| | | | Title of each class | | Trading Symbol | | Name of each exchange on which registered | Common Stock, par value $0.01 per share | | XSPA | | The Nasdaq Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨☐ No x⌧ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨☐ No x⌧ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x⌧ No ¨☐ Indicate by check mark whether the registrant has submitted electronically 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. | | | | Large accelerated filer | ¨☐ | | Accelerated filer | ¨☐ | Non-accelerated filer | ¨☒ | | Smaller reporting company | x☒ | (Do not check if a smaller reporting company) | | | 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨☐ No x⌧ The aggregate market value of the registrant'sregistrant’s common stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in such calculation is an affiliate), as of June 30, 2021, the last business day of the registrant’s most recently completed second quarter, was $162,522,363 computed by reference to the closing sale price of such shares$1.54 per share on the Nasdaq Stock Market LLC on June 30, 2017 was $26,336,000. 2021. As of March 15, 2018, 26,581,06728, 2022, 95,071,210 shares of the registrant'sregistrant’s common stock are outstanding. DOCUMENTS INCORPORATED BY REFERENCE The following documents (or parts thereof) are incorporatedCertain information required by reference into the following parts ofPart III will be included in an amendment to this Annual Report on Form 10-K: Certain information required in Part III10-K.
Table of this Annual Report on Form 10-K is incorporated from the Registrant’s Proxy Statement for the 2018 Annual Meeting of Stockholders.Contents Table of Contents CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate, among other matters, to our anticipated financial performance, future revenues or earnings, business prospects, projected ventures, new products and services, anticipated market performance and similar matters. These risks and uncertainties, many of which are beyond our control, include: | · | the impact of our business and asset acquisitions on our operations and operating results including our ability to realize the expected value and benefits of such acquisitions; |
| · | our ability to develop and offer new products and services; |
| · | our ability to raise additional capital to fund our operations and business plan and the effects that such financing may have on the value of the equity instruments held by our stockholders; |
| · | general economic conditions and level of consumer and corporate spending on health and wellness and travel; |
| · | with regard to our retail businesses, our ability to secure new locations, maintain existing ones, and ensure continued customer traffic at those locations; |
| · | our ability to hire a skilled labor force and the costs associated with that labor; |
| · | our ability to accurately forecast the costs associated with opening new retail locations and maintaining existing ones and the revenue derived from our retail locations; |
| · | performance by our Airport Concession Disadvantaged Business Enterprise partners on obligations set forth in our joint venture agreements; |
| · | our ability to protect our confidential information and customers’ financial data and other personal information; |
| · | failure or disruption to our information technology systems; |
| · | the impact of the recently passed federal tax reform bill; |
| · | our ability to retain key members of our management team; |
| · | the loss of, or an adverse change with regard to, one or more of our significant suppliers, distributors, vendors or other business relationships; |
| · | unexpected events and trends in the health and wellness and travel industries;
|
| · | market acceptance, quality, pricing, availability and useful life of our products and/or services, as well as the mix of our products and services sold; |
| · | competitive conditions within our industries; |
| · | our compliance with laws and regulations in the jurisdictions in which we do business and any changes in such laws and regulations; |
| · | lawsuits, claims, and investigations that may be filed against us and other events that may adversely affect our reputation; |
| · | our ability to protect and maintain our intellectual property rights; and |
| · | our ability to license and monetize our patents, including litigation outcomes. |
include, but are not limited to, the following:
●the adverse effects of public health epidemics, including the recent coronavirus outbreak, on our business, results of operations and financial condition;
●the continued closure of many US spa locations; ●our previously identified material weakness related to our internal control over financial reporting, which remains unremediated as of the date of this report; ●our ability to develop and offer new products and services, including Treat, our new travel, health and wellness brand, and our XpresCheck® Wellness Centers launched in 2020; ●our ability to effectively deploy our available cash resources, as well as our ability raise additional capital to fund our operations and business plan, to the extent necessary; ●general economic conditions and level of consumer and corporate spending on health, wellness and travel; ●our ability to secure new locations, maintain or converting existing ones to XpresCheck or Treat locations, and ensure continued customer traffic at those locations; ●our ability to hire a skilled labor force and the costs associated with that labor; ●our ability to accurately forecast the costs associated with opening new retail locations and maintaining or converting existing ones, and the revenue derived from our retail locations; ●performance by our Airport Concession Disadvantaged Business Enterprise partners on obligations set forth in our joint venture agreements; ●our ability to protect our confidential information and customers’ financial data and other personal information; ●failure or disruption to our information technology systems; ●our ability to retain key members of our management team; ●the loss of, or an adverse change with regard to, one or more of our significant suppliers, distributors, vendors or other business relationships; ●unexpected events and trends in the health, wellness and travel industries; ●market acceptance, quality, pricing, availability and useful life of our products and/or services, as well as the mix of our products and services sold; ●competitive conditions within our industries; ●our compliance with laws and regulations in the jurisdictions in which we do business and any new laws and regulations or changes in existing laws and regulations; ●further regulatory actions in the healthcare sector that could impact our ability to continue operations; ●the discontinuance of EUA policies that could impact our business ●lawsuits, claims, and investigations that may be filed against us and other events that may adversely affect our reputation; and ●our ability to protect and maintain our intellectual property. Forward-looking statements may appear throughout this Annual Report on Form 10-K, including, without limitation, the following sections: Item 1 “Business,” Item 1A “Risk Factors,” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 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 (the “Exchange Act”). 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,” “will be,” “will continue,” “will likely result,” “plans,” “predicts,” “projects,” “seeks,” “should,” “future,” “targets,” “continue,” “would,” or the negative of such terms, and similar or comparable terminology or expressions or variations intended to identify forward-looking statements. These statements are based on current expectations and assumptions based on information currently available to us. Such forward-looking statements are subject to risks, uncertainties, assumptions (that may never materialize or may prove incorrect) 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. These forward-looking statements are not guarantees of future performance, and actual results may vary materially from the results and expectations discussed. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and in this Annual Report on Form 10-K, and in particular, the risks discussed under the caption “Risk Factors” in Item 1A of this report and those discussed in other documents 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. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements to reflect events or circumstances that may arise after the date of such forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. All references in this Annual Report on Form 10-K to “we,” “us” and “our” refer toXpresSpa Group, Inc. (prior to January 5, 2018, known as “FORM Holdings Corp.”), a Delaware corporation, and its consolidated subsidiaries unless the context requires otherwise. PART I ITEM 1. BUSINESS Overview On January 5, 2018, we changed our name to XpresSpa Group, Inc. (“XpresSpa Group” or) is one of the “Company”) from FORM Holdings Corp. Our common stock, par value $0.01 per share, which had previously been listed under the trading symbol “FH” on the Nasdaq Capital Market, has been listed under the trading symbol “XSPA” since January 8, 2018.
Rebranding to XpresSpa Group aligned our corporate strategy to build a pure-playleading global travel health and wellness services company, which we commenced following our acquisition ofholding companies. XpresSpa Group currently has three reportable operating segments: XpresSpa®, XpresTest, and Treat™.
XpresSpa Group’s subsidiary, XpresSpa Holdings, LLC (“XpresSpa”) on December 23, 2016. In 2017, we recruited employees for positions in both corporate and field teams, accelerated unit growth, reinvested in certain locations and extended leases, significantly streamlined operations, and engaged in new exclusive partnerships that offer XpresSpa customers innovative products and services. We currently have two operating segments: wellness and intellectual property.
Our wellness operating segment consists of XpresSpa, which ishas been a leadingglobal airport retailer of spa services.services through its XpresSpa is a well-recognized airport spa brand with 56 locations, consisting of 51 domestic and 5 international locations, as of December 31, 2017. XpresSpa offersoffering travelers premium spa services, including massage, nail and skin care, as well as spa and travel products. During 2017 and 2016, our wellness operating segment generated $48,373,000 and $811,000
In March 2020, we temporarily closed all global XpresSpa locations due to the categorization by local jurisdictions of revenue, respectively (2016 results include eight days of operations from the acquisition on December 23, 2016 to December 31, 2016). In 2017, approximately 81% of XpresSpa’s total revenue was generated by services, primarily massage and nailcare, 18% was generated by retail products, primarily travel accessories, and 1% was related to cryotherapy and loungers. Our intellectual property operating segment is engaged in the monetization of patents related to content and ad delivery, remote monitoring and computing technologies. During 2017 and 2016, this operating segment generated $450,000 and $11,175,000 of revenue, respectively.
In October 2017, we completed the sale of FLI Charge, Inc. (“FLI Charge”) and in March 2018, we completed the sale of Group Mobile Int’l LLC (“Group Mobile”). These two entities previously comprised our technology operating segment. The results of operations for FLI Charge and Group Mobile are presented in the consolidated statements of operations and comprehensive lossspa locations as consolidated net loss from discontinued operations. The carrying amounts of assets and liabilities belonging to Group Mobile“non-essential services.” XpresSpa reopened 22 locations as of December 31, 2017,2021 as described under "Recent Developments - XpresSpa Premium Spa Services" below. We will evaluate reopening the remaining XpresSpa spa locations on a location-by-location basis as travel returns and FLI Chargeresume normal operations at such selected locations once airport traffic returns to sufficient levels to support operations at a unit level, and Group Mobileachieve adequate unit-level economics, including acceptable profit levels as well as serves our longer-term strategy of offering fully integrated health and wellness services.
Since the beginning of the temporary closure of our XpresSpa locations, we successfully launched our XpresCheck®Wellness Centers, through XpresSpa Group’s subsidiary XpresTest, Inc. (“XpresCheck” or “XpresTest”),offering COVID-19 and other medical diagnostic testing services to the traveling public, as well as airline, airport and concessionaire employees, and TSA and U.S. Customs and Border Protection agents. XpresCheck has entered into managed services agreements (“MSAs”) with professional medical services companies that provide health care services to patients. The medical services companies pay XpresCheck a monthly fee to operate in the XpresCheck Wellness Centers. Under the terms of the MSAs, we provide office space, equipment, supplies, non-licensed staff, and management services in return for the management fee. Also, we continue to evaluate alternative testing protocols and work in partnership with airlines and others for safe travels. The third segment is Treat, which is operating through XpresSpa Group’s subsidiary Treat, Inc. (“Treat”) launched in 2021 as our new travel, health and wellness brand transforming the way we provide care to our customers through a suite of health and wellness services supported by an integrated digital platform and a relevant retail offering to the traveling public. Treat’s on-site centers (currently located in JFK International Airport and opening in April 2022 in Phoenix Sky Harbor International Airport and later this year in Salt Lake City International Airport) provide access to health and wellness services for travelers. Our teams provide travel-related diagnostic testing for virus, cold, flu and other illnesses as well as hydration therapy, IV drips, and vitamin injections. Travelers can purchase time blocks to use our wellness rooms to engage in interactive services like self-guided yoga, meditation and low impact weight exercises or to relax and unplug from the hectic pace of the airport and renew themselves before or after their trip. Treat offers a website (www.treat.com) and mobile app to complement the offering with relevant health and wellness content designed to help people on the go with information that could impact their travel. The platform provides travelers access to a comprehensive online marketplace of services including global illness tracker tools such as the COVID-19 Requirements Map, on-demand chat care by licensed providers, a health wallet to store personal and family health records (including COVID-19 testing results), and a scheduler to arrange for direct care at one of our on-site locations. Although we recognize three segments of business, our strategy for the future is to create and leverage a fully integrated set of products and services that are both profitable and scalable across our portfolio of brands. Additionally, we will expand our retail strategy, not only adding more products for sale but aligning those products more efficiently to our service offerings. This product strategy may include, for example, adding fortified water and hydration packets to the delivery of an onsite hydration IV or adding muscle relaxation patches to a neck or back massage to continue treatment after the delivery of the service. We also plan to build our capability for delivering health and wellness services outside the airport. We believe operating outside of the airport complements our offering and allows us to scale growth faster. We will be looking to further expand internationally. While international travel has not picked back up to pre-pandemic levels, we want to be opportunistic in our approach, taking advantage of the current market to grow in preparation for a full return of travel. We believe a strategy for international expansion further advances our overall biosurveillance efforts. These strategic imperatives will be accomplished through development of an infrastructure specifically focused on enabling scalable and efficient growth. While management has used all currently available information in assessing our business prospects, the ultimate impact of the COVID-19 pandemic on our XpresCheck Wellness Centers and on our results of operations, financial condition and cash flows remains uncertain and could have a material effect on our business. Recent Developments XpresCheck Wellness Centers XpresCheck’s business has MSAs with state licensed physicians and nurse practitioners, under which we administer COVID-19 testing options, including a Polymerase Chain Reaction (PCR) test and a rapid PCR test. As of the date of this report, there are 15 operating XpresCheck locations operating in 12 airports, including following locations opened since December 31, 2016,2020: | ● | On January 12, 2021, we opened our second XpresCheck Wellness Center at Boston’s Logan International Airport. It contains seven separate testing rooms to provide diagnostic COVID-19 testing. |
| ● | On January 20, 2021, we announced the opening of an XpresCheck Wellness Center at Salt Lake City International Airport. It contains four separate testing rooms to provide diagnostic COVID-19 testing. |
| ● | On February 16, 2021, we announced the opening of our second XpresCheck Wellness Center at Newark Liberty International Airport. It contains four separate testing rooms to provide diagnostic COVID-19 testing. |
| ● | On March 8, 2021, we announced the opening of an XpresCheck Wellness Center at Houston George Bush Intercontinental Airport. It contains four separate testing rooms to provide diagnostic COVID-19 testing. |
| ● | On March 15, 2021, we announced the opening of XpresCheck Wellness Centers at Dulles International and Reagan National Airports in Virginia, containing nine and four separate testing rooms, respectively, to provide diagnostic COVID-19 testing. |
| ● | On April 8, 2021, we announced the opening of an XpresCheck Wellness Center at Seattle-Tacoma International Airport. It contains eight separate testing rooms to provide diagnostic COVID-19 testing. |
| ● | On April 21, 2021, we announced the opening of an XpresCheck Wellness Center at San Francisco International Airport. It contains nine separate testing rooms to provide diagnostic COVID-19 testing. |
| ● | On October 13, 2021, we opened an XpresCheck Wellness Center at Hartsfield-Jackson Atlanta International Airport (ATL) Concourse E, converting a legacy XpresSpa located in Concourse E. It contains six separate testing rooms to provide diagnostic COVID-19 testing. |
| ● | In February 2022, a second XpresCheck Wellness Center opened at Denver International Airport, pre-security in the Great Hall. It contains six separate testing rooms to provide diagnostic COVID-19 testing. |
| ● | In March 2022, we opened an XpresCheck Wellness Center in Orlando International Airport, pre-security, in the South Walk area of the Main Terminal. It contains five separate testing rooms to provide diagnostic COVID-19 testing. |
During the fourth quarter of 2021, XpresCheck initiated a $2 million, eight-week pilot program with the Centers for Disease Control and Prevention (CDC) in collaboration with Concentric by Ginkgo. Under this program, XpresCheck is conducting biosurveillance monitoring at four major U.S. airports (JFK International Airport, Newark Liberty International Airport, San Francisco International Airport, and Hartsfield-Jackson Atlanta International Airport) aimed at identifying existing and new SARS-CoV-2 variants. On January 31, 2022, we announced the extension of the program, bringing the total contract to $5.6 million. Approximately $1.6 million of the original $2 million in revenue was recognized during the fourth quarter of 2021. We anticipate the remaining $4.0 million of the full $5.6 million amount will be realized during the first and second quarters of 2022. XpresSpa Premium Spa Services There are presentedcurrently sixteen operating XpresSpa domestic locations (including one franchise location in Austin-Bergstrom International Airport) and we expect to re-open four additional domestic locations in the consolidated balance sheets as assets held for disposal and liabilities held for disposal, respectively. near-term. A significant number of the domestic XpresSpa locations are operating approximately eight hours per day during the busiest hours (compared to up to sixteen hours per day pre-pandemic) improving labor productivity. Additionally, XpresSpa implemented a price increase in mid-October 2021 which further improved profitability. As airport volumes improve, we will continue to review our operating hours to optimize revenue opportunity. During the fourth quarter of 2021, we began testing several new services to take advantage of a growing interest in non-traditional spa services and expansion of our retail offering to align more closely with the services we provide. We are evaluating the success of these new initiatives at each airport on an on-going basis and will incorporate changes to our approach as more of the portfolio is reactivated. There are also six international locations operating, including three XpresSpa locations in Dubai International Airport in the United Arab Emirates and three XpresSpa locations in Schiphol Amsterdam Airport in the Netherlands. We have also signed for an additional five locations at Istanbul Airport and expect to open the first store during the summer of 2022. Treat Treat is our new travel, health and wellness brand transforming the way we access care through a suite of health and wellness services supported by an integrated digital platform and a relevant retail offering to the traveling public. Treat’s on-site centers (currently located in JFK International Airport and opening in April 2022 in Phoenix Sky Harbor International Airport and later this year in Salt Lake City International Airport) provide access to health and wellness services for travelers. Our teams provide travel-related diagnostic testing for virus, cold, flu and other illnesses as well as hydration therapy, IV drips, and vitamin injections. Travelers can purchase time blocks to use our wellness rooms to engage in interactive services like self-guided yoga, meditation and low impact weight exercises or to relax and unplug from the hectic pace of the airport and renew themselves before or after their trip. Treat offers a website (www.treat.com) and mobile app to complement the offering with relevant health and wellness content designed to help people on the go with information that could impact their travel. The platform provides travelers access to a comprehensive online marketplace of services including global illness tracker tools such as the COVID-19 Requirements Map, on-demand chat care by licensed providers, a health wallet to store personal and family health records (including COVID-19 testing results), and a scheduler to arrange for direct care at one of our on-site locations. Share Repurchase Program During 2021, the Company executed on its share repurchase program, repurchasing and redeeming 4,702,072 shares at average cost of $1.66 per share, for a total of $7.8 million. During March 2022, the Company continuing to execute on its share repurchase program, repurchased 7,142,446 shares at average cost of $1.55 per share, for a total of $11.1 million. HyperPointe Acquisition In January 2022, we announced and closed on the acquisition of GCG Connect, LLC d/b/a HyperPointe. HyperPointe is a leading digital healthcare and data analytics relationship marketing agency servicing the global healthcare and pharmaceutical industry. HyperPointe has significant experience in patient and healthcare professional marketing and deep technological experience with CXM (customer experience management) and data analytics. Since June 2020, HyperPointe’s management team and suite of services and technology have been used to develop and deploy the technological infrastructure needed to scale the growth of our XpresCheck business HyperPointe’s experience in this space continues to serve the XpresCheck business and should play a critical role in the expansion of on-going biosurveillance efforts. Terms of the transaction were $5.6 million in cash, and $1 million in common stock, as well as potential additional earn-out payments of up to $7.5 million over a three-year timeframe based upon future performance; these earn-out payments may be satisfied in cash or common stock or a combination thereof subject to various terms and conditions. HyperPointe currently operates as a stand-alone entity within XpresSpa Group. Ezra Ernst, the current Chief Executive Officer (“CEO”) of HyperPointe, also serves as CEO of XpresCheck, reporting to Scott Milford, XpresSpa Group’s CEO. Mr. Ernst is spearheading efforts to further integrate XpresCheck’s biosurveillance screening and testing business with HyperPointe’s customer experience management technology and data management know how in the healthcare and pharmaceutical verticals to further drive new revenue opportunities. Reverse Stock Split On June 11, 2020, we effected a 1-for-3 reverse stock split, whereby every three shares of our common stock was reduced to one share of our common stock and the price per share of our common stock was multiplied by 3. All references to shares and per share amounts have been adjusted to reflect the reverse stock split. Our Strategy and Outlook Wellness
XpresSpaWe believe that our company is a leading airport retailer of spawell positioned to benefit from consumers’ growing interest and pent-up demand in travel health and wellness and increasing demand for health and wellness related services and related products. It isOur go-forward plan includes the expansion and integration of products and services across our three brands; the execution of an ‘off-airport’ strategy to deliver more products and services; the implementation of an international expansion plan; and ensuring we can scale our growth in a well-recognized and popular airport spa brand with an approximately 50% market share in the United States and nearly three times the number of domestic locations as its closest competitor. It provides approximately one million services per year. As of December 31, 2017, XpresSpa operated 56 total locations in 23 airports in three countries: the United States, Netherlands and United Arab Emirates. XpresSpa also sells wellness and travel products through its internet site, www.xpresspa.com. Key services and products offered include:responsible way that drives shareholder value.
| · | massage services for the neck, back, feet and whole body; |
| · | nail care, such as pedicures, manicures and polish changes; |
| · | travel products, such as neck pillows, blankets and massage tools; and |
| · | new offerings, such as cryotherapy services, NormaTec compression services, and Dermalogica personal care services and retail products. |
For over 15 years, increased security requirements have led travelers to spend more time at the airport. In addition, in anticipation of the long and often stressful security lines, travelers allow for more time to get through security and, as a result, often experience increased downtime prior to boarding. Consequently, travelers at large airport hubs have idle time in the terminal after passing through security.
XpresSpa was developedcreated for travelers to address the stress and idle time spent at the airport, allowing travelers to spend this time productively, by relaxing and focusing on personal care and wellness. We believe that XpresSpaIt is well positioneda well-recognized and popular airport spa brand with a dominant market share in the United States, with nearly three times the number of domestic locations as its closest competitor. As travel needs changed based on new health and passenger safety concerns resulting from the COVID-19 pandemic, in 2020, we created a companion company, XpresCheck, which is also in airports and which offers COVID-19 testing and other medical diagnostic testing services to benefit from consumers’ growing interest inairport employees and the traveling public. Further, the Company continues developing Treat, a travel health and wellness brand that is positioned for a post-pandemic world and increasing demand for spathat leverages our historic travel wellness experience and newly acquired healthcare expertise. The Company sees this concept evolution as a significant opportunity to be a category innovator in a new niche industry where it can leverage technology in addition to its existing real estate and airport experience in providing travelers with peace of mind and access to integrated care. While COVID-19 testing will be available under this new brand, the broader suite of services may include: pre-travel health and related wellness products. Intellectual Property
Our intellectual property operating segment is engagedplanning. Treat’s on-site centers (currently located in the monetization of patents relatedJFK International Airport and in April 2022 in Phoenix Sky Harbor International Airport and later this year in Salt Lake City International Airport) intend to content and ad delivery, remote monitoring and computing technologies.
Recent Developments
Rebranding
On January 5, 2018, we changed our nameprovide access to XpresSpa Group, Inc. from FORM Holdings Corp, which aligned our corporate strategy to build a pure-play health and wellness services company.for travelers. Our common stock, par value $0.01 per share, which had previously been listed underteams provide travel-related diagnostic testing for virus, cold, flu and other illnesses as well as hydration therapy, IV Drips, and vitamin injections. Travelers can purchase time blocks to use our wellness rooms to engage in interactive services like self-guided yoga, meditation and low impact weight exercises or to relax and unplug from the trading symbol “FH” onhectic pace of the Nasdaq Capital Market, has been listed underairport and renew themselves before or after their trip.
Although we recognize three segments of business, our strategy for the trading symbol “XSPA” since January 8, 2018. Dispositions
On October 20, 2017,future, is to create and leverage a fully integrated set of products and services that are both profitable and scalable across our portfolio of brands. Additionally, we sold FLI Chargewill expand our retail strategy, not only adding more products for sale but aligning those products more efficiently to our service offerings. For example, adding fortified water and hydration packets to the delivery of an onsite hydration IV or adding muscle relaxation patches to a groupneck or back massage to continue treatment after the delivery of private investorsthe service.
We also plan to build our capability for delivering health and FLI Charge management, who now ownwellness services outside the airport. We believe operating outside of the airport complements our offering and operate FLI Charge. On March 22, 2018, we sold Group Mobileallows us to a third party. scale growth faster. We will be looking to further expand internationally. While international travel has not picked back up to pre-pandemic levels, we want to be providing any continued management or financing support to FLI Charge or Group Mobile. Sale of Patents
In January 2018, we sold certain patents to Crypto Currency Patent Holdings Company LLC, a unit of Marathon Patent Group, Inc. (“Marathon”), for approximately $1,250,000, comprised of $250,000opportunistic in cash and 250,000 shares of Marathon common stock valued at approximately $1,000,000 at the timeour approach, taking advantage of the transaction. Pursuantcurrent market to the sale, we cannot directly or indirectly offer, sell, pledge or transfer, or otherwise dispose of, the Marathon common stockgrow in preparation for a periodfull return of 180 days endingtravel. We believe a strategy for international expansion further advances our overall biosurveillance efforts.
These strategic imperatives will be accomplished through development of an infrastructure specifically focused on July 11, 2018.enabling scalable and efficient growth. Capital Raise
Impairment On July 26, 2017, we entered intoWe completed an underwriting agreement (the “Underwriting Agreement”) with Roth Capital Partners, LLC, acting as the representative of the several underwriters named therein (collectively, the “Underwriters”), relating to the issuance and sale (the “Offering”) of 6,900,000 sharesassessment of our common stock, par value $0.01 per share (“XSPA Common Stock”) including 900,000 shares subject to the Underwriters’ over-allotment option, which was exercised on August 2, 2017property and closed on August 4, 2017. The price to the public in the Offering was $1.10 per shareequipment and the Underwriters agreed to purchase the sharesoperating lease right of XSPA 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 approximately $6,584,000 after deducting underwriting discounts and commissions and other estimated offering expenses.
Competition
Wellness
XpresSpa operated 56 locations, which includes 51 domestic locations and 5 international locationsuse assets for impairment as of December 31, 2017. 2021. Based upon the results of the impairment test, we recorded an impairment expense related to property and equipment and operating lease right of use assets of $90,130 and $747,497 respectively, during the year ended December 31, 2021, which is included in Impairment/disposal of assets in our consolidated statements of operations and comprehensive income (loss). The expense was primarily related to the impairment of leasehold improvements made to certain XpresSpa spa locations and operating lease right of use assets where management determined that the locations discounted future cash flows were not sufficient to recover the carrying value of these assets over the remaining lease term.
We completed an assessment of our intangible assets for impairment as of December 31, 2021 and determined that these assets were not impaired as the majority of the assets are related to our new business brand Treat which opened its first location in December 2021. It is still too early to determine impairment for Treat due to its early business stage. In 2020 we recorded an impairment expense of approximately $5.0 million, $3.9 million, and $6.3 million related to property and equipment, intangible assets, and operating lease right of use assets, respectively, which is included in Impairment/disposal of assets in our consolidated statements of operations and comprehensive loss as of December 31, 2020. This expense was related to the impairment of the XpresSpa trademarks, where management determined that in light of the effect of the COVID-19 pandemic, the XpresSpa brand’s discounted future cash flows were not sufficient to recover the carrying value of these assets. The full extent to which COVID-19 will impact our results will depend on future developments, which are highly uncertain and cannot be predicted with accuracy, including new information which may emerge concerning the severity of the virus, the actions to contain or treat its impact and vaccinations. The impact of the COVID-19 pandemic could continue to have a material adverse effect on our XpresSpa business, results of operations, financial condition, liquidity and prospects in the near-term and beyond 2022. While we have used all currently available information in our forecasts, the ultimate impact of the COVID-19 pandemic on our results of operations, financial condition and cash flows is highly uncertain. Our results of operations, financial condition and cash flows are dependent on future developments, including the duration of the pandemic and the related length of its impact on the global economy, which at the present time are highly uncertain and cannot be predicted with accuracy. Chief Executive Officer Transition Mr. Scott R. Milford, previously our Chief Operating Officer was promoted to the CEO effective January 19, 2022. Mr. Milford, 57, has served as the Company’s Chief People Officer since July 2019 until his promotion to the Chief Operating Officer in December 2020. Before joining the Company, he served as VP, People Operations of SoulCycle from January to July 2019. Prior to that, he served as Chief People Officer for Bayada Home Health during 2018. Previously, he was Senior Vice President – Human Resources for Le Pain Quotidien from 2016 to 2018, and Senior Vice President – Human Resources for Town Sports from 2009 to 2015. His other relevant experience includes senior Human Resources leadership positions at Starbucks Coffee Company (2003-2008), Universal Music Group (1999-2003), and Blockbuster Entertainment and its parent Viacom International (1991-1999). Competition Our domestic units operate within many of the largest and most heavily trafficked airports in the United States. The balance of the North Americandomestic market is highly fragmented and is represented largely by small, privately-owned entities that operate one or twoentities. The largest domestic competitor operated 21 locations in a single airport. Only two other market participants operate 10 or more airport locationsin11 airports in the United States. The largest domestic competitor operates 14 locations in seven airports. Outside There are no other multi-city multi-airport operators. Competition, where present, is typically a locally based health system urgent care center, or heath provider, or a contracted vendor of North America, this same competitor operates 22 locations in eight international airports. the airport. Intellectual Property
After a period of intense competition from public and private companies for the acquisition of intellectual property assets, prices have dropped substantially. Due to the many patent sales and divestments over the past few years, many companies continue to seek to monetize intellectual property by licensing their patents to companies in a number of technology sectors. This has occurred in an increasingly challenging and changing legal environment for monetizing patents.
Our Market Airport retailers differ significantly from traditional retailers. Unlike traditional retailers, airport retailers benefit from a steady and largely predictable flow of traffic from a constantly changing customer base. Airport retailers also benefit from “dwell time,” the period after travelers have passed through airport security and before they board an aircraft. For over 15 years, increased security requirements have led travelers to spend more time at the airport. In addition, in anticipation of the long and often stressful security lines, travelers allow for more time to get through security and, as a result, often experience increased downtime prior to boarding. XpresSpa was developed to address the stressstressful and idle time spent at the airport, allowing travelers to spend this time productively, by relaxing and focusing on personal care and wellness. We believe that XpresSpa Group is well positioned to benefit from consumers’ growing interest in health and wellness and increasing demand for spaproducts and services designed to improve overall health and related wellness products. According to the Global Wellness Institute, global wellness was a $3.7 trillion industry in 2015, which was an increase of 10.6% from $3.3 trillion in 2013. In addition, according to the Global Wellness Institute, the global spa industry represented $98.6 billion in 2015 and the fitness, mind and body industry represented $542 billion in 2015.well-being. In addition, a confluence of microeconomic events has created favorable conditions for the expansion of retail concepts at airports, in particular, retail concepts that attract higher spending from air travelers. The competition for airplane landings has forced airports to lower landing fees, which in turn has necessitated augmenting their retail offerings to offset budget shortfalls. Infrastructure projects at airports across the country, again intended to make an airport more desirable to airlines, require funding from bond issuances that in turn rely upon, in part, the expected minimum rent guarantees and expected income from concessionaires. Equally as important to the industry growth is XpresSpa’sXpresSpa Group’s flexible, valuable and desirable retail format.format and footprint within the airport retail segment. Before the pandemic, XpresSpa opensGroup historically opened multiple locations annually, which have ranged in size from 200 square feet to 2,600 square feet, with a typical size of approximately 1,200800 square feet. XpresSpa isGroup has been able to adapt its operating model to almost any size location available in space constrained airports. This increased flexibility compared to other retail concepts allowshas allowed, and will continue to allow XpresSpa Group to operate multiple stores within an airport, from which it enjoys synergies due to shared labor between stores. including in some cases for different concepts. XpresSpa Group believes that its operating metrics represent an attractive return on invested capital and, as a result, is pursuing new locations at airports and terminals around the country. Historically, XpresSpa has won approximately four outthe majority of every fiveall requests for proposal (“RFP”) in which it has participated. Due to the COVID-19 outbreak, effective March 24, 2020, we temporarily closed all global spa locations, largely due to the categorization of our spa locations by local jurisdictions as “non-essential services”. Normal market conditions and travel behavior were negatively impacted by the COVID-19 outbreak. Similar to many businesses in the travel sector, our business has been materially and adversely impacted by the COVID-19 outbreak. Most of the domestic travel restrictions have been lifted as of December 31, 2021 and we believe that travel conditions are slowly returning to pre pandemic level. We have reopened sixteen locations out of our total domestic portfolio of thirty one Spas. As travel slowly returns, our intention is to continue to review our portfolio and reopen spas once airport traffic returns to sufficient levels to support our operations and achieve adequate unit-level economics, including acceptable profit levels as well as serves our longer-term strategy of offering fully integrated health and wellness services. The market for XpresCheck is predominantly airline passengers requiring a negative COVID test at their destinations to avoid quarantine, with much smaller components of airline employees and general public electing testing at the airport. We believe this market will continue to exist into and potentially beyond 2023, albeit with some changes in the size and test types. Our new concept envisions delivering integrated health and wellness care, through technology and services, accessed at on-site airport wellness centers as well as outside of airports. We expect this travel health and wellness brand to expand our relevant market well beyond the flying passengers of the airports, in which we have a physical presence, and into a digital experience before, during and after travel. We also believe these offerings will be more relevant products and services and hence consumed by a greater portion of our target population. Regulation Our operations are subject to a range of laws and regulations adopted by national, regional and local authorities from the various jurisdictions in which we operate, including those relating to, among others, licensing (e.g., massage, nail, and cosmetology), public health and safety and fire codes. Failure to obtain or retain required licenses and approvals, including those related to licensing, public health and safety and fire codes, would adversely affect our operations. Although we have not experienced, and do not anticipate, significant problems obtaining required licenses, permits or approvals, any difficulties, delays or failures in obtaining such licenses, permits or approvals could delay or prevent the opening, or adversely impact the viability, of our operations.
Airport authorities in the United States frequently require that our airport concessions meet minimumAirport Concession Disadvantaged Business Enterprise ("ACDBE") participation requirements. The Department of Transportation’s (“DOT”) ACDBE program is implemented by recipients of DOT Federal Financial Assistance, including airport agencies that receive federal funding. The ACDBE program is administered by the Federal Aviation Administration (“FAA”), state and local ACDBE certifying agencies and individual airports. The ACDBE program is designed to help ensure that small firms owned and controlled by socially and economically disadvantaged individuals can compete for airport contracting and concession opportunities in domestic passenger service airports. The ACDBE regulations require that airport recipients establish annual ACDBE participation goals, review the scope of anticipated large prime contracts throughout the year, and establish contract-specificcontract specific ACDBE participation goals. We generally meet the contract specific goals through an agreement providing for co-ownership of the retail location with a disadvantaged business enterprise. Frequently, and within the guidelines issued by the FAA, we may lend money to ACDBEs in connection with concession agreements in order to help the ACDBE fund the capital investment required under a concession agreement. The rules and regulations governing the certification of ACDBE participation in airport concession agreements are complex, and ensuring ongoing compliance is costly and time consuming. Further, if we fail to comply with the minimum ACDBE participation requirements in our concession agreements, we may be held responsible for breach of contract, which could result in the termination of a concession agreement and monetary damages. See “Item 1A. Risk Factors – Risks Related to our Business Operations – Failure to comply with minimum airport concession disadvantaged business enterprise participation goals and requirements could lead to lost business opportunities or the loss of existing business.” We are subject to the Fair Labor Standards Act, the Immigration Reform and Control Act of 1986, the Occupational Safety and Health Act, the Family and Medical Leave Act, the Affordable Care Act, the Healthcare Insurance Portability and Accountability Act and various federal and state laws governing matters such as minimum wages, overtime, unemployment tax rates, workers’ compensation rates, citizenship requirements and other working conditions. We are also subject to the Americans with Disabilities Act, which prohibits discrimination on the basis of disability in public accommodations and employment, which may require us to design or modify our concession locations to make reasonable accommodations for disabled persons. We are also subject to certain truth-in-advertising, general customs, consumer and data protection, product safety, workers’ health and safety and public health rules that govern retailers in general, as well as the merchandise sold within the various jurisdictions in which we operate. We are also subject to HIPAA and the HITECH Act as they relate to patients’ Protected Health Information (PHI), patient rights, breach notification and other actions. Employees As of March 15, 2018,2022, we had 697approximately 363 full-time and 14866 part-time employees.employees of XpresSpa had 53 full-time employees in San Francisco International Airport, who are represented by a labor union and are covered by a collective bargaining agreement. XpresSpa had 34 full-time employees in Los Angeles International Airport, who are represented by a labor union and are covered by a collective bargaining agreement.Group. We consider our relationships with our employees to be good. Corporate Information We were incorporated in Delaware as a corporation on January 9, 2006 and completed an initial public offering in June 2010. On January 5, 2018, we changed our name to XpresSpa Group, Inc. from FORM Holdings Corp. as part of a rebranding that aligned our corporate strategy to build a pure-play health and wellness services company. Our common stock, par value $0.01 per share, which was previously listed under the trading symbol “FH” on the Nasdaq Capital Market, has been listed under the trading symbol “XSPA” since January 8, 2018. Our principal executive offices are located at 780 Third Avenue, 12254 West 31st Street, 11th Floor, New York, New York 10017.10001. Our telephone number is (212) 309-7549 and our website address iswww.xpresspagroup.com. We also operate the websitewebsites www.xpresspa.com and www.xprescheck.com.
References in this Annual Report on Form 10-K to our website address does not constitute incorporation by reference of the information contained on the website. We make our filings with the Securities and Exchange Commission, or the SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, other reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, and amendments to the foregoing reports, available free of charge on or through our website as soon as reasonably practicable after we file these reports with, or furnish such reports to, the SEC. In addition, we post the following information on our website: | ·● | our corporate code of conduct and our insider trading compliance manual; and |
| ·● | charters for our audit committee, compensation committee, and nominating and corporate governance committee. |
The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC. The public can obtain any documents that we file with the SEC athttp://www.sec.gov. ITEM 1A. RISK FACTORS Our business, financial condition, results of operations and the trading price of our common stock could be materially adversely affected by any of the following risks as well as the other risks highlighted elsewhere in this Annual Report on Form 10-K. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may materially affect our business, financial condition and results of operations. Risk Factor Summary Risks Related to our Financial Condition and Capital Requirements | ● | The ongoing outbreak and continued spread of COVID-19 throughout the United States and worldwide may continue to adversely affect our business operations, employee availability, financial condition, liquidity and cash flow for an extended period of time. |
| ● | We may be unable to remediate the material weakness in our internal control over financial reporting that we identified, or otherwise to maintain effective internal control over financial reporting. |
| ● | Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited. |
| ● | Global economic and market conditions may adversely affect our business, financial condition and operating results. |
| ● | Increasing inflation could adversely affect our business, financial condition, results of operations or cash flows. |
| ● | Our business requires substantial capital expenditures and we may not have access to the capital required to maintain and grow our operations. |
| ● | We may in the future be required to consolidate/unconsolidate the assets, liabilities, and results of operations of certain of our XpresCheck business, which could have an adverse impact on our results of operations, financial position, and gross margin. |
Risks Related to our Business Operations | ● | We have comparatively limited operating history in the diagnostic testing and vaccination industry. |
| ● | We have risks associated with long-term formal contracts and relationships with professional practices for operation of the COVID-19 and other medical testing and vaccination services in our Treat and XpresCheck Wellness Centers. |
| ● | We may be unable to successfully secure new locations for, or transition our existing spa facilities or XpresCheck Wellness Centers into, facilities related to our new travel health and wellness concept. |
| ● | Any delays or difficulties securing laboratory substances, equipment and other materials used for COVID-19 tests could disrupt our operations and materially harm our business. |
| ● | The COVID-19 testing technology we have chosen may not perform as expected, as a result of human error or otherwise, may be replaced in the future by different or cheaper technology, and may not aid in the testing of future variants of the virus. |
| ● | Any disputes relating to improper handling, storage or disposal of the potentially hazardous materials, chemicals and patient samples in our XpresCheck diagnostic testing and vaccination business could be time consuming and costly. |
| ● | Changes in laws and regulations to which our business is subject, or failure to comply with existing or future laws and regulations, could result in increased costs and the imposition of fines or penalties. |
| ● | Changes in the way that the FDA regulates COVID-19 tests could result in the additional expense in offering tests and would affect the profitability of our Treat and XpresCheck businesses. |
| ● | Our professional practice partner’s failure to accurately bill for testing services, or to comply with applicable laws relating to government healthcare programs, could adversely affect our business. |
| ● | We depend on third parties to provide services critical to our XpresCheck diagnostic testing and vaccination business, and we would by adversely impacted by their failure to comply with applicable laws and regulations or breaches of their information technology systems. |
| ● | Our business operations may be materially impaired if we do not comply with privacy laws or information security policies, including laws protecting health information and personal data. |
| ● | Hardware and software failures or delays in our information technology systems or payment systems could disrupt our operations and cause the loss of confidential information, customers and business opportunities. |
| ● | Delays in the processing of special permits, applications and licenses by state and federal departments may result in contractual delays. |
| ● | Our capital expenditures for Treat may not generate a positive return and we will incur significant additional costs. |
| ● | We rely on international and domestic airplane travel, and the time that airline passengers spend in United States airports post-security. |
| ● | We rely on a limited number of distributors and suppliers for certain of our products, and events outside our control may disrupt our supply chain and ultimately cause us to lose our concessions. |
| ● | Our operating results may fluctuate significantly due to factors beyond our control. |
| ● | Our expansion into new airports or off-airport locations may present increased risks due to our unfamiliarity with those areas. |
| ● | We may not be able to execute our growth strategy to expand and integrate new concessions or future acquisitions into our business or remodel existing concessions. |
| ● | If the estimates and assumptions we use to determine the size of our market are inaccurate, our future growth rate may be impacted. |
| ● | We currently rely on a skilled, licensed labor force to provide services, and the supply of this labor force is finite. |
| ● | Unionization of our labor force or continued minimum wage increases could increase our cost of labor. |
| ● | We compete for new locations in airports and may not be able to secure new locations. |
| ● | We may not be able to predict accurately or fulfill customer preferences or demands. |
| ● | Our leases may be terminated, either for convenience by the landlord or as a result of an XpresSpa default. |
| ● | Our ability to operate depends on the traffic patterns of the terminals in which we operate. |
| ● | We are dependent on our local partners. |
| ● | Failure to comply with minimum airport concession disadvantaged business enterprise participation goals and requirements could lead to lost business opportunities or the loss of existing business. |
| ● | If we are unable to protect our customers’ credit card data and other personal information, we could be exposed to data loss, litigation and liability, and our reputation could be significantly harmed. |
| ● | Negative social media regarding XpresSpa, XpresCheck, and Treat could result in decreased revenues and impact our ability to recruit workers. |
| ● | We source, develop and sell products that may result in product liability defense costs and product liability payments. |
| ● | We have commenced legal proceedings and/or licensing discussions with security, content distribution and/or telecommunications companies, which may be time consuming, may fail to lead to a license, or may result in litigation. |
| ● | We may fail or be unable to protect our patents, trademarks or other proprietary rights we use. |
| ● | We and our subsidiaries have been, are, and may become involved in litigation that could divert management’s attention and harm our businesses. |
| ● | Our recent acquisition of HyperPointe, and any future acquisitions or business opportunities, could involve unknown risks that could harm our business and adversely affect our financial condition and results of operations. |
| ● | Laws regulating the corporate practice of medicine could restrict the manner in which we are permitted to conduct our XpresCheck and Treat businesses, and the failure to comply with such laws could subject us to penalties or require a restructuring of our business. |
Risks Related to Capital Stock | ● | The market price of our common stock historically has been and likely will continue to be highly volatile, and our common stock has historically traded in low volumes. |
| ● | Future sales of our shares of common stock or the exercise of a substantial number of warrants or options could cause the market price of our common stock to drop significantly, even if our business is otherwise performing well. |
| ● | We have no current plans to pay dividends on our common stock, and our investors may not receive funds without selling their stock. |
| ● | Our failure to meet the continued listing requirements of The Nasdaq Capital Market could result in a delisting of our common stock. |
Risks Related to our Financial Condition and Capital Requirements The ongoing outbreak and continued spread of COVID-19 throughout the United States and worldwide, may continue to adversely affect our business operations, employee availability, financial condition, liquidity and cash flow for an extended period of time. We may not be ableThe COVID-19 outbreak continues to raise additional capital. Moreover, additional financing may have an impact on the global economy, resulting in rapidly changing market and economic conditions. Similar to many businesses in the travel sector, our business has been materially adversely impacted by the recent COVID-19 outbreak due to the restrictions on travel that have been implemented from time to time. Effective March 24, 2020, we temporarily closed all global spa locations, largely due to the categorization of our spa locations by local jurisdictions as “non-essential services” in connection with the outbreak of COVID-19. This initially created a materially adverse impact on our cash flows from operations and caused a liquidity crisis, and continues to adversely affect our spa business even as we have gradually re-opened many of our spa locations. Ongoing significant reductions in business related to our spa business could cause further loss of sales and profits and other material adverse effects. The continuing impact of COVID-19 on our spa business, and as our result financial results, liquidity and cash flows, depends on future developments, including new information that may emerge concerning future variants, the severity of those variants and action taken to contain or prevent further spread within the U.S. and the related impact on consumer confidence and spending, all of which are highly uncertain and cannot be predicted. Government and private sector responsive actions to the current outbreak, and fluctuations in severity due to changes in the coronavirus causing COVID-19 and impacts in various geographies, may continue to adversely affect our business operations. It is impossible to predict the effect and ultimate impact of the future spread of COVID-19 as the situation continues to rapidly evolve. Even as travel and other activities return to normalized, pre-pandemic levels, the ongoing development and evolution of the COVID-19 outbreak continues, and we expect there will continue to be significant and material disruptions to our operations, which will have a material adverse effect on our business, financial condition and results of operations.
