194)  (933)
Cash flows from financing activities        
Distributions to noncontrolling interests  (220)  — 
Net cash used in financing activities – continuing operations  (220)  — 
Net cash used in financing activities – discontinued operations  —   (361)
Net cash used in financing activities  (220)  (361)
Effect of exchange rate changes and foreign currency translation  (66)  (44)
Decrease in cash and cash equivalents  (2,814)  (6,237)
Cash and cash equivalents at beginning of period  6,368   17,910 
Cash and cash equivalents at end of period $3,554  $11,673 
Cash paid during the period for        
Interest $150  $150 

  

The accompanying notes form an integral part of these condensed consolidated financial statements.

 

4

6 

 

  

FORM Holdings Corp. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

(In thousands)

  Common
stock		  Preferred
stock		  Additional
paid-
in capital		  Accumulated
deficit		  Accumulated
other
comprehensive
loss		  Total
FORM
equity		  Non
controlling
interests		  Total
equity		 
December 31, 2016 $183  $5  $280,221  $(220,868) $(13) $59,528  $4,641  $64,169 
Issuance of common stock for services  —   —   20   —   —   20   —   20 
Shares of common stock issued for the acquisition of Excalibur  9   —   1,800   —   —   1,809   —   1,809 
Decrease in shares of preferred stock issued to XpresSpa sellers  —   —   (908)  —   —   (908)  —   (908)
Conversion of preferred stock to common stock  4   (1)  (3)  —   —   —   —   — 
Stock-based compensation  —   —   1,473   —   —   1,473   —   1,473 
Net loss for the period  —   —   —   (13,435)  —   (13,435)  176   (13,259)
Foreign currency translation  —   —   —   —   (151)  (151)  —   (151)
Contributions from
noncontrolling interests		  —   —   —   —   —   —   100   100 
June 30, 2017 $196  $4  $282,603  $(234,303) $(164) $48,336  $4,917  $53,253 

  Common
stock		  Preferred
stock		  Additional
paid-
in capital		  Accumulated
deficit		  Accumulated
other
comprehensive
loss		  Total
FORM
equity		  Non
controlling
interests		  Total
equity		 
December 31, 2015 $132  $—  $237,246  $(196,862) $—  $40,516  $—  $40,516 
Issuance of common stock forrepayment of convertible debt and related interest  18   —   2,978   —   —   2,996   —   2,996 
Stock-based compensation  —   —   962   —   —   962   —   962 
Net loss for the period  —   —   —   (14,762)  —   (14,762)  —   (14,762)
June 30, 2016 $150  $—  $241,186  $(211,624) $—  $29,712  $—  $29,712 

The accompanying notes form an integral part of these condensed consolidated financial statements.

5

FORM Holdings Corp. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

  Six months ended June 30, 
  2017  2016 
Cash flows from operating activities        
Consolidated net loss $(13,259) $(14,762)
Adjustments to reconcile consolidated net loss to net cash provided by (used in) operating activities:        
Items not affecting cash flows        
Depreciation and amortization  4,955   1,222 
Impairment of intangible assets  —   11,937 
Amortization of debt discount and debt issuance costs  —   660 
Stock-based compensation  1,473   962 
Amendment to warrants as part of debt modification  —   (281)
Extinguishment of debt  —   356 
Issuance of shares of common stock for services  20   — 
Change in fair value of derivative warrant liabilities and conversion feature  (159)  (87)
Exchange rate loss (gain), net  —   (75)
Changes in current assets and liabilities net of effects of acquisition        
Increase in accounts receivable  (1,277)  (139)
Increase in inventory  (1,386)  (32)
Decrease in other current assets and other assets  1,473   443 
Increase (decrease) in accounts payable, accrued expenses and other current liabilities  (557)  375 
Increase (decrease) in deferred revenue  (52)  146 
Decrease in other liabilities  (15)  (246)
Net cash provided by (used in) operating activities – continuing operations  (8,784)  479 
Net cash provided by operating activities - discontinued operations  931   219 
Net cash provided by (used in) operating activities  (7,853)  698 
Cash flows from investing activities        
Cash acquired as part of acquisition  26   — 
Acquisition of property and equipment  (1,565)  (151)
Acquisition of software  (148)  — 
Decrease in deposits  —   2,001 
Net cash provided by (used in) investing activities  (1,687)  1,850 
Cash flows from financing activities        
Repayment of line of credit  (361)  — 
Net contributions from noncontrolling interests  100   — 
Debt issuance costs  —   (50)
Net cash used in financing activities  (261)  (50)
Effect of exchange rate changes on cash and cash equivalents  (151)  — 
Increase (decrease) in cash and cash equivalents  (9,952)  2,498 
Cash and cash equivalents at beginning of period  17,910   24,951 
Cash and cash equivalents at end of period $7,958  $27,449 
Cash paid during the period for        
Interest $430  $40 
         
Noncash investing and financing transactions        
Issuance of common stock to repay debt and interest  —   2,996 

The accompanying notes form an integral part of these condensed consolidated financial statements.

6

FORM Holdings Corp.XpresSpa Group, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands, except for share and per share data)

 

Note 1. General

 

On January 5, 2018, FORM Holdings Corp. changed its name to XpresSpa Group, Inc. (“FORM”XpresSpa Group” or the “Company”). The Company’s common stock, par value $0.01 per share, which had previously been listed under the trading symbol “FH” on the Nasdaq Capital Market (“Nasdaq”), has three operating segments:been listed under the trading symbol “XSPA” since January 8, 2018. Rebranding to XpresSpa Group aligned the Company’s corporate strategy to build a pure-play health and wellness technology and intellectual property.services company, which the Company commenced following its acquisition of XpresSpa Holdings, LLC (“XpresSpa”) on December 23, 2016.

 

The Company’s

As a result of the transition to a pure-play health and wellness services company, the Company currently has one operating segment consiststhat is also its sole reporting unit, which is comprised of XpresSpa, which is a leading airport retailer of spa services. XpresSpa is a well-recognized airport spa brand with 5257 locations, including 48consisting of 52 domestic and 45 international locations as of June 30, 2017.March 31, 2018. XpresSpa offers travelers premium spa services, including massage, nail and hairskin care, as well as spa and travel products.

In October 2017, the Company completed the sale of FLI Charge, Inc. (“FLI Charge”) and, in March 2018, the Company completed the sale of Group Mobile Int’l LLC (“Group Mobile”). These two entities formerly comprised the Company’s technology operating segment, which was eliminated following the disposition of Group Mobile. The results of operations for FLI Charge and Group Mobile are presented in the condensed consolidated statements of operations and comprehensive loss as consolidated net loss from discontinued operations. The carrying amounts of assets and liabilities belonging to Group Mobile are presented in the condensed consolidated balance sheets as assets held for disposal and liabilities held for disposal, respectively, as of March 31, 2018 and December 31, 2017.

The Company acquired XpresSpaowns certain patent portfolios, which it looks to monetize through sales and licensing agreements. During the three-month period ended March 31, 2018, the Company determined that its former intellectual property operating segment would no longer be an area of focus and, as such, will no longer operate as a separate operating segment, as it is not expected to generate any material revenues.

As of March 31, 2018, the Company had cash and cash equivalents of $3,554. In addition, the Company’s current assets were $6,321 and current liabilities were $8,560 as of March 31, 2018.

On May 15, 2018, the Company entered into a securities purchase agreement (the “Agreement”) with certain institutional investors (the “Investors”), pursuant to which the Company agreed to sell up to (i) an aggregate principal amount of $4,438 in 5% Secured Convertible Notes due 2019, which includes $88 to be issued to Palladium Capital Advisors as Placement Agent (the “Convertible Notes”), convertible into shares of the fourth quarterCompany’s common stock, par value $0.01 per share (the “Common Stock”) at a conversion price of 2016.$0.62 per share, (ii) Class A Warrants (the “Class A Warrants”) to purchase 7,157,259 shares of Common Stock at an exercise price of $0.62 per share and (iii) Class B Warrants (the “Class B Warrants,” and together with the Class A Warrants, the “Warrants”) to purchase 3,578,630 shares of Common Stock at an exercise price of $0.62 per share. The Convertible Notes bear interest at a rate of 5% per annum. The Convertible Notes are senior secured obligations of the Company and are secured by certain of its personal property. Unless earlier converted or redeemed, the Convertible Notes will mature in November 2019. The Company expects to close the transaction as soon as possible following the filing of these financial statements.

 

The Company’s technologymanagement believes that its current cash balance, the issuance of the Convertible Notes and Warrants, and cash provided by future operating segment consistsactivities will be sufficient to fund its planned operations and scheduled Convertible Notes principal repayments for at least the next twelve months following the date of Group Mobile as well as an 11% equity interest in InfoMedia Services Limited (“InfoMedia”). Group Mobile offers rugged hardware and software solutions, including laptops, tablets, and mobile printers, as well as installation and deployment services. The Company acquired Group Mobile in the fourth quarterfiling of 2015 and Excalibur Integrated Systems Inc. (“Excalibur”), which was merged with Group Mobile, in the first quarter of 2017. The Company’s equity interest in InfoMedia increased from 8.25% to 11% in the first quarter of 2017 due to a realignment of ownership interests.these financial statements.

As further detailed in Note 10 “Discontinued Operations and Assets and Liabilities Held for Disposal,” during June 2017, the Company concluded that the requirement to report the results of FLI Charge as discontinued operations was triggered.

The Company is currently evaluating strategic alternatives with respect to Group Mobile in an attempt to enhance stockholder value. These strategic alternatives may include a possible sale, merger, spin-off or other separation of Group Mobile or other forms of business combinations or strategic transactions. The Company is seeking to enter into one or more strategic transactions involving Group Mobile in the first quarter of 2018.

The Company’s intellectual property operating segment is engaged in the monetization of patents related to content and ad delivery, remote monitoring and mobile technologies.

Note 2. Accounting and Reporting Policies

 

(a) Basis of presentation and principles of consolidation

 

The accompanying interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and the instructions to Rule 10-01 of Regulation S-X, and should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2016.2017. The condensed consolidated financial statements include the accounts of the Company, all entities that are wholly-owned by the Company, and all entities in which the Company has a controlling financial interest. All adjustments that, in the opinion of management, are necessary for a fair presentation for the periods presented have been reflected by the Company. Such adjustments are of a normal, recurring nature. The results of operations for the three and six-month periodsthree-month period ended June 30, 2017March 31, 2018 are not necessarily indicative of the results that may be expected for the entire fiscal year or for any other interim period. All significant intercompany balances and transactions have been eliminated in consolidation.

 

(b) Use of estimates

 

The preparation of the accompanying condensed consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses for the periods presented. Actual results may differ from such estimates. Significant items subject to such estimates and assumptions include the Company’s intangible assets, the useful lives of the Company’s intangible assets, the valuation of the Company’s derivative warrants,warrant liabilities, the valuation of stock-based compensation, deferred tax assets and liabilities, income tax uncertainties, and other contingencies.

 


(c) Cash and Cash Equivalents

The Company maintains cash in checking accounts with financial institutions. The Company has established guidelines relating to diversification and maturities of its investments in order to minimize credit risk and maintain high liquidity of funds. Cash equivalents include amounts due from third-party financial institutions for credit and debit card transactions. These items typically settle in less than five days. As of March 31, 2018, the Company held significant portions of its cash balance in overseas accounts, totaling $2,661, which is not insured by the Federal Deposit Insurance Corporation (“FDIC”). If the Company were to distribute the amounts held overseas, the Company would need to follow an approval process as defined in its operating and partnership agreements, which may delay the availability of cash to the Company.

(d) Revenue recognition

  

The Company recognizes revenue for the wellness operating segment from the sale of XpresSpa products and services at the point of sale, net of discounts and applicable sales taxes. Revenues from the XpresSpa wholesale and e-commerce businesses are recorded at the time goods are shipped. The Company excludes all sales taxes assessed to its customers. Sales taxes assessed on revenues are included in accounts payable, accrued expenses and other current liabilities in the condensed consolidated balance sheets until remitted to the state agencies.

 

The Company records

Other revenue from product sales inrelates to one-time intellectual property licenses as well as the technology operating segment when title and risk of loss are passed to the customer, there is persuasive evidence of an arrangement for sale, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. The Company’s shipping terms typically specify F.O.B. destination, at which time title and risk of loss have passed to the customer. At the time of sale of hardware products, the Company records an estimate for sales returns and allowances based on historical experience. Hardware products sold by the Company are warranted by the vendor.

7

The Company has drop-shipment arrangements with many of its hardware vendors and suppliers to deliver products directly to customers. Revenue for drop-shipment arrangements is recorded on a gross basis upon delivery to the customer with contract terms that typically specify F.O.B. destination. Revenue is recognized on a gross basis, as the Company is the principal in the transaction, as the primary obligor in the arrangement, assumes the inventory risk if the product is returned by the customer, sets the pricecertain of the product to the customer, assumes credit risk for the amounts invoiced, and works closely with the customers to determine their hardware specifications.

Freight billed to customers is recognized as net product revenue and the related freight costs as a cost of sales.

On certain occasions, the Company’s technology operating segment will enter into a bill and hold arrangement with a customer. When this occurs, the Company makes a determination as to when it will be the proper time to recognize revenue. In doing so, the Company takes the following into consideration:

whether the risks of ownership have passed to the customer;

the customer must have made a fixed commitment to purchase the goods;

the customer must request and have a substantial business purpose for ordering on a bill and hold basis;

there must be a fixed schedule for delivery that is reasonable and consistent with the customer’s business purpose;

the Company cannot retain any specific performance obligations that would make the earnings process incomplete;

the goods must be segregated from remaining inventory (i.e., they cannot be used to fill orders for others); and

the goods must be complete and ready for shipment.

For multiple-element arrangements in the Company’s technology operating segment that include hardware products, services and maintenance, the Company allocates revenue to all deliverables based on their relative selling prices. In such circumstances, the Company uses a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”) and (iii) best estimate of selling price (“ESP”). VSOE generally exists only when the Company sells the deliverable separately and is the price actually charged by the Company for that deliverable. ESPs reflect the Company’s best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis. The Company allocates revenue to all deliverables based on the VSOE of each element, and if VSOE does not exist revenue is recognized when elements lacking VSOE are delivered.

intellectual property. Revenue from patent licensing is recognized if collectability is reasonably assured, persuasive evidence ofwhen the Company transfers promised intellectual property rights to customers in an arrangement exists,amount that reflects the sales price is fixed or determinable and delivery ofconsideration to which the service has been rendered.Company expects to be entitled in exchange for those intellectual property rights. Currently, revenue arrangements related to intellectual property provide for the payment of contractually determined fees and other consideration for the grant of certain intellectual property rights related to the Company’s patents. These rights typically include some combination of the following: (i) the grant of a non-exclusive, retroactive and future license to manufacture and/or sell products covered by patents, (ii) the release of the licensee from certain claims, and (iii) the dismissal of any pending litigation. The intellectual property rights granted typically extend until the expiration of the related patents. Pursuant to the terms of these agreements, the Company has no further obligation with respect to the grant of the non-exclusive retroactive and future licenses, covenants-not-to-sue, releases, and other deliverables, including no express or implied obligation on the Company’s part to maintain or upgrade the related technology, or provide future support or services. Generally, the agreements provide for the grant of the licenses, covenants-not-to-sue, releases, and other significant deliverables upon execution of the agreement, or upon receipt of the upfront payment. As such, the earnings process is complete and revenue is recognized upon the execution of the agreement, upon receipt of the upfront fee, and when all other revenue recognition criteria have been met.transfer of the promised intellectual property rights.

