UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20172019
¨ | 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 | |
Identification No.) | ||
(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 | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, par value $0.01 per share | XSPA | The Nasdaq Stock Market LLC |
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, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.Act:
Large accelerated filer | ¨ | Accelerated filer | ¨ |
Non-accelerated filer | x | Smaller reporting company | x |
Emerging growth company | ¨ |
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 November 9, 2017, 26,545,69012, 2019, 14,452,664 shares of the registrant’s common stock were outstanding.
FORM Holdings Corp.XpresSpa Group, Inc. and Subsidiaries
Table of Contents
Item 1. Condensed Consolidated Financial Statements
Item 1. | Consolidated Condensed Financial Statements |
FORM Holdings Corp.XpresSpa Group, Inc. and Subsidiaries
CONSOLIDATED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
September 30, 2017 (Unaudited) | December 31, 2016 | |||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 10,072 | $ | 17,910 | ||||
Accounts receivable, net | 2,668 | 404 | ||||||
Inventory | 4,044 | 2,890 | ||||||
Other current assets | 630 | 2,150 | ||||||
Assets held for disposal | 451 | 1,507 | ||||||
Total current assets | 17,865 | 24,861 | ||||||
Restricted cash | 487 | 638 | ||||||
Property and equipment, net | 14,411 | 16,284 | ||||||
Intangible assets, net | 13,897 | 15,233 | ||||||
Goodwill | 25,836 | 24,409 | ||||||
Other assets | 1,343 | 1,382 | ||||||
Total assets | $ | 73,839 | $ | 82,807 | ||||
Current liabilities | ||||||||
Accounts payable, accrued expenses and other current liabilities | $ | 10,401 | $ | 11,434 | ||||
Deferred revenue | 174 | 133 | ||||||
Liabilities held for disposal | 80 | 206 | ||||||
Total current liabilities | 10,655 | 11,773 | ||||||
Long-term liabilities | ||||||||
Debt | 6,500 | 6,500 | ||||||
Derivative warrant liabilities | 52 | 259 | ||||||
Other liabilities | 796 | 106 | ||||||
Total liabilities | 18,003 | 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 420,541 outstanding with a liquidation value of $20,186 as of September 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; 26,540,690 and 18,304,881 issued and outstanding as of September 30, 2017 and December 31, 2016, respectively | 265 | 183 | ||||||
Additional paid-in capital | 289,823 | 280,221 | ||||||
Accumulated deficit | (239,000 | ) | (220,868 | ) | ||||
Accumulated other comprehensive loss | (133 | ) | (13 | ) | ||||
Total equity attributable to the Company | 50,959 | 59,528 | ||||||
Noncontrolling interests | 4,877 | 4,641 | ||||||
Total equity | 55,836 | 64,169 | ||||||
Total liabilities and equity | $ | 73,839 | $ | 82,807 |
September 30, 2019 (Unaudited) | December 31, 2018 | |||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 2,432 | $ | 3,403 | ||||
Retail inventory | 854 | 782 | ||||||
Other current assets | 690 | 1,574 | ||||||
Total current assets | 3,976 | 5,759 | ||||||
Restricted cash | 451 | 487 | ||||||
Property and equipment, net | 9,621 | 11,795 | ||||||
Intangible assets, net | 7,358 | 9,167 | ||||||
Operating lease right of use assets, net | 9,818 | — | ||||||
Other assets | 2,494 | 3,376 | ||||||
Total assets | $ | 33,718 | $ | 30,584 | ||||
Current liabilities | ||||||||
Accounts payable, accrued expenses and other | $ | 7,761 | $ | 8,172 | ||||
Senior secured note | — | 6,500 | ||||||
Convertible notes, net | — | 1,986 | ||||||
Total current liabilities | 7,761 | 16,658 | ||||||
Senior secured note, net | 4,153 | — | ||||||
Convertible note, net | 1,046 | — | ||||||
Derivative liabilities | 6,088 | 476 | ||||||
Operating lease liabilities | 9,818 | — | ||||||
Other liabilities | 315 | 315 | ||||||
Total liabilities | 29,181 | 17,449 | ||||||
Commitments and contingencies (see Note 16) | ||||||||
Stockholders’ equity * | ||||||||
Series A Convertible Preferred Stock, $0.01 par value per share; 6,968 shares authorized; 6,673 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; 480,417 shares issued and 425,750 shares outstanding as of both periods with a liquidation value of $20,436 | 4 | 4 | ||||||
Series E Convertible Preferred Stock, $0.01 par value per share, 2,397,060 shares authorized; 967,742 issued and outstanding as of both periods with a liquidation value of $3,000 | 10 | 10 | ||||||
Series F Convertible Preferred Stock, $0.01 par value per share, 9,000 shares authorized; 8,996 shares issued and outstanding at September 30, 2019 and none at December 31, 2018 with a liquidation value of $900 | — | — | ||||||
Common Stock, $0.01 par value per share; 150,000,000 shares authorized; 2,918,169 and 1,761,802 issued and outstanding as of September 30, 2019 and December 31, 2018, respectively | 363 | 352 | ||||||
Additional paid-in capital | 301,601 | 295,904 | ||||||
Accumulated deficit | (301,068 | ) | (286,913 | ) | ||||
Accumulated other comprehensive loss | (360 | ) | (251 | ) | ||||
Total stockholders’ equity attributable to common shareholders | 550 | 9,106 | ||||||
Noncontrolling interests | 3,987 | 4,029 | ||||||
Total stockholders’ equity | 4,537 | 13,135 | ||||||
Total liabilities and stockholders’ equity | $ | 33,718 | $ | 30,584 |
*Adjusted, where applicable, to reflect the impact of the 1:20 reverse stock split that became effective on February 22, 2019.
The accompanying notes form an integral part of these consolidated condensed consolidated financial statements.
3
FORM Holdings Corp.
XpresSpa Group, Inc. and Subsidiaries
CONSOLIDATED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(In thousands, except share and per share data)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenue | ||||||||||||||||
Wellness | $ | 12,652 | $ | — | $ | 36,563 | $ | — | ||||||||
Technology | 4,879 | 1,751 | 11,820 | 5,478 | ||||||||||||
Intellectual property | 200 | 1,350 | 300 | 11,000 | ||||||||||||
Total revenue | 17,731 | 3,101 | 48,683 | 16,478 | ||||||||||||
Cost of sales | ||||||||||||||||
Wellness | 10,347 | — | 29,583 | — | ||||||||||||
Technology | 3,902 | 1,554 | 9,520 | 4,858 | ||||||||||||
Intellectual property* | 126 | 1,164 | 343 | 6,127 | ||||||||||||
Total cost of sales | 14,375 | 2,718 | 39,446 | 10,985 | ||||||||||||
Depreciation, amortization and impairment | 1,894 | 182 | 6,849 | 13,341 | ||||||||||||
General and administrative* | 5,473 | 3,564 | 17,012 | 8,059 | ||||||||||||
Total operating expenses | 21,742 | 6,464 | 63,307 | 32,385 | ||||||||||||
Operating loss from continuing operations | (4,011 | ) | (3,363 | ) | (14,624 | ) | (15,907 | ) | ||||||||
Non-operating income (expense), net | (85 | ) | (272 | ) | (24 | ) | 246 | |||||||||
Interest expense | (183 | ) | (949 | ) | (550 | ) | (1,697 | ) | ||||||||
Extinguishment of debt | — | (262 | ) | — | (472 | ) | ||||||||||
Loss from continuing operations before income taxes | (4,279 | ) | (4,846 | ) | (15,198 | ) | (17,830 | ) | ||||||||
Income tax expense | (57 | ) | — | (284 | ) | — | ||||||||||
Consolidated net loss from continuing operations | (4,336 | ) | (4,846 | ) | (15,482 | ) | (17,830 | ) | ||||||||
Loss from discontinued operations before income taxes | (208 | ) | (415 | ) | (2,321 | ) | (2,193 | ) | ||||||||
Income tax expense | — | — | — | — | ||||||||||||
Net loss from discontinued operations | (208 | ) | (415 | ) | (2,321 | ) | (2,193 | ) | ||||||||
Consolidated net loss | (4,544 | ) | (5,261 | ) | (17,803 | ) | (20,023 | ) | ||||||||
Net income attributable to noncontrolling interests | (153 | ) | — | (329 | ) | — | ||||||||||
Net loss attributable to the Company | $ | (4,697 | ) | $ | (5,261 | ) | $ | (18,132 | ) | $ | (20,023 | ) | ||||
Consolidated net loss from continuing operations | $ | (4,336 | ) | $ | (4,846 | ) | $ | (15,482 | ) | $ | (17,830 | ) | ||||
Other comprehensive income (loss) from continuing operations: foreign currency translations | 31 | — | (120 | ) | — | |||||||||||
Comprehensive loss from continuing operations | (4,305 | ) | (4,846 | ) | (15,602 | ) | (17,830 | ) | ||||||||
Consolidated net loss from discontinued operations | (208 | ) | (415 | ) | (2,321 | ) | (2,193 | ) | ||||||||
Other comprehensive loss from discontinued operations: foreign currency translations | — | — | — | — | ||||||||||||
Comprehensive loss from discontinued operations | (208 | ) | (415 | ) | (2,321 | ) | (2,193 | ) | ||||||||
Comprehensive loss | $ | (4,513 | ) | $ | (5,261 | ) | $ | (17,923 | ) | $ | (20,023 | ) | ||||
Loss per share: | ||||||||||||||||
Basic and diluted net loss per share | ||||||||||||||||
Loss per share from continuing operations | $ | (0.19 | ) | $ | (0.31 | ) | $ | (0.76 | ) | $ | (1.20 | ) | ||||
Loss per share from discontinued operations | (0.01 | ) | (0.03 | ) | (0.11 | ) | (0.15 | ) | ||||||||
Total basic and diluted net loss per share | $ | (0.20 | ) | $ | (0.34 | ) | $ | (0.87 | ) | $ | (1.35 | ) | ||||
Weighted-average number of shares outstanding during the period: | ||||||||||||||||
Basic | 24,144,002 | 15,473,895 | 20,852,034 | 14,880,925 | ||||||||||||
Diluted | 24,144,002 | 15,473,895 | 20,852,034 | 14,880,925 | ||||||||||||
*Includes stock-based compensation expense, as follows: | ||||||||||||||||
Intellectual property | $ | — | $ | 59 | $ | — | $ | 191 | ||||||||
General and administrative | 706 | 426 | 2,179 | 1,256 | ||||||||||||
Total stock-based compensation expense | $ | 706 | $ | 485 | $ | 2,179 | $ | 1,447 |
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenue | ||||||||||||||||
Services | $ | 10,230 | $ | 10,391 | $ | 30,704 | $ | 31,220 | ||||||||
Products | 2,301 | 2,531 | 5,781 | 6,540 | ||||||||||||
Other | — | — | 1,184 | 800 | ||||||||||||
Total revenue | 12,531 | 12,922 | 37,669 | 38,560 | ||||||||||||
Cost of sales | ||||||||||||||||
Labor | 5,842 | 5,997 | 17,507 | 18,697 | ||||||||||||
Occupancy | 1,894 | 1,996 | 5,811 | 6,216 | ||||||||||||
Products and other operating costs | 1,953 | 1,992 | 5,322 | 5,208 | ||||||||||||
Total cost of sales | 9,689 | 9,985 | 28,640 | 30,121 | ||||||||||||
General and administrative | 3,108 | 3,943 | 9,204 | 12,443 | ||||||||||||
Depreciation and amortization | 1,464 | 1,879 | 4,692 | 5,375 | ||||||||||||
Impairment of assets | 106 | — | 936 | — | ||||||||||||
Impairment of goodwill | — | — | — | 19,630 | ||||||||||||
Total operating expenses | 14,367 | 15,807 | 43,472 | 67,569 | ||||||||||||
Operating loss from continuing operations | (1,836 | ) | (2,885 | ) | (5,803 | ) | (29,009 | ) | ||||||||
Interest expense | (780 | ) | (624 | ) | (2,052 | ) | (1,212 | ) | ||||||||
Other non-operating income (expense), net | (2,161 | ) | 378 | (5,817 | ) | 877 | ||||||||||
Loss from continuing operations before income taxes | (4,777 | ) | (3,131 | ) | (13,672 | ) | (29,344 | ) | ||||||||
Income tax benefit | 143 | 66 | 101 | 198 | ||||||||||||
Loss from continuing operations after income taxes | (4,634 | ) | (3,065 | ) | (13,571 | ) | (29,146 | ) | ||||||||
Loss from discontinued operations, net of income taxes | — | — | — | (1,115 | ) | |||||||||||
Net loss | (4,634 | ) | (3,065 | ) | (13,571 | ) | (30,261 | ) | ||||||||
Net income attributable to noncontrolling interests | (210 | ) | (122 | ) | (584 | ) | (382 | ) | ||||||||
Net loss attributable to common shareholders | $ | (4,844 | ) | $ | (3,187 | ) | $ | (14,155 | ) | $ | (30,643 | ) | ||||
Loss from continuing operations | $ | (4,634 | ) | $ | (3,065 | ) | $ | (13,571 | ) | $ | (29,146 | ) | ||||
Other comprehensive income (loss) from continuing operations | 82 | (3 | ) | (109 | ) | (205 | ) | |||||||||
Comprehensive loss from continuing operations | (4,552 | ) | (3,068 | ) | (13,680 | ) | (29,351 | ) | ||||||||
Comprehensive loss from discontinued operations | — | — | — | (1,115 | ) | |||||||||||
Comprehensive loss | $ | (4,552 | ) | $ | (3,068 | ) | $ | (13,680 | ) | $ | (30,466 | ) | ||||
Loss per share attributable to common shareholders | ||||||||||||||||
Loss per share from continuing operations | $ | (1.68 | ) | $ | (2.25 | ) | $ | (6.33 | ) | $ | (21.66 | ) | ||||
Loss per share from discontinued operations | — | — | — | (.82 | ) | |||||||||||
Basic and diluted net loss per common share | $ | (1.68 | ) | $ | (2.25 | ) | $ | (6.33 | ) | $ | (22.48 | ) | ||||
Weighted-average number of shares outstanding during the period*: | ||||||||||||||||
Basic | 2,875,501 | 1,417,614 | 2,236,323 | 1,363,440 | ||||||||||||
Diluted | 2,875,501 | 1,417,614 | 2,236,323 | 1,363,440 |
*Adjusted to reflect the impact of the 1:20 reverse stock split that became effective on February 22, 2019.
The accompanying notes form an integral part of these consolidated condensed consolidated financial statements.
FORM Holdings Corp.XpresSpa Group, Inc. and Subsidiaries
CONSOLIDATED 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 FORM equity | Non controlling interests | Total equity | |||||||||||||||||||||||||
December 31, 2016 | $ | 5 | $ | 183 | $ | 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 | ||||||||||||||||||||||||
Net proceeds from sale and issuance of shares of common stock in public offering | — | 69 | 6,515 | — | — | 6,584 | — | 6,584 | ||||||||||||||||||||||||
Decrease in shares of preferred stock issued to XpresSpa sellers | — | — | (908 | ) | — | — | (908 | ) | — | (908 | ) | |||||||||||||||||||||
Conversion of preferred stock to common stock | (1 | ) | 4 | (4 | ) | — | — | (1 | ) | — | (1 | ) | ||||||||||||||||||||
Stock-based compensation | — | — | 2,179 | — | — | 2,179 | — | 2,179 | ||||||||||||||||||||||||
Net loss for the period | — | — | — | (18,132 | ) | — | (18,132 | ) | 329 | (17,803 | ) | |||||||||||||||||||||
Foreign currency translation | — | — | — | — | (120 | ) | (120 | ) | — | (120 | ) | |||||||||||||||||||||
Net distributions to noncontrolling interests | — | — | — | — | — | — | (93 | ) | (93 | ) | ||||||||||||||||||||||
September 30, 2017 | $ | 4 | $ | 265 | $ | 289,823 | $ | (239,000 | ) | $ | (133 | ) | $ | 50,959 | $ | 4,877 | $ | 55,836 | ||||||||||||||
Preferred stock | Common 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 | |||||||||||||||
Vesting of restricted stock units (“RSUs”) | — | 1 | (1 | ) | — | — | — | — | — | |||||||||||||||||||||||
Issuance of common stock for repayment of convertible debt and related interest | — | 18 | 3,031 | — | — | 3,049 | — | 3,049 | ||||||||||||||||||||||||
Sale of shares of common stock from subscription agreement | — | 7 | 1,727 | — | — | 1,734 | — | 1,734 | ||||||||||||||||||||||||
Stock-based compensation | — | — | 1,447 | — | — | 1,447 | — | 1,447 | ||||||||||||||||||||||||
Net loss for the period | — | — | — | (20,023 | ) | — | (20,023 | ) | — | (20,023 | ) | |||||||||||||||||||||
September 30, 2016 | $ | — | $ | 158 | $ | 243,450 | $ | (216,885 | ) | $ | — | $ | 26,723 | $ | — | $ | 26,723 |
Preferred stock | Common stock | Additional paid- in capital | Accumulated deficit | Accumulated other comprehensive loss | Total Company equity | Non- controlling interests | Total equity | |||||||||||||||||||||||||
December 31, 2018 | $ | 14 | $ | 352 | $ | 295,904 | $ | (286,913 | ) | $ | (251 | ) | $ | 9,106 | $ | 4,029 | $ | 13,135 | ||||||||||||||
Issuance of common stock for repayment of debt and interest | — | 2 | 815 | — | — | 817 | — | 817 | ||||||||||||||||||||||||
Stock-based compensation | — | — | 104 | — | — | 104 | — | 104 | ||||||||||||||||||||||||
Net income (loss) for the period | — | — | — | (2,973 | ) | — | (2,973 | ) | 129 | (2,844 | ) | |||||||||||||||||||||
Foreign currency translation | — | — | — | — | (21 | ) | (21 | ) | — | (21 | ) | |||||||||||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | — | (166 | ) | (166 | ) | ||||||||||||||||||||||
March 31, 2019 | 14 | 354 | 296,823 | (289,886 | ) | (272 | ) | 7,033 | 3,992 | 11,025 | ||||||||||||||||||||||
Conversion of senior notes and warrants into common shares | — | 6 | 3,488 | — | — | 3,494 | — | 3,494 | ||||||||||||||||||||||||
Stock-based compensation | — | — | 127 | — | — | 127 | — | 127 | ||||||||||||||||||||||||
Foreign currency translation | — | — | — | — | (170 | ) | (170 | ) | — | (170 | ) | |||||||||||||||||||||
Net income (loss) for the period | — | — | — | (6,338 | ) | — | (6,338 | ) | 245 | (6,093 | ) | |||||||||||||||||||||
Contributions from noncontrolling interests | — | — | — | — | — | — | 16 | 16 | ||||||||||||||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | �� | (174 | ) | (174 | ) | ||||||||||||||||||||||
June 30, 2019 | 14 | 360 | 300,438 | (296,224 | ) | (442 | ) | 4,146 | 4,079 | 8,225 | ||||||||||||||||||||||
Issuance of Series F Preferred Stock | — | — | 1,131 | — | — | 1,131 | — | 1,131 | ||||||||||||||||||||||||
Stock-based compensation | — | — | 35 | — | — | 35 | — | 35 | ||||||||||||||||||||||||
Exercise of June 2019 Class A Warrants into common stock | — | 3 | (3) | — | — | — | — | — | ||||||||||||||||||||||||
Foreign currency translation | — | — | — | — | 82 | 82 | — | 82 | ||||||||||||||||||||||||
Net income (loss) for the period | — | — | — | (4,844 | ) | — | (4,844 | ) | 210 | (4,634 | ) | |||||||||||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | — | (302 | ) | (302 | ) | ||||||||||||||||||||||
September 30, 2019 | $ | 14 | $ | 363 | $ | 301,601 | $ | (301,068 | ) | $ | (360 | ) | $ | 550 | $ | 3,987 | $ | 4,537 |
*Adjusted to reflect the impact of the 1:20 reverse stock split that became effective on February 22, 2019.
The accompanying notes form an integral part of these consolidated condensed consolidated financial statements.
5
FORM Holdings Corp.
XpresSpa Group, Inc. and Subsidiaries
CONSOLIDATED CONDENSED 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 interests | 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 income (loss) for the period | — | — | — | (23,933 | ) | — | (23,933 | ) | 83 | (23,850 | ) | |||||||||||||||||||||
Foreign currency translation | — | — | — | — | (66 | ) | (66 | ) | — | (66 | ) | |||||||||||||||||||||
Contributions from noncontrolling interests | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | — | (220 | ) | (220 | ) | ||||||||||||||||||||||
March 31, 2018 | 4 | 266 | 290,707 | (273,641 | ) | (140 | ) | 17,196 | 4,819 | 22,015 | ||||||||||||||||||||||
Vesting of restricted stock units (“RSUs”) | — | 5 | (5 | ) | — | — | — | — | — | |||||||||||||||||||||||
Issuance of equity warrants | — | — | 64 | — | — | 64 | — | 64 | ||||||||||||||||||||||||
Stock-based compensation | — | — | 259 | — | — | 259 | — | 259 | ||||||||||||||||||||||||
Net income (loss) for the period | — | — | — | (3,523 | ) | — | (3,523 | ) | 177 | (3,346 | ) | |||||||||||||||||||||
Foreign currency translation | — | — | — | — | (136 | ) | (136 | ) | — | (136 | ) | |||||||||||||||||||||
Contributions from noncontrolling interests | — | — | — | — | — | — | 76 | 76 | ||||||||||||||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | — | (920 | ) | (920 | ) | ||||||||||||||||||||||
June 30, 2018 | 4 | 271 | 291,025 | (277,164 | ) | (276 | ) | 13,860 | 4,152 | 18,012 | ||||||||||||||||||||||
Stock-based compensation | — | — | 194 | — | — | 194 | 194 | |||||||||||||||||||||||||
Issuance of common stock for repayment of debt and interest | — | 48 | 770 | — | — | 818 | — | 818 | ||||||||||||||||||||||||
Net income (loss) for the period | — | — | — | (3,187 | ) | — | (3,187 | ) | 122 | (3,065 | ) | |||||||||||||||||||||
Foreign currency translation | — | — | — | — | (3 | ) | (3 | ) | (3 | ) | ||||||||||||||||||||||
Contributions from noncontrolling interests | — | — | — | — | — | — | 43 | 43 | ||||||||||||||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | — | (244 | ) | (244 | ) | ||||||||||||||||||||||
September 30, 2018 | $ | 4 | $ | 319 | 291,989 | (280,351 | ) | (279 | ) | 11,682 | 4,073 | 15,755 |
The accompanying notes form an integral part of these consolidated condensed financial statements.