In connection with the valuepreparation of our annual financial statements for the year ended December 31, 2020, we identified a material weakness in our internal control over financial reporting, and that weakness has not been fully remediated as of December 31, 2021. Any continuing failure to maintain effective internal control over financial reporting could have a material adverse effect on our results of operations and financial position. Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. In connection with our audit of the equity instruments heldyear ended December 31, 2020, we identified a material weakness in our internal controls over our financial close and reporting process. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected and corrected on a timely basis. Our management has concluded that additional formal procedures need to be put in place in the financial close and reporting process to ensure that appropriate reviews occur on all financial reporting analysis in a timely manner. We also concluded that we did not maintain a sufficient complement of corporate employee personnel with appropriate levels of accounting and controls knowledge and experience commensurate with our financial reporting requirements to appropriately analyze, record and disclose accounting matters completely and accurately. As this deficiency created a reasonable possibility that a material misstatement would not have been prevented or detected in a timely basis, management concluded that the control deficiency represented a material weakness and accordingly our internal control over financial reporting was not effective as of December 31, 2020. We are currently still considering the full extent of, and implementing, procedures to implement in order to remediate the material weakness described above. Our preliminary remediation plan, complemented by our stockholders. existing outsourced internal audit procedures, includes implementing a more robust review process, an increase in the supervision and monitoring of the financial reporting processes and our accounting personnel, and implementing better controls over calculations, analysis and conclusions associated with non-routine transactions at a more precise level. Moreover, we hired a new chief financial officer in December 2020 and a new corporate controller in March 2021, and such individuals are critical to the implementation of such procedures. However, notwithstanding this remediation plan, and the steps taken in fiscal year 2021, management concluded that the control deficiency continued to represent a material weakness and accordingly our internal control over financial reporting was not effective as of December 31, 2021, We may choosecannot assure you that any of our remedial measures will be effective in resolving this material weakness. If our management is unable to raiseconclude that we have effective internal control over financial reporting, or to certify the effectiveness of such controls, or if additional fundsmaterial weaknesses in connection with any potential acquisitionour internal controls are identified in the future, we could be subject to regulatory scrutiny and a loss of operating businesses or other assets.public confidence, which could have a material adverse effect on our business and our stock price. In addition, if we may also need additional funds to respond to business opportunitiesdo not maintain adequate, qualified financial and challenges, including our ongoing operating expenses, protection of our assets, development of new lines of businessmanagement personnel, processes and enhancement of our operating infrastructure. While we may need to seek additional funding,controls, we may not be able to obtain financing on acceptable terms,manage our business effectively or at all. In addition, the terms ofaccurately report our financings may be dilutive to, or otherwise adversely affect, holders of our common stock. We may also seek additional funds through arrangements with collaborators or other third parties. We may not be able to negotiate arrangements on acceptable terms, if at all. If we are unable to obtain additional fundingfinancial performance on a timely basis, we may be required to curtail or terminate some or allwhich could adversely affect our results of our business plans. Any such financing that we undertake will likely be dilutive to our current stockholders.operations and financial condition. Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited. As of December 31, 2017, we had federal2021, our estimated aggregate total net operating loss carryforwards (“NOL”s) of $159,007,000 which expireNOLs”) were $150.9 million for U.S. federal purposes, expiring 20 years from the respective tax years to which they relate.relate, and $56.3 million for U.S. federal purposes with an indefinite life due to new regulations in the Tax Cuts and Jobs Act of 2017. Our ability to utilize our NOLs may be limited under Section 382 of the Internal Revenue Code. The limitations apply if an ownership change, as defined by Section 382, occurs. Generally, an ownership change occurs when certain stockholders increase their aggregate ownership by more than 50 percentage points over their lowest ownership percentage in a testing period (typically three years). Additionally, United Statesthe Tax Reform Act of 1986 imposed substantial restrictions on the utilization of NOL and tax laws limitcredits in the time during which theseevent of an ownership change of a corporation. Thus, our ability to utilize all such NOL and credit carryforwards may be utilized against future taxes. As a result, we may not be able to take full advantage of these carryforwards for federal and state tax purposes.limited. Future changes in stock ownership may also trigger an ownership change and, consequently, a Section 382 limitation. The recently passed comprehensive federal tax reform bill could adversely affect our businessCoronavirus Aid, Relief, and financial condition. On December 22, 2017, President Trump signed into law the “Tax CutsEconomic Security Act (the “CARES Act”) was enacted on March 27, 2020 and Jobs Act,” or TCJA, which significantly reforms the Internal Revenue Code of 1986, as amended, or the Code. The TCJA, among other things, includes favorable changes to U.S. federal tax rates, imposes significant additional limitations onlaw and incentives for businesses impacted by COVID-19. However, we do not anticipate the deductibility of interestincome tax law changes and net operating loss carryforwards, allows for the expensing of capital expenditures, and puts into effect the migration fromincentives will have a “worldwide” system of taxation to a territorial system. Our net deferred tax assets and liabilities will be revalued at the newly enacted U.S. corporate rate, and thematerial impact if any, will be recognized in our tax expense in the year of enactment. We continue to examine the impact this tax reform legislation may have on our business. The overall impactresults of the TCJA is uncertain and our business andoperations or financial condition could be adversely affected.position.
Global economic and market conditions may adversely affect our business, financial condition and operating results. Our business plan depends significantly on worldwide economic conditions and our success is dependent on consumer spending, which is sensitive to economic downturns,downturns; inflation and any associated rise in unemployment, declineunemployment; declines in consumer confidence,confidence; adverse changes in exchange rates, increaserates; increases in interest rates, increase inrates; the priceimpact of oil,high energy, fuel, food and healthcare costs; , deflation, direct or indirect taxes, or increaseincreases in consumer debt levels.levels; fears of war or actual conflicts, such as the Russian invasion of Ukraine, civil unrest, terrorism or violence; and increased stock market volatility. As a result, economic downturns may have a material adverse impact on our business, financial condition and results of operations. Moreover, uncertainty about global economic conditions poses a risk as businesses and individuals may postpone spending in response to tighter credit, negative financial news and declines in income or asset values. This could have a negative effect on corporate and individual spending on health and wellness and travel. These factors, taken together or individually, could cause material harm to our business, financial condition and results of operations. Increasing inflation could adversely affect our business, financial condition, results of operations or cash flows. Inflation and some of the measures taken by or that may be taken by the governments in countries where we operate in an attempt to curb inflation may have negative effects on the economies of those countries generally. If the United States or other countries where we operate experience substantial inflation in the future, our business may be adversely affected. In addition, we may not be able to adjust the prices we charge for our products and services to offset the impact of inflation on our expenses, leading to an increase in our operating expenses and a reduction in our margins. This could have a material adverse impact on our business, financial condition, results of operations or cash flows. Our business requires substantial capital expenditures and we may not have access to the capital required to maintain and grow our operations. The development of our new branding concept in the travel health and wellness space, as well as maintaining and expanding our operations in our existing and new locations and expanding our testing operations, are all capital intensive activities. Specifically, the construction, redesign and maintenance of our locations in airport terminals where we operate, technology costs, and compliance with applicable laws and regulations require substantial capital expenditures. Moreover, the creation of a digital platform in the travel health and wellness space will take substantial capital resources. In connection with all of the foregoing, we will require significant capital to fund our operations and respond to potential strategic opportunities, such as investments, acquisitions and expansions. Since mid-2020, we have been able to obtain additional capital through access to the equity markets, selling our common stock and warrants. While we have mitigated the cash crisis we faced in the first half of 2020 and are cash flow positive in our XpresCheck business, throughout our operating history prior to the successful launch of our XpresCheck business, we did not generate sufficient cash from operations to fund new store development. Accordingly, we will be dependent upon managing and effectively deploying our existing cash resources and may require additional funding to fully realize the design and implementation of our travel health and wellness concept. If and to the extent we determine it is necessary or desirable, we may not be able to obtain such additional financing, through equity capital when needed, on acceptable terms, or at all. In addition, the terms of our financings may be dilutive to, or otherwise adversely affect, holders of our common stock. Moreover, our ability to raise additional equity capital will be constrained because we have relatively few authorized shares of common stock that are not issued and outstanding or reserved for future issuance, and we may need to increase our authorized shares or undertake a reverse stock split in the near future to maintain our flexibility in access the equity capital markets. If we are unable to obtain additional funding on a timely basis, we may be required to curtail or terminate some or all of our business plans. Any such financing that we undertake will likely be dilutive to our current stockholders. We must continue to invest capital to maintain or to improve the success of our concessions and to meet refurbishment requirements in our concessions. Decisions to expand into new terminals could also affect our capital needs. Our actual capital expenditures in any year will vary depending on, among other things, the extent to which we are successful in renewing existing concessions and winning additional concession agreements. We may in the future be required to consolidate/unconsolidated the assets, liabilities, and results of operations of certain of our XpresCheck business, which could have an adverse impact on our results of operations, financial position, and gross margin. The Financial Accounting Standards Board has issued accounting guidance regarding variable interest entities (“VIEs”) that affects our accounting treatment of our XpresCheck business. To ascertain whether we are required to consolidate an entity, we determine whether it is a VIE and if we are the primary beneficiary in accordance with the accounting guidance. Factors we consider in determining whether we are the VIE’s primary beneficiary include the decision-making authority of each partner, which partner manages the day-to-day operations of the joint venture and each partner’s obligation to absorb losses or right to receive benefits from the joint venture in relation to that of the other partner. Changes in the financial accounting guidance, or changes in circumstances within our XpresCheck business, could lead us to determine that we have to consolidate/unconsolidate the assets, liabilities, and results of operations of those businesses. The consolidation/unconsolidation of our VIEs could have a material adverse impact on our results of operations, financial position, and gross margin. In addition, we may enter into future joint ventures or make other equity investments, which could have an adverse impact on us because of the financial accounting guidance regarding VIEs. Risks Related to our Business Operations We have comparatively limited operating history in the diagnostic testing and vaccination industry. Despite our management’s extensive experience in health and wellness services and commencing XpresCheck’s diagnostic testing and vaccination services in 2020, we still have relatively limited operating history in the that business, including providing management services to a professional practice offering diagnostic testing or vaccination services. We face substantial risks and uncertainties to which our new diagnostic testing and vaccination line of business is subject. To address these risks and uncertainties, we must, among other things, successfully execute our business strategy, respond to competitive developments and attract and retain qualified personnel. We cannot assure you that we will operate profitably or that our business strategy will be successful. As a result, our diagnostic testing and vaccination line of business may not succeed. XpresSpaWe have risks associated with long-term formal contracts and relationships with professional practices for the ordering of and collection of samples for, or with laboratories for the performance of, COVID-19 and other medical testing and vaccination services in our Treat and XpresCheck® Wellness Centers.
We began offering COVID-19 and other medical testing services, as well as and certain seasonal vaccines in XpresCheck™ Wellness Centers. Beginning in June 2020, we began establishing formal contractual relationship with professional practices for the ordering of and collection of samples for, and with clinical laboratories for the performance, of COVID-19 testing. These contractual relationships generally provide for an initial one-year periods, with automatic one-year renewals, unless otherwise terminated by either party. We may never formalize longer-term arrangements with a professional practice or clinical laboratory for these purposes and may never conduct diagnostic testing and vaccination operations on a widescale basis. Conversely, our current arrangements may restrict our flexibility if the contractual arrangements are not on favorable terms. In either case, there can be no assurances that we will be able to execute our current plans or generate substantial revenue associated with our current XpresCheck COVID-19 testing and other medical testing and vaccines plans, including any COVID-19 vaccine that might become available in the future. We may be unable to successfully secure new locations for, or transition our existing spa facilities or XpresCheck Wellness Centers into, facilities related to our new travel health and wellness concept. As we transition our business to our new travel health and wellness concept, there can be no assurances that we will be able to open locations or renovate our other existing spa or XpresCheck facilities for the purpose of delivering the services planned in our new concept. In addition, to the extent we determine to open new XpresCheck Wellness Centers or further expand our initial sites, there can be no assurance that such locations will be available or that we will be able to renovate our other existing spa facilities for the purpose of operating such additional XpresCheck locations. In addition, we have expanded our testing capabilities to include rapid testing services for other communicable diseases, including influenza, COVID-19, RSV, Flu A&B, as well as seasonal flu vaccination services which may require additional renovations and costs. If we are unable to successfully transition our existing facilities to locations at which we will deliver our new health and wellness concept or deliver COVID-19 testing or other medical testing and vaccination services due to issues with lease agreements, permits, licenses or other delays, we will not be able to move forward with our planned business transition. We rely on a limited number of professional practices and suppliers and, in some cases, a single professional practice or supplier, for the COVID-19 test and certain of the laboratory substances, equipment and other materials used for COVID-19 tests, and any delays or difficulties securing these materials could disrupt our operations and materially harm our business. We contract with a limited number of professional practices for the ordering of and collection of samples for COVID-19 testing. We currently rely on a limited number of suppliers for test kits, seasonal flu vaccines, collection supplies, reagents, and various other equipment and materials we currently use in performing COVID-19 or other medical testing or for administering seasonal flu vaccines, and we may not be able to increase our number of suppliers significantly for these items. In addition, our competitors may have more substantial resources and may have access to these materials, which may reduce their availability to us, increase our costs or both. Although we currently have long-term agreements with a relatively limited number of professional practices and suppliers, these professional practice partners or suppliers could cease supplying these services or tests, materials and equipment to us due to disruptions in the professional practice’s or supplier’s operations, a determination to pursue other activities or lines of business, or for other reasons, or the professional practice or supplier could fail to provide us with sufficient quantities of services or materials that meet our specifications. Transitioning to a new professional practice or supplier or locating a temporary substitute, even if available, would be time-consuming and expensive, could result in interruptions in or otherwise affect the performance specifications of our intended operations, or could require that we revalidate the tests we use. In addition, the use of services, equipment or materials provided by a replacement professional practice or supplier could require us to alter our future operations and procedures. Moreover, we believe there are currently only a limited number of manufacturers that are capable of supplying and servicing some of the equipment and other materials necessary for our intended operations. As a result, replacement equipment and materials that meet our quality control and performance requirements may not be available on reasonable terms, in a timely manner or at all. If we encounter delays or difficulties securing, reconfiguring or revalidating the equipment, reagents and other materials required for administering tests, our operations could be materially disrupted and our business, financial condition, results of operations, and reputation could be adversely affected. We also may experience services or supply issues as we increase the volume or scope of our testing and vaccination services. The COVID-19 testing technology we have chosen may not perform as expected, as a result of human error or otherwise, may be replaced in the future by different or cheaper technology, and may not aid in the testing of future variants of the virus. In June 2020, our professional practice partner began performing point of care COVID-19 testing at our JFK Airport XpresCheck location, and our testing service has since expanded to 15 locations in 12 airports across the US. Our success will depend on the COVID-19 and other communicable diseases testing technology we have chosen to use to continue provide a reliable, high-quality diagnostic result. Diagnostic testing for COVID-19 still remains relatively new, and there is reliantno guarantee that the COVID-19 test technology we are currently using, or that we may choose to use in the future, will be accurate. Moreover, if testing technology becomes significantly cheaper in the future, our business could be harmed because the amount we can charge for testing services, and our margins on our testing business, may be reduced. In addition, we believe that customers will be particularly sensitive to COVID-19 test defects and errors. As a result, the failure of the chosen tests to perform as expected could significantly impair our reputation and the public image of the tests we use. There can be no assurance that the COVID-19 test technology will be broadly adopted for use. Moreover, while we believe the COVID-19 test technology we are currently using is effective for the current variants of COVID-19, a new variant could emerge that requires a different testing methodology or technology, and we may not have access to that technology, or it may not exist at the time of the emergency of any such new variants. As a result, the failure or perceived failure of the chosen tests to perform as expected could have a material adverse effect on our business, financial condition, results of operation and cash flows. If there is little or no demand for the COVID-19 test, because of these quality concerns or because of other, less expensive testing options, our business could be materially harmed. Moreover, as testing technology evolves, develops and improves over time, we may not be able to identify and gain access to the latest and best COVID-19 testing methodologies and equipment. There can be no assurance that demand for our COVID-19 testing services will continue in the future at the levels we have experienced recently or that we expect going forward, because of the success of containment efforts and vaccines, widespread availability of testing at other locations or at a greatly reduced cost, or due to other events. If there is no demand for our COVID-19 testing services or demand is significantly lower than we expect, our business will be materially harmed. Our COVID-19 testing and other medical testing and vaccination capabilities are subject to risks around test pricing, availability and acceptance in the market or by countries or states that are imposing travel or quarantine restrictions. Our ability to successfully offer COVID-19 tests will depend significantly on the continued perception that the tests used by our professional practice partner can reduce transmission risk and are reliable. In addition, COVID-19 testing materials may become substantially cheaper and more widely available, either of which would have an adverse effect on the necessity of our services and the profitability of our XpresCheck business. Moreover, we cannot assure you regarding the availability of, or our access to, various COVID-19 vaccinations. These apps would directly link into COVID-19 test results from there partnered labs, so that passengers would be able to show their test results through these apps to airlines and destinations in order to facilitate a hassle-free entry and avoid quarantines, where applicable. However, there can be no assurance as to the degree to which our public testing model assists passengers meet testing requirements for entry into, or avoidance of quarantine in various countries, and we may not be able to execute our COVID-19 testing strategy and our business results may be harmed. In addition, our testing capabilities currently include rapid testing services for other communicable diseases, including influenza, COVID-19, RSV, Flu A&B, as well as seasonal flu vaccines. This requires us to expend additional funds and efforts to obtain medical testing supplies for these additional communicable diseases and to market our capabilities in these additional areas. Demand for these additional testing and vaccination services may never meet anticipated levels, which would have a material adverse effect on our business, financial condition and results of operations. We use potentially hazardous materials, chemicals and patient samples in our XpresCheck diagnostic testing and vaccination business and any disputes relating to improper handling, storage or disposal of these materials could be time consuming and costly. Our professional practice partner’s diagnostic testing activities involve the controlled use of hazardous laboratory materials and chemicals, including small quantities of acid and alcohol, and patient samples. They are subject to U.S. laws and regulations related to the protection of the environment, the health and safety of employees and the handling, transportation and disposal of medical specimens, infectious and hazardous waste. They could be liable for accidental contamination or discharge or any resultant injury from hazardous materials, and conveyance, processing, and storage of and data on patient samples. If they fail to comply with applicable laws or regulations, they could be required to pay penalties or be held liable for any damages that result and this liability could exceed their financial resources. Further, future changes to environmental health and safety laws could cause them to incur additional expense or restrict operations. In the event of a lawsuit or investigation concerning such hazardous materials, we could be held responsible for any injury caused to persons or property by exposure to, or release of, these hazardous materials or patient samples that may contain infectious materials. The cost of this liability could exceed our resources. While we expect to maintain broad form liability insurance coverage for these risks, and we expect our professional practice partner to maintain appropriate malpractice insurance, the level or breadth of our or their coverage may not be adequate to fully cover potential liability claims to which we might be exposed. Our XpresCheck diagnostic testing and vaccination business could be harmed from the loss or suspension of a license or imposition of a fine or penalties under, or future changes in, or interpretations of, the law or regulations of the Clinical Laboratory Improvement Act of 1967, and the Clinical Laboratory Improvement Amendments of 1988 (CLIA), or those of Medicare, Medicaid or other national, state or local agencies in the U.S. and other countries where we operate laboratories. The performance of laboratory testing is subject to extensive U.S. regulation, and many of these statutes and regulations have not been interpreted by the courts. CLIA extends federal oversight to virtually all physician practices performing clinical laboratory testing and to clinical laboratories operating in the U.S. by requiring that they be certified by the federal government or, in the case of clinical laboratories, by a federally approved accreditation agency. The sanction for failure to comply with CLIA requirements may be suspension, revocation or limitation of a laboratory’s CLIA certificate, which is necessary to conduct business, as well as significant fines and/or criminal penalties. In addition, we expect to be subject to regulation under state law. State laws may require that laboratories and/or laboratory personnel meet certain licensing or other qualifications, specify certain quality controls or require maintenance of certain records. Applicable statutes and regulations could be interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that would adversely affect our business. Potential sanctions for violation of these statutes and regulations include significant fines and the suspension or loss of various licenses, certificates and authorizations, which could have a material adverse effect on our business. In addition, compliance with future legislation could impose additional requirements on us, which may be costly. U.S. Food and Drug Administration (FDA) regulation of diagnostic products could result in increased costs and the imposition of fines or penalties, and could have a material adverse effect upon our business. The FDA has regulatory responsibility for instruments, test kits, reagents and other devices used by clinical laboratories. The FDA enforces laws and regulations that govern the development, testing, manufacturing, performance, labeling, advertising, marketing, distribution and surveillance of diagnostic products, and it regularly inspects and reviews the manufacturing processes and product performance of diagnostic products. FDA regulation of the diagnostic products we use could result in increased costs and administrative and legal actions for noncompliance, including warning letters, fines, penalties, product suspensions, product recalls, injunctions and other civil and criminal sanctions, which could have a material adverse effect on our business, financial condition, results of operation and cash flows. If we fail to comply with the complex federal, state, local and foreign laws and regulations that apply to our XpresCheck business, we could suffer severe consequences that could materially and adversely affect our operating results and financial condition. We expect our planned operations to be subject to extensive federal, state, local and foreign laws and regulations, all of which are subject to change. These laws and regulations currently include, among other things: | | | | ● | CLIA, which requires that laboratories obtain certification from the federal government, and state licensure laws; | | ● | FDA laws and regulations; | | | | | ● | The Health Insurance Portability and Accountability Act (HIPAA), which imposes comprehensive federal standards with respect to the privacy and security of protected health information and requirements for the use of certain standardized electronic transactions, and amendments to HIPAA under the Health Information Technology for Economic and Clinical Health Act (HITECH), which strengthen and expand HIPAA privacy and security compliance requirements, increase penalties for violators, extend enforcement authority to state attorneys general and impose requirements for breach notification; | | | | | ● | state laws regulating genetic testing and protecting the privacy of genetic test results, as well as state laws protecting the privacy and security of health information and personal data and mandating reporting of breaches to affected individuals and state regulators; | | | | | ● | the federal anti-kickback law, or the Anti-Kickback Statute, which prohibits knowingly and willfully offering, paying, soliciting, receiving, or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing, arranging for, or recommending of an item or service that is reimbursable, in whole or in part, by a federal healthcare program; | | | | | ● | other federal and state fraud and abuse laws, such as anti-kickback laws, prohibitions on self-referral, and false claims acts, which may extend to services reimbursable by any third-party payor, including private insurers; | | | | | ● | the federal Physician Payments Sunshine Act, which requires medical device manufactures to track and report to the federal government certain payments and other transfers of value made to physicians and teaching hospitals and ownership or investment interests held by physicians and their immediate family members; | | | | | ● | Section 216 of the federal Protecting Access to Medicare Act of 2014, which requires applicable laboratories to report private payor data in a timely and accurate manner beginning in 2017 and every three years thereafter (and in some cases annually); | | ● | state laws that impose reporting and other compliance-related requirements; | | | | | ● | state billing laws, including regulations on “pass through billing” which may limit our ability to submit claims for payment and/or mark up the cost of services in excess of the price paid for such |
| | services, and “direct-bill” laws which may limit our ability to purchase services from a laboratory and bill for the services ordered; and | | ● | similar foreign laws and regulations that apply to us in the countries in which we operate. |
These laws and regulations are complex and are subject to interpretation by the courts and by government agencies. Our failure to comply could lead to civil or criminal penalties, exclusion from participation in state and federal healthcare programs, or prohibitions or restrictions on our laboratory’s ability to provide or receive payment for our services. We believe that we are in material compliance with all statutory and regulatory requirements, but there is a risk that one or more government agencies could take a contrary position, or that a private party could file suit under the qui tam provisions of the federal False Claims Act or a similar state law. Such occurrences, regardless of their outcome, could damage our reputation and adversely affect important business relationships with third parties, including managed care organizations, and other private third-party payors. Changes in the way that the FDA regulates COVID-19 tests could result in the additional expense in XpresCheck offering tests and would affect the profitability of our XpresCheck business. Historically, the U.S. Food and Drug Administration (“FDA”) has exercised enforcement discretion with respect to most laboratory-developed tests (“LDTs”) and has not required laboratories that furnish LDTs to comply with the agency’s requirements for medical devices (e.g., establishment registration, device listing, quality systems regulations, premarket clearance or premarket approval, and post-market controls). In recent years, however, the FDA publicly announced its intention to regulate certain LDTs and issued two draft guidance documents that set forth a proposed phased-in risk-based regulatory framework that would apply varying levels of FDA oversight to LDTs. However, these guidance documents were withdrawn at the end of the Obama administration and replaced by an informal discussion paper reflecting some of the feedback that FDA had received on LDT regulation. The FDA acknowledged that the discussion paper in January 2017 does not represent the formal position of the FDA and is not enforceable. Nevertheless, the FDA wanted to share its synthesis of the feedback that it had received in the hope that it might advance public discussion on future LDT oversight. Notwithstanding the discussion paper, the FDA continues to exercise enforcement discretion and may decide to regulate certain LDTs on a case-by-case basis at any time, which could result in additional expense in offering tests. Until the FDA finalizes its regulatory position regarding LDTs, or other legislation is passed reforming the federal government’s regulation of LDTs, it is unknown how the FDA may regulate tests we use in the future and what testing and data may be required to support any required clearance or approval. Our professional practice partner’s failure to accurately bill for testing services, or to comply with applicable laws relating to government healthcare programs, could have a material adverse effect on our business. Billing for diagnostic testing and vaccination services is complex and subject to extensive and non-uniform rules and administrative requirements. We expect that the majority of our billing and related operations will be provided by a third party. Failure to accurately bill for our services could have a material adverse effect on our business. In addition, failure to comply with applicable laws relating to billing government healthcare programs may result in various consequences, including the return of overpayments, civil and criminal fines and penalties, exclusion from participation in government healthcare programs and the loss of various licenses, certificates and authorizations necessary to operate our business, as well as incur additional liabilities from third-party claims, all of which could have a material adverse effect on our business. Certain violations of these laws may also provide the basis for a civil remedy under the federal False Claims Act, including fines and damages of up to three times the amount claimed. The qui tam provisions of the federal False Claims Act and similar provisions in certain state false claims acts allow private individuals to bring lawsuits against healthcare companies on behalf of the government. Although we expect to be in compliance, in all material respects, with applicable laws and regulations, there can be no assurance that a regulatory agency or tribunal would not reach a different conclusion. The federal and state governments have substantial leverage in negotiating settlements since the amount of potential damages and fines far exceeds the rates at which services will be reimbursed, and the government has the remedy of excluding a non-compliant provider from participation in the Medicare and Medicaid programs. We expect that federal and state governments continue aggressive enforcement efforts against perceived healthcare fraud. Legislative provisions relating to healthcare fraud and abuse provide government enforcement personnel with substantial funding, powers, penalties and remedies to pursue suspected cases of fraud and abuse. We depend on third parties to provide services critical to our XpresCheck diagnostic testing and vaccination business, and we depend on them to comply with applicable laws and regulations. Additionally, any breaches of the information technology systems of third parties could have a material adverse effect on our operations. We depend on third parties to provide services critical to our XpresCheck diagnostic testing and vaccination business, including supplies, ground and air transport of clinical and diagnostic testing supplies and specimens, vaccinations, research products, and people, among other services. Third parties that provide services to us are subject to similar risks related to security of customer-related information and compliance with U.S., state, local, or international environmental, health and safety, and privacy and security laws and regulations as those faced by us. Any failure by third parties to comply with applicable laws, or any failure of third parties to provide services more generally, could have a material impact on us, whether because of the loss of the ability to receive services from the third parties, our legal liability for the actions or inactions of third parties, or otherwise. In addition, third parties to whom we outsource certain services or functions may process personal data, or other confidential information belonging to us. A breach or attack affecting these third parties could also harm our business, results of operations and reputation. Our business operations and reputation may be materially impaired if we do not comply with privacy laws or information security policies. We collect, generate, process or maintain sensitive information, such as patient data and other personal information. If we do not use or adequately safeguard that information in compliance with applicable requirements under federal, state and international laws, or if it were disclosed to persons or entities that should not have access to it, our business could be materially impaired, our reputation could suffer and we could be subject to fines, penalties and litigation. In the event of a data security breach, we may be subject to notification obligations, litigation and governmental investigation or sanctions, and may suffer reputational damage, which could have an adverse impact on our business. For example, in 2021, there were two HIPAA breaches that were reported to Health and Human Services, concerning our JFK and SLC XpresCheck locations, after which the team reinforced HIPAA training and counseled the responsible individuals. We are subject to laws and regulations regarding protecting the security and privacy of certain healthcare and personal information, including: (a) at the federal level, HIPAA and the regulations thereunder, which establish (i) a complex regulatory framework including requirements for safeguarding protected health information and (ii) comprehensive federal standards regarding the uses and disclosures of protected health information; and (b) state laws, including the California Consumer Privacy Act. Hardware and software failures or delays in our information technology systems, including failures resulting from our systems conversions or otherwise, could disrupt our operations and cause the loss of confidential information, customers and business opportunities or otherwise adversely impact our business. IT systems will be used extensively in virtually all aspects of our business, including clinical testing, test reporting, billing, customer service, logistics and management of medical data. Our success depends, in part, on the continued and uninterrupted performance of our IT systems. A failure or delay in our IT systems could impede our ability to serve our customers and patients and protect their confidential personal data. Despite redundancy and backup measures and precautions that we have implemented, our IT systems may be vulnerable to damage, disruptions and shutdown from a variety of sources, including telecommunications or network failures, system conversion or standardization initiatives, human acts and natural disasters. These issues can also arise as a result from failures by third parties with whom we do business and for which we have limited control. Any disruption or failure of our IT systems could have a material impact on our ability to serve our customers and patients, including negatively affecting our reputation in the marketplace. We must comply with complex and overlapping laws protecting the privacy and security of health information and personal data. There are a number of state, federal and international laws protecting the privacy and security of health information and personal data. Under the administrative simplification provisions of HIPAA, the U.S. Department of Health and Human Services has issued regulations which establish uniform standards governing the conduct of certain electronic healthcare transactions and protecting the privacy and security of personal health information (PHI) used or disclosed by healthcare providers and other covered entities. The privacy regulations regulate the use and disclosure of PHI by healthcare providers engaging in certain electronic transactions or “standard transactions.” They also set forth certain rights that an individual has with respect to his or her PHI maintained by a covered healthcare provider, including the right to access or amend certain records containing PHI or to request restrictions on the use or disclosure of PHI. The HIPAA security regulations establish administrative, physical, and technical standards for maintaining the integrity and availability of PHI in electronic form. These standards apply to covered healthcare providers and also to “business associates” or third parties providing services involving the use or disclosure of PHI. The HIPAA privacy and security regulations establish a uniform federal “floor” and do not supersede state laws that are more stringent or provide individuals with greater rights with respect to the privacy or security of, and access to, their records containing PHI. As a result, we may be required to comply with both HIPAA privacy regulations and varying state privacy and data security laws. Moreover, HITECH, among other things, established certain health information security breach notification requirements. In the event of a breach of unsecured PHI, a covered entity must notify each individual whose PHI is breached, federal regulators and in some cases, must publicize the breach in local or national media. Breaches affecting 500 individuals or more are publicized by federal regulators who publicly identify the breaching entity, the circumstances of the breach and the number of individuals affected. These laws contain significant fines and other penalties for wrongful use or disclosure of PHI. Given the complexity of HIPAA and HITECH and their overlap with state privacy and security laws, and the fact that these laws are rapidly evolving and are subject to changing and potentially conflicting interpretation, our ability to comply with the HIPAA, HITECH and state privacy requirements is uncertain and the costs of compliance are significant. Adding to the complexity is that our planned operations are currently evolving and the requirements of these laws will apply differently depending on such things as whether or not we bill electronically for our services, or provide services involving the use or disclosure of PHI and incur compliance obligations as a business associate. The costs of complying with any changes to HIPAA, HITECH and state privacy restrictions may have a negative impact on our operations. Noncompliance could subject us to criminal penalties, civil sanctions and significant monetary penalties as well as reputational damage. We also will be required to collect and maintain personal information about our employees as well as receive and transfer certain payment information, to accept payments from our customers, including credit card information. Most states have adopted laws requiring notification of affected individuals and state regulators in the event of a breach of personal information, which is a broader class of information than the health information protected by HIPAA. Many state laws impose significant data security requirements, such as encryption or mandatory contractual terms to ensure ongoing protection of personal information. Activities outside of the United States implicate local and national data protection standards, impose additional compliance requirements, and generate additional risks of enforcement for non-compliance. The collection and use of such information may be subject to contractual obligations as well. If the security and information systems that we or our outsourced third-party providers use to store or process such information are compromised or if we, or such third parties, otherwise fail to comply with these laws, regulations, and contractual obligations, we could face litigation and the imposition of penalties that could adversely affect our financial performance. We must comply with all applicable privacy and data security laws in order to operate our business and may be required to expend significant capital and other resources to ensure ongoing compliance, to protect against security breaches and hackers or to alleviate problems caused by such breaches. Breaches of health information and/or personal data may be extremely expensive to remediate, may prompt federal or state investigation, fines, civil and/or criminal sanctions and significant reputational damage. Our capital expenditures in XpresCheck Wellness Centers may not generate a positive return and we will incur significant additional costs. Our capital expenditures may not generate a positive return. Significant capital expenditures will be required to construct new XpresCheck Wellness Centers or renovate our existing spa facilities to accommodate our proposed new business model. No assurance can be given that our future capital expenditures will generate a positive return or that we will have adequate capital available to finance such construction or renovations. If we are unable to, or elect not to, pay for costs associated with such construction or renovations, the ability of our professional practice partner to order or perform COVID-19 or other medical testing could be limited, and our competitive position could be harmed. Additionally, we expect to incur significant additional costs as we expand the ability of our professional practice partner to perform on-site COVID-19 and other medical testing in XpresCheck Wellness Centers. The COVID-19 outbreak could disrupt our future supply chain, including by impacting our ability to secure COVID-19 or other testing supplies and to provide personal protective equipment for our employees in our testing locations. For similar reasons, the COVID-19 pandemic has also adversely impacted, and may continue to adversely impact, third parties that will be critical to our business, including vendors, suppliers, and business partners. These developments, and others that are difficult or impossible to predict, could materially impact our business, financial results, cash flows, and financial position. We rely on international and domestic airplane travel, and the time that airline passengers spend in United States airports post-security. A decrease inContinued lower demand for airline travel, a decrease in the desire of customers to buy spa services and products, or decreased time spent in airports would negatively impact XpresSpa’s operations. XpresSpa depends upon a large number of airplane travelers with the propensity for health and wellness, and in particular spa treatments and products, spending significant time post- securitypost-security clearance check points. The number of airline travelers has been extremely volatile since the onset of COVID-19 in March 2020. If the number of airline travelers remains at lower levels (or decreases iffurther), the time that these travelers spend post-security decreases, and/or if travelerstravelers’ ability or willingness to pay for XpresSpa’s products and services diminishes, this could have an adverse effect on XpresSpa’s growth, business activities, cash flow, financial condition and results of operations. Some reasons for these events could include: | ·● | the impact of a public health epidemic, including COVID-19, which has interfered and may continue to interfere with our ability, or the ability of our employees, workers, contractors, suppliers and other business partners to perform our and their respective responsibilities and obligations relative to the conduct of our business. A public health epidemic, including COVID-19, poses the risk of disruptions from the temporary closure of third-party suppliers and manufacturers, restrictions on the shipment of our products, restrictions on our employees' and other service providers' ability to travel, the decreased willingness or ability of our customers to travel or to utilize our services and shutdowns that may be requested or mandated by governmental authorities. The extent to which COVID-19 will continue to impact our results will depend on future developments related to the virus and its spread, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others; |
| ● | the ongoing closure of a significant number of our spa locations, and the reduced operating hours at those spa locations that have re-opened; |
| ● | terrorist activities (including cyber-attacks), pandemics and outbreaks of contagious diseases, such as the Zika or Ebola crises, impacting either domestic or international travel through airports where XpresSpa operates, causing fear of flying, flight cancellations, or an economic downturn, fears of war or actual conflicts, such as the Russian invasion of Ukraine, civil unrest, terrorism or violence or any other eventevents of a similar nature, even if not directly affecting the airline industry, may lead to a significant reduction in the number of airline passengers; |
| ·● | a decrease in business spending that impacts business travel, such as a recession; |
| ·● | a decrease in consumer spending that impacts leisure travel, such as a recession or a stock market downturn or a change in consumer lending regulations impacting available credit for leisure travel; |
| ·● | an increase in airfare prices that impacts the willingness of air travelers to fly, such as an increase in oil prices or heightened taxation from federal or other aviation authorities; |
| ·● | severe weather, ash clouds, airport closures, natural disasters, strikes or accidents (airplane or otherwise), causing travelers to decrease the amount that they fly and any of these events, or any other event of a similar nature, even if not directly affecting the airline industry, may lead to a significant reduction in the number of airline passengers; |
| ·● | as to our spa business, scientific studies that malign the use of spa services or the products used in spa services, such as the impact of certain chemicals and procedures on health and wellness; or |
| ·● | streamlined security screening checkpoints, which could decrease the wait time at checkpoints and therefore the time air travelers budget for spending time at the airport. |
Further, any disruption to, or suspension of services provided by airlines and the travel industry as a result of financial difficulties, labor disputes, construction work, increased security, changes to regulations governing airlines, mergers and acquisitions in the airline industry and challenging economic conditions causing airlines to reduce flight schedules or increase the price of airline tickets could negatively affect the number of airline passengers. Additionally, the threat of terrorism and governmental measures in response thereto, such as increased security measures, recent executive orders in the United States impacting entry into the United States and changing attitudes towards the environmental impacts of air travel may in each case reduce demand for air travel and, as a result, decrease airline passenger traffic at airports. The effect that these factors would have on our business depends on their magnitude and duration, and a reduction in airline passenger numbers will result in a decrease in our sales and may have a materially adverse impact on our business, financial condition and results of operations.
Our success will depend in part on relationships with third parties. Any adverse changes in these relationships could adversely affect our business, financial condition, or results of operations.
Our success is dependent on our ability to maintain and renew our business relationships and to establish new business relationships. There can be no assurance that our management will be able to maintain such business relationships or enter into or maintain new business contracts and other business relationships, on acceptable terms, if at all. The failure to maintain important business relationships could have a material adverse effect on our business, financial condition, or results of operations.
We rely on a limited number of distributors and suppliers for certain of our products, and events outside our control may disrupt our supply chain, which could result in an inability to perform our obligations under our concession agreements and ultimately cause us to lose our concessions.
We rely on a small number of suppliers for our products. As a result, these distributors may have increased bargaining power and we may be required to accept less favorable purchasing terms. In the event of a dispute with a supplier or distributor, the delivery of a significant amount of merchandise may be delayed or cancelled, or we may be forced to purchase merchandise from other suppliers on less favorable terms. Such events could cause turnover to fall or costs to increase, adversely affecting our business, financial condition and results of operations. In particular, we have publicized our sale of certain brands of products in our stores – our failure to sell these brands may adversely affect our business.