 

8

(d)(e) Cost of sales

 

Cost of sales for the Company’s wellness operating segment consists of store-level costs. Store-level costs include all costs that are directly attributable to the store operations and include:

 

payroll and related benefits for store operations and store-level management;

 

rent, percentage rent and occupancy costs;

 

the cost of merchandise;

 

freight, shipping and handling costs;

 

production costs;

 

inventory shortage and valuation adjustments, including purchase price allocation increase in fair values which was recorded as part of acquisition; and

 

costs associated with sourcing operations.

 

Cost of sales for the Company’s technology operating segment includes costsrelated to acquire or manufacture goods for inventory.

Cost of sales for the Company’s intellectual property operating segment mainly includes expenses incurred in connection with the Company’s patent licensing and enforcement activities, patent-related legal expenses paid to external patent counsel (including contingent legal fees), licensing and enforcement related research, consulting and other expenses paid to third parties, as well as related internal payroll expenses.

 


(e) Recently adopted(f) Investments

The Company accounts for its investments in other entities using the cost method of accounting pronouncementswhen the Company has no substantial influence and the investment is less than 20% of the investee entity. Under the cost method, the investment is recorded at cost, which approximates fair value, on the date of acquisition. The Company performs an assessment for impairment on at least an annual basis, or when there is an indication that cost exceeds fair value.

(g) Fair value measurements

The Company measures fair value in accordance with FASB ASC 820-10,Fair Value Measurements and Disclosures. FASB ASC 820-10 clarifies that fair value is an exit price, representing the amount that would be received by selling an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, FASB ASC 820-10 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.

Level 2: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

Level 3: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

(h) Recently issued accounting pronouncements

ASU No. 2017-01, Business Combinations2014-09, Revenue from Contracts with Customers (Topic 805): Clarifying the Definition606)

The core principle of a Business

In January 2017, the FASB issued Accounting Standards Update No. 2017-01 (“ASU 2017-01”) “Business Combinations (Topic 805): Clarifying the Definition of a Business.” ASU 2017-01 provides guidance to evaluate whether transactionsthis new standard is that revenue should be accountedrecognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for as acquisitions (or disposals)those goods or services. This guidance was amended in July 2015 and is effective for annual reporting periods beginning after December 15, 2017. Adoption of assets or businesses. If substantially allthis ASU did not have a material impact on the Company’s condensed consolidated financial statements.

ASU No. 2016-01, Financial Instruments – Overall (Topic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities

This standard amends various aspects of the fair valuerecognition, measurement, presentation, and disclosure for financial instruments. With respect to the Company’s condensed consolidated financial statements, the most significant impact relates to the accounting for equity investments. It will impact the disclosure and presentation of financial assets and liabilities. The amendments in this update are effective for annual reporting periods, and interim periods within those years beginning after December 15, 2017. Adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements.

ASU No. 2016-02, Leases (Topic 842)

This standard provides new guidance related to accounting for leases and supersedes U.S. GAAP on lease accounting with the intent to increase transparency. This standard requires operating leases to be recorded on the balance sheet as assets and liabilities and requires disclosure of key information about leasing arrangements. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of operations and comprehensive loss. The adoption will require a modified retrospective approach as of the gross assets acquired (or disposed of)beginning of the earliest period presented. The new standard is concentratedeffective for the fiscal year beginning after December 15, 2018, with early adoption permitted. The Company is currently in the process of evaluating the impact of the adoption on its condensed consolidated financial statements, but the Company expects that it will result in a single asset or a group of similarsignificant increase in its long-term assets the assets acquired (or disposed of) are not considered a business. The Company adopted ASU 2017-01 as of January 1, 2017 on a prospective basis.and liabilities.

 

(f) Recent issued accounting pronouncements not yet adopted

ASU No. 2017-04, Intangibles - GoodwillIntangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment

In January 2017,This standard provides new guidance to eliminate the FASB issued Accounting Standards Update No. 2017-04 (“ASU 2017-04”) “Intangibles - Goodwill and Other (Topic 350): Simplifyingrequirement to calculate the Test for Goodwill Impairment.” ASU 2017-04 eliminates step two of the goodwill impairment test and specifies that goodwill impairment should be measured by comparing theimplied fair value of goodwill, or the Step 2 test, to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit withunit’s carrying amount over its carrying amount. Additionally,fair value. The loss recognized should not exceed the amount oftotal goodwill allocated to eachthe reporting unit with a zero or negative carrying amount of net assets should be disclosed. ASU 2017-04unit. The new standard is effective for annual or interim goodwill impairment tests performed inthe fiscal yearsyear beginning after December 15, 2019;2019, with early adoption is permitted. The Company currently anticipates that the adoptionearly adopted this standard effective January 1, 2018. Adoption of this ASU 2017-04 willdid not have a material impact on itsthe Company’s condensed consolidated financial statements.


ASU No. 2017-09, Stock Compensation2018-02, Income Statement – Reporting Comprehensive Income (Topic 718)220): ScopeReclassification of Modification AccountingCertain Tax Effects from Accumulated Other Comprehensive Income

In May 2017, the FASB issued Accounting Standards Update No. 2017-09 (“ASU 2017-09”) “Stock Compensation (Topic 718): Scope of Modification Accounting.” ASU 2017-09This standard provides guidance abouton the reclassification of certain tax effects from accumulated other comprehensive income to retained earnings in the period in which changes to the terms or conditionseffects of a share-based payment award require an entity to apply modification accountingthe change in Topic 718.the United States federal corporate income tax rate in the Tax Cuts and Jobs Act is recorded. The current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in this update. ASU 2017-09new standard is effective for annual periods, and interim periods within those annual periods,the fiscal year beginning after December 15, 2017; early adoption is permitted.2018. The Company is currently in the process of evaluating the potential impact of the adoption of this standard on its condensed consolidated financial statements.

 

(g)(i) Reclassification

 

Certain balances have been reclassified to conform to presentation requirements, including the presentation of discontinued operations and assets and liabilities held for disposal with respect to the Company’s FLI Charge business (refer to Note 10), as well as consistent presentation of the allocation of cost of sales and general and administrative expenses to align presentation for operating segments.between store locations and corporate in the condensed consolidated statements of operations and comprehensive loss.

 

Note 3. Net Loss per Share of Common Stock

Basic net loss per share is computed by dividing the net loss for the period by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted-average number of shares of common stock plus dilutive potential common stock considered outstanding during the period. However, as the Company generated a net loss in all periods presented, some potentially dilutive securities, including certain warrants and stock options, were not reflected in diluted net loss per share because the impact of such instruments was anti-dilutive.

9

 

The table below presents the computation of basic and diluted net losslosses per share of common stock:

 

 Three months ended June 30,  Six months ended June 30,  Three months ended
March 31,		 
 2017  2016  2017  2016  2018  2017 
Basic numerator:                        
Net loss from continuing operations attributable to shares of common stock $(5,458) $(9,809) $(11,322) $(12,984) $(23,328) $(4,947)
Net loss from discontinued operations attributable to shares of common stock  (1,552)  (998)  (2,113)  (1,778)  (605)  (1,478)
Net loss attributable to shares of common stock $(7,010) $(10,807) $(13,435) $(14,762)
Net loss attributable to the Company $(23,933) $(6,425)
Basic denominator:                        
Basic shares of common stock outstanding  19,310,994   14,993,686   19,178,769   14,576,183   26,592,781   18,862,715 
        
Basic loss per share of common stock from continuing operations $(0.28) $(0.65) $(0.59) $(0.89) $(0.88) $(0.26)
Basic loss per share of common stock from discontinued operations  (0.08)  (0.07)  (0.11)  (0.12)  (0.02)  (0.08)
Basic net loss per share of common stock $(0.36) $(0.72) $(0.70) $(1.01) $(0.90) $(0.34)
                        
Diluted numerator:                        
Net loss from continuing operations attributable to shares of common stock $(5,458) $(9,809) $(11,322) $(12,984) $(23,328) $(4,947)
Net loss from discontinued operations attributable to shares of common stock  (1,552)  (998)  (2,113)  (1,778)  (605)  (1,478)
Net loss attributable to shares of common stock $(7,010) $(10,807) $(13,435) $(14,762)
Net loss attributable to the Company $(23,933) $(6,425)
Diluted denominator:                        
Diluted shares of common stock outstanding  19,310,994   14,993,686   19,178,769   14,576,183   26,592,781   18,862,715 
        
Diluted loss per share of common stock from continuing operations $(0.28) $(0.65) $(0.59) $(0.89) $(0.88) $(0.26)
Diluted loss per share of common stock from discontinued operations  (0.08)  (0.07)  (0.11)  (0.12)  (0.02)  (0.08)
Diluted net loss per share of common stock $(0.36) $(0.72) $(0.70) $(1.01) $(0.90) $(0.34)
                        
Net loss per share data presented excludes from the calculation of diluted net loss the following potentially dilutive securities, as they had an anti-dilutive impact:                        
Both vested and unvested options to purchase an equal number of shares of common stock of the Company  5,135,399   1,492,434   5,135,399   1,492,434   3,579,585   5,138,732 
Unvested restricted stock units (“RSUs”) to issue an equal number of shares of common stock of the Company  400,942   7,808   400,942   7,808 
Unvested RSUs to issue an equal number of shares of common stock of the Company  330,188   400,942 
Warrants to purchase an equal number of shares of common stock of the Company  3,430,877   1,006,679   3,430,877   1,006,679   3,087,500   3,430,877 
Preferred stock on an as converted basis  3,439,587   —   3,620,626   —   3,364,328   3,931,416 
Conversion feature of senior secured notes  —   —   —   159,462 
Total number of potentially dilutive instruments, excluded from the calculation of net loss per share  12,406,805   2,506,921   12,587,844   2,666,383 
Total number of potentially dilutive instruments excluded from the calculation of net loss per share of common stock  10,361,601   12,901,967 

 


Note 4. Business Combinations

XpresSpaGoodwill

  

During the three months ended June 30, 2017,On January 5, 2018, the Company learned new information about legalchanged its name to XpresSpa Group as part of a rebranding effort to align its corporate strategy to build a pure-play health and other professional costswellness services company, which existedthe Company commenced following its acquisition of XpresSpa on December 23, 2016. Following the subsequent sale of Group Mobile on March 22, 2018, which was the only remaining component of the Company’s technology operating segment, the Company’s management made the decision that its intellectual property operating segment would no longer be an area of focus and would no longer operate as a separate operating segment as it is not expected to generate any material revenues. This completed the transition of the Company into a pure-play health and wellness company with only one operating segment, consisting of its XpresSpa business.

The Company’s market capitalization is sensitive to the volatility of its stock price. On January 2, 2018, the first trading day of the fiscal year 2018, the Company’s stock price opened at $1.36 and closed at $1.45. The closing price of the Company’s stock on March 29, 2018, the last trading day of the first quarter of fiscal 2018, was $0.72. The average closing stock price of the Company from January 2, 2018 through March 29, 2018 was approximately $1.02, ranging from $0.71 to $1.80 during that period.

Subsequent to the first quarter of fiscal 2018, on April 19, 2018, the Company entered into a separation agreement with its Chief Executive Officer regarding his resignation as Chief Executive Officer and as a Director the Company. On that same date, the Company’s Senior Vice President and Chief Executive Officer of XpresSpa was appointed by the Board of Directors as the Chief Executive Officer and as a Director of the Company.

These events were identified by the Company’s management as triggering events requiring that goodwill be tested for impairment as of March 31, 2018. In addition to the acquisition dateCompany’s rebranding efforts to a pure-play health and wellness services company, its stock price continued to decline even after the announcement of XpresSpa.the new Chief Executive Officer. The Company’s stock price has averaged $0.67 following March 31, 2018. As the stock price has not rebounded, the Company determined that the impairment relates to the three-month period ended March 31, 2018.

The Company performed a quantitative goodwill impairment test, in which the Company compared the carrying value of the reporting unit to its estimated fair value, which was calculated using an income approach. The key assumptions for this approach are projected future cash flows and a discount rate, which is based on a weighted average cost of capital adjusted for the relevant risk associated with the characteristics of the business and the projected future cash flows. As a result of the quantitative goodwill impairment test performed as of March 31, 2018, the Company and the sellers of XpresSpa (the “XpresSpa Sellers”) agreed to reduce the total amount of Series D Convertible Preferred Stock (“FORM Preferred Stock”), which was previously issued to the XpresSpa Sellers in conjunction with the acquisition of XpresSpa. The Company reduced the number of the FORM Preferred Stock by 16,219 shares and estimateddetermined that the fair value of the reductionreporting unit did not exceed its carrying amount and, therefore, goodwill of the considerationreporting unit was $908,considered impaired.

Based on the estimated fair value of goodwill, the Company recorded an impairment charge of $19,630, to reduce the carrying value of goodwill to its fair value, which was recorded as a reductiondetermined to be zero. This impairment charge is included in goodwill impairment in the condensed consolidated statements of preferred equityoperations and goodwill.comprehensive loss for the three-month period ended March 31, 2018.

 

Additionally, during the three months ended June 30, 2017, certain XpresSpa Sellers converted 45,260 shares of their FORM Preferred Stock into 362,077 shares of the Company’s common stock, par value $0.01 per share.

As a result of these events, the total number of shares of FORM Preferred Stock was reduced from 491,427 as of December 31, 2016 to 429,948 shares as of June 30, 2017 and the face value (and liquidation preference) was reduced from $23,588 to $20,638.

Group Mobile

On February 2, 2017, the Company acquired Excalibur, which is an end-to-end solutions provider of mobile hardware devices, wireless network security, data networking, telephony and mobile application development and software solutions. Following the acquisition, Excalibur was merged with Group Mobile within the Company’s technology operating segment.

In consideration for the acquisition, the Company issued 888,573 unregistered shares of the Company’s common stock, par value $0.01 per share, to the former stockholders of Excalibur (the “Excalibur Sellers”). In addition, the Excalibur Sellers will, in the three years following the closing of this transaction, also receive $500 for each $2,000 of gross profit generated by a specified list of Excalibur accounts annually, until such cumulative gross profit reaches $6,000, and an additional $500 when such cumulative profit reaches $10,000, such amounts are payable in either cash or the Company’s common stock, at the election of the Company.