XpresSpa Group, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine months ended September 30, | ||||||||
2017 | 2016 | |||||||
Cash flows from operating activities | ||||||||
Consolidated net loss | $ | (17,803 | ) | $ | (20,023 | ) | ||
Adjustments to reconcile consolidated net loss to net cash used in operating activities: | ||||||||
Items not affecting cash flows | ||||||||
Depreciation and amortization | 6,849 | 1,404 | ||||||
Impairment of intangible assets | — | 11,937 | ||||||
Amortization of debt discount and debt issuance costs | — | 1,798 | ||||||
Stock-based compensation | 2,179 | 1,447 | ||||||
Amendment to warrants as part of debt modification | — | (281 | ) | |||||
Extinguishment of debt | — | 356 | ||||||
Issuance of shares of common stock for services | 20 | 53 | ||||||
Gain on disposal of asset | (148 | ) | — | |||||
Change in fair value of derivative warrant liabilities and conversion feature | (207 | ) | 185 | |||||
Conversion of shares of preferred stock to shares of common stock | (1 | ) | — | |||||
Exchange rate gain, net | — | (76 | ) | |||||
Changes in current assets and liabilities net of effects of acquisition | ||||||||
Increase in accounts receivable, net | (1,729 | ) | (1,581 | ) | ||||
Increase in inventory | (1,103 | ) | (89 | ) | ||||
Decrease in other current assets and other assets | 1,739 | 307 | ||||||
Increase (decrease) in accounts payable, accrued expenses and other current liabilities | (1,593 | ) | 1,502 | |||||
Increase (decrease) in deferred revenue | (79 | ) | 81 | |||||
Decrease in other liabilities | (13 | ) | (267 | ) | ||||
Net cash used in operating activities – continuing operations | (11,889 | ) | (3,247 | ) | ||||
Net cash provided by operating activities – discontinued operations | 930 | 278 | ||||||
Net cash used in operating activities | (10,959 | ) | (2,969 | ) | ||||
Cash flows from investing activities | ||||||||
Cash acquired as part of acquisition | 26 | — | ||||||
Acquisition of property and equipment | (2,734 | ) | (243 | ) | ||||
Acquisition of software | (331 | ) | — | |||||
Proceeds from sale of asset | 150 | — | ||||||
Decrease in deposits | — | 2,001 | ||||||
Increase in investments | — | (1,734 | ) | |||||
Net cash provided by (used in) investing activities | (2,889 | ) | 24 | |||||
Cash flows from financing activities | ||||||||
Proceeds from commitments to issue common stock under subscription agreement | — | 1,734 | ||||||
Net proceeds from sale and issuance of shares of common stock in public offering | 6,584 | — | ||||||
Repayment of debt and line of credit | (361 | ) | (2,011 | ) | ||||
Net distributions to noncontrolling interests | (93 | ) | — | |||||
Debt issuance costs | — | (50 | ) | |||||
Net cash provided by (used in) financing activities | 6,130 | (327 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents | (120 | ) | — | |||||
Decrease in cash and cash equivalents | (7,838 | ) | (3,272 | ) | ||||
Cash and cash equivalents at beginning of period | 17,910 | 24,951 | ||||||
Cash and cash equivalents at end of period | $ | 10,072 | $ | 21,679 | ||||
Cash paid during the period for | ||||||||
Interest | $ | 580 | $ | 40 | ||||
Noncash investing and financing transactions | ||||||||
Issuance of common stock to repay debt and interest | — | 2,996 |
Nine months ended September 30, | ||||||||
2019 | 2018 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (13,571 | ) | $ | (30,261 | ) | ||
Net loss from discontinued operations | — | (1,115 | ) | |||||
Net loss from continuing operations | (13,571 | ) | (29,146 | ) | ||||
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities: | ||||||||
Depreciation and amortization | 4,692 | 5,375 | ||||||
Issuance of Series F Convertible Preferred Stock | 1,131 | — | ||||||
Revaluation of warrants and conversion options | 780 | (1,541 | ) | |||||
Debt conversion expense | 1,547 | 169 | ||||||
Amortization of debt discount and debt issuance costs | 955 | 589 | ||||||
Impairment of assets | 936 | — | ||||||
Stock-based compensation | 266 | 765 | ||||||
Impairment of cost method investment | 1,188 | — | ||||||
Accretion of interest on notes | 476 | — | ||||||
Issuance of warrants | 689 | 64 | ||||||
Impairment of goodwill | — | 19,630 | ||||||
Gain on the sale of patents | — | (450 | ) | |||||
Changes in assets and liabilities: | ||||||||
(Increase) decrease in inventory | (72 | ) | 357 | |||||
Increase in other current assets and other assets | 574 | (741 | ) | |||||
(Increase) in accounts payable, accrued expenses and other | (373) | (1,095 | ) | |||||
Decrease in other liabilities | — | (105 | ) | |||||
Net cash used in operating activities – continuing operations | (782 | ) | (6,129 | ) | ||||
Net cash provided by operating activities – discontinued operations | — | 1,501 | ||||||
Net cash used in operating activities | (782 | ) | (4,628 | ) | ||||
Cash flows from investing activities: | ||||||||
Acquisition of property and equipment | (1,641 | ) | (2,682 | ) | ||||
Acquisition of software | — | (143 | ) | |||||
Proceeds from the sale of patents | — | 250 | ||||||
Cash received from payment of note receivable | — | 800 | ||||||
Net cash used in investing activities | (1,641 | ) | (1,775 | ) | ||||
Cash flows from financing activities: | ||||||||
Issuance of note to Calm | 2,500 | — | ||||||
Distributions to noncontrolling interests | (642 | ) | (1,384 | ) | ||||
Contributions from noncontrolling interests | 16 | 119 | ||||||
Debt issuance costs | (220 | ) | (320 | ) | ||||
Payments on convertible notes | (129 | ) | — | |||||
Proceeds from convertible notes and warrants | — | 4,350 | ||||||
Net cash provided by financing activities: | 1,525 | 2,765 | ||||||
Effect of exchange rate changes and foreign currency translation | (109 | ) | (205 | ) | ||||
Decrease in cash and cash equivalents | (1,007 | ) | (3,843 | ) | ||||
Cash and cash equivalents and restricted cash at beginning of period | 3,890 | 6,368 | ||||||
Cash and cash equivalents and restricted cash at end of period | $ | 2,883 | $ | 2,525 | ||||
Cash paid during the period for: | ||||||||
Interest | $ | 628 | $ | 580 | ||||
Income taxes | $ | 35 | $ | — | ||||
Non-cash investing and financing transactions: | ||||||||
Addition of right of use assets and liabilities | $ | 9,818 | — | |||||
Conversion of notes and interest into common stock | $ | 2,728 | $ | — | ||||
Increase in note to pay fee to lender | $ | 500 | $ | — | ||||
Issuance of common stock to repay $649 of debt and interest | $ | — | $ | 818 | ||||
Non-cash acquisition of cost method investment | $ | — | $ | 2,705 | ||||
Debt discount related to issuance of convertible notes | $ | — | $ | 1,962 |
The accompanying notes form an integral part of these consolidated condensed consolidated financial statements.
FORM Holdings Corp.
XpresSpa Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except for share and per share data)
Note 1. General
Overview
On January 5, 2018, the Company changed its name to XpresSpa Group, Inc. (“XpresSpa Group” or the “Parent”) from FORM Holdings Corp. The Company rebranded to XpresSpa Group to align its corporate strategy to build a pure-play health and wellness services company, which commenced following its acquisition of XpresSpa Holdings, LLC (“FORM”Holdings” or “XpresSpa”) on December 23, 2016 (XpresSpa Group, Inc. and Holdings consolidated is referred to as the “Company”) has three operating segments: wellness, technology and intellectual property..
The Company’sAs a result of the transition to a pure-play health and wellness services company, the Company currently has one operating segment consists ofthat is also its sole reporting unit, XpresSpa, which is athe leading airport retailer of spa services. XpresSpa is a well-recognized airport spa brand with 51 locations, consisting of 47 domestic and 4 international, as of September 30, 2017. XpresSpa offers travelers premium spa services, including massage, nail and hairskin care, as well as spa and travel products.
Basis of Presentation and Principals of Consolidation
The Company acquired XpresSpaunaudited interim consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles in the fourth quarterUnited States of 2016.America (“GAAP”) for interim financial information and the instructions to Article 8-03 of Regulation S-X, and should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2018. The unaudited interim consolidated condensed financial statements for all 2018 periods presented have been derived from the audited financial statements. The financial statements include the accounts of the Company, all entities that are wholly owned by the Company, and all entities in which the Company has a controlling financial interest. All adjustments that, in the opinion of management, are necessary for a fair presentation for the periods presented have been reflected by the Company. Such adjustments are of a normal, recurring nature. The results of operations for the three and nine-month periods ended September 30, 2019 are not necessarily indicative of the results that may be expected for the entire fiscal year or for any other interim period. All significant intercompany balances and transactions have been eliminated in consolidation.
Recent Developments
The Company’s 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. The Company acquired Group Mobile in the fourth quarter 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.
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.
As further detailed in Note 10 “Discontinued Operations and Assets and Liabilities Held for Disposal,” in June 2017, the Company concluded that the requirement to report the results of FLI Charge as discontinued operations was triggered. FLI Charge was subsequently sold in October 2017.Calm Private Placement
On July 26, 2017,8, 2019, the Company entered into an underwritinga securities purchase agreement (the “Underwriting“Calm Purchase Agreement”) with Roth Capital Partners, LLC, acting asCalm.com, Inc. (“Calm”) pursuant to which the representativeCompany agreed to sell (i) an aggregate principal amount of the several underwriters named therein (collectively, the “Underwriters”$2,500 in an unsecured convertible note due 2022 (the “Calm Note”), relatingwhich is convertible into shares of Series E Convertible Preferred Stock (the “Series E Preferred Stock”) and (ii) warrants to the issuance and sale (the “Offering”) of 6,900,000purchase 937,500 shares of the Company’s common stock, par value $0.01 per share (“FORM Common(the “Common Stock”) including 900,000 shares, at an exercise price of $2.00 per share (the “Calm Warrants”) (collectively, the “Calm Private Placement”).
The Company received $2,500 in gross proceeds from the Calm Private Placement.
Convertible Notes and Warrants
The Calm Note is an unsecured subordinated obligation of the Company. Unless earlier converted or redeemed, the Calm Note will mature on May 31, 2022. The Calm Note bears interest at a rate of 5% per annum, subject to increase in the Underwriters’ over-allotmentevent of default to the lesser of 18% per annum or the maximum rate permitted under applicable law. The Calm Note is convertible at any time until the Calm Note is no longer outstanding, in whole or in part, at the option of Calm into shares of Series E Preferred Stock at a conversion price equal to $3.10 per share, except that no shares of Series E Preferred Stock could be issued as payment of interest or in connection with anti-dilution protection or voluntary reduction of the conversion price until receipt of shareholder approval, which approval was obtained on October 2, 2019. Interest on the Calm Note is payable in arrears beginning on the last day of each February, May, August and November during the period beginning on the original issuance date and ending on, and including, the maturity date, when all amounts outstanding under the Calm Note becomes due and payable in cash. The Company may elect to pay interest in cash, shares of Series E Preferred Stock or a combination thereof.
The Calm Warrants entitle Calm to purchase an aggregate of 937,500 shares of Common Stock. The Calm Warrants are exercisable beginning six months from the date of issuance, have a term of five years and feature an exercise price equal to $2.00 per share.
See Note 9. “Long-term Notes and Convertible Notes”, for discussion of the accounting for the Calm Private Placement.
Calm Collaboration Agreement
On July 8, 2019, the Company entered into an Amended and Restated Product Sale and Marketing Agreement with Calm (the “Amended and Restated Collaboration Agreement”), which replaced the parties’ previous Product Sale and Marketing Agreement, dated as of November 12, 2018. The Amended and Restated Collaboration Agreement primarily relates to the display, marketing, promotion, offer for sale and sale of Calm’s products in each of the Company’s branded stores worldwide. The Amended and Restated Collaboration Agreement will remain in effect until July 31, 2021, unless terminated earlier in accordance with the Amended and Restated Collaboration Agreement, and automatically renews for successive terms of six months unless either party provides written notice of termination no later than thirty days prior to any such automatic renewal of the Amended and Restated Collaboration Agreement. On October 30, 2019, the Company and Calm entered into an amendment to the Amended and Restated Collaboration Agreement, which provides for the addition of certain Calm branded products, which amendment is attached as Exhibit 10.8 to this Quarterly Report on Form 10-Q and incorporated by reference herein.
Amendment to Certificate of Designation of Series E Convertible Preferred Stock
On July 8, 2019, the Company filed a certificate of amendment to the Certificate of Designation of Series E Convertible Preferred Stock (the “Series E COD Amendment”) with the State of Delaware to (i) increase the number of authorized shares of Series E Preferred Stock to 2,397,060 and (ii) upon receipt of Shareholder Approval, reduce the conversion price to $2.00. The Series E COD Amendment was approved by the Board of Directors of the Company and the Company obtained shareholder approval of the Series E COD Amendment on October 2, 2019. See Note 10.“Stockholders’ Equity”.
B3D Transaction and Senior Secured Note
On July 8, 2019, Holdings entered into the fourth amendment (the “Credit Agreement Amendment”) to its existing Credit Agreement with B3D, LLC (“B3D”) (the “Senior Secured Note” or the “B3D Note”) in order to, among other provisions, (i) extend the maturity date to May 31, 2021, (ii) reduce the applicable interest rate to 9.0%, and (iii) to amend and restate certain other provisions relating to its 11.24% Senior Secured Note. As consideration for these and other modifications the principal amount owed to B3D was increased to $7.0 million. Principal and any interest accrued thereon are convertible, at B3D’s option, into Common Stock subject to receipt of shareholder approval, which was exercisedobtained on October 2, 2019 ( the “B3D Transaction”).
B3D Note
The B3D Note is a senior secured and guaranteed obligation of Holdings, secured by the personal property of the parent company of Holdings (XpresSpa Group, Inc.) and Holdings’ wholly owned subsidiaries. Unless earlier converted or redeemed, the B3D Note will mature on May 31, 2021. The B3D Note bears interest at a rate of 9.00% per annum, calculated on a monthly basis. Interest only is payable in arrears on the last business date of each month (the "Monthly Interest"). Notwithstanding the foregoing, until the earlier of (i) ninety days from the date of the Credit Agreement Amendment or (ii) the date upon which shareholder approval is received, which approval was obtained on October 2, 2019 (the "Interest Deferment Date"), the Monthly Interest continued to accrue, compounded monthly, and all unpaid amounts thereof became due and payable on the Interest Deferment Date. At the option of Holdings, all or any portion of the Monthly Interest that is payable (i) on the Interest Deferment Date or (ii) after the Interest Deferment Date, but not more than twenty-one days and not less than five trading days prior to the date on which each payment of Monthly Interest is due, may be paid in shares of XpresSpa Group, Inc.’s Common Stock. At any time after receipt of shareholder approval until the B3D Note is no longer outstanding, at the option of B3D, all or any portion of the outstanding principal amount of the B3D Note, plus any accrued and unpaid interest thereon, shall be convertible into XpresSpa Group, Inc.’s Common Stock at a conversion price equal to $2.00 per share.
See Note 9."Long-term Notes and Convertible Notes", for discussion of the accounting for the B3D Transaction and B3D Note.
On August 2, 201722, 2019, the Company entered into an amendment to the B3D Note. Among other provisions, the amendment provided that B3D shall not have the right to convert the B3D Note into shares of Common Stock to the extent that such conversion would cause B3D to beneficially own in excess of the Beneficial Ownership Limitation, initially defined as 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon conversion of the B3D Note.
Series D Convertible Preferred Stock Amendment and closed on August 4, 2017. TheDecember 2016 Warrant Amendment
Series D Convertible Preferred Stock Amendment
On July 8, 2019, the Company filed a certificate of amendment to the Certificate of Designation of Series D Convertible Preferred Stock (the “Series D COD Amendment”) with the State of Delaware to, upon receipt of shareholder approval, reduce the conversion price to $2.00 and provide for automatic conversion of the publicSeries D Convertible Preferred Stock (the “Series D Preferred Stock”) into shares of Common Stock. The Series D COD Amendment was approved by the Company’s Board and the Company obtained shareholder approval on October 2, 2019.
December 2016 Warrant Amendment
On July 8, 2019, the Company entered into an amendment to certain outstanding warrants issued in December 2016 (the “December 2016 Warrants”) to the holders of its Series D Preferred Stock (the “December 2016 Warrant Amendment”) to provide for (i) a reduction in the Offeringprice to convert to Common Stock to $2.00, (ii) certain anti-dilution price protection and (iii) voluntary reduction of the conversion price by the Company in its discretion. The Company obtained shareholder approval in connection with the December 2016 Warrant Amendment on October 2, 2019. The December 2016 Warrants were recorded as an equity instrument at December 31, 2016. As such, no adjustment to the consolidated condensed financial statements was $1.10made as a result of the change in the conversion price.
May 2018 SPA Amendment, Series F Preferred Stock and Series B Preferred Stock
May 2018 SPA Amendment
On May 15, 2018, in a private placement offering, the Company issued (i) 5% Secured Convertible Notes (the “5% Secured Convertible Notes”) convertible into Common Stock at $12.40 per share, due November 2019, (ii) May 2018 Class A Warrants to purchase 357,863 shares of Common Stock (the “May 2018 Class A Warrants”) and (iii) Class B Warrants to purchase 178,932 shares of Common Stock (the “May 2018 Class B Warrants”).
On July 8, 2019, the Company entered into an amendment (the “May 2018 SPA Amendment”) to its Securities Purchase Agreement, dated as of May 15, 2018, by and between the Company and the Underwriters agreedpurchasers party thereto (the “May 2018 SPA”), to purchaseprovide for, among other provisions, (i) an update to certain definitions, including the sharesdefinition of FORM Common Stock froman “Exempt Issuance,” (ii) the Companywaiver of certain provisions regarding restrictions on subsequent equity sales and participation in subsequent financings, (iii) the removal of certain of such provisions upon receipt of shareholder approval (obtained on October 2, 2019), (iv) the amendment to certain provisions of the May 2018 Class A Warrants issued pursuant to the Underwriting Agreement atMay 2018 SPA to modify certain provisions in connection with a purchaseNotice Failure (as such term is defined in the May 2018 Class A Warrants), and the reduction in the exercise price of $1.023the May 2018 Class A Warrants issuable pursuant to anti-dilution price protection contained in such May 2018 Class A Warrants to $2.00 per share. The net proceedsshare following receipt of shareholder approval, which approval was obtained on October 2, 2019, (v) the cancellation of all outstanding May 2018 Class B Warrants and (vi) the establishment of a new class of preferred stock, designated Series F Convertible Preferred Stock, par value $0.01 per share (the “Series F Preferred Stock”) and the issuance of 8,996 shares of such Series F Preferred Stock to the parties to the May 2018 SPA Amendment, which are convertible into Common Stock upon receipt of shareholder approval, which approval was obtained on October 2, 2019.
Certificate of Designation of Series F Preferred Stock
In connection with the May 2018 SPA Amendment, on July 8, 2019, the Company filed with the Secretary of State of the State of Delaware a Certificate of Designation of Preferences, Rights and Limitations of Series F Convertible Preferred Stock (the “Series F Certificate of Designation”) establishing and designating the rights, powers and preferences of the Series F Preferred Stock. The Company designated 9,000 shares of Series F Preferred Stock. The Series F Convertible Preferred Stock was recorded at its fair value on July 8, 2019 of $1,154 (net of issuance costs of approximately $123) in the Company’s consolidated condensed balance sheet as of September 30, 2019. See Note 10.“Stockholders’ Equity” for further discussion.
Certificate of Elimination of Series B Preferred Stock
On July 8, 2019, the Company filed a Certificate of Elimination of Shares of Series B Preferred Stock (the “Certificate of Elimination”) to the Company’s amended and restated certificate of incorporation. The Certificate of Elimination reduced, pursuant to Section 151(g) of the Delaware General Corporation Law, the number of authorized shares of Series B Convertible Preferred Stock of the Company, par value $0.01 per share (the “Series B Preferred Stock”) from 1,609,167 shares to zero shares. Pursuant to the provisions of Section 151(g) of the Delaware General Corporation Law, the 1,609,167 authorized shares of Series B Preferred Stock were eliminated pursuant to the reduction return to the available undesignated preferred stock of the Company and may be re-designated into another series of preferred stock.
CEO Transition
On February 8, 2019, Edward Jankowski resigned as Chief Executive Officer of the Company and as a director of the Company. Mr. Jankowski’s resignation was not as a result of any disagreement with the Company on any matters related to the Company’s operations, policies or practices. Mr. Jankowski is receiving termination benefits including $375 payable in equal installments over a twelve-month term which commenced on February 13, 2019 and COBRA continuation coverage paid in full by the Company for up to a maximum of twelve months.
Effective as of February 11, 2019, Douglas Satzman was appointed by the Company’s Board of Directors as the Chief Executive Officer of the Company and as a director of the Company to fill the position vacated by Mr. Jankowski.
Liquidity and Going Concern
As of September 30, 2019, the Company had cash and cash equivalents of $2,432, total current assets of $3,976, total current liabilities of $7,761, and a working capital deficiency of $3,785, compared to a working capital deficiency of $10,899 as of December 31, 2018.
The Company is exploring valuable strategic partnerships, right-sizing its corporate structure, and stream-lining spa operations. The Company expects that these actions will be executed in alignment with the anticipated timing of its long-term liquidity needs. There can be no assurance, however, that any such opportunities will materialize.
The Company has also reduced operating expenses with net cash used in operating activities decreasing from $6,129 for the nine months ended September 30, 2018 to $782 for the nine months ended September 30, 2019. While the Company continues to focus on its overall profitability; the Company expects to incur net losses in the foreseeable future.
The report of the Company’s independent registered public accounting firm on its financial statements for the year ended December 31, 2018 included an explanatory paragraph indicating that there is substantial doubt about the Company’s ability to continue as a going concern. In addition to the transactions that have already occurred, the Company believes it is probable that it will generate additional liquidity through other actions it expects to undertake in the near future. The Company’s management believes it will successfully mitigate the substantial doubt raised by its historical operating results and will satisfy its liquidity needs for at least twelve months from the Offering were $6,584 after deducting underwriting discountsissuance of these financial statements. However, the Company cannot reasonably predict with any certainty that the results of its actions will generate the liquidity required to satisfy its liquidity needs.