Further, damage or disruption to our supply chain due to any of the following could impair our ability to sell our products: adverse weather conditions or natural disaster, government action, fire, terrorism, cyber-attacks, the outbreak or escalation of armed hostilities, pandemic, industrial accidents or other occupational health and safety issues, strikes and other labor disputes, customs or import restrictions or other reasons beyond our control or the control of our suppliers and business partners. Failure to take adequate steps to mitigate the likelihood or potential impact of such events, or to effectively manage such events if they occur, could adversely affect our business, financial condition and results of operations, as well as require additional resources to restore our supply chain.
XpresSpa’s operating results may fluctuate significantly due to certain factors, some of which are beyond its control.
XpresSpa’s operating results may fluctuate from period to period significantly because of several factors, including:
| · | the timing and size of new unit openings, particularly the launch of new terminals; |
| · | passenger traffic and seasonality of air travel; |
| · | changes in the price and availability of supplies; |
| · | macroeconomic conditions, both nationally and locally; |
| · | changes in consumer preferences and competitive conditions; |
| · | expansion to new markets and new locations; and |
| · | increases in infrastructure costs, including those costs associated with the build-out of new concession locations and renovating existing concession locations.
|
XpresSpa’s operating results may fluctuate significantly as a result of the factors discussed above. Accordingly, results for any period are not necessarily indicative of results to be expected for any other period or for any year.
XpresSpa’s expansion into new airports or off-airport locations may present increased risks due to its unfamiliarity with those areas.
XpresSpa’s growth strategy depends upon expanding into markets where it has little or no meaningful operating experience. Those locations may have demographic characteristics, consumer tastes and discretionary spending patterns that are different from those in the markets where its existing operations are located. As a result, new airport terminal and/or off-airport operations may be less successful than existing concession locations in current airport terminals. XpresSpa may find it more difficult in new markets to hire, motivate and keep qualified employees who can project its vision, passion and culture. XpresSpa may also be unfamiliar with local laws, regulations and administrative procedures, including the procurement of spa services retail licenses, in new markets which could delay the build-out of new concession locations and prevent it from achieving its target revenues on a timely basis. Operations in new markets may also have lower average revenues or enplanements than in the markets where XpresSpa currently operates. Operations in new markets may also take longer to ramp up and reach expected sales and profit levels, and may never do so, thereby negatively affecting XpresSpa’s results of operations.
XpresSpa’s growth strategy is highly dependent on its ability to successfully identify and open new XpresSpa locations.
XpresSpa’s growth strategy primarily contemplates expansion through procuring new XpresSpa locations and opening new XpresSpa stores and kiosks. Implementing this strategy depends on XpresSpa’s ability to successfully identify new store locations. XpresSpa will also need to assess and mitigate the risk of any new store locations, to open the stores on favorable terms and to successfully integrate their operations with ours. XpresSpa may not be able to successfully identify opportunities that meet these criteria, or, if it does, XpresSpa may not be able to successfully negotiate and open new stores on a timely basis. If XpresSpa is unable to identify and open new locations in accordance with its operating plan, XpresSpa’s revenue growth rate and financial performance may fall short of our expectations.
Our profitability depends on the number of airline passengers in the terminals in which we have concessions. Changes by airport authorities or airlines that lower the number of airline passengers in any of these terminals could affect our business, financial condition and results of operations.
The number of airline passengers that visit the terminals in which we have concessions is dependent in part on decisions made by airlines and airport authorities relating to flight arrivals and departures. A decrease in the number of flights and resulting decrease in airline passengers could result in fewer sales, which could lower our profitability and negatively impact our business, financial condition and results of operations. Concession agreements generally provide for a minimum annual guaranteed payment (“MAG”) payable to the airport authority or landlord regardless of the amount of sales at the concession. Currently, the majority of our concession agreements provide for a MAG that is either a fixed dollar amount or an amount that is variable based upon the number of travelers using the airport or other location, retail space used, estimated sales, past results or other metrics. If there are fewer airline passengers than expected or if there is a decline in the sales per airline passenger at these facilities, we will nonetheless be required to pay the MAG or fixed rent and our business, financial condition and results of operations may be materially adversely affected. Furthermore, the exit of an airline from a market or the bankruptcy of an airline could reduce the number of airline passengers in a terminal or airport where we operate and have a material adverse impact on our business, financial condition and results of operations. The effect that these factors would have on our business depends on their magnitude and duration, and a reduction in airline passenger numbers will result in a decrease in our sales and may have a materially adverse impact on our business, financial condition and results of operations. We rely on a limited number of distributors and suppliers for certain of our products, and events outside our control may disrupt our supply chain, which could result in an inability to perform our obligations under our concession agreements and ultimately cause us to lose our concessions. We rely on a small number of suppliers for our products. As a result, these distributors may have increased bargaining power and we may be required to accept less favorable purchasing terms. In the event of a dispute with a supplier or distributor, the delivery of a significant amount of merchandise may be delayed or cancelled, or we may be forced to purchase merchandise from other suppliers on less favorable terms. Such events could cause turnover to fall or costs to increase, adversely affecting our business, financial condition and results of operations. In particular, we have publicized our sale of certain brands of products in our stores – our failure to sell these brands may adversely affect our business. Further, damage or disruption to our supply chain due to any of the following could impair our ability to sell our products: adverse weather conditions or natural disaster, government action, fire, terrorism, cyber-attacks, the outbreak or escalation of armed hostilities (such as the Russian invasion of Ukraine), pandemics, industrial accidents or other occupational health and safety issues, strikes and other labor disputes, customs or import restrictions or other reasons beyond our control or the control of our suppliers and business partners. Failure to take adequate steps to mitigate the likelihood or potential impact of such events, or to effectively manage such events if they occur, could adversely affect our business, financial condition and results of operations, as well as require additional resources to restore our supply chain. Our operating results may fluctuate significantly due to certain factors, some of which are beyond our control. XpresSpa’s operating results may fluctuate from period to period significantly because of several factors, including: | ● | the timing and size of new unit openings, particularly the launch of new terminals; |
| ● | passenger traffic and seasonality of air travel; |
| ● | changes in the price and availability of supplies; |
| ● | macroeconomic conditions, nationally locally and internationally; |
| ● | changes in consumer preferences and competitive conditions; |
| ● | expansion to new markets and new locations; and |
| ● | increases in infrastructure costs, including those costs associated with the build-out of new concession locations and renovating existing concession locations. |
XpresSpa’s operating results may fluctuate significantly as a result of the factors discussed above. Accordingly, results for any period are not necessarily indicative of results to be expected for any other period or for any year. Our expansion into new airports or off-airport locations, and to the online marketplace, may present increased risks due to its unfamiliarity with those areas. XpresSpa’s growth strategy depends upon transitioning to our travel health and wellness concept, which will expanding into markets (including an online presence) where have little or no meaningful operating experience, as well as managing our XpresCheck Wellness Center growth. Those markets and locations may have demographic characteristics, consumer tastes and discretionary spending patterns that are different from those in the markets where our existing spa and testing operations are located. As a result, new airport terminal and/or off-airport operations may be less successful than existing concession locations in current airport terminals. XpresSpa may find it more difficult in new markets to hire, motivate and keep qualified employees who can project its vision, passion and culture. XpresSpa may also be unfamiliar with local laws, regulations and administrative procedures, including the procurement of spa services retail licenses, in new markets which could delay the build-out of new concession locations and prevent it from achieving its target revenues on a timely basis. Operations in new markets may also have lower average revenues or enplanements than in the markets where XpresSpa currently operates. Operations in new markets may also take longer to ramp up and reach expected sales and profit levels, and may never do so, thereby negatively affecting XpresSpa’s results of operations. Our growth strategy is dependent in part on our ability to successfully identify and open new locations. Implementing the part of our strategy relating to our travel health and wellness concept depends on our ability to successfully identify new locations. We will also need to assess and mitigate the risk of any new locations, to open the location 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 locations on a timely basis. If we are unable to identify and open new locations in accordance with its operating plan, our revenue growth rate and financial performance may fall short of our expectations. Our profitability relating to our operations depends on the number of airline passengers in the terminals in which we have concessions. Changes by airport authorities or airlines that lower the number of airline passengers in any of these terminals could affect our business, financial condition and results of operations. The number of airline passengers that visit the terminals in which we have concessions is dependent in part on decisions made by airlines and airport authorities relating to flight arrivals and departures. A decrease in the number of flights and resulting decrease in airline passengers could result in fewer sales, which could lower our profitability and negatively impact our business, financial condition and results of operations. Concession agreements generally provide for a minimum annual guaranteed payment (“MAG”) payable to the airport authority or landlord regardless of the amount of sales at the concession. Currently, the majority of our concession agreements provide for a MAG that is either a fixed dollar amount or an amount that is variable based upon the number of travelers using the airport or other location, retail space used, estimated sales, past results or other metrics. If there are fewer airline passengers than expected or if there is a decline in the sales per airline passenger at these facilities, we will nonetheless be required to pay the MAG or fixed rent and our business, financial condition and results of operations may be materially adversely affected. Furthermore, the exit of an airline from a market or the bankruptcy of an airline could reduce the number of airline passengers in a terminal or airport where we operate and have a material adverse impact on our business, financial condition and results of operations. We may not be able to execute our growth strategy to expand and integrate new concessions, our recently acquired entity or future acquisitions into our business or remodel existing concessions. Any new concessions, future acquisitions or remodeling of existing concessions may divert management resources, result in unanticipated costs, or dilute the ownership of our stockholders.
Part of our growth strategy is to expand and remodel our existing facilities and to seek new concessions through tenders, direct negotiations or other acquisition opportunities. In this regard, our future growth will depend upon a number of factors, such as our ability to identify any such opportunities, structure a competitive proposal and obtain required financing and consummate an offer. Our growth strategy will also depend on factors that may not be within our control, such as the timing of any concession or acquisition opportunity. We must also strategically identify which airport terminals and concession agreements to target based on numerous factors, such as airline passenger numbers, airport size, the type, location and quality of available concession space, level of anticipated competition within the terminal, potential future growth within the airport and terminal, rental structure, financial return and regulatory requirements. We cannot provide assurance that this strategy will be successful. In addition, we may encounter difficulties integrating expanded or new concessions or any acquisitions.acquisitions, including our recent acquisition of HyperPointe. Such expanded or new concessions or acquisitions, including HyperPointe, may not achieve anticipated turnover and earnings growth or synergies and cost savings. Delays in the commencement of new projects and the refurbishment of concessions can also affect our business. In addition, we will expend resources to remodel our concessions and may not be able to recoup these investments. A failure to grow successfully may materially adversely affect our business, financial condition and results of operations.
In particular, new concessions and acquisitions, our recent acquisition of HyperPointe, and in some cases future expansions and remodeling of existing concessions, could pose numerous risks to our operations, including that we may: | ·● | have difficulty integrating operations or personnel; for example, HyperPointe has a number of contractual arrangements with pharmaceutical companies; however, we historically do not have experience in that business line.; |
| ·● | incur substantial unanticipated integration costs; |
| ·● | experience unexpected construction and development costs and project delays; |
| ·
● | face difficulties associated with securing required governmental approvals, permits and licenses (including construction permits) in a timely manner and responding effectively to any changes in federal, state or local laws and regulations that adversely affect our costs or ability to open new concessions; |
| ·● | have challenges identifying and engaging local business partners to meet ACDBEAirport Concession Disadvantaged Business Enterprise ("ACDBE") requirements in concession agreements; |
| ·● | not be able to obtain construction materials or labor at acceptable costs; |
| ·● | face engineering or environmental problems associated with our new and existing facilities; |
| ·● | experience significant diversion of management attention and financial resources from our existing operations in order to integrate expanded, new or acquired businesses, which could disrupt our ongoing business; |
| ·● | lose key employees, particularly with respect to acquired or new operations; |
| ·● | have difficulty retaining or developing acquired or new business customers; |
| ·● | impair our existing business relationships with suppliers or other third parties as a result of acquisitions; |
| ·● | fail to realize the potential cost savings or other financial benefits and/or the strategic benefits of acquisitions, new concessions or remodeling; and |
| ·● | incur liabilities from the acquired businesses and we may not be successful in seeking indemnification for such liabilities. |
In connection with acquisitions or other similar investments, we could incur debt or amortization expenses related to intangible assets, suffer asset impairments, assume liabilities or issue stock that would dilute the percentage of ownership of our then-current stockholders. We may not be able to complete acquisitions or integrate the operations, products, technologies or personnel gained through any such acquisition, which may have a materially adverse impact on our business, financial condition and results of operations. If the estimates and assumptions we use to determine the size of our market are inaccurate, our future growth rate may be impacted. Market opportunity estimates and growth forecasts are subject to uncertainty and are based on assumptions and estimates that may not prove to be accurate. The estimates and forecasts in this annual reportAnnual Report on Form 10-K relating to the size and expected growthreemergence of the travel retail market may prove to be inaccurate. Even if the market in which we compete meets our size estimates and forecasted growth,rate of return to normalized travel activity, our business could fail to reemerge or grow at similar rates, if at all. The principal assumptions relating to our market opportunity include projected reemergence and growth in the travel retail market and our share of the market. If these assumptions prove inaccurate, our business, financial condition and results of operations could be adversely affected. Our business requires substantial capital expenditures and we may not have access to the capital required to maintain and grow our operations.
Maintaining and expanding our operations in our existing and new retail locations is capital intensive. Specifically, the construction, redesign and maintenance of our retail space in airport terminals where we operate, technology costs, and compliance with applicable laws and regulations require substantial capital expenditures. We may require additional capital in the future to fund our operations and respond to potential strategic opportunities, such as investments, acquisitions and expansions.
We must continue to invest capital to maintain or to improve the success of our concessions and to meet refurbishment requirements in our concessions. Decisions to expand into new terminals could also affect our capital needs. Our actual capital expenditures in any year will vary depending on, among other things, the extent to which we are successful in renewing existing concessions and winning additional concession agreements.
We cannot provide assurance that we will be able to maintain our operating performance, generate sufficient cash flow, or have access to sufficient financing to continue our operations and development activities at or above our present levels, and we may be required to defer all or a portion of our capital expenditures. Our business, financial condition and results of operations may be materially adversely affected if we cannot make such capital expenditures.
XpresSpa currently reliesrely on a skilled, licensed labor force to provide spaour services, and the supply of this labor force is finite. If XpresSpawe cannot hire adequate staff for itsour locations, itwe will not be able to operate.
As of March 15, 2018,2022, XpresSpa had 697approximately 363 full-time and 14866 part-time employees in its locations. Excluding some dedicated retail staff, the majority of these employees are licensed to perform spa services, and hold such licenses as masseuses, nail technicians, aestheticians, barbers and master barbers. The demand for these licensed technicians has been increasing as more consumers gravitate to health and wellness treatments such as spa services. XpresSpa competes not only with other airport-based spa companies but with spa companies outside of the airport for this skilled labor force. In addition, all staff hired by XpresSpa must pass the background checks and security clearances necessary to work in airport locations. If XpresSpa is unable to attract and retain qualified staff to work in its airport locations, its ability to operate will be impacted negatively. In addition, our XpresCheck business and new health and wellness concept may also require licensed professionals, and we may not have access to those professionals on a cost-effective basis, or at all. Effective March 24, 2020, we temporarily closed all global locations and furloughed the majority of our XpresSpa employees in connection with the outbreak of COVID-19. As restrictions are lifted, we will continue to evaluate reinstating the furloughed employees, but there can be no assurances that such employees will return to our locations in a timely manner or at all.
Our business is subject to various laws and regulations, and changes in such laws and regulations, or failure to comply with existing or future laws and regulations, could adversely affect us. We are subject to various laws and regulations in the United States, Netherlands, Turkiye, and United Arab Emirates that affect the operation of our concessions. The impact of current laws and regulations, the effect of changes in laws or regulations that impose additional requirements and the consequences of litigation relating to current or future laws and regulations, or our inability to respond effectively to significant regulatory or public policy issues, could increase our compliance and other costs of doing business and, therefore, have an adverse impact on our results of operations. Failure to comply with the laws and regulatory requirements of governmental authorities could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability. In addition, certain laws may require us to expend significant funds to make modifications to our concessions in order to comply with applicable standards. Compliance with such laws and regulations can be costly and can increase our exposure to litigation or governmental investigations or proceedings. XpresSpa’sOur labor force could unionize, putting upward pressure on labor costs.
Currently, XpresSpa stores in two airports have a labor force which is unionized. Major players in labor organization, and in particular “Unite Here!” which represents approximately 45,000 employees in the airport concessions and airline catering industries, could target XpresSpa locations for its unionization efforts. In the event of the successful unionization of all of XpresSpa’s labor force, XpresSpa would likely incur additional costs in the form of higher wages, more benefits such as vacation and sick leave, and potentially also higher health care insurance costs. XpresSpa competesWe compete for new locations in airports and may not be able to secure new locations.
XpresSpa participatesWe participate in the highly competitive and lucrative airport concessions industry, and as a result competescompete for retail leases with a variety of larger, better capitalized concessions companies as well as smaller, mid-tier and single unit operators. Frequently, an airport includes a spaonly one similar travel health and wellness concept per terminal within its retail product setoffering and, in those instances, XpresSpa competeswe compete primarily with BeRelax, Terminal Getaway, Massage Bar and 10 Minute Manicure.these other concessionaires. Moreover, our contractual arrangement with the CDC involves a long request for proposal process, which could further delay or harm our ability to obtain leases on a timely basis or at all.
We may not be able to predict accurately or fulfill customer preferences or demands. We derive a significant amount of our revenue from the sale of massage, cosmetic and luxury products which are subject to rapidly changing customer tastes. The availability of new products and changes in customer preferences has made it more difficult to predict sales demand for these types of products accurately. Our success depends in part on our ability to predict and respond to quickly changing consumer demands and preferences, and to translate market trends into appropriate merchandise offerings. Additionally, due to our limited sales space relative to other retailers, the proper selection of salable merchandise is an important factor in revenue generation. We cannot provide assurance that our merchandise selection will correspond to actual sales demand. If we are unable to predict or rapidly respond to sales demand or to changing styles or trends, or if we experience inventory shortfalls on popular merchandise, our revenue may be lower, which could have a materially adverse impact on our business, financial condition and results of operations. XpresSpa’sOur leases may be terminated, either for convenience by the landlord or as a result of an XpresSpa default.
XpresSpa has store locations and kiosks in a number of airports in which the landlord, with prior written notice to XpresSpa, can terminate XpresSpa’s lease, including for convenience or as necessary for airport purposes or operations. If a landlord elects to terminate a lease at an airport, XpresSpa may have to shut down one or more store locations at that airport. In addition, we have received rent concessions from landlords on a majority of our airport location leases relating to our temporary closures in response to the ongoing COVID-19 pandemic, allowing for the relief of minimum guaranteed payments in exchange for percentage-of-revenue rent or providing relief from rent through payment deferrals. These deferrals may lapse or expire with respect to any particular spa location before we believe it makes economic sense to reopen that location, in which case the landlord may decide to terminate the lease for that location if we do not agree to reopen it. Additionally, XpresSpa leases have numerous provisions governing the operation of XpresSpa’s stores. Violation of one or more of these provisions, even unintentionally, may result in the landlord finding that XpresSpa is in default of the lease. Violation of lease provisions may result in fines and, in some cases, termination of a lease. XpresSpa’sOur ability to operate depends on the traffic patterns of the terminals in which it operates,we operate, and the cessation or disruption of air traveler traffic in these terminals would negatively impact XpresSpa’s addressable market.
XpresSpa depends on a high volume of air travelers in its terminals. It is possible that a terminal in which XpresSpa operates could become subject to a lower volume of air travelers, which would significantly impact traffic near and around XpresSpa locations and therefore its total addressable market. Lower volume in a terminal could be caused by:
| ·● | terminal construction that results in the temporary or permanent closure of a unit, or adversely impacts the volume or pattern of traffic flows within an airport; |
| ·● | an airline utilizing an airport in which XpresSpa operates could abandon that airport or an individual terminal in favor of other airports or terminals, or because it is contracting operations; or |
| ·● | adverse weather conditions could cause damage to the terminal or airport in which XpresSpa operates, resulting in the temporary or permanent closure of a unit. |
We are dependent on our local partners. Our local partners, including our ACDBE partners, maintain ownership interests in certain of our locations. Our participation in these operating entities differs from market to market. While the precise terms of each relationship vary, our local partners may have control over certain portions of the operations of these concessions. The stores are operated pursuant to the applicable joint venture agreement governing the relationship between us and our local partner. Generally, these agreements also provide that strategic decisions are to be made by a committee comprised of us and our local partner. These concessions involve risks that are different from the risks involved in operating a concession independently, and include the possibility that our local partners: | ·● | are in a position to take action contrary to our instructions, our requests, our policies, our objectives or applicable laws; |
| ·● | take actions that reduce our return on investment; |
| ·● | go bankrupt or are otherwise unable to meet their capital contribution obligations; |
| ·● | have economic or business interests or goals that are or become inconsistent with our business interests or goals; or |
| ·● | take actions that harm our reputation or restrict our ability to run our business. |
Failure to comply with minimum airport concession disadvantaged business enterprise participation goals and requirements could lead to lost business opportunities or the loss of existing business. Pursuant to ACDBE participation requirements, XpresSpa is often required to meet, or use good faith efforts to meet, certain minimum ACDBE participation requirements when bidding on or submitting proposals for new concession contracts. If XpresSpa is unable to find and/or partner with an appropriate ACDBE, XpresSpa may lose opportunities to open new locations. In addition, a number of XpresSpa’s existing leases contain minimum ACDBE participation requirements which require the ACDBE to own a significant portion of the business being operated under those leases. The level of ACDBE participation requirements may affect XpresSpa’s profitability and/or its ability to meet financial forecasts. Further, if XpresSpa fails to comply with the minimum ACDBE participation requirements, XpresSpa may be held responsible for a breach of contract, which could result in the termination of a lease and impairment of XpresSpa’s ability to bid on or obtain future concession contracts. To the extent that XpresSpa leases are terminated and XpresSpa is required to shut down one or more store locations, there could be a material adverse impact to its business and results of operations.
Continued minimum wage increases wouldcould negatively impact XpresSpa’sour cost of labor. XpresSpa compensates its licensed technicians via a formula that includes commissions. As a result, anAn increase in the minimum wage wouldcould increase XpresSpa’s cost of labor and have an adverse impact on our business, financial condition and results of operations.
Our business and financial condition could be constrained by XpresSpa’s outstanding debt.
XpresSpa is obligated under the Senior Secured Note payable to Rockmore Investment Master Fund Ltd. (“Rockmore”), a related party, which has an outstanding balance of approximately $6,500,000, with a maturity date of May 1, 2019. The Senior Secured Note accrues interest of 11.24% per annum. XpresSpa has granted Rockmore a security interest in all of its tangible and intangible personal property to secure its obligations under the Senior Secured Note. The Senior Secured Note is an outstanding obligation of XpresSpa but is guaranteed by us.
Information technology systems failure or disruption, or changes to information technology related to payment systems, could impact our day-to-day operations. Our information technology systems are used to record and process transactions at our point-of-sale interfaces and to manage our operations. These systems provide information regarding most aspects of our financial and operational performance, statistical data about our customers, our sales transactions and our inventory management. Fire, natural disasters, power-loss, telecommunications failure, break-ins, terrorist attacks (including cyber-attacks), computer viruses, electronic intrusion attempts from both external and internal sources and similar events or disruptions may damage or impact our information technology systems at any time. These events could cause system interruption, delays or loss of critical data and could disrupt our acceptance and fulfillment of customer orders, as well as disrupt our operations and management. For example, although our point-of-sales systems are programmed to operate and process customer orders independently from the availability of our central data systems and even of the network, if a problem were to disable electronic payment systems in our stores, credit card payments would need to be processed manually, which could result in fewer transactions. Significant disruption to systems could have a material adverse impact on our business, financial condition and results of operations. We also continually enhance or modify the technology used for our operations. We cannot be sure that any enhancements or other modifications we make to our operations will achieve the intended results or otherwise be of value to our customers. Future enhancements and modifications to our technology could consume considerable resources. We may be required to enhance our payment systems with new technology, which could require significant expenditures. If we are unable to maintain and enhance our technology to process transactions, we may experience a materially adverse impact on our business, financial condition and results of operations. If XpresSpa iswe are unable to protect itsour customers’ credit card data and other personal information, XpresSpawe could be exposed to data loss, litigation and liability, and itsour reputation could be significantly harmed. Privacy protection is increasingly demanding, and the use of electronic payment methods and collection of other personal information, including order history, travel history and other preferences, exposes XpresSpa to increased risk of privacy and/or security breaches as well as other risks. The majority of XpresSpa’s sales are by credit or debit cards. Additionally, XpresSpa collects and stores personal information from individuals, including its customers and employees. In the future, XpresSpa may experience security breaches in which credit and debit card information or other personal information is stolen. Although XpresSpa uses secure private networks to transmit confidential information, third parties may have the technology or know-how to breach the security of the customer information transmitted in connection with credit and debit card sales, and its security measures and those of technology vendors may not effectively prohibit others from obtaining improper access to this information. The techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and are often difficult to detect for long periods of time, which may cause a breach to go undetected for an extensive period of time. Advances in computer and software capabilities, new tools, and other developments may increase the risk of such a breach. Further, the systems currently used for transmission and approval of electronic payment transactions, and the technology utilized in electronic payments themselves, all of which can put electronic payment at risk, are determined and controlled by the payment card industry, not by XpresSpa. In addition, contractors, or third parties with whom XpresSpa does business or to whom XpresSpa outsources business operations may attempt to circumvent its security measures in order to misappropriate such information and may purposefully or inadvertently cause a breach involving such information. If a person is able to circumvent XpresSpa’s security measures or those of third parties, he or she could destroy or steal valuable information or disrupt XpresSpa’s operations. XpresSpa may become subject to claims for purportedly fraudulent transactions arising out of the actual or alleged theft of credit or debit card information, and XpresSpa may also be subject to lawsuits or other proceedings relating to these types of incidents. Any such claim or proceeding could cause XpresSpa to incur significant unplanned expenses, which could have an adverse effect on its business or results of operations. Further, adverse publicity resulting from these allegations could significantly harm its reputation and may have a material adverse effect on it. Although XpresSpa carries cyber liability insurance to protect against these risks, there can be no assurance that such insurance will provide adequate levels of coverage against all potential claims.
Negative social media regarding XpresSpa could result in decreased revenues and impact XpresSpa’s ability to recruit workers. XpresSpa’s affinity among consumers is highly dependent on their positive feelings about the brand, its customer service and the range and quality of services and products that it offers. A negative customer experience that is posted to social media outlets and is distributed virally could tarnish XpresSpa’s brand and its customers may opt to no longer engage with the brand. XpresSpa employsWe employ people in multiple different jurisdictions, and the employment laws of those jurisdictions are subject to change. In addition, itsour services are regulated through government-issued operating licenses. Noncompliance with applicable laws could result in employee lawsuits or legal action taken by government authorities.
XpresSpa must comply with a variety of employment and business practices laws across the United States, Netherlands and United Arab Emirates. XpresSpa monitors the laws governing its activities, but in the event it does not become aware of a new regulation or fails to comply with a regulation, it could be subject to disciplinary action by governing bodies and potentially employee lawsuits. XpresSpa is not currently cash flow positiveWe source, develop and will depend on funding to open new locations. In the event that capital is unavailable, XpresSpa will not be able to open new locations.
Throughout its operating history, XpresSpa has not generated sufficient cash from operations to fund its new store development. As a result, it will be dependent upon additional funding for its new location growth until such time as it can produce enough cash to profitably fund its own location growth.
XpresSpa sources, develops and sellssell products that may result in product liability defense costs and product liability payments.
The ingredients in XpresSpa’s products contain ingredients that are deemed to be safe by the United States Federal Drug Administration and the Federal Food, Drug and Cosmetics Act. However, there is no guarantee that these ingredients will not cause adverse health effects to some consumers given the wide range of ingredients and allergies amongst the general population. XpresSpa may face substantial product liability exposure for products it sells to the general public or that is uses in its services. Product liability claims, regardless of their merits, could be costly and divert management’s attention, and adversely affect XpresSpa’s reputation and the demand for its products and services. XpresSpa to date has not been named as a defendant in any product liability action.
We have commenced legal proceedings and/or licensing discussions with security, content distribution and/or telecommunications companies. We expect that licensing discussions may be time consuming and may either, absent any litigation we initiate, fail to lead to a license, or may result in litigations commenced by the potential licensee. To license or otherwise monetize the patent assets that we own, we have commenced legal proceedings and/or attempted to commence licensing discussions with a number of companies, during the course of which we allege that such companies infringe one or more of our patents. The future viability of our licensing program is highly dependent on the outcome of these discussions, and there is a risk that we may be unable to achieve the results we desire from such negotiations and be forced either to accept minimal royalties or commence litigations against the alleged infringer. In addition, the recipients of our licensing overtures have substantially more resources than we do, which could make our licensing efforts more difficult. Furthermore, due to changes in the approach to patent laws around the world it has become much easier for potential licensees to commence proceedings to revoke or otherwise nullify our patents in lieu of engaging in bona fide licensing discussions. There is a real risk that any potential licensee we approach would rather commence proceedings to revoke our patents than engage in any licensing discussions whatsoever. We anticipate that any legal proceedings could continue for several years. While we endeavor, where possible, to engage counsel on a full or partial contingency basis, proceedings may commence that fall outside of contingency arrangements with counsel and may require significant expenditures for legal fees and other expenses. Disputes regarding the assertion of patents and other intellectual property rights are highly complex and technical. Once initiated, we may be forced to litigate against other parties in addition to the originally named defendants. Our adversaries may allege defenses and/or file counterclaims for, among other things, revocation of our patents or file collateral litigations in an effort to avoid or limit liability and damages for patent infringement. If such actions by our adversaries are successful, they may preclude our ability to derive licensing revenue from the patents being asserted. There is a risk that we may be unable to achieve the results we desire from such litigation, which may harm our business. In addition, the defendants in these litigations have substantially more resources than we do, which could make our litigation efforts more difficult. There is a risk that aA court willmay find our patents invalid, not infringed or unenforceable and/or that the USPTO or other relevant patent offices in various countries willmay either invalidate the patents or materially narrow the scope of their claims during the course of a reexamination, opposition or other such proceeding. In addition, even with a positive trial court verdict, the patents may be invalidated, found not infringed or rendered unenforceable on appeal. This risk may occur either presently or from time to time in connection with future litigations we may bring.
Patent litigation is inherently risky, and the outcome is uncertain. Some of the parties that we believe infringe on our patents are large and well-financed by companies with substantially greater resources than ours. We believe that these parties may devote a substantial amount of resources in an attempt to avoid or limit a finding that they are liable for infringing on our patents or, in the event liability is found, to avoid or limit the amount of associated damages. In addition, there is a risk that these parties may file reexaminations or other proceedings with the USPTO or other government agencies in the United States or abroad in an attempt to invalidate, narrow the scope or render unenforceable the patents we own. In addition, as part of our ongoing legal proceedings, the validity and/or enforceability of our patents-in-suit is often challenged in a court or an administrative proceeding. We may not be able to successfully monetize our patents and, thus, we may fail to realize all of the anticipated benefits of acquisitions from third parties.
There is no assurance that we will be able to successfully monetize the patent portfolios that we acquired from third parties. The patents we acquired could fail to produce anticipated benefits or could have other adverse effects that we currently do not foresee.
In addition, the acquisition of a patent portfolio is subject to a number of risks, including, but not limited to the following:
| · | There is a significant time lag between acquiring a patent portfolio and recognizing revenue from those patent assets, if at all. During that time lag, material costs are likely to be incurred that would have a negative effect on our results of operations, cash flows and financial position. |
| · | The integration of a patent portfolio is a time consuming and expensive process that may disrupt our operations. If our integration efforts are not successful, our results of operations could be harmed. In addition, we may not achieve anticipated synergies or other benefits from such acquisition. |
Therefore, there is no assurance that we will be able to monetize an acquired patent portfolio and recoup our investment.
We and our subsidiaries have been, are, and may become involved in litigation that could divert management’s attention and harm our businesses. Litigation often is expensive and diverts management’s attention and resources, which could adversely affect our businesses. We may be exposed to claims against us even if no wrongdoing has occurred. Responding to such claims, regardless of their merit, can be time-consuming,time consuming, costly to defend, disruptive to our management’s attention and to our resources, damaging to our reputation and brand, and may cause us to incur significant expenses. Even if we are indemnified against such costs, the indemnifying party may be unable to uphold its contractual obligations. New legislation, regulations or court rulings related to enforcing patents could harm our business and operating results. Intellectual property is the subject of intense scrutiny by the courts, legislatures and executive branches of governments around the world. Various patent offices, governments or intergovernmental bodies may implement new legislation, regulations or rulings that impact the patent enforcement process, or the rights of patent holders and such changes could negatively affect licensing efforts and/or litigations. For example, limitations on the ability to bring patent enforcement claims, limitations on potential liability for patent infringement, lower evidentiary standards for invalidating patents, increases in the cost to resolve patent disputes and other similar developments could negatively affect our ability to assert our patent or other intellectual property rights. It is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any of the proposals will become enacted as laws. Compliance with any new or existing laws or regulations could be difficult and expensive, affect the manner in which we conduct our business and negatively impact our business, prospects, financial condition and results of operations. Our failure or inability to protect the trademarks or other proprietary rights we use or claims of infringement by us of rights of third parties, could adversely affect our competitive position or the value of our brands. We believe that our trademarks and other proprietary rights are important to our success and our competitive position. However, any actions that we take to protect the intellectual property we use may not prevent unauthorized use or imitation by others, which could have an adverse impact on our image, brand or competitive position. If we commence litigation to protect our interests or enforce our rights, we could incur significant legal fees. We also cannot provide assurance that third parties will not claim infringement by us of their proprietary rights. Any such claim, whether or not it has merit, could be time consuming and distracting for our management, result in costly litigation, cause changes to existing retail concepts or delays in introducing retail concepts, or require us to enter into royalty or licensing agreements. As a result, any such claim could have a material adverse impact on our business, financial condition and results of operations.
FutureOur recent acquisition of HyperPointe, and any future acquisitions or business opportunities, could involve unknown risks that could harm our business and adversely affect our financial condition and results of operations.
WeIn January 2022, we acquired HyperPointe. In addition, we have in the past, and may in the future, acquire businesses or make investments, directly or indirectly through our subsidiaries, that involve unknown risks, some of which will be particular to the industry in which the investment or acquisition targets operate, including risks in industries with which we are not familiar or experienced. Although we intend to conduct appropriate business, financial and legal due diligence in connection with the evaluation of future investment or acquisition opportunities, there can be no assurance that our due diligence investigations will identify every matter that could have a material adverse effect on us. We may be unable to adequately address the financial, legal and operational risks raised by such investments or acquisitions, especially if we are unfamiliar with the relevant industry. The realization of any unknown risks could expose us to unanticipated costs and liabilities and prevent or limit us from realizing the projected benefits of the investments or acquisitions, which could adversely affect our financial condition, liquidity, results of operations, and trading price.
Laws regulating the corporate practice of medicine could restrict the manner in which we are permitted to conduct our XpresCheck and Treat businesses, and the failure to comply with such laws could subject us to penalties or require a restructuring of our business. In operating our XpresCheck business, we have MSAs with state licensed physicians and nurse practitioners, under which we administer COVID-19 testing options, in 15 locations operating in 12 airports. We also have MSAs for operating our Treat business. Some of the states in which we currently operate this business have laws that prohibit business entities from directly owning physician practices, practicing medicine, employing physicians to practice medicine, exercising control over medical decisions by physicians or engaging in certain arrangements, such as fee-splitting, with physicians (such activities are generally referred to as the “corporate practice of medicine”). In some states these prohibitions are expressly stated in a statute or regulation, while in other states the prohibition is a matter of judicial or regulatory interpretation. Other states in which we may operate in the future may also generally prohibit the corporate practice of medicine. While we endeavor to comply with state corporate practice of medicine laws and regulations as we interpret them in the operation of our XpresCheck and Treat businesses, the laws and regulations in these areas are complex, changing, and often subject to varying interpretations. The interpretation and enforcement of these laws vary significantly from state to state. Penalties for violations of the corporate practice of medicine vary by state and may result in physicians being subject to disciplinary action, as well as to forfeiture of revenue from payors for services rendered. For business entities such as us, violations may also bring both civil and, in more extreme cases, criminal liability for engaging in medical practice without a license. Some of the relevant laws, regulations and agency interpretations in states with corporate practice of medicine restrictions have been subject to limited judicial and regulatory interpretation, and state laws and regulations are subject to change. Regulatory authorities and other parties in some states may assert that our MSAs mean that, through our XpresCheck and Treat businesses, we are engaged in the prohibited corporate practice of medicine. If this were to occur, we could be subject to civil and/or criminal penalties, our MSAs with physicians could be found legally invalid and unenforceable (in whole or in part) or we could be required to restructure our arrangements with physicians, in each case in one or more of the jurisdictions in which we operate. Any of these outcomes may have a material adverse effect on our business, results of operations, financial condition, cash flows in our XpresCheck and Treat businesses and our reputation overall. Risks Related to our Capital Stock Stock prices can be volatile, and this volatility may depress the price of our common stock. The stock market has experienced significant price and volume fluctuations, which have affected the market price of many companies in ways that may have been unrelated to those companies’ operating performance. Furthermore, we believe that our stock price may reflect certain future growth and profitability expectations. If we fail to meet these expectations, then our stock price may significantly decline, which could have an adverse impact on investor confidence. We believe that various factors may cause the market price of our common stock to fluctuate, perhaps substantially, including, among others, the following: | ● | the effects that COVID-19 might have on our results of operations and financial position; |
| ● | additions to or departures of our key personnel; |
| ● | announcements of innovations by us or our competitors; |
| ● | announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, capital commitments, or new technologies; |
| ● | new regulatory pronouncements and changes in regulatory guidelines; |
| ● | developments or disputes concerning our patents and efforts in licensing and/or enforcing our patents; |
| ● | lawsuits, claims, and investigations that may be filed against us, and other events that may adversely affect our reputation; |
| ● | changes in financial estimates or recommendations by securities analysts; and |
| ● | general and industry-specific economic conditions. |
Our ability to raise additional capital through equity offerings is constrained due to relatively few authorized shares available for future issuance. Our ability to raise additional equity capital is currently constrained because we have relatively few authorized shares of common stock that are not issued and outstanding or reserved for future issuance, and we may need to increase our authorized shares or undertake a reverse stock split in the near future to maintain our flexibility in access the equity capital markets. If we are unable to obtain additional funding on a timely basis, we may be required to curtail or terminate some or all of our business plans. Any such financing that we undertake will likely be dilutive to our current stockholders. The exercise of a substantial number of warrants or options by our security holders may have an adverse effect on the market price of our common stock. Should our warrants and options outstanding as of March 28, 2022 be exercised, there would be an additional 28,292,472 shares of common stock eligible for trading in the public market. The incentive equity instruments granted to our management, employees, directors and consultants are subject to acceleration of vesting of 75% and 100% (according to the agreement signed with each grantee) upon a subsequent change of control. Such securities, if exercised, will increase the number of issued and outstanding shares of our common stock. Therefore, the sale of the shares of common stock underlying the warrants and options could have an adverse effect on the market price for our securities and/or on our ability to obtain future financing. We have no current plans to pay dividends on our common stock, and our investors may not receive funds without selling their stock. We have not declared or paid any cash dividends on our common stock, nor do we expect to pay any cash dividends on our common stock for the foreseeable future. Investors seeking cash dividends should not invest in our common stock for that purpose. We currently intend to retain any additional future earnings to finance our operations and growth and, therefore, we have no plans to pay cash dividends on our common stock at this time. Any future determination to pay cash dividends on our common stock will be at the discretion of our Board of Directors and will be dependent on our earnings, financial condition, operating results, capital requirements, any contractual restrictions, and other factors that our Board of Directors deems relevant. Accordingly, our investors may have to sell some or all of their common stock in order to generate cash from their investment. You may not receive a gain on your investment when you sell our common stock and may lose the entire amount of your investment. The market price of our common stock historically has been and likely will continue to be highly volatile. The market price for our shares of common stock historically has been highly volatile, and the market for our shares has from time-to-time experienced significant price and volume fluctuations, based both on our operating performance and for reasons that appear to be unrelated to our operating performance. The market price of our shares of common stock may fluctuate significantly in response to a number of factors, including: | ● | the continuing impact of COVID-19 on our business, financial condition, results of operations and cash flows; |
| ● | the level of our financial resources; |
| ● | our ability to develop and introduce new products and services; |
| ● | developments concerning our intellectual property rights generally or those of us or our competitors; |
| ● | our ability to raise additional capital to fund our operations and business plan and the effects that such financing may have on the value of the equity instruments held by our stockholders; |
| ● | our ability to retain key personnel; |
| ● | general economic conditions and level of consumer and corporate spending on health and wellness, and travel; |
| ● | our ability to hire a skilled labor force and the costs associated; |
| ● | our ability to secure new retail locations, maintain existing ones, and ensure continued customer traffic at those locations; |
| ● | changes in securities analysts’ estimates of our financial performance or deviations in our business and the trading price of our common stock from the estimates of securities analysts; |
| ● | our ability to protect our customers’ financial data and other personal information; |
| ● | the loss of one or more of our significant suppliers; |
| ● | unexpected trends in the health and wellness and travel industries and potential technology and service obsolescence; |
| ● | market acceptance, quality, pricing, availability and useful life of our products and/or services, as well as the mix of our products and services sold; and |
| ● | lawsuits, claims, and investigations that may be filed against us and other events that may adversely affect our reputation. |
Our failure to meet the continued listing requirements of The Nasdaq Capital Market could result in a delisting of our common stock. The continued listing standards of Nasdaq provide, among other things, that a company may be delisted if the bid price of its stock drops below $1.00 for a period of 30 consecutive business days or if stockholders’ equity is less than $2,500,000. On January 2, 2020, we received a deficiency letter from The Nasdaq Stock Market which indicated that we were not in compliance with the minimum bid price requirement. Although we were able to regain compliance by the applicable deadline, our stock price may fall below the minimum bid price in the future and we may be unable to regain compliance. Additionally, if we fail to comply with any other continued listing standards of Nasdaq, our common stock would also be subject to delisting. If that were to occur, our common stock would be subject to rules that impose additional sales practice requirements on broker-dealers who sell our securities. The additional burdens imposed upon broker-dealers by these requirements could discourage broker-dealers from effecting transactions in our common stock. This would significantly and negatively affect the ability of investors to trade our securities and would significantly and negatively affect the value and liquidity of our common stock. These factors could contribute to lower prices and larger spreads in the bid and ask prices for our common stock. Delisting of our common stock also would likely have a negative effect on the price of our common stock and would impair your ability to sell or purchase our common stock when you wish to do so. Further, if we were to be delisted from The Nasdaq Capital Market, our common stock would cease to be recognized as covered securities and we would be subject to regulation in each state in which we offer our securities. If we seek to implement a reverse stock split in order to remain listed on The Nasdaq Capital Market, the announcement and/or implementation of a reverse stock split could significantly negatively affect the price of our common stock. Delisting from Nasdaq could adversely affect our ability to raise additional financing through the public or private sale of equity securities, would significantly affect the ability of investors to trade our securities and would negatively affect the value and liquidity of our common stock. Delisting could also have other negative results, including the potential loss of confidence by employees, the loss of institutional investor interest and fewer business development opportunities. Our common stock has historically traded in low volumes. We cannot predict whether an active trading market for our common stock will ever develop. Even if an active trading market develops, the market price of our common stock may be significantly volatile. Historically, our common stock has experienced a lack of consistent trading liquidity. In the absence of an active trading market you may have difficulty buying and selling our common stock at all or at the price you consider reasonable; and market visibility for shares of our common stock may be limited, which may have a depressive effect on the market price for shares of our common stock and on our ability to raise capital or make acquisitions by issuing our common stock. Anti-takeover provisions of Delaware law, provisions in our charter and bylaws, and our stockholder rights plan could prevent or frustrate attempts by stockholders to change our Board of Directors or current management and could delay, discourage or make more difficult a third-party acquisition of control of us. We are a Delaware corporation and, as such, certain provisions of Delaware law could prevent or frustrate attempts by stockholders to change the Board of Directors or current management, or could delay, discourage or make more difficult a third-party acquisition of control of us, even if the change in control would be beneficial to stockholders or the stockholders regard it as such. We are subject to the provisions of Section 203 of the Delaware General Corporation Law (“DGCL”), which prohibits certain “business combination” transactions (as defined in Section 203) with an “interested stockholder” (defined in Section 203 as a 15% or greater stockholder) for a period of three years after a stockholder becomes an “interested stockholder,” unless the attaining of “interested stockholder” status or the transaction is pre-approved by our Board of Directors, the transaction results in the attainment of at least an 85% ownership level by an acquirer or the transaction is later approved by our Board of Directors and by our stockholders by at least a 66 2/2/3 percent vote of our stockholders other than the “interested stockholder,” each as specifically provided in Section 203. Our certificate of incorporation and our bylaws, each as currently in effect, also contain certain provisions that may delay, discourage or make more difficult a third-party acquisition of control of us. Such provisions include a provision that any vacancies on our Board of Directors may only be filled by a majority of the directors then serving, although not a quorum, and not by the stockholders and the ability of our Board of Directors to issue preferred stock, without stockholder approval, that could dilute the stock ownership of a potential unsolicited acquirer and hinder an acquisition of control of us that is not approved by our Board of Directors, including through the use of preferred stock in connection with a stockholder rights plan. We have also adopted a stockholder rights plan in the form of a Section 382 Rights Plan, designed to help protect and preserve our substantial tax attributes primarily associated with our NOLs under Section 382 of the Internal Revenue Code and research tax credits under Sections 382 and 383 of the Internal Revenue Code and related United States Treasury regulations, which was approved by our stockholders in December 2016 and expires in March 2019.2022. Although this is not the purpose of the Section 382 Rights Plan, it could have the effect of making it uneconomical for a third party to acquire us on a hostile basis.