The fair value measurement of goodwill was classified within Level 3 of the total purchase price is $2,125fair value hierarchy because the income approach was used, which utilizes significant inputs that are unobservable in the market. The Company believes it made reasonable estimates and includes aassumptions to calculate the fair value of contingent considerationthe reporting unit as of $316 and fair value of unregistered shares of common stock issued of $1,809.the impairment test measurement date.

 

Note 5. Other Assets

Other assets in the condensed consolidated balance sheets are comprised of the following as of March 31, 2018 and December 31, 2017:

  

March 31,
2018

  December 31,
2017		 

Cost method investments

 $

2,909

  $

834

 

Lease deposits

  856   852 
Other assets $3,765  $1,686 

As of March 31, 2018, the Company’s other assets included:

 10·$1,625 cost method investment in Route1 Inc. (“Route1”), which the Company received from the disposition of Group Mobile in March 2018;

 ·$856 deposits made pursuant to various lease agreements, which will be returned to the Company at the end of the leases;

·$787 cost method investment in InfoMedia Services Limited (“InfoMedia”), which the Company acquired in 2014;

·$450 cost method investment in Marathon Patent Group, Inc. (“Marathon”), that the Company received in January 2018; and

·$47 cost method investment in FLI Charge, which the Company received from the disposition of FLI Charge in October 2017.

11 

 

Assets acquired and liabilities assumed were recorded at their fair values as of the acquisition date. The purchase price for the acquisition was allocated to the net tangible and intangible assets based on their fair values as of the acquisition date. The excess of the purchase price over the net tangible assets and intangible assets was recorded as goodwill. The table below presents preliminary allocation of the purchase price:

  Fair Value 
Assets    
Current assets (including cash of $26) $628 
Deferred tax assets  29 
Property and equipment  21 
Intangible assets  556 
Goodwill  2,320 
Total assets  3,554 
     
Liabilities    
Accounts payable and accrued expenses  1,214 
Deferred tax liabilities  215 
Total liabilities  1,429 
Net assets, fair value $2,125 

The allocation of the purchase price was based upon a preliminary valuation performed using the Company's estimates and assumptions, which are subject to change within the measurement period (up to one year from the acquisition date).

  

Note 5.6. Segment Information

 

The

As a result of the Company’s transition to a pure-play health and wellness services company, it currently has one operating segments are defined as components of an enterprise about which separate financial information is availablesegment that is regularly evaluated by the enterprise’s chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance. The Company concluded that it conducts its business through three operating segments, which are also its reportable segments:

wellness (XpresSpa);

technology (Group Mobile); and

intellectual property

Segment operating results reflect losses before corporate and unallocated shared expenses, interest expense and income taxes. Corporate and unallocated shared expenses principally consist of costs for corporate functions, rent for office space, stock-based compensation, executive management and certain unallocated administrative support functions.

  Three months ended June 30,  Six months ended June 30, 
  2017  2016  2017  2016 
Revenue                
Wellness $12,927  $—  $23,911  $— 
Technology  3,450   2,450   6,941   3,727 
Intellectual property  —   8,900   100   9,650 
Total revenue  16,377   11,350   30,952   13,377 
                 
Cost of sales                
Wellness  10,401   —   19,236   — 
Technology  2,690   2,180   5,618   3,304 
Intellectual property  118   4,243   217   4,963 
Total cost of sales  13,209   6,423   25,071   8,267 
                 
Segment operating loss                
Wellness  (1,992)  —   (4,363)  — 
Technology  (742)  (327)  (1,656)  (648)
Intellectual property  (126)  (7,577)  (131)  (8,280)
Corporate  (2,270)  (1,814)  (4,463)  (3,616)
Total segment operating loss  (5,130)  (9,718)  (10,613)  (12,544)
Corporate non-operating expense, net  (228)  (91)  (306)  (440)
Loss from continuing operations before income taxes $(5,358) $(9,809) $(10,919) $(12,984)

11

  June 30, 2017  December 31, 2016 
Assets        
Wellness $53,137  $57,527 
Technology  4,602   8,634 
Intellectual property  825   940 
Corporate  13,818   15,706 
Total assets $72,382  $82,807 

General and administrative costs are allocated among the operating segments and non-operating corporate segment. The non-operating corporate segment does not have any revenue, but does incur expenses such as compensation expenses, rent and infrastructure costs. The non-operating corporate segment’s assets are mainlysole reporting unit, which is comprised of cash.XpresSpa.

 

The Company currently operates in two geographical regions:segments: the United States and all other countries. The following table represents the geographical revenue regionaland segment operating loss for the three-month periods ended March 31, 2018 and 2017, and total asset information as of March 31, 2018 and for the three and six months ended June 30, 2017 and 2016.December 31, 2017. There were no concentrations of geographical revenue, regionalsegment operating loss or total assets related to any single foreign country that were material to the Company’s condensed consolidated financial statements.

 

 Three months ended June 30,  Six months ended June 30,  

Three months ended

March 31,

 
 2017  2016  2017  2016  2018  2017 
Revenue                        
United States $15,115  $11,350  $28,574  $13,377  $11,259  $9,968 
All other countries  1,262   —   2,378   —   1,341   1,116 
Total revenue  16,377   11,350   30,952   13,377  $12,600  $11,084 
                        
Cost of sales                        
United States  12,384   6,423   23,569   8,267  $8,990  $8,257 
All other countries  825   —   1,502   —   787   677 
Total cost of sales  13,209   6,423   25,071   8,267  $9,777  $8,934 
                        
Segment operating income (loss)                        
United States  (5,636)  (9,713)  (11,309)  (12,541) $(23,276) $(4,759)
All other countries  506   (5)  696   (3)  220   190 
Total segment operating income (loss)  (5,130)  (9,718)  (10,613)  (12,544)
Corporate non-operating expense, net  (228)  (91)  (306)  (440)
Operating loss from continuing operations  (23,056)  (4,569)
Other non-operating expense, net  (273)  (75)
Loss from continuing operations before income taxes $(5,358) $(9,809) $(10,919) $(12,984) $(23,329) $(4,644)

 

  June 30, 2017  December 31, 2016 
Assets        
United States $70,380  $80,053 
All other countries  2,002   2,754 
Total assets $72,382  $82,807 

12

  March 31,
2018		  December 31,
2017		 
Assets        
United States $32,567  $55,152 
All other countries  4,224   3,642 
Assets held for disposal  717   6,446 
Total assets $37,508  $65,240 

 

Note 6.7. Fair Value Measurements

 

Derivative Warrant Liabilities

 

The following table presents the placement in the fair value hierarchy of derivatederivative warrant liabilities measured at fair value on a recurring basis as of June 30, 2017March 31, 2018 and December 31, 2016:

2017:

 

     Fair value measurement at reporting date using 
     Quoted prices in       
     active markets  Significant other  Significant 
     for identical  observable  unobservable 
  Balance  assets (Level 1)  inputs (Level 2)  inputs (Level 3) 
March 31, 2018: $1  $—  $—  $1 
                 
December 31, 2017: $34  $—  $—  $34 

     Fair value measurement at reporting date using 
     Quoted prices in       
     active markets  Significant other  Significant 
     for identical  observable  unobservable 
  Balance  assets (Level 1)  inputs (Level 2)  inputs (Level 3) 
June 30, 2017:                
May 2015 Warrants $100  $—  $—  $100 
                 
December 31, 2016:                
May 2015 Warrants $259  $—  $—  $259 

The Company measures its derivative warrant liabilities at fair value. The May 2015 Warrantsderivative warrant liabilities were classified within Level 3 because they were valued using the Black-Scholes-Merton model, which utilizes significant inputs that are unobservable in the market. These derivative warrant liabilities were initially measured at fair value and are marked to market at each balance sheet date.

 

In addition to the above, the Company’s financial instruments as of June 30, 2017March 31, 2018 and December 31, 20162017, consisted of cash and cash equivalents, trade and loan receivables, inventory, accounts payable and Debt.other current liabilities. The carrying amounts of all the aforementioned financial instruments approximate fair value because of the short-term maturities of these instruments.

 

The following table summarizes the changes in the Company’s derivative warrant liabilities measured at fair value using significant unobservable inputs (Level 3) during the three- and six-month periodsthree-month period ended June 30, 2017:March 31, 2018:

December 31, 2017 $34 
Decrease in fair value of the derivative warrant liabilities  (33)
March 31, 2018 $1 

  

  May 2015
Warrants		 
December 31, 2016 $259 
Decrease in fair value of the derivative warrant liabilities  (159)
June 30, 2017 $100 

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 thatchanges are consistent with expectations of management based upon the sensitivity and nature of the inputs.

 

June 30,March 31, 2018:

DescriptionValuation techniqueUnobservable inputsRange

Derivative warrant liabilities

Black-Scholes-MertonVolatility39.56%
Risk free interest rate2.21%
Expected term, in years2.09
Dividend yield0.00%

December 31, 2017:

 

Description Valuation technique Unobservable inputs Range 
May 2015 Warrants

Derivative warrant liabilities

 Black-Scholes-Merton Volatility  42.1239.64%
    Risk freeRisk-free interest rate  1.511.88%
    Expected term, in years  2.842.34 
    Dividend yield  0.00%

 

December 31, 2016:

DescriptionValuation techniqueUnobservable inputsRange
May 2015 WarrantsBlack-Scholes-MertonVolatility45.15%
Risk-free interest rate1.57%
Expected term, in years3.34
Dividend yield0.00%

Sensitivity of Level 3 measurements to changes in significant unobservable inputs

 

The inputs to estimate the fair value of the Company’s derivative warrant liabilities were the current market price of the Company’s common stock, the exercise price of the derivative warrant liabilities, their remaining expected term, the volatility of the Company’s common stock price and the risk-free interest rate over the expected term. Significant changes in any of those inputs in isolation can result in a significant change in the fair value measurement.

 

13

Generally, an increase in the market price of the Company’s shares of common stock, an increase in the volatility of the Company’s shares of common stock, and an increase in the remaining term of the derivative warrant liabilities would each result in a directionally similar change in the estimated fair value of the Company’s derivative warrant liabilities. Such changes would increase the associated liability while decreases in these assumptions would decrease the associated liability. An increase in the risk-free interest rate or a decrease in the differential between the derivative warrant liabilities’ exercise price and the market price of the Company’s shares of common stock would result in a decrease in the estimated fair value measurement and thus a decrease in the associated liability. The Company has not, and does not plan to, declare dividends on its common stock, and as such, there is no change in the estimated fair value of the derivative warrant liabilities due to the dividend assumption.

Other Fair Value MeasurementsMarathon Common Stock

 

On January 11, 2018 (the “Transaction Date”), the Company entered into a Patent Rights Purchase and Assignment Agreement (the “Agreement”) with Crypto Currency Patent Holding Company LLC (the “Buyer”) and its parent company, Marathon, pursuant to which the Buyer agreed to purchase certain of the Company’s patents. As consideration for the patents, the Buyer paid $250 and Marathon issued 250,000 shares of Marathon common stock (the “Marathon Common Stock”) to the Company. The Marathon Common Stock is subject to a lockup period commencing on the Transaction Date and ending on July 11, 2018 (the “Lockup Period”).

The Marathon Common Stock is recognized as a cost method investment and, as such, must be measured at cost on the date of acquisition, which, as of the Transaction Date, approximates fair value. The following table presents the placement in the fair value hierarchy of shares of the contingent consideration assumed by the Company following the acquisition of Excalibur, which isMarathon Common Stock measured at fair value on a recurringnonrecurring basis andas of the decreaseTransaction Date:

     Fair value measurement at reporting date using 
     Quoted prices in       
     active markets  Significant other  Significant 
     for identical  observable  unobservable 
  Balance  assets (Level 1)  inputs (Level 2)  inputs (Level 3) 
January 11, 2018 $450  $—  $450  $— 

The fair value of the Marathon Common Stock was estimated by multiplying the number of shares as they become tradeable by the price per share as of the Transaction Date, information that falls within Level 1 of the fair value hierarchy, quoted prices in shares of FORM Preferred Stock issuedactive markets for identical assets; however, due to the XpresSpa Sellers,fact that the Marathon Common Stock is restricted during the Lockup Period, the Company applied a discount on the lack of marketability to estimate the fair value at the measurement date, which was measured atis a significant other observable input resulting in placement in Level 2 of the fair value hierarchy.

Other Fair Value Measurements

The Company is also required to measure the fair value on a non-recurringrecurring basis of the contingent consideration it assumed following the acquisition of Excalibur Integrated Systems, Inc. (“Excalibur”) on February 2, 2017. The Company determined that there was no change in the fair value of the contingent consideration of $316 between December 31, 2017 and March 31, 2018. Although the Company disposed of Excalibur as part of April 4, 2017 (the “Valuation Date”):the Group Mobile disposition, the contingent consideration remained due to the remnant of the earn-out provision due to the former stockholders of Excalibur, which is what first led to the recognition of a contingent consideration upon the acquisition of Excalibur. The contingent consideration is included in other liabilities in the condensed consolidated balance sheets.

 

     Fair value measurement at reporting date using 
     Quoted prices in       
     active markets  Significant other  Significant 
     for identical  observable  unobservable 
  Balance  assets (Level 1)  inputs (Level 2)  inputs (Level 3) 
June 30, 2017:                
Contingent consideration $316  $—  $—  $316 
FORM Preferred Stock $908  $—  $—  $908 

The purchase value of the contingent consideration assumed by the Company following the acquisition of Excalibur and the fair value of the decrease in shares of FORM Preferred Stock issued to the XpresSpa Sellers werewas determined using the Monte-Carlo simulation and, as such, werewas classified asin 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.

Valuation processes for Level 3 Fair Value Measurements

To estimate the fair value of the decrease in shares of FORM Preferred Stock, the Monte-Carlo simulation was performed using the following variables:

Description Valuation technique Variables Range 
FORM Preferred Stock Monte-Carlo Share price as of the Valuation Date $1.95 
    Volatility  46.0%
    Risk free interest rate  2.22%

Additionally, the Monte-Carlo simulation used the value of the underlying equity value issued to XpresSpa Sellers on the date of the XpresSpa acquisition, December 23, 2016, which is comprised of the aggregation of the fair value of the shares of the Company’s common stock, shares of FORM Preferred Stock and warrants.

 

Note 7. Stock-based8. Stock-Based Compensation

 

As of June 30, 2017, 1,258,603March 31, 2018, 2,796,386 shares of the Company’s common stock were available for future grants under the Company’s 2012 Employee, Director and Consultant Equity Incentive Plan. Total stock-based compensation expense for the six-month periods ended June 30,March 31, 2018 and 2017 was $312 and 2016 was $1,473 and $962, respectively. Total$741, respectively, the latter of which included stock-based compensation expense for the three-month periods ended June 30, 2017 and 2016 was $732 and $499, respectively.