If the Company continues to experience operating losses, and commissionsthe Company is not able to generate additional liquidity through the actions described above or through some combination of other actions, while not expected, the Company may not be able to access additional funds and other estimated offering expenses.the Company might need to secure additional sources of funds, which may or may not be available. Additionally, a failure to generate additional liquidity could negatively impact its access to inventory or services that are important to the continued operation of the business.
Note 2. Accounting and Reporting Policies
(a) Basis of presentation and principles of consolidation
(a) Right of use asset and lease liability
The accompanying interimright of use asset on our consolidated condensed consolidated financial statements have been preparedbalance sheet represents a lessee's right to use an asset over the life of a lease. The asset is calculated as the initial amount of the lease liability, plus any lease payments made to the lessor before the lease commencement date, plus any initial direct costs incurred, minus any lease incentives received. The amortization period for the right of use asset is from the lease commencement date to the earlier of the end of the lease term or the end of the useful life of the asset.
The addition of these items on the balance sheet is in accordance with generally acceptednew lease accounting principlesstandard Topic 842-Leases issued by the FASB. This standard requires operating leases to be recorded on the balance sheet as assets and liabilities and requires disclosure of key information about leasing arrangements. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the 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. 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 resultsstatement of operations for the three and nine-month periods ended September 30, 2017 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.comprehensive loss.
11
(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, the valuation of stock-based compensation, deferred tax assets and liabilities, income tax uncertainties, and other contingencies.
(c) Revenue recognition
The Company recognizes revenue for the wellness operating segment from the sale of XpresSpa products at the time the goods are purchased at our stores or online (usually by credit card) and services when they are rendered at the point of sale,our stores, net of discounts and applicable sales taxes. Revenues from the XpresSpa wholesale and e-commerce businesses are recorded at the time goods are shipped. Accordingly, the Company recognizes revenue for its single performance obligation related to both in-store and online sales at the point at which the service has been performed or the control of the merchandise has passed to the customer. The Company excludes all sales taxes assessed to its customers. Sales taxes assessed on revenues are included in accounts payable, accrued expenses and other current liabilities in the consolidated condensed consolidated balance sheets until remitted to the respective state agencies.
The Company recordsOther 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.
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:
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 of an arrangement exists,when the sales price is fixed or determinable and delivery of the service has been rendered. Currently, revenue arrangements related toCompany transfers promised 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.
(d) 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:
Cost of sales for the Company’s technology operating segment includes costs 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 accounting pronouncements
ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition 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 transactions should be accounted for as acquisitions (or disposals) of assets or businesses. If substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single asset or a group of similar 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.
(f) Recently issued accounting pronouncements not yet adopted
ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606)
The core principle of the new standard is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entityCompany expects to be entitled in exchange for those goodsintellectual property rights.
(c) Recently adopted accounting pronouncements
ASU No. 2016-02, Leases (Topic 842), as amended
This standard and its amendments provide new guidance related to accounting for leases and supersedes GAAP on lease accounting with the intent to increase transparency. This standard requires operating leases to be recorded on the balance sheet as assets and liabilities and requires disclosure of key information about leasing arrangements. Leases will be classified as either finance or services. operating, with classification affecting the pattern of expense recognition in the statement of operations and comprehensive loss.
On January 1, 2019, the Company adopted ASU 2016-02 on a prospective basis, beginning on January 1, 2019 using the optional transition method. The Company applied the transition options permitted by ASU 2018-11 and elected the package of practical expedients to alleviate certain operational and reporting complexities related to the adoption, one of which was not to recognize a right of use asset or lease liability for leases with a term of twelve months or less. See Note 8. “Leases” for further discussion. The Company recorded right of use assets and lease liabilities for its operating leases of $9,565 upon adoption of ASU 2016-02.
ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
This standard provides guidance was amendedon the reclassification of certain tax effects from accumulated other comprehensive income to retained earnings in July 2015the period in which the effects of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recorded. The new standard is effective for annual reporting periodsthe fiscal year beginning after December 15, 2017. As such,2018. The Company adopted this standard on January 1, 2019. Adoption of this standard did not have a material impact on the Company is currently assessingCompany’s consolidated condensed financial statements.
(d) Recently issued accounting pronouncements
ASU No. 2016-13, Financial Instruments -Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
This standard changes the impactimpairment model for most financial assets that are measured at amortized cost and certain other instruments, including trade receivables, from an incurred loss model to an expected loss model and adds certain new required disclosures. Under the expected loss model, entities will recognize estimated credit losses to be incurred over the entire contractual term of the adoption on its condensed consolidated financial statements.instrument rather than delaying recognition of credit losses until it is probable the loss has been incurred. The Company will adopt the new standard and related updates effective January 1, 2018, and intends to use the modified retrospective method of adoption.
Based upon its preliminary assessment undertaken through September 30, 2017, the Company expects that the new standard will have an impact on revenue recognition for Group Mobile contracts in its technology operating segment, and expects to conclude on this assessment by December 31, 2017. The Company does not expect for there to be an impact on revenue recognition for its wellness operating segment, as the revenue is recognized when the service is performed and payment is collected from the customer.
The Company continues to monitor additional changes, modifications, clarifications or interpretations being undertaken by the FASB, which may, in conjunction with the completion of the Company’s overall assessment of the new guidance, impact the Company’s current conclusions.
ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued Accounting Standards Update No. 2017-04 (“ASU 2017-04”) “Intangibles - Goodwill and Other (Topic 350): Simplifying 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 the fair value of a reporting unit with its carrying amount. Additionally, the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets should be disclosed. ASU 2017-04 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 anticipatesBased upon the outstanding balance of the Company’s trade receivables and its positive collection history, the Company’s management does not believe that the adoption of ASU 2017-04this standard will not have a material impact on its consolidated financial statements.position and results of operations.
ASU No. 2017-09, Stock Compensation2018-13, Fair Value Measurement (Topic 718)820): Scope of Modification Accounting
In May 2017, the FASB issued Accounting Standards Update No. 2017-09 (“ASU 2017-09”) “Stock Compensation (Topic 718): Scope of Modification Accounting.” ASU 2017-09 provides guidance about which changesDisclosure Framework—Changes to the terms or conditions of a share-based payment award require an entityDisclosure Requirements for Fair Value Measurement
This amendment provides updates to apply modification accountingthe disclosure requirements on fair value measures in Topic 718.820 which includes the changes in unrealized gains and losses in other comprehensive income for recurring Level 3 fair value measurements, the option of additional quantitative information surrounding unobservable inputs and the elimination of disclosures around the valuation processes for Level 3 measurements. The 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; early2019. The Company’s management does not believe that the adoption is permitted. The Company is currently in the process of evaluating the potentialthis standard will have a material impact of the adoption on its consolidated financial statements.position and results of results of operations.
(e) Presentation
(g) Reclassification
Certain balancesitems in the 2018 financial statements have been reclassified to conform to the presentation requirements, includingin the 2019 financial statements. Such reclassifications did not have a material impact on 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 cost of sales and general and administrative expenses to align presentation for operating segments.overall financial statements.
Note 3. Net Potentially Dilutive Securities
Loss per Shareshare attributable to common shareholders data for each period presented excludes from the calculation of diluted net loss the following potentially dilutive securities (reflecting the impact of the 1:20 reverse stock split that became effective on February 22, 2019) as they had an anti-dilutive impact:
As of September 30, | ||||||||
2019 | 2018 | |||||||
Both vested and unvested options to purchase an equal number of shares of Common Stock of the Company | 178,229 | 114,250 | ||||||
Unvested RSUs to issue an equal number of shares of Common Stock of the Company | 37,500 | 22,750 | ||||||
Warrants to purchase an equal number of shares of Common Stock of the Company | 1,462,224 | 703,670 | ||||||
Preferred stock on an as converted basis | 862,035 | 163,216 | ||||||
Convertible notes on an as converted basis | — | 217,500 | ||||||
Total number of potentially dilutive securities excluded from the calculation of loss per share attributable to common shareholders | 2,539,988 | 1,221,386 |
The 5% Secured Convertible Notes were converted into Common Stock in June 2019. See Note 9.“Long-term Notes and Convertible Notes.”
Basic net loss per share is computed by dividingOn October 2, 2019, the net loss forCompany obtained shareholder approval of the period byreduction in the weighted-average numberconversion price of the Company’s Series D Preferred Stock to Common Stock. Effective October 2, 2019, the Series D Preferred Stock converted into 10,964,460 shares of common stock outstanding duringCommon Stock and 1,408,050 warrants to purchase Common Stock. As of November 12, 2019, 570,035 of 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, potentially dilutive securities, including certain warrants have been exercised and stock options, were not reflected in diluted net loss per share because the impact of such instruments was anti-dilutive.
The table below presents the computation of basic and diluted net loss per share of common stock:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Basic numerator: | ||||||||||||||||
Net loss from continuing operations attributable to shares of common stock | $ | (4,489 | ) | $ | (4,846 | ) | $ | (15,811 | ) | $ | (17,830 | ) | ||||
Net loss from discontinued operations attributable to shares of common stock | (208 | ) | (415 | ) | (2,321 | ) | (2,193 | ) | ||||||||
Net loss attributable to shares of common stock | $ | (4,697 | ) | $ | (5,261 | ) | $ | (18,132 | ) | $ | (20,023 | ) | ||||
Basic denominator: | ||||||||||||||||
Basic shares of common stock outstanding | 24,144,002 | 15,473,895 | 20,852,034 | 14,880,925 | ||||||||||||
Basic loss per share of common stock from continuing operations | $ | (0.19 | ) | $ | (0.31 | ) | $ | (0.76 | ) | $ | (1.20 | ) | ||||
Basic loss per share of common stock from discontinued operations | (0.01 | ) | (0.03 | ) | (0.11 | ) | (0.15 | ) | ||||||||
Basic net loss per share of common stock | $ | (0.20 | ) | $ | (0.34 | ) | $ | (0.87 | ) | $ | (1.35 | ) | ||||
Diluted numerator: | ||||||||||||||||
Net loss from continuing operations attributable to shares of common stock | $ | (4,489 | ) | $ | (4,846 | ) | $ | (15,811 | ) | $ | (17,830 | ) | ||||
Net loss from discontinued operations attributable to shares of common stock | (208 | ) | (415 | ) | (2,321 | ) | (2,193 | ) | ||||||||
Net loss attributable to shares of common stock | $ | (4,697 | ) | $ | (5,261 | ) | $ | (18,132 | ) | $ | (20,023 | ) | ||||
Diluted denominator: | ||||||||||||||||
Diluted shares of common stock outstanding | 24,144,002 | 15,473,895 | 20,852,034 | 14,880,925 | ||||||||||||
Diluted loss per share of common stock from continuing operations | $ | (0.19 | ) | $ | (0.31 | ) | $ | (0.76 | ) | $ | (1.20 | ) | ||||
Diluted loss per share of common stock from discontinued operations | (0.01 | ) | (0.03 | ) | (0.11 | ) | (0.15 | ) | ||||||||
Diluted net loss per share of common stock | $ | (0.20 | ) | $ | (0.34 | ) | $ | (0.87 | ) | $ | (1.35 | ) | ||||
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 | 4,876,899 | 1,492,434 | 4,876,899 | 1,492,434 | ||||||||||||
Unvested RSUs to issue an equal number of shares of common stock of the Company | 365,565 | — | 365,565 | — | ||||||||||||
Warrants to purchase an equal number of shares of common stock of the Company | 3,087,500 | 1,006,679 | 3,087,500 | 1,006,679 | ||||||||||||
Preferred stock on an as converted basis | 3,439,587 | — | 3,620,626 | — | ||||||||||||
Conversion feature of senior secured notes | — | — | — | 105,920 | ||||||||||||
Total number of potentially dilutive instruments, excluded from the calculation of net loss per share | 11,769,551 | 2,499,113 | 11,950,590 | 2,605,033 |
converted into Common Stock.
Note 4. Business CombinationsCash, Cash Equivalents, and Restricted Cash
XpresSpa
DuringCash, cash equivalents, and restricted cash in the second quarter of 2017, the Company learned new information about legal and other professional costs which existed asconsolidated condensed balance sheets are comprised of the acquisition date of XpresSpa. As a result, 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 estimated that the fair value of the reduction of the consideration was $908, which was recorded as a reduction of preferred equity and goodwill.
Additionally, during the second and third quarters of 2017, certain XpresSpa Sellers converted an aggregate of 54,667 shares of their FORM Preferred Stock into 437,235 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 420,541 sharesfollowing as of September 30, 20172019 and December 31, 2018:
September 30, 2019 | December 31, 2018 | |||||||
Cash denominated in United States dollars | $ | 480 | $ | 2,000 | ||||
Cash denominated in currency other than United States dollars | 1,605 | 1,143 | ||||||
Restricted cash | 451 | 487 | ||||||
Credit and debit card receivables | 347 | 260 | ||||||
Total cash, cash equivalents, and restricted cash | $ | 2,883 | $ | 3,890 |
Cash denominated in Unites States dollars decreased from December 31, 2018 primarily due to increased capital expenditures to renovate spas and to open new spas, distributions to the face value (and liquidation preference) was reduced from $23,588 to $20,186.Company’s noncontrolling interest investees and payments made on the Senior Secured Notes.
Group Mobile
On February 2, 2017, the Company acquired Excalibur, which is an end-to-end solutions providerRestricted cash represents balances at financial institutions to secure bonds and letters 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 withincredit as required by 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 of the total purchase price is $2,125 and includes a fair value of contingent consideration of $316 and fair value of unregistered shares of common stock issued of $1,809.
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) | $ | 613 | ||
Deferred tax assets | 29 | |||
Property and equipment | 21 | |||
Intangible assets | 556 | |||
Goodwill | 2,335 | |||
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).various lease agreements.
Note 5. Segment Information
The Company’s 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. The Company concluded that it conducts its business through three operating segments, which are also its reportable segments:
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.Other Current Assets
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenue | ||||||||||||||||
Wellness | $ | 12,652 | $ | — | $ | 36,563 | $ | — | ||||||||
Technology | 4,879 | 1,751 | 11,820 | 5,478 | ||||||||||||
Intellectual property | 200 | 1,350 | 300 | 11,000 | ||||||||||||
Total revenue | 17,731 | 3,101 | 48,683 | 16,478 | ||||||||||||
Cost of sales | ||||||||||||||||
Wellness | 10,347 | — | 29,583 | — | ||||||||||||
Technology | 3,902 | 1,554 | 9,520 | 4,858 | ||||||||||||
Intellectual property | 126 | 1,164 | 343 | 6,127 | ||||||||||||
Total cost of sales | 14,375 | 2,718 | 39,446 | 10,985 | ||||||||||||
Segment operating income (loss) | ||||||||||||||||
Wellness | (1,639 | ) | — | (6,002 | ) | — | ||||||||||
Technology | (490 | ) | (565 | ) | (2,146 | ) | (1,213 | ) | ||||||||
Intellectual property | 217 | 113 | 86 | (8,167 | ) | |||||||||||
Corporate | (2,099 | ) | (2,911 | ) | (6,562 | ) | (6,527 | ) | ||||||||
Total segment operating loss | (4,011 | ) | (3,363 | ) | (14,624 | ) | (15,907 | ) | ||||||||
Corporate non-operating expense, net | (268 | ) | (1,483 | ) | (574 | ) | (1,923 | ) | ||||||||
Loss from continuing operations before income taxes | $ | (4,279 | ) | $ | (4,846 | ) | $ | (15,198 | ) | $ | (17,830 | ) |
As of September 30, 2019, and December 31, 2018, the Company’s other current assets were comprised of the following:
September 30, 2017 | December 31, 2016 | |||||||
Assets | ||||||||
Wellness | $ | 51,151 | $ | 57,527 | ||||
Technology | 14,445 | 7,014 | ||||||
Intellectual property | 603 | 940 | ||||||
Corporate | 7,189 | 15,819 | ||||||
Assets held for disposal | 451 | 1,507 | ||||||
Total assets | $ | 73,839 | $ | 82,807 |
September 30, 2019 | December 31, 2018 | |||||||
Cash in escrow | $ | 254 | $ | — | ||||
Prepaid expenses | 222 | 1,204 | ||||||
Other | 214 | 370 | ||||||
Total other current assets | $ | 690 | $ | 1,574 |
General and administrative costsCash in escrow is the amount the Company was required to put into escrow to fund the renovation of one of its spa locations. Prepaid expenses are 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 mainlypredominantly comprised of cash.prepaid insurance policies which have terms of one year or less. The balance decreased from December 31, 2018 due to the timing of payments and amortization of the year end prepaid insurance balance.
Note 6. Other Assets
Other assets in the consolidated condensed balance sheets are comprised of the following as of September 30, 2019 and December 31, 2018:
September 30, 2019 | December 31, 2018 | |||||||
Cost method investments | $ | 1,294 | $ | 2,482 | ||||
Lease deposits | 894 | 894 | ||||||
Other | 306 | — | ||||||
Total other assets | $ | 2,494 | $ | 3,376 |
The Company currently operatesrecorded an impairment loss on its FLI Charge cost method investment of approximately $47 which is included in two geographical regions: United States“Impairment of assets” on the Company’s consolidated condensed statements of operations and all other countries. The following table represents the geographical revenue, regional operatingcomprehensive loss and total asset information as of and for the three and nine months ended September 30, 20172019. As of September 30, 2019, the Company’s cost method investments consist primarily of a $787 investment in InfoMedia Services Limited which the Company acquired in 2014 and 2016. the remaining investment in Route1 of $484, which it received as part of the disposition of Group Mobile in March 2018.
In the second quarter of 2019, the Company impaired its investment in Route1, due to an under performance of operating results. The Company recorded an impairment charge of $1,141 in the second quarter of 2019, which is included in “Other non-operating income (expense), net” on the consolidated condensed statement of operations and comprehensive loss for the nine months ended September 30, 2019.
The Company has not identified any other events or changes in circumstances that could have a significant adverse effect on the carrying value of its remaining cost method investments.
Note 7. Intangible Assets and Goodwill
The following table provides information regarding the Company’s intangible assets subject to amortization, which consist of the following:
September 30, 2019 | December 31, 2018 | |||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization and Impairment | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization and Impairment | Net Carrying Amount | |||||||||||||||||||
Trade name | $ | 13,309 | $ | (6,149 | ) | $ | 7,160 | $ | 13,309 | $ | (4,485 | ) | $ | 8,824 | ||||||||||
Customer relationships | 312 | (312 | ) | — | 312 | (312 | ) | — | ||||||||||||||||
Software | 312 | (114 | ) | 198 | 312 | (69 | ) | 243 | ||||||||||||||||
Patents | 26,897 | (26,897 | ) | — | 26,897 | (26,797 | ) | 100 | ||||||||||||||||
Total intangible assets | $ | 40,830 | $ | (33,472 | ) | $ | 7,358 | $ | 40,830 | $ | (31,663 | ) | $ | 9,167 |
The Company’s trade name relates to the value of the XpresSpa trade name, customer relationships represent the value of loyalty customers, software relates to certain capitalized third-party costs related to a new point-of-sale system, and patents consist of intellectual property portfolios acquired from third parties.
The Company’s intangible assets are amortized over their expected useful lives. During the three and nine months ended September 30, 2019 and 2018, the Company recorded amortization expense of $583 and $510, respectively, and $1,727 and $1,901, respectively.
During the three months ended September 30, 2019, the Company wrote off the net book value of certain patents that were no longer generating cash flow totaling approximately $85, which is included in “Impairment of assets” for the three and nine months ended September 30, 2019 on the Company’s consolidated condensed statement of operations and comprehensive loss.
Based on the intangible assets balance as of September 30, 2019, the estimated amortization expense for the remainder of the calendar year and each of the succeeding calendar years is as follows:
Calendar Years ending December 31, | Amount | |||
Remainder of 2019 | $ | 463 | ||
2020 | 2,275 | |||
2021 | 2,275 | |||
2022 | 2,275 | |||
2023 | 70 | |||
Total | $ | 7,358 |
There were no concentrations of geographical revenue, regional operating loss or total assetsimpairment indicators related to any single foreign countryof the Company’s amortizable intangible assets during the nine months ended September 30, 2019.
Goodwill Impairment
During the first quarter of fiscal year 2018, the Company’s stock price declined from an opening price of $1.36 on January 2, 2018 to $0.72 on March 29, 2018. Subsequently, on April 19, 2018, the Company entered into a separation agreement with its Chief Executive Officer regarding his resignation as Chief Executive Officer and Director. These events were identified by the Company’s management as triggering events requiring that goodwill be tested for impairment as of March 31, 2018. As the stock price had not rebounded, the Company determined that there was an impairment of the goodwill. The Company performed a quantitative goodwill impairment test, in which the Company compared the carrying value of the reporting unit to its estimated fair value, which was calculated using an income approach. The key assumptions for this approach were materialprojected future cash flows and a discount rate, which was based on a weighted average cost of capital adjusted for the relevant risk associated with the characteristics of the business and the projected future cash flows. As a result of the quantitative goodwill impairment test performed as of March 31, 2018, the Company determined that the fair value of the reporting unit was less than its’ carrying amount and, therefore, goodwill of the reporting unit was considered impaired. The Company recorded an impairment charge of $19,630 to reduce the carrying value of goodwill to its fair value, which was determined to be zero. The impairment to goodwill was a result of the structural changes to the Company, including completion of the transition from a holding company to a pure-play health and wellness company, the change in Chief Executive Officer and the reduction in the Company’s stock price.
Note 8. Leases
The Company leases its retail space at various domestic and international airports. Additionally, the Company leases its corporate office in New York. Certain leases entered into by the Company fall under ASU No. 2016-02, Leases (“Topic 842”) discussed in Note 2 (b) “Recently adopted accounting pronouncements”. The Company determines if an arrangement is a lease at inception and if it qualifies under Topic 842. Some of the Company’s lease arrangements contain fixed payments throughout the term of the lease. Others involve a variable component to determine the lease obligation where a certain percentage of sales is used to calculate the lease payments. The Company enters into certain leases that expire and are then extended on a month-to-month basis. These leases are not included in the calculation of the total lease liability and the right of use asset after they convert to month-to-month.
All qualifying leases held by the Company are classified as operating leases. Operating lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company records its operating lease assets and liabilities based on required guaranteed payments under each lease agreement. The Company uses its incremental borrowing rate, which approximates the rate at which the Company can borrow funds on a secured basis, using the information available at commencement date of the lease in determining the present value of guaranteed lease payments. The interest rate implicit in the lease is generally not determinable in transactions where a company is the lessee.