These provisions of the DGCL, our certificate of incorporation and bylaws, and our Section 382 Rights Plan may delay, discourage or make more difficult certain types of transactions in which our stockholders might otherwise receive a premium for their shares over the current market price, and might limit the ability of our stockholders to approve transactions that they think may be in their best interest. Having availed ourselves of scaled disclosure available to smaller reporting companies, we cannot be certain if such reduced disclosure will make our common stock less attractive to investors. Under Section 12b-2 of the Exchange Act, a “smaller reporting company” is a company that is not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent company that is not a smaller reporting company, and has a public float of less than $250 million and annual revenues of less than $100 million during the most recently completed fiscal year. Similar to emerging growth companies, smaller reporting companies are permitted to provide simplified executive compensation disclosure in their filings; they are exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that independent registered public accounting firms provide an attestation report on the effectiveness of internal controls over financial reporting; and they have certain other decreased disclosure obligations in their SEC filings, including, among other things, only being required to provide two years of audited financial statements in annual reports. Decreased disclosure in our SEC filings as a result of our having availed ourselves of scaled disclosure may make it harder for investors to analyze our results of operations and financial prospects. Other Risk Factors Our confidential information may be disclosed by other parties. We routinely enter into non-disclosure agreements with other parties, including but not limited to vendors, law firms, parties with whom we are engaged in negotiations, and employees. However, there exists a risk that those other parties will not honor their contractual obligations to not disclose our confidential information. This may include parties who breach such obligations in the context of confidential settlement offers and/or negotiations. In addition, there exists a risk that, upon such breach and subsequent dissemination of our confidential information, third parties and potential licensees may seek to use such confidential information to their advantage and/or to our disadvantage including in legal proceedings in which we are involved. Our ability to act against such third parties may be limited, as we may not be in privity of contract with such third parties. Risks Related to our Capital Stock
Stock prices can be volatile, and this volatility may depress the price of our common stock.
The stock market has experienced significant price and volume fluctuations, which have affected the market price of many companies in ways that may have been unrelated to those companies’ operating performance. Furthermore, we believe that our stock price may reflect certain future growth and profitability expectations. If we fail to meet these expectations, then our stock price may significantly decline, which could have an adverse impact on investor confidence. We believe that various factors may cause the market price of our common stock to fluctuate, perhaps substantially, including, among others, the following:
| · | additions to or departures of our key personnel; |
| · | announcements of innovations by us or our competitors; |
| · | announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, capital commitments, or new technologies; |
| · | new regulatory pronouncements and changes in regulatory guidelines; |
| · | developments or disputes concerning our patents and efforts in licensing and/or enforcing our patents; |
| · | lawsuits, claims, and investigations that may be filed against us, and other events that may adversely affect our reputation; |
| · | changes in financial estimates or recommendations by securities analysts; and |
| · | general and industry-specific economic conditions. |
Future sales of our shares of common stock by our stockholders could cause the market price of our common stock to drop significantly, even if our business is otherwise performing well.
As of March 15, 2018, we have 26,581,067 shares of common stock issued and outstanding, excluding shares of common stock issuable upon exercise of warrants, options or restricted stock units, or preferred stock on an as-converted basis. As shares saleable under Rule 144 are sold or as restrictions on resale lapse, the market price of our common stock could drop significantly if the holders of shares of restricted stock sell them or are perceived by the market as intending to sell them. This decline in our stock price could occur even if our business is otherwise performing well.
Ownership of our common stock may be highly concentrated, and it may prevent our existing stockholders from influencing significant corporate decisions and may result in conflicts of interest that could cause our stock price to decline.
Our executive officers and directors beneficially own or control approximately 26% of our common stock on a fully diluted basis. Accordingly, these executive officers and directors, acting individually or as a group, have substantial influence over the outcome of a corporate action requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transaction. These stockholders may also exert influence in delaying or preventing a change in control of us, even if such change in control would benefit our other stockholders. In addition, the significant concentration of stock ownership may adversely affect the market value of our common stock due to investors’ perception that conflicts of interest may exist or arise.
The exercise of a substantial number of warrants or options by our security holders may have an adverse effect on the market price of our common stock.
Should our warrants outstanding as of March 15, 2018 be exercised, there would be an additional 3,087,500 shares of common stock eligible for trading in the public market. The incentive equity instruments granted to our management, employees, directors and consultants are subject to acceleration of vesting of 75% and 100% (according to the agreement signed with each grantee) upon a subsequent change of control. Such securities, if exercised, will increase the number of issued and outstanding shares of our common stock. Therefore, the sale of the shares of common stock underlying the warrants and options could have an adverse effect on the market price for our securities and/or on our ability to obtain future financing.
We have no current plans to pay dividends on our common stock, and our investors may not receive funds without selling their common stock.
We have not declared or paid any cash dividends on our common stock, nor do we expect to pay any cash dividends on our common stock for the foreseeable future. Investors seeking cash dividends should not invest in our common stock for that purpose. We currently intend to retain any additional future earnings to finance our operations and growth and, therefore, we have no plans to pay cash dividends on our common stock at this time. Any future determination to pay cash dividends on our common stock will be at the discretion of our Board of Directors and will be dependent on our earnings, financial condition, operating results, capital requirements, any contractual restrictions, and other factors that our Board of Directors deems relevant.
Accordingly, our investors may have to sell some or all of their common stock in order to generate cash from their investment. You may not receive a gain on your investment when you sell our common stock and may lose the entire amount of your investment.
We may fail to meet publicly announced financial guidance or other expectations about our business, which would cause our stock to decline in value. From time to time, we provide preliminary financial results or forward lookingforward-looking financial guidance, to our investors. Such statements are based on our current views, expectations and assumptions that may not prove to be accurate and may vary from actual results and involve known and unknown risks and uncertainties that may cause actual results, performance, achievements or share prices to be materially different from any future results, performance, achievements or share prices expressed or implied by such statements. Such risks and uncertainties include the risk factors contained herein. If we fail to meet our projections and/or other financial guidance for any reason, our stock price could decline. The market price of our common stock historically has been and likely will continue to be highly volatile.
The market price for our shares of common stock historically has been highly volatile, and the market for our shares has from time to time experienced significant price and volume fluctuations, based both on our operating performance and for reasons that appear to us unrelated to our operating performance. The market price of our shares of common stock may fluctuate significantly in response to a number of factors, including:
| · | our ability to realize the expected value and benefits of our recent business and asset acquisitions; |
| · | the level of our financial resources; |
| · | our ability to develop and introduce new products and/or develop intellectual property; |
| · | developments concerning our intellectual property rights generally or those of us or our competitors; |
| · | our ability to raise additional capital to fund our operations and business plan and the effects that such financing may have on the value of the equity instruments held by our stockholders; |
| · | our ability to retain key personnel; |
| · | general economic conditions and level of consumer and corporate spending on technology, consumer electronics, health and wellness, and travel; |
| · | our ability to hire a skilled labor force and the costs associated; |
| · | our ability to secure new retail locations, maintain existing ones, and ensure continued customer traffic at those locations;
|
| · | changes in securities analysts’ estimates of our financial performance or deviations in our business and the trading price of our common stock from the estimates of securities analysts; |
| · | our ability to protect our customers’ financial data and other personal information; |
| · | the loss of one or more of our significant suppliers or vendors; |
| · | unexpected trends in the health and wellness and travel industries and potential technology and service obsolescence; |
| · | market acceptance, quality, pricing, availability and useful life of our products and/or services, as well as the mix of our products and services sold; |
| · | lawsuits, claims, and investigations that may be filed against us and other events that may adversely affect our reputation; and |
| · | our ability to license and monetize our patents, including litigation outcomes. |
Our common stock could be delisted from Nasdaq, which could affect the market price of our common stock and its liquidity. Our listing on Nasdaq is contingent upon meeting all the continued listing requirements of Nasdaq which include maintaining a minimum bid price of not less than $1.00 per share. Nasdaq Listing Rules provide that a failure to meet the minimum bid price requirement exists if the deficiency continues for a period of 30 consecutive business days.
On March 16, 2018, we received written notice from the Listing Qualifications Department of The Nasdaq Stock Market LLC (“Nasdaq”) that for the preceding 30 consecutive business days (February 1, 2018 through March 15, 2018), our common stock did not maintain a minimum closing bid price of $1.00 per share as required by Nasdaq Listing Rule 5550(a)(2). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we were given an initial compliance period of 180 calendar days, or until September 12, 2018, to regain compliance with Nasdaq Listing Rule 5550(a)(2). In addition, compliance can be achieved automatically and without further action if the closing bid price of our common stock is at or above $1.00 for a minimum of ten consecutive business days at any time during the 180-day compliance period, in which case Nasdaq will notify us of our compliance and the matter will be closed.
If our common stock is delisted from Nasdaq, our ability to raise capital in the future may be limited. Delisting could also result in less liquidity for our stockholders and a lower stock price. Such a delisting would likely have a negative effect on the price of our common stock and would impair your ability to sell or purchase our common stock when you wish to do so. In the event of a delisting, we expect to take actions to restore our compliance with Nasdaq’s listing requirements, but we can provide no assurance that any action taken by us would result in our common stock becoming listed again, or that any such action would stabilize the market price or improve the liquidity of our common stock.
Our common stock has traded in low volumes. We cannot predict whether an active trading market for our common stock will ever develop. Even if an active trading market develops, the market price of our common stock may be significantly volatile.
Historically, our common stock has experienced a lack of trading liquidity. In the absence of an active trading market you may have difficulty buying and selling our common stock at all or at the price you consider reasonable; and market visibility for shares of our common stock may be limited, which may have a depressive effect on the market price for shares of our common stock and on our ability to raise capital or make acquisitions by issuing our common stock.
If we raise additional capital in the future, stockholders’ ownership in us could be diluted.
Any issuance of equity we may undertake in the future to raise additional capital could cause the price of our shares to decline or require us to issue shares at a price that is lower than that paid by holders of our shares in the past, which would result in previously issued shares being dilutive. If we obtain funds through a credit facility or through the issuance of debt or preferred securities, these securities would likely have rights senior to rights as a common stockholder, which could impair the value of our shares.
If we exercise the option to repay the preferred stock issued in connection with the merger with XpresSpa (the “Merger”) in stock rather than cash, such repayment may result in the issuance of a large number of shares of common stock which may have a negative effect on the trading price of our common stock as well as a dilutive effect.
Pursuant to the terms of the shares of preferred stock issued in connection with the Merger (the “XSPA Preferred Stock”), on the seven-year anniversary of the initial issuance date of the shares of XSPA Preferred Stock, December 23, 2024, we may repay each share of XSPA Preferred Stock, at our option, in cash, by delivery of shares of common stock or through any combination thereof. If we elect to make a payment, or any portion thereof, in shares of common stock, the number of shares deliverable (the “Base Shares”) will be based on the volume weighted average price per share of our common stock for the thirty trading days prior to the date of calculation (the “Base Price”) plus an additional number of shares of common stock (the “Premium Shares”), calculated as follows: (i) if the Base Price is greater than $9.00, no Premium Shares shall be issued, (ii) if the Base Price is greater than $7.00 and equal to or less than $9.00, an additional number of shares equal to 5% of the Base Shares shall be issued, (iii) if the Base Price is greater than $6.00 and equal to or less than $7.00, an additional number of shares equal to 10% of the Base Shares shall be issued, (iv) if the Base Price is greater than $5.00 and equal to or less than $6.00, an additional number of shares equal to 20% of the Base Shares shall be issued and (v) if the Base Price is less than or equal to $5.00, an additional number of shares equal to 25% of the Base Shares shall be issued. Accordingly, if the volume weighted average price per share of our common stock is below $9.00 per share as of the time of repayment and we exercise the option to make such repayment in shares of our common stock, a large number of shares of our common stock may be issued to the holders of the XSPA Preferred Stock upon maturity which may have a negative effect on the trading price of our common stock. At the seven-year maturity date of the XSPA Preferred Stock (which shall be the date that is seven years from the closing date of the Merger), we, at our election, may decide to issue shares of our common stock based on the formula set forth above or to re-pay in cash all or any portion of the XSPA Preferred Stock.
On December 23, 2023, upon the maturity of the XSPA Preferred Stock, when determining whether to repay the XSPA Preferred Stock in cash or shares of common stock, we expect to consider a number of factors, including our cash position, the price of our common stock and our capital structure at such time. Because we do not have to make a determination as to which option to elect until 2023, it is impossible to predict whether it is more or less likely to repay in cash, stock or a portion of each.
Having availed ourselves of scaled disclosure available to smaller reporting companies, we cannot be certain if such reduced disclosure will make our common stock less attractive to investors.
Under Section 12b-2 of the Exchange Act, a "smaller reporting company" is a company that is not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent company that is not a smaller reporting company, and has a public float of less than $75 million and annual revenues of less than $50 million during the most recently completed fiscal year. Similar to emerging growth companies, smaller reporting companies are permitted to provide simplified executive compensation disclosure in their filings; they are exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that independent registered public accounting firms provide an attestation report on the effectiveness of internal controls over financial reporting; and they have certain other decreased disclosure obligations in their SEC filings, including, among other things, only being required to provide two years of audited financial statements in annual reports. Decreased disclosure in our SEC filings as a result of our having availed ourselves of scaled disclosure may make it harder for investors to analyze our results of operations and financial prospects.
ITEM 1B. UNRESOLVED STAFF COMMENTS Not applicable. ITEM 2. PROPERTIES As of December 31, 2017,2021, besides our Global Support Center to 254 West 31st Street in New York City, XpresSpa Group had 56 company-operated stores52 spa and clinic locations in 24 airports, in the United States, Netherlands and United Arab Emirates. All of the storeslocations as of that date were located in airports and are leased, typically with one or two renewal options after the initial term. Economic terms vary by type and location of store and, on average, the lease terms are 5-8 years. Our New York office, which serves as our corporate office, as well as XpresSpa’s office, is located at 780 Third Avenue, 12th Floor, New York, New York. The annual rental fee for this space is approximately $409,000 and the lease expires in October 2019.years with several stores operating on a month-to-month basis. We believe that our facility is adequate to accommodate our business needs.
ITEM 3. LEGAL PROCEEDINGS Litigation and legal proceedings Wellness
Cordial
Effective October 2014,Certain of our wholly owned-subsidiary, XpresSpa, terminated its former ACDBE partner, Cordial Endeavor Concessionsoutstanding legal matters include speculative claims for substantial or indeterminate amounts of Atlanta, LLC (“Cordial”),damages. We regularly evaluate developments in its Atlanta Terminal A (and future Terminals D, Eour legal matters that could affect the amount of any potential liability and F) store locations.
Cordial filedmake adjustments as appropriate. Significant judgment is required to determine both the likelihood of there being any potential liability and the estimated amount of a seriesloss related to our legal matters.
With respect to our outstanding legal matters, based on our current knowledge, our management believes that the Cityamount or range of Atlanta, both beforea potential loss will not, either individually or in the aggregate, have a material adverse effect on our business, consolidated financial position, results of operations or cash flows. However, the outcome of such legal matters is inherently unpredictable and aftersubject to significant uncertainties. We evaluated the termination,outstanding legal matters and assessed the probability and likelihood of the occurrence of liability. Based on management’s estimates, we have recorded a liability of approximately $0.8 million for all outstanding legal matters as of December 31, 2021 which is included in “Accounts payable, accrued expenses and other current liabilities” in the consolidated balance sheet. Related legal fees are recorded in the period 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.they are incurred. After the termination of the relationship with Cordial, XpresSpa sought to substitute two new ACDBE partners in place of Cordial.
In April 2015, Cordial filed a complaint with the United States Federal Aviation Administration (“FAA”), which oversees the City of Atlanta with regard to airport ACDBE programs, and, in December 2015, the FAA instructed that the City of Atlanta review XpresSpa’s request to substitute new partners in lieu of Cordial and Cordial’s claims of retaliation. In response to the FAA instruction, pursuant to a corrective action plan approved by the FAA, the City of Atlanta held a hearing in February 2016 and ruled in favor of XpresSpa such substitution and claims of retaliation. Cordial submitted a further complaint to the FAA claiming that the City of Atlanta was biased against Cordial and that the City of Atlanta’s decision was wrong. In August 2016, the parties met with the FAA. On October 4, 2016, the FAA sent a letter to the City of Atlanta directing that the City of Atlanta retract previous findings on Cordial’s allegations and engage an independent third party to investigate issues previously decided by Atlanta. The FAA also directed that Atlanta determine monies potentially due to Cordial.
On January 3, 2017, XpresSpa filed a lawsuit in the Supreme Court of the State of New York, County of New York against Cordial and several related parties. The lawsuit alleges breach of contract, unjust enrichment, breach of fiduciary duty, fraudulent inducement, fraudulent concealment, tortious interference, and breach of good faith and fair dealing. XpresSpa is seeking damages, declaratory judgment, rescission/termination of certain agreements, disgorgement of revenue, fees and costs and various other relief. On February 21, 2017, the defendants filed a motion to dismiss. On March 3, 2017, XpresSpa filed a first amended complaint against defendants. On April 5, 2017, Cordial filed a motion to dismiss. On September 12, 2017, the Court held a hearing on the motion to dismiss. On November 2, 2017, the Court granted the motion to dismiss which was entered on November 13, 2017. On December 22, 2017, XpresSpa filed a notice of appeal.
In re Chen et al. In March 2015, four former XpresSpa employees who worked at XpresSpa locations in John F. Kennedy International Airport and LaGuardia Airport filed a putative class and collective action wage-hour litigation in the United States District Court, Eastern District of New York.In re Chen et al., CV 15-1347 (E.D.N.Y.) against the Company and the Company’s founders Moreton and Marisol Binn (the “Binns”). Plaintiffs claimclaimed 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 assertasserted class claims for unpaid overtime on behalf of New York spa technicians under the New York Labor Law, and discriminatory employment practices under New York State and City laws. On July 1, 2015, the plaintiffs moved to have the court authorize notice of the FLSA misclassification claim sent to all employees in the spa technician job classification at XpresSpa locations around the country in the last three years. Defendants opposed the motion. On February 16, 2016, the Magistrate Judge assigned to the case issued a Report & Recommendation, recommending that the District Court Judge grant the plaintiffs’ motion. On March 1, 2016, the defendants filed Opposition to the Magistrate Judge’s Report & Recommendation, arguing that the District Court Judge should reject the Magistrate Judge’s findings. On September 23, 2016, the court ruled in favor of the plaintiffs and conditionally certified the class. The parties held a mediation on February 28, 2017 and reached an agreement on a settlement in principle. On September 6, 2017, the parties entered into a settlement agreement. On September 15, 2017, the parties filed a motion for settlement approval with the Court; 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. On August 21, 2019, the Court issued an Order denying the parties’ motion for preliminary approval of the revised settlement, as the Court still had concerns about several of the settlement terms. At the December 6, 2019 Status Conference with the Court, the Court reiterated its denial of preliminary approval of the proposed settlement agreement. The Court instructed a notice of pendency to be disseminated to putative collective members, who will then have a 60-day window to decide whether to participate in the case. On or about August 10, 2020, the parties entered into settlement agreements. Intellectual Property
Our intellectual property operating segment is engagedOn June 6, 2020, the Company participated in litigation,a status conference with the Court, and the parties discussed the possibility of entering into a new settlement agreement that addresses the Court’s concerns. On or about August 5, 2020, the parties entered into settlement agreements and sought a preliminary approval order from the Court. On March 30, 2021, the Court issued an Order conditionally granting the motion for which no liability is recorded, as we do not expectpreliminary approval subject to resolution of certain issues pertaining to administration of the settlement. On April 6, 2021, Plaintiffs’ counsel wrote to the Court regarding their proposed resolution on such issues and the Court ultimately granted preliminary approval on May 25, 2021. Notice of the settlement was sent out to the class members on June 22, 2021 and a material negative outcome.
Corporate
Binn v. FORM Holdings Corp. et al.fairness hearing with the Court was scheduled for September 23, 2021.
On October 1, 2021, the Court issued an Order granting the parties’ motion for final approval of the settlement. There were no appeals and the settlement was effective as of November 6, 2017, Moreton Binn2, 2021. The Settlement Administrator has confirmed to the parties that settlement checks have been distributed to the Class on November 5, 2021. The Judge marked the case as closed on the docket on November 10, 2021. Kyle Collins v. Spa Products Import & Distribution Co., LLC et al This is a combined class action and Marisol F, LLC,California Private Attorney’s General Act (“PAGA”) action. Plaintiff seeks to recover wages, penalties and PAGA penalties for claims for (1) failure to provide meal periods, (2) failure to provide rest breaks, (3) failure to pay overtime, (4) inaccurate wage statements, (5) waiting time penalties, and (6) PAGA penalties of $100 per employee per pay period per violation. There are approximately 240 current and former stockholders of XpresSpa, filed a lawsuit against the Company and its directorsemployees in the United States District Courtlitigation class. The parties agreed to mediation on May 26, 2020, however, due to COVID-19 the parties subsequently stayed all proceedings. The mediation session occurred on March 18, 2021 and the matter was settled. A revised motion for the Southern District of New York. The lawsuit alleges violations of various sectionspreliminary approval of the Exchange Act, material omissionssettlement was filed with the Court in February 2022 and misrepresentations (negligent and fraudulent), fraudulent omission, expropriation, breach of fiduciary duties, aiding and abetting, and unjust enrichment in the defendants’ conduct related to the Company’s acquisition of XpresSpa, and seeks rescission of the transaction, damages, equitable and injunctive relief, fees and costs, and various other relief. On January 17, 2018, the defendants filed athis motion to dismiss the complaint. On February 7, 2018, the plaintiffs amended their complaint. On February 28, 2018, the defendants filed a motion to dismiss the amended complaint. On March 21, 2018, the plaintiffs filed an opposition to the motion to dismiss the amended complaint. The defendants’ reply in further support of the motion to dismiss the amended complaint is due March 30, 2018.pending. In addition to those matters specifically set forth herein, the Company and its subsidiaries are involved in various other claims and legal actions that arise in the ordinary course of business. The Company does not believe that the ultimate resolution of these actions will have a material adverse effect on the Company’s financial position, results of operations, liquidity, or capital resources. However, a significant increase in the number of these claims, or one or more successful claims under which the Company incurs greater liabilities than the Company currently anticipates, could materially adversely affect the Company’s business, financial condition, results of operations and cash flows. In the event that an action is brought against usthe Company or one of ourits subsidiaries, wethe Company will investigate the allegation and vigorously defend ourselves.itself. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. PART II ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Our common stock, par value $0.01 per share, which was previously listed on the Nasdaq Capital Market under the trading symbol “FH,” has been listed under the trading symbol “XSPA” since January 8, 2018. The following table sets forth, for On June 11, 2020, the periods indicated, the high and low sales prices for ourCompany effected a 1-for-3 reverse stock split, whereby every three shares of its common stock as reportedwas reduced to one share of its common stock and the price per share of its common stock was multiplied by 3. All references to shares and per share amounts have been adjusted to reflect the Nasdaq Capital Market: | | | High | | | Low | | | Year ended December 31, 2017 | | | | | | | | | | First quarter | | $ | 2.60 | | | $ | 2.05 | | | Second quarter | | $ | 2.08 | | | $ | 1.54 | | | Third quarter | | $ | 1.64 | | | $ | 1.12 | | | Fourth quarter | | $ | 1.72 | | | $ | 1.08 | |
| | | High | | | Low | | | Year ended December 31, 2016 | | | | | | | | | | First quarter | | $ | 2.80 | | | $ | 1.18 | | | Second quarter | | $ | 2.47 | | | $ | 1.48 | | | Third quarter | | $ | 2.90 | | | $ | 1.79 | | | Fourth quarter | | $ | 4.05 | | | $ | 1.99 | |
reverse stock split. Stockholders As of March 15, 2018,28, 2022, we had 50100 stockholders of record of the 26,581,06795,071,210 outstanding shares of our common stock. This does not reflect persons or entities that hold their stock in nominee or "street" name through various brokerage firms. Dividend Policy We have never declared or paid any cash dividends on our capital stock, and do not anticipate paying any cash dividends on our capital stock in the foreseeable future. We currently intend to retain future earnings, if any, to finance our operations and to expand our business. Any future determination to pay cash dividends will be at the discretion of our Board of Directors and will be dependent upon our financial condition, operating results, capital requirements and other factors that our Board of Directors considers appropriate. Issuer Purchases of Equity Securities During 2021, we executed on our share repurchase program, repurchasing and redeeming 4.7 million shares at average cost of $1.66 per share, for a total of $7.8 million. None.
During March 2022, the Company continuing to execute on its share repurchase program, repurchased 7.1 million shares at average cost of $1.55 per share, for a total of $11.1 million. Unregistered Sales of Equity Securities None.
ITEM 6. SELECTED FINANCIAL DATA[RESERVED] Not required as we are a smaller reporting company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Unless otherwise stated, dollar amounts are provided in thousands, except share and per share data. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with, and is qualified in its entirety by, our consolidated financial statements (including notes to the consolidated financial statements) and the other consolidated financial information appearing elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. Actual results and timing of events could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Overview On January 5, 2018, we changed our name to XpresSpa Group, Inc. from FORM Holdings Corp. as partis one of a rebranding that aligned our corporate strategy to build a pure-playthe leading global travel health and wellness services company. We have twoholding companies. XpresSpa Group currently has three reportable operating segments: wellnessXpresSpa, XpresTest, and intellectual property.Treat.
Our wellness operating segment consists of XpresSpa which ishas been a leadingglobal airport retailer of spa services.services through its XpresSpa is a well-recognized airport spa brand with 56 locations, consisting of 51 domestic and 5 international, as of December 31, 2017. XpresSpa offersoffering travelers premium spa services, including massage, nail and skin care, as well as spa and travel products. During 2017products (“XpresSpa”).
Through XpresSpa Group’s subsidiary XpresTest, we launched XpresCheck Wellness Centers, also in airports. XpresCheck offers COVID-19 and 2016,other medical diagnostic testing services to the traveling public, as well as airline, airport and concessionaire employees, and TSA and U.S. Customs and Border Protection agents. XpresTest has entered into MSAs with professional medical services companies or professional limited liability companies (“PLLC”) that provide health care services to patients. The PLLCs pay XpresTest a monthly fee to operate in the XpresCheck Wellness Centers. Under the terms of MSAs, we provide office space, equipment, supplies, non-licensed staff, and management services in return for a management fee. Effective July 1, 2021, we determined that the PLLCs are VIEs due to their equity holders having insufficient capital at risk, and the Company having a variable interest and a primary beneficiary in these PLLCs. Furthermore, XpresSpa Group continues to develop Treat, a travel health and wellness brand that is positioned for a post-pandemic world. Treat’s on-site centers (currently located in JFK International Airport and opening in April 2022 in Phoenix Sky Harbor International Airport and later this year in Salt Lake City International Airport) provide access to health and wellness services for travelers. Our teams provide travel-related diagnostic testing for virus, cold, flu and other illnesses as well as hydration therapy, IV Drips, and vitamin injections. Travelers can purchase time blocks to use our wellness rooms to engage in interactive services like self-guided yoga, meditation and low impact weight exercises or to relax and unplug from the hectic pace of the airport and renew themselves before or after their trip. Although we recognize three segments of business, our strategy for the future, is to create and leverage a fully integrated set of products and services that are both profitable and scalable across our portfolio of brands. Additionally, we will expand our retail strategy, not only adding more products for sale but aligning those products more efficiently to our service offerings. For example, adding fortified water and hydration packets to the delivery of an onsite hydration IV or adding muscle relaxation patches to a neck or back massage to continue treatment after the delivery of the service. We also plan to build our capability for delivering health and wellness services outside the airport. We believe operating segment generated $48,373,000outside of the airport complements our offering and $811,000allows us to scale growth faster. We will be looking to further expand internationally. While international travel has not picked back up to pre-pandemic levels, we want to be opportunistic in our approach, taking advantage of revenue, respectively (2016the current market to grow in preparation for a full return of travel, We believe a strategy for international expansion further advances our overall biosurveillance efforts. These strategic imperatives will be accomplished through development of an infrastructure specifically focused on enabling scalable and efficient growth. Table of Contents ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Treat offers a website (www.treat.com) and mobile app to complement the offering with relevant health and wellness content designed to help people on the go with information that could impact their travel. The platform provides travelers access to a comprehensive online marketplace of services including global illness tracker tools such as the COVID-19 Requirements Map, on-demand chat care by licensed providers, a health wallet to store personal and family health records (including COVID-19 testing results), and a scheduler to arrange for direct care at one of our on-site locations. In March 2020, we temporarily closed all global XpresSpa locations due to the categorization by local jurisdictions of the spa locations as “non-essential services.” A significant number of our XpresSpa locations remain closed, although several have reopened as described under "Recent Developments -XpresSpa Premium Spa Services" below. We intend to assess the reopening of remaining XpresSpa®™ spa locations on a location-by-location basis. Since the beginning of the temporary closure of our XpresSpa locations, we successfully launched our XpresCheck Wellness Centers, offering such testing services, as described above. Also, we continue to evaluate alternative testing protocols and work in partnership with airlines and others for safe travels. While management has used all currently available information in assessing our business prospects, the ultimate impact of the COVID-19 pandemic on our XpresCheck Wellness Centers and on our results include eight days of operations, fromfinancial condition and cash flows remains uncertain and could have a material effect on our business. Recent Developments XpresCheck Wellness Centers XpresCheck’s business has management services agreements with state licensed physicians and nurse practitioners, under which we administer COVID-19 testing options, including a Polymerase Chain Reaction (PCR) test and a rapid PCR test. As of the acquisition on December 23, 2016 todate of this report, there are 15 operating XpresCheck locations operating in 12 airports, including the following locations opened since December 31, 2016).2020: | ● | On January 12, 2021, we opened our second XpresCheck Wellness Center at Boston’s Logan International Airport. It contains seven separate testing rooms to provide diagnostic COVID-19 testing. |
| ● | On January 20, 2021, we announced the opening of an XpresCheck Wellness Center at Salt Lake City International Airport. It contains four separate testing rooms to provide diagnostic COVID-19 testing. |
| ● | On February 16, 2021, we announced the opening of our second XpresCheck testing facility at Newark Liberty International Airport. It contains four separate testing rooms to provide diagnostic COVID-19 testing. |
| ● | On March 8, 2021, we announced the opening of an XpresCheck Wellness Center at Houston George Bush Intercontinental Airport. It contains four separate testing rooms to provide diagnostic COVID-19 testing. |
| ● | On March 15, 2021, we announced the opening of XpresCheck Wellness Centers at Dulles International and Reagan National Airports in Virginia, containing nine and four separate testing rooms, respectively, to provide diagnostic COVID-19 testing. |
| ● | On April 8, 2021, we announced the opening of an XpresCheck Wellness Center at Seattle-Tacoma International Airport. It contains eight separate testing rooms to provide diagnostic COVID-19 testing. |
| ● | On April 21, 2021, we announced the opening of an XpresCheck Wellness Center at San Francisco International Airport. It contains nine separate testing rooms to provide diagnostic COVID-19 testing. |
Table of Contents ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) | ● | On October 13, 2021, we opened an XpresCheck Wellness Center at Hartsfield-Jackson Atlanta International Airport (ATL) Concourse E, converting a legacy XpresSpa located in Concourse E. It contains six separate testing rooms to provide diagnostic COVID-19 testing. |
| ● | In February 2022, a second XpresCheck opened at Denver International Airport, pre-security in the Great Hall. It contains six separate testing rooms to provide diagnostic COVID-19 testing. |
| ● | In March 2022, we opened an XpresCheck in Orlando International Airport, pre-security, in the South Walk area of the Main Terminal. It contains five separate testing rooms to provide diagnostic COVID-19 testing. |
During 2021, XpresCheck initiated a $2,001, eight-week pilot program with the Centers for Disease Control and Prevention (CDC) in collaboration with Concentric by Ginkgo. Under this program, XpresCheck is conducting biosurveillance monitoring at four major U.S. airports (JFK International Airport, Newark Liberty International Airport, San Francisco International Airport, and Hartsfield-Jackson Atlanta International Airport) aimed at identifying existing and new SARS-CoV-2 variants. On January 31, 2022, we announced the extension of the program, bringing the total contract to $5,534. Approximately $1,557 of the original $2,001 in revenue was recognized during the fourth quarter of 2021. We anticipate the remaining $3,977 of the full $5,534 amount will be realized in the first and second quarters of 2022. XpresSpa Premium Spa Services There are currently sixteen operating XpresSpa domestic locations (including one franchise location in Austin-Bergstrom International Airport) and we expect to re-open four additional domestic locations in the near-term. A majority of the domestic XpresSpa locations are operating approximately eight hours per day during the busiest hours (compared to up to sixteen hours per day pre-pandemic) improving labor productivity. Additionally, XpresSpa implemented a price increase in mid-October 2021 which further improved profitability. And as airport volumes improve, we will continue to review our operating hours to optimize revenue opportunity. Our intellectual propertyDuring the fourth quarter, we began testing several new services to take advantage of a growing interest in non-traditional spa services and expansion of our retail offering to align more closely with the services we provide. We are evaluating the success of these new initiatives at each airport on an on-going basis and will incorporate changes to our approach as more of the portfolio is reactivated.