The following table illustrates the options granted during the six-month period ended June 30, 2017.

TitleGrant dateNo. of
options		Exercise
price		Fair value at
grant date		Vesting termsAssumptions used in
Black-
Scholes option pricing
model
Directors, management, and employeesJanuary 20171,545,000$2.12 – $2.15$0.89 – $0.96Over 1 year for directors; Over 3 years for management and employees

Volatility: 44.27% – 44.90%

Risk free interest rate: 1.95% – 2.16%

Expected term, in years: 5.29 – 5.79

Dividend yield: 0.00% 

of $194 included in discontinued operations.

 


The following table illustratessummarizes the RSUs granted to a consultant during the six-monththree-month period June 30, 2017.ended March 31, 2018.

 

Title Grant date No. of RSUs  Fair value at grant date  Vesting term
Management and employees January 2017  400,942  $2.12  Over 1 year period, vesting on 1 year anniversary of grant date
Grant date No. of RSUs  

Fair market

value at grant date

  Vesting term
February 28, 2018  53,408  $0.94  Vesting immediately upon grant

No options were granted during the three-month period ended March 31, 2018.

 

The activity related to RSUs and stock options and RSUs during the six-monththree-month period ended June 30, 2017March 31, 2018 consisted of the following:

 

  RSUs  Options 
  No. of
RSUs		  Weighted
 average
grant date
fair value		  No. of
options		  Weighted
average
exercise
price		  Exercise
price range		  Weighted 
average
grant date
fair value		 
Outstanding as of January 1, 2017  —   —   3,679,101  $7.60  $1.55 – 55.00  $5.41 
Granted  400,942  $2.12   1,545,000  $2.12  $2.12 – 2.15  $0.93 
Vested/Exercised  —   —   —   —   —   — 
Forfeited  —   —   (72,334) $24.80  $1.55 – 37.20  $16.81 
Expired  —   —   (16,368) $43.66  $9.94 – 55.00  $22.02 
Outstanding as of June 30, 2017  400,942  $2.12   5,135,399  $5.60  $1.55 – 41.00  $3.85 
Exercisable as of June 30, 2017  —      2,459,982  $9.72  $1.55 – 41.00     

15

On January 20, 2017, the Company entered into amended employment agreements with its named executive officers. Under the terms of certain of these agreements, certain of these officers are entitled to a percentage of the amount equal to the total amount of cash and the fair market value of all noncash consideration paid or payable to the Company or its stockholders in connection with an initial public offering or a change of control of certain subsidiaries of the Company. The amended employment agreements also allow for the granting of equity awards to certain officers in connection with an initial public offering of certain subsidiaries of the Company.

  RSUs  Options 
  No. of
RSUs		  Weighted
 average
grant date
fair value		  No. of
options		  Weighted
average
exercise
price		  Exercise
price
range		  Weighted 
average
grant date
fair value		 
Outstanding as of January 1, 2018  365,565  $2.12   4,317,942  $5.67  $1.10 – 41.00  $3.86 
Granted  53,408  $0.94   —   —   —   — 
Vested/Exercised  (88,785) $1.41   —   —   —   — 
Forfeited  —   —   (686,041) $7.99  $1.55 – 37.20  $5.40 
Expired  —   —   (52,316) $16.24  $9.60 – 16.50  $9.71 
Outstanding as of March 31, 2018  330,188  $2.12   3,579,585  $5.07  $1.10 – 41.00  $3.39 
Exercisable as of March 31, 2018  —   —   2,505,417  $6.45  $1.10 – 41.00     

 

The Company did not recognize tax benefits related to its stock-based compensation as there is a full valuation allowance recorded.

Note 8. Income Taxes

The Company’s provision for income taxes consists of federal, state, local, and foreign taxes in amounts necessary to align the Company’s year-to-date provision for income taxes with the effective tax rate that the Company expects to achieve for the full year. Each quarter, the Company updates its estimate of the annual effective tax rate and records cumulative adjustments as deemed necessary. The income tax provisions for the six months ended June 30, 2017 reflect an estimated global annual effective tax rate of approximately -3.96% from continuing operations. Discontinued operations for the six months ended June 30, 2017 reflect an annual effective tax rate of 0.58%.

As of June 30, 2017, deferred tax assets generated from the Company’s U.S. activities were offset by a valuation allowance because realization depends on generating future taxable income, which, in the Company’s estimation, is not more likely than not to be generated before such net operating loss carryforwards expire. The Company expects its effective tax rate for its current fiscal year to be significantly lower than the statutory rate as a result of a full valuation allowance; therefore, any loss before income taxes does not generate a corresponding income tax benefit.

Income tax expense for the six months ended June 30, 2017 of approximately $227 was attributable primarily to tax deductions related to goodwill, for which there is no corresponding financial statement amortization expense, partially offset by the reduction in the valuation allowance needed following the acquisition of Excalibur's deferred tax liability. The final annual tax rate cannot be determined until the end of the fiscal year; therefore, the actual tax rate could differ from current estimates. Although the Company has an immaterial amount of uncertain tax positions, the Company does not expect to record any additional material provisions for unrecognized tax benefits with the next year.

  

Note 9. Related PartiesParty Transactions

 

On April 22, 2015, XpresSpa entered into a credit agreement and secured promissory note (the “Debt”) with Rockmore Investment Master Fund Ltd. (“Rockmore”) that, which was amended on August 8, 2016. Rockmore is an investment entity controlled by the Company’s board member, Bruce T. Bernstein. The Debt had an outstanding balance of $6,500 as of both June 30, 2017March 31, 2018 and December 31, 2016, which is2017, included in long-term liabilities in the condensed consolidated balance sheets. During the six-month periodquarter ended June 30, 2017,March 31, 2018, XpresSpa paid $430$150 of interest and recorded $365$183 of interest expense. Duringexpense related to the debt.

On May 2017, per the original agreement and with Rockmore’s consent,14, 2018, the Company electedand Rockmore agreed to extend the maturity date of the Debt from May 1, 20182019 to May 1,December 31, 2019. No other material terms of the Debt were modified.

In addition, the Company paid $212 to Mr. Bernstein in March 2017 for the legal costs incurred in conjunction with the acquisition of XpresSpa and certain legal proceedings related to litigation with Amiral Holdings SAS (“Amiral”) prior to the completion of such acquisition, as Mr. Bernstein was indemnified by XpresSpa and was a defendant in the Amiral legal proceedings. These costs are included in accounts payable, accrued expenses and other current liabilities in the condensed consolidated balance sheet as of December 31, 2016.

16

 

Note 10. Discontinued Operations and Assets and Liabilities Held Forfor Disposal

 

FLI Charge

During June

On October 20, 2017, the Company concluded that the requirement to report the results of FLI Charge, a wholly-owned subsidiary included in its technology operating segment, as discontinued operations was triggered. The Company is currently negotiating the terms of an agreement to sellsold FLI Charge to a third-party investor in exchange for a minority investment in the formgroup of shares of preferred stock in the newly created entity, which willprivate investors and FLI Charge management, to own and operate FLI Charge. ThePost-closing, the Company willdoes not be providingprovide any continued management or financing support to FLI Charge.


Group Mobile

On March 7, 2018 (the “Signing Date”), the Company entered into a membership purchase agreement (the “Purchase Agreement”) with Route1 Security Corporation, a Delaware corporation (the “Buyer”), and Route1 pursuant to which the Buyer agreed to acquire Group Mobile (the “Disposition”). The transaction is expectedclosed 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 closethe Company:

·25,000,000 shares of Route1 common stock (the “Route1 Common Stock”);

·warrants to purchase 30,000,000 shares of Route1 Common Stock, which will feature an exercise price of CAD 5 cents per share of common stock and will be exercisable for a three-year period; and

·certain other payments over the three-year period pursuant to an earn-out provision in the Purchase Agreement.

The Company retained certain inventory with a value of $555 to be disposed of separately from the transaction with Route1 in the third quarterfirst half of 2017. In connection with2018. Of this agreement, a non-cash impairment loss of $1,092 relating to FLI Charge’s technology assets and goodwillamount, $110 was recordedsold as of June 30, 2017. March 31, 2018 resulting in $445 remaining in assets held for disposal in the condensed consolidated balance sheets as of that date. Assets held for disposal also includes $272 of accounts receivable associated with the sale of the inventory excluded from the transaction with Route1.

Post-closing, the Company owned approximately 6.7% of Route1 Common Stock. The Route1 Common Stock is not tradable until a date no earlier than 12 months after the Closing Date; 50%, or 12,500,000 shares, of Route1 Common Stock are tradeable after 12 months plus an additional 2,083,333 shares of Route1 Common Stock are tradeable each month until 18 months after the Closing Date, subject to a change of control provision. The Company has the ability to sell the Route1 Common Stock and warrants to qualified institutional investors. The Purchase Agreement also contains representations, warranties, and covenants customary for transactions of this type.

The total consideration of the Disposition is recognized as a cost method investment and, as such, must be measured at cost on the date of acquisition, which, as of the Closing Date, approximates fair value. The fair value of the total consideration as of the Closing Date was determined to be $1,625, which is less than the carrying value of the asset, and is included in other assets in the condensed consolidated balance sheet as of March 31, 2018. This resulted in a loss on disposal of $301, which is included in consolidated net loss from discontinued operations in the condensed consolidated statements of operations and comprehensive loss.

The value of the total consideration for the Group Mobile disposition was determined using a combination of valuation methods including:

(i)The value of the Route 1 Common Stock was determined to be $308, which was estimated by multiplying the number of shares as they become tradeable by the price per share as of the Closing Date.

(ii)The value of the warrants was determined to be $176, which was obtained using the Black-Scholes-Merton model.

(iii)The value of the earn-out provision was determined to be $1,141, which was estimated using a Monte-Carlo simulation analysis.

The value of the Route1 Common Stock was classified within Level 2 of the fair value hierarchy because, although quoted prices in active markets for identical assets were used, which is a Level 1 attribute, the Company applied a discount on the lack of marketability to estimate the fair value due to the fact that the Route1 Common Stock will be restricted for different periods, which is a significant other observable input. The value of the warrants and earn-out provision were classified within Level 3 of the fair value hierarchy because they were valued using the Black-Scholes-Merton model and a Mote-Carlo simulation analysis, respectively, each of which utilizes significant inputs that are unobservable in the market.

The Company’s fair value measurements are evaluated by management to ensure that they are consistent with expectations of management based upon the sensitivity and nature of the inputs.


Operating Results and Assets and Liabilities Held for Sale

The following table representspresents the components of operating resultsthe consolidated net loss from discontinued operations, as presented in the condensed consolidated statements of operations and comprehensive loss:loss, for the three-month periods ended March 31, 2018 for Group Mobile and March 31, 2017 for Group Mobile and FLI Charge:

 

  Three months ended June 30,  Six months ended June 30, 
  2017  2016  2017  2016 
Revenue $19   13   53  $29 
Cost of sales  (36)  —   (68)  (2)
Depreciation, amortization and impairment  (1,130)  (21)  (1,168)  (42)
General and administrative  (405)  (990)  (930)  (1,763)
Loss from discontinued operations before income taxes  (1,552)  (998)  (2,113)  (1,778)
Income tax expense  —   —   —   — 
Net loss from discontinued operations $(1,552) $(998) $(2,113) $(1,778)

  Three months ended March 31, 
  2018  2017 
Revenue $2,834  $3,525 
Cost of sales  (2,305)  (2,960)
Depreciation and amortization  (131)  (173)
General and administrative  (680)  (1,868)
Loss on disposal  (301)  — 
Non-operating expense  (22)  (2)
Loss from discontinued operations before income taxes  (605)  (1,478)
Income tax expense  —   — 
Consolidated net loss from discontinued operations $(605) $(1,478)

  

In addition, the following table presents the carrying amounts of theGroup Mobile’s major classes of assets and liabilities held for saledisposal as of June 30, 2017March 31, 2018 and December 31, 2016,2017, as presented in the condensed consolidated balance sheets.

sheets:

 

 June 30, 2017 December 31, 2016  March 31,
2018		  December 31,
2017		 
Cash $—  $150 
Accounts receivable, net $39  $45   272   2,920 
Inventory  208   53   445   1,935 
Other current assets  24   92   —   3 
Property and equipment, net  196   183   —   874 
Intangible assets, net  —   377   —   564 
Goodwill  —   757 
Assets held for disposal $467  $1,507  $717  $6,446 
                
Accounts payable, accrued expenses and other current liabilities $88  $196  $—  $3,142 
Deferred revenue  9   10   —   619 
Liabilities held for disposal $97  $206  $—  $3,761 

Note 11. Income Taxes

The Company’s provision for income taxes consists of federal, state, local, and foreign taxes in amounts necessary to align the Company’s year-to-date provision for income taxes with the effective tax rate that the Company expects to achieve for the full year. Each quarter, the Company updates its estimate of the annual effective tax rate and records cumulative adjustments as deemed necessary. The income tax provisions for the quarter ended March 31, 2018 reflect an estimated global annual effective tax rate of approximately 0.57%. As of March 31, 2018, deferred tax assets generated from the Company’s activities in the United States were offset by a valuation allowance because realization depends on generating future taxable income, which, in the Company’s estimation, is not more likely than not to be generated before such net operating loss carryforwards expire. The Company expects its effective tax rate for its current fiscal year to be significantly lower than the statutory rate as a result of a full valuation allowance; therefore, any loss before income taxes does not generate a corresponding income tax benefit.

Income tax benefit for the quarter ended March 31, 2018 of $84 was attributable primarily to the reduction to the valuation allowance as a result of the Tax Cuts and Jobs Act’s impact on the lives of net operating losses. The final annual tax rate cannot be determined until the end of the fiscal year; therefore, the actual tax rate could differ from current estimates. Although the Company has an immaterial amount of uncertain tax positions, the Company does not expect to record any additional material provisions for unrecognized tax benefits in the next year.


Note 11.12. Commitments and Contingencies

 

Litigation and legal proceedings

 

Certain of the Company’s outstanding legal matters include speculative claims for substantial or indeterminate amounts of damages. The Company regularly evaluates developments in its legal matters that could affect the amount of any potential liability and makes adjustments as appropriate. Significant judgment is required to determine both the likelihood of there being a liability and the estimated amount of a loss related to such matters.

 

With respect to the Company’s outstanding legal matters, based on its current knowledge, the Company’s management believes that the amount or range of a potential loss will not, either individually or in the aggregate, have a material adverse effect on its business, consolidated financial position, results of operations or cash flows. However, the outcome of such legal matters is inherently unpredictable and subject to significant uncertainties. The Company evaluated the matters described below, and assessed the probability and likelihood of the occurrence of liability. Based on management’s estimates, the Company recorded $650,$250, which is included in accounts payable, accrued expenses, and other current liabilities in the condensed consolidated balance sheet as of June 30, 2017.March 31, 2018.

 

The Company expenses legal fees in the period in which they are incurred.