The Company reviews all of its existing lease agreements on a quarterly basis to determine whether there were any modifications to existing lease agreements and to assess if any agreements should be accounted for pursuant to the guidance in Topic 842. The option to extend the term of one existing lease contract was exercised during the current period. The Company recalculated the right of use asset and lease liability based on the modified lease term and adjusted both balances. There were no other lease modifications during the period. The Company entered into two new lease arrangements that are included in the balances of its right of use asset and lease liability as of September 30, 2019.
The following is a summary of the activity in the Company’s operating lease liabilities for the nine months ended September 30, 2019:
Operating lease liabilities, January 1, 2019 | $ | 10,809 | ||
New leases entered | 1,531 | |||
Termination of existing qualifying leases | (421 | ) | ||
Amortization of lease obligation | (2,101 | ) | ||
Operating lease liabilities, September 30, 2019 | $ | 9,818 |
In July 2019, as a result of an early termination of a lease for one of its locations that was closed, the Company assessed all assets at the closed location (primarily leasehold improvements) for impairment. This resulted in a charge of approximately $620 which was included in“Impairment of assets” in the consolidated condensed statements of operations and comprehensive loss that was recorded in June 30, 2019 and is reflected in the current period year to date results. The Company also reduced the remaining balance in the right of use assets and the lease liabilities by approximately $421 in June 2019 to write off the balances related to the leases for this location.
The Company expensed approximately $210 of costs capitalized in anticipation of opening new spas that the Company later determined would not be realized. This charge is included in the“Impairment of assets” line in the consolidated condensed statement of operations and comprehensive loss for the nine months ended September 30, 2019.
As of September 30, 2019, operating leases contain the following future minimum commitments:
Calendar Years ending December 31, | Amount | |||
Remainder of 2019 | $ | 922 | ||
2020 | 3,441 | |||
2021 | 2,897 | |||
2022 | 2,196 | |||
2023 | 1,282 | |||
Thereafter | 1,495 | |||
Total future lease payments | 12,233 | |||
Less: interest expense at incremental borrowing rate | (2,415 | ) | ||
Net present value of lease liabilities | $ | 9,818 |
Other assumptions and pertinent information related to the Company’s condensed consolidated financial statements.accounting for operating leases are:
Weighted average remaining lease term: | 5.1 years | |||
Weighted average discount rate used to determine present value of operating lease liability: | 11.01 | % | ||
Cash paid for lease obligations during the nine months ended September 30, 2019: | $ | 2,827 |
Variable lease payments calculated monthly as a percentage of a product and services revenue, was $794 and $2,291 for the three and nine months ended September 30, 2019.
Note 9. Long-term Notes and Convertible Notes
Total Debt as of September 30, 2019 and December 31, 2018 is comprised of the following:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenue | ||||||||||||||||
United States | $ | 16,228 | $ | 3,101 | $ | 44,802 | $ | 16,478 | ||||||||
All other countries | 1,503 | — | 3,881 | — | ||||||||||||
Total revenue | 17,731 | 3,101 | 48,683 | 16,478 | ||||||||||||
Cost of sales | ||||||||||||||||
United States | 13,539 | 2,718 | 37,108 | 10,985 | ||||||||||||
All other countries | 836 | — | 2,338 | — | ||||||||||||
Total cost of sales | 14,375 | 2,718 | 39,446 | 10,985 | ||||||||||||
Segment operating loss | ||||||||||||||||
United States | (4,540 | ) | (3,360 | ) | (15,849 | ) | (15,901 | ) | ||||||||
All other countries | 529 | (3 | ) | 1,225 | (6 | ) | ||||||||||
Total segment operating loss | (4,011 | ) | (3,363 | ) | (14,624 | ) | (15,907 | ) | ||||||||
Corporate non-operating expense, net | (268 | ) | (1,483 | ) | (574 | ) | (1,923 | ) | ||||||||
Loss from continuing operations before income taxes | $ | (4,279 | ) | $ | (4,846 | ) | $ | (15,198 | ) | $ | (17,830 | ) | ||||
September 30, 2017 | December 31, 2016 | |||||||||||||||
Assets | ||||||||||||||||
United States | $ | 70,141 | $ | 78,546 | ||||||||||||
All other countries | 3,247 | 2,754 | ||||||||||||||
Assets held for disposal | 451 | 1,507 | ||||||||||||||
Total assets | $ | 73,839 | $ | 82,807 |
September 30, 2019 | December 31, 2018 | |||||||
B3D Note, net of $2,847 in unamortized debt issuance costs and fair value adjustments as of September 30, 2019 | $ | 4,153 | $ | 6,500 | ||||
5% Secured Convertible Notes, net | — | 1,986 | ||||||
Calm Note, net of $1,454 in unamortized debt issuance costs and fair value adjustments | 1,046 | — | ||||||
Total debt | $ | 5,199 | $ | 8,486 |
B3D Note
On July 8, 2019, the Company entered into the fourth amendment to its existing credit agreement (the “Amendment to the Credit Agreement”) with B3D, to renegotiate the terms of its 11.24 %, $6,500 senior secured note as discussed in Note 1“General” underRecent Developments. The Amendment to the Credit Agreement, among other provisions, (i) extended the maturity date to May 31, 2021, (ii) reduced the applicable interest rate to 9.0%, and (iii) amended and restated certain other provisions. As consideration for these and other modifications, the principal amount owed to B3D was increased to $7,000.
The Company engaged an independent third party to assess the fair value of each of the derivative instruments included in the B3D Note. The results of the appraisal were that the conversion feature and the B3D Note should be bifurcated, and that the conversion option should be treated as a separate derivative liability. A fair value of $2,774 was assigned to the conversion option, which is included in “Derivative Liabilities” on the consolidated condensed balance sheet and the B3D Note was assigned a fair value of $4,226 as of July 8, 2019. The conversion option was marked to market as of September 30, 2019 and as a result, the Company recorded a revaluation gain of approximately $479 that is included in“Other income (expense), net” for the three and nine months ended September 30, 2019. During the three and nine months ended September 30, 2019 the Company recorded $362 of accretion expense that increased the carrying value of the B3D Note.
The modification to the terms included in the Credit Agreement Amendment were accounted for as a troubled debt restructuring in the Company’s consolidated condensed financial statements as of September 30, 2019, in accordance with ASC 470-60“Troubled Debt Restructurings by Debtors”. A debtor in a troubled debt restructuring involving only a modification of terms of a payable should account for the effects of the restructuring prospectively from the time of restructuring and not change the carrying amount of the payable at the time of the restructuring. The Company will pay interest monthly at the revised 9.0% rate over the life of the B3D Note. Since the future cash payments for principal and interest under the restructured B3D Note will be greater than the carrying value of the original note no gain was recorded.
As a result of the extension of the maturity date to May 31, 2021, the balance of the B3D Note was reclassified from current liabilities as of December 31, 2018 to long-term liabilities on the Company’s consolidated condensed balance sheet as of September 30, 2019.
The Company agreed upon a $500 increase in the principal amount of the B3D Note which will be amortized on a straight-line basis over the revised term of the B3D Note. The net balance of the deferred issuance costs was $435 as of September 30, 2019 and is presented as a reduction of the B3D Note balance in the Company’s consolidated condensed balance sheet. Amortization expense from July 8, 2019 through September 30, 2019 was $65 and is included in “Interest expense” in the consolidated condensed statements of operations and comprehensive loss. Amortization of debt issuance costs for the three and nine months ended September 30, 2018 was $394 and $589, respectively, also included in “Interest expense”.
The B3D Note is guaranteed on a full, unconditional, joint, and several basis, by the parent Company, XpresSpa Group, Inc., and all wholly owned subsidiaries of Holdings (the “Guarantor Subsidiaries”). Under the terms of a security and guarantee agreement dated July 8, 2019, XpresSpa Group, Inc. (the parent company) and the Guarantor Subsidiaries each fully and unconditionally, jointly and severally, guarantee the payment of interest and principal on the B3D Note. Holdings pledged and granted to B3D a first priority security interest in, among other things, all of its equity interests in Holdings and all of its rights to receive distributions, cash or other property in connection with Holdings. The Company has not presented separate consolidating financial statements of XpresSpa Group, Inc., Holdings and Holdings wholly owned subsidiaries as each entity has guaranteed the B3D Note, so each entity is responsible for the payment.
Convertible Notes
5% Secured Convertible Notes
On May 15, 2018, in a private placement offering, the Company issued (i) 5% Secured Convertible Notes (the “5% Secured Convertible Notes”) convertible into Common Stock at $12.40 per share, originally due November 2019, (ii) May 2018 Class A Warrants to purchase 357,863 shares of Common Stock and (iii) May 2018 Class B Warrants to purchase 178,932 shares of Common Stock. The May 2018 Class A and May 2018 Class B Warrants were originally convertible into Common Stock at $12.40 per share. The Company received aggregate proceeds of $4,438 from the May 2018 private placement. Debt issuance costs that had been capitalized related to the 5% Secured Convertible Notes, were being amortized on a straight-line basis over their remaining term of the 5% Secured Convertible Notes. The Company did not record amortization expense of the debt issuance costs related to the 5% Secured Convertible Notes after June 30, 2019 as the notes were converted into Common Stock on June 27, 2019. The balance of debt issuance costs of $135 was written off in June 2019 and was included in “Interest expense” in the consolidated condensed financial statements for the nine months ended September 30, 2019.
During the second quarter of 2019, the Company failed to make minimum monthly payments as required pursuant to the 5% Secured Convertible Notes, which failure constituted an event of default. Pursuant to the terms of the 5% Secured Convertible Notes, upon an event of default, an investor may elect to accelerate payment of the outstanding principal amount of such investor’s 5% Secured Convertible Notes, liquidated damages and other amounts owing in respect thereof through the date of acceleration, which amounts become immediately due and payable in cash. No investor provided notice to the Company electing to exercise its right to accelerate payment.
On June 27, 2019, the Company entered into the Third Amendment Agreement to the 5% Secured Convertible Notes (the “Third Amendment”) whereby the holders of the 5% Convertible Notes agreed to convert their notes then held into Common Stock. The Third Amendment reduced the conversion price of the 5% Convertible Notes to Common Stock from $12.40 per share to $2.48 per share. As a result of the reduction in the conversion price, the Company recorded debt conversion expense of $1,547 to account for the additional consideration paid over what was agreed to in the original 5% Secured Convertible Notes agreement. The expense is reflected in “Other non-operating income (expense), net” in the consolidated condensed statement of operations and comprehensive loss. The 5% Secured Convertible Notes holders converted their remaining outstanding principal balances plus accrued interest into 586,389 shares of Common Stock and 356,772 Class A Warrants (the “June 2019 Class A Warrants”). The June 2019 Class A Warrants had an exercise price of $0.01 and are otherwise identical in form and substance to the Company's existing May 2018 Class A Warrants.
The Company had an independent third party perform an appraisal of the June 2019 Class A Warrants as of June 30, 2019. The June 2019 Class A Warrants were assigned an appraised value of $689. The value of these warrants was recorded as a derivative liability on the consolidated balance sheet and will be marked to market at the end of each reporting period. The expense of $689 is included in“Other non-operating income (expense), net” in the consolidated condensed statements of operations and comprehensive loss in the second quarter of 2019 and is included in our current period year to date results.
The June 2019 Class A Warrants were converted into 354,502 shares of Common Stock in July 2019.
Calm Note
The Calm Note is an unsecured subordinated obligation of the Company. The Calm Note will mature on May 31, 2022, and bears interest at a rate of 5% per annum, subject to increase in the event of default. The Calm Note is convertible at any time, in whole or in part, at the option of Calm into shares of Series E Preferred Stock at a conversion price equal to $3.10 per share. Interest on the Calm Note is payable in arrears and may be paid in cash, shares of Series E Preferred Stock or a combination thereof.
The Company engaged an independent third party to assess the fair value of each of the derivative instruments included in the Calm Note. The results of the appraisal were that the conversion feature and the Calm Warrants should be bifurcated, and both treated as derivative liabilities. A fair value of $351 was assigned to the conversion option, a fair value of $1,018 was assigned to the Calm Warrants and the Calm Note was assigned a fair value of $1,131 as of July 8, 2019. The conversion option and the Calm Warrants were marked to market as of September 30, 2019 and, as a result, the Company recorded a revaluation gain of approximately $185 that is included in“Other income (expense), net” in the consolidated condensed statements of operations and comprehensive loss for the three and nine months ended September 30, 2019.
The Company capitalized approximately $220 of costs related to the issuance of the Calm Note and recorded amortization expense of approximately $19 from the date the debt was issued on July 8, 2019 through September 30, 2019. The net balance of the deferred issuance costs is $201 as of September 30, 2019 and is presented as a reduction of the Calm Note balance in the Company’s consolidated condensed balance sheet. Amortization expense is included in“Interest expense” in the Company’s consolidated condensed statements of operations and comprehensive loss for the three- and nine-month periods ended September 30,2019. During the three and nine months ended September 30, 2019, the Company recorded $116 of accretion expense that increased the carrying value of the Calm Note.
Note 10. Stockholders’ Equity
Series D Convertible Preferred Stock Amendment and December 2016 Warrant Amendment
On July 8, 2019, the Company filed the Series D COD Amendment with the State of Delaware to reduce the conversion price of Series D Convertible Preferred Stock to Common Stock to $2.00 and to then provide for automatic conversion of the Series D Convertible Preferred Stock into shares of Common Stock.
When a reporting entity changes the terms of its preferred stock it must assess whether the changes should be accounted for as either a modification or extinguishment. The Company engaged an independent third party to perform an appraisal to determine the fair value of the Series D Preferred Stock before and after the changes were made. The results of the fair value assessment indicated that the fair values before and after the change in the provisions and characteristics of the Series D Preferred Shares were not substantially different (in practice, substantially different has been interpreted to be greater than ten percent). Therefore, the Company did not record an adjustment to the Series D Preferred Stock.
Also, on July 8, 2019, the Company entered into an amendment to the December 2016 Warrants to provide for (i) a reduction in the exercise price into Common Stock to $2.00, (ii) certain anti-dilution price protection and (iii) a voluntary reduction at a future date of the exercise price by the Company in its discretion.
Series E Convertible Preferred Stock
On July 8, 2019, the Company filed the Series E COD Amendment with the State of Delaware to (i) increase the number of authorized shares of Series E Preferred Stock to 2,397,060 and (ii) reduce the conversion price to $2.00. The Series E COD Amendment was approved by the Board of Directors of the Company and the Company obtained shareholder approval of the Series E COD Amendment on October 2, 2019.
When a reporting entity changes the terms of its outstanding preferred stock it must assess whether the changes should be accounted for as either a modification or an extinguishment. The Company engaged an independent third party to perform an appraisal to determine the fair value of the Series E Preferred Stock before and after the changes were made. The results of the fair value assessment indicated that the fair values before and after the change in the provisions and characteristics of the Series E Preferred Stock were not substantially different (in practice, substantially different has been interpreted to be greater than ten percent). Therefore, the Company did not record an adjustment to the Series E Preferred Stock.
Series F Convertible Preferred Stock
In connection with the May 2018 SPA Amendment, the Company issued 8,996 shares of Series F Convertible Preferred Stock to the parties to the May 2018 SPA Amendment. The Company engaged an independent third party to perform an appraisal to determine the fair value of the Series F Preferred Stock. The Series F Preferred Stock has a par value of $0.01 per share and a stated value of $100 per share. The Series F Preferred Stock was appraised at a fair value of $1,254, which was recorded as a charge to“Other income (expense), net” in the Company’s consolidated condensed financial statements for the three and nine months ended September 30, 2019.
Reverse Stock Split
On February 22, 2019, the Company filed a certificate of amendment to its amended and restated certificate of incorporation with the Secretary of State of the State of Delaware to effect a 1-for-20 reverse stock split of the Company’s shares of Common Stock. Such amendment and ratio were previously approved by the Company’s stockholders and Board of Directors.
As a result of the reverse stock split, every twenty (20) shares of the Company’s pre-reverse split Common Stock were combined and reclassified into one (1) share of Common Stock. Proportionate voting rights and other rights of common stockholders were affected by the reverse stock split. Stockholders who would have otherwise held a fractional share of Common Stock received payment in cash in lieu of any such resulting fractional shares of Common Stock as the post-reverse split amounts of Common Stock were rounded down to the nearest full share. No fractional shares were issued in connection with the reverse stock split.
Note 6.11. Derivative Liabilities and Fair Value Measurements
Derivative Warrant LiabilitiesFair value measurements are determined based on assumptions that a market participant would use in pricing an asset or a liability. A three-tiered hierarchy distinguishes between market participant assumptions based on (i) observable inputs such as quoted prices in active markets (Level 1), (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2) and (iii) unobservable inputs that require us to use present value and other valuation techniques in the determination of fair value (Level 3).
The Company’s financial instruments as of September 30, 2019 and December 31, 2018 consisted of cash and cash equivalents, trade receivables, retail inventory, accounts payable, accrued expenses and other current liabilities. The carrying amounts of all the aforementioned financial instruments approximate fair value because of the short-term nature of these instruments.
Derivative Liabilities
In connection with the Calm Private Placement, the Company granted warrants to purchase 937,500 shares of the Company’s Common Stock, at an exercise price of $2.00 per share.
The Calm Warrants issued in connection with the Calm Private Placement entitle Calm to purchase an aggregate of 937,500 shares of Common Stock. The Calm Warrants are exercisable beginning six months from the date of issuance, have a term of five years and can be exercised for shares of Common Stock at an exercise price of $2.00 per share.
At September 30, 2019, the Company had outstanding its May 2018 Class A Warrants and the Calm Warrants which are classified as liabilities and are included in“Derivative liabilities” on the consolidated condensed balance sheet. Both the May 2018 Class A Warrants and the Calm Warrants were fair valued as of September 30, 2019 and market to market as of that date (see Note 9. Long-term Notes and Convertible Notes for further discussion).
The May 2018 Class B Warrants were cancelled in July 2019. Holders of these warrants were granted Class A Warrants and shares of the Company’s Series F Preferred Stock (see Note 10.“Stockholders’ Equity” for further discussion regarding the Series F Preferred Stock).
The fair value of the conversion options related to the issuance of the B3D Note of $2,295 and the Calm Note of $324 are included in “Derivative liabilities” on the consolidated condensed balance sheet as of September 30, 2019.
The following table presents the placement in the fair value hierarchy of the Company’s derivative warrant liabilities measured at fair value on a recurring basis as of September 30, 20172019 and December 31, 2016:2018:
Fair value measurement at reporting date using | ||||||||||||||||
Quoted prices in | ||||||||||||||||
active markets | Significant other | Significant | ||||||||||||||
for identical | observable | unobservable | ||||||||||||||
Balance | assets (Level 1) | inputs (Level 2) | inputs (Level 3) | |||||||||||||
September 30, 2017: | ||||||||||||||||
May 2015 Warrants | $ | 52 | $ | — | $ | — | $ | 52 | ||||||||
December 31, 2016: | ||||||||||||||||
May 2015 Warrants | $ | 259 | $ | — | $ | — | $ | 259 |
Quoted prices in | ||||||||||||||||
active markets | Significant other | Significant | ||||||||||||||
for identical | observable | unobservable | ||||||||||||||
Balance | assets (Level 1) | inputs (Level 2) | inputs (Level 3) | |||||||||||||
September 30, 2019: | ||||||||||||||||
May 2018 Class A Warrants | $ | 2,609 | $ | — | $ | — | $ | 2,609 | ||||||||
B3D conversion option | 2,295 | — | — | 2,295 | ||||||||||||
Calm Warrants | 860 | — | — | 860 | ||||||||||||
Calm conversion option | 324 | — | — | 324 | ||||||||||||
Total | $ | 6,088 | $ | — | $ | — | $ | 6,088 | ||||||||
December 31, 2018: | ||||||||||||||||
May 2018 Class A Warrants | $ | 476 | $ | — | $ | — | $ | 476 | ||||||||
May 2018 Class B Warrants | — | — | — | — | ||||||||||||
Total | $ | 476 | $ | — | $ | — | $ | 476 |
The Company measures its derivative warrant liabilities at fair value. The May 2015 Warrantsderivative liabilities were classified within Level 3 because they were valued using the Black-Scholes-MertonMonte-Carlo model, which utilizes significant inputs that are unobservable.unobservable in the market. These derivative warrant liabilities were initially measured at fair value and are marked to market at each balance sheet date. The derivative liabilities are recorded shown as “Derivative liabilities” in the consolidated condensed balance sheets and the revaluation of the derivative liabilities is included in“Other non-operating income (expense), net” in the consolidated condensed statements of operations and comprehensive loss.
In addition to the above, the Company’s financial instruments as of September 30, 2017 and December 31, 2016 consisted of cash and cash equivalents, receivables, accounts payable and Debt. The carrying amounts of all the aforementioned financial instruments approximate fair value because of the short-term maturities of these instruments.
The following table summarizes the changes in the Company’s derivative warrant liabilities measured at fair value using significant unobservable inputs (Level 3) during the three- and nine-month periodsnine months ended September 30, 2017:2019:
May 2015 Warrants | ||||
December 31, 2016 | $ | 259 | ||
Decrease in fair value of the derivative warrant liabilities | (159 | ) | ||
June 30, 2017 | 100 | |||
Decrease in fair value of the derivative warrant liabilities | (48 | ) | ||
September 30, 2017 | $ | 52 |
December 31, 2018 | $ | 476 | ||
Fair value ascribed to embedded derivative conversion options and warrants | 4,143 | |||
Issuance of June 2019 Class A Warrants | 689 | |||
Conversion of June 2019 Class A Warrants into Common Stock | (689 | ) | ||
Revaluation of derivative conversion options and warrants at September 30, 2019 | 1,469 | |||
September 30, 2019 | $ | 6,088 |
Valuation processesProcesses for Level 3 Fair Value Measurements
Fair value measurement of the derivative warrant liabilities falls within Level 3 of the fair value hierarchy. The fair value measurements are evaluated by management to ensure that changes are consistent with expectations of management based upon the sensitivity and nature of the inputs.