There are also six international locations operating, segment is engagedincluding three XpresSpa locations in Dubai International Airport in the monetizationUnited Arab Emirates and three XpresSpa locations in Schiphol Amsterdam Airport in the Netherlands. We have also signed for five locations at Istanbul Airport and expect to open the first store this summer. Treat Treat is our new travel, health and wellness brand transforming the way we access care through a suite of patents relatedhealth and wellness services supported by an integrated digital platform and a relevant retail offering to the traveling public. Treat’s on-site centers (currently located in JFK International Airport and opening soon in Phoenix Sky Harbor International Airport and later this year in Salt Lake City International Airport) provide access to health and wellness services for travelers. Our teams provide travel-related diagnostic testing for virus, cold, flu and other illnesses as well as hydration therapy, IV Drips, and vitamin injections. Travelers can purchase time blocks to use our wellness rooms to engage in interactive services like self-guided yoga, meditation and low impact weight exercises or to relax and unplug from the hectic pace of the airport and renew themselves before or after their trip. Table of Contents ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Treat offers a website (www.treat.com) and mobile app to complement the offering with relevant health and wellness content designed to help people on the go with information that could impact their travel. The platform provides travelers access to a comprehensive online marketplace of services including global illness tracker tools such as the COVID-19 Requirements Map, on-demand chat care by licensed providers, a health wallet to store personal and ad delivery, remote monitoringfamily health records (including COVID-19 testing results), and computing technologies. During 2017 and 2016, this operating segment generated $450,000 and $11,175,000a scheduler to arrange for direct care at one of revenue, respectively.our on-site locations. HyperPointe Acquisition In January 2022, we announced and closed on the acquisition of GCG Connect, LLC d/b/a HyperPointe. HyperPointe is a leading digital healthcare and data analytics relationship marketing agency servicing the global healthcare and pharmaceutical industry. HyperPointe has significant experience in patient and healthcare professional marketing and deep technological experience with CXM (customer experience management) and data analytics. Since June 2020, HyperPointe’s management team and suite of services and technology have been used to develop and deploy the technological infrastructure needed to scale the growth of our XpresCheck® business HyperPointe’s experience in this space continues to serve the XpresCheck business and will play a critical role in the expansion of on-going biosurveillance efforts. Terms of the transaction were $5,612 in cash, and $1,000 in common stock, as well as potential additional earn-out payments of up to $7,500 over a three-year timeframe based upon future performance; these earn-out payments may be satisfied in cash or common stock or a combination thereof subject to various terms and conditions. HyperPointe currently operates as a stand-alone entity within XpresSpa Group. Ezra Ernst, who is the current CEO of HyperPointe, also serves as CEO of XpresCheck, reporting to Scott Milford, XpresSpa Group CEO. Mr. Ernst is spearheading efforts to further integrate XpresCheck’s biosurveillance screening and testing business with HyperPointe’s customer experience management technology and data management know how in the healthcare and pharmaceutical verticals to further drive new revenue opportunities. Liquidity As of December 31, 2021, we had approximately $105,506 of cash and cash equivalents, total current assets of approximately $108,979. Our total current liabilities balance, which includes primarily accounts payable, accrued expenses, deferred revenue, the current portion or promissory note, and the current portion of operating lease liabilities was $19,827 as of December 31, 2021. The working capital was $89,152 as of December 31, 2021, compared to a working capital of $78,302 as of December 31, 2020. During 2021, holders of the Company’s December 2020 Investor Warrants, December 2020 Placement Agent Warrants and December 2020 Placement Agent Tail Fee Warrants exercised a total of 11,273,529 warrants for common shares. The Company received gross proceeds of approximately $19,245. In accordance with the placement agent agreements with H.C. Wainwright & Co., LLC and Palladium, the Company paid cash fees of $2,162 and issued 846,588 warrants to H.C. Wainwright & Co., LLC at an exercise price of $2.125 per share and 325,500 warrants to Palladium at an exercise price of $1.70 per share. While we have aggressively reduced operating and overhead expenses, and we continue to focus on our overall profitability, we have been able to generate positive cash flows from operations, and Net Income. We expect to achieve future profitability, in the light of various growth initiatives that we have implemented. Table of Contents ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) B3D Senior Secured Loan On January 9, 2020, as compensation for the consent of B3D to the CC Agreement, we entered into the Fifth Credit Agreement Amendment with B3D in order to (i) increase the principal amount owed to B3D from $7,000 to $7,150, which additional $150 in principal and any interest accrued thereon will become convertible, at B3D’s option, into shares of our common stock upon receipt of the approval of our stockholders, which was obtained on May 28, 2020 and (ii) provide for the advance payment of 97,223 shares of common stock in satisfaction of the interest payable pursuant to the B3D Note for the months of October, 2017, we completedNovember and December 2020. The common stock was issued to B3D on January 14, 2020. We capitalized a $150 fee charged by the salelender to consent to the CC Agreement. The total of FLI Chargefees paid to the lender as consideration for entering into the Fourth and Fifth Credit Agreement Amendments of $650 was capitalized and was being amortized over the remaining term of the B3D Note. We recorded amortization expense of $62 related to these capitalized costs, which is included in March 2018, we completed the sale of Group Mobile. These two entities previously comprisedInterest expense in our technology operating segment. The resultsconsolidated statements of operations and comprehensive loss. On March 6, 2020, XpresSpa Holdings entered into the Sixth Credit Agreement Amendment with B3D in order to, among other provisions, (i) increase the principal amount owed to B3D from $7,150 to $7,900, which additional $750 in principal, comprised of $500 in new funding and $250 in debt issuance costs, and any interest accrued thereon will be convertible, at B3D’s option, into shares of our common stock subject to receipt of the approval of our stockholders which was obtained on May 28, 2020 and (ii) decrease the conversion rate under the B3D Note from $6.00 per share to $1.68 per share. On March 19, 2020, the conversion rate was further reduced to $0.525 per share after giving effect to certain anti-dilution adjustments. The Sixth Credit Agreement Amendment was accounted for FLI Chargeas an extinguishment of debt in our consolidated financial statements. In March 2020, we extinguished debt with a carrying value of $4,829, net of unamortized debt discount of $1,845 and Group Mobile are presentedunamortized debt issuance costs of $476. In addition, we extinguished $2,048 of derivative liability, which represented the estimated fair value of the conversion option based upon provisions included in the Fifth Credit Agreement Amendment. We determined that the conversion option in the Sixth Credit Agreement Amendment should be bifurcated from the host instrument and engaged a third party to assess the fair value of the conversion option. As a result, we recorded debt with a carrying value of $3,994, net of a debt discount of $3,656 and debt issuance costs of $250, and a derivative liability of $3,656. We recognized a loss on the extinguishment of debt of $273 during the year ended December 31, 2020, which represents the difference between the carrying amount of the debt recorded under the Fourth and Fifth Credit Agreement Amendments and the debt recorded under the Sixth Credit Agreement Amendment and is included in Other non-operating income (expense), net in the consolidated statements of operations and comprehensive loss. Subsequent to the Sixth Credit Agreement Amendment and during the year ended December 31, 2020, B3D elected to convert a total of $7,900 of principal into shares of common stock at conversion prices of $1.68 and $0.525. As a result, approximately $15,395 of derivative liability was settled and reclassified to equity, we wrote off $3,156 of unamortized debt discount and debt issuance costs, and 13,934,525 shares of common stock were issued. We recognized a revaluation loss related to the derivative liability of $11,990 during the year ended December 31, 2020, which is included in “Loss on revaluation of warrants and conversion options” in the consolidated statements of operations and comprehensive loss. A total of $884 of accretion expense on the debt discount was recorded in the years ended December 31, 2020, which is included in “Interest expense” in the consolidated statements of operations and comprehensive loss and increased the carrying value of the B3D Note. Total amortization expense related to the B3D Note debt issuance costs was $98 for the year ended December 31, 2020, which is included in “Interest expense” in the consolidated statements of operations and comprehensive loss. The B3D Note was 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 Table of Contents ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) fully and unconditionally, jointly and severally, guaranteed 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. We have not presented separate consolidating financial statements of XpresSpa Group, Inc., Holdings and Holdings’ wholly owned subsidiaries, as consolidated net loss from discontinued operations.each entity has guaranteed the B3D Note, so each entity is responsible for the payment. Paycheck Protection Program On May 1, 2020, the Company entered into a U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“the PPP”) promissory note in the principal amount of $5,653 payable to Bank of America, NA (“Bank of America”) evidencing a PPP loan (the “PPP Loan”). The carrying amountsPPP Loan bears interest at a rate of assets1% per annum. No payments were due on the PPP Loan during a six-month deferral period commencing on May 2, 2020. Commencing one month after the expiration of the deferral period and liabilities belongingcontinuing on the same day of each month thereafter until the maturity date of the PPP Loan, the Company is obligated to Group Mobile asmake monthly payments of principal and interest, each in such equal amount required to fully amortize the principal amount outstanding on the PPP Loan by the maturity date. The maturity date is May 2, 2022. The principal amount of the PPP Loan was subject to forgiveness under the PPP upon the Company’s request to the extent that the PPP Loan proceeds are used to pay expenses permitted by the PPP. Bank of America may have forgiven interest accrued on any principal forgiven if the SBA pays the interest. Currently, the Company is paying its monthly principal and interest related to the PPP Loan when due. The PPP Loan contains customary borrower default provisions and lender remedies, including the right of Bank of America to require immediate repayment in full the outstanding principal balance of the PPP Loan with accrued interest. As of December 31, 2017,2021 and FLI Charge2020, $4 and Group Mobile as$37 of December 31, 2016, are presentedinterest has been accrued, respectively, and is included in Accounts payable, accrued expenses and other in the consolidated balance sheets as assets held for disposal and liabilities held for disposal, respectively. sheets. Our Strategy and Outlook We believe that our company is well positioned to benefit from consumers’ growing interest in travel health and wellness and increasing demand for health and wellness related services and products. XpresSpa was created for travelers to address the stress and idle time spent at the airport, allowing travelers to spend this time relaxing and focusing on personal care and wellness. It is a well-recognized and popular airport spa brand with a dominant market share in the United States, with nearly three times the number of domestic locations as its closest competitor. Travel needs are changing based on new health and passenger safety concerns resulting from the COVID-19 pandemic. Therefore, in 2020 we created a companion company, XpresCheck, which is also in airports and which offers COVID-19 testing and other medical diagnostic testing services to airport employees and the traveling public. Further, the Company continues developing Treat, a travel health and wellness brand that is positioned for a post-pandemic world and that leverages its historic travel wellness experience and newly acquired healthcare expertise. The Company sees this concept evolution as a significant opportunity to be a category innovator in a new niche industry where it can leverage technology in addition to its existing real estate and airport experience in providing travelers with peace of mind and access to integrated care. While COVID-19 testing will be available under this new brand, the broader suite of services may include: pre-travel health and wellness planning. Treat’s on-site centers (currently located in JFK International Airport and opening soon in Phoenix Sky Harbor International Airport and later this year in Salt Lake City International Airport) provide access to health and wellness services for travelers. Our teams provide travel-related diagnostic testing for virus, cold, flu and other illnesses as well as hydration therapy, IV Drips, and vitamin injections. Travelers can purchase time blocks to use our wellness rooms to engage in interactive services like self-guided yoga, meditation and low impact weight exercises or to relax and unplug from the hectic pace of the airport and renew themselves before or after their trip. Table of Contents ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Airport Rent Concessions We expect mosthave received rent concessions from landlords on a majority of our revenueleases, allowing for the relief of minimum guaranteed payments in exchange for percentage-of-revenue rent or providing relief from rent through payment deferrals. Currently, the period of relief from these payments range from three- to continue to be generated from our wellness operating segment through XpresSpa. XpresSpa regularly measures comparable store sales, which it defines as current period sales from stores opened more than 12 months compared to those same stores’ salestwenty eight-months and began in the prior year period (“Comp Store Sales”). The measurementMarch 2020. We received minimum guaranteed payment concession of Comp Store Sales on a daily, weekly, monthly, quarterlyapproximately $2,078 and year-to-date basis provides an additional perspective on XpresSpa’s total sales growth when considering the influence of new unit contribution. A reconciliation between Comp Store Sales and total revenue as reported on the financial statements is presented below:
| | | 2017 | | | 2016 (unaudited) | | | % | | | | | Comp Store | | | Non-Comp
Store | | | Total | | | Comp Store | | | Non-Comp
Store | | | Total | | | | | | Revenue | | $ | 42,502,000 | | | $ | 5,871,000 | | | $ | 48,373,000 | | | $ | 41,277,000 | | | $ | 2,543,000 | | | $ | 43,820,000 | | | | 3% | |
Comp Store Sales increased 3% during the year-ended$2,107, respectively, in years ended December 31, 2017 as compared2021 and 2020.
Reconciliation of Full-Year 2021 and 2020 Net Income (Loss) to the same period in 2016. As of December 31, 2017, XpresSpa had 56 open locations; during the year, XpresSpa opened nine new locations, including one location internationally, and closed five underperforming locations. We plan to grow XpresSpa by:
| · | continuing to focus on spa-level productivity and leveraging retail partnerships, such as Dermalogica and Essie, to increase units per transaction, which will contribute into the growth of the Comp Store Sales; |
| · | through the opening of new locations; and
|
| · | through our franchising program, which was approved in January 2018.
|
Full-Year 2017 Adjusted EBITDA or Loss (Non-GAAP Measure)
| | | | | | | | | Year ended December 31, | Revenue: | | 2021 | | 2020 | Managed services fees | | $ | 16,843 | | $ | — | Patient service revenue | | | 50,689 | | | — | Services | | | 5,420 | | | 7,025 | Products | | | 763 | | | 1,004 | Other | | | 14 | | | 356 | Total revenue | | | 73,729 | | | 8,385 | | | | | | | | Cost of sales | | | | | | | Labor | | | 13,421 | | | 6,290 | Occupancy | | | 2,505 | | | 2,809 | Product and other operating costs | | | 25,459 | | | 2,884 | Total cost of sales | | | 41,385 | | | 11,983 | Depreciation and amortization | | | 3,201 | | | 5,210 | Impairment/disposal of assets | | | 837 | | | 15,356 | General and administrative | | | 24,199 | | | 15,940 | Total operating expense | | | 69,622 | | | 48,489 | Earnings (loss) from operations | | | 4,107 | | | (40,104) | Interest expense, net | | | 43 | | | (1,832) | Gain (loss) on revaluation of warrants and conversion options | | | — | | | (51,147) | Other non-operating (expense)/income, net | | | (1,201) | | | 858 | Income (loss) before income taxes | | | 2,949 | | | (92,225) | Income tax expense | | | (56) | | | (7) | Net income (loss) | | | 2,893 | | | (92,232) | Net (income) loss attributable to noncontrolling interests | | | 456 | | | 1,744 | Net income (loss) attributable to common shareholders | | $ | 3,349 | | $ | (90,488) | | | | | | | | Income (loss) from operations | | $ | 4,107 | | $ | (40,104) | Add back: | | | | | | | Depreciation and amortization | | | 3,201 | | | 5,210 | Impairment/disposal of assets | | | 837 | | | 15,356 | Stock-based compensation expense | | | 2,856 | | | 1,328 | Adjusted EBITDA /(Loss) | | $ | 11,001 | | $ | (18,210) |
The table below provides a summary of the wellness operating segment’s performance by quarter during 2017:
| | | Quarter-Ended | | | | | | | | March 31 | | | June 30 | | | September 30 | | | December 31 | | | Total
Wellness | | | Total revenue | | $ | 10,984,000 | | | $ | 12,927,000 | | | $ | 12,652,000 | | | $ | 11,810,000 | | | $ | 48,373,000 | | | | | | | | | | | | | | | | | | | | | | | | | Cost of sales | | | | | | | | | | | | | | | | | | | | | | Labor | | | 5,309,000 | | | | 5,783,000 | | | | 6,458,000 | | | | 6,777,000 | | | | 24,327,000 | | | Occupancy | | | 1,771,000 | | | | 1,983,000 | | | | 1,950,000 | | | | 1,917,000 | | | | 7,621,000 | | | Product, supplies and other operating costs | | | 1,755,000 | | | | 2,635,000 | | | | 1,939,000 | | | | 709,000 | | | | 7,038,000 | | | Total cost of sales | | | 8,835,000 | | | | 10,401,000 | | | | 10,347,000 | | | | 9,403,000 | | | | 38,986,000 | | | | | | | | | | | | | | | | | | | | | | | | | Gross profit | | | 2,149,000 | | | | 2,526,000 | | | | 2,305,000 | | | | 2,407,000 | | | | 9,387,000 | | | Gross profit as a % of total revenue | | | 19.6 | % | | | 19.6 | % | | | 18.2 | % | | | 20.4 | % | | | 19.4 | % | | | | | | | | | | | | | | | | | | | | | | | | Depreciation and amortization | | | | | | | | | | | | | | | | | | | | | | Depreciation | | | 1,129,000 | | | | 2,327,000 | | | | 1,110,000 | | | | 984,000 | | | | 5,550,000 | | | Amortization | | | 586,000 | | | | 592,000 | | | | 597,000 | | | | 600,000 | | | | 2,375,000 | | | Total depreciation and amortization | | | 1,715,000 | | | | 2,919,000 | | | | 1,707,000 | | | | 1,584,000 | | | | 7,925,000 | | | | | | | | | | | | | | | | | | | | | | | | | Total general and administrative | | | 2,805,000 | | | | 1,599,000 | | | | 2,237,000 | | | | 2,071,000 | | | | 8,712,000 | | | | | | | | | | | | | | | | | | | | | | | | | Operating loss from continuing operations | | | (2,371,000 | ) | | | (1,992,000 | ) | | | (1,639,000 | ) | | | (1,248,000 | ) | | | (7,250,000 | ) | | | | | | | | | | | | | | | | | | | | | | | | Plus: | | | | | | | | | | | | | | | | | | | | | | Depreciation and amortization | | | 1,715,000 | | | | 2,919,000 | | | | 1,707,000 | | | | 1,584,000 | | | | 7,925,000 | | | Merger and acquisition, integration and one-time costs | | | 484,000 | | | | 200,000 | | | | 529,000 | | | | 50,000 | | | | 1,263,000 | | | | | | | | | | | | | | | | | | | | | | | | Adjusted EBITDA income (loss) | | $ | (172,000 | ) | | $ | 1,127,000 | | | $ | 597,000 | | | $ | 386,000 | | | $ | 1,938,000 | |
Merger and acquisition, integration and one-time costs relate to the following:
| · | 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. These one-time costs of $200,000, which were incurred in the third quarter of 2017, directly impacted our cost of sales. |
| · | Integration costs related to the acquisition and corporate function consolidation, which were recorded in general and administrative expense, of approximately $1,063,000. |
We use GAAP and non-GAAP measurements to assess the trends in our business. With respect to XpresSpa, weWe review its Adjusted EBITDA, a non-GAAP measure, which we define as earnings before interest, tax, depreciation and amortization expense, excluding merger and acquisition, integration and one-time costs and stock-based compensation.
Table of Contents The table below shows the reconciliation from the nearest U.S. GAAP measure to adjusted EBITDA on both a segment and consolidated level.ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
| | | Wellness | | | Intellectual Property | | | Corporate | | | Total | | | Operating loss from continuing operations | | $ | (7,250,000 | ) | | $ | 9,000 | | | $ | (7,832,000 | ) | | $ | (15,073,000 | ) | | | | | | | | | | | | | | | | | | | | Plus: | | | | | | | | | | | | | | | | | | Depreciation and amortization | | | 7,925,000 | | | | 23,000 | | | | 28,000 | | | | 7,976,000 | | | Merger and acquisition, integration and one-time costs | | | 1,263,000 | | | | — | | | | 152,000 | | | | 1,415,000 | | | Stock-based compensation expense | | | — | | | | — | | | | 2,177,000 | | | | 2,177,000 | | | | | | | | | | | | | | | | | | | | | Adjusted EBITDA income (loss) | | $ | 1,938,000 | | | $ | 32,000 | | | $ | (5,475,000 | ) | | $ | (3,505,000 | ) |
Adjusted EBITDA is a supplemental measure of financial performance that is not required by or presented in accordance with GAAP.GAAP but is a measurement used by management to assess the trends in our business. In evaluating our performance as measured by Adjusted EBITDA, we recognize and consider the limitations of this measurement. Reconciliations of operating loss from continuing operations for the wellness operating segment and for the overall Company for the year-endedyears ended December 31, 20172021 and 2020 to Adjusted EBITDA income (loss)loss are presented in the tables above. We consider Adjusted EBITDA to be an important indicator for the performance of our business, but not a measure of performance or liquidity calculated in accordance with U.S. GAAP. We have included this non-GAAP financial measure because management utilizes this information for assessing our performance and liquidity, and as an indicator of our ability to make capital expenditures and finance working capital requirements. We believe that Adjusted EBITDA is a measurement that is commonly used by analysts and some investors in evaluating the performance and liquidity of growth companies such as us. ours.
In particular, we believe that it is useful for analysts and investors to understand this indicator because itthat Adjusted EBITDA excludes certain transactions not related to our core cash operating activities.activities, which are primarily related to our XpresCheck Wellness Centers. We believe that excluding these transactions allows investors to meaningfully analyze the performance of our core cash operations. Adjusted EBITDA should not be considered in isolation or as an alternative to cash flow from operating activities or as an alternative to operating income or as an indicator of operating performance or any other measure of performance derived in accordance with GAAP. In evaluating our performance as measured by Adjusted EBITDA, we recognize and consider the limitations of this measurement. Adjusted EBITDA does not reflect our obligations for the payment of income taxes, interest expense, or other obligations such as capital expenditures. Accordingly, Adjusted EBITDA is only one of the measurements that management utilizes. Results of Operations Revenue We recognize revenue for the wellness operating segment from the sale of XpresSpa productsservices when they are rendered at our stores and servicesfrom the sale of products at the point of sale,time goods are purchased at our stores or online (usually by credit card), net of discounts and applicable sales taxes. Revenue from the XpresSpa wholesaleSignificant number of our spa locations remain closed and e-commerce businesses are recorded at the time goods are shipped. We exclude all sales taxes assessed totherefore generate little revenue. Other revenue primarily represents fees earned through strategic partnerships and product placement arrangement in our customers. Sales taxes assessed on revenues are included in accounts payable, accrued expensesspas. Through our XpresCheck Wellness Centers and other current liabilities in the consolidated balance sheets until remitted to the state agencies. Revenue from patent licensing is recognized if collectability is reasonably assured, persuasive evidence of an arrangement exists, the sales price is fixed or determinable and delivery of the service has been rendered. Currently, revenue arrangements related to intellectual property provide for the payment of contractually determined fees and other consideration for the grant of certain intellectual property rights related to our 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 tounder the terms of these agreements,the Managed Services Agreement (“MSA”) with PLLCs that in turn contract with physicians and nurse practitioners, we offer testing services to airline employees, contractors, concessionaire employees, TSA officers and U.S. Customs and Border Protection agents, as well as the traveling public. We have entered into MSAs with PLLCs that provide healthcare services to patients. Under the terms of the MSAs which may be modified according for commercial reasonableness and fair market value, XpresTest provides office space, equipment, supplies, non-licensed staff, and management services to be used for the purpose of COVID-19 and other medical diagnostic testing in return for a management fee. However, as a result of uncertainties around the cash flows of the XpresCheck Wellness Centers, we concluded in 2020 that the collectability criteria to qualify as a contract under ASC 606 was not met, and therefore, revenue associated with the monthly management fee would not be recognized until a subsequent reassessment resulted in the MSAs meeting the collectability criteria. XpresTest recognized revenue of $16,843 (including catch-up revenue of $3,186 for 2020) during the six months ended June 30, 2021, under the MSAs, pursuant to reassessments in 2021, of the MSAs executed in 2020 and amended in 2021, and assessments and reassessments of MSAs executed and amended in 2021 until June 30, 2021 resulting in management’s conclusion that they met the collectability criteria. Any revenue collected not meeting the collectability criteria was recorded as deferred revenue. Effective, July 1, 2021 (see Note 4), we determined that the PLLCs are variable interest entities due to its equity holder having insufficient capital at risk, and we have no further obligation with respect toa variable interest in the grantPLLCs. In pursuance, the total revenue of the non-exclusive retroactive and future licenses, covenants-not-to-sue, releases, and other deliverables, including no express or implied obligation on our part to maintain or upgrade the related technology, or provide future support or services. Generally, the agreements provide$50,689 for the grantPLLCs for the six months ended December 31, 2021 were designated as a revenue for us.
Cost of sales Cost of sales for our wellness operating segment consists of store-level costs. Store-levelcosts at the spa-level and wellness center-level. These costs include all costs that are directly attributable to the storelocation’s operations and include: | ·● | payroll and related benefits for storethe location’s operations and store-level management; |
| ·● | rent, percentage rent and occupancy costs; |
| ·● | the cost of merchandise;merchandise, including testing kits; |
| ·● | freight, shipping and handling costs; |
| ·● | inventory shortage and valuation adjustments, including purchase price allocation increase in fair values which was recorded as part of acquisition; and |
| ·● | costs associated with sourcing operations. |
Cost of sales for the Company’s intellectual property operating segment mainly includes expenses incurred in connection with the Company’s patent licensingDepreciation and enforcement activities, patent-related legal expenses paid to external patent counsel (including contingent legal fees), licensing and enforcement related research, consulting and other expenses paid to third parties, as well as related internal payroll expenses.
Depreciation, amortization and impairment
Property and equipment isare stated at cost, net of accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets. The useful lives of our property and equipment isare based on estimates of the period over which we expect the assets to be of economic benefit to us. LeaseholdOur property and equipment assets primarily consist of leasehold improvements to our stores and are amortized over the shorter of the useful life of the asset or the term of the lease. Amortization of our intangible assets areis recognized on a straight-line basis over the remaining useful life of the intangible assets. Impairment/disposal of assets We test our long-lived assets (which primarily includes property and equipment and right of use lease asset) for impairment on at least an annual basis or whenever circumstances indicate that the carrying amount may not be recoverable. Long-lived assets are tested for impairment at the lowest level at which there are identifiable operating cash flows. An impairment loss is recognized if the carrying amount of a fixed asset (asset group) is not recoverable and exceeds its fair value. Impairment charges related to our amortized, intangible assets are recorded when an impairment indicator exists and the carrying amount of the related asset exceeds its fair value. General and administrative General and administrative expenses include management and administrative personnel, public and investor relations, overhead/office costs, insurance legal fees, accounting fees and various other professional fees, as well as sales and marketing costs and stock-based compensation for management and administrative personnel. Table of Contents ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Loss on revaluation of warrants and conversion option (Loss) gain on revaluation of warrants and conversion options is primarily comprised of adjustments to the fair value of the derivative conversion option of the debt instruments and the fair value of the warrants. Non-operating income (expense) Non-operating income (expense) primarily includes transaction gains (losses) from foreign exchange rate differences,gain on equity investments and bank charges, deposits, interest related to outstanding debt, as well as fair value adjustments related to our derivative warrant liabilities. The value of these derivative warrant liabilities is highly influenced by assumptions used in its valuation, as well as by our stock price as of the period end (revaluation date). charges. Income taxes On December 22, 2017, the United States government enacted comprehensive tax reform, commonly referred to as the Tax Cuts and Jobs Act of 2017 (“Tax Act”). The Tax Act makes changes to the corporate tax rate, business-related deductions and taxation of foreign earnings, among other changes, that will generally be effective for tax years beginning after December 31, 2017.
As of December 31, 2017,2021, deferred tax assets generated from our activities in the United States were offset by a valuation allowance because realization depends on generating future taxable income, which, in our estimation, is not more likely than not to be generated before such net operating loss carryforwards expire. Segment reporting
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 conduct our business through two operating segments, which are also our reportable segments: wellnessand intellectual property. It should be noted that the segment reporting for wellness for 2016 only covers the period following the closing of the acquisition of XpresSpa on December 23, 2016 through our fiscal year end onYear ended December 31, 2016. We previously had a third operating segment, technology, which was comprised of our FLI Charge and Group Mobile businesses. The technology operating segment was discontinued due to the sale of FLI Charge in October 2017 and sale of Group Mobile in March 2018. The results of operations for FLI Charge and Group Mobile are presented in the consolidated statements of operations and comprehensive loss as consolidated net loss from discontinued operations.
Organizing our business through two operating segments allows us to align our resources and manage the operations. We determine our operating segments based on a number of factors our management uses to evaluate and run our business operations, including similarities of customers, products and technology. Our Chief Executive Officer is our CODM, who regularly reviews operating segment revenue and operating income (loss) when assessing financial results of operating segments and allocating resources.
We measure the performance of our operating segments based upon operating segment revenue and operating income (loss). Segment operating income (loss) includes revenue and expenses incurred directly by the operating segment, including cost of sales and selling, marketing, and general and administrative costs. General and administrative costs are allocated amongst the operating segments and non-operating corporate segment.
Year-ended December 31, 20172021 compared to the year-endedyear ended December 31, 2016
2020 Revenue | | | | | | | | | | | | Year ended December 31, | | | 2021 | | 2020 | | Inc/(Dec) | Total revenue | | $ | 73,729 | | $ | 8,385 | | $ | 65,344 |
We generate revenue through each of our operating segments.
| | | Year ended December 31, | | | | | 2017 | | | 2016 | | | Change | | | Wellness | | $ | 48,373,000 | | | $ | 811,000 | | | $ | 47,562,000 | | | Intellectual property | | | 450,000 | | | | 11,175,000 | | | | (10,725,000 | ) | | Total revenue | | $ | 48,823,000 | | | $ | 11,986,000 | | | $ | 36,837,000 | |
During the year-endedyear ended December 31, 2017, we recorded2021, total revenues increased $65,344, or 779%. The increase in revenue was primarily due to patient service revenue of $48,823,000, which represents an increase of $36,837,000, or 307.3%, as compared to $11,986,000 recorded in the year-ended December 31, 2016. The increase was primarily attributable to a full year of revenue generated at XpresSpa of $48,373,000 during 2017. Following its acquisition on December 23, 2016, only eight days of revenue were recognized from XpresSpa in 2016, which totaled $811,000; on an unaudited basis, XpresSpa generated revenue of $43,820,000 in 2016. During 2017, XpresSpa’s sales were comprised of the following: 81% service, 18% retail, and 1% related to cryotherapy and loungers. The intellectual property operating segment generated revenue of $450,000$50,689 during the year-ended December 31, 2017, a decreasesecond half of $10,725,000 from the same period in 2016. The intellectual property operating segment’s revenue2021 and MSA fees of $11,175,000$16,843 for the year-ended December 31, 2016 was mainly duesix months ended June 30, 2021, respectively through managed services agreements with professional medical services companies that provide healthcare services to a one-time paymentpatients in our XpresCheck Wellness Centers (while the majority of $8,900,000 received in connection with a particular license and settlement agreement.
We plan to grow XpresSpa’s revenue through a combination of increases in sales at our existing XpresSpa locations andremain closed). In addition, the addition of new locations. For our intellectual property operating segment, we intend to continue to monetize our existing portfolio through licensing and strategic partnerships.Company saw a slight increase in revenue associated with the XpresSpa locations that opened during 2021.
Cost of sales | | | | | | | | | | | | Year ended December 31, | | | 2021 | | 2020 | | Inc/(Dec) | Cost of sales | | $ | 41,385 | | $ | 11,983 | | $ | 29,402 |
| | | Year ended December 31, | | | | | 2017 | | | 2016 | | | Change | | | Wellness | | $ | 38,986,000 | | | $ | 404,000 | | | $ | 38,582,000 | | | Intellectual property | | | 357,000 | | | | 6,334,000 | | | | (5,977,000 | ) | | Total cost of sales | | $ | 39,343,000 | | | $ | 6,738,000 | | | $ | 32,605,000 | |
During the year-ended December 31, 2017, we recorded total cost of sales of $39,343,000. The increase in cost of sales of $32,605,000,$29,402, or 483.9%245%, was primarily due to the directincrease in revenues resulting in increased costs associated withto operate the revenue generated at ourXpresCheck locations due to the COVID-19 Pandemic; and the reopening of certain XpresSpa locations. For the wellness operating segment, thelocations that were temporarily closed during 2020. We had 22 open Spa locations as of December 31, 2021, and 2 open Spa locations as of December 31, 2020. The largest component in the cost of sales are costs of testing kits and labor costs at the store-level, as our associates receive commission-based compensation as well as additional incentives based on individual and store performance.location-level, Cost of sales also includes rent and related occupancy costs, which are also acan primarily include rent based on percentage of sales, as well as other product costs directly associated with the procurement of retail inventory, and other operating costs.
Depreciation and amortization | | | | | | | | | | | | Year ended December 31, | | | 2021 | | 2020 | | Inc/(Dec) | Depreciation and amortization | | $ | 3,201 | | $ | 5,210 | | $ | (2,009) |
Table of Contents ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) During the year ended December 31, 2021, depreciation and amortization expense decreased $2,009, or 38.6%, compared to the depreciation and amortization expense recorded during the year ended December 31, 2020. The decrease was primarily due to the write-off of the stores that were permanently closed during the year ended December 31, 2020. Fewer locations resulted in lower amortization of leasehold improvements. Impairment/disposal of assets | | | | | | | | | | | | Year ended December 31, | | | 2021 | | 2020 | | Inc/(Dec) | Impairment/disposal of assets | | $ | 837 | | $ | 15,356 | | $ | (14,519) |
We expect to continue to recognize higher costcompleted an assessment of sales in 2018, especially for our wellness operating segment, as we plan to grow XpresSpa’s Comp Store Sales and continue to open new locations. Depreciation, amortization, and impairment
| | | Year ended December 31, | | | | | 2017 | | | 2016 | | | Change | | | Depreciation, amortization, and impairment | | $ | 7,976,000 | | | $ | 13,254,000 | | | $ | (5,278,000 | ) |
Depreciation expense relating to our property and equipment and right of use lease assets for the year-endedimpairment as of December 31, 2017 was $5,573,0002021 and includes $3,862,0002020. Based upon the results of depreciation related to leasehold improvements at XpresSpa locations, which is our main categorythe impairment test, we recorded an impairment of property and equipment. Includedequipment and right of use lease assets of approximately $90 and $747, respectively, in the depreciation expense from continuing operations for the year-endedyear ended December 31, 2017 is $1,131,000 of accelerated depreciation2021. The expense was primarily related to the closureimpairment of oneleasehold improvements made to certain XpresSpa locations and right of XpresSpa’s JFK locationsuse lease assets where as a result of the COVID-19 pandemic, management determined that the location’s discounted future cash flow was not enough to support the carrying value of the leasehold improvements and right of use lease assets over the remaining lease term.
Loss on revaluation of warrants and conversion option | | | | | | | | | | | | Year ended December 31, | | | 2021 | | 2020 | | Inc/(Dec) | Loss on revaluation of warrants and conversion options | | $ | — | | $ | 51,147 | | $ | (51,147) |
Loss on revaluation of warrants and conversion option in June 2017. Amortization expense relating2020 is primarily comprised of adjustments to our intangible assets for the year-ended December 31, 2017 was approximately $2,403,000fair value of which $2,220,000the derivative conversion option of the debt instruments and the fair value of the warrants, including losses of $11,990, $8,985, $15,480 and $14,692 related to the amortization ofB3D Note, the trade name assets, which wereCalm Note, the primary intangible assets acquired inCalm Warrants and the purchase of XpresSpa in December 2016. There was no impairment expense recordedClass A Warrants, respectively, during the year-endedyear ended December 31, 2017.2020. General and administrative | | | | | | | | | | | | Year ended December 31, | | | 2021 | | 2020 | | Inc/(Dec) | General and administrative | | $ | 24,199 | | $ | 15,940 | | $ | 8,259 |
During the year ended December 31, 2016, we determined that there were impairment indicators related to certain of our patents. A significant factor considered when making this determination occurred on May 6, 2016, when we changed the name of our company from “Vringo, Inc.” to “FORM Holdings Corp.” and concurrently announced our repositioning as a holding company of small and middle market growth companies. We concluded that this factor was deemed a “triggering” event, which required the related patent assets to be tested for impairment. In performing this impairment test, we determined that the patent portfolios, which together represent an asset group, were subject to impairment testing. In the first step of the impairment test, we utilized our projections of future undiscounted cash flows based on our existing plans for the patents. As a result, it was determined that our projections of future undiscounted cash flows were less than the carrying value of the asset group. Accordingly, we performed the second step of the impairment test to measure the potential impairment by calculating the asset group’s fair value as of May 6, 2016. As a result, following amortization for the month of April, we recorded an impairment charge of $11,937,000, or 88.7% of the carrying value of the patents prior to impairment, which resulted in a new carrying value of $1,526,000 on May 6, 2016. Following the impairment, we re-evaluated the remaining useful life and concluded that there were no changes. General and administrative
| | | Year ended December 31, | | | | | 2017 | | | 2016 | | | Change | | | General and administrative | | $ | 16,577,000 | | | $ | 9,702,000 | | $ | 6,875,000 | |
During the year-ended December 31, 2017,2021, general and administrative expenses increased by $6,875,000,$8,259, or 70.9%51.8%, to $16,577,000, compared to $9,702,000 that was recorded during the year-ended December 31, 2016. The overall increase was primarily due to mergerstart-up costs associated with the XpresCheck brand, development of the Treat brand and acquisitionadditional legal fees related to the resolution of certain legal matters, offset by reduced variable costs related to our acquisitionthe closed XpresSpa locations.
Interest (income) expense | | | | | | | | | | | | Year ended December 31, | | | 2021 | | 2020 | | Inc/(Dec) | Interest (income) expense | | $ | (43) | | $ | 1,832 | | $ | (1,875) |
Interest expense decreased by $1,875, or 102%, primarily due to conversions to Common Stock of XpresSpathe Calm Note and increased general and administrative costs associated with XpresSpa, which we acquired on December 23, 2016 and, as such, had only eight daysB3D Note during 2020. Non-operating (expense) income, net | | | | | | | | | | | | Year ended December 31, | | | 2021 | | 2020 | | Inc/(Dec) | Other non-operating (expense) /income, net | | $ | (1,201) | | $ | 858 | | $ | (2,059) |
The following is a summary of the transactions included in non-operating income (expense), net for the year-ended December 31, 2016. In addition, included in the general and administrative expenses, are $2,177,000 and $2,225,000 of stock-based compensation for the year-ended December 31, 2017 and 2016, respectively. In relation to our acquisition of XpresSpa, we incurred $1,263,000 of expenses related to the transaction, including legal costs, financial and legal diligence, tax accounting, and valuation.
Following our acquisition of XpresSpa, we incurred approximately $445,000 of general and administrative expenses during the period from the closing of the acquisition on December 23, 2016 until December 31, 2016. These costs mainly related to rent and payroll expenses.
Our expectations are that our general and administrative expenses will decrease in the future, as we completed the sale of FLI Charge in October 2017 and Group Mobile in March 2018, integrated our wellness operating segment and corporate functions, and began to realize savings as we leverage economies of scale.
Non-operating expense, net
| | | Year ended December 31, | | | | | 2017 | | | 2016 | | | Change | | | Non-operating expense, net | | $ | (928,000 | ) | | $ | (1,571,000 | ) | | $ | 643,000 | |
During the year-ended December 31, 2017, we recorded net non-operating expense in the amount of $928,000 compared to net non-operating expense in the amount of $1,571,000 recorded during the yearyears ended December 31, 2016. The net non-operating expense2021 and 2020:
| | | | | | | | | Year ended December 31, | | | 2021 | | 2020 | (Loss)/gain on equity investments | | $ | (1,045) | | $ | 1,284 | Loss on extinguishment of debt | | | — | | | (182) | Bank fees and financing charges | | | (139) | | | (244) | Other | | | (17) | | | — | Total | | $ | (1,201) | | $ | 858 |
As of $928,000 during 2017 was mainly comprisedDecember 31, 2021, the equity investment in Route1 had a readily determinable fair value of $731,000$722. We recorded an unrealized loss of interest expense related to a credit agreement and secured promissory note (the “Debt”)$1,045 in connection with Rockmore Investment Master Fund Ltd. (“Rockmore”) and $470,000the remeasurement of finance expenses recorded by our wellness operating segment. The net non-operating expenses were reduced by a gain of $225,000 on the revaluationshares of our derivative warrant liabilitiescommon stock and other non-operating income items.warrants of Route 1 it obtained in the 2018 sale of Group Mobile to Route 1. For the year-ended December 31, 2016, we recorded interest expense of $1,698,000 and a loss on the extinguishment of debt of $472,000 related to senior secured notes that were repaid in full on July 1, 2016. The net non-operating expenses were mainly reduced by a gain of $438,000 on the revaluation of our derivative warrant liabilities, a gain of $146,000 attributable to the foreign exchange related to our deposits with courts in foreign jurisdictions prior to them being returned during the first half of 2016, and other non-operating income items.
We expect that our non-operating income (expense) will remain highly volatile, and we may choose to fund our operations through additional financing. In particular, non-operatingNon-operating income (expense) will be affected by the adjustments to the fair value of our derivative instruments.equity investment, which could fluctuate materially from period to period. Fair value of these derivative instruments depends on a variety of assumptions, such as estimations regarding triggering of down-round protection and estimated future share price. An estimated increase in the price of our common stock would increase the value of the warrants and thus result in a loss on our statements of operations.assumptions.
Discontinued Operations
In October 2017, we completed the sale of FLI Charge and in March 2018, we completed the sale of Group Mobile. These two entities previously comprised our technology operating segment. The results of operations for FLI Charge and Group Mobile are presented in the consolidated statements of operations and comprehensive loss as consolidated net loss from discontinued operations. The discontinued operations had a loss $12,277,000 for the year-ended December 31, 2017, an increase of $7,553,000 from the loss of $4,724,000 for discontinued operations for the year-ended December 31, 2016.
Income Taxes on Income On December 22, 2017, the United States government enacted the Tax Act, which makes changes to the corporate tax rate, business-related deductions and taxation of foreign earnings, among other changes, that will generally be effective for tax years beginning after December 31, 2017.
As of December 31, 2017,2021, our estimated aggregate total NOLs were approximately $159,007,000$150,926 for United StatesU.S. federal state and local purposes, expiring 20 years from the respective tax years to which they relate.relate, and $56,336 for U.S. federal purposes with an indefinite life due to new regulations in the Tax Act of 2017. The NOL amounts are presented before Internal Revenue Code, Section 382 limitations (“Section 382”).limitations. The Tax Reform Act of 1986 imposed substantial restrictions on the utilization of NOLsNOL and tax credits in the event of an ownership change of a corporation. Thus, our ability to utilize all such NOLsNOL and credit carryforwards may be limited. The NOLs available following our merger completed in 2012 that areCARES Act was enacted on March 27, 2020 and provides favorable changes to tax law for businesses impacted by COVID-19. However, we do not subject to limitation amount to $119,406,000. The remaining NOLs of $39,601,000 are subject toanticipate the limitation of Section 382. The annual limitation is approximately $2,000,000. income tax law changes will materially benefit us. We did not have any material unrecognized tax benefits as of December 31, 2017.2021. We do not expect to record any additional material provisions for unrecognized tax benefits within the next year. Liquidity and Capital Resources In March 2020, we temporarily closed all global XpresSpa locations due to the categorization by local jurisdictions of the spa locations as “non-essential services.” XpresSpa reopened 22 locations as of December 31, 2021 as described under "Recent Developments -XpresSpa Premium Spa Services" below. We intend to reopen the remaining XpresSpa spa locations on a location-by-location basis and resume normal operations at such selected locations once airport traffic returns to sufficient levels to support operations at a unit level. Furthermore, XpresSpa Group continues to develop Treat, a travel health and wellness brand that is positioned for a post-pandemic world. Treat’s on-site centers (currently located in JFK International Airport and opening soon in Phoenix Sky Harbor International Airport and later this year in Salt Lake City International Airport) provide access to health and wellness services for travelers. Our teams provide travel-related diagnostic testing for virus, cold, flu and other illnesses as well as hydration therapy, IV Drips, and vitamin injections. Travelers can purchase time blocks to use our wellness Table of Contents ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) rooms to engage in interactive services like self-guided yoga, meditation and low impact weight exercises or to relax and unplug from the hectic pace of the airport and renew themselves before or after their trip. As of December 31, 2021, we had approximately $105,506 of cash and cash equivalents and total current assets of $108,979. Our total current liabilities balance, which primarily includes accounts payable, accrued expenses, the current portion of promissory note and the current portion of operating lease liabilities was $19,827 as of December 31, 2021. The working capital surplus was $89,152 as of December 31, 2021, compared to a working capital of $78,302 as of December 31, 2020. During 2021, holders of our December 2020 Investor Warrants, December 2020 Placement Agent Warrants and December 2020 Placement Agent Tail Fee Warrants exercised a total of 11,273,529 warrants for common shares. We received gross proceeds of approximately $19,245. In accordance with the placement agent agreements with H.C. Wainwright & Co., LLC and Palladium, we paid cash fees of $2,162 and issued 846,588 warrants to H.C. Wainwright & Co., LLC at an exercise price of $2.125 per share and 325,500 warrants to Palladium at an exercise price of $1.70 per share. Also, during 2021, we executed on our share repurchase program, repurchasing and redeeming 4,702,072 shares at average cost of $1.66 per share, for a total of $7,825. Also, during March 2022, the Company continuing to execute on its share repurchase program, repurchased 7,142,446 shares at average cost of $1.55 per share, for a total of $11,095. Our primary liquidity and capital requirements are for current and new XpresSpa locations for our wellness operating segment. As of December 31, 2017, we had cash and cash equivalents of $6,368,000 that we expect to utilize, along with cash flows from operations, to provide capital to support the growthmaintenance of our business, primarily through opening new XpresSpa locations, maintaining our existingcurrent XpresSpa locations and purchasing inventory for XpresSpa to support anticipated growth in salesbrand, as well as the expansion of the Treat Centers and maintaining corporate functions. In addition, we have approximately $3,279,000 of note and loan receivables, inventory and other current assets to support our working capital needs. Our total cash decreased by $11,542,000 from $17,910,000 as ofXpresCheck Wellness Centers. During the year ended December 31, 2016 to $6,368,000 as of December 31, 2017.2021, we generated $14,561 from operations.
On July 26, 2017, we entered into the Underwriting Agreement with Roth Capital Partners, LLC, acting as the representative of the Underwriters, relating to the Offering of 6,900,000 shares of XSPA Common Stock including 900,000 shares subject to the Underwriters’ over-allotment option, which was exercised on August 2, 2017 and closed on August 4, 2017. The price to the public in the Offering was $1.10 per share and the Underwriters agreed to purchase the shares of XSPA 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 approximately $6,584,000 after deducting underwriting discounts and commissions and other estimated offering expenses.