 

17

Cordial

Effective October 2014, XpresSpa terminated its former Airport Concession Disadvantaged Business Enterprise (“ACDBE”) partner, Cordial Endeavor Concessions of Atlanta, LLC (“Cordial”), in several store locations at Hartsfield-Jackson Atlanta International Airport.

Cordial filed a series of complaints with the City of Atlanta, both before and after the termination, in which Cordial alleged, among other things, that the termination was not valid and that XpresSpa unlawfully retaliated against Cordial when Cordial raised concerns about the joint venture. In response to the numerous complaints it received from Cordial, the City of Atlanta required the parties to engage in two mediations.

After the termination of the relationship with Cordial, XpresSpa sought to substitute two new ACDBE partners in place of Cordial.

In April 2015, Cordial filed a complaint with the United States Federal Aviation Administration (“FAA”), which oversees the City of Atlanta with regard to airport ACDBE programs, and, in December 2015, the FAA instructed that the City of Atlanta review XpresSpa’s request to substitute new partners in lieu of Cordial and Cordial’s claims of retaliation. In response to the FAA instruction, pursuant to a corrective action plan approved by the FAA, the City of Atlanta held a hearing in February 2016 and ruled in favor of XpresSpa such substitution and claims of retaliation. Cordial submitted a further complaint to the FAA claiming that the City of Atlanta was biased against Cordial and that the City of Atlanta’s decision was wrong. In August 2016, the parties met with the FAA. On October 4, 2016, the FAA sent a letter to the City of Atlanta directing that the City of Atlanta retract previous findings on Cordial’s allegations and engage an independent third party to investigate issues previously decided by Atlanta. The FAA also directed that Atlanta determine monies potentially due to Cordial.

 

On January 3, 2017, XpresSpa filed a lawsuit in the Supreme Court of the State of New York, County of New York against Cordial and several related parties. The lawsuit alleges breach of contract, unjust enrichment, breach of fiduciary duty, fraudulent inducement, fraudulent concealment, tortious interference, and breach of good faith and fair dealing relateddealing. 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 XpresSpa’s former partnership with Cordial as XpresSpa’s ACDBE partner in several store locations at Hartsfield-Jackson Atlanta International Airport (the “Cordial Litigation”).dismiss. On March 3, 2017, XpresSpa filed a first amended complaint against Cordial.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 the Cordial Litigation.

which was entered on November 13, 2017. On January 4,December 22, 2017, XpresSpa filed a notice of appeal.

On March 30, 2018, Cordial filed a lawsuit against XpresSpa, a subsidiary of XpresSpa, and several additional parties in the Superior Court of Fulton County, Georgia, alleging the violation of Cordial’s civil rights, tortious interference, breach of fiduciary duty, civil conspiracy, conversion, retaliation, and unjust enrichment. Cordial has threated to seek punitive damages, attorneys’ fees and litigation expenses, accounting, indemnification, and declaratory judgment as to the status of the membership interests of XpresSpa and Cordial in the joint venture and Cordial’s right to profit distributions and management fees from the joint venture. On May 3, 2018, the Court issued an order extending the time for the defendants to respond to Cordial’s lawsuit until June 25, 2018. On May 4, 2018, the defendants removed the lawsuit to the United States District Court for the SouthernNorthern District of New York against its former attorney, Kevin Ross, and his law firm, alleging malpractice, unjust enrichment, breach of fiduciary duty, fraudulent inducement, fraudulent concealment, tortious interference, and promissory estoppel related to XpresSpa’s former partnership with Cordial, as well as XpresSpa’s engagement of Kevin Ross as its attorney (the “Ross Litigation”). On March 17, 2017, XpresSpa filed a First Amended Complaint against the defendants. On June 2, 2017, the Ross Defendants filed their answer.Georgia.

 

Both the Cordial Litigation and Ross Litigation are pending before the respective courts.


In re Chen et al.

On

In March 16, 2015, four former XpresSpa employees of XpresSpa 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, for the Eastern District of New York, claimingYork. 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 overtime was unpaid.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 Courtcourt ruled in favor of the plaintiffs and conditionally certified the class. The parties held a mediation on February 28, 2017 and reached an agreement on a settlement in principle. On September 6, 2017, the parties entered into a settlement agreement. On September 15, 2017, the parties filed a motion for settlement approval with the Court. XpresSpa subsequently paid the agreed-upon settlement amount to the settlement claims administrator to be held in escrow pending a fairness hearing and final approval by the Court. On March 30, 2018 the Court entered a Memorandum and Order denying the motion without prejudice to renewal due to questions and concerns the Court had about certain settlement terms. On April 24, 2018 the parties jointly submitted a supplemental letter to the Court advocating for the fairness and adequacy of the settlement, and we appeared in Court on April 25, 2018 for a hearing to discuss the settlement terms in greater detail with the assigned Magistrate Judge. At the conclusion of the hearing, the Court still had questions about the adequacy and fairness of the settlement terms, and the Judge asked that the parties jointly submit additional information to the Court addressing the open issues. The parties are in the process of finalizingpreparing this submission for filing with the Court by the May 18, 2018 deadline.

Binn v. FORM Holdings Corp. et al.

On November 6, 2017, Moreton Binn and Marisol F, LLC, former stockholders of XpresSpa, filed a formal settlement agreement,lawsuit against the Company and preparingits directors in the United States District Court for the Southern District of New York. The lawsuit alleges violations of various sections of the Exchange Act, material omissions and misrepresentations (negligent and fraudulent), fraudulent omission, expropriation, breach of fiduciary duties, aiding and abetting, and unjust enrichment in the defendants’ conduct related to the Company’s acquisition of XpresSpa, and seeks rescission of the transaction, damages, equitable and injunctive relief, fees and costs, and various other relief. On January 17, 2018, the defendants filed a motion to dismiss the Court for preliminary approvalcomplaint. On February 7, 2018, the plaintiffs amended their complaint. On February 28, 2018, the defendants filed a motion to dismiss the amended complaint. On March 21, 2018, the plaintiffs filed an opposition to the motion to dismiss the amended complaint. On March 30, 2018, the defendants filed a reply in further support of a classwide settlement.

Otherthe defendants’ motion to dismiss the amended complaint.

 

XpresSpa isIn 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 XpresSpa’sthe 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 and adversely affect the Company’s business, financial condition, results of operations and cash flows.

 

In the event that an action is brought against us or one of our subsidiaries, we will investigate the allegation and vigorously defend ourselves.

Intellectual Property

The Company’s intellectual property operating segmentCompany is engaged in litigation related to certain of the intellectual property that it owns, for which no liability is recorded, as the Company does not expect a material negative outcome.

 

Note 12.13. Subsequent Events

 

On July 26, 2017,May 15, 2018, the Company entered into the Agreement with the Investors, pursuant to which the Company agreed to sell up to (i) an underwriting agreement (the “Underwriting Agreement”) with Rothaggregate principal amount of $4,438 in the Convertible Notes, which includes $88 issued to Palladium Capital Partners, LLC, actingAdvisors as the representativePlacement Agent, convertible into Common Stock at a conversion price of $0.62 per share, (ii) Class A Warrants to purchase 7,157,259 shares of Common Stock at an exercise price of $0.62 per share and (iii) Class B Warrants to purchase up to 3,578,630 shares of Common Stock at an exercise price of $0.62 per share. The Convertible Notes bear interest at a rate of 5% per annum. The Convertible Notes are senior secured obligations of the several underwriters named therein (collectively,Company and are secured by certain of its personal property. Unless earlier converted or redeemed, the “Underwriters”)Convertible Notes will mature in November 2019. The Company intends to use the proceeds of this financing primarily for working capital and new store openings. The Company expects to close the transaction as soon as possible following the filing of these financial statements.

The principal amount of the outstanding Convertible Notes is to be repaid monthly in the amount of $296, beginning in September 2018, and the Company may make such payments and related interest payments in cash or, subject to certain conditions, in registered shares of its common stock (or a combination thereof), relatingat its election. If the Company chooses to repay the Convertible Notes in shares of its common stock, the shares will be issued at a 10% discount to the issuance and sale (the “Offering”) of 6,900,000 sharesvolume weighted average price of the Company’s common stock par value $0.01 per share (“FORM Common Stock”for the five (5) trading days commencing eight (8) days prior to the relevant repayment date and ending on the fourth (4th) including 900,000 sharestrading day prior to such repayment date, subject to the Underwriters’ over-allotment option, which was exercised on August 2, 2017 and closed on August 4, 2017. The price to the public in the Offering was $1.10 per share and the Underwriters agreed to purchase the shares of FORM Common Stock from the Company pursuant to the Underwriting Agreement at a purchaseminimum floor price of $1.023 per share.not less than 20% of the conversion price of the Convertible Notes on the issue date. The net proceedsCompany may also repay the Convertible Notes in advance of the maturity schedule subject to the Company from the Offering were approximately $6,700 after deducting underwriting discounts and commissions and other estimated offering expenses.

early repayment penalties of 15%.

18

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained herein that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipates,” “believes,” “can,” “continues,” “could,” “estimates,” “expects,” “intends,” “may,” “will be,” “plans,” “projects,” “seeks,” “should,” “targets,” “will,” “would,” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 20162017 filed on March 29, 2018, as subsequently amended on April 30, 20172018 (the “2016“2017 Annual Report”) and this Quarterly Report on Form 10-Q and any future reports we file with the Securities and Exchange Commission (“SEC”). The forward-looking statements set forth herein speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements, except as required by law.

All references in this Quarterly Report on Form 10-Q to “we,” “us” and “our” refer to FORM Holdings Corp. (prior to May 5, 2016, known as “Vringo,XpresSpa Group, Inc.”), a Delaware corporation, and its condensed consolidated subsidiaries.

 

Overview

 

FORM Holdings Corp.On January 5, 2018, we changed our name to XpresSpa Group, Inc. (“FORM”XpresSpa Group” or the “Company”) from FORM Holdings Corp. Our common stock, par value $0.01 per share, which had previously been listed under the trading symbol “FH” on the Nasdaq Capital Market, has three operating segments:been listed under the trading symbol “XSPA” since January 8, 2018. Rebranding to XpresSpa Group aligned our corporate strategy to build a pure-play health and wellness technology and intellectual property.services company, which we commenced following our acquisition of XpresSpa Holdings, LLC (“XpresSpa”) on December 23, 2016.

 

Our wellness operating segment consists of XpresSpa, which is a leading airport retailer of spa services. XpresSpa is a well-recognized airport spa brand with 5257 locations, including 48consisting of 52 domestic and 45 international locations as of June 30, 2017. XpresSpaMarch 31, 2018. It offers travelers premium spa services, including massage, nail and hairskin care, as well as spa and travel products. We acquired XpresSpa inFor the fourth quarterthree-month period ended March 31, 2018, approximately 86% of 2016.XpresSpa’s total revenue was generated by services, primarily massage and nailcare, and 14% was generated by retail products, primarily travel accessories.

 

Our technology operating segment consists of Group Mobile as well as an 11% equity interest in InfoMedia Services Limited (“InfoMedia”). Group Mobile offers rugged hardware and software solutions, including laptops, tablets, and mobile printers, as well as installation and deployment services. In the first quarterOctober 2017, we completed the acquisitionsale of Excalibur Integrated Systems,FLI Charge, Inc. (“Excalibur”FLI Charge”) which is an end-to-end solutions providerand in March 2018, we completed the sale of mobile hardware devices, wireless network security, data networking, telephony and mobile application development and software solutions. Following the acquisition, Excalibur was merged with Group Mobile within our technology operating segment. Our equity interest in InfoMedia, which is accountedInt’l LLC (“Group Mobile”). The results of operations for under the cost method of investment, increased from 8.25% to 11% in the first quarter of 2017 due to a realignment of ownership interests.

As of June 30, 2017, our FLI Charge business is reflected as discontinued operationsand Group Mobile are presented in ourthe condensed consolidated statements of operations and comprehensive loss as consolidated net loss from discontinued operations. The carrying amounts of assets and liabilities belonging to Group Mobile are presented in the condensed consolidated balance sheets as assets held for disposal and liabilities held for disposal, in our condensed consolidated balance sheetsrespectively, as a result of an offer from a third party to finance its ongoing operations.

We are currently evaluating strategic alternatives with respect to Group Mobile in an attempt to enhance stockholder value. These strategic alternatives may include a possible sale, merger, spin-off or other separation of Group Mobile or other forms of business combinations or strategic transactions. We are seeking to enter into one or more strategic transactions involving Group Mobile in the first quarter of 2018.

Our intellectual property operating segment is engaged in the monetization of patents related to contentMarch 31, 2018 and ad delivery, remote monitoring and mobile technologies.December 31, 2017.

 

We own certain patent portfolios, which we now look to monetize through sales and licensing agreements.


Q1 2018 Adjusted EBITDA

Subsequent to June 30, 2017, we completed a public offering of 6,900,000 shares of our common stock, at $1.10 per share, for net proceeds of approximately $6.7 million.

  Three months ended  Three months ended 
  March 31, 2018  March 31, 2017 
Products and services revenue $11,800,000  $10,984,000 
         
Cost of sales        
Labor  (6,210,000)  (5,309,000)
Occupancy  (2,060,000)  (1,771,000)
Products and other operating costs  (1,443,000)  (1,755,000)
Total cost of sales  (9,713,000)  (8,835,000)
         
Gross profit  2,087,000   2,149,000 
Gross profit as a % of total revenue  17.7%  19.6%
         
Depreciation, amortization and impairment        
Depreciation  (1,047,000)  (1,134,000)
Amortization  (606,000)  (592,000)
Goodwill impairment  (19,630,000)  — 
Total depreciation, amortization and impairment  (21,283,000)  (1,726,000)
         
Total general and administrative expense  (4,596,000)  (4,993,000)
         
Other operating revenue and expense        
Other operating revenue  800,000   100,000 
Other operating expense  (64,000)  (99,000)
Total other operating revenue, net  736,000   1,000 
         
Operating loss from continuing operations  (23,056,000)  (4,569,000)
         
Add:        
Depreciation and amortization  1,653,000   1,726,000 
Goodwill impairment  19,630,000   — 
Merger and acquisition, integration, and one-time costs  —   526,000 
Stock-based compensation expense  312,000   547,000 
         
Adjusted EBITDA loss $(1,461,000) $(1,770,000)

  

19

Second Quarter 2017 Highlights

  Three Months Ended June 30, 2017 
  Wellness  Technology  Intellectual
Property		  Corporate  Total 
Total revenue $12,927,000  $3,450,000  $—  $—  $16,377,000 
                     
Cost of sales                    
Products  1,124,000   2,690,000   —   —   3,814,000 
Labor  5,783,000   —   —   —   5,783,000 
Occupancy  1,983,000   —   —   —   1,983,000 
Other operating costs  1,511,000   —   118,000   —   1,629,000 
Total cost of sales  10,401,000   2,690,000   118,000   —   13,209,000 
                     
Gross profit  2,526,000   760,000   (118,000)  —   3,168,000 
Gross profit as a % of total revenue  19.6%  22.0%  —   —   19.3%
                     
Depreciation and amortization                    
Depreciation  2,327,000   14,000   —   7,000   2,348,000 
Amortization  592,000   148,000   6,000   —   746,000 
Total depreciation and amortization  2,919,000   162,000   6,000   7,000   3,094,000 
                     
General and administrative                    
Stock-based compensation  —   —   —   732,000   732,000 
Other general and administrative  1,599,000   1,340,000   2,000   1,531,000   4,472,000 
Total general and administrative  1,599,000   1,340,000   2,000   2,263,000   5,204,000 
                     
Operating loss from continuing operations $(1,992,000) $(742,000) $(126,000) $(2,270,000) $(5,130,000)

We use GAAP and non-GAAP measurements to assess the trends in our business. With respect to XpresSpa, we review XpresSpa’sbusiness, including Adjusted EBITDA, a non-GAAP measure, which we define as earnings before interest, tax, depreciation and amortization expense, excluding one-time costs (e.g., merger and acquisition, integration and integration related costs)one-time costs and stock-based compensation.