September 30, 2017:2019:
Description | Valuation technique | Unobservable inputs | Range | |||||
Calm Warrants | Monte Carlo Model | Volatility | 67.1 | % | ||||
Risk-free interest rate | 1.60 | % | ||||||
Expected term, in years | 4.77 | |||||||
Dividend yield | 0.00 | % | ||||||
Calm conversion option | Monte Carlo Model | Volatility | 67.2 | % | ||||
Risk-free interest rate | 1.63 | % | ||||||
Expected term, in years | 2.67 | |||||||
Dividend yield | 0.00 | % | ||||||
B3D conversion option | Monte Carlo Model | Volatility | 67.6 | % | ||||
Risk-free interest rate | 1.73 | % | ||||||
Expected term, in years | 1.67 | |||||||
Dividend yield | 0.00 | % | ||||||
May 2018 Class A Warrants | Monte Carlo Model | Volatility | 42.5 | % | ||||
Risk-free interest rate | 1.60 | % | ||||||
Expected term, in years | 3.63 | |||||||
Dividend yield | 0.00 | % |
December 31, 2018:
Description | Valuation technique | Unobservable inputs | Range | |||||
Volatility | % | |||||||
% | ||||||||
Expected term, in years | ||||||||
Dividend yield | 0.00 | % |
December 31, 2016:
Sensitivity of Level 3 measurementsMeasurements to changesChanges in significant unobservable inputsSignificant 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,Common Stock, the exercise price of the derivative warrant liabilities,of the conversion options and the warrants, their remaining expected term, the volatility of the Company’s common stockCommon Stock price and the risk-free interest rate over the expected term. Significant changes in any of those inputs in isolation can result in a significant change in the fair value measurement.
Generally, an increase in the market price of the Company’s shares of common stock,Common Stock, an increase in the volatility of the Company’s shares of common stock,Common Stock, and an increase in the remaining term of the derivative warrant liabilities would each result in a directionally similar change in thetheir estimated fair value of the Company’s derivative warrant liabilities.values Such changes would increase the associated liabilityliabilities while decreases in these assumptions would decrease the associated liability.liabilities. 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 stockCommon Stock would result in a decrease in the estimated fair value measurement and thus a decrease in the associated liability. The Company has not declared, and does not plan to declare, dividends on its common stockCommon 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 Measurements
The following table presents the placement in the fair value hierarchy of the contingent consideration assumed by the Company following the acquisition of Excalibur, which is measured at fair value on a recurring basis:
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) | |||||||||||||
September 30, 2017: | ||||||||||||||||
Contingent consideration | $ | 316 | $ | — | $ | — | $ | 316 |
The purchase value of the contingent consideration assumed by the Company following the acquisition of Excalibur was determined using the Monte-Carlo simulation and, as such, was classified as Level 3 of the fair value hierarchy. The fair value measurements are evaluated by management to ensure that changes are consistent with expectations of management based upon the sensitivity and nature of the inputs.
Note 7.12. Stock-based Compensation
As of September 30, 2017, 1,552,480 shares ofThe Company has a stock-based compensation plan available to grant stock options and RSUs to the Company’s common stock were available for future grants underdirectors, employees and consultants. Under the Company’s 2012 Employee, Director and Consultant Equity Incentive Plan. Plan (the “Plan”) a maximum of 355,000 shares of Common Stock may be awarded. In February 2019, the Company granted a total of 32,500 stock options to members of its Board of Directors and 75,000 stock options to the Company’s newly elected Chief Executive Officer at an exercise price of $4.20 per share. The options vest over a period of one year. The Company also granted 37,500 RSUs to its newly elected Chief Executive Officer at an exercise price of $4.20 per share.
Total stock-based compensation expense for the nine-month periodsthree and nine months ended September 30, 20172019 was $35 and 2016 was $2,179$266, respectively, and $1,447, respectively. Totalfor the three and nine months ended September 30, 2018, stock-based compensation expense for the three-month periods ended September 30, 2017was $194 and 2016 was $706 and $485,$570, respectively.
Note 13. Related Party Transactions
On April 14, 2018, the Company entered into a consulting agreement with an employee of Mistral Equity Partners, which is a significant shareholder of the Company and whose Chief Executive Officer is a member of the Board of Directors of the Company, to consult on certain business-related matters. The following table illustratestotal consideration was $10 per month through April 30, 2019, when it was terminated. The Company recorded consulting expense of $40 up through the options granted duringtermination date of the agreement.
Note 14. Discontinued Operations
FLI Charge
On October 20, 2017 (the “Closing Date”), the Company sold FLI Charge, a wholly owned subsidiary included in its discontinued technology operating segment, to a group of private investors and FLI Charge management. As part of the sale, the Company received a perpetual royalty agreement (the “Royalty Agreement”). The Company also received a warrant exercisable in shares of FLI Charge or an affiliate of FLI Charge upon an initial public offering or certain defined events in connection with a change of control. The warrant has a five-year life and is based on a valuation of the lesser of $30,000 or the financing valuation of FLI Charge preceding the initial public offering or certain defined events.
In June 2019, the Company received a buyout from the Royalty Agreement and warrants in the amount of $1,100. This is reflected in“Other” revenue on the consolidated condensed statement of operations and comprehensive loss.
Group Mobile
On March 7, 2018, the Company entered into a membership purchase agreement (the “Purchase Agreement”) with Route1 Security Corporation, a Delaware corporation (the “Buyer”), and Route1 Inc., an Ontario corporation (“Route1”), pursuant to which the Buyer agreed to acquire Group Mobile, a wholly-owned subsidiary included in the Company’s discontinued technology operating segment, (the “Disposition”). The transaction closed on March 22, 2018 (the “Closing Date”), after which the Company no longer had any involvement with Group Mobile.
In consideration for the Disposition, the Buyer issued to the Company:
· | 25,000,000 shares of common stock of Route1 (“Route1 Common Stock”); |
· | warrants to purchase 30,000,000 shares of Route1 Common Stock, which had an exercise price of CAD 5 cents per share of Route 1 Common Stock and will be exercisable for a three-year period; and |
· | certain other payments over the three-year period pursuant to an earn-out provision in the Purchase Agreement. |
Post-closing, the Company owned approximately 6.7% of Route1 common stock. The Route1 common stock is not tradable until a date no earlier than 12 months after the Closing Date; 50%, or 12,500,000 shares of Route1 common stock are tradeable after 12 months plus an additional 2,083,333 shares of Route1 common stock are tradeable each month until 18 months after the Closing Date, subject to a change of control provision. The Company has the ability to sell the Route1 common stock and warrants to qualified institutional investors. The Group Mobile Purchase Agreement also contains representations, warranties, and covenants customary for transactions of this type.
The total consideration of the Disposition was recognized as a cost method investment and, as such, was measured at cost on the date of acquisition, which, as of the Closing Date, approximated fair value. The fair value of the total consideration as of the Closing Date was determined to be $1,625, which was less than the carrying value of the asset. This resulted in a loss on disposal which is included in consolidated net loss from discontinued operations in the consolidated condensed statement of operations and comprehensive loss that was recorded in the nine-month period ended September 30, 2017.2018 of $1,115.
The value of the total consideration for the Group Mobile disposition was determined using a combination of valuation methods including:
(i) | The value of the Route 1 common stock was determined to be $308, which was estimated by multiplying the number of shares as they become tradeable by the price per share as of the Closing Date. |
The value of the warrants was determined to be $176, which was calculated using the Black-Scholes-Merton model. |
The value of | ||||||||||||
|
Due to the underperformance of operating results by Group Mobile in the first period for which results were required to be reported to the Company, we determined that the asset was impaired as of June 30, 2019 and recorded an impairment charge of $1,141, which is included in“Other non-operating income (expense), net” on the consolidated condensed statement of operations and comprehensive loss for the nine months ended September 30, 2019 (See Note 6.“Other Assets”).
Operating Results of Discontinued Operations
The following table illustratespresents the RSUs granted duringcomponents of the nine-month period September 30, 2017.
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 |
The activity related to stock optionsconsolidated net loss from discontinued operations, as presented in the consolidated condensed statements of operations and RSUs duringcomprehensive loss for the nine-month period ended September 30, 2017 consisted of the following:2018:
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 | (35,377 | ) | $ | 2.12 | (330,834 | ) | $ | 15.57 | $ | 1.55 – 41.00 | $ | 10.61 | ||||||||||||
Expired | — | — | (16,368 | ) | $ | 43.66 | $ | 9.94 – 55.00 | $ | 22.02 | ||||||||||||||
Outstanding as of September 30, 2017 | 365,565 | $ | 2.12 | 4,876,899 | $ | 5.21 | $ | 1.55 – 41.00 | $ | 3.59 | ||||||||||||||
Exercisable as of September 30, 2017 | — | 2,780,024 | $ | 7.77 | $ | 1.55 – 41.00 |
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.
The Company did not recognize tax benefits related to its stock-based compensation as there is a full valuation allowance recorded.
Nine months ended September 30, 2018 | ||||
Revenue | $ | 2,834 | ||
Cost of sales | (2,305 | ) | ||
Depreciation and amortization | (131 | ) | ||
General and administrative | (1,190 | ) | ||
Loss on disposal | (301 | ) | ||
Non-operating income (expense), net | (22 | ) | ||
Loss from discontinued operations | $ | (1,115 | ) |
Note 8.15. Income Taxes
The Company’s provision for income taxes consists of federal, state, local, and foreign taxes in amounts necessary to align the Company’s year-to-date provision for income taxes with the effective tax rate that the Company expects to achieve for the full year. Each quarter, the Company updates its estimate of the annual effective tax rate and records cumulative adjustments as deemed necessary. The income tax provisions for the nine monthsnine-month period ended September 30, 20172019 reflect an estimated global annual effective tax benefit at the rate of approximately -3.0% from continuing operations. Discontinued operations for the nine months ended September 30, 2017 reflect an annual effective tax rate of 0.0%1%.
As of September 30, 2017,2019, deferred tax assets generated from the Company’s U.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
The Company recorded an income tax expense forbenefit during the three and nine months ended September 30, 20172019, which is comprised primarily of approximately $284 was attributable primarily tothe release of a liability for an uncertain tax deductions related to goodwill,position for which there is no corresponding financial statement amortization expense,the statute of limitations expired in the third quarter of 2019 of $132, partially offset by the reduction in the valuation allowance needed following the acquisition of Excalibur's deferred tax liability.earnings generated by foreign subsidiaries. The final annual tax rate cannot be determined until the end of the fiscal year;year therefore, the actual tax rate could differ from current estimates. Although theThe Company has an immaterial amount of remaining liabilities for uncertain tax positions the Companyand does not expect to record any additional material provisions for unrecognized tax benefits within the next year.
Note 9. Related Parties 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 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 September 30, 2017 and December 31, 2016, which is included in long-term liabilities in the condensed consolidated balance sheets. During the three- and nine-month period ended September 30, 2017, XpresSpa paid $150 and $580 of interest and recorded $183 and $548 of interest expense, respectively. During May 2017, per the original agreement and with Rockmore’s consent, the Company elected to extend the maturity date of the Debt from May 1, 2018 to May 1, 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.
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, a wholly-owned subsidiary included in its technology operating segment, as discontinued operations was triggered. As a result, a non-cash impairment loss of $1,092 relating to FLI Charge’s technology assets and goodwill was recorded as of June 30, 2017.
On October 20, 2017 (the “Closing Date”), the Company sold FLI Charge to a group of private investors and FLI Charge management, who will own and operate FLI Charge. The Company will not be providing any continued management or financing support to FLI Charge.
Total consideration for the sale of FLI Charge is $1,250, payable in installments. The consideration is secured by a note and security agreement. Additionally, the Company is entitled to a 5% royalty, in perpetuity, on the gross revenue of FLI Charge and of any affiliate of FLI Charge with regard to conductive wireless charging, power, or accessories. The Company also received a warrant exercisable in FLI Charge or an affiliate of FLI Charge upon an initial public offering or certain defined events in connection with a change of control. The warrant has a five-year life and is based on a valuation of the lesser of $30,000 or the financing valuation of FLI Charge preceding the initial public offering or certain defined events. The Company is currently evaluating the gain on the sale of FLI Charge.
The following table represents the components of operating results from discontinued operations, as presented in the condensed consolidated statements of operations and comprehensive loss:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenue | $ | 10 | 4 | 63 | $ | 33 | ||||||||||
Cost of sales | (15 | ) | (7 | ) | (83 | ) | (9 | ) | ||||||||
Depreciation, amortization and impairment | (21 | ) | (21 | ) | (1,189 | ) | (63 | ) | ||||||||
General and administrative | (182 | ) | (391 | ) | (1,112 | ) | (2,154 | ) | ||||||||
Loss from discontinued operations before income taxes | (208 | ) | (415 | ) | (2,321 | ) | (2,193 | ) | ||||||||
Income tax expense | — | — | — | — | ||||||||||||
Net loss from discontinued operations | $ | (208 | ) | $ | (415 | ) | $ | (2,321 | ) | $ | (2,193 | ) |
In addition, the following table presents the carrying amounts of the major classes of assets and liabilities held for sale as of September 30, 2017 and December 31, 2016, as presented in the condensed consolidated balance sheets.
September 30, 2017 | December 31, 2016 | |||||||
Accounts receivable, net | $ | 39 | $ | 45 | ||||
Inventory | 212 | 53 | ||||||
Other current assets | 9 | 92 | ||||||
Property and equipment, net | 191 | 183 | ||||||
Intangible assets, net | — | 377 | ||||||
Goodwill | — | 757 | ||||||
Assets held for disposal | $ | 451 | $ | 1,507 | ||||
Accounts payable, accrued expenses and other current liabilities | $ | 71 | $ | 196 | ||||
Deferred revenue | 9 | 10 | ||||||
Liabilities held for disposal | $ | 80 | $ | 206 |
Note 11.16. Commitments and Contingencies
Litigation and legal proceedings
Certain of the Company’s outstanding legal matters include speculative claims for substantial or indeterminate amounts of damages. The Company regularly evaluates developments in its legal matters that could affect the amount of any potential liability and makes adjustments as appropriate. Significant judgment is required to determine both the likelihood of there being any potential liability and the estimated amount of a loss related to the Company’s legal matters. Based
With respect to the Company’s outstanding legal matters, based on the Company’sits current knowledge, the Company’s management believes that the amount or range of a potential loss from its outstanding legal matters will not, either individually or in the aggregate, have a material adverse effect on its business, consolidated financial position, results of operations or cash flows. However, the outcome of such legal matters is inherently unpredictable and subject to significant uncertainties. The Company evaluated the outstanding legal matters described below, and assessed the probability and likelihood of the occurrence of liability. Based on management’s estimates, the Company recorded $745,has reserved $290 as of September 30, 2019 and December 31, 2018, which is included in accounts“Accounts payable, accrued expenses and other current liabilities liabilities”in the consolidated condensed consolidated balance sheet as of September 30, 2017.sheets.
The Company expenses legal fees in the period in which they are incurred.
Cordial
Effective October 2014, XpresSpa terminated its former Airport Concession Disadvantaged Business Enterprise (“ACDBE”) partner, Cordial Endeavor Concessions of Atlanta, LLC (“Cordial”), in several store locations at Hartsfield-Jackson Atlanta International Airport.
Cordial filed a series of complaints with the City of Atlanta, both before and after the termination, in which Cordial alleged, among other things, that the termination was not valid and that XpresSpa unlawfully retaliated against Cordial when Cordial raised concerns about the joint venture. In response to the numerous complaints it received from Cordial, the City of Atlanta required the parties to engage in two mediations.
After the termination of the relationship with Cordial, XpresSpa sought to substitute two new ACDBE partners in place of Cordial.
In April 2015, Cordial filed a complaint with the United States Federal Aviation Administration (“FAA”), which oversees the City of Atlanta with regard to airport ACDBE programs, and, in December 2015, the FAA instructed that the City of Atlanta review XpresSpa’s request to substitute new partners in lieu of Cordial and Cordial’s claims of retaliation. In response to the FAA instruction, pursuant to a corrective action plan approved by the FAA, the City of Atlanta held a hearing in February 2016 and ruled in favor of XpresSpa such substitution and claims of retaliation. Cordial submitted a further complaint to the FAA claiming that the City of Atlanta was biased against Cordial and that the City of Atlanta’s decision was wrong. In August 2016, the parties met with the FAA. On October 4, 2016, the FAA sent a letter to the City of Atlanta directing that the City of Atlanta retract previous findings on Cordial’s allegations and engage an independent third party to investigate issues previously decided by Atlanta. The FAA also directed that the City of Atlanta determine monies potentially due to Cordial.
On January 3, 2017, XpresSpa filed a lawsuit in the Supreme Court of the State of New York, County of New York, against Cordial and several related parties. The lawsuit alleges breach of contract, unjust enrichment, breach of fiduciary duty, fraudulent inducement, fraudulent concealment, tortious interference, and breach of good faith and fair dealing 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 the Cordial Litigation.dismiss. On September 12, 2017, the Court held a hearing on the motion to dismiss.
On January 4,November 2, 2017, the Court granted the motion to dismiss which was entered on November 13, 2017. On December 22, 2017, XpresSpa filed a notice of appeal, and on September 24, 2018, XpresSpa perfected its appellate rights and submitted a brief to the Supreme Court of New York, First Department appellate court. Oral arguments on the appeal are expected to take place in early 2019. Oral argument on the appeal went forward on March 20, 2019, and the Company expects the court to rule on the appeal in the coming months.
On March 30, 2018, Cordial filed a lawsuit against XpresSpa, a subsidiary of XpresSpa, and several additional parties in the Superior Court of Fulton County, Georgia, alleging the violation of Cordial’s civil rights, tortious interference, breach of fiduciary duty, civil conspiracy, conversion, retaliation, and unjust enrichment. Cordial has threated to seek punitive damages, attorneys’ fees and litigation expenses, accounting, indemnification, and declaratory judgment as to the status of the membership interests of XpresSpa and Cordial in the joint venture and Cordial’s right to profit distributions and management fees from the joint venture. On May 3, 2018, the Court issued an order extending the time for the defendants to respond to Cordial’s lawsuit until June 25, 2018. On May 4, 2018, the defendants moved the lawsuit to the United States District Court for the SouthernNorthern District of Georgia. On June 5, 2018, the Court granted an extension of time for the defendants’ response until August 17, 2018. On August 9, 2018, the Court granted an additional extension of time for the defendants’ response until September 7, 2018, and thereafter provided another extension pending the Court’s consideration of XpresSpa’s Motion to Stay all action in the Georgia lawsuit, pending resolution of the New York against its former attorney, Kevin Ross,lawsuit and his law firm, alleging malpractice, unjust enrichment, breachthe FAA action. On October 29, 2018, XpresSpa’s Motion to Stay was denied. Prior to resolution of fiduciary duty, fraudulent inducement, fraudulent concealment, tortious interference,the Motion to Stay, Cordial filed a Motion for Temporary Restraining Order (“TRO Motion”), seeking to enjoin the defendants 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,specifically XpresSpa, from, among other things, distributing any cash flow, net profits, or management fees, or otherwise expending resources beyond necessary operating expenses. XpresSpa filed an opposition and, in a First Amended Complaint againstdecision entered December 26, 2018, the defendants. On June 2, 2017, the RossCourt denied Cordial’s TRO Motion entirely. Defendants filed their answer.a Motion to Dismiss the Complaint in its entirety on November 20, 2018, which is pending decision by the Court.
BothA Director's Determination was issued by the FAA in connection with the Part 16 Complaint ("Part 16 Proceeding") filed by Cordial Litigationagainst the City of Atlanta ("City") in 2017 ("Director's Determination"). The Company and Ross Litigation are pending beforeCordial were not parties to the respective courts.FAA action, and had no opportunity to present evidence or otherwise be heard in such action. The Director's Determination concluded that the City was not in compliance with certain Federal obligations concerning the federal government's ACDBE program, including relating to the City's oversight of the Joint Venture Operating Agreement between Clients and Cordial, Cordial's termination, and Cordial's retaliation and harassment claims, and the City was ordered to achieve compliance in accordance with the Director's Determination. The Director's Determination does not constitute a Final Agency Decision and it is not subject to judicial review, pursuant to 14 CFR § 16.247(b)(2). Because the Company is not a party to the Part 16 Proceeding, the Company would not be considered "a party adversely affected by the Director's Determination" with a right of appeal to the FAA Assistant Administrator for Civil Rights.
On August 7, 2019, the Company filed a response, advising the U.S. District Court that: (i) the Company is not party to the FAA proceeding and therefore had no opportunity to present evidence or otherwise be heard in such action; (ii) as non-party, the Company is not bound by the Director's Determination; and (iii) the FAA cannot dictate the interpretation or enforceability of the contract between Cordial and the Company, which is the subject of the U.S. District Court action initiated by Cordial and the New York State Court action initiated by the Company.
The Company has been involved in settlement negotiations seeking to resolve all pending matters, and those negotiations are continuing.
In re Chen et al.
OnIn 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; this motion is pending. In October 2017,Court. XpresSpa subsequently paid the agreed-upon settlement amount to the settlement claims administrator to be held in escrow pending a fairness hearing and final approval by the Court. On March 30, 2018, the Court entered a Memorandum and Order denying the motion without prejudice to renewal due to questions and concerns the Court had about certain settlement terms. On April 24, 2018, the parties jointly submitted a supplemental letter to the Court advocating for the fairness and adequacy of the settlement and appeared in Court on April 25, 2018 for a hearing to discuss the settlement terms in greater detail with the assigned Magistrate Judge. At the conclusion of the hearing, the Court still had questions about the adequacy and fairness of the settlement terms, and the Judge asked that the parties jointly submit additional information to the Court addressing the open issues. The parties submitted such information to the Court on May 18, 2018 and are awaiting the Court’s ruling on the open issues.
On August 21, 2019, the Court issued an Order denying the parties’ motion for preliminary approval of the revised settlement, as the Court still had concerns about several of the settlement terms. The Court set a deadline of September 19, 2019 for the parties to submit a revised proposal. The time to submit a revised settlement agreement for the Chen case has been further extended to November 7, 2019.
OtherBinn v. FORM Holdings Corp. et al.