Below is a summary of the cash expenses and expenditures for the year-ended December 31, 2017:
| Cash balance as of December 31, 2016 | | $ | 17,910,000 | | | Net proceeds from the Offering | | | 6,584,000 | | | Total cash available for use in 2017 | | | 24,494,000 | | | | | | | | | Wellness operating segment | | | | | | Net cash generated from XpresSpa operations | | | 1,938,000 | | | Contributions received from noncontrolling interests | | | 316,000 | | | Merger and acquisition, integration and one-time costs | | | (1,263,000 | ) | | Capital expenditures | | | (4,712,000 | ) | | Payment of pre-XpresSpa acquisition accounts payable | | | (1,500,000 | ) | | Interest paid on the Debt | | | (731,000 | ) | | Security deposits for new leases | | | (183,000 | ) | | Distributions to noncontrolling interests | | | (452,000 | ) | | Other cash expenses | | | (1,458,000 | ) | | Net cash used by wellness operating segment | | | (8,045,000 | ) | | | | | | | | Corporate and intellectual property | | | | | | Net cash generated from intellectual property operating segment | | | 93,000 | | | Merger and acquisition costs related to the XpresSpa acquisition | | | (575,000 | ) | | Salaries and fringe benefits | | | (1,820,000 | ) | | Directors and officers liability insurance and other insurance payments | | | (451,000 | ) | | Director compensation | | | (300,000 | ) | | State of Delaware franchise tax payments | | | (328,000 | ) | | Tax returns, sales tax, audit, airport audits, valuations | | | (868,000 | ) | | Office rent (not allocated to XpresSpa) | | | (415,000 | ) | | Net cash used in operations and other | | | (906,000 | ) | | Net cash used by intellectual property operating segment and corporate | | | (5,570,000 | ) | | | | | | | | Discontinued operations | | | | | | Group Mobile and FLI Charge discontinued operations | | | (4,511,000 | ) | | Net cash used by discontinued operations | | | (4,511,000 | ) | | | | | | | | Cash balance as of December 31, 2017 | | $ | 6,368,000 | |
Based on our current operating plans, we expect to have sufficient funds for at least the next 12 months of operations. In addition, we may choose to raise additional funds in connection with new store openings and potential acquisitions of operating assets, which we expect to be complementary to our wellness operating segment. There can be no assurance, however, that any such opportunities will materialize.
Cash flows | | | | | | | | | | | | Year ended December 31, | | | 2021 | | 2020 | | Change | Net cash provided by (used in) operating activities | | $ | 14,561 | | $ | (25,012) | | $ | 39,573 | Net cash used in investing activities | | $ | (5,156) | | $ | (4,349) | | $ | (807) | Net cash provided by financing activities | | $ | 6,350 | | $ | 117,225 | | $ | (110,875) |
| | | Year ended December 31, | | | | | 2017 | | | 2016 | | | Change | | | Net cash used in operating activities | | $ | (12,172,000 | ) | | $ | (8,441,000 | ) | | $ | (3,731,000 | ) | | Net cash provided by (used in) investing activities | | $ | (5,396,000 | ) | | $ | 3,474,000 | | | $ | (8,870,000 | ) | | Net cash provided by (used in) financing activities | | $ | 6,087,000 | | | $ | (2,061,000 | ) | | $ | 8,148,000 | |
Operating activities During the year-ended December 31, 2017, net cash used in operating activities totaled $12,172,000, of which $8,761,000 was net cash used in continuing operations and $3,411,000 was net cash used in our discontinued operations. During the year-ended December 31, 2016, net cash used in operating activities totaled $8,441,000, of which $3,429,000 was net cash used in operating activities and $5,012,000 was net cash used in discontinued operations. The increase of cash used in operating activities of $3,731,000 was due to cash used in our daily operations. This was also driven by the fact that 2017 includes a full year of XpresSpa operations as compared to only eight days of operations in 2016, from the date of acquisition on December 23, 2016 through December 31, 2016.
Our net cash used in operating activities is expected to decrease in the future as we have integrated our wellness operating segment and corporate functions and began to realize savings as we leverage economies of scale.
Investing activities
During the year ended December 31, 2017,2021, net cash generated in operating activities was $14,561 as compared to net cash used in operating activities in 2020 of $25,012. The increase in net cash generated by operating activities was primarily due to the operations of our new XpresCheck Wellness Centers brand. Investing activities During the year ended December 31, 2021, net cash used in investing activities totaled $5,396,000, of which $4,286,000 was$5.156, compared to net cash used in continuing operations and $1,110 was net cash used in our discontinued operations, mainly attributable to the net cash used to acquire property and equipment and software. This was driven by capital expenditures for store openings and renovations as well as systems enhancements at both the stores and corporate office. The net cash used was partially reduced by $250,000 received upon the closing of FLI Charge and $150,000 received from the sale of one of our intellectual property operating segment’s patents. Duringinvesting activities during the year ended December 31, 2016, net cash provided by investing activities totaled $3,474,000, which2020 of $4,349. Cash in 2021 was comprised of $4,049,000 of net cash provided by continuing operations and $575,000 of net cash used in our discontinued operations. The net cash provided by continuing operations was mainly attributable to the cash acquired as a direct result of the acquisition of XpresSpa as well as from refunds of deposits we had with courts in Germany, Brazil and Romania. These proceeds were offset by $66,000 spentprimarily to acquire propertyleasehold improvements for new openings of XpresCheck and equipment.
Treat locations and the development of a new website for the Treat brand. We expect that net cash used in investing activities will increase as we intend to continue to open new storesXpresCheck and Treat locations and develop supporting infrastructure and systems for our wellness operating segment.systems. Table of Contents ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Financing activities During the year-ended December 31, 2017, net cashCash provided by financing activities totaled $6,087,000, which was comprised of $6,448,000 of net cash provided by continuing operations and $361,000 of net cash used in our discontinued operations. Included in the net cash provided by continuing operations are net proceeds of $6,584,000 received from the Offering in July and $316,000 from contributions made by certain of XpresSpa’s ACDBE partners, offset by distribution paymentsdecreased $110,875 primarily due to XpresSpa’s ACDBE partners of $452,000.lower equity based financing transactions.
During the year ended December 31, 2016, net cash used in financing activities totaled $2,061,000, which was all attributable to continuing operations and was comprised of $2,011,000 of net cash used to repay senior secured notes that were repaid in full on July 1, 2016 and $50,000 paid related to expenses incurred as a result of a debt modification to the senior secured notes prior to repayment.
A significant portion of our issued and outstanding warrants, for which the underlying shares of common stock held by non-affiliates are freely tradable, are currently “out-of-the-money.” Therefore, the potential of additional incoming funds from exercises by our warrant holders is currently very limited. To the extent that any of our issued and outstanding warrants were “in-the-money,” it could be used as a source of additional funding if the warrant holders choose to exercise their warrants for cash.
We may also choose to raise additional funds in connection with any acquisitions that we may pursue. There can be no assurance, however, that any such opportunity will materialize. Moreover, any such financing would most likely be dilutive to our current stockholders.
Off-Balance Sheet Arrangements We have no obligations, assets or liabilities that would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. Critical Accounting PoliciesEstimates While our significant accounting policies are more fully described in the notes to our audited consolidated financial statements for the year ended December 31, 2017, which appear elsewhere in this Annual Report on Form 10-K, weWe believe the following accounting policiesestimates to be the most critical in understanding the judgments and estimates we used in preparing our consolidated financial statements for the year ended December 31, 2017.2021.
Variable Interest Entities Revenue recognition
We recognize revenue from the sale of XpresSpa products and services at the point of sale, net of discounts and applicable sales taxes. Revenues from the XpresSpa wholesale and e-commerce businesses are recorded at the time goods are shipped. We exclude all sales taxes assessed to our customers. Sales taxes assessed on revenues are included in accounts payable, accrued expensesThe Company evaluates its ownership, contractual, pecuniary, and other current liabilitiesinterests in entities to determine if it has any variable interest in a variable interest entity (“VIE”). These evaluations are complex and involve judgment. If the Company determines that an entity in which it holds a contractual or ownership interest is a VIE and that the Company is the primary beneficiary, the Company consolidates such entity in its consolidated financial statements. The primary beneficiary of a VIE is the party that meets both of the following criteria: (i) has the power to make decisions that most significantly affect the economic performance of the VIE; and (ii) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE. Management performs ongoing reassessments of whether changes in the consolidated balance sheets until remittedfacts and circumstances regarding the Company’s involvement with a VIE will cause the consolidation conclusion to the state agencies.change. Changes in consolidation status are applied prospectively.
Revenue from patent licensing is recognized if collectability is reasonably assured, persuasive evidenceImpairment of an arrangement exists, the sales price is fixed or determinable and delivery of the service has been rendered. Currently, revenue arrangements related to intellectual property provide for the payment of contractually determined fees and other consideration for the grant of certain intellectual property rights related to our 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, we have 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 our 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.Long-Lived Assets
Goodwill
Goodwill is an asset representing the future economic benefits arising from otherLong-lived assets acquired in a business combination that are not individually identified and separately recognized.
Goodwill is reviewedtested for impairment at least annually,the lowest level at which there are identifiable operating cash flows, which is at the individual spa or clinic location for the XpresSpa and when triggeringXpresCheck businesses. The Company’s long-lived assets consist primarily of leasehold improvements and right to use lease assets for each of its locations (considered the asset group). The Company reviews its long-lived assets for recoverability yearly or sooner if events occur,or changes in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)Topic 350, Intangibles – Goodwill and Other. We have two reporting units for purposes of evaluating goodwill impairment and perform our annual goodwill impairment test on December 31. We have the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. If we can support the conclusion that it is not more likely than notcircumstances indicate that the faircarrying value of long-lived assets may not be recoverable. If indicators are present, the Company performs a reporting unit is less than its carrying amount, then we would not need to perform the two-step impairmentrecoverability test for the reporting unit. If we cannot support such a conclusion or do not elect to perform the qualitative assessment, then the first step of the goodwill impairment test is used to identify potential impairment by comparing the fair valuesum of the reporting unit withestimated undiscounted future cash flows attributable to the asset group in question to its carrying amount, including goodwill.
If the fair value of the reporting unit exceeds its carrying value, then the second step of the impairment test (measurement) does not need to be performed. If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the entity must perform the second step of the impairment test. Under the second step, anamount. An impairment loss is recognized for anyif it is determined that the long-lived asset group is not recoverable and is calculated based on the excess of the carrying amount of the reporting unit’s goodwilllong-lived asset group over the impliedlong-lived asset groups fair value of that goodwill.value. The implied fair value of goodwill is determined by allocatingCompany estimates the fair value of long-lived assets using present value income approach. Future cash flow was calculated based on forecasts over the reporting unit in a manner similar to an acquisition price allocation andestimated remaining useful life of the residual fair value after this allocationasset group, which for each of the Company’s locations, is the impliedremaining term of the operating lease. The Company estimates it weighted average cost of capital as the discount rate since it expects that this rate incorporates not only the time value of money but also the expectations regarding future cash flows and an appropriate risk premium.
The estimates used to calculate future cash flows are subjective in nature and involve uncertainties and matters of significant judgments and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated fair value of each asset group. The Company will calculate the reporting unit goodwill. A significantfuture cash flow using what it believes to be the most predictable of several scenarios. Typically, the changes in assumptions run under different business scenarios would not result in a material change in the assessment of the potential impairment or the impairment amount of judgment isa locations long-lived asset group. But if these estimates or related assumptions were to change materially, the Company may be required in performing goodwillto record an impairment tests including estimating the fair valuecharge. There were no indications of impairment as of December 31, 2017 for our continuing operations.See “Note 17 –Discontinued Operations and Assets and Liabilities Held for Disposal” for impairment charges pertaining to our discontinued operations for the year-ended December 31, 2017.
Intangible assets Intangible assets include trade names, customer relationships, and technology, which were primarily acquired as part of the acquisition of XpresSpa in December 2016 and arewere recorded based on the estimated fair value in purchase price allocation. IntangibleIn addition, intangible assets also include purchased patents.software and website development costs that were capitalized as part of the Company’s development of a mobile application and website for the treat brand. The Company accounts for these costs in accordance with ASC 350-40, Internal-Use Software. The intangible assets are amortized over their estimated useful lives, which are periodically evaluated for reasonableness. OurThe Company’s intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The fair value is than compared to the carrying value and an impairment charge is recognized by the amount in which the carrying value exceeds the fair value of the asset. In assessing the recoverability of ourthe Company’s intangible assets, wethe Company must make estimates and assumptions regarding future cash flows and other factors to determine the fair value of the respective assets. These estimates and assumptions could have a significant impact on whether an impairment charge is recognized and also the magnitude of any such charge. Fair value estimates are made at a specific point in time, based on relevant information. These estimates are subjective in natureDuring the years ended December 31, 2021 and involve uncertainties2020, the Company recognized impairment of $0 and matters of significant judgments and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. If these estimates or material related assumptions change in the future, we may be required to record impairment charges related to its intangible assets.$3,934.
Fair value measurements OurThe Company’s financial instruments consist principally of cash and cash equivalents, receivables, debt, equity investments, and derivative warrantliabilities. The fair value of a financial instrument is the amount that would be received in an asset sale or paid to transfer a liability in an orderly transaction between unaffiliated market participants. Assets and liabilities are measured at fair value. Such liabilitiesvalue are classified within Level 3 ofcategorized based on whether the fair value hierarchy because theyinputs are valued usingobservable in the Black-Scholes-Merton (“Black-Scholes”)market and the Monte-Carlo models (as these warrants include down-round protection clauses), which utilize significantdegree that the inputs that are unobservable inobservable. The categorization of financial instruments within the market. The inputs to estimate the fair value of our derivative warrant liabilities are the current market price of our common stock, the exercise price of the warrant, the warrants’ remaining expected term, the volatility of our common stock price, our assumptions regarding the probability and timing of a down-round protection triggering event and the risk-free interest rate. The tables below illustrate the unobservable inputs estimated by managementvaluation hierarchy is based on the respective balance sheet dates:
December 31, 2017:
Description | | Valuation technique | | Unobservable inputs | | Range | | May 2015 Warrants | | Black-Scholes | | Volatility | | | 39.64 | % | | | | | Risk-free interest rate | | | 1.88 | % | | | | | Expected term, in years | | | 2.34 | | | | | | Dividend yield | | | 0.00 | % |
December 31, 2016:
Description | | Valuation technique | | Unobservable inputs | | Range | | May 2015 Warrants | | Black-Scholes | | Volatility | | | 45.15 | % | | | | | Risk free interest rate | | | 1.57 | % | | | | | Expected term, in years | | | 3.34 | | | | | | Dividend yield | | | 0.00 | % |
The fair value measurementslowest level of the derivative warrant liabilities are evaluated by managementinput that is significant to ensure that changes are consistent with expectations of management based upon the sensitivity and nature of the related inputs. Significant changes in any of those inputs in isolation can result in a significant change in the fair value measurement. Generally, an increaseThe hierarchy is prioritized into three levels (with Level 3 being the lowest) defined as follows:
Level 1: Quoted prices in active markets for identical assets or liabilities that the market price of our common stock, an increase inentity has the volatility of our common stock, an increase in the remaining term of the warrants, or an increase of a probability of a down-round triggering event would each result in a directionally similar change in the estimated fair value of our derivative warrant liabilities. Such changes would increase the associated liability while decreases in these assumptions would decrease the associated liability. An increase in the risk-free interest rate or a decrease in the positive differential between the warrants’ exercise price and the market price of our common stock would result in a decrease in the estimated fair value measurement of the warrants and thus a decrease in the associated liability. We have not, and do not planability to declare dividends on our common stock and, as such, there is no change in the estimated fair value of the derivative warrant liabilities due to the dividend assumption. Had we made different assumptions about the inputs noted above, the recorded gain or loss, our net loss and net loss per share amounts could have been significantly different. access. Stock-based compensationLevel 2:
Stock-based compensation is recognized Observable inputs other than prices included in Level 1, such as an expense in the accompanying consolidated statements of operations and comprehensive loss and such cost is measured at the grant-date fair value of the equity-settled award. The fair value of stock options is estimated as of the date of grant using the Black-Scholes model. The expense is recognized on a straight-line basis over the requisite service period. We use the simplified method to estimate the expected term of options due to insufficient history and high turnover in the past. The contractual life of options granted under our 2006 and 2012 option plans are 6 and 10 years, respectively. Since our Company lacks sufficient history, expected volatility is estimated based on the average historical volatility ofquoted prices for similar entities with publicly traded shares. The risk-free rate for the expected term of the option is based on the United States Treasury yield curve as of the date of grant.
Income taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognizedin active markets; quoted prices for the future tax consequences attributable to differences between the financial statement carrying amounts of existingidentical or similar assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the periodmarkets that includes the enactment date. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not more likely than not to be realized. Tax benefits related to excess deductions on stock-based compensation arrangementsactive; or other inputs that are recognized when they reduce taxes payable.
In assessing the need for a valuation allowance, we look at cumulative losses in recent years, estimates of future taxable earnings, feasibility of tax planning strategies, the ability to realize tax benefit carryforwards, and other relevant information. Valuation allowances related to deferred tax assetsobservable or can be impacted by changes to tax laws, changes to statutory tax rates and future taxable earnings. Ultimately, the actual tax benefits to be realized will be based upon future taxable earnings levels, which are very difficult to predict. In the event that actual results differ from these estimates in future periods, we will be required to adjust the valuation allowance.
Significant judgment is required in evaluating our federal, state and foreign tax positions and in the determination of our tax provision. Despite management's belief that our liability for unrecognized tax benefits is adequate, it is often difficult to predict the final outcome or the timing of the resolution of any particular tax matters. We may adjust these accruals as relevant circumstances evolve, such as guidance from the relevant tax authority, our tax advisors, or resolution of issues in the courts. Our tax expense includes the impact of accrual provisions and changes to accruals that it considers appropriate. These adjustments are recognized as a component of income tax expense entirely in the period in which new information is available. We record interest related to unrecognized tax benefits in interest expense and penalties in the accompanying consolidated statements of operations and comprehensive loss as general and administrative expenses.
We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50 percent of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
On December 22, 2017, the United States government enacted the Tax Act, which makes changes to the corporate tax rate, business-related deductions and taxation of foreign earnings, among other changes, that will generally be effective for tax years beginning after December 31, 2017.
corroborated with observable market data. Segment reporting
Operating segments are defined as components of an enterprise about which separate financial information is available that is regularly evaluated by the enterprise’s CODM in deciding how to allocate resources and in assessing performance. We conduct our business through two operating segments, which are also our reportable segments: wellness and intellectual property. It should be noted that the segment reporting for wellness in 2016 only covers the period following the closing of the acquisition of XpresSpa on December 23, 2016 through our fiscal year end on December 31, 2016. We previously had a third operating segment, technology, which was comprised of our FLI Charge and Group Mobile businesses. The technology operating segment was discontinued due to the sale of FLI Charge in October 2017 and sale of Group Mobile in March 2018. The results of operations for FLI Charge and Group Mobile are presented in the consolidated statements of operations and comprehensive loss as consolidated net loss from discontinued operations. The carrying amounts of assets and liabilities belonging to Group Mobile as of December 31, 2017, and FLI Charge and Group Mobile as of December 31, 2016, are presented in the consolidated balance sheets as assets held for disposal and liabilities held for disposal, respectively.
Organizing our business through two operating segments allows us to align our resources, review and monitor performance, and make operating decisions. We determine our operating segments based on a number of factors our management uses to evaluate and run our business operations, including similarities of customers, products and technology. Our CODM regularly reviews operating segment revenue and operating income (loss) when assessing financial results of operating segments and allocating resources.
We measure the performance of our operating segments based upon operating segment revenue and operating income (loss). Operating segment operating income (loss) includes revenue and expenses incurred directly by the operating segment, including material costs, service costs, research and development and selling, marketing, and administrative expenses. Each operating segment records their respective general and administrative costs with the exception of the intellectual property operating segment, which has minimal general and administrative costs so they are combined with those of the non-operating corporate segment. No revenue from transactions between our operating segments was recorded.
Recently issued accounting pronouncementsLevel 3:
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 entity expects to be entitled in exchange for those goods or services. This guidance was amended in July 2015 and is effective for annual reporting periods beginning after December 15, 2017. We are currently in the final stage of assessing the impact of the adoption on our consolidated financial statements. We do not expect for there to be an impact on revenue recognition for our wellness operating segment, as the revenue is recognized when the service is performed and payment is collected from the customer. We do not expect for there to be an impact on revenue recognition for our intellectual property operating segment, as revenue is recognized upon execution of a settlement and/or licensing agreement, receipt of an upfront fee, and when all other revenue recognition criteria have been met, aswe have no further obligation, including no express or implied obligation on our part to maintain or upgrade the related technology, or provide future support or services.
ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory
This standard requires an entity to measure in-scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The new standard is effective for fiscal years and interim periods within those years beginning after December 15, 2016. Adoption of this ASU did not have a material impact on our consolidated financial statements.
ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
This standard simplifies the presentation of deferred income taxes by eliminating the separate classification of deferred income tax liabilities and assets into current and noncurrent amounts in the consolidated balance sheet. The amendments in the update require that all deferred tax liabilities and assets be classified as noncurrent in the consolidated balance sheet. The amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods within those fiscal years and may be applied either prospectively or retrospectively to all periods presented. Early adoption is permitted. We adopted ASU No. 2015-17 prospectively effective December 31, 2016. Adoption of this ASU did not result in any adjustment to the consolidated balance sheet as we record a full valuation allowance of our total deferred tax assets.
ASU No. 2016-01, Financial Instruments – Overall (Topic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
This standard which amends various aspects of the recognition, measurement, presentation, and disclosure for financial instruments. With respect to our consolidated financial statements, the most significant impact relates to the accounting for equity investments. It will impact the disclosure and presentation of financial assets and liabilities. The amendments in this update are effective for annual reporting periods, and interim periods within those years beginning after December 15, 2017. Early adoption by public entities is permitted only for certain provisions. We are currently in the process of evaluating the impact of the adoption on our consolidated financial statements.
ASU No. 2016-02, Leases (Topic 842)
This standard provides new guidance related to accounting for leases and supersedes United States GAAP on lease accounting with the intent to increase transparency. This standard requires operating leases to be recorded on the balance sheet as assets and liabilities and requires disclosure of key information about leasing arrangements. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of operations and comprehensive loss. The adoption will require a modified retrospective approach at the beginning of the earliest period presented. The new standard is effective for the fiscal year beginning after December 15, 2018, with early adoption permitted. We are currently in the process of evaluating the impact of the adoption on our consolidated financial statements, but we expect that it will result in a significant increase in our long-term assets and liabilities.
ASU No. 2016-06, Derivatives and Hedging: Contingent Put and Call Options in Debt Instruments
This standard clarifies the steps required to assess whether a call or put option meets the criteria for bifurcation as an embedded derivative. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2016. Adoption of this ASU did not have a material impact on our consolidated financial statements.
ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
This standard provides new guidance to simplify the accounting for stock-based payments and addresses the treatment of income tax consequences including classification of awards as either equity or liabilities, and classification on the statement of cash flows in financing or operating cash flows, respectively. The standard permits us to elect a policy whereby forfeitures are accounted for as they occur rather than on an estimated basis. The new standard is effective for the fiscal year beginning after December 15, 2016, with early adoption permitted. Adoption of this ASU did not have a material impact on our consolidated financial statements.
ASU No. 2016-13, Financial Instruments -Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
This standard changes the impairment model for most financial assetsUnobservable inputs that are measured at amortized costsupported by little or no market activity and certain other instruments, including trade receivables, from an incurred loss modelthat are significant to an expected loss model and adds certain new required disclosures. Under the expected loss model, entities will recognize estimated credit losses to be incurred over the entire contractual term of the instrument rather than delaying recognition of credit losses until it is probable the loss has been incurred. The new standard is effective for the fiscal year beginning after December 15, 2019, with early adoption permitted. We are currently in the process of evaluating the potential impact of the adoption on our consolidated financial statements.
ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts, Cash Payments, and Restricted Stock
This standard provides new guidance to help clarify whether certain items should be categorized as operating, investing, or financing in the statement of cash flows. This ASU No. 2016-15 provides guidance on eight specific cash flow issues. The new standard is effective for the fiscal year beginning after December 15, 2017, with early adoption permitted. Adoption of this ASU did not have a material impact on our consolidated financial statements.
ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business
This standard provides new guidance to clarify the definition of a business by providing guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions of assets or businesses. Under the new standard, to classify the acquisition of assets as a business, there must be an input, a substantive process that results in outputs, with outputs being defined as the key elements of the business. If substantially all the fair value of the assets acquired is concentratedand liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs.
There have been no changes in a single identifiable assetLevel 1, Level 2, and Level 3 and no changes in valuation techniques for these assets or group of similar identifiable assets, this would not qualify as a business. The new standard is effectiveliabilities for the fiscal year beginning afteryears ended December 15, 2017, with early adoption permitted. We31, 2021 and 2020. Investments in public companies are currentlycarried at fair value based on quoted market prices. Investments in equity securities of nonpublic entities without readily determinable fair values are carried at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the process of evaluating the potential impactidentical or a similar investment of the adoptionsame issuer. The Company reviews its equity securities without readily determinable fair values on our consolidated financial statements. ASU No. 2017-04, Intangibles-Goodwilla regular basis to determine if the investment is impaired. For purposes of this assessment, the Company considers the investee’s cash position, earnings and Other (Topic 350): Simplifyingrevenue outlook, liquidity and management ownership, among other factors, in its review. If management’s assessment indicates that an impairment exists, the Test for Goodwill Impairment
This standard provides new guidance to eliminateCompany estimates the requirement to calculate the implied fair value of goodwill, or the Step 2 test, to measure a goodwill impairment charge. Instead, entities will recordequity investment and recognizes in current earnings an impairment charge basedloss that is equal to the difference between the fair value of the equity investment and its carrying amount. Equity investments are recorded in other assets on the excessaccompanying consolidated balance sheets.
Recently adopted accounting pronouncements Please refer Note 2 to the reporting unit. The new standard is effective for the fiscal year beginning after December 15, 2019, with early adoption permitted. We are currentlyConsolidated Financial Statements in the process of evaluating the potential impact of the adoption on our consolidated financial statements. ASU No. 2017-09, Stock Compensation (Topic 718): Scope of Modification Accounting
This standard provides guidance about which changes to the terms or conditions of a stock-based payment award require an entity to apply modification accounting in Topic 718. 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 2017-09 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017; early adoption is permitted. AdoptionItem 8 of this ASU did not have a material impactAnnual Report on our consolidated financial statements.Form 10-K.
ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted ImprovementsRecently issued accounting pronouncements
Please refer Note 2 to Accounting for Hedging ActivitiesConsolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. This standard was created to provide more specific guidance and to simplify the application
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not required as we are a smaller reporting company. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our consolidated financial statements required by this Item are set forth in Item 15 beginning on page F-1 of this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Exchange Act that are designed to ensure that information required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive OfficerCEO and Chief Financial Officer (Principal Financial and Accounting Officer), as appropriate, to allow timely decisions regarding required disclosure. As of December 31, 2017, we carried out an evaluation, underUnder the supervision of and with the participation of our management, including our Chief Executive OfficerCEO and Chief Financial Officer (“CFO”), we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the endDecember 31, 2021. Our evaluation as of the period covered by this report.
Changes in Internal Control over Financial Reporting
There were no changesDecember 31, 2019 identified a material weaknesses in our internal control over financial reporting, during the year endedwhich remained unmitigated as of December 31, 20172021, as noted below in Report of Management on Internal Control over Financial Reporting. Based on their evaluation, our CEO and CFO concluded that have materially affected,the Company’s disclosure controls and procedures were not effective as of December 31, 2021 to ensure that information required to be disclosed by us in the reports that we file or are reasonably likelysubmit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and to materially affect,provide reasonable assurance that such information is accumulated and communicated to our internal control overmanagement, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.. Notwithstanding this conclusion, management believes that the consolidated financial reporting.
statements in this Form 10-K fairly present in all material respects our financial condition, results of operations and cash flows in conformity with GAAP. Report of Management on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal executive officer and principal financial and accounting officer and effected by our Board of Directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that: pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; | · | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; |
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and | · | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. | · | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. |
Because of our inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017.2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013 Framework). Based on our assessment,evaluation, management believesconcluded that as of December 31, 2017, our internal control over financial reporting was not effective as of December 31, 2021 due to a material weakness in our internal controls over our financial close and reporting process identified in 2019 and remaining unmitigated as of December 31, 2021. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected and corrected on a timely basis. As this deficiency created a reasonable possibility that a material misstatement would not be prevented or detected in a timely basis, management concluded that the control deficiency represented a material weakness and accordingly our internal control over financial reporting was not effective basedas of December 31, 2021. Management concluded that additional formal procedures should be implemented in the financial close and reporting process to ensure that appropriate and timely reviews occur on those criteria.all financial reporting analysis. Remediation Plan for Material Weakness in Internal Control over Financial Reporting We and our Board treat the controls surrounding, and the integrity of, our financial statements with the utmost priority. Management is committed to the planning and implementation of remediation efforts to address control deficiencies and any other identified areas of risk. These remediation efforts are intended to both address the identified material weakness and to enhance our overall financial control environment. In particular: | | | | | · | | we will continue to strengthen our interim and annual financial review controls to function with a sufficient level of precision to detect and correct errors on a timely basis. | | · | | we will continue to improve the timeliness of our closing processes with respect to interim and annual periods. | | | | | | | | |
Following identification of this control deficiency, commenced remediation efforts by implementing modifications to better ensure that the Company has appropriate and timely reviews on all financial reporting analysis. The material weakness in our internal control over financial reporting will not be considered remediated until these modifications are implemented, in operation for a sufficient period of time, tested, and concluded by management to be designed and operating effectively. In addition, as we continue to evaluate and work to improve our internal control over financial reporting, management may determine to take additional measures to address control deficiencies or determine to modify our remediation plan. Management will test and evaluate the implementation of these modifications during 2022 to ascertain whether they are designed and operating effectively to provide reasonable assurance that they will prevent or detect a material misstatement in the Company’s financial statements. The steps we took to address the deficiencies identified included: we appointed a permanent Chief Financial Officer in December 2020. we have engaged in efforts to restructure accounting processes and revise organizational structures to enhance accurate accounting and appropriate financial reporting. we have engaged outside service providers to assist with the valuation and recording of key reporting areas such as leases and stock compensation expense. we have implemented additional accounting software to aid in the accounting and financial reporting process. we have contracted an independent consulting firm to assist with the preparation of the Financial Statements and U.S. GAAP accounting research. in March 2021, we hired a seasoned Certified Public Accountant as a permanent Corporate Controller, who also has a Certified Information Systems Auditor accreditation. We are committed to maintaining a strong internal control environment, and we believe the measures described above will strengthen our internal control over financial reporting and remediate the material weakness we have identified. Our remediation efforts have begun, and we will continue to devote significant time and attention to these remedial efforts. As we continue to evaluate and work to improve our internal control over financial reporting, management may determine to take additional measures to strengthen controls or to modify the remediation plan described above, which may require additional implementation time. As noted above, we believe that, as a result of management’s in-depth review of its accounting processes, and the additional procedures management has implemented, there are no material inaccuracies or omissions of material fact in this Form 10-K and, to the best of our knowledge, we believe that the consolidated financial statements in this Form 10-K fairly present in all material respects our financial condition, results of operations and cash flows in conformity with GAAP. Changes in Internal Control over Financial Reporting Based on our evaluation, management concluded that our internal control over financial reporting was not effective as of December 31, 2021 due to a material weakness in our internal control over our financial close and reporting process, which was discovered in 2019, still remaining unmitigated. Management continues to conclude that as of December 31, 2021, we still did not have a sufficient complement of corporate personnel with appropriate levels of accounting and controls knowledge and experience commensurate with our financial reporting requirements to appropriately analyze, record and disclose accounting matters completely and accurately. As a result of this evaluation, we extensively used outside consultants who possessed the appropriate levels of accounting and controls knowledge to appropriately analyze, record and disclose accounting matters completely and accurately. Other than as set forth in the foregoing paragraph, there have been no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION As previously reported, on January 21, 2022, the Company announced that it had appointed Scott R. Milford to the role of President and Chief Executive Officer of the Company, effective as of January 19, 2022. The appointment of Mr. Milford followed the resignation of Douglas Satzman as the President and CEO of the Company for personal reasons effective as of the same date. On March 28, 2022,the Company and Mr. Milford entered into an Executive Employment Agreement (the “Employment Agreement”) in connection with Mr. Milford’s service to the Company as its CEO. The terms of the Employment Agreement are effective as of January 19, 2022, the date of Mr. Milford’s assumption of the role of CEO. The Employment agreement has a term of two years (the “Employment Period”) from the Effective Date. Following the Employment Period, Mr. Milford will continue to be employed by the Company as an “at will” employee. Pursuant to the terms of the Employment Agreement, Mr. Milford will be entitled to receive an annual base salary of $425,000. The Employment agreement also provides that Mr. Milford will be eligible to participate in any annual bonus and other incentive compensation program that the Company may adopt from time to time for its executive officers. Under the Employment Agreement, Mr. Milford will be eligible to earn an annual bonus, the target amount of which will be up to one hundred percent (100%) of Base Salary, based upon the achievement of performance goals and metrics established by the Board at its sole discretion. Any bonus will be determined as soon as reasonably practicable after the Company’s annual financial statements are finalized and will be split 50/50 between cash and a grant of restricted stock units with respect to the Company’s common stock. In the event the Employment Agreement is terminated for good reason by Mr. Milford, or by the Company without cause and Mr. Milford provides the Company with a release of claims, Mr. Milford shall be entitled to receive a cash severance payment in the amount of one hundred percent (100%) of his then current base salary and one year of COBRA continuation coverage. In addition, the Employment Agreement contains non-solicitation and non-competition provisions that apply during the term of Mr. Milford's employment and for six months thereafter. The foregoing description of the Employment Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Employment Agreement, a copy of which is attached hereto as Exhibit 10.48 and is incorporated herein by reference. ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS Not applicable.Applicable PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information called for by this Item maywill be foundincluded in our definitive Proxy Statement in connection with our 2018an amendment to this Annual Meeting of StockholdersReport on Form 10-K to be filed with the SEC under the captions “Management and Corporate Governance Matters,” “Section 16(a) Beneficial Ownership Reporting Compliance,” and “Code of Conduct and Ethics” is incorporated by reference in this Item 10. ITEM 11. EXECUTIVE COMPENSATION Information called for by this Item maywill be foundincluded in our definitive Proxy Statement in connection with our 2018an amendment to this Annual Meeting of StockholdersReport on Form 10-K to be filed with the SEC under the captions “Executive Officer and Director Compensation” and “Management and Corporate Governance” and is incorporated by reference in this Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information called for by this Item maywill be foundincluded in our definitive Proxy Statement in connection with our 2018an amendment to this Annual Meeting of StockholdersReport on Form 10-K to be filed with the SEC under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” and is incorporated by reference in this Item 12. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information called for by this Item maywill be foundincluded in our definitive Proxy Statement in connection with our 2018an amendment to this Annual Meeting of StockholdersReport on Form 10-K to be filed with the SEC under the captions “Certain Relationships and Related Person Transactions” and “Management and Corporate Governance” and is incorporated by reference in this Item 13. ITEM 14. PRINCIPAL ACCOUNTINGACCOUNTANT FEES AND SERVICES Information called for by this Item maywill be foundincluded in our definitive Proxy Statement in connection with our 2018an amendment to this Annual Meeting of StockholdersReport on Form 10-K to be filed with the SEC under the caption “Independent Registered Public Accounting Firm” and is incorporated by reference in this Item 14. PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a)(1)Consolidated Financial Statements. For the financial statements included in this Annual Report on Form 10-K, see “Index to the Financial Statements” on page F-1. (a)(2)Consolidated Financial Statement Schedules.All schedules are omitted because they are not applicable or because the required information is included in the financial statements or notes thereto. (a)(3)Exhibits. The following exhibits are filed as part of, or incorporated by reference into, this Annual Report on Form 10-K.
Exhibits Index Exhibit
No. | Description | | | |
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Exhibit
No.2.1
| | Description | 2.1
| | Agreement and Plan of Merger by and among FORM Holdings Corp., FHXMS, LLC, XpresSpa Holdings, LLC, the unitholders of XpresSpa who are parties thereto and Mistral XH Representative, LLC, as representative of the unitholders, dated as of August 8, 2016 (incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed with the SEC on August 8, 2016) | | | | 2.2 | | Amendment No. 1 to Agreement and Plan of Merger by and among FORM Holdings Corp., FHXMS, LLC, XpresSpa Holdings, LLC and Mistral XH Representative, LLC, as representative of the unitholders, dated September 8, 2016 (incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed with the SEC on September 9, 2016) | | | | 2.3 | | Amendment No. 2 to Agreement and Plan of Merger by and among FORM Holdings Corp., FHXMS, LLC, XpresSpa Holdings, LLC and Mistral XH Representative, LLC, as representative of the unitholders, dated October 25, 2016 (incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed with the SEC on October 25, 2016) | | | | 3.1 | | Amended and Restated Certificate of Incorporation as amended as of November 28, 2016 (incorporated by reference from Exhibit 3.1 to our Annual Report on Form 10-K filed with the SEC on April 20, 2020) | | | | 3.2 | | Certificate of Amendment to the Amended and Restated Certificate of Incorporation of XpresSpa Group, Inc., filed with the Secretary of State of the State of Delaware on June 10, 2020 (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed with the SEC on May 5, 2016)June 10, 2020) | | | | 3.23.3 | | Certificate of Amendment to Amended and Restated Certificate of Incorporation, dated January 5, 2018 (incorporated by reference to our Current Report on Form 8-K filed with the SEC on January 5, 2018)
| | | | 3.3 | | Third Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to our CurrentAnnual Report on Form 8-K10-K filed with the SEC on January 5, 2018)April 1, 2019) | | | | 3.43.4 | | CertificateAmendment to Bylaws of Designations, Preferences and Rights of Series A Convertible Preferred Stock (incorporated by reference from Exhibit 3.2 to our Current Report on Form 8-K filed on July 20, 2012)
| | | | 3.5 | | Certificate of Designations of Preferences, Rights and Limitations of Series B Convertible Preferred StockXpresSpa Group, Inc. (incorporated by reference from Exhibit 3.1 to our Current Report on Form 8-K filed with the SEC on October 16, 2015)August 6, 2021) | | | | 3.64.1 | | Certificate of Designation of Series C Junior Participating Preferred Stock (incorporated by reference from Exhibit 3.1 to our Current Report on Form 8-K filed with the SEC on March 21, 2016)
| | | | 3.7 | | Certificate of Designation of Preferences, Rights and Limitations of Series D Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed with the SEC on December 23, 2016). | | | | 4.1 | | Specimen common stock certificate (incorporated by reference from our Registration Statement on Form S-1 filed on May 18, 2010) | | | | 4.2 | | Form of Warrant Agreement (incorporated by reference from our Registration Statement on Form S-1 filed on March 29, 2010) | | | | 4.3 | | Form of Special Bridge Warrants (incorporated by reference from our Registration Statement on Form S-1 filed on January 29, 2010) | | | | 4.4† | | Form of Management Option Agreement (incorporated by reference from our Registration Statement on Form S-1 filed on March 29, 2010) | | | | 4.5 | | Form of Preferential Reload Warrant (incorporated by reference from our Quarterly Report on Form 10-Q for the period ended March 31, 2012 filed on May 15, 2012) |
4.6 | | Form of Reload Warrants (incorporated by reference from our Quarterly Report on Form 10-Q for the period ended March 31, 2012 filed on May 15, 2012) | | | | 4.7 | | Form of Series 1 Warrant (incorporated by reference from Annex F to our Registration Statement on Form S-4 (File No. 333-180609) originally filed with the SEC on April 6, 2012) | | | | 4.8 | | Form of Series 2 Warrant (incorporated by reference from Annex G to our Registration Statement on Form S-4 (File No. 333-180609) originally filed with the SEC on April 6, 2012) | | | | 4.9 | | Form of Warrant, dated June 20, 2014 (incorporated by reference from our Quarterly Report on Form 10-Q for the period ended June 30, 2014 filed on August 6, 2014) | | | | 4.10 | | Form of Warrant (incorporated by reference from Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on October 16, 2015) | | | | 4.11 | | Form of Notes (incorporated by reference from Exhibit 10.2 to our Current Report on Form 8-K filed with the SEC on May 4, 2015) | | | | 4.12 | | Form of Warrant (incorporated by reference from Exhibit 10.3 to our Current Report on Form 8-K filed with the SEC on May 4, 2015) | | | | 4.13 | | Form of Base Indenture between Vringo, Inc. and Computershare Trust Company, N.A. (incorporated by reference from Exhibit 10.4 to our Current Report on Form 8-K filed with the SEC on May 4, 2015) | | | | 4.14 | | Form of First Supplemental Indenture (incorporated by reference from Exhibit 10.5 to our Current Report on Form 8-K filed with the SEC on May 4, 2015) | | | | 4.15 | | Section 382 Rights Agreement, dated as of March 18, 2016, between Vringo, Inc. and American Stock Transfer & Trust Company, LLC, which includes the Form of Certificate of Designation of Series C Junior Participating Preferred Stock as Exhibit A, the Form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Stock as Exhibit C (incorporated by reference from Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on March 21, 2016) | | | |
Exhibit
No. | | Description |
|---|
| | |
|---|
4.2 | | Amendment to Section 382 Rights Agreement, dated March 18, 2019, between the Company and American Stock Transfer & Trust Company, LLC (incorporated by reference from Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on March 22, 2019) | 4.16 | | | 4.3 | | Form of Warrant to Purchase Shares of Common Stock of FORM Holdings Corp. (incorporated by reference from Annex F to our Registration Statement on Form S-4 filed with the SEC on October 26, 2016) | | | | 10.1†4.4 | | Form of Secured Convertible Note (incorporated by reference from Exhibit 4.1 to our Quarterly Report on Form 10-Q filed with the SEC on May 15, 2018) | | | | 4.5 | | Amendment to Secured Convertible Note (incorporated by reference from Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on June 27, 2019) | | | | 4.6 | | Second Amended and Restated Convertible Promissory Note, dated as of July 8, 2019 (incorporated by reference from Exhibit 4.3 to our Current Report on Form 8-K filed with the SEC on July 8, 2019) | | | | 4.7 | | Third Amended and Restated Convertible Promissory Note, dated as of January 9, 2020 (incorporated by reference from Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on January 14, 2020) | | | | 4.8 | | Fourth Amended and Restated Convertible Promissory Note, dated as of March 6, 2020 (incorporated by reference from Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on March 6, 2020) | | | | 4.9 | | Unsecured Convertible Note due May 31, 2022 (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on July 8, 2019) | | | | 4.10 | | Warrant to Purchase Common Stock in favor of Calm.com, Inc., dated as of July 8, 2019 (incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K filed with the SEC on July 8, 2019) | | | | 4.11 | | Form of Pre-Funded Warrant to Purchase Common Stock, dated March 19, 2020 (incorporated by reference from Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on March 19, 2020) | | | | 4.12 | | Form of Pre-Funded Warrant to Purchase Common Stock, dated March 25, 2020 (incorporated by reference from Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on March 25, 2020) | | | | 4.13 | | Form of Pre-Funded Warrant to Purchase Common Stock, dated March 27, 2020 (incorporated by reference from Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on March 27, 2020) | | | | 4.14 | | Form of Pre-Funded Warrant to Purchase Common Stock, dated April 6, 2020 (incorporated by reference from Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on April 7, 2020) | | | | 4.15 | | Description of the Registrant’s Securities (incorporated by reference from Exhibit 4.22 to our Annual Report on Form 10-K filed with the SEC on April 20, 2020) | | | | 4.16 | | Amended and Restated Calm Note, dated as of April 17, 2020 (incorporated by reference from Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on April 17, 2020). | | | | 4.17 | | Amended and Restated Calm Note, dated as of April 22, 2020 (incorporated by reference from Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on April 24, 2020) | | | | 4.18 | | Form of Warrant to Purchase Common Stock, dated June 17, 2020 (incorporated by reference from Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on June 17, 2020) |
Exhibit
No. | | Description |
|---|
| | |
|---|
| | | 4.19 | | Form of Placement Agent Warrant to Purchase Common Stock, dated June 17, 2020 (incorporated by reference from Exhibit 4.2 to our Current Report on Form 8-K filed with the SEC on June 17, 2020) | | | | 4.20 | | Form of Warrant to Purchase Common Stock, dated August 25, 2020 (incorporated by reference from Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on August 28, 2020) | | | | 4.21 | | Form of Pre-Funded Warrant to Purchase Common Stock, dated August 25, 2020 (incorporated by reference from Exhibit 4.2 to our Current Report on Form 8-K filed with the SEC on August 28, 2020) | | | | 4.22 | | Form of Placement Agent Warrant to Purchase Common Stock, dated August 25, 2020 (incorporated by reference from Exhibit 4.3 to our Current Report on Form 8-K filed with the SEC on August 28, 2020) | | | | 4.23 | | Form of Warrant to Purchase Common Stock, dated December 17, 2020 (incorporated by reference from Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on December 21, 2020) | | | | 4.24 | | Form of Placement Agent Warrant to Purchase Common Stock, dated December 17, 2020 (incorporated by reference from Exhibit 4.2 to our Current Report on Form 8-K filed with the SEC on December 21, 2020) | | | | 10.1† | | Vringo, Inc. 2012 Employee, Director and Consultant Equity Incentive Plan, as amended (incorporated by reference from Appendix C of our Proxy Statement on Schedule 14A (DEF 14A) filed with the SEC on September 25, 2015) | | | | 10.2† | | Form of Management Option Agreement (incorporated by reference from our Registration Statement on Form S-1 filed on March 29, 2010). | | | | 10.3† | | Form of Stock Option Agreement (incorporated by reference from our Registration Statement on Form S-8 filed on July 26, 2012) | | | | 10.3†10.4† | | Form of Restricted Stock Unit Agreement (incorporated by reference from our Registration Statement on Form S-8 filed on July 26, 2012) |
| | 10.410.5 | | Form of Indemnification Agreement, dated January 31, 2013, by and between Vringo, Inc. and each of its Directors and Executive Officer (incorporated by reference from our Annual Report on Form 10-K for the period ended December 31, 2012 filed on March 21, 2013) | | | | 10.510.6† | | Subscription Agreement, dated as of August 8, 2016, by and between FORM Holdings Corp. and Mistral Spa Holdings, LLC (incorporated by reference from Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on August 8, 2016)
| | | | 10.6 | | Subscription Agreement and Joinder, dated as of August 8, 2016, by and between XpresSpa Holdings, LLC and FORM Holdings Corp (incorporated by reference from Exhibit 10.2 to our Current Report on Form 8-K filed with the SEC on August 8, 2016) | | | | 10.7† | | FORM Holdings Corp. 2012 Employee, Director and Consultant Equity Incentive Plan, as amended (incorporated by reference from Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on November 28, 2016) | | | | 10.8†10.19 | | Independent Director’sForm of Registration Rights Agreement, dated May 15, 2018, by and among the Company and the Investors (incorporated by reference from Exhibit 10.9 to our Quarterly Report on Form 10-Q filed with the SEC on May 15, 2018).