 

Adjusted EBITDA has been presented in this Quarterly Report on Form 10-Q and is a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP. Reconciliations of operating loss for the three-month periods ended March 31, 2018 and March 31, 2017 to Adjusted EBITDA loss are presented in the tables above.

We consider Adjusted EBITDA to be an important indicator for the performance of our business, but not a measure of performance or liquidity calculated in accordance with U.S. GAAP. We have included this non-GAAP financial measure because management utilizes this information for assessing our performance and liquidity, and as an indicator of our ability to make capital expenditures and finance working capital requirements. We believe that Adjusted EBITDA is a measurement that is commonly used by analysts and some investors in evaluating the performance and liquidity of companies such as us. In particular, we believe that it is useful for analysts and investors to understand this relationshipindicator because it excludes transactions not related to our core cash operating activities. We believe that excluding these transactions allows investors to meaningfully analyze the performance of our core cash operations. Adjusted EBITDA should not be considered in isolation or as an alternative to cash flow from operating activities or as an alternative to operating income or as an indicator of operating performance or any other measure of performance derived in accordance with GAAP. In evaluating our performance as measured by Adjusted EBITDA, we recognize and consider the limitations of this measurement. Adjusted EBITDA does not reflect our obligations for the payment of income taxes, interest expense, or other obligations such as capital expenditures. Accordingly, Adjusted EBITDA is only one of the measurements that management utilizes.

The following table provides a reconciliation of operating loss from continuing operations for our three operating segments and corporate to Adjusted EBITDA income (loss) for the three months ended June 30, 2017:

  Three Months Ended June 30, 2017 
  Wellness  Technology  Intellectual
Property		  Corporate  Total 
Operating loss from continuing operations $(1,992,000) $(742,000) $(126,000) $(2,270,000) $(5,130,000)
Plus:                    
Depreciation and amortization  2,919,000   162,000   6,000   7,000   3,094,000 
Stock-based compensation  —   —   —   732,000   732,000 
Merger and acquisition, integration and one-time costs  200,000   —   —   110,000   310,000 
Adjusted EBITDA income (loss) $1,127,000  $(580,000) $(120,000) $(1,421,000) $(994,000)

Our operating segments are defined as components of an enterprise about which separate financial information is available that is regularly evaluated by the enterprise’s chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance. We concluded that we conduct our business through three operating segments, which are also our reportable segments: wellness, technology and intellectual property.

Segment operating results reflect losses before corporate and unallocated shared expenses, interest expense, income taxes and noncontrolling interests.

Wellness

Our wellness operating segment recognized revenue of $12,927,000 during the second quarter of 2017, which was generated by XpresSpa for services provided and health and beauty products sold. We acquired XpresSpa on December 23, 2016 and are actively integrating its corporate functions and optimizing the operating segment’s performance. During the six-month period ended June 30, 2017, we opened three new flagship locations, consisting of one location at John F. Kennedy International Airport’s Terminal 4 and two locations at Phoenix Sky Harbor International Airport. We also closed two small temporary kiosks to better align our resources. During the second quarter of 2017, we also started a major renovation to another location in John F. Kennedy International Airport’s Terminal 4; this renovation is expected to be completed in the third quarter of 2017. A number of our stores will be undergoing maintenance or renovations during the third quarter of 2017. Wherever possible, we seek to receive lease extensions or other concessions when we undergo these processes. As of June 30, 2017, we operated a total of 52 XpresSpa locations.

20

Store-level costs include all costs that are directly attributable to the store operations and include:

payroll and related benefits for our store operations and store-level management;

rent, percentage rent and occupancy costs;

the cost of merchandise;

freight, shipping and handling costs;

production costs;

inventory shortage and valuation adjustments, including purchase price allocation increase in fair values which was recorded as part of acquisition; and

costs associated with our sourcing operations.

General and administrative costs include insurance, infrastructure, payroll and benefits, inventory planning, marketing and other costs. Also included in general and administrative costs are expenses related to the integration of XpresSpa as well as office consolidation and moving costs, which amounted to $310,000 during the second quarter of 2017.

Depreciation and amortization costs include the depreciation of leasehold improvements and equipment and the amortization of the brand and customer relationship intangible assets, which were recorded at fair value as of the acquisition date.

Technology

Our technology operating segment predominantly includes revenues and cost of sales generated by Group Mobile and Excalibur. During the second quarter of 2017, Group Mobile’s revenue increased 40.8% from $2,450,000 for the three-month period ended June 30, 2016 to $3,450,000 for the three-month period ended June 30, 2017, respectively. This was mainly due to the increased sales pipeline throughout 2016 and early 2017.

Intellectual Property

The intellectual property operating segment includes revenues from one-time patent licenses as well as expenses incurred in connection with our patent licensing and related internal payroll expenses.

Corporate

Corporate and unallocated shared expenses principally consist of costs for corporate functions, rent for office space, stock-based compensation, executive management and certain unallocated administrative support functions.

Discontinued Operations

During June 2017, we concluded that the requirement to report the results of FLI Charge, a wholly-owned subsidiary included in our technology operating segment, as discontinued operations was triggered. We are currently negotiating the terms of an agreement to sell FLI Charge to a third-party investor in exchange for a minority investment in the form of shares of preferred stock in the newly created entity which will own and operate FLI Charge. We will not be providing any continued management or financing support to FLI Charge. The transaction is expected to close in the third quarter of 2017. In connection with this agreement, a non-cash impairment loss of $1,092,000 relating to FLI Charge’s technology assets and goodwill was recorded as of June 30, 2017. The results of operations for FLI Charge are presented on the condensed consolidated statements of operations and comprehensive loss as consolidated net loss from discontinued operations, which totaled $1,552,000 and $2,113,000 for the three- and six-month periods ended June 30, 2017, respectively. In addition, the carrying amounts of assets and liabilities belonging to FLI Charge are presented on the condensed consolidated balance sheets as assets held for disposal and liabilities held for disposal, respectively.

Results of Operations

 

Three-month period ended June 30, 2017March 31, 2018 compared to the three-month period ended June 30, 2016March 31, 2017

 

Revenue

 

  Three months ended June 30, 
  2017  2016  Change 
Revenue $16,377,000  $11,350,000  $5,027,000 

  Three months ended March 31, 
  2018  2017  Change 
Revenue $12,600,000  $11,084,000  $1,516,000 

 

During the three-month period ended June 30, 2017,March 31, 2018, we recorded total revenue of $16,377,000,$12,600,000, which represents an increase of $5,027,000$1,516,000 (or 44.3%13.7%) compared to the three-month period ended June 30, 2016.March 31, 2017. The increase in revenue was a result of the opening of nine new XpresSpa generated $12,927,000locations and the closure of revenuefive underperforming locations during fiscal year 2017 and the opening of three new XpresSpa locations and the closure of two underperforming locations during the first quarter of fiscal year 2018. Additionally, we have experienced an increase in comparable store sales, which we define as current period sales from stores opened more than 12 months compared to those same stores’ sales in the second quarter of 2017. Our technology operating segment demonstrated 40.8% growth in quarterly revenues from $2,450,000 forprior year period.

Additionally, during the three-month period ended June 30, 2016 to $3,450,000March 31, 2018, we sold certain of our patents for the$250,000 and shares of common stock in Marathon Patent Group, Inc. that were fair valued at $450,000. Additionally, in both three-month periodperiods ended June 30, 2017.March 31, 2018 and March 31, 2017, we entered into an executed confidential patent license agreement with a third-party for which we received a one-time lump sum payment of $100,000.

Cost of sales

  Three months ended March 31, 
  2018  2017  Change 
Cost of sales $9,777,000  $8,934,000  $843,000 

 

During the three-month period ended June 30, 2016, our intellectual property operating segment recognized a one-time lump sum payment of $8,900,000 in connection with an executed confidential license agreement. 

21

Cost of sales

  Three months ended June 30, 
  2017  2016  Change 
Cost of sales $13,209,000  $6,423,000  $6,786,000 

During the three-month period ended June 30, 2017,March 31, 2018, we recorded total cost of sales of $13,209,000,$9,777,000, which represents an increase of $6,786,000$843,000 (or 105.7%9.4%) compared to the three-month period ended June 30, 2016. XpresSpa recorded totalMarch 31, 2017. This is consistent with the increase in revenues, as we have experienced an increase in cost of sales of $10,401,000, which represent direct costs incurred for store operations. As result, our wellness operating segment’s gross profit for the quarter was 19.6%. Our technology operating segment recorded $2,690,000 of cost of sales, which is driven by the increase in sales during the quarter. As a result, our technology operating segment generated 22.0% gross margin during the quarter.  

During the three-month period ended June 30, 2016, our intellectual property costs were $4,243,000, which include legalassociated with labor and consulting costs relatedoccupancy due to the confidential license agreement reachedopening of new stores during fiscal year 2017 and the quarter and royalty expenses to a previous owner of some of our patents. These costs decreased to $118,000 for the three-month period ended June 30, 2017.

As a percentage of total revenue, cost of sales were 80.7% in the secondfirst quarter of 2017 compared to 56.6% in the second quarter of 2016, which is driven by the direct cost of sales generated by XpresSpa.

We expect our cost of sales will grow over time as our revenues increase. We expect that total cost of sales as a percentage of sales will decline gradually over time as a result of the improvement of store-level performance by our wellness operating segment and as our technology operating segment implements new offerings.fiscal 2018.

 

Depreciation amortization and impairmentamortization

 

  Three months ended June 30, 
  2017  2016  Change 
Depreciation, amortization and impairment $3,094,000  $12,329,000  $(9,235,000)
  Three months ended March 31, 
  2018  2017  Change 
Depreciation and amortization $1,653,000  $1,726,000  $(73,000)

 

During the three-month period ended June 30, 2017,March 31, 2018, depreciation and amortization expense totaled $3,094,000,$1,653,000, which represents a decrease of $9,235,000$73,000 (or 74.9%4.2%), compared to the amortizationdepreciation and impairmentamortization expense recorded during the three-month period ended June 30, 2016. ThereMarch 31, 2017. The decrease was nodue to the disposal of certain property and equipment during fiscal year 2017 that reduced the amount of the quarterly depreciation expense.


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Goodwill impairment expense for the three-month period ended June 30, 2017 and no depreciation expense recorded for the three-month period ended June 30, 2016. Amortization and impairment expense for the three months ended June 30, 2016 was significantly higher and was primarily attributed to an $11,937,000 impairment charge to our patents asset group.

 

The overall decrease in depreciation, amortization and impairment expense was partially offset by an increase in depreciation expense resulting from leasehold improvements and equipment of $2,327,000 and the amortization of the brand and customer relationship intangible assets of $592,000, which were acquired as part of our acquisition of XpresSpa within our wellness operating segment in December 2016. The depreciation expense of $2,327,000 is higher than the typical depreciation expense for the quarter due to a formal decision made in April 2017 to perform a complete renovation of our flagship JFK location, at which point useful lives were revised to fully depreciate all remaining assets by the store close date.

  Three months ended March 31, 
  2018  2017  Change 
Goodwill impairment $19,630,000  $—  $19,630,000 

 

We expect depreciation and amortization expense will increase gradually over time as we open more stores in our wellness operating segment and will remain somewhat constant in our technology operating segment.

General and administrative

  Three months ended June 30, 
  2017  2016  Change 
General and administrative $5,204,000  $2,316,000  $2,888,000 

During the three-month period ended June 30, 2017,March 31, 2018, we recorded $19,630,000 of goodwill impairment expense. There was no goodwill impairment recorded during the three-month period ended March 31, 2017.

On January 5, 2018, we changed our name to XpresSpa Group as part of a rebranding effort to align our corporate strategy to build a pure-play health and wellness services company, which we commenced following our acquisition of XpresSpa on December 23, 2016. Following the subsequent sale of Group Mobile on March 22, 2018, which was the only remaining component of our technology operating segment, our management made the decision that our intellectual property operating segment would no longer be an area of focus and would no longer operate as a separate operating segment as it is not expected to generate any material revenues. This completed our transition into a pure-play health and wellness company with only one operating segment, consisting of our XpresSpa business.

During the first quarter of fiscal year 2018, our stock price declined from an opening price of $1.36 on January 2, 2018 to $0.72 on March 29, 2018. Subsequently, on April 19, 2018, we entered into a separation agreement with our Chief Executive Officer regarding his resignation as Chief Executive Officer and as our Director.

These events were identified by our management as triggering events requiring that goodwill be tested for impairment as of March 31, 2018. In addition to our rebranding efforts to a pure-play health and wellness services company, our stock price continued to decline even after the announcement of the new Chief Executive Officer. Our stock price has averaged $0.67 following March 31, 2018. As the stock price has not rebounded, we determined that the impairment relates to the three-month period ended March 31, 2018.

We performed testing on the estimated fair value of goodwill and, as a result, we recorded an impairment charge of $19,630,000 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 and the change in Chief Executive Officer.

General and administrative

  Three months ended March 31, 
  2018  2017  Change 
General and administrative $4,596,000  $4,993,000  $(397,000)

During the three-month period ended March 31, 2018, general and administrative expenses increaseddecreased by $2,888,000$397,000 (or 124.7%8.0%) compared to the three-month period ended June 30, 2016. AsMarch 31, 2017. This decrease is a percentageresult of revenue, total general andstreamlined processes at the corporate level to reduce administrative expenses were 31.8% and 20.4% during the second quartercosts, as well as a reduction in stock-based compensation expense of 2017 and 2016, respectively.