On November 6, 2017, Moreton Binn and Marisol F, LLC, former stockholders of XpresSpa, filed a lawsuit against FORM Holdings Corp. (“FORM) and its directors in the United States District Court for the Southern District of New York. The lawsuit alleged violations of various sections of the Securities Exchange Act of 1934 (“Exchange Act”), material omissions and misrepresentations (negligent and fraudulent), fraudulent omission, expropriation, breach of fiduciary duties, aiding and abetting, and unjust enrichment in the defendants’ conduct related to the Company’s acquisition of XpresSpa, and sought rescission of the transaction, damages, equitable and injunctive relief, fees and costs, and various other relief. On January 17, 2018, the defendants filed a motion to dismiss the complaint. On February 7, 2018, the plaintiffs amended their complaint. On February 28, 2018, the defendants filed a motion to dismiss the amended complaint. By March 30, 2018, the motion to dismiss was fully briefed. On August 7, 2018, the Court ruled on the defendants’ motion, dismissing eight of the plaintiffs’ ten claims and denying the defendants’ motion to dismiss with respect to the two remaining claims, related to the Exchange Act. On October 30, 2018, the Court ordered that the plaintiffs could file an amended complaint, and, in response, the defendants could move for summary judgment. Consistent with the Court’s Order, on November 16, 2018, the plaintiffs filed a second amended complaint, modifying their allegations, and asserting claims pursuant to the Exchange Act and the Securities Act of 1933, as well as bringing a breach of contract claim. On December 17, 2018, the defendants filed a motion for summary judgment seeking dismissal of all claims. On February 1, 2019, the plaintiffs opposed defendant’s motion, requested discovery and cross-moved for partial summary judgement filed an opposition to defendants’ motion and a counter motion for partial summary judgment. Defendants’ summary judgement motion and plaintiff’s cross-motion for partial summary judgment were fully briefed as of March 15, 2019. On April 29, 2019, an emergency hearing was held before the Court in which the plaintiff sought a temporary restraining order and preliminary injunction to preclude acceleration of the maturity on the Senior Secured Note. The Court entered a temporary restraining order, while allowing parties the opportunity to brief the issue.
On May 21, 2019, the Court granted the defendant’s motion for summary judgement in full, dismissing all claims in the action. On July 3, 2019, the plaintiffs filed a notice of appeal in the United States Court of Appeals for the second circuit. The Company and its directors continue to believe that this action is without merit and intend to defend the appeal vigorously. On July 1, 2019, the Court held oral argument on Binn’s motion for preliminary injunction. After hearing argument by both sides, the Court deferred action and ordered that the temporary restraining order remain in place. On July 23, 2019, the Court denied the plaintiffs’ request for a preliminary injunction and vacated the temporary restraining order.
Kainz v. FORM Holdings Corp. et al.
On March 20, 2019, a second suit was commenced in the United States District Court for the Southern District of New York against FORM, seven of its directors and former directors, as well as a managing director of Mistral Equity Partners (“Mistral”). The individual plaintiff, a shareholder of XpresSpa Holdings, LLC at the time of the merger in December 2016, alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making false statements concerning,inter alia,the merger and the independence of FORM’s board of directors, violated Section 12(2) of the Securities Act of 1933, breached the merger agreement by making false and misleading statements concerning the merger and fraudulently induced the plaintiff into signing the joinder agreement related to the merger. On May 8, 2019, the Company and its directors and the managing director of Mistral filed a motion to dismiss the complaint. On June 5, 2019, plaintiffs opposed the motion and filed a cross-motion for a partial stay. Defendants’ motion to dismiss was fully briefed as of June 19, 2019.
On November 13, 2019, the matter was dismissed in its entirety. Plaintiff has 30 days to file a notice of appeal.
Binn, et al. v. Bernstein et al.
On June 3, 2019, a third suit was commenced in the United States District Court for the Southern District of New York against FORM, five of its directors, as well as Rockmore, the Company’s previous senior secured lender and a senior executive of the lender. Although this action is brought by Morton Binn and Marisol F, LLC, it is asserted derivatively on behalf of the Company. Plaintiffs assert eight causes of action, including that certain individual defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, by making false statements concerning,inter alia,the merger and the independence of FORM’s board of directors and the valuation of the Company’s lease portfolio. Plaintiffs also assert common law claims for breach of fiduciary duty, corporate waste, unjust enrichment, faithless servant doctrine, and aiding and abetting certain of the directors’ alleged breaches of fiduciary duty. The Company and its directors believe that this action is without merit and intend to file a motion to dismiss and defend the action vigorously.
The defendants filed a motion to dismiss on October 23, 2019. The plaintiffs’ opposition brief is due December 6, 2019.
Route1
On or about May 23, 2018, Route1 Inc., Route1 Security Corporation (together, “Route1”) and Group Mobile Int’l, LLC (“Group Mobile”) commenced a legal proceeding against the Company in the Ontario Superior Court of Justice.
Route1 and Group Mobile seek damages in relation to alleged breaches of a Membership Purchase Agreement entered into between Route1 and the Company on or about March 7, 2018, pursuant to which Route1 acquired the Company’s 100% membership interest in Group Mobile. All capitalized terms not otherwise defined herein have the meanings ascribed to them in the Agreement.
The Plaintiffs allege that the Company: (i) failed to ensure all Tax Returns were true, correct and compliant in all respects and that all Taxes had been paid in full; (ii) failed to ensure that all inventory of Group Mobile had been priced in accordance with GAAP and consisted of a quality and quantity that was materially usable and salable in the Ordinary Course of Business; (iii) failed to ensure that Group Mobile’s Most Recent Balance Sheet was materially complete and correct and prepared in accordance with GAAP; (iv) failed to record all liabilities on Group Mobile’s Most Recent Balance Sheet; and (v) failed to deliver the agreed upon amount of Net Working Capital, and/or pay the Shortfall, to Route1. The litigation is at an early stage, and it is not yet possible to assess the likelihood of success and/or liability.
Rodger Jenkins v. XpresSpa Group, Inc.
In March 2019, Rodger Jenkins filed a lawsuit against the Company in the United States District Court for the Southern District of New York. The lawsuit alleges breach of contract of the stock purchase agreement related to the Company’s acquisition of Excalibur Integrated Systems, Inc. and seeks specific performance, compensatory damages and other fees, expenses and costs.
The Company has denied the material allegations of the complaint and is currently defending the action. At this stage, we are unable to predict the outcome of this litigation.
Intellectual Property and Other Matters
The Company is engaged in litigation related to certain of the intellectual property that it owns, for which no liability is recorded, as the Company does not expect a material negative outcome.
In addition to those matters specifically set forth herein, the Company and its subsidiaries are involved in various other claims and legal actions that arise in the ordinary course of business. The Company does not believe that the ultimate resolution of these actions will have a material adverse effect on 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 adversely affect the Company’s business, financial condition, results of operations and cash flows.
The Company’s intellectual property operating segmentIn the event that an action is engaged in litigation, for which no liability is recorded, asbrought against the Company does not expect a material negative outcome.or one of its subsidiaries, the Company will investigate the allegation and vigorously defend itself.
Note 17. Subsequent Events
Upon the approval by the Company’s shareholders on October 2, 2019, on October 3, 2019 all issued and outstanding shares of the Company’s Series D Preferred Stock were converted into shares of the Company’s Common Stock pursuant to Section 6.3.4 of the Certificate of Designation of Preferences, Rights and Limitations of the Series D Preferred Stock, as amended on July 8, 2019, except to the extent that any holder of Series D Preferred Stock would otherwise beneficially own in excess any beneficial ownership limitation applicable to such holder after giving effect to the conversion, in which case such holder’s Series D Preferred Stock converted automatically into warrants to purchase the number of shares of the Company’s Common Stock equal to the number of shares of Common Stock into which the holder’s Series D Preferred Stock would otherwise have converted.
On November 6, 2017, Moreton Binn and Marisol F, LLC, former shareholders of XpresSpa, filed a lawsuit againstOctober 28, 2019, the Company entered into a Consent Agreement (the “Consent Agreement”) between Holdings and B3D. The Consent Agreement was entered into in order to postpone the interest payment on its directors allegingB3D Note of $107, which was due on various dates through December 3, 2019 so that the defendants engagedCompany can make the payment in securities violations, misrepresentation,registered, unrestricted shares of its Common stock.
On October 1, 2019, the Company entered into Amendment No. 3 to the Agreement and variousPlan of Merger (the “Merger Agreement”), by and among the Company (formerly known as FORM Holdings Corp.), Holdings and Mistral XH Representative, LLC, as representative of the unitholders of Holdings, dated as of August 8, 2016, as subsequently amended. The amendment to the Merger Agreement provided, among other allegations regardingthings, for the release from escrow of (i) certain shares of the Company’s acquisitionSeries D Preferred Stock to the unitholders of XpresSpa. TheHoldings and (ii) certain shares of Series D Preferred Stock to the Company is currently in satisfaction of certain indemnification claims in connection with the process of evaluating the claims.Merger Agreement.
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, 20162018 filed on MarchApril 1, 2019, as subsequently amended on April 30, 20172019 (the “2016“2018 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 consolidated subsidiaries.
Overview
FORM Holdings Corp.On January 5, 2018, we changed our name to XpresSpa Group, Inc. (“FORM”XpresSpa Group” or the “Company”) has three operating segments:from FORM Holdings Corp. Rebranding to XpresSpa Group in January 2018 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.
OurAs a result of the transition to a pure-play health and wellness services company, we currently have one operating segment consists ofthat is also our sole reporting unit, XpresSpa, which is a leading airport retailer of spa services. XpresSpa is a well-recognized airport spa brand with 51 locations, consisting of 4746 domestic and 45 international locations as of September 30, 2017.2019. XpresSpa offers travelers premium spa services, including massage, nail and hairskin care, as well as spa and travel products. We acquiredFor the nine-month period ended September 30, 2019 and 2018, XpresSpa’s revenue was $37,669 and $38,560, respectively. For the nine-month period ended September 30, 2019, approximately 82% of XpresSpa’s total revenue was generated by services, primarily massage and nail care, 15% was generated by retail products, primarily travel accessories and 3% was revenue from the one-time sale of its intellectual property licenses.
Recent Developments
Relocation of Corporate Headquarters and Global Support Team
On October 21, 2019, the Company relocated its corporate office functions and its Global Support Center in New York City from 780 Third Avenue in midtown Manhattan to 254 W 31st Street in Manhattan. The new XpresSpa Global Support Center will house all corporate employees and the Company estimates that the move will yield an annual cost reduction of $300 in occupancy expenses.
Calm Private Placement
On July 8, 2019, the Company entered into a securities purchase agreement (the “Calm Purchase Agreement”) with Calm.com, Inc. (“Calm”) pursuant to which the Company agreed to sell (i) an aggregate principal amount of $2,500 in a 5% unsecured convertible note due on May 31, 2022 (the “Calm Note”), which is convertible into shares of Series E Convertible Preferred Stock (the “Series E Preferred Stock”) and (ii) warrants to purchase 937,500 shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”), at a conversion price of $2.00 per share (the “Calm Warrants”) (collectively, the “Calm Private Placement”).
The Company received $2,500 in gross proceeds from the Calm Private Placement.
Notes and Warrants
The Calm Note is an unsecured subordinated obligation of the Company. Unless earlier converted or redeemed, the Calm Notes will mature on May 31, 2022. The Calm Note bears interest at a rate of 5% per annum, subject to increase in the fourth quarterevent of 2016.default to the lesser of 18% per annum or the maximum rate permitted under applicable law. The Calm Note is convertible at any time until the Calm Note is no longer outstanding, in whole or in part, at the option of Calm into shares of Series E Preferred Stock at a conversion price equal to $3.10 per share, except that no shares of Series E Preferred Stock could be issued as payment of interest or in connection with anti-dilution protection or voluntary reduction of the conversion price until receipt of shareholder approval, which approval was obtained on October 2, 2019. Interest on the Calm Note is payable in arrears beginning on the last day of each February, May, August and November during the period beginning on the original issuance date and ending on, and including, the maturity date, when all amounts outstanding under the Calm Notes become due and payable in cash. The Company may elect to pay interest in cash, shares of Series E Preferred Stock or a combination thereof.
The Calm Warrants entitle Calm to purchase an aggregate of 937,500 shares of Common Stock. The Calm Warrants are exercisable beginning six months from the date of issuance, have a term of five years and feature an exercise price equal to $2.00 per share.
Our technology operating segment consistsSee Note 9. “Long-term Notes and Convertible Notes”, to the consolidated condensed financial statements for discussion of the accounting for the Calm Private Placement.
Calm Collaboration Agreement
On July 8, 2019, the Company entered into an Amended and Restated Product Sale and Marketing Agreement with Calm (the “Amended and Restated Collaboration Agreement”), which replaced the parties’ previous Product Sale and Marketing Agreement, dated as of November 12, 2018. The Amended and Restated Collaboration Agreement primarily relates to the display, marketing, promotion, offer for sale and sale of Calm’s products in each of the Company’s branded stores worldwide. The Amended and Restated Collaboration Agreement will remain in effect until July 31, 2021, unless terminated earlier in accordance with the Amended and Restated Collaboration Agreement, and automatically renews for successive terms of six months unless either party provides written notice of termination no later than thirty days prior to any such automatic renewal of the Amended and Restated Collaboration Agreement. On October 30, 2019, the Company and Calm entered into an amendment to the Amended and Restated Collaboration Agreement, which provides for the addition of certain Calm branded products, which amendment is attached as Exhibit 10.8 to this Quarterly Report on Form 10-Q and incorporated by reference herein.
Amendment to Certificate of Designation of Series E Convertible Preferred Stock
On July 8, 2019, the Company filed a certificate of amendment to the Certificate of Designation of Series E Convertible Preferred Stock (the “Series E COD Amendment”) with the State of Delaware to (i) increase the number of authorized shares of Series E Convertible Preferred Stock (the “Series E Preferred Stock”) to 2,397,060 and (ii) upon receipt of Shareholder Approval, reduce the conversion price to $2.00. The Series E COD Amendment was approved by the Board of Directors of the Company and the Company obtained shareholder approval of the Series E COD Amendment on October 2, 2019. See Note 10“Stockholders’ Equity”.
B3D Transaction and B3D Note
B3D Transaction
On July 8, 2019, Holdings, entered into the fourth amendment (the “Credit Agreement Amendment”) to its existing Credit Agreement with B3D, LLC (“B3D”) in order to, among other provisions, (i) extend the maturity date to May 31, 2021, (ii) reduce the applicable interest rate to 9.0%, and amend and restate certain other provisions related to its 11.24% senior secured note. As consideration for these and other modifications the principal amount owed to B3D was increased by $500 to $7,000. Principal and any interest accrued thereon are convertible, at B3D’s option, into Common Stock subject to receipt of shareholder approval, which was obtained on October 2, 2019 (the “B3D Transaction”).
B3D Note
The B3D Note is a senior secured obligation of Holdings, secured by the personal property of the parent company of Holdings (XpresSpa Group, MobileInc.) and Holdings’ wholly owned subsidiaries. Unless earlier converted or redeemed, the B3D Note will mature on May 31, 2021. The B3D Note bears interest at a rate of 9.00% per annum, calculated on a monthly basis. Interest only is payable in arrears on the last business date of each month (the “Monthly Interest”). Notwithstanding the foregoing, until the earlier of (i) ninety days from the date of the Credit Agreement Amendment or (ii) the date upon which shareholder approval is received, which approval was obtained on October 2, 2019 (the “Interest Deferment Date”), the Monthly Interest continued to accrue, compounded monthly, and all unpaid amounts thereof became due and payable on the Interest Deferment Date. At the option of Holdings, all or any portion of the Monthly Interest that is payable (i) on the Interest Deferment Date or (ii) after the Interest Deferment Date, but not more than twenty-one days and not less than five trading days prior to the date on which each payment of Monthly Interest is due, may be paid in shares of XpresSpa Group, Inc.’s Common Stock. At any time after receipt of shareholder approval until the B3D Note is no longer outstanding, at the option of B3D, all or any portion of the outstanding principal amount of the B3D Note, plus any accrued and unpaid interest thereon, shall be convertible into XpresSpa Group, Inc.’s Common Stock at the option of B3D at a conversion price equal to $2.00 per share.
On August 22, 2019, the Company entered into an amendment to the B3D Note. Among other provisions, the amendment provided that B3D shall not have the right to convert the B3D Note into shares of XpresSpa Group, Inc.’s Common Stock to the extent that such conversion would cause B3D to beneficially own in excess of the Beneficial Ownership Limitation, initially defined as well4.99% of the number of shares of XpresSpa Group Inc.’s Common Stock outstanding immediately after giving effect to the issuance of shares of XpresSpa Group, Inc.’s Common Stock issuable upon conversion of the B3D Note. See Note 9“Long-term Notes and Convertible Notes” for discussion of the accounting for the B3D Transaction.
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Series D Convertible Preferred Stock Amendment and December 2016 Warrant Amendment
Series D Convertible Preferred Amendment
On July 8, 2019, the Company filed a certificate of amendment to the Certificate of Designation of Series D Convertible Preferred Stock (the “Series D COD Amendment”) with the State of Delaware to, upon receipt of shareholder approval, reduce the conversion price to $2.00 and provide for automatic conversion of the Series D Convertible Preferred Stock (the “Series D Preferred Stock”) into shares of Common Stock. The Series D COD Amendment was approved by the Company’s Board, and the Company obtained shareholder approval on October 2, 2019.
December 2016 Warrant Amendment
On July 8, 2019, the Company entered into an amendment to certain outstanding warrants issued in December 2016 (the “December 2016 Warrants”) to the holders of its Series D Preferred Stock (the “December 2016 Warrant Amendment”) to provide for (i) a reduction in the price to convert to Common Stock to $2.00, (ii) certain anti-dilution price protection and (iii) voluntary reduction of the conversion price by the Company in its discretion. The Company obtained shareholder approval in connection with the December 2016 Warrant Amendment on October 2, 2019. The December 2016 Warrants were recorded as an 11% equity interest in InfoMedia Services Limited (“InfoMedia”). Group Mobile offers rugged hardware and software solutions, including laptops, tablets, and mobile printers,instrument at December 31, 2016. As such, no adjustment to the consolidated condensed financial statements was made as well as installation and deployment services. Ina result of the first quarter 2017, we completed the acquisition of Excalibur Integrated Systems, Inc. (“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 our technology operating segment. Our equity interest in InfoMedia, which is accounted for under the cost method of investment, increased from 8.25% to 11%change in the first quarter of 2017 due to a realignment of ownership interests.conversion price.
WeMay 2018 SPA Amendment, Series F Preferred Stock and Series B Preferred Stock
May 2018 SPA Amendment
On May 15, 2018, in a private placement offering, the Company issued (i) 5% Secured Convertible Notes (the “5% Secured Convertible Notes”) convertible into Common Stock at $12.40 per share, due November 2019, (ii) May 2018 Class A Warrants to purchase 357,863 shares of Common Stock (the “May 2018 Class A Warrants”) and (iii) Class B Warrants to purchase 178,932 shares of Common Stock (the “May 2018 Class B Warrants”).
On July 8, 2019, the Company entered into an amendment (the “May 2018 SPA Amendment”) to the Securities Purchase Agreement, dated as of May 15, 2018, by and between the Company and the purchasers party thereto (the “May 2018 SPA”), to provide for, among other provisions, (i) an update to certain definitions, including the definition of an “Exempt Issuance,” (ii) the waiver of certain provisions regarding restrictions on subsequent equity sales and participation in subsequent financings, and the removal of certain of such provisions upon receipt of shareholder approval (obtained on October 2, 2019), (iii) the amendment to certain provisions of the Class A Warrants issued pursuant to the May 2018 SPA to modify certain provisions in connection with a Notice Failure (as such term is defined in the Class A Warrants), and the reduction in the conversion price of the Class A Warrants issuable pursuant to anti-dilution price protection contained in such Class A Warrants to $2.00 per share following receipt of shareholder approval, which approval was obtained on October 2, 2019, (iv) the cancellation of all outstanding Class B Warrants and (v) the establishment of a new class of preferred stock, designated Series F Convertible Preferred Stock, par value $0.01 per share (the “Series F Preferred Stock”) and the issuance of 8,996 shares of such Series F Preferred Stock to the parties to the May 2018 SPA Amendment, which are currently evaluating strategic alternativesconvertible into Common Stock upon receipt of shareholder approval, which approval was obtained on October 2, 2019.
Certificate of Designation of Series F Preferred Stock
In connection with respectthe May 2018 SPA Amendment, on July 8, 2019, the Company filed with the Secretary of State of the State of Delaware a Certificate of Designation of Preferences, Rights and Limitations of Series F Convertible Preferred Stock (the “Series F Certificate of Designation”) establishing and designating the rights, powers and preferences of the Series F Preferred Stock. The Company designated 9,000 shares of Series F Preferred Stock. The Series F Convertible Preferred Stock was recorded at its fair on July 8, 2019 of $1,131 (net of issuance costs of approximately $123,000) in the Company’s consolidated condensed balance sheet as of September 30, 2019. See Note 10.“Stockholders’ Equity” for further discussion.
Certificate of Elimination of Series B Preferred Stock
On July 8, 2019, the Company filed a Certificate of Elimination of Shares of Series B Preferred Stock (the “Certificate of Elimination”) to Group Mobile in an attemptthe Company’s amended and restated certificate of incorporation. The Certificate of Elimination reduced, pursuant to enhance stockholder value. These strategic alternativesSection 151(g) of the Delaware General Corporation Law, the number of authorized shares of Series B Convertible Preferred Stock of the Company, par value $0.01 per share (the “Series B Preferred Stock”) from 1,609,167 shares to zero shares. Pursuant to the provisions of Section 151(g) of the Delaware General Corporation Law, the 1,609,167 authorized shares of Series B Preferred Stock were eliminated pursuant to the reduction return to the available undesignated preferred stock of the Company and may includebe re-designated into another series of preferred stock.
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Reverse Stock Split
On February 22, 2019, the Company filed a possible sale, merger, spin-off or other separationcertificate of Group Mobile or other formsamendment to its amended and restated certificate of business combinations or strategic transactions. We are seekingincorporation with the Secretary of State of the State of Delaware to entereffect a 1-for-20 reverse stock split of the Company’s shares of Common Stock. Such amendment and ratio were previously approved by the Company’s stockholders and Board of Directors.
As a result of the reverse stock split, every twenty (20) shares of the Company’s pre-reverse split Common Stock were combined and reclassified into one or more strategic transactions involving Group Mobile(1) share of Common Stock. Proportionate voting rights and other rights of common stockholders were affected by the reverse stock split. Stockholders who would have otherwise held a fractional share of Common Stock received payment in cash in lieu of any such resulting fractional shares of Common Stock as the first quarterpost-reverse split amounts of 2018.Common Stock were rounded down to the nearest full share. No fractional shares were issued in connection with the reverse stock split.
Liquidity and Going Concern
As of September 30, 2017,2019, we had cash and cash equivalents of $2,432, total current assets of $3,976, total current liabilities of $7,761 and a working capital deficiency of $3,785 as compared to a working capital deficiency of $10,899 as of December 31, 2018.