| | | | 10.20 | | Amendment to Securities Purchase Agreement and Class A Warrants and Class B Warrants, dated as of July 8, 2019, by and between FORM Holdings Corp.the Company and Andrew R. Heyer,the purchasers party thereto (incorporated by reference from Exhibit 10.5 to our Current Report on Form 8-K filed with the SEC on July 8, 2019) | | | | 10.21 | | Product Sale and Marketing Agreement, dated November 12, 2018, by and between the Company and Calm.com, Inc. (incorporated by reference to Exhibit 10.28 to our Annual Report on Form 10-K filed with the SEC on April 1, 2019) |
Exhibit
No. | | Description |
|---|
| | |
|---|
| | | 10.22 | | Amendment to Amended and Restated Product Sale and Marketing, dated as of December 23, 2016October 30, 2019, by and between the Company and Calm.com, Inc. (incorporated by reference from Exhibit 10.8 to our Quarterly Report on Form 10-Q filed with the SEC on November 14, 2019) | | | | 10.25 | | Securities Purchase Agreement, dated as of July 8, 2019, by and between the Company and Calm.com, Inc. (incorporated by reference from Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on December 23, 2016)July 8, 2019) | | | | 10.9*††10.26 | | Confidential Settlement and Patent AssignmentRegistration Rights Agreement, dated as of July 8, 2019, by and between FORM Holdings Corp.the Company and Nokia Corporation dated as of December 5, 2016Calm.com, Inc. (incorporated by reference from Exhibit 10.2 to our AnnualCurrent Report on Form 10-K for8-K filed with the period ended December 31, 2016 filedSEC on March 30, 2017)July 8, 2019)
| | | | 10.1010.27 | | FormAmendment No. 3 to Agreement and Plan of Stock Purchase Agreement,Merger, dated as of February 2, 2016,October 1, 2019, by and between FORMthe Company, XpresSpa Holdings, Corp., Excalibur Integrated Systems, Inc., eachLLC, and Mistral XH Representative, LLC, as representative of the holdersunitholders of the capital stock of Excalibur, and the sellers’ representativeCompany (incorporated by reference from Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on FebruaryOctober 3, 2017)2019)
| | | | 10.11†10.29 | | EmploymentSecurities Purchase Agreement, dated February 13, 2013,as of March 19, 2020, by and between Vringo, Inc.the Company and Cliff Weinsteinthe purchasers party thereto (incorporated by reference fromto Exhibit 10.1410.1 to ourthe Company’s Current Report on Form 8-K filed with the SEC on March 19, 2020)
| | | | 10.30 | | Form of Exchange Agreement, dated as of March 19, 2020 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on March 19, 2020) | | | | 10.31 | | Voting Agreement, dated as of March 19, 2020, by and between the Company and Mistral Spa Holdings LLC (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on March 19, 2020) | | | | 10.32 | | Securities Purchase Agreement, dated as of March 25, 2020, by and between the Company and the purchasers party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 25, 2020) | | | | 10.33 | | Securities Purchase Agreement, dated as of March 27, 2020, by and between the Company and the purchasers party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 27, 2020) | | | | 10.34 | | Securities Purchase Agreement, dated as of April 6, 2020, by and between the Company and the purchasers party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 7, 2020) | | | | 10.35† | | Stock Option Grant under the XpresSpa Group Inc. 2020 Equity Incentive Plan (incorporated by reference to Exhibit 10.35 to the Company’s Annual Report on Form 10-K filed with the SEC on March 10, 2016)31, 2021) | | | | 10.12†10.36† | | Amendment to Employment Agreement dated October 13, 2015, by and between Vringo,Notice of Restricted Stock Unit Award under the XpresSpa Group Inc. and Cliff Weinstein2020 Equity Incentive Plan (incorporated by reference fromto Exhibit 10.2410.36 to ourthe Company’s Annual Report on Form 10-K filed with the SEC on March 10, 2016)31, 2021)
| | | | 10.13†10.37† | | Amendment to Employment AgreementOffer Letter, dated January 18, 2017, byNovember 27, 2020, between the Company and between FORM Holdings Corp. and Cliff WeinsteinJames A. Berry (incorporated by reference fromto Exhibit 10.110.37 to our Quarterlythe Company’s Annual Report on Form 10-Q10-K filed with the SEC on May 15, 2017)March 31, 2021)
|
Exhibit
No. | | Description |
|---|
| | |
|---|
| | | 10.38 | | | 10.14†
| | Amendment to Employment Agreement dated May 15, 2017, by and between FORM Holdings Corp. and Cliff WeinsteinU.S. Small Business Administration Paycheck Protection Program Note (incorporated by reference fromto Exhibit 10.1 to ourthe Company’s Current Report on Form 8-K filed with the SEC on May 5, 2017)7, 2020) | | | | 10.15†10.39 | | Executive EmploymentForm of Exchange Agreement, dated January 20, 2017, by and between FORM Holdings Corp. and Edward JankowskiJune 4, 2020 (incorporated by reference fromto Exhibit 10.210.1 to our Quarterly Report on Form 10-Q filed with the SEC on May 15, 2017)
| | | | 10.16† | | Executive Employment Agreement, dated January 18, 2017, by and between FORM Holdings Corp. and Andrew Perlman (incorporated by reference from Exhibit 10.3 to our Quarterly Report on Form 10-Q filed with the SEC on May 15, 2017) | | | | 10.17† | | Executive Employment Agreement, dated January 17, 2017, by and between FORM Holdings Corp. and Anastasia Nyrkovskaya (incorporated by reference from Exhibit 10.4 to our Quarterly Report on Form 10-Q filed with the SEC on May 15, 2017) | | | | 10.18† | | Executive Employment Agreement, dated January 17, 2017, by and between FORM Holdings Corp. and Jason Charkow (incorporated by reference from Exhibit 10.5 to our Quarterly Report on Form 10-Q filed with the SEC on May 15, 2017) | | | | 10.19 | | MembershipPurchase Agreement dated as of March 7, 2018 by and among Route1 Security Corporation, Route1 Inc. and XpresSpa Group, Inc. (incorporated by reference from Exhibit 2.1 to ourCompany’s Current Report on Form 8-K filed with the SEC on June 4, 2020) | | | | 10.40 | | Form of Securities Purchase Agreement, dated as of June 17, 2020 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 17, 2020) | | | | 10.41 | | Form of Securities Purchase Agreement, dated as of August 25, 2020 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 28, 2020) | | | | 10.42† | | XpresTest, Inc. 2020 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 28, 2020) | | | | 10.43† | | XpresSpa Group, Inc. 2020 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 30, 2020) | | | | 10.44 | | Form of Securities Purchase Agreement, dated as of December 17, 2020 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 21, 2020) | | | | 10.45† | | Form of XpresTest, Inc. Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.45 to the Company’s Amendment No. 1 to Annual Report on Form 10-K/A filed with the SEC on April 30, 2021) | | | | 10.46† | | Separation Agreement and Release dated as of January 21, 2022, between the Company and Doug Satzman (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 26, 2012) | | | | 10.48†* | | Executive Employment Agreement dated March 26, 2018)28, 2022, between the Company and Scott Milford. |
Exhibit
No. | | Description |
|---|
| | |
|---|
| | | 101.LAB | | | 101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase Document | | | | 101.PRE*101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | | 104 | | Cover Page Interactive Data File (embedded within the Inline XBRL documents) | | | |
| † | Management contract or compensatory plan or arrangement. |
| †† | Certain portions have been omitted pursuant to a confidential treatment request. Omitted information has been filed separately with the SEC. |
** Furnished herewith. 48 † Management contract or compensatory plan or arrangement.
†† Certain portions have been omitted pursuant to a confidential treatment request. Omitted information has been filed separately with the SEC. ITEM 16. FORM 10-K SUMMARY None. Exhibit XpresSpa Group, Inc. and Subsidiaries INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm TheTo the Board of Directors and
Stockholders of XpresSpa Group, Inc.:
Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of XpresSpa Group, Inc. and subsidiaries (the Company)“Company”) as of December 31, 20172021 and 2016,2020, and the related consolidated statements of operations, and comprehensive loss, changes inincome (loss), stockholders’ equity (deficit), and cash flows for each of the years then ended December 31, 2021 and 2020, and the related notes and schedules (collectively referred to as the financial statements)“financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172021 and 2016,2020, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2017,2021 and 2020, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Valuation of Long-Lived Assets As described in Note 2 to the financial statements, the Company evaluates long-lived assets for recoverability if events or changes in circumstances indicate that the carrying value of long-lived assets may not be recoverable. If indicators are present, the Company performs a recoverability test by comparing the sum of the estimated undiscounted future cash flows attributable to the asset group in question to its carrying amount. An impairment loss is recognized if it is determined that the long-lived asset group is not recoverable and is calculated based on the excess of the carrying amount of the long-lived asset group over the long-lived asset group fair value. The impairment tests require management to make assumptions when estimating the fair value of the asset groups, including financial projections. We identified the valuation of long-lived assets as a critical audit matter because of certain significant assumptions management makes in determining the fair value of the asset groups, including projections. The significant judgments made by management resulted in a high degree of auditor judgment and an increased audit effort in performing procedures. This is made more challenging by the uncertainty of the potential impact to cash flows due to the COVID-19 pandemic. Our audit procedures related to the Company’s valuation of long-lived assets included the following, among others, (i) testing management’s process for determining fair value estimates; (ii) evaluating the reasonableness of the significant assumptions used by management related to financial performance, and discount rates. Evaluating management’s assumptions related to financial performance involved evaluating whether the assumptions were reasonable considering (i) current and historical trends of the underlying assets; and (ii) engaging in discussions with management to evaluate the Company’s plans to develop an asset or dispose of an asset before the end of its estimated useful life. Professionals with specialized skill and knowledge were used to assist in evaluating the reasonableness of the significant assumptions related to the discount rate. Variable Interest Entities As described in Note 2 to the financial statements, the Company evaluates its ownership, contractual, pecuniary, and other interests in entities to determine if it has any variable interest in a variable interest entity (“VIE”). These evaluations are complex and involve judgment. If the company determines that an entity in which it holds a contractual or ownership interest is a VIE and that the Company is the primary beneficiary, the Company consolidates such entity in its financial statements. In connection with the Company’s XpresCheck Wellness Centers the Company provides services pursuant to contracts with Professional Limited Liability Companies (“PLLC’s”) which in turn contracts with physicians and other medical professional providers to render COVID-19 and other diagnostic testing services. Upon formation of the PLLC’s the Company executes with each PLLC a Managed Services Agreement (“MSA”), which provide various administrative services, management services and day-to day activities of the practice to be rendered by the Company. Effective July 1, 2021, contractual arrangements between the Company, the Company’s affiliated medical group and nominated shareholder were modified in a manner that changed the characteristics or adequacy of the nominee shareholder. As a result of this modification, the Company performed a reassessment to determine if the Company’s contractual interest in the PC’s met the criteria of the primary beneficiary. We identified management’s accounting for variable interest entities as a critical audit matter because there is significant judgment required by management to evaluate the contractual arrangements under the variable interest entity consolidation model. Auditing such considerations involved especially challenging auditor judgment in evaluating the appropriateness of the Company’s assessment and an increased audit effort. Our audit procedures related to the Company’s evaluation of whether the Company is the primary beneficiary included the following, among others, (i) assessed the contractual agreements and other related documents and evaluated the relationship and terms of the agreements to verify whether the PLLC’s should be considered a VIE (ii) evaluated if the Company has the power to direct the activities of the PLLC’s that most significantly impact the PLLC’s economic performance; (iii) evaluated the Company’s obligation to absorb losses of the PLLC’s that could potentially be significant to the PLLC’s; and (iv) for any entity for which the Company has determined consolidation is appropriate, we evaluated whether the Company consolidated the balances at the appropriate amounts, including applying appropriate audit procedures to the entity’s financial statements. /s/ CohnReznick LLP | | | | /s/ Friedman LLP | | We have served as the Company’s auditor since 2015. | 2020. | | | Jericho,East Hanover, New York | Jersey | March 29, 2018 | 31, 2022 |
XpresSpa Group, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) | | | | | | | | | December 31, | | December 31, | | | 2021 | | 2020 | Current assets | | | | | | | Cash and cash equivalents | | $ | 105,506 | | $ | 89,801 | Accounts receivable | | | 615 | | | - | Inventory | | | 1,763 | | | 657 | Other current assets | | | 1,095 | | | 1,321 | Total current assets | | | 108,979 | | | 91,779 | | | | | | | | Restricted cash | | | 751 | | | 701 | Property and equipment, net | | | 6,658 | | | 4,161 | Intangible assets, net | | | 3,732 | | | 870 | Operating lease right of use assets, net | | | 4,336 | | | 3,034 | Other assets | | | 2,810 | | | 2,588 | Total assets | | $ | 127,266 | | $ | 103,133 | | | | | | | | Current liabilities | | | | | | | Accounts payable, accrued expenses and other | | $ | 12,958 | | $ | 6,468 | Current portion of operating lease liabilities | | | 2,736 | | | 2,797 | Deferred revenue | | | 549 | | | 914 | Current portion of promissory note, unsecured | | | 3,584 | | | 3,298 | Total current liabilities | | | 19,827 | | | 13,477 | | | | | | | | Long-term liabilities | | | | | | | Promissory note, unsecured | | | - | | | 2,355 | Operating lease liabilities | | | 7,504 | | | 6,930 | Total liabilities | | | 27,331 | | | 22,762 | Commitments and contingencies (see Note 19) | | | | | | | | | | | | | | Equity | | | | | | | Series A Convertible Preferred Stock, $0.01 par value per share; 6,968 shares authorized; NaN issued and outstanding | | | - | | | - | Series C Junior Preferred Stock, $0.01 par value per share; 300,000 shares authorized; NaN issued and outstanding | | | - | | | - | Series D Convertible Preferred Stock, $0.01 par value per share; 500,000 shares authorized; NaN issued and outstanding | | | - | | | - | Series E Convertible Preferred Stock, $0.01 par value per share, 2,397,060 shares authorized; NaN issued and outstanding | | | - | | | - | Series F Convertible Preferred Stock, $0.01 par value per share, 9,000 shares authorized; NaN issued and outstanding | | | - | | | - | Common Stock, $0.01 par value per share, 150,000,000 shares authorized; 101,269,349 and 94,058,853 shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively | | | 1,013 | | | 941 | Additional paid-in capital | | | 487,306 | | | 475,709 | Accumulated deficit | | | (395,275) | | | (398,624) | Accumulated other comprehensive loss | | | (312) | | | (220) | Total equity attributable to XpresSpa Group, Inc. | | | 92,732 | | | 77,806 | Noncontrolling interests | | | 7,203 | | | 2,565 | Total equity | | | 99,935 | | | 80,371 | Total liabilities and equity | | $ | 127,266 | | $ | 103,133 |
| | | December 31,
2017 | | | December 31,
2016 | | | Current assets | | | | | | | | | | Cash and cash equivalents | | $ | 6,368 | | | $ | 17,910 | | | Inventory | | | 1,159 | | | | 2,506 | | | Other current assets | | | 2,120 | | | | 1,637 | | | Assets held for disposal | | | 6,446 | | | | 8,446 | | | Total current assets | | | 16,093 | | | | 30,499 | | | | | | | | | | | | | Restricted cash | | | 487 | | | | 638 | | | Property and equipment, net | | | 15,797 | | | | 16,266 | | | Intangible assets, net | | | 11,547 | | | | 13,719 | | | Goodwill | | | 19,630 | | | | 20,303 | | | Other assets | | | 1,686 | | | | 1,382 | | | Total assets | | $ | 65,240 | | | $ | 82,807 | | | | | | | | | | | | | Current liabilities | | | | | | | | | | Accounts payable, accrued expenses and other current liabilities | | $ | 8,736 | | | $ | 10,990 | | | Liabilities held for disposal | | | 3,761 | | | | 783 | | | Total current liabilities | | | 12,497 | | | | 11,773 | | | | | | | | | | | | | Long-term liabilities | | | | | | | | | | Debt | | | 6,500 | | | | 6,500 | | | Other liabilities | | | 404 | | | | 365 | | | Total liabilities | | | 19,401 | | | | 18,638 | | | Commitments and contingencies (see Note 19) | | | | | | | | | | | | | | | | | | | | Stockholders’ equity | | | | | | | | | | Series A Convertible Preferred stock, $0.01 par value per share; 500,000 shares authorized; 6,968 issued and none outstanding | | | — | | | | — | | | Series B Convertible Preferred stock, $0.01 par value per share, 5,000,000 shares authorized; 1,666,667 shares issued and none outstanding | | | — | | | | — | | | Series C Junior Preferred stock, $0.01 par value per share; 300,000 shares authorized; none issued and outstanding | | | — | | | | — | | | Series D Convertible Preferred Stock, $0.01 par value per share, 500,000 shares authorized; 475,208 shares issued and 420,541 shares outstanding with a liquidation value of $20,186 as of December 31, 2017; 491,427 shares 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; 26,545,690 and 18,304,881 shares issued and outstanding as of December 31, 2017 and 2016, respectively | | | 265 | | | | 183 | | | Additional paid-in capital | | | 290,396 | | | | 280,221 | | | Accumulated deficit | | | (249,708 | ) | | | (220,868 | ) | | Accumulated other comprehensive loss | | | (74 | ) | | | (13 | ) | | Total stockholders’ equity attributable to the Company | | | 40,883 | | | | 59,528 | | | Noncontrolling interests | | | 4,956 | | | | 4,641 | | | Total stockholders’ equity | | | 45,839 | | | | 64,169 | | | Total liabilities and stockholders’ equity | | $ | 65,240 | | | $ | 82,807 | |
The accompanying notes form an integral part of these consolidated financial statements XpresSpa Group, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (In thousands, except share and per share data) | | | | | | | | | | | | Year ended December 31, | | | | | 2021 | | 2020 | | | | | | | | | | | Revenue, net | | | | | | | | | Managed services fees | | | $ | 16,843 | | $ | - | | Patient services revenue | | | | 50,689 | | | - | | Services | | | | 5,420 | | | 7,025 | | Products | | | | 763 | | | 1,004 | | Other | | | | 14 | | | 356 | | Total revenue, net | | | | 73,729 | | | 8,385 | | | | | | | | | | | Cost of sales | | | | | | | | | Labor | | | | 13,421 | | | 6,290 | | Occupancy | | | | 2,505 | | | 2,809 | | Products and other operating costs | | | | 25,459 | | | 2,884 | | Total cost of sales | | | | 41,385 | | | 11,983 | | Depreciation and amortization | | | | 3,201 | | | 5,210 | | Impairment/disposal of assets | | | | 837 | | | 15,356 | | General and administrative | | | | 24,199 | | | 15,940 | | Total operating expenses | | | | 69,622 | | | 48,489 | | Operating income (loss) | | | | 4,107 | | | (40,104) | | Interest income (expense), net | | | | 43 | | | (1,832) | | Loss on revaluation of warrants and conversion options | | | | - | | | (51,147) | | Other non-operating (expense) income, net | | | | (1,201) | | | 858 | | Income (loss) before income taxes | | | | 2,949 | | | (92,225) | | Income tax expense | | | | (56) | | | (7) | | Net income (loss) | | | | 2,893 | | | (92,232) | | Net loss attributable to noncontrolling interests | | | | 456 | | | 1,744 | | Net income (loss) attributable to XpresSpa Group, Inc. | | | $ | 3,349 | | $ | (90,488) | | | | | | | | | | | Net income (loss) | | | $ | 2,893 | | $ | (92,232) | | Other comprehensive (loss) income from operations | | | | (92) | | | 63 | | Comprehensive income (loss) | | | $ | 2,801 | | $ | (92,169) | | | | | | | | | | | Earnings / Loss per share | | | | | | | | | Basic and diluted net earnings / loss per share | | | $ | 0.03 | | $ | (2.05) | | Weighted-average number of shares outstanding during the period | | | | | | | | | Basic | | | | 104,306,173 | | | 44,567,542 | | Diluted | | | | 105,076,758 | | | 44,567,542 | |
The accompanying notes form an integral part of these consolidated financial statements. XpresSpa Group, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY(DEFICIT) (In thousands, except share data) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | Series E | | Series F | | | | | | | Additional | | | | | other | | Total | | Non- | | | | | | Preferred stock | | Preferred stock | | Common stock | | paid- | | Accumulated | | comprehensive | | Company | | controlling | | Total | | | Shares | | Amount | | Shares | | Amount | | Shares * | | Amount * | | in capital * | | deficit | | loss | | equity | | interests | | equity | January 1, 2020 | | 977,865 | | $ | 10 | | 8,996 | | $ | 0 | | 5,157,390 | | $ | 52 | | $ | 302,118 | | $ | (308,136) | | $ | (283) | | $ | (6,239) | | $ | 3,703 | | $ | (2,536) | Issuances of Common Stock for payment of interest on B3D Note | | — | | | — | | — | | | — | | 324,585 | | | 3 | | | 459 | | | — | | | — | | | 462 | | | — | | | 462 | Conversion of B3D Note to Common Stock | | — | | | — | | — | | | — | | 13,934,525 | | | 139 | | | 20,000 | | | — | | | — | | | 20,139 | | | — | | | 20,139 | Issuance of Series E Preferred Stock for payment of interest on Calm Note | | 10,123 | | | — | | — | | | — | | — | | | — | | | 63 | | | — | | | — | | | 63 | | | — | | | 63 | Issuance of Common Stock for payment of interest on Calm Note | | — | | | — | | — | | | — | | 47,305 | | | — | | | 35 | | | — | | | — | | | 35 | | | — | | | 35 | Conversion of Calm Note to Common Stock | | — | | | — | | — | | | — | | 4,761,906 | | | 48 | | | 10,551 | | | — | | | — | | | 10,599 | | | — | | | 10,599 | Conversion of Series E Preferred Stock into Common Stock | | (987,988) | | | (10) | | — | | | — | | 510,460 | | | 5 | | | 5 | | | — | | | — | | | — | | | — | | | — | Conversion of Series F Preferred Stock into Common Stock | | — | | | — | | (8,996) | | | — | | 1,221,945 | | | 12 | | | (12) | | | — | | | — | | | — | | | — | | | — | Exercise of May 2018 Class A Warrants into Common Stock | | — | | | — | | — | | | — | | 4,961,290 | | | 50 | | | 8,987 | | | — | | | — | | | 9,037 | | | — | | | 9,037 | Exercise of Calm Warrants into Common Stock | | — | | | — | | — | | | — | | 1,622,149 | | | 16 | | | 4,092 | | | — | | | — | | | 4,108 | | | — | | | 4,108 | March Warrant Exchange for Common Stock - Class A Warrant | | — | | | — | | — | | | — | | 2,385,528 | | | 24 | | | 6,410 | | | — | | | — | | | 6,434 | | | — | | | 6,434 | March Warrant Exchange for Common Stock - Class D Warrant | | — | | | — | | — | | | — | | 527,669 | | | 5 | | | (5) | | | — | | | — | | | — | | | — | | | — | June Warrant Exchange for Common Stock - Calm Warrant | | — | | | — | | — | | | — | | 2,062,126 | | | 21 | | | 11,734 | | | — | | | — | | | 11,755 | | | — | | | 11,755 | Direct offerings of Common Stock and pre-funded warrants, net of costs | | — | | | — | | — | | | — | | 56,374,555 | | | 564 | | | 110,055 | | | — | | | — | | | 110,619 | | | — | | | 110,619 | Issuance of restricted stock | | — | | | — | | — | | | — | | 102,943 | | | 1 | | | (1) | | | — | | | — | | | — | | | — | | | — | Stock option exercises | | — | | | — | | — | | | — | | 6,167 | | | — | | | 7 | | | — | | | — | | | 7 | | | — | | | 7 | Issuance of Common Stock for services | | — | | | — | | — | | | — | | 58,333 | | | 1 | | | 134 | | | — | | | — | | | 135 | | | — | | | 135 | Fractional shares retired in reverse stock split | | — | | | — | | — | | | — | | (23) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | Stock-based compensation | | — | | | — | | — | | | — | | — | | | — | | | 1,077 | | | — | | | — | | | 1,077 | | | 251 | | | 1,328 | Foreign currency translation | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | 63 | | | 63 | | | — | | | 63 | Net loss for the period | | — | | | — | | — | | | — | | — | | | — | | | — | | | (90,488) | | | — | | | (90,488) | | | (1,744) | | | (92,232) | Distributions to noncontrolling interests | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | (244) | | | (244) | Contributions from noncontrolling interests | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | 599 | | | 599 | December 31, 2020 | | — | | $ | — | | — | | $ | — | | 94,058,853 | | $ | 941 | | $ | 475,709 | | $ | (398,624) | | $ | (220) | | $ | 77,806 | | $ | 2,565 | | $ | 80,371 |
*January 1, 2020 per share and weighted-average number of shares were adjusted to reflect the impact of the 1:3 reverse stock split that became effective on June 11, 2020. The accompanying notes form an integral part of these consolidated financial statements. XpresSpa Group, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSSCHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (In thousands, except share data) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated | | Total | | | | | | | | | Series E | | Series F | | | | | | | Additional | | | | | other | | Company | | Non- | | | | | | Preferred stock | | Preferred stock | | Common stock | | paid- | | Accumulated | | comprehensive | | equity | | controlling | | Total | | | Shares | | Amount | | Shares | | Amount | | Shares * | | Amount * | | in capital * | | deficit | | loss | | | | interests | | equity | January 1, 2021 | | — | | $ | — | | — | | $ | — | | 94,058,853 | | $ | 941 | | $ | 475,709 | | $ | (398,624) | | $ | (220) | | $ | 77,806 | | $ | 2,565 | | $ | 80,371 | Warrant exercises, net of costs | | — | | | — | | — | | | — | | 11,273,529 | | | 113 | | | 16,972 | | | — | | | — | | | 17,085 | | | — | | | 17,085 | Issuance of Common Stock for services | | — | | | — | | — | | | — | | 232,637 | | | 2 | | | 377 | | | — | | | — | | | 379 | | | — | | | 379 | Issuance of restricted stock | | — | | | — | | — | | | — | | 398,068 | | | 4 | | | (4) | | | — | | | — | | | — | | | — | | | — | Stock-based compensation | | — | | | — | | — | | | — | | — | | | — | | | 2,017 | | | — | | | — | | | 2,017 | | | 839 | | | 2,856 | Net income for the period | | — | | | — | | — | | | — | | — | | | — | | | — | | | 3,349 | | | — | | | 3,349 | | | (456) | | | 2,893 | Foreign currency translation | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | (92) | | | (92) | | | — | | | (92) | Contributions from noncontrolling interests | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | 818 | | | 818 | Redemptions of certain noncontrolling interests | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | (502) | | | (502) | Consolidation of Variable Interest Entities | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | 5,109 | | | 5,109 | Repurchase and retirement of common stock | | — | | | — | | — | | | — | | (4,702,072) | | | (47) | | | (7,778) | | | — | | | — | | | (7,825) | | | — | | | (7,825) | Distributions to noncontrolling interests | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | (1,170) | | | (1,170) | Stock option exercises | | — | | | — | | — | | | — | | 8,334 | | | — | | | 13 | | | — | | | — | | | 13 | | | — | | | 13 | December 31, 2021 | | — | | $ | — | | — | | $ | — | | 101,269,349 | | $ | 1,013 | | $ | 487,306 | | $ | (395,275) | | $ | (312) | | $ | 92,732 | | $ | 7,203 | | $ | 99,935 |
The accompanying notes form an integral part of these consolidated financial statements. XpresSpa Group, Inc. and per share data) Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) | | | For the years ended December 31, | | | | | 2017 | | | 2016 | | | | | | | | | | | Revenue | | | | | | | | | | Wellness | | $ | 48,373 | | | $ | 811 | | | Intellectual property | | | 450 | | | | 11,175 | | | Total revenue | | | 48,823 | | | | 11,986 | | | | | | | | | | | | | Cost of sales | | | | | | | | | | Wellness | | | 38,986 | | | | 404 | | | Intellectual property* | | | 357 | | | | 6,334 | | | Total cost of sales | | | 39,343 | | | | 6,738 | | | Depreciation, amortization and impairment | | | 7,976 | | | | 13,254 | | | General and administrative* | | | 16,577 | | | | 9,702 | | | Total operating expenses | | | 63,896 | | | | 29,694 | | | Operating loss from continuing operations | | | (15,073 | ) | | | (17,708 | ) | | Interest expense | | | (731 | ) | | | (1,698 | ) | | Extinguishment of debt | | | — | | | | (472 | ) | | Other non-operating income (expense), net | | | (197 | ) | | | 599 | | | Loss from continuing operations before income taxes | | | (16,001 | ) | | | (19,279 | ) | | Income tax expense | | | (111 | ) | | | — | | | Consolidated net loss from continuing operations | | | (16,112 | ) | | | (19,279 | ) | | Loss from discontinued operations before income taxes* | | | (12,265 | ) | | | (4,724 | ) | | Income tax expense | | | (12 | ) | | | — | | | Consolidated net loss from discontinued operations | | | (12,277 | ) | | | (4,724 | ) | | Consolidated net loss | | | (28,389 | ) | | | (24,003 | ) | | Net income attributable to noncontrolling interests | | | (451 | ) | | | (3 | ) | | Net loss attributable to the Company | | $ | (28,840 | ) | | $ | (24,006 | ) | | | | | | | | | | | | Consolidated net loss from continuing operations | | $ | (16,112 | ) | | $ | (19,279 | ) | | Other comprehensive income (loss) from continuing operations: foreign currency translation | | | (61 | ) | | | (13 | ) | | Comprehensive loss from continuing operations | | | (16,173 | ) | | | (19,292 | ) | | Consolidated net loss from discontinued operations | | | (12,277 | ) | | | (4,724 | ) | | Other comprehensive income (loss) from discontinued operations: foreign currency translation | | | — | | | | — | | | Comprehensive loss from discontinued operations | | | (12,277 | ) | | | (4,724 | ) | | Comprehensive loss | | $ | (28,450 | ) | | $ | (24,016 | ) | | | | | | | | | | | | Loss per share | | | | | | | | | | Loss per share from continuing operations | | $ | (0.74 | ) | | $ | (1.27 | ) | | Loss per share from discontinued operations | | | (0.55 | ) | | | (0.31 | ) | | Total basic and diluted net loss per share | | $ | (1.29 | ) | | $ | (1.58 | ) | | Weighted-average number of shares outstanding during the year | | | | | | | | | | Basic | | | 22,286,983 | | | | 15,167,292 | | | Diluted | | | 22,286,983 | | | | 15,167,292 | | | | | | | | | | | | | * Includes stock-based compensation expense, as follows: | | | | | | | | | | Intellectual property costs | | $ | — | | | $ | 223 | | | General and administrative | | | 2,177 | | | | 2,225 | | | Discontinued operations | | | 568 | | | | 122 | | | Total stock-based compensation expense | | $ | 2,745 | | | $ | 2,570 | |
| | | | | | | | | Year ended December 31, | | | 2021 | | 2020 | Cash flows from operating activities | �� | | | | | | Net income (loss) | | $ | 2,893 | | $ | (92,232) | Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | Items included in net loss not affecting operating cash flows: | | | | | | | Revaluation of warrants and conversion options | | | — | | | 51,147 | Revaluation of contingent consideration | | | — | | | (315) | Depreciation and amortization | | | 3,201 | | | 5,210 | Impairment/disposal of assets | | | 837 | | | 15,356 | Accretion of debt discount on notes | | | — | | | 1,125 | Amortization of operating lease right of use asset | | | 1,719 | | | 2,015 | Issuance of shares of Common Stock for payment of interest | | | — | | | 497 | Issuance of shares of Series E Preferred Stock for payment of interest | | | — | | | 63 | Loss on the extinguishment of debt | | | — | | | 182 | Issuance of shares of Common Stock for services | | | 379 | | | 135 | Amortization of debt issuance costs | | | — | | | 128 | Stock-based compensation | | | 2,856 | | | 1,328 | Loss on equity investment | | | 1,046 | | | (1,287) | Changes in assets and liabilities: | | | | | | | Increase in inventory | | | (1,106) | | | (10) | Increase in accounts receivable | | | (1,124) | | | — | Decrease in deferred revenue | | | (365) | | | — | Other assets, current and non-current | | | (1,251) | | | (281) | Other liabilities, current and non-current | | | (1,211) | | | (2,904) | Increase (decrease) in accounts payable | | | 6,687 | | | (5,169) | Net cash provided by (used) in operating activities | | | 14,561 | | | (25,012) | Cash flows from investing activities | | | | | | | Acquisition of property and equipment | | | (4,282) | | | (3,969) | Cash acquired on consolidations of certain Variable Interest Entities | | | 2,434 | | | — | Acquisition of software | | | (3,308) | | | (380) | Net cash used in investing activities | | | (5,156) | | | (4,349) | Cash flows from financing activities | | | | | | | Proceeds from direct offerings of Common Stock and warrants exercises, net of costs | | | 17,085 | | | 110,619 | Proceeds from borrowings under Paycheck Protection Program | | | — | | | 5,653 | Proceeds from additional borrowing from B3D | | | — | | | 500 | Proceeds from stock option exercises | | | 13 | | | 7 | Proceeds from funding advance | | | — | | | 910 | Repayment of funding advance | | | — | | | (819) | Repayment of Paycheck Protection Program | | | (2,069) | | | — | Redemption of non-controlling interests | | | (502) | | | — | Repurchase of Common Stocks | | | (7,825) | | | — | Contributions from noncontrolling interests | | | 818 | | | 599 | Distributions to noncontrolling interests | | | (1,170) | | | (244) | Net cash provided by financing activities | | | 6,350 | | | 117,225 | Effect of exchange rate changes on cash, cash equivalents and restricted cash | | | — | | | 3 | Increase in cash, cash equivalents and restricted cash | | | 15,755 | | | 87,867 | Cash, cash equivalents, and restricted cash at beginning of the year | | | 90,502 | | | 2,635 | Cash, cash equivalents, and restricted cash at end of the year | | $ | 106,257 | | $ | 90,502 | Cash paid for | | | | | | | Interest | | $ | 11 | | $ | 187 | Income taxes | | | — | | $ | 11 | Non-cash investing and financing transactions | | | | | | | Conversions of B3D Note into Common Stock | | | — | | | 20,139 | Conversions of Calm Note into Common Stock | | | — | | | 10,599 | Conversion and exchange of Calm Warrant into Common Stock | | | — | | | 15,863 | Exercise and exchanges of May 2018 Class A Warrants | | | — | | | 15,471 | Capital expenditures included in Accounts payable, accrued expenses and other | | | 1,081 | | | — |
The accompanying notes form an integral part of these consolidated financial statements. XpresSpa Group, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
| | | Preferred
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deficit | | | Accumulated
other
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Company
equity | | | Non-
controlling
interest | | | Total
equity | | | Balance as of December 31, 2015 | | $ | — | | | $ | 132 | | | $ | 237,246 | | | $ | (196,862 | ) | | $ | — | | | $ | 40,516 | | | $ | — | | | $ | 40,516 | | | Vesting of restricted stock units (“RSUs”) | | | — | | | | 1 | | | | (1 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | Issuance of common stock | | | — | | | | 25 | | | | 4,770 | | | | — | | | | — | | | | 4,795 | | | | — | | | | 4,795 | | | Equity warrants issued for acquisition of XpresSpa | | | — | | | | — | | | | 2,689 | | | | — | | | | — | | | | 2,689 | | | | — | | | | 2,689 | | | Shares of common stock issued for acquisition of XpresSpa | | | — | | | | 25 | | | | 5,200 | | | | — | | | | — | | | | 5,225 | | | | — | | | | 5,225 | | | Shares of preferred stock issued for acquisition of XpresSpa | | | 5 | | | | — | | | | 27,747 | | | | — | | | | — | | | | 27,752 | | | | — | | | | 27,752 | | | Stock-based compensation | | | — | | | | — | | | | 2,570 | | | | — | | | | — | | | | 2,570 | | | | — | | | | 2,570 | | | Net loss for the year | | | — | | | | — | | | | — | | | | (24,006 | ) | | | — | | | | (24,006 | ) | | | 3 | | | | (24,003 | ) | | Foreign currency translation | | | — | | | | — | | | | — | | | | — | | | | (13 | ) | | | (13 | ) | | | — | | | | (13 | ) | | Noncontrolling interests from acquisition of XpresSpa | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 4,638 | | | | 4,638 | | | Balance as of December 31, 2016 | | | 5 | | | | 183 | | | | 280,221 | | | | (220,868 | ) | | | (13 | ) | | | 59,528 | | | | 4,641 | | | | 64,169 | | | Issuance of common stock for services | | | — | | | | — | | | | 27 | | | | — | | | | — | | | | 27 | | | | — | | | | 27 | | | Shares of common stock issued for 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 | | | — | | | | — | | | | 2,745 | | | | — | | | | — | | | | 2,745 | | | | — | | | | 2,745 | | | Net loss for the year | | | — | | | | — | | | | — | | | | (28,840 | ) | | | — | | | | (28,840 | ) | | | 451 | | | | (28,389 | ) | | Foreign currency translation | | | — | | | | — | | | | — | | | | — | | | | (61 | ) | | | (61 | ) | | | — | | | | (61 | ) | | Contributions from noncontrolling interests | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 316 | | | | 316 | | Distributions to
noncontrolling interests | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (452 | ) | | | (452 | ) | | Balance as of December 31, 2017 | | $ | 4 | | | $ | 265 | | | $ | 290,396 | | | $ | (249,708 | ) | | $ | (74 | ) | | $ | 40,883 | | | $ | 4,956 | | | $ | 45,839 | |
The accompanying notes form an integral part of these consolidated financial statements.