The results of the three-month period ended June 30, 2017 include incremental general and administrative expenses associated with our recent acquisitions of XpresSpa and Excalibur. The increase$235,000 from $547,000 for the three-month period ended June 30,March 31, 2017 compared to $312,000 for the samethree-month period ended June 30, 2016 is primarily attributed to $1,599,000 of general and administrative expenses associated with XpresSpa. We did not recognize any general and administrative expenses generated by Excalibur prior to its acquisition on February 2, 2017 or XpresSpa prior to its acquisition on December 23, 2016. Additionally, there was an increase in stock-based compensation expense of $297,000, which was a result of equity awards granted to our directors, management and employees in January 2017.

March 31, 2018.

 

Non-operating expense, net

 

  Three months ended June 30, 
  2017  2016  Change 
Non-operating expense, net $(228,000) $(91,000) $(137,000)

  Three months ended March 31, 
  2018  2017  Change 
Non-operating expense, net $(273,000) $(75,000) $(198,000)


 

Net non-operating expenses include interest expense, gain or loss on the revaluation of derivative warrant liabilities and other non-operating income and expenses.

 

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During the three-month period ended June 30, 2017,March 31, 2018, we recorded total net non-operating expense in the amount of $228,000$273,000 compared to total net non-operating expense in the amount of $91,000$75,000 recorded during the three-month period ended June 30, 2016.March 31, 2017.

 

For the three-month period ended June 30,March 31, 2018, we recorded interest expense of $183,000 related to XpresSpa’s credit agreement and secured promissory note (the “Debt”) with Rockmore Investment Master Fund Ltd. (“Rockmore”) and other non-operating expenses of $123,000. These non-operating expenses were offset by a gain of $33,000 on the revaluation of the derivative warrant liabilities that is reported as non-operating income.

For the three-month period ended March 31, 2017, we recorded interest expense of $178,000 mainly$189,000 related to XpresSpa’sthe Debt. This non-operating expense was reducedoffset by a gain of $133,000$26,000 on the revaluation of the derivative warrant liabilities and additional non-operating expenseincome of $183,000.

For the three-month period ended June 30, 2016, we recorded interest expense of $272,000 for the amortization of the debt discount and debt issuance costs associated with debt that was repaid during July 2016. The non-operating expenses reported during the three-month period ended June 30, 2016 were reduced by a gain of $99,000 on the revaluation of the derivative warrant liabilities.

Six-month period ended June 30, 2017 compared to the six-month period ended June 30, 2016

Revenue

  Six months ended June 30, 
  2017  2016  Change 
Revenue $30,952,000  $13,377,000  $17,575,000 

During the six-month period ended June 30, 2017, we recorded total revenue of $30,952,000, which represents an increase of $17,575,000 (or 131.4%) as compared to $13,377,000 recorded in the six-month period ended June 30, 2016. The results of the six-month period ended June 30, 2017 include incremental revenues associated with our recent acquisitions of XpresSpa and Excalibur. We did not recognize any revenue generated by Excalibur prior to its acquisition on February 2, 2017 or XpresSpa prior to its acquisition on December 23, 2016. Our technology operating segment demonstrated 86.2% growth in revenue from $3,727,000 for the six-month period ended June 30, 2016 to $6,941,000 for the three-month period ended June 30, 2017.

Cost of sales

  Six months ended June 30, 
  2017  2016  Change 
Cost of sales $25,071,000  $8,267,000  $16,804,000 

During the six-month period ended June 30, 2017, we recorded total cost of sales of $25,071,000, which represents an increase of $16,804,000 (or 203.3%) compared to the six-month period ended June 30, 2016. The results of the six-month period ended June 30, 2017 include incremental cost of sales associated with our recent acquisitions of XpresSpa and Excalibur. We did not recognize any cost of sales generated by Excalibur prior to its acquisition on February 2, 2017 or XpresSpa prior to its acquisition on December 23, 2016. We expect the cost of sales to increase over time as we incur the full results of operations of XpresSpa and Excalibur.

Depreciation, amortization and impairment

  Six months ended June 30, 
  2017  2016  Change 
Depreciation, amortization and impairment $4,955,000  $13,159,000  $(8,204,000)

During the six-month period ended June 30, 2017, depreciation and amortization expense totaled $4,955,000, which represents a decrease of $8,204,000 (or 62.3%), compared to the amortization and impairment expense recorded during the six-month period ended June 30, 2016. There was no impairment expense for the six-month period ended June 30, 2017 and no depreciation expense recorded for the six-month period ended June 30, 2016.

Amortization and impairment expense for the six months ended June 30, 2016 was significantly higher and was primarily attributed to an $11,937,000 impairment charge to our patents asset group. During the six-month period ended June 30, 2016, we determined that there were impairment indicators related to certain of our patents. A significant factor considered when making this determination occurred on May 6, 2016, when we changed the name of our company from “Vringo, Inc.” to “FORM Holdings Corp.” and concurrently announced our repositioning as a holding company of small- and middle-market growth companies. We concluded that this factor was deemed a “triggering” event, which required the related patent assets to be tested for impairment. In performing this impairment test, we determined that the patent portfolios, which together represent an asset group, were subject to impairment testing. In the first step of the impairment test, we utilized our projections of future undiscounted cash flows based on our existing plans for the patents. As a result, it was determined that our projections of future undiscounted cash flows were less than the carrying value of the asset group. Accordingly, we performed the second step of the impairment test to measure the potential impairment by calculating the asset group’s fair value as of May 6, 2016. As a result, following amortization for the month of April, we recorded an impairment charge of $11,937,000, or 88.7% of the carrying value of the patents prior to impairment, which resulted in a new carrying value of $1,526,000 on May 6, 2016. Following the impairment, we reevaluated the remaining useful life and concluded that there were no changes in the estimated useful life. There were no impairment indicators related to any of our other amortizable intangible assets during the six-month period ended June 30, 2017.

The overall decrease in depreciation, amortization and impairment expense, when comparing the six-month period ended June 30, 2017 to the six-month period ended June 30, 2016, was partially offset by an increase in depreciation expense resulting from leasehold improvements and equipment of $3,456,000 and the amortization of the brand and customer relationship intangible assets of $1,177,000, which were acquired as part of our acquisition of XpresSpa within our wellness operating segment in December 2016. The depreciation expense of $3,456,000 is higher than the typical depreciation expense for the six-month period due to a formal decision made in April 2017 to perform a complete renovation of our flagship JFK location which resulted in a revision to the useful lives. This resulted in an additional $1,100,000 of depreciation expense related to the JFK location.

We expect depreciation and amortization expense will increase gradually over time as we open more stores in our wellness operating segment and new locations and will remain somewhat constant in our technology operating segment.

$88,000.

 

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General and administrative

  Six months ended June 30, 
  2017  2016  Change 
General and administrative $11,539,000  $4,495,000  $7,044,000 

During the six-month period ended June 30, 2017, general and administrative expenses increased by $7,044,000 (or 156.7%) compared to the six-month period ended June 30, 2016. As a percentage of revenue, total general and administrative expenses were 37.3% and 33.6% during the six-month periods ended June 30, 2017 and 2016, respectively.

The results of the six-month period ended June 30, 2017 include incremental general and administrative expenses associated with our recent acquisitions of XpresSpa and Excalibur. The increase for the six-month period ended June 30, 2017 compared to the same period ended June 30, 2016 is primarily attributed to $4,404,000 of general and administrative expenses associated with XpresSpa, of which $484,000 related to merger and acquisition and integration costs. We did not recognize any general and administrative expenses generated by Excalibur prior to its acquisition on February 2, 2017 or XpresSpa prior to its acquisition on December 23, 2016. Additionally, there was an increase in stock-based compensation expense of $643,000, which was a result of equity awards granted to our directors, management and employees in January 2017.

Non-operating expense, net

  Six months ended June 30, 
  2017  2016  Change 
Non-operating expense, net $(306,000) $(440,000) $134,000 

During the six-month period ended June 30, 2017, we recorded total net non-operating expense in the amount of $306,000 compared to total net non-operating expense in the amount of $440,000 recorded during the six-month period ended June 30, 2016.

For the six-month period ended June 30, 2017, we recorded interest expense of $367,000 mainly related to XpresSpa’s Debt. This was reduced by a gain of $159,000 on the revaluation of the derivative warrant liabilities and additional non-operating expense of $98,000.

For the six-month period ended June 30, 2016, we recorded interest expense of $748,000 for the interest recorded related to the monthly interest payments and the amortization of the debt discount and debt issuance costs as well as accrued interest calculated using the effective interest method associated with debt that was repaid during July 2016. In addition, we elected to repay principal installments for this debt for January and February 2016 in shares of our common stock, which were issued at a discount of 15% to market prices, which resulted in a $210,000 loss on the extinguishment of debt.

The net non-operating expenses reported during the six-month period ended June 30, 2016 were reduced by a gain of $369,000 on the revaluation of the derivative warrant liabilities.

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Liquidity and Capital Resources

 

Our primary liquidity and capital requirements are for new XpresSpa locations for our wellness operating segment, as well as working capital for our technology operating segment.locations. As of June 30, 2017,March 31, 2018, we had cash and cash equivalents of $7,958,000$3,554,000. We hold significant portions of our cash balance in overseas accounts, which is not insured by the Federal Deposit Insurance Corporation (“FDIC”). If we were to distribute the amounts held overseas, we would need to follow an approval process as it is defined in our operating and partnership agreements, which may delay the availability of our cash to us.

During the three-month period ended March 31, 2018, we incurred $1,244,000 of capital expenditures, paid $150,000 of interest on the Debt, distributed $220,000 to noncontrolling interests and spent $2,184,000 on our operations. This was offset by the receipt of $250,000 from the sale of patents in January 2018 and the receipt of $800,000 from a note receivable that wewas paid in full in February 2018. We expect to utilize our cash and cash equivalents, along with cash flows from operations, to provide capital to support the growth of our business, primarily through opening new XpresSpa locations, maintaining our existing XpresSpa locations purchasing inventory for Group Mobile to support the growth in sales and maintaining corporate functions. In addition,As of March 31, 2018, we havehad approximately $7,478,000 of trade receivables,$2,050,000 inventory and otherprepaid expenses and $717,000 of assets held for disposal, which amount to total current assets to support our working capital needs.of $6,321,000. Our total current liabilities which include accounts payables, accrued expenses and accrued reserves were $8,560,000.

 

On July 26, 2017,May 15, 2018, we entered into an underwritinga securities purchase agreement (the “Underwriting Agreement”“Agreement”) with Rothcertain institutional investors (the “Investors”), pursuant to which we agreed to sell up to (i) an aggregate principal amount of $4,438,000 in 5% Secured Convertible Notes due 2019, which includes $88,000 to be issued to Palladium Capital Partners, LLC, actingAdvisors as the representative of the several underwriters named therein (collectively, the “Underwriters”Placement Agent (the “Convertible Notes”), relating to the issuance and sale (the “Offering”) of 6,900,000convertible into shares of our common stock, par value $0.01 per share (“FORM(the “Common Stock”) at a conversion price of $0.62 per share, (ii) Class A Warrants (the “Class A Warrants”) to purchase 7,157,259 shares of Common Stock”) including 900,000 shares subject to the Underwriters’ over-allotment option, which was exercised on August 2, 2017 and closed on August 4, 2017. TheStock at an exercise price to the public in the Offering was $1.10of $0.62 per share and (iii) Class B Warrants (the “Class B Warrants,” and together with the Underwriters agreedClass A Warrants, the “Warrants”) to purchase 3,578,630 shares of Common Stock at an exercise price of $0.62 per share. The Convertible Notes bear interest at a rate of 5% per annum. The Convertible Notes are senior secured obligations of ours and are secured by certain of our personal property. Unless earlier converted or redeemed, the Convertible Notes will mature in November 2019.

The principal amount of the outstanding Convertible Notes is to be repaid monthly in the amount of approximately $296,000, beginning in September 2018, and we may make such payments and related interest payments in cash or, subject to certain conditions, in registered shares of our common stock (or a combination thereof), at our election. If we choose to repay the Convertible Notes in shares of our common stock, the shares of FORM Common Stock from us pursuantwill be issued at a 10% discount to the Underwriting Agreement at a purchasevolume weighted average price of $1.023 per share. Our net proceeds fromour common stock for the Offering were approximately $6,700,000 after deducting underwriting discountsfive (5) trading days commencing eight (8) days prior to the relevant repayment date and commissions and other estimated offering expenses.

ending on the fourth (4th) trading day prior to such repayment date, subject to a minimum floor price of not less than 20% of the conversion price of the Convertible Notes on the issue date. We may also repay the Convertible Notes in advance of the maturity schedule subject to early repayment penalties of 15%.

 

Our total cash decreased from $17,910,000 as of December 31, 2016 to $7,958,000 as of June 30, 2017. Of the $9,952,000 decrease, approximately $6,697,000 was related either to non-recurring payments, capital expenditures or payments for inventory, the latter of which is reflected as a current asset in the condensed consolidated balance sheets.

Key payments and items from December 31, 2016 to June 30, 2017:

Group Mobile and XpresSpa inventory $1,644,000 
Overdue payables acquired as part of XpresSpa  1,500,000 
Capital expenditures  1,263,000 
Merger and acquisition and integration-related professional fees  776,000 
Leases and tax-related matters  453,000 
Interest paid on Debt  430,000 
Repayment of line of credit upon Excalibur acquisition  361,000 
Severance  250,000 
  $6,677,000 

Based onmanagement believes that our current cash balance, the issuance of the Convertible Notes and Warrants, and cash provided by future operating plans, we expectactivities will be sufficient to have sufficient fundsfund our planned operations and scheduled Convertible Notes principal repayments for at least the next 12twelve months following the date of operations. In addition, we may choose to raise additional funds in connection with new store openings and potential acquisitionsthe filing of operating assets, which will be complementary to our wellness operating segment. There can be no assurance, however, that any such opportunities will materialize.these financial statements.

 

Off-Balance Sheet Arrangements

 

We have no obligations, assets or liabilities thatwhich would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.

 

Critical Accounting Estimates

 

These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC on March 29, 2018, as subsequently amended on April 30, 2017,2018, which includes a description of our critical accounting policies that involve subjective and complex judgments that could potentially affect reported results. While there have been no material changes to our critical accounting policies as to the methodologies or assumptions we apply under them, we continue to monitor such methodologies and assumptions.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

 

Not required as we are a smaller reporting company.

Item 4.Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.Procedures

 

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

As of June 30, 2017,March 31, 2018, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

 

Changes in Internal Control over Financial Reporting

The scope of management's assessment of the effectiveness of

There has been no change in our internal control over financial reporting includes all of(as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2018 that has materially affected, or is reasonably likely to materially affect, our subsidiaries except XpresSpa and Excalibur, which were acquired on December 23, 2016 and February 2, 2017, respectively. Our consolidated revenue for the six-month period ended June 30, 2017 was $30,952,000, of which XpresSpa and Excalibur represented $23,911,000 and $2,086,000, respectively, and our total assets as of June 30, 2017 were $72,382,000, of which XpresSpa and Excalibur represented $53,137,000 and $4,178,000, respectively.internal control over financial reporting.