We have aggressively reduced operating expenses, reducing net cash used in operating activities from continuing operations from $6,129 for the nine months ended September 30, 2018 to $782 for the nine months ended September 30, 2019. While we continue to focus on our FLI Charge business is reflected as discontinued operationsoverall profitability, we expect to incur net losses in the foreseeable future. As discussed above in our Annual Report on Form 10-K, the report of our independent registered public accounting firm on our financial statements for the year ended December 31, 2018 includes an explanatory paragraph indicating that there is substantial doubt about our ability to continue as a going concern. The receipt of this explanatory paragraph with respect to our financial statements for the year ended December 31, 2018 resulted in a breach of a covenant under the 5% Secured Convertible Notes. No investor provided notice to the Company electing to exercise its right to accelerate payment. We have since renegotiated the terms of the 5% Secured Convertible Notes. (See Note 9.“Long-term Notes and Convertible Notes” to the consolidated condensed financial statements.)
On June 27, 2019, the Company entered into the Third Amendment Agreement to the 5% Secured Convertible Notes (the “Third Amendment”) with the intention of inducing the holders of the 5% Secured Convertible Notes to convert into Common Stock. To induce the holders to convert, the Third Amendment reduced the conversion price of the 5% Secured Convertible Notes to Common Stock from $12.40 per share to $2.48 per share. As a result of the reduction in the conversion price of the 5% Convertible Notes and the associated May 2018 Class A Warrants from $12.40 per share to $2.48 per share on June 27, 2019, the Company recorded a debt conversion expense of $1,547 to account for the additional consideration paid over what was agreed to in the original Convertible Note agreement. The expense was recorded in“Other non-operating income (expense), net” in the consolidated statement of operations and comprehensive loss in the quarter ended June 30, 2019. Some Note holders converted their remaining outstanding principal balances plus accrued interest into 586,359 shares of Common Stock. Any Note holders who did not convert to Common Stock had their 5% Convertible Notes converted into 356,772 Class A Warrants (the “June 2019 Class A Warrants”). The June 2019 Class A Warrants have an exercise price of $0.01 and are otherwise identical in form and substance to the Company's existing May 2018 Class A Warrants. The Company had an independent third party perform an appraisal of the June 2019 Class A Warrants as of June 30, 2019. The June 2019 Class A Warrants were assigned an appraised value of $689. The value of the June 2019 Class A Warrants was recorded as a derivative liability on the consolidated condensed balance sheet and will be marked to market at the end of each quarter. The expense of $689 is included in“Other non-operating income (expense), net” in the consolidated condensed statements of operations and comprehensive loss in the quarter ended June 30, 2019 and assets held for disposal and liabilities held for disposalis included in our condensed consolidated balance sheets. FLI Charge was subsequently sold during October 2017.current period year to date results. The June 2019 Class A Warrants were converted into 354,502 shares of Common Stock in July 2019.
We have taken actions to improve our overall cash position and access to liquidity, as discussed above. We continue to execute our strategies to expand and explore strategic partnerships, right-size our corporate structure, and streamline our operations. We expect that the actions taken will enhance our liquidity and financial stability and expect that these actions will be executed in alignment with the anticipated timing of our future liquidity needs. There can be no assurance; however, that any such opportunities will materialize.
Our intellectual propertyhistorical operating segmentresults indicate that there is engagedsubstantial doubt related to the Company's ability to continue as a going concern. We believe it is probable that the actions discussed have successfully mitigated the substantial doubt raised by our historical operating results and will satisfy our liquidity in the monetizationshort term. However, we cannot reasonably predict with any certainty that the results of patentsour actions will generate the expected liquidity required to satisfy our long-term liquidity needs.
If we continue to experience operating losses, and we are not able to generate additional liquidity through the actions described above or through some combination of other actions, while not expected, we may not be able to access additional funds and we might need to secure additional sources of funds, which may or may not be available to us. Additionally, a failure to generate additional liquidity could negatively impact our access to inventory or services that are important to the operation of our business.
CEO Transition
On February 8, 2019, Edward Jankowski resigned as our Chief Executive Officer and as a director. Mr. Jankowski’s resignation was not as a result of any disagreement on any matters related to contentour operations, policies or practices. Mr. Jankowski is receiving termination benefits including $375 payable in equal installments over a twelve-month term which commenced on February 13, 2019 and ad delivery, remote monitoringCOBRA continuation coverage paid in full for up to a maximum of twelve months.
Effective as of February 11, 2019, Douglas Satzman was appointed by our Board of Directors as our Chief Executive Officer and mobile technologies.as a director, filling the position vacated by Mr. Jankowski.
Dispositions
On October 20, 2017, we sold FLI Charge to a group of private investors and FLI Charge management, who now own and operate FLI Charge. In February 2019, we entered into an agreement to release FLI Charge’s obligation to pay any royalties on FLI Charge’s perpetual gross revenues with regard to conductive wireless charging, power, or accessories, and to cancel its warrants exercisable in FLI Charge in exchange for cash proceeds of $1,100 which were received in full on February 15, 2019.
In March 2018, we completed the sale of Group Mobile Int’l LLC (“Group Mobile”). The results of operations for Group Mobile are presented in the consolidated condensed statements of operations and comprehensive loss as“Loss from discontinued operations, net of income taxes”.
Calm Collaboration Agreement
On November 12, 2018, we entered into a Product Sale and Marketing Agreement (the “Collaboration Agreement”) with Calm primarily related to the display, marketing, promotion, offer for sale and sale of Calm’s products in each of our branded stores throughout the United States.
On July 26, 2017,8, 2019, we entered into the Underwritingan Amended and Restated Product Sale and Marketing Agreement with Roth Capital Partners, LLC, acting asCalm (the “Amended and Restated Collaboration Agreement”), which replaced the representativeprevious Collaboration Agreement. The Amended and Restated Collaboration Agreement primarily relates to the display, marketing, promotion, offer for sale and sale of Calm’s products in each of XpresSpa’s stores worldwide. The Amended and Restated Collaboration Agreement shall remain in effect until July 31, 2021, unless terminated earlier in accordance with the Amended and Restated Collaboration Agreement, and automatically renews for successive terms of six months unless either party provides written notice of termination no later than thirty days prior to any such automatic renewal of the Underwriters, relatingAmended and Restated Collaboration Agreement. On October 30, 2019, the Company and Calm entered into an amendment to the OfferingAmended and Restated Collaboration Agreement, which provides for the addition of 6,900,000 shares of FORM Common Stock including 900,000 shares subjectcertain Calm branded products, which amendment is attached as Exhibit 10.8 to the Underwriters’ over-allotment option, which was exercisedthis Quarterly Report on August 2, 2017Form 10-Q 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 us pursuant to the Underwriting Agreement at a purchase price of $1.023 per share. The net proceeds to us from the Offering were $6,584,000 after deducting underwriting discounts and commissions and other estimated offering expenses.incorporated by reference herein.
Third Quarter 2017 HighlightsOur Strategy and Outlook
Same Store Sales
Three Months Ended September 30, 2017 | ||||||||||||||||||||
Wellness | Technology | Intellectual Property | Corporate | Total | ||||||||||||||||
Total revenue | $ | 12,652,000 | $ | 4,879,000 | $ | 200,000 | $ | — | $ | 17,731,000 | ||||||||||
Cost of sales | ||||||||||||||||||||
Products | 1,005,000 | 3,902,000 | — | — | 4,907,000 | |||||||||||||||
Labor | 6,458,000 | — | — | — | 6,458,000 | |||||||||||||||
Occupancy | 1,950,000 | — | — | — | 1,950,000 | |||||||||||||||
Other operating costs | 934,000 | — | 126,000 | — | 1,060,000 | |||||||||||||||
Total cost of sales | 10,347,000 | 3,902,000 | 126,000 | — | 14,375,000 | |||||||||||||||
Gross profit | 2,305,000 | 977,000 | 74,000 | — | 3,356,000 | |||||||||||||||
Gross profit as a % of total revenue | 18.2 | % | 20.0 | % | 37.0 | % | — | 18.9 | % | |||||||||||
Depreciation and amortization | ||||||||||||||||||||
Depreciation | 1,110,000 | 24,000 | — | 7,000 | 1,141,000 | |||||||||||||||
Amortization | 597,000 | 150,000 | 6,000 | — | 753,000 | |||||||||||||||
Total depreciation and amortization | 1,707,000 | 174,000 | 6,000 | 7,000 | 1,894,000 | |||||||||||||||
General and administrative | ||||||||||||||||||||
Stock-based compensation | — | — | — | 706,000 | 706,000 | |||||||||||||||
Other general and administrative | 2,237,000 | 1,293,000 | (149,000 | ) | 1,386,000 | 4,767,000 | ||||||||||||||
Total general and administrative | 2,237,000 | 1,293,000 | (149,000 | ) | 2,092,000 | 5,473,000 | ||||||||||||||
Operating income (loss) from continuing operations | $ | (1,639,000 | ) | $ | (490,000 | ) | $ | 217,000 | $ | (2,099,000 | ) | $ | (4,011,000 | ) |
We use GAAP and non-GAAP measurements to assess the trends in our business. With respectbusiness, including comparable store sales, a non-GAAP measure we define as current period sales from stores opened more than 12 months compared to those same stores’ sales in the prior year period (“Comp Store Sales”). The measurement of Comp Store Sales on a daily, weekly, monthly, quarterly and year-to-date basis provides an additional perspective on XpresSpa’s total sales growth when considering the influence of new unit contribution. Revenue from Comp and Non-Comp Store sales is presented below:
Nine Months Ended September 30, 2019 | Nine Months Ended September 30, 2018 | % Inc/(Dec) | ||||||||||||||||||||||||||
Comp Store | Non-Comp Store | Total | Comp Store | Non-Comp Store | Total | Comp Store | ||||||||||||||||||||||
Products and Services | $ | 35,642 | $ | 843 | $ | 36,485 | $ | 34,878 | $ | 2,882 | $ | 37,760 | 2.2 | % |
Comp Store Sales increased 2.2% during the nine months ended September 30, 2019 as compared to the same period in 2018. XpresSpa we review itshad 51 open locations during the nine months ended September 30, 2019 and 57 open locations during the comparable period of 2018. Comp Store sales increased despite having six fewer stores open primarily due to an increase in the average ticket per transaction and by fixing retail supplier issues and upselling services.
We plan to grow XpresSpa by continuing to focus on spa-level productivity and leveraging retail partnerships to increase units per transaction, which will contribute to the growth of the Comp Store Sales and through the opening of new locations.
Q3 2019 Comp Store Sales and Adjusted EBITDA a(loss)
Another non-GAAP measure,measurement we use to assess the trends in our business is Adjusted EBITDA, which we define as earnings before interest, tax,taxes, depreciation and amortization expense, excluding merger andfinancing costs, acquisition integration andcosts, other one-time costsand stock-based compensation.
Comp Store Sales and Adjusted EBITDA has been presented in this Quarterly Report on Form 10-Q and is aare supplemental measuremeasures of financial performance that isare not required by or presented in accordance with GAAP. Reconciliations of operating loss from continuing operations for the three and nine-month periods ended September 30, 2019 to Adjusted EBITDA (loss) are presented in the tables below.
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 thisthese non-GAAP financial measuremeasures 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 Comp Store Sales and Adjusted EBITDA is a measurementare measurements that isare 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 indicatorthese indicators because itfor Comp Store Sales only comparable sales for stores open at least 12 months are included. Adjusted EBITDA (loss) 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 Comp Store Sales and Adjusted EBITDA, we recognize and consider the limitations of this measurement.these measurements. 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 September 30, 2017:
Three Months Ended September 30, 2017 | ||||||||||||||||||||
Wellness | Technology | Intellectual Property | Corporate | Total | ||||||||||||||||
Operating income (loss) from continuing operations | $ | (1,639,000 | ) | $ | (490,000 | ) | $ | 217,000 | $ | (2,099,000 | ) | $ | (4,011,000 | ) | ||||||
Plus: | ||||||||||||||||||||
Depreciation and amortization | 1,707,000 | 174,000 | 6,000 | 7,000 | 1,894,000 | |||||||||||||||
Stock-based compensation | — | — | — | 706,000 | 706,000 | |||||||||||||||
Merger and acquisition, integration and one-time costs | 529,000 | 290,000 | — | — | 819,000 | |||||||||||||||
Adjusted EBITDA income (loss) | $ | 597,000 | $ | (26,000 | ) | $ | 223,000 | $ | (1,386,000 | ) | $ | (592,000 | ) |
Merger and acquisition, integration and one-time costs relate to the following:
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 income (loss) before corporate and unallocated shared expenses, interest expense, income taxes and noncontrolling interests.
WellnessQ3 2019 Adjusted EBITDA (loss)
(amounts in thousands)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenue | ||||||||||||||||
Services | $ | 10,230 | $ | 10,391 | $ | 30,704 | $ | 31,220 | ||||||||
Products | 2,301 | 2,531 | 5,781 | 6,540 | ||||||||||||
Other | — | — | 1,184 | 800 | ||||||||||||
Total revenue | 12,531 | 12,922 | 37,669 | 38,560 | ||||||||||||
Cost of sales | ||||||||||||||||
Labor | 5,842 | 5,997 | 17,507 | 18,697 | ||||||||||||
Occupancy | 1,894 | 1,996 | 5,811 | 6,216 | ||||||||||||
Products and other operating costs | 1,953 | 1,992 | 5,322 | 5,208 | ||||||||||||
Total cost of sales | 9,689 | 9,985 | 28,640 | 30,121 | ||||||||||||
Depreciation, amortization and impairment | ||||||||||||||||
Depreciation and amortization | 1,464 | 1,879 | 4,692 | 5,375 | ||||||||||||
Impairment of assets | 106 | — | 936 | — | ||||||||||||
Impairment of goodwill | — | — | — | 19,630 | ||||||||||||
Total depreciation, amortization and impairment | 1,570 | 1,879 | 5,628 | 25,005 | ||||||||||||
Total general and administrative expense | 3,108 | 3,943 | 9,204 | 12,443 | ||||||||||||
Loss from continuing operations | (1,836 | ) | (2,885 | ) | (5,803 | ) | (29,009 | ) | ||||||||
Interest expense | (780 | ) | (624 | ) | (2,052 | ) | (1,212 | ) | ||||||||
Other non-operating income (expense), net | (2,161 | ) | 378 | (5,817 | ) | 877 | ||||||||||
Loss from continuing operations before income taxes | (4,777 | ) | (3,131 | ) | (13,672 | ) | (29,344 | ) | ||||||||
Income tax benefit | 143 | 66 | 101 | 198 | ||||||||||||
Loss from continuing operations | (4,634 | ) | (3,065 | ) | (13,571 | ) | (29,146 | ) | ||||||||
Loss from discontinued operations, net of income taxes | — | — | — | (1,115 | ) | |||||||||||
Net loss | (4,634 | ) | (3,065 | ) | (13,571 | ) | (30,261 | ) | ||||||||
Net income attributable to noncontrolling interests | (210 | ) | (122 | ) | (584 | ) | (382 | ) | ||||||||
Net loss attributable to common shareholders | $ | (4,844 | ) | $ | (3,187 | ) | $ | (14,155 | ) | $ | (30,643 | ) | ||||
Operating loss from continuing operations | $ | (1,836 | ) | $ | (2,885 | ) | $ | (5,803 | ) | $ | (29,009 | ) | ||||
Add back: | ||||||||||||||||
Depreciation, amortization and impairment of assets | 1,570 | 1,879 | 5,628 | 5,375 | ||||||||||||
Financing transaction, acquisition integration and other one-time costs | 138 | 452 | 363 | 1,057 | ||||||||||||
Goodwill impairment | — | — | — | 19,630 | ||||||||||||
Stock-based compensation expense | 35 | 194 | 266 | 765 | ||||||||||||
Less: | ||||||||||||||||
Net income attributable to noncontrolling interests | (210 | ) | (3 | ) | (584 | ) | (382 | ) | ||||||||
Adjusted EBITDA (loss) | $ | (303 | ) | $ | (363 | ) | $ | (130 | ) | $ | (2,564 | ) |
33
Results of Operations
Our wellness operating segment recognizedRevenue
We recognize revenue from the sale of $12,652,000 duringXpresSpa services when they are rendered at our stores and from the third quartersale of 2017, which was generatedproducts at the time goods are purchased at our stores or online (usually by credit card), net of discounts and applicable sales taxes. Revenues from the XpresSpa for services providedwholesale and health and beauty products sold. We acquired XpresSpa on December 23, 2016 ande-commerce businesses are actively integrating its corporate functions and optimizingrecorded at the operating segment’s performance. Duringtime goods are shipped. Other revenue relates to one-time intellectual property licenses as well as the nine-month period ended September 30, 2017, we opened three new flagship locations, consistingsale of one location at John F. Kennedy International Airport’s Terminal 4 and two locations at Phoenix Sky Harbor International Airport. We also closed three small temporary kiosks to better align our resources. We also completed a major renovation to another location in John F. Kennedy International Airport’s Terminal 4, which opened in September 2017. A numbercertain of our stores will be undergoing maintenance or renovations during the fourth quarter of 2017. Wherever possible, we seek to receive lease extensions or other concessionsintellectual property. Revenue from patent licensing is recognized when we undergo these processes. As of September 30, 2017,transfer promised intellectual property rights to purchasers in an amount that reflects the consideration to which we operated a total of 51 XpresSpa locations.expect to be entitled in exchange for those intellectual property rights.
Cost of sales
Cost of sales consists of store-level costs. Store-level costs include all costs that are directly attributable to the store operations, and include:
Cost of merchandise as well as its freight, shipping and handling costs;
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 one-time costs related to the interruption of business due to hurricanes that affected our locations in Houston, Texas, Miami and Orlando, Florida, and Atlanta, Georgia and the integration costs related to the acquisition, which together amounted to $529,000 during the third 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 third quarter of 2017, Group Mobile’s revenue increased 178.6% from $1,751,000 for the three-month period ended September 30, 2016 to $4,879,000 for the three-month period ended September 30, 2017. This was mainly due to the increased sales pipeline throughout 2016 and 2017.
Intellectual Property
The intellectual property operating segmentmainly includes revenues from one-time patent licenses as well as expenses incurred in connection with ourthe 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. In July 2017, the intellectual property operating segment recognized a $148,000 gain on the sale of an asset.
CorporateGeneral and administrative
CorporateGeneral and unallocated sharedadministrative expenses principally consist ofinclude management and administrative personnel, public and investor relations, overhead/office costs, for corporate functions, rent for office space,insurance and various other professional fees, as well as sales and marketing costs and stock-based compensation executivefor management and certain unallocated administrative support functions.personnel.
Discontinued OperationsOther non-operating income (expense), net
During June 2017, we concluded that the requirementOther non-operating income (expense), net includes transaction gains (losses) from foreign exchange rate differences, impairments of cost method investments not related to report the resultsour primary line of FLI Charge, a wholly-owned subsidiary included inbusiness, bank charges, deposits, as well as fair value adjustments related to our technology operating segment, as discontinued operations was triggered. As a result, a non-cash impairment loss of $1,092,000 relating to FLI Charge’s technology assets and goodwill was recorded during the second quarter of 2017.
On October 20, 2017, we sold FLI Charge to a group of private investors and FLI Charge management, who will own and operate FLI Charge. We will not be providing any continued management or financing support to FLI Charge.
Total consideration for the sale of FLI Charge is $1,250,000, payable in installments. The consideration is secured by a note and security agreement. Additionally, we are entitled to a 5% royalty, in perpetuity, on the gross revenue of FLI Charge and of any affiliate of FLI Charge with regard to conductive wireless charging, power, or accessories. We also received a warrant exercisable in FLI Charge or an affiliate of FLI Charge upon an initial public offering or certain defined events in connection with a change of control. The warrant has a five-year life and is based on a valuation of the lesser of $30,000,000 or the financing valuation of FLI Charge preceding the initial public offering or certain defined events. We are currently evaluating the gain on the sale of FLI Charge.
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 $208,000 and $2,321,000 for the three- and nine-month periods ended September 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.derivative liabilities.
Results of Operations
Three-month period ended September 30, 20172019 compared to the three-month period ended September 30, 20162018
Revenue
Three months ended September 30, | ||||||||||||
2017 | 2016 | Change | ||||||||||
Revenue | $ | 17,731,000 | $ | 3,101,000 | $ | 14,630,000 |
Three months ended September 30, | ||||||||||||
2019 | 2018 | Inc/(Dec) | ||||||||||
Revenue | $ | 12,531 | $ | 12,922 | $ | (391 | ) |
DuringThe decrease in revenue of $391 or 3.0% was primarily due the three-month perioddecrease in the number of spas open during the three months ended September 30, 2017, we recorded total revenue of $17,731,000, which represents an increase of $14,630,000 (or 471.8%)2019 (51 spas) as compared to the three-monthcomparable period ended September 30, 2016. Of the increase, XpresSpa generated $12,652,000 of revenue in the third quarter of 2017. We did not recognize any revenue generated by XpresSpa prior to its acquisition on December 23, 2016. Our technology operating segment demonstrated 178.6% growth in quarterly revenues from $1,751,000 for the three-month period ended September 30, 2016 to $4,879,000 for the three-month period ended September 30, 2017.
Our intellectual property segment recognized a one-time lump sum payment of $200,000 in connection with an executed confidential license agreement for the three-month period ended September 30, 2017, a decrease compared to the three-month period ended September 30, 2016, for which our intellectual property operating segment recognized a one-time lump sum payment of $1,350,000 in connection with an executed confidential license agreement.2018 (57 spas).
Cost of sales
Three months ended September 30, | ||||||||||||
2017 | 2016 | Change | ||||||||||
Cost of sales | $ | 14,375,000 | $ | 2,718,000 | $ | 11,657,000 |
Three months ended September 30, | ||||||||||||
2019 | 2018 | Inc/(Dec) | ||||||||||
Cost of sales | $ | 9,689 | $ | 9,985 | $ | (296 | ) |
During the three-month period ended September 30, 2017, we recorded total
The decrease in cost of sales of $14,375,000, which represents an increase of $11,657,000 (or 428.9%) compared$296 or 3.0% was primarily due in part due to the three-month period ended September 30, 2016. XpresSpa recorded total costdecrease in revenue and is consistent with initiatives taken by management to streamline processes and reduce store-level costs which included an emphasis on increased productivity of spa personnel and reduced warehousing and shipping charges.
Cost of sales of $10,347,000, which represent direct costs incurred for store operations. As a result, our wellness operating segment’s gross profit for the quarter was 18.2%. Our technology operating segment recorded cost of sales of $3,902,000, which resulted in our technology operating segment generating 20.0% gross margin during the quarter.
During the three-month period ended September 30, 2016, we recorded total cost of sales of $2,718,000. Group Mobile recorded total cost of sales of $1,554,000, which represent direct costs from its product sales. Our intellectual property operating segment’s costs were $1,164,000, which included legal and consulting costs relatedis expected to the confidential license agreement reached during the quarter and royalty expenses to a previous owner of some of our patents. These intellectual property costs decreased to $126,000 for the three-month period ended September 30, 2017.
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 salesrevenues will decline gradually over time as a result of the improvement of store-level performance by our wellness operating segment.improvements which we continue to prioritize.
Depreciation amortization and impairmentamortization
Three months ended September 30, | ||||||||||||
2017 | 2016 | Change | ||||||||||
Depreciation, amortization and impairment | $ | 1,894,000 | $ | 182,000 | $ | 1,712,000 |
Three months ended September 30, | ||||||||||||
2019 | 2018 | Inc/(Dec) | ||||||||||
Depreciation and amortization | $ | 1,464 | $ | 1,879 | $ | (415 | ) |
During
The decrease of $415 or 22.1% was primarily due to six fewer locations in the current three-month period ended September 30, 2017, depreciation andversus the prior year. Fewer locations result in lower amortization expense totaled $1,894,000, which represents an increase of $1,712,000 (or 940.7%) compared to the amortization expense recorded during the three-month period ended September 30, 2016. There was no impairment expense for the three-month period ended September 30, 2017 and no depreciation or impairment expense recorded for the three-month period ended September 30, 2016.leasehold improvements.
Impairment of assets
Three months ended September 30, | ||||||||||||
2019 | 2018 | Inc/(Dec) | ||||||||||
Impairment of assets | $ | 106 | $ | — | $ | 106 |
The overall increaseamount recorded in depreciation, amortization and impairment expense was mainly duethe current period primarily represents the write down of patent assets that we no longer expect to an increase in depreciation expense resulting from leasehold improvements and equipment of $1,110,000 andgenerate cash flow for the amortization of the brand and customer relationship intangible assets of $597,000, which were acquired as part of our acquisition of XpresSpa within our wellness operating segment in December 2016.Company.
We expect depreciation and amortization expense will increase gradually over time for our wellness operating segment as we open more stores and will remain somewhat constant in our technology operating segment.
General and administrative
Three months ended September 30, | ||||||||||||
2019 | 2018 | Inc/(Dec) | ||||||||||
General and administrative | $ | 3,108 | $ | 3,943 | $ | (835 | ) |
Three months ended September 30, | ||||||||||||
2017 | 2016 | Change | ||||||||||
General and administrative | $ | 5,473,000 | $ | 3,564,000 | $ | 1,909,000 |
The decrease of $835 or 21.2% was primarily due to a reduction of higher paid executive management personnel salaries and related benefits of approximately $620, and a net decrease in professional fees and corporate expenses of approximately $260.
During
Other non-operating income (expense), net
Three months ended September 30, | ||||||||||||
2019 | 2018 | Inc/(Dec) | ||||||||||
Other non-operating income (expense), net | $ | (2,161 | ) | $ | 378 | $ | (2,539 | ) |
Included in other non-operating income (expense), net for the three-month periodthree months ended September 30, 2017, general2019 is expense of $1,154 for the issuance of 8,996 shares of Series F Convertible Preferred Stock, which represents the fair value of the shares as of the date issued of July 8, 2019, and administrative expenses increased by $1,909,000 (or 53.6%) comparedexpense of $1,512 related to the three-month period ended September 30, 2016. The resultsvaluation of the three-month period ended September 30, 2017 include incremental general and administrative expenses associated with our acquisitions of XpresSpa and Excalibur. The increase for the three-month period ended September 30, 2017 compared to the three-month period ended September 30, 2016 is primarily attributed to $2,237,000 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 $221,000, which was a result of equity awards granted to our directors, management and employees in January 2017.
Non-operating expense, net
Three months ended September 30, | ||||||||||||
2017 | 2016 | Change | ||||||||||
Non-operating expense, net | $ | 268,000 | $ | 1,483,000 | $ | (1,215,000 | ) | |||||
Net non-operating expenses include interest expense, revaluation of derivative warrant liabilities, extinguishment of debt and other non-operating income and expenses.
During the three-month period ended September 30, 2017, we recorded total net non-operating expense in the amount of $268,000 compared to total net non-operating expense in the amount of $1,483,000 recorded during the three-month period ended September 30, 2016.
For the three-month period ended September 30, 2017, we recorded interest expense of $183,000 mainly related to XpresSpa’s Debt as well as other net non-operating expense of $133,000. These expenses wereClass A Warrants, partially offset by a $185 gain of $48,000 on the revaluation of the derivative warrant liabilities.conversion feature and warrants related to the Calm Private Placement (See Note 11. “Derivative Liabilities and Fair Value Measurements” to the Company’s consolidated condensed financial statements for additional information).
For the three-month period ended September 30, 2016, we recorded interest expense of $949,000 for the amortization of the debt discount and debt issuance costs associated with debt that was repaid during July 2016. We also recorded $262,000 of extinguishment of debt when the debt was repaid. These were in addition to other non-operating expenses of $369,000 offset byThe 2018 amount includes a gain of $97,000 on the revaluation of derivative warrants partially offset by the derivative warrant liabilities.write down of a cost investment.
Interest expense
Three months ended September 30, | ||||||||||||
2019 | 2018 | Inc/(Dec) | ||||||||||
Interest expense | $ | (780 | ) | $ | (624 | ) | $ | 156 |
Interest expense increased $156 or 25.0% primarily due to interest and accretion expenses related to the renegotiation of the B3D Note and the issuance of the Calm Note on July 8, 2019, which was more than interest and accretion expenses incurred related to the Company’s 11.24% senior secured note and the 5% Secured Convertible Notes during the comparable prior year period.
Nine-month period ended September 30, 20172019 compared to the nine-month period ended September 30, 20162018
Revenue
Nine months ended September 30, | ||||||||||||
2017 | 2016 | Change | ||||||||||
Revenue | $ | 48,683,000 | $ | 16,478,000 | $ | 32,205,000 |
Nine months ended September 30, | ||||||||||||
2019 | 2018 | Inc/(Dec) | ||||||||||
Revenue | $ | 37,669 | $ | 38,560 | $ | (891 | ) |
During the nine-month period ended September 30, 2017, we recorded2019, total revenue of $48,683,000, which represents an increase of $32,205,000 (or 195.4%) as compared to $16,478,000 recorded in the nine-month period ended September 30, 2016. The results of the nine-month period ended September 30, 2017 include incremental revenues associated with our acquisitions of XpresSpa and Excalibur. We did not recognize any revenue generated by Excalibur prior to its acquisition on February 2, 2017decreased $891 or XpresSpa prior to its acquisition on December 23, 2016. Our technology operating segment demonstrated 115.8% growth in revenue from $5,478,000 for the nine-month period ended September 30, 2016 to $11,820,000 for the nine-month period ended September 30, 2017.
Cost of sales
Nine months ended September 30, | ||||||||||||
2017 | 2016 | Change | ||||||||||
Cost of sales | $ | 39,446,000 | $ | 10,985,000 | $ | 28,461,000 |
During the nine-month period ended September 30, 2017, we recorded total cost of sales of $39,446,000, which represents an increase of $28,461,000 (or 259.1%)2.3% compared to the nine-month period ended September 30, 2016. The results of the nine-month period ended September 30, 2017 include incremental cost of sales associated with our 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
Nine months ended September 30, | ||||||||||||
2017 | 2016 | Change | ||||||||||
Depreciation, amortization and impairment | $ | 6,849,000 | $ | 13,341,000 | $ | (6,492,000 | ) |
During the nine-month period ended September 30, 2017, depreciation and amortization expense totaled $6,849,000, which represents a decrease of $6,492,000 (or 48.7%) compared2018, primarily due to the amortization and impairment expense recordeddecrease in the number of spas open during the nine-month period ended September 30, 2016. There was no impairment expense for the nine-month period ended September 30, 2017 and no depreciation expense recorded for the nine-month period ended September 30, 2016.
Amortization and impairment expense for the nine months ended September 30, 2016 was significantly higher and was primarily attributed to an $11,937,000 impairment charge to our patents asset group. During the second quarter of 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 repositioning2019 (51 spas) 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 2016, 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 nine-month period ended September 30, 2017.
The overall decrease in depreciation, amortization and impairment expense, when comparing the nine-month period ended September 30, 2017 to the nine-month period ended September 30, 2016, was partially offset by an increase in depreciation expense resulting from leasehold improvements and equipment of $4,567,000 and the amortization of the brand and customer relationship intangible assets of $1,775,000, which were acquired as part of our acquisition of XpresSpa within our wellness operating segment in December 2016. The depreciation expense of $4,567,000 is higher than the typical depreciation expense for the nine-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.
General and administrative
Nine months ended September 30, | ||||||||||||
2017 | 2016 | Change | ||||||||||
General and administrative | $ | 17,012,000 | $ | 8,059,000 | $ | 8,953,000 |
During the nine-month period ended September 30, 2017, general and administrative expenses increased by $8,953,000 (or 111.1%) compared to the nine-monthcomparable prior year period ended September 30, 2016. The results of the nine-month period ended September 30, 2017 include incremental general and administrative expenses associated with our acquisitions of XpresSpa and Excalibur. The increase for the nine-month period ended September 30, 2017 compared to the same period ended September 30, 2016 is primarily attributed to $6,537,000 of general and administrative expenses associated with XpresSpa, of which $1,013,000 related to merger and acquisition, integration, and one-time 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 $732,000, which was a result of equity awards granted to our directors, management and employees in January 2017.(57 spas).
Non-operating expense, netCost of sales
Nine months ended September 30, | ||||||||||||
2017 | 2016 | Change | ||||||||||
Non-operating expense, net | $ | 574,000 | $ | 1,923,000 | $ | (1,349,000 | ) |
Net non-operating expenses include interest expense, revaluation of derivative warrant liabilities, extinguishment of debt and other non-operating income and expenses.
Nine months ended September 30, | ||||||||||||
2019 | 2018 | Inc/(Dec) | ||||||||||
Cost of sales | $ | 28,640 | $ | 30,121 | $ | (1,481 | ) |
During the nine-month period ended September 30, 2017, we recorded2019, total net non-operating expense in the amountcost of $574,000sales decreased $1,481 or 4.9% compared to the nine-month period ended September 30, 2018. This was primarily due to the decrease in revenue and the impact of initiatives taken by management to streamline processes and reduce store-level costs which included reduced warehousing and shipping charges.
Cost of sales is expected to grow over time as our revenues increase. We expect that total net non-operatingcost of sales as a percentage of revenues will decline gradually over time as a result of the store-level performance improvements which we continue to prioritize.
Depreciation and amortization
Nine months ended September 30, | ||||||||||||
2019 | 2018 | Inc/(Dec) | ||||||||||
Depreciation and amortization | $ | 4,692 | $ | 5,375 | $ | (683 | ) |
During the nine-month period ended September 30, 2019, depreciation and amortization expense in the amount of $1,923,000 recordeddecreased $683 or 12.7% due primarily to six fewer locations open during the nine-month period ended September 30, 2016.2019 versus the comparable prior year period. Fewer locations resulted in lower amortization of leasehold improvements.
ForImpairment of assets
Nine months ended September 30, | ||||||||||||
2019 | 2018 | Inc/(Dec) | ||||||||||
Impairment of assets | $ | 936 | $ | — | $ | 936 |
In July 2019, the lease for our location in the World Trade Center in New York was terminated. As a result, the Company assessed all assets (primarily leasehold improvements) for impairment. This resulted in a charge of approximately $620.
The balance of $316 primarily represents a $210 write-off of work in progress related to the opening of new spas that was started but ultimately deemed not viable of $210 and an $85 write down of patent assets that were no longer expected to generate cash flow for the Company.
Impairment of goodwill
Nine months ended September 30, | ||||||||||||
2019 | 2018 | Inc/(Dec) | ||||||||||
Impairment of goodwill | $ | — | $ | 19,630 | $ | (19,630 | ) |
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 Director. These events were identified by our management as triggering events requiring that goodwill be tested for impairment as of March 31, 2018. As the stock price had not rebounded, we determined that the impairment related to the three-month period ended March 31, 2018. We performed testing on the estimated fair value of goodwill and, as a result, we recorded an impairment charge of $19,630 to reduce the carrying value of goodwill to its fair value, which was determined to be zero. The impairment to goodwill was a result of the structural changes to the Company, including completion of the transition from a holding company to a pure-play health and wellness company, the change in our Chief Executive Officer and the reduction in our stock price.
General and administrative
Nine months ended September 30, | ||||||||||||
2019 | 2018 | Inc/(Dec) | ||||||||||
General and administrative | $ | 9,204 | $ | 12,443 | $ | (3,239 | ) |
During the nine-month period ended September 30, 2017, we recorded interest expense of $550,000 mainly related2019, general and administrative expenses decreased by $3,239 or 26.0% compared to XpresSpa’s Debt as well as other net non-operating expense of $231,000. These expenses were reduced by a gain of $207,000 on the revaluation of the derivative warrant liabilities.
For the nine-month period ended September 30, 2016,2018. This decrease was due primarily to a reduction of higher paid executive management personnel salaries and benefits of approximately $1,500, an overall reduction in corporate overhead expenses and lower professional fees compared to the 2018 period where we recorded interest expense of $1,697,000 for the interest recordedincurred professional fees related to the monthly interest payments and the amortizationsale of the debt discount and debt issuanceCompany’s Group Mobile division in March 2018.
Interest expense
Nine months ended September 30, | ||||||||||||
2019 | 2018 | Inc/(Dec) | ||||||||||
Interest expense | $ | (2,052 | ) | $ | (1,212 | ) | $ | 840 |
Interest expense increased $840 or 69.3% due primarily to six months of interest expense recorded in the 2019 period on our 5% Secured Convertible Notes versus two months of expense recorded in 2018. We also expensed the remaining balance of deferred financing costs as well as accrueda result of the conversion of the 5% Secured Convertible Notes in June 2019 and recorded accretion of interest calculated using the effective interest methodexpense associated with debt that was repaid during July 2016. There was also $472,000the 5% Secured Convertible Notes of extinguishmentapproximately $800 in 2019, as compared to approximately $500 recorded in the comparable 2018 period.
Other non-operating income (expense), net
Nine months ended September 30, | ||||||||||||
2019 | 2018 | Inc/(Dec) | ||||||||||
Other non-operating income (expense), net | $ | (5,817 | ) | $ | 877 | $ | (6,694 | ) |
The following is a summary of debt recorded when the debt was repaid. Thesetransactions included in other non-operating expenses were offset by a gain of $97,000income (expense), net for the nine months ended September 30, 2019 and 2018:
Nine months ended September 30, | ||||||||
2019 | 2018 | |||||||
Debt conversion expense related to conversion of 5% Secured Convertible Notes | $ | 1,547 | $ | — | ||||
Loss on revaluation of warrants and conversion options | 780 | 898 | ||||||
Issuance of Series F Preferred Stock | 1,131 | — | ||||||
Issuance of warrants | 689 | |||||||
Impairment of cost method investments | 1,188 | — | ||||||
Other | 482 | (21 | ) | |||||
Total | $ | 5,817 | $ | 877 |
See the notes to the consolidated condensed financial statements for additional information on the revaluationabove transactions.
Discontinued Operations
In March 2018, we completed the sale of Group Mobile, previously part of our technology operating segment. The results of operations for Group Mobile are presented in the derivative warrant liabilitiesconsolidated condensed statements of operations and othercomprehensive loss as“Loss from discontinued operations, net non-operatingof income of $149,000.taxes” which totaled $1,115 for nine months ended September 30, 2018.
Liquidity and Capital Resources
Our primary liquidity and capital requirements are for newthe renovation of our current XpresSpa locations and for our wellness operating segment, as well as working capital for our technology operating segment.new locations. As of September 30, 2017,2019, we had cash and cash equivalents of $10,072,000 that$2,432. We hold $1,606 of our cash and cash equivalents balance in overseas bank accounts. If we were to distribute the amounts held overseas, we would need to follow an approval and distribution process as it is defined in our operating and partnership agreements, which may delay and/or reduce the availability of cash to us. Our total cash and cash equivalents balance decreased $971 from $3,403 as of December 31, 2018, primarily due to capital expenditures during the nine-month period, distributions to noncontrolling investees, operating activities and debt service payments.
As a result of the refinancing transactions discussion in theOverviewsection above and disclosed in the notes to the consolidated condensed financial statements, the working capital deficiency was reduced from $10,899 as of December 31, 2018 to $3,785 as of September 30, 2019.
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 maintainingsupporting corporate functions. In addition, we have approximately $7,342,000 of trade receivables, inventory and other current assets to support our working capital needs.
On July 26, 2017, we entered intoWe have taken actions to cure defaults under our debt agreements, improve our overall cash position and our access to liquidity. We continue to expand and explore strategic partnerships, right-size our corporate structure, and streamline our operations. We expect that the Underwriting Agreement with Roth Capital Partners, LLC, acting as the representative of the Underwriters, relatingactions taken to the Offering of 6,900,000 shares of FORM Common Stock including 900,000 shares subject to the Underwriters’ over-allotment option, which was exercised on August 2, 2017date will enhance our liquidity and closed on August 4, 2017. The price to the public in the Offering was $1.10 per sharefinancial stability and the Underwriters agreed to purchase the shares of FORM Common Stock from us pursuant to the Underwriting Agreement at a purchase price of $1.023 per share. Our net proceeds from the Offering were $6,584,000 after deducting underwriting discounts and commissions and other estimated offering expenses.
Our total cash decreased from $17,910,000 as of December 31, 2016 to $10,072,000 as of September 30, 2017. Approximately $11,057,000 of the cash outflow during the nine-month period ended September 30, 2017 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 September 30, 2017:
Cash spent on inventory on-hand | $ | 1,830,000 | ||
Overdue payables acquired as part of XpresSpa | 1,500,000 | |||
Capital expenditures for stores and technology | 3,065,000 | |||
Merger and acquisition and integration-related professional fees | 1,595,000 | |||
Leases and tax-related matters | 587,000 | |||
Interest paid on Debt | 580,000 | |||
Repayment of line of credit upon Excalibur acquisition | 361,000 | |||
XpresSpa severance | 407,000 | |||
Cash outflow related to discontinued operations | 1,132,000 | |||
$ | 11,057,000 |
Based on our current operating plans, we expect to have sufficient funds for at least the next 12 months of operations following the date ofthat these financial statements. In addition, we may choose to raise additional funds in connection with new store openings and potential acquisitions of operating assets, whichactions will be complementary toexecuted in alignment with the anticipated timing of our wellness operating segment.liquidity needs. There can be no assurance, however, that any such opportunities will materialize.
Our historical operating results indicate that there is substantial doubt related to the Company’s ability to continue as a going concern. We believe it is probable that the actions discussed above have successfully mitigated the substantial doubt raised by our historical operating results and will satisfy our liquidity needs in the short-term; however, we cannot reasonably predict with any certainty that the results of our planned actions will generate the expected liquidity required to satisfy our liquidity needs for the long-term.
Off-Balance Sheet ArrangementsIf we continue to experience operating losses, and we are not able to generate additional liquidity through some other actions, while not expected, we may not be able to access additional funds and we might need to secure additional sources of funds, which may or may not be available to us. Additionally, a failure to generate additional liquidity could negatively impact our access to inventory or services that are important to the operation of our business.
We have no obligations, assets or liabilities that would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.
Critical Accounting EstimatesPolicies
These consolidated 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 MarchApril 1, 2019, as subsequently amended on April 30, 2017,2019, 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.
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. |
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”))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 ChiefPrincipal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of September 30, 2017,2019, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and ChiefPrincipal 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 ChiefPrincipal Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
The scope of management's assessment of the effectiveness of internal control over financial reporting includes all of our subsidiaries except Excalibur, which was acquired on February 2, 2017. Our consolidated revenue for the nine-month period ended September 30, 2017 was $48,683,000, of which Excalibur represented $4,195,000, and our total assets as of September 30, 2017 were $73,839,000, of which Excalibur represented $4,772,000.
Changes in Internal Control over Financial Reporting
On February 2, 2017, we 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 our technology operating segment. We are currently in the process of evaluating and integrating Excalibur's historical internal controls over financial reporting into ours.
Other than thisThere has been no change there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 20172019 that havehas materially affected, or areis reasonably likely to materially affect, our internal control over financial reporting.
Item 1. | Legal Proceedings. |
For information regarding legal proceedings, see Note 11 “Commitments16.“Commitments and Contingencies” in our notes to the consolidated 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.
Risks Related to Our Common Stock2018.
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.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.
Calm Private Placement
None.On July 8, 2019, the Company entered into the Calm Purchase Agreement with Calm pursuant to which the Company agreed to sell (i) the Calm Notes, which are convertible into shares of Series E Preferred Stock and (ii) the Calm Warrants. The Company received $2,500 in gross proceeds from the Calm Private Placement. For additional information, see Note 1.“General – Recent Developments.”
B3D Transaction
On July 8, 2019, Holdings entered into the Credit Agreement Amendment to its existing Credit Agreement with B3D in order to, among other provisions, (i) extend the maturity date to May 31, 2021, (ii) reduce the applicable interest rate to 9.0%, and (iii) to amend and restate certain other provisions. The principal amount owed to B3D was increased to $7.0 million, which principal and any interest accrued thereon are convertible, at B3D’s option, into Common Stock subject to receipt of shareholder approval, which approval was obtained on October 2, 2019. For additional information, see Note 1.“General – Recent Developments.”
Series F Preferred Stock
In connection with the May 2018 SPA Amendment, on July 8, 2019, the Company filed with the Secretary of State of the State of Delaware a Certificate of Designation of Preferences, Rights and Limitations of Series F Convertible Preferred Stock (the “Series F Certificate of Designation”) establishing and designating the rights, powers and preferences of the Series F Preferred Stock. The Company designated 9,000 shares of Series F Preferred Stock. For additional information, see Note 1.“General – Recent Developments.”
Item 3.Defaults Upon Senior Securities.
Item 3. | Defaults Upon Senior Securities. |
None.
Item 4.Mine Safety Disclosures.
Item 4. | Mine Safety Disclosures. |
Not applicable.
Item 5. | Other Information. |
None.
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Item 6. | Exhibits. |
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 9th day of November 2017.authorized.
Date: | November 14, 2019 | By: | /s/ Douglas Satzman | |
Douglas Satzman | ||||
Chief | ||||
(Principal Executive Officer) | ||||
(Principal Financial and Accounting Officer) |