Part II– OTHER INFORMATION

Item 1.Legal Proceedings.

 

Item 1.Legal Proceedings.

For information regarding legal proceedings, see Note 1112 “Commitments and Contingencies” in our notes to the condensed consolidated financial statements included in “Item 1. Financial Statements.”

Item 1A.Risk Factors.

 

There have been no material changes to the risk factors discussed in Item 1A.Risk Factors.

Our business, financial condition, results of operations and the trading price of our common stock could be materially adversely affected by any of the following risks as well as the other risks highlightedFactors in our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 30, 2017. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may materially affect our business, financial condition and results of operations.

Risks Related to XpresSpa

Our growth strategy is highly dependent on our ability to successfully identify and open new XpresSpa locations.

Our growth strategy primarily contemplates expansion through procuring new XpresSpa locations and opening new XpresSpa stores and kiosks. Implementing this strategy depends on our ability to successfully identify new store locations. We will also need to assess and mitigate the risk of any new store locations, to open the stores on favorable terms and to successfully integrate their operations with ours. We may not be able to successfully identify opportunities that meet these criteria, or, if we do, we may not be able to successfully negotiate and open new stores on a timely basis. If we are unable to identify and open new XpresSpa locations in accordance with our operating plan, our revenue growth rate and financial performance may fall short of our expectations.

 

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Risks Related to Our Common Stock

We may fail to meet publicly announced financial guidance or other expectations about our business, which would cause our stock to decline in value.

From time to time, we provide preliminary financial results or forward looking financial guidance, to our investors. Such statements are based on our current views, expectations and assumptions that may not prove to be accurate and may vary from actual results and involve known and unknown risks and uncertainties that may cause actual results, performance, achievements or share prices to be materially different from any future results, performance, achievements or share prices expressed or implied by such statements. Such risks and uncertainties include the risk factors contained herein and in our Form 10-K for the year ended December 31, 2016. If we fail to meet our projections and/or other financial guidance for any reason, our stock price could decline.

27

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3.Defaults Upon Senior Securities.

 

None.

 

Item 4.Mine Safety Disclosures.

 

Not applicable.

 

Item 5.Other Information.

 

None.

Private Placement Offering

On May 15, 2018, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with certain accredited investors (the “Investors”), pursuant to which the Company agreed to sell (the “Offering”) up to (i) an aggregate principal amount of $4,438,000 in 5% Secured Convertible Notes due 2019, which includes $88,000 issued to Palladium Capital Advisors as Placement Agent (the “Convertible Notes”), convertible into shares of common stock of the Company, par value $0.01 per share (“Common Stock”) at a conversion price of $0.62 per share, (ii) Class A Warrants to purchase 7,157,259 shares of Common Stock at an exercise price of $0.62 per share (the “Class A Warrants”) and (iii) Class B Warrants to purchase 3,578,630 shares of Common Stock at an exercise price of $0.62 per share (the “Class B Warrants,” and together with the Class A Warrants, the “Warrants”). The Company expects to receive $4,350,000 in gross proceeds from the Offering. The Company expects to close the transaction as soon as possible following the filing of these financial statements.

Securities Purchase Agreement

The Purchase Agreement contains representations and warranties of the Company and the Investors which are typical for transactions of this type. In addition, the Purchase Agreement contains customary covenants on the Company’s part that are typical for transactions of this type, as well as the following additional covenants: (i) until no Investor holds less than 10% of the Convertible Notes originally issued to such Investor, the Company agreed not to enter into any variable rate transactions; (ii) the Company agreed to offer to the Investors, until one year after the Closing, the opportunity to participate in any subsequent securities offerings by the Company; (iv) the Company agreed to use its commercially reasonable efforts to hold a stockholder meeting within 120 days of the Closing Date at which the Company will solicit the stockholders’ affirmative vote for approval of its issuance of certain shares issuable upon conversion of the Convertible Notes and the exercise of the Warrants described in the transaction documents in accordance with the applicable law and rules and regulations of the Nasdaq Stock Market (“Nasdaq”).

The Purchase Agreement obligates the Company to indemnify the Investors and various related parties for certain losses including those resulting from (i) any misrepresentation or breach of any representation or warranty made by the Company, (ii) any breach of any obligation of the Company, and (iii) certain claims by third parties.

 

28

Convertible Notes and Warrants

The Convertible Notes are senior secured obligations of the Company and are secured by certain personal property of the Company, pursuant to a Security Agreement (as defined below). Unless earlier converted or redeemed, the Convertible Notes will mature in November 2019. The Convertible Notes bear 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 Convertible Notes, including interest accrued thereon, are convertible at any time until a Convertible Note is no longer outstanding, in whole or in part, at the option of the holders into shares of Common Stock at a conversion price of $0.62 per share. The Convertible Notes have a beneficial ownership limitation such that none of the Investors have the right to convert any portion of their Convertible Notes if the Investor (together with its affiliates or any other persons acting together as a group with the Investor) would beneficially own in excess of 9.99% of the number of shares of Common Stock outstanding immediately after giving effect to the issuance of Common Stock issuable upon conversion of such Convertible Notes. In addition, the Convertible Notes provide for a conversion cap such that the Company may not issue any shares of Common Stock upon conversion of Convertible Notes which would exceed the aggregate number of shares of Common Stock the Company could issue upon conversion of the Convertible Notes without breaching its obligations, if any, under Nasdaq rules and regulations.

Interest on the Convertible Notes is payable in arrears beginning in September 2018, on the four-month anniversary of the issuance of the Convertible Notes, and is payable on each monthly anniversary thereafter, including at maturity when all amounts outstanding under the Convertible Notes become due and payable (each a “Payment Date”). The Company may elect to pay interest in cash, shares of Common Stock or a combination thereof. On each Payment Date, the Company must also make payments to the Investors in an amount equal to 6.67% of the initial principal amount of the outstanding Convertible Notes (the “Monthly Principal Amount”). The Company may elect to pay the Monthly Principal Amount in shares of Common Stock (or a combination of cash and shares of Common Stock) (a “Principal Share Payment”), subject to certain conditions. A Principal Share Payment will be determined by dividing the Monthly Principal Amount by ninety percent (90%) of the daily volume weighted average price, or VWAP, as defined and determined under the Convertible Notes, for the five (5) trading days beginning on the eighth (8th) trading day prior to the relevant Payment Date and ending on the fourth (4th) trading day preceding such Payment Date. Notwithstanding the foregoing, the Principal Share Repayment shall not be less than 20% of the conversion price of the Convertible Notes on the date of issuance unless the Company is not then subject to Nasdaq listing rule 5635(d) or if approved by Nasdaq.

If the Company receives gross cash proceeds of $10,000,000 or more in connection with a closing of an offering of its securities, the Convertible Notes require the Company to make an offer to the Investors to repay an Investor’s pro rata portion of the net proceeds, if such a closing occurs, of up to 100% of the Investor’s principal amount of Convertible Notes and accrued but unpaid interest designated by the Investor. Beginning four months after issuance, the Company has the option to prepay the outstanding principal amount of Convertible Notes, in whole or in part, by paying to the Investor 115% of the principal amount to be redeemed, together with accrued but unpaid interest, if any, and any other sums due, accrued or payable to the Investor under the Convertible Notes.

The Convertible Notes also contain certain negative covenants, including prohibitions on the incurrence of indebtedness, liens, amendments to the Company’s organizational documents, dividends, redemption, related party transactions and entry into any equity line of credit agreement or variable rate transactions. The Convertible Notes also contain standard and customary events of default including, but not limited to, failure to make payments when due, failure to observe or perform covenants or agreements contained in the Convertible Notes, existence of a default or event of default under any of the Transaction Documents (as defined in the Convertible Notes), the bankruptcy or insolvency of the Company or any of its subsidiaries and unsatisfied judgments against the Company.

The Class A Warrants and Class B Warrants entitle the holders to purchase 7,157,259 and 3,578,630 shares of Common Stock, respectively. The Class A Warrants are exercisable beginning six months from the date of issuance and have a term of five years. The Class B Warrants are exercisable beginning six months from the date of issuance and have a term of six months. The Class A Warrants and Class B Warrants each have an exercise price of $0.62 per share.

The terms of the each of the Convertible Notes and the Warrants provide for anti-dilution protection for issuances of Common Stock at a price per share less than the price equal to the conversion price or exercise price, as applicable, subject to approval by the Company’s stockholders. In the event of a “fundamental transaction” (as defined in the Warrants), the Investors will have the right to receive the value of the Warrants as determined in accordance with the Black Scholes option pricing model.

The Convertible Notes, Warrants and the shares of common stock issuable upon conversion and exercise of the Convertible Notes and Warrants (the “Underlying Shares”) have not been registered under the Securities Act of 1933, as amended (the “Securities Act”) and were issued and sold in reliance upon the exemption from registration contained in Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D promulgated thereunder. Each Investor acquired the securities for investment and acknowledged that it is an accredited investor as defined by Rule 501 under the Securities Act. The Convertible Notes, Warrants and Underlying Shares may not be offered or sold in the absence of an effective registration statement or exemption from the registration requirements under the Securities Act.

Registration Rights Agreement

In connection with the Purchase Agreement, the Company and the Investors entered into a Registration Rights Agreement (the “Registration Rights Agreement”), pursuant to which the Company has agreed to register the Underlying Shares on a registration statement on Form S-3 (the “Registration Statement”) to be filed with the United States Securities and Exchange Commission (the “SEC”) within forty-five (45) days after the date of the issuance of the Convertible Notes and Warrants and to cause the Registration Statement to be declared effective under the Securities Act of 1933, as amended (the “Securities Act”). If certain of the Company’s obligations under the Registration Rights Agreement are not met, the Company is required to pay partial liquidated damages to the Investors.


Security Agreement

The Company also entered into a Security Agreement (the “Security Agreement”) with Alpha Capital Anstalt, as collateral agent (the “Collateral Agent”), the Investors and such holders of the Convertible Notes as may be issued in the future (together with the Investors, the “Secured Parties”). Pursuant to the Security Agreement, the Secured Parties were granted a security interest in certain of the Company’s personal property to secure the payment and performance of all of the Company’s obligations under the Convertible Notes, Warrants, Purchase Agreement, Registration Rights Agreement and Security Agreement (together, the “Transaction Documents”). In addition, in connection the Security Agreement, certain of the Company’s subsidiaries executed a subsidiary guaranty (each a “Subsidiary Guarantor,” and together the “Subsidiary Guarantors”), pursuant to which the Subsidiary Guarantors agreed to guarantee and act as surety for the payment of the Convertible Notes and other of the Company’s obligations under the Transaction Documents. The Convertible Notes will be effectively subordinated to an existing secured promissory note, as amended (the “Senior Note”), and all of the Company’s obligations under the Senior Note (together the “Senior Debt”) held by Rockmore Investment Master Fund Ltd. (“Rockmore” or the “Senior Lender”) until the Senior Debt is paid in full.

The foregoing descriptions of the Purchase Agreement, Registration Rights Agreement, Security Agreement, Convertible Notes and Warrants are incomplete, and are subject to, and qualified in their entirety by reference to the full text of thereof, copies of each of which are attached hereto as exhibits 10.8, 10.9, 10.10, 4.1, 4.2 and 4.3, respectively, each of which is incorporated herein in its entirely by reference.

Exemption under the Company’s Section 382 Rights Agreement

The Company’s board of directors has previously adopted a Section 382 Rights Agreement, dated as of March 18, 2016, between the Company and American Stock Transfer & Trust Company, LLC, as rights agent (the “Rights Agreement”) to protect stockholder value by deterring acquisitions of the Company’s common stock that would potentially limit the Company’s ability to use its net operating loss carryforwards (“NOLs”) and other tax benefits, which may be used to reduce potential future income tax obligations. In general, the rights issued under the Rights Agreement impose a significant penalty to any person, together with its Affiliates (as defined in the Rights Agreement), that acquires 4.99% or more of the Company’s common stock, unless such person is an “Exempt Person” or is otherwise excluded from the Rights Agreement.

In connection with the Offering, the Company has granted an exemption to Alpha Capital Anstalt (“Alpha”) under the Rights Agreement, following the determination by the board of directors of the Company that Alpha is an “Exempt Person” pursuant to Section 29 of the Rights Agreement.

Rockmore Debt

On May 14, 2018, the Company and Rockmore agreed to extend the maturity date of the credit agreement and secured promissory note (the “Debt”) from May 1, 2019 to December 31, 2019. No other material terms of the Debt were modified.

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Item 6.Exhibits.Exhibits.

 

Exhibit

No.

 Description
4.1*Form of Convertible Note.
   
10.14.2* Amendment No. 4 to the Employment Agreement dated October 13, 2015, by and between the Company and Clifford Weinstein (incorporated by reference from Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on May 5, 2015).of Class A Warrant.
   
31.1*4.3* Form of Class B Warrant.
10.1*Credit agreement dated as of April 22, 2015, by and between XpresSpa Holdings, LLC and Rockmore Investment Master Fund Ltd.
10.2*First Amendment to Credit Agreement and Conditional Waiver dated as of August 8, 2016, by and between XpresSpa Holdings, LLC and Rockmore Investment Master Fund Ltd.
10.3*Second Amendment to Credit Agreement dated as of May 10, 2017, by and between XpresSpa Holdings, LLC and B3D, LLC.
10.4*Third Amendment to Credit Agreement dated as of May 14, 2018, by and between XpresSpa Holdings, LLC and B3D, LLC.
10.5*Security Agreement dated as of April 22, 2015, by and between XpresSpa Holdings, LLC and Rockmore Investment Master Fund Ltd.
10.6*Supplement No. 1 to Security Agreement dated as of May 18, 2015, by and between XpresSpa Holdings, LLC and Rockmore Investment Master Fund Ltd.
10.7*Supplement No. 2 to Security Agreement dated as of December 20, 2017, by and between XpresSpa Holdings, LLC and Rockmore Investment Master Fund Ltd.
10.8*Form of Securities Purchase Agreement, dated May 15, 2018, by and among the Company and the Investors.
10.9*Form of Registration Rights Agreement, dated May 15, 2018, by and among the Company and the Investors.
10.10*Form of Security Agreement, dated May 15, 2018, by and among the Company, the Subsidiaries, the Collateral Agent and the Investors.
31.1*Certification of Principal Executive Officer pursuant to Exchange Act, Rules 13a - 14(a) and 15d - 14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2* Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a - 14(a) and 15d - 14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32** Certifications of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101.INS* XBRL Instance Document
   
101.SCH* XBRL Taxonomy Extension Schema Document
   
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB* XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document
   
* Filed herewith.
** Furnished herein.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on the 9th15th day of August 2017.May 2018.

 

FORM Holdings Corp.XpresSpa Group, Inc.
 
By:/s/ ANASTASIA NYRKOVSKAYA
 Anastasia Nyrkovskaya
 Chief Financial Officer
 (Principal Financial and Accounting Officer)

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