XpresSpa Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | For the
years ended December 31, | | | | | 2017 | | | 2016 | | | Cash flows from operating activities | | | | | | | | | | Consolidated net loss | | $ | (28,389 | ) | | $ | (24,003 | ) | | Consolidated net loss from discontinued operations | | | (12,277 | ) | | | (4,724 | ) | | Consolidated net loss from continuing operations | | | (16,112 | ) | | | (19,279 | ) | | Adjustments to reconcile consolidated net loss from continuing operations to net cash used in operating activities: | | | | | | | | | | Items not affecting cash flows | | | | | | | | | | Depreciation and amortization | | | 7,976 | | | | 1,317 | | | Impairment of intangible assets | | | — | | | | 11,937 | | | Amortization of debt discount and debt issuance costs | | | — | | | | 1,871 | | | Stock-based compensation | | | 2,177 | | | | 2,448 | | | Issuance of warrants | | | — | | | | (281 | ) | | Loss on extinguishment of debt | | | — | | | | 356 | | | Conversion of shares of preferred stock to shares of common stock | | | (1 | ) | | | — | | | Issuance of shares of common stock for services | | | 27 | | | | 65 | | | Royalties settled by disposal of assets | | | — | | | | 1,750 | | | Gain on disposal of assets | | | (148 | ) | | | (564 | ) | | Change in fair value of derivative warrant liabilities | | | (225 | ) | | | (158 | ) | | Contingent liability as a result of acquisition | | | 316 | | | | — | | | Exchange rate loss, net | | | — | | | | (89 | ) | | Changes in assets and liabilities net of effects of acquisition | | | | | | | | | | Decrease in inventory | | | 1,347 | | | | 74 | | | Decrease (increase) in other current assets and other assets | | | (636 | ) | | | 284 | | | Decrease in accounts payable, accrued expenses and other current liabilities | | | (3,114 | ) | | | (2,880 | ) | | Decrease in other liabilities | | | (368 | ) | | | (280 | ) | | Net cash used in operating activities – continuing operations | | | (8,761 | ) | | | (3,429 | ) | | Net cash used in operating activities – discontinued operations | | | (3,411 | ) | | | (5,012 | ) | | Net cash used in operating activities | | | (12,172 | ) | | | (8,441 | ) | | Cash flows from investing activities | | | | | | | | | | Cash acquired as part of acquisition | | | 26 | | | | 2,114 | | | Acquisition of property and equipment | | | (4,479 | ) | | | (66 | ) | | Acquisition of software | | | (233 | ) | | | — | | | Proceeds from the sale of subsidiary | | | 250 | | | | — | | | Proceeds from sale of assets | | | 150 | | | | — | | | Decrease (increase) in deposits | | | — | | | | 2,001 | | | Net cash provided by (used in) investing activities – continuing operations | | | (4,286 | ) | | | 4,049 | | | Net cash used in investing activities – discontinued operations | | | (1,110 | ) | | | (575 | ) | | Net cash provided by (used in) investing activities | | | (5,396 | ) | | | 3,474 | | | Cash flows from financing activities | | | | | | | | | | Net proceeds from sale and issuance of shares of common stock in public offering | | | 6,584 | | | | — | | | Repayment of debt and line of credit | | | — | | | | (2,011 | ) | | Contributions from noncontrolling interests | | | 316 | | | | — | | | Distributions to noncontrolling interests | | | (452 | ) | | | — | | | Debt issuance costs | | | — | | | | (50 | ) | | Net cash provided by (used in) financing activities – continuing operations | | | 6,448 | | | | (2,061 | ) | | Net cash used in financing activities – discontinued operations | | | (361 | ) | | | — | | | Net cash provided by (used in) financing activities | | | 6,087 | | | | (2,061 | ) | | Effect of exchange rate changes | | | (61 | ) | | | (13 | ) | | Decrease in cash and cash equivalents | | | (11,542 | ) | | | (7,041 | ) | | Cash and cash equivalents at beginning of the year | | | 17,910 | | | | 24,951 | | | Cash and cash equivalents at end of the year | | $ | 6,368 | | | $ | 17,910 | | | Cash paid during the year for | | | | | | | | | | Interest | | $ | 731 | | | $ | 40 | | | Non-cash investing and financing transactions | | | | | | | | | | Issuance of shares of common stock to repay debt and interest | | $ | — | | | $ | 2,996 | | | Issuance of shares of common stock, preferred stock and warrants for the acquisition of XpresSpa | | $ | (908 | ) | | $ | 35,666 | | | Issuance of shares of common stock for the acquisition of Excalibur | | $ | 1,809 | | | $ | — | |
The accompanying notes form an integral part of these consolidated financial statements.
XpresSpa Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except for share and per share data) Note 1. General Overview Overview
On January 5, 2018, FORM Holdings Corp. changed its name to XpresSpa Group, Inc. (“XpresSpa Group” or the “Company”). The Company’s common stock, par value $0.01 per share, which had previously been listed under the trading symbol “FH” on the Nasdaq Capital Market, has been listed under the trading symbol “XSPA” since January 8, 2018.
Rebranding to XpresSpa Group aligned the Company’s corporate strategy to build is a pure-playleading global travel health and wellness services company, which the Company commenced following its acquisition ofholding company. XpresSpa Holdings, LLC (“XpresSpa”) on December 23, 2016. In 2017, the Company recruited employees for positions in both corporate and field teams, accelerated unit growth, reinvested in certain locations and extended leases, significantly streamlined operations, and engaged in new exclusive partnerships that offer XpresSpa customers innovative products and services.
The CompanyGroup currently has two3 reportable operating segments: wellnessXpresSpa, XpresTest, and intellectual property.Treat.
The Company’s wellness operating segment consists of XpresSpa which ishas been a leadingglobal airport retailer of spa services.services through its XpresSpa is a well-recognized airport spa brand with 56 locations, consisting of 51 domestic and 5 international locations, as of December 31, 2017. XpresSpa offersoffering travelers premium spa services, including massage, nail and skin care, as well as spa and travel products. During 2017products (“XpresSpa”).
Due to the COVID-19 Outbreak, effective March 24, 2020, the Company temporarily closed all global spa locations, largely due to the categorization of our spa locations by local jurisdictions as “non-essential services”. Normal market conditions and 2016,travel behavior were negatively impacted by the wellness operating segment generated $48,373 and $811 of revenue, respectively (2016 results include eight days of operations from the acquisition on December 23, 2016COVID-19 outbreak. Similar to December 31, 2016). The Company’s intellectual property operating segment is engagedmany businesses in the monetization of patents related to content and ad delivery, remote monitoring and computing technologies. During 2017 and 2016, this operating segment generated $450 and $11,175 of revenue, respectively.
In October 2017, the Company completed the sale of FLI Charge, Inc. (“FLI Charge”) and in March 2018, the Company completed the sale of Group Mobile Int’l LLC (“Group Mobile”). These two entities previously comprisedtravel sector, the Company’s technology operating segment. The resultsbusiness has been materially and adversely impacted by the COVID-19 outbreak. Most of operations for FLI Charge and Group Mobile are presented in the consolidated statements of operations and comprehensive loss as consolidated net loss from discontinued operations. The carrying amounts of assets and liabilities belonging to Group Mobiledomestic travel restrictions have been lifted as of December 31, 2017,2021 and FLI Chargethe Company believes that travel conditions are slowly returning to normal. The Company has reopened 16 locations out of its total domestic portfolio of 31 Spas. As travel slowly returns, the Company’s intention is to continue to review its portfolio and reopen spas once airport traffic returns to sufficient levels to support its operations and achieve adequate unit-level economics, including acceptable profit levels as well as serves our longer-term strategy of offering fully integrated health and wellness services.
Since the beginning of the temporary closure of XpresSpa locations, the Company through XpresSpa Group’s subsidiary XpresTest, Inc. (“XpresTest”), launched XpresCheck Wellness Centers, also in airports. XpresCheck offers COVID-19 and other medical diagnostic testing services to the traveling public, as well as airline, airport and concessionaire employees, and TSA and U.S. Customs and Border Protection agents. XpresTest has entered into managed services agreements (“MSAs”) with professional medical services companies that provide health care services to patients. The medical services companies pay XpresTest a monthly fee to operate in the XpresCheck Wellness Centers. Under the terms of MSAs, the Company provides office space, equipment, supplies, non-licensed staff, and management services in return for a management fee. Effective July 1, 2021, the Company determined that the PLLCs are VIEs due to their equity holders having insufficient capital at risk, and the Company having a variable interest and a primary beneficiary in the PLLCs. While management has used all currently available information in assessing the Company’s business prospects, the ultimate impact of the COVID-19 pandemic and its XpresCheck Wellness Centers on its results of operations, financial condition and cash flows remains uncertain. The success or failure of the Company’s XpresCheck Wellness Centers could also have a material effect on the Company’s business. Recent Developments XpresCheck Wellness Centers XpresCheck’s business has management services agreements with state licensed physicians and nurse practitioners, under which we administer COVID-19 testing options, including a Polymerase Chain Reaction (PCR) test and a rapid PCR test. As of the date of this report, there are 15 operating XpresCheck locations operating in 12 airports, including following locations opened since December 31, 2020: | ● | On January 12, 2021, the Company opened its second XpresCheck Wellness Center at Boston’s Logan International Airport. It contains 7 separate testing rooms to provide diagnostic COVID-19 testing. |
Table of Contents XpresSpa Group, MobileInc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except for share and per share data) | ● | On January 20, 2021, the Company announced the opening of an XpresCheck Wellness Center at Salt Lake City International Airport. It contains 4 separate testing rooms to provide diagnostic COVID-19 testing. |
| ● | On February 16, 2021, the Company announced the opening of our second XpresCheck Wellness Center facility at Newark Liberty International Airport. It contains 4 separate testing rooms to provide diagnostic COVID-19 testing. |
| ● | On March 8, 2021, the Company announced the opening of an XpresCheck Wellness Center at Houston George Bush Intercontinental Airport. It contains 4 separate testing rooms to provide diagnostic COVID-19 testing. |
| ● | On March 15, 2021, the Company announced the opening of XpresCheck Wellness Centers at Dulles International and Reagan National Airports in Virginia, containing 9 and 4 separate testing rooms, respectively, to provide diagnostic COVID-19 testing. |
| ● | On April 8, 2021, the Company announced the opening of an XpresCheck Wellness Center at Seattle-Tacoma International Airport. It contains 8 separate testing rooms to provide diagnostic COVID-19 testing. |
| ● | On April 21, 2021, the Company announced the opening of an XpresCheck Wellness Center at San Francisco International Airport. It contains 9 separate testing rooms to provide diagnostic COVID-19 testing. |
| ● | On October 13, 2021, the Company opened an XpresCheck Wellness Center at Hartsfield-Jackson Atlanta International Airport (ATL) Concourse E, converting a legacy XpresSpa located in Concourse E. It contains 6 separate testing rooms to provide diagnostic COVID-19 testing. |
| ● | In February 2022, a second XpresCheck Wellness Center opened at Denver International Airport, pre-security in the Great Hall. It contains 6 separate testing rooms to provide diagnostic COVID-19 testing. |
| ● | In March 2022, the Company opened an XpresCheck Wellness Center in Orlando International Airport, pre-security, in the South Walk area of the Main Terminal. It contains 5 separate testing rooms to provide diagnostic COVID-19 testing. |
During 2021, XpresCheck initiated a $2,001 eight-week pilot program with the Centers for Disease Control and Prevention (CDC) in collaboration with Concentric by Ginkgo. Under this program, XpresCheck is conducting biosurveillance monitoring at four major U.S. airports (JFK International Airport, Newark Liberty International Airport, San Francisco International Airport, and Hartsfield-Jackson Atlanta International Airport) aimed at identifying existing and new SARS-CoV-2 variants. On January 31, 2022, the Company announced the extension of the program, bringing the total contract to $5,534. Approximately $1,557 of the original $2,001 in revenue was recognized during the fourth quarter of 2021. We anticipate the remaining $3,977 of the full $5,534 amount will be realized in the first and second quarters of 2022. XpresSpa Premium Spa Services There are currently 16 operating XpresSpa domestic locations (including the Company’s franchise location in Austin-Bergstrom International Airport) and the Company expects to re-open 4 additional domestic locations in the near-term. A majority of the domestic XpresSpa locations are operating approximately 8 hours per day during the busiest hours (compared to up to 16 hours per day pre-pandemic). Additionally, XpresSpa implemented a price increase in mid-October 2021 in its efforts to return to profitability. And as airport volumes improve, the Company will continue to review operating hours to optimize revenue opportunity. During the fourth quarter, the Company began testing several new services to take advantage of a growing interest in non-traditional spa services and expansion of our retail offering to align more closely with the services we provide. The Table of Contents XpresSpa Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except for share and per share data) Company is evaluating the success of these new initiatives at each airport on an on-going basis and will incorporate changes to our approach as more of the portfolio is reactivated. There are also 6 international locations operating, including 3 XpresSpa locations in Dubai International Airport in the United Arab Emirates and 3 XpresSpa locations in Schiphol Amsterdam Airport in the Netherlands. The Company has also signed for 5 locations at Istanbul Airport and expect to open the first store this summer. Treat Treat is the Company’s new travel, health and wellness brand transforming the way one accesses care through a suite of health and wellness services supported by an integrated digital platform and a relevant retail offering to the traveling public. Treat’s on-site centers (currently located in JFK International Airport and opening soon in Phoenix Sky Harbor International Airport and later this year in Salt Lake City International Airport) provide access to health and wellness services for travelers. The Company’s teams provide travel-related diagnostic testing for virus, cold, flu and other illnesses as well as hydration therapy, IV Drips, and vitamin injections. Travelers can purchase time blocks to use the Company’s wellness rooms to engage in interactive services like self-guided yoga, meditation and low impact weight exercises or to relax and unplug from the hectic pace of the airport and renew themselves before or after their trip. Treat offers a website (www.treat.com) and mobile app to complement the offering with relevant health and wellness content designed to help people on the go with information that could impact their travel. The platform provides travelers access to a comprehensive online marketplace of services including global illness tracker tools such as the COVID-19 Requirements Map, on-demand chat care by licensed providers, a health wallet to store personal and family health records (including COVID-19 testing results), and a scheduler to arrange for direct care at one of our on-site locations. Liquidity and Financial Condition As of December 31, 2021, the Company had approximately $105,506 of cash and cash equivalents, and total current assets of approximately $108,979. The Company's total current liabilities balance, which includes accounts payable, deferred revenue, accrued expenses, and the current portions of its promissory note and operating lease liabilities was approximately $19,827 as of December 31, 2016, are presented in the consolidated balance sheets2021. The working capital was $89,152 as assets held for disposal and liabilities held for disposal, respectively. Wellness
XpresSpa is a leading airport retailer of spa services and related products. As of December 31, 2017, XpresSpa operated 56 total locations in 23 airports in three countries: the United States, Netherlands2021, compared to a working capital of $78,302 as of December 31, 2020.
The Company has aggressively reduced operating and United Arab Emirates. Services and products include: massage services for the neck, back, feet and whole body;
nail care, such as pedicures, manicures and polish changes;
travel products, such as neck pillows, blankets and massage tools; and
new offerings, such as cryotherapy services, NormaTec compression services, and Dermalogica personal care services and retail products.
For over 15 years, increased security requirements have led travelers to spend more time at the airport. In addition, in anticipation of the long and often stressful security lines, travelers allow for more time to get through security and, as a result, often experience increased downtime prior to boarding. Consequently, travelers at large airport hubs have idle timeoverhead expenses in the terminal after passing through security.
XpresSpa was developedbrand, while it continues to address the stress and idle time spent at the airport, allowing travelers to spend this time productively, by relaxing and focusingfocus on personal care and wellness. XpresSpa is well positioned to benefitits overall profitability, resulting in generation of positive cash flows from consumers’ growing interest in health and wellness and increasing demand for spa services and related wellness products. In addition, a confluence of microeconomic events has created favorable conditions for the expansion of retail concepts at airports, in particular retail concepts that attract higher spending from air travelers. The competition for airplane landings has forced airports to lower landing fees, which in turn has necessitated augmenting their retail offerings to offset budget shortfalls. Infrastructure projects at airports across the country, intended to make an airport more desirable to airlines, require funding from bond issuances that in turn rely upon, in part, the expected minimum rent guarantees and expected income from concessionaires.
Intellectual Property
operations, The intellectual property operating segment is engaged in the monetizationCompany has taken actions to improve its overall cash position and access to liquidity through equity offerings and debt retirements, by exploring valuable strategic partnerships, right sizing its corporate structure and streamlining its operations. During 2021, holders of patentsour December 2020 Investor Warrants, December 2020 Placement Agent Warrants and December 2020 Placement Agent Tail Fee Warrants exercised a total of 11,273,529 warrants for shares of our common stock. We received gross proceeds of approximately $19,245. In accordance with our placement agent agreements with H.C. Wainwright & Co., LLC and Palladium, we paid cash fees of $2,162 and issued 846,588 warrants to H.C. Wainwright & Co., LLC at an exercise price of $2.125 per share and 325,500 warrants to Palladium at an exercise price of $1.70 per share. See Note 12. Stockholders’ Equity for related to content and ad delivery, remote monitoring and computing technologies.discussion. Table of Contents Recent Developments
Rebranding
On January 5, 2018, the Company changed its name to XpresSpa Group, Inc. from FORM Holdings Corp, which aligned its corporate strategy to build a pure-play health and wellness services company. The Company’s common stock, par value $0.01Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except for share and per share which had previously been listed under the trading symbol “FH” on the Nasdaq Capital Market, has been listed under the trading symbol “XSPA” since January 8, 2018.data) DispositionsAirport Rent Concessions
On October 20, 2017, the Company sold FLI Charge to a group of private investors and FLI Charge management, who now own and operate FLI Charge. On March 22, 2018, the Company sold Group Mobile to a third party. The Company will not behas received rent concessions from landlords on a majority of its leases, allowing for the relief of minimum guaranteed payments in exchange for percentage-of-revenue rent or providing any continued management or financing support to FLI Charge or Group Mobile.
Sale of Patents
In January 2018,relief from rent through payment deferrals. Currently, the Company sold certain patents to Crypto Currency Patent Holdings Company LLC, a unit of Marathon Patent Group, Inc. (“Marathon”), for approximately $1,250, comprised of $250 in cash and 250,000 shares of Marathon common stock valued at approximately $1,000 at the time of the transaction. Pursuant to the sale, the Company cannot directly or indirectly offer, sell, pledge or transfer, or otherwise dispose of, the Marathon common stock for a period of 180 days ending on July 11, 2018.relief from these payments range from three-to twenty eight-months and began in March 2020. The Company received minimum guaranteed payment concession of approximately $2,078 and $2,107, respectively, in years ended December 31, 2021 and 2020.
Capital Raise
On July 26, 2017, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Roth Capital Partners, LLC, acting as the representative of the several underwriters named therein (collectively, the “Underwriters”), relating to the issuance and sale (the “Offering”) of 6,900,000 shares of the Company’s common stock, par value $0.01 per share (“XSPA Common Stock”) including 900,000 shares subject to the Underwriters’ over-allotment option, which was exercised on August 2, 2017 and closed on August 4, 2017. The price to the public in the Offering was $1.10 per share and the Underwriters agreed to purchase the shares of XSPA Common Stock from the Company pursuant to the Underwriting Agreement at a purchase price of $1.023 per share. The net proceeds to the Company from the Offering were approximately $6,584 after deducting underwriting discounts and commissions and other estimated offering expenses.
Note 2. Accounting and Reporting Policies (a) Basis of presentation and principles of consolidation The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States GAAP.of America (“U.S. GAAP”). The consolidated financial statements include the accounts of the Company, all entities that are wholly-ownedwholly owned by the Company, and all entities in which the Company has a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation. (b) Use of estimates The preparation of the accompanying consolidated financial statements in conformity with United StatesU.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses for the periods presented. Actual results may differ from such estimates. Significant items subject to such estimates and assumptions include the Company’s long-lived assets, intangibles assets, the useful lives of the Company’s intangible assets, the valuation of the Company’s derivative warrant liabilities, the valuation of stock-based compensation, deferred tax assets and liabilities, income tax uncertainties, and other contingencies. (c) Translation into United States dollars The Company conducts certain transactions in foreign currencies, which are recorded at the exchange rate as of the transaction date. All exchange gains and losses occurring from the remeasurement of monetary balance sheet items denominated in non-dollar currencies are included in non-operating income (expense) in the consolidated statements of operations and comprehensive loss. Accounts of the foreign subsidiaries of XpresSpa are translated into United States dollars. Assets and liabilities have been translated primarily at year end exchange rates and revenues and expenses have been translated at average monthly rates for the year. The translation adjustments arising from the use of different exchange rates are included as foreign currency translation within the consolidated statements of operations and comprehensive lossincome (loss) and consolidated statements of changes in stockholders’ equity. Table of Contents XpresSpa Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except for share and per share data) (d) Cash and cash equivalents The Company maintains cash in checking and money market accounts with financial institutions. The Company has established guidelines relating to diversification and maturities of its investments in order to minimize credit risk and maintain high liquidity of funds. The Company considers all highly liquid investments purchased with an original maturity of three months or less from the time they are acquired to be cash equivalents. Cash equivalents include amounts due from third partythird-party financial institutions for credit and debit card transactions. These itemstransactions which typically settle in less than 5five days. (e) Derivative instruments The Company recognizes all derivative instruments as either assets or liabilities in the consolidated balance sheets at their respective fair values. The Company'sCompany’s derivative instruments have been recorded as liabilities at fair value, and are revalued at each reporting date, with changes in the fair value of the instruments included in the consolidated statements of operations and comprehensive loss as non-operating income (expense). The Company reviews the terms of features embedded in non-derivative instruments to determine if such features require bifurcation and separate accounting as derivative financial instruments. Equity-linked derivative instruments are evaluated in accordance with FASB Accounting Standard Codification (“ASC”) 815-40, “Contracts in an Entity’s Own Equity”Equity,” to determine if such instruments are indexed to the Company’s own stock and qualify for classification in equity. (f) Accounts receivable Accounts receivable are recorded net of an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. In developing the allowance, the Company considers historical loss experience, the overall quality of the receivable portfolio and specifically identified customer risks. The Company periodically reviews the adequacy of the allowance and the factors used in the estimation making adjustments to the estimate as necessary. Accounts receivable pertaining to continuing operations are included in other current assets in the consolidated balance sheets. As of December 31, 2017 and 2016, there was no allowance for doubtful accounts.
(g) Inventory
All inventory is valued at the lower of cost or net realizable value. Cost is determined using a weighted-average cost method. Inventory is included in current assets in the consolidated balance sheets. (h)(g) Intangible assets
Intangible assets include trade names, customer relationships, and technology, which were primarily acquired as part of the acquisition of XpresSpa in December 2016 and arewere recorded based on the estimated fair value in purchase price allocation. IntangibleIn addition, intangible assets also include purchased patents.software and website development costs that were capitalized as part of the Company’s development of a mobile application and website for the treat brand. The Company accounts for these costs in accordance with ASC 350-40, Internal-Use Software. The intangible assets are amortized over their estimated useful lives, which are periodically evaluated for reasonableness. Gain or loss on dispositions of intangible assets isreflected in general and administrative expense in the consolidated statements of operations and comprehensive loss. The Company’s intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The fair value is than compared to the carrying value and an impairment charge is recognized by the amount in which the carrying value exceeds the fair value of the asset. In assessing the recoverability of the Company’s intangible assets, the Company must make estimates and assumptions regarding future cash flows and other factors to determine the fair value of the respective assets. These estimates and assumptions could have a significant impact on whether an impairment charge is recognized and also the magnitude of any such charge. Fair value estimates are made at a specific point in time, based on relevant information. These estimates are subjective in natureDuring the years ended December 31, 2021 and involve uncertainties and matters of significant judgments and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. If these estimates or material related assumptions change in the future,2020, the Company may be required to recordrecognized impairment charges related to its intangible assets.of $0 and $3,934. (i)(h) Property and equipment
Equipment Property and equipment isare recorded at historical cost and primarily consists of leasehold improvements, furniture and fixtures, and other operating equipment. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are depreciated over the lesser of the lease term or economic useful life. Maintenance and repairs are charged to expense, and renovations or improvements that extend the service lives of the Company’s assets are capitalized over the lesser of the extension period or life of the improvement. Gain or loss on dispositions Table of propertyContents XpresSpa Group, Inc. and equipmentis reflected in the consolidated net loss from discontinued operations in the consolidated statementsSubsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except for share and per share data) (i) Impairment of operations and comprehensive loss.long-lived assets (j) Goodwill
Goodwill is an asset representing the future economic benefits arising fromLong-lived assets acquired in a business combination that are not individually identified and separately recognized.
Goodwill is reviewedtested for impairment at least annually,the lowest level at which there are identifiable operating cash flows, which is at the individual spa or clinic location for the XpresSpa and when triggering events occur, in accordance withXpresCheck businesses. The Company’s long-lived assets consist primarily of leasehold improvements and right to use lease assets for each of its locations (considered the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)Topic 350, Intangibles – Goodwill and Otherasset group). The Company has two reporting unitsreviews its long-lived assets for purposesrecoverability yearly or sooner if events or changes in circumstances indicate that the carrying value of evaluating goodwill impairment and performing its annual goodwill impairment test on December 31. The Company has the option to perform a qualitative assessment to determine if an impairment is more likely thanlong-lived assets may not to have occurred.be recoverable. If indicators are present, the Company can support the conclusion that it is not more likely than not that the fair value ofperforms a reporting unit is less than its carrying amount, then the Company would not need to perform the two-step impairmentrecoverability test for the reporting unit. If the Company cannot support such a conclusion or does not elect to perform the qualitative assessment, then the first step of the goodwill impairment test is used to identify potential impairment by comparing the fair valuesum of the reporting unit withestimated undiscounted future cash flows attributable to the asset group in question to its carrying amount, including goodwill.
If the fair value of the reporting unit exceeds its carrying value, then the second step of the impairment test (measurement) does not need to be performed. If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the Company must perform the second step of the impairment test. Under the second step, anamount. An impairment loss is recognized for anyif it is determined that the long-lived asset group is not recoverable and is calculated based on the excess of the carrying amount of the reporting unit’s goodwilllong-lived asset group over the impliedlong-lived asset groups fair value of that goodwill.value. The implied fair value of goodwill is determined by allocatingCompany estimates the fair value of long-lived assets using present value income approach. Future cash flow was calculated based on forecasts over the reporting unitestimated remaining useful life of the asset group, which for each of the Company’s locations, is the remaining term of the operating lease.
(j) Leases The right of use asset (“ROU”) on the Company’s consolidated balance sheet represents a lessee's right to use an asset over the life of a lease. Operating lease ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term, 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. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company has elected to exclude all short-term leases (i.e, leases with term of 12 months or less) from recognition on the balance sheet. The Company’s lease liabilities are determined by calculating the present value of all future lease payments using the rate implicit in the lease if it can be readily determined, or the lessee’s incremental borrowing rate. The Company uses its incremental borrowing rate at the inception of the lease to determine the present value of future lease payments as the rate implicit in its leases could not be readily determined. Certain leases provide for contingent rents that are not measurable at inception. These contingent rents are primarily based on a manner similar topercentage of sales that are in excess of a predetermined level, an acquisitionincrease based on a change in the consumer price allocationindex or fair market value. These amounts are excluded from the calculation of the right of use asset and lease liability under ASC 842. Minimum rent under these leases is included in the determination of rent expense when it is probable that the expense has been incurred and the residual fair value afteramount can be reasonably estimated. The Financial Accounting Standards Board (“FASB”) issued a Q&A in March 2020 that focused on the application of lease guidance in ASC 842 for lease concessions related to the effects of COVID-19. The FASB staff has said that entities can elect to not evaluate whether concessions granted by lessors related to COVID-19 are lease modifications. Entities that make this allocation iselection can then apply the implied fair valuelease modification guidance in ASC 842 or account for the concession as if it were contemplated as part of the reporting unit goodwill. A significant amount of judgment is required in performing goodwill impairment tests including estimatingexisting contract. The Company has elected to not treat the fair value of a reporting unitconcessions as lease modifications and the implied fair value of goodwill. There were no indications of impairment as of December 31, 2017will instead account for the Company’s continuing operations.See “Note 17 –Discontinued Operationslease concessions as if they were contemplated as part of the existing leases. The Company has recorded negative variable lease expense and Assets and Liabilities Held for Disposal” for impairment charges pertaining to discontinued operations foradjusted lease liabilities at the year-ended December 31, 2017.point in which the rent concession has become accruable.
(k) Restricted cash and other assets Restricted cash, which is listed as its owna separate line item in the consolidated balance sheets, represents balances at financial institutions to secure bonds and letters of credit as required by the Company’s various lease agreements. Table of Contents Prior to December 31, 2013,XpresSpa Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except for share and per share data) (l) Equity investments Equity investments are carried at fair value with the Company operated a global platform for the distribution of mobile social applications and services. On February 18, 2014, the Company sold its mobile social application business to InfoMedia Services Limited (“InfoMedia”), receiving an 8.25% ownership interestchanges in InfoMedia as consideration and a seat on the board of directors of InfoMedia. The Company’s equity interest increased from 8.25% to 11% in the first quarter of 2017 due to a realignment of ownership interests. The Company’s investment in InfoMedia is included in other assetsfair value recorded in the consolidated balance sheets forstatement of operations and other comprehensive income (loss) in accordance with ASU 2016-01. Equity investments without readily determinable fair values are measured at cost less any identified impairment and reflective of any observable transactions. The Company will perform a qualitative assessment on an annual basis and recognize impairment if there are sufficient indicators that the years ended December 31, 2017 and December 31, 2016.fair value of the investment is less than the carrying value. (l)(m) Revenue recognition
XpresSpa The Company recognizes revenue from the sale of XpresSpa products and services when the services are rendered at XpresSpa stores and from the sale of products at the point of sale,time products are purchased at the Company’s stores or online usually by credit card, net of discounts and applicable sales taxes. Accordingly, the Company recognizes revenue for the Company’s single performance obligation related to both in-store and online sales at the point at which the service has been performed or the control of the merchandise has passed to the customer. Revenues from the XpresSpa wholesaleretail and e-commerce businesses are recorded at the time goods are shipped. The Company has a franchise agreement with an unaffiliated franchisee to operate an XpresSpa location. Under the Company’s franchising model, all initial franchising fees relate to the franchise right, which is a single performance obligation that transfers over time. Upon receipt of the non-recurring, non-refundable initial franchise fee, management records a deferred revenue liability and recognizes revenue on a straight-line basis over the life of the franchise agreement. The Company has also entered into collaborative agreements with marketing partners whereby it sells certain of its partners’ products in the Company’s XpresSpa spas. The Company acts as an agent for revenue recognition purposes and therefore records revenue net of the revenue share payable to the partners. Upon receipt of the non-recurring, non-refundable initial collaboration fee, management records a deferred revenue liability and recognizes revenue on a straight-line basis over the life of the collaboration agreement. XpresCheck Through its XpresCheck Wellness Centers and under the terms of the Managed Services Agreement (“MSA”) with PLLCs that in turn contract with physicians and Nurse Practitioners, the Company offers testing services to airline employees, contractors, concessionaire employees, TSA officers and U.S. Customs and Border Protection agents, as well as the traveling public. The Company has entered into MSAs with PLLCs that provide healthcare services to patients. Under the terms of the MSAs which may be modified for commercial reasonableness and fair market value, XpresTest provides office space, equipment, supplies, non-licensed staff, and management services to be used for the purpose of COVID-19 and other medical diagnostic testing in return for a management fee which was deemed a performance obligation for recognizing revenue prior to July 1, 2021. However, as a result of uncertainties around the cash flows of the XpresCheck Wellness Centers, the Company concluded in 2020 that the collectability criteria to qualify as a contract under ASC 606 was not met, and therefore, revenue associated with the monthly management fee would not be recognized until a subsequent reassessment resulted in the MSAs meeting the collectability criteria. XpresTest recognized revenue of $16,843 (including a cumulative catch-up adjustment of $3,186)during the six months ended June 30, 2021, under the MSAs, pursuant to reassessments in 2021, of the MSAs executed in 2020 and amended in 2021, and assessments and reassessments of MSAs executed and amended in 2021 until June 30, 2021, resulting in management’s conclusion that they met the collectability criteria. Any revenue collected not meeting the collectability criteria was recorded as deferred revenue. Table of Contents XpresSpa Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except for share and per share data) Effective, July 1, 2021 (see Note 4), the Company determined that the PLLCs are variable interest entities due to its equity holder having insufficient capital at risk, and the Company having a variable interest in the PLLCs. In pursuance, the total revenue of $50,689 for the PLLCs for the six months period ended December 31, 2021 were designated as revenue for the company. The performance obligation for this revenue was the PLLCs administering COVID-19 tests to airline employees, contractors, concessionaire employees, TSA officers and U.S. Customs and Border Protection agents, as well as the traveling public, with revenue being recognized at the point in time at which the service is performed. During 2021, XpresCheck initiated a $2,001, eight-week pilot program with the Centers for Disease Control and Prevention (CDC) in collaboration with Concentric by Ginkgo. Under this program, XpresCheck is conducting biosurveillance monitoring at four major U.S. airports (JFK International Airport, Newark Liberty International Airport, San Francisco International Airport, and Hartsfield-Jackson Atlanta International Airport) aimed at identifying existing and new SARS-CoV-2 variants. On January 31, 2022, the Company announced the extension of the program, bringing the total contract to $5,534. Approximately $1,557 of the original $2,001 in revenue was recognized during the fourth quarter of 2021 as the Company has one performance obligation related to this contract with CDC, for which the Company is recognizing the revenue over time. We anticipate the remaining $3,977(out of which $527 is in deferred revenue as of December 31, 2021) of the full $5,534 amount will be realized in the first and second quarters of 2022. The Company excludes all sales taxes assessed to its customers.our customers from revenue. Sales taxes assessed on revenues are included in accountsAccounts payable, accrued expenses and other current liabilities in on the Company’s consolidated balance sheets until remitted to the state agencies. Revenue from patent licensing is recognized if collectability is reasonably assured, persuasive evidence of an arrangement exists, the sales price is fixed or determinable and delivery of the service has been rendered. Currently, revenue arrangements related to intellectual property provide for the payment of contractually determined fees and other consideration for the grant of certain intellectual property rights related to the Company’s patents. These rights typically include some combination of the following: (i) the grant of a non-exclusive, retroactive and future license to manufacture and/or sell products covered by patents, (ii) the release of the licensee from certain claims, and (iii) the dismissal of any pending litigation. The intellectual property rights granted typically extend until the expiration of the related patents. Pursuant to the terms of these agreements, the Company has no further obligation with respect to the grant of the non-exclusive retroactive and future licenses, covenants-not-to-sue, releases, and other deliverables, including no express or implied obligation on the Company’s part to maintain or upgrade the related technology, or provide future support or services. Generally, the agreements provide for the grant of the licenses, covenants-not-to-sue, releases, and other significant deliverables upon execution of the agreement, or upon receipt of the upfront payment. As such, the earnings process is complete and revenue is recognized upon the execution of the agreement, upon receipt of the upfront fee, and when all other revenue recognition criteria have been met.
(m)(n) Gift cards and customer rewards program
XpresSpa offers no-fee, non-expiring gift cards to its customers. No revenue is recognized upon issuance of a gift card and a liability is established for the gift card’s cash value. The liability is relieved, and revenue is recognized upon redemption by the customer. As the gift cards have no expiration date, there is no provision for reduction in the value of unused card balances. In addition, XpresSpa maintains a rewards program in which customers earn loyalty points, which can be redeemed for future services. Loyalty points are rewarded upon joining the loyalty program, for customer birthdays, and based upon customer spending. When a customer redeems loyalty points, the Company recognizes revenue for the redeemed cash value and reduces the related loyalty program liability. On June 1, 2018, the Company adopted a formal expiration policy whereby any loyalty members with inactivity for an 18-month period will forfeit any unused loyalty rewards. Upon closure of the spa locations in March 2020, the Company temporarily suspended the expiration policy. The costs associated with gift cards and reward points are accrued as the rewards are earned by the cardholder and are included in accountsAccounts payable, accrued expenses and other current liabilities in the consolidated balance sheets until remitted to the state agencies.used. (o) Segment reporting ASC 280, (n) Segment Reporting, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the Chief Executive Officer, who reviews the financial performance and the results of operations of the segments prepared in accordance with U.S. GAAP when making decisions about allocating resources and assessing performance of the Company. The Company operates in twocurrently has 3 reportable operating segments: wellnessXpresSpa. XpresTest, and intellectual property. The Company’s wellnessTreat. See Note 15. Segment Information. Table of Contents XpresSpa Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except for share and per share data) There are currently no intersegment revenues. Asset information by operating segment is comprised of XpresSpa, a leading airport retailer of spa services and related travel products that has 56 locations as of December 31, 2017.presented below since the chief operating decision maker reviews this information by segment. The Company’s intellectual property operating segment is engagedreporting segments follow the same accounting policies used in the monetizationpreparation of patents related to content and ad delivery, remote monitoring and computing technologies. The Company previously had a third operating segment, technology, which was comprised of its FLI Charge and Group Mobile businesses. The technology operating segment was discontinued due to the sale of FLI Charge in October 2017 and sale of Group Mobile in March 2018. The results of operations for FLI Charge and Group Mobile are presented in theCompany’s audited consolidated statements of operations and comprehensive loss as consolidated net loss from discontinued operations. (o) Rent expensefinancial statements.
Minimum rent expense is recognized over the term of the lease, starting when possession of the property is taken from the landlord, which normally includes a construction period prior to the store opening. When a lease contains a predetermined fixed escalation of the minimum rent, the Company recognizes the related rent expense on a straight-line basis and records the difference between the recognized rent expense and the amounts payable under the lease as a short-term or long-term deferred rent liability. Costs related to common area maintenance, insurance, real estate taxes, and other occupancy costs the Company is obligated to pay are excluded from minimum rent expense.
Certain leases provide for contingent rents that are not measurable at inception. These contingent rents are primarily based on a percentage of sales that are in excess of a predetermined level and/or rent increase based on a change in the consumer price index or fair market value. These amounts are excluded from minimum rent and are included in the determination of rent expense when it is probable that the expense has been incurred and the amount can be reasonably estimated.
(p) Pre-opening costs Pre-opening and start-up activity costs, which include rent and occupancy, supplies, advertising, and other direct expenses incurred prior to the opening of a new store, are expensed in the period in which they occur.are incurred. (q) Cost of sales Cost of sales for the Company’s wellness operating segment consists of store-levelspa and clinic operating costs. Store-levelThese costs include all costs that are directly attributable to the storelocation’s operations and include: | ·● | payroll and related benefits for storethe location’s operations and store-level management; |
| ·● | rent, percentage rent and occupancy costs; |
| ·● | the cost of merchandise;merchandise and testing supplies; |
| ·● | freight, shipping and handling costs; |
| ·● | inventory shortage and valuation adjustments, including purchase price allocation increase in fair values which was recorded as part of acquisition;adjustments; and |
| ·● | costs associated with sourcing operations. |
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.
(r) Stock-based compensation Stock-based compensation is recognized as an expense in the consolidated statements of operations and comprehensive loss and such cost is measured at the grant-date fair value of the equity-settled award. The fair value of stock options is estimated as of the date of grant using the Black-Scholes-Merton (“Black-Scholes”) option-pricing model. The fair value of RSUsRestricted Stock Units (“RSUs”) is calculated as of the date of grant using the grant date closing share price multiplied by the number of RSUs granted. The expense is recognized on a straight-line basis, over the requisite service period. The Company uses the simplified method to estimate the expected term of options due to insufficient history and high turnover in the past. Expected volatility is estimated based on a weighted average historical volatility of the Company and comparable entities with publicly traded shares.Company. The risk-free rate for the expected term of the option is based on the United States Treasury yield curve as of the date of grant. (s) Income taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not more likely than not to be realized. Tax benefits related to excess deductions on stock-based compensation arrangements are recognized when they reduce taxes payable. On December 22, 2017, the United States government enacted comprehensive tax reform, commonly referred to as the Tax Cuts and Jobs Act of 2017 (“Tax Act”). The Tax Act makes changes to the corporate tax rate, business-related deductions and taxation of foreign earnings, among other changes, that will generally be effective for tax years beginning after December 31, 2017.
Table of Contents XpresSpa Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except for share and per share data) In assessing the need for a valuation allowance, the Company looks at cumulative losses in recent years, estimates of future taxable earnings, feasibility of tax planning strategies, the ability to realize tax benefit carryforwards, and other relevant information. Valuation allowances related to deferred tax assets can be impacted by changes to tax laws, changes to statutory tax rates and future taxable earnings. Ultimately, the actual tax benefits to be realized will be based upon future taxable earnings levels, which are very difficult to predict. In the event that actual results differ from these estimates in future periods, the Company will be required to adjust the valuation allowance. Significant judgment is required in evaluating the Company's federal, state, local, and foreign tax positions and in the determination of its tax provision. Despite management's belief that the Company's liability for unrecognized tax benefits is adequate, it is often difficult to predict the final outcome or the timing of the resolution of any particular tax matters. The Company may adjust these accruals as relevant circumstances evolve, such as guidance from the relevant tax authority, its tax advisors, or resolution of issues in the courts. The Company's tax expense includes the impact of accrual provisions and changes to accruals that it considers appropriate. These adjustments are recognized as a component of income tax expense entirely in the period in which new information is available. The Company records interest related to unrecognized tax benefits in interest expense and penalties in the consolidated statements of operations and comprehensive loss as general and administrative expenses.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company had 0 uncertain tax positions as of December 31, 2021 and 2020. (t) Noncontrolling interests Noncontrolling interests represent the noncontrolling holders’ percentage share of earnings or losses fromfrom; i) the subsidiaries, in which the Company holds a majority, but less than 100 percent,100%, ownership interest, ii) Variable Interest Entities, where the Company is a primary beneficiary (See sub note (w) below, and the results of which are included in the Company’s consolidated statements of operations and comprehensive loss.income (loss). Net earningsloss attributable to noncontrolling interests represents the proportionate share of the noncontrolling holders'holders’ ownership in certain subsidiaries of XpresSpa.XpresSpa and of XpresTest. (u) Net lossincome/(loss) per common share Basic net lossincome (loss) per share is computed by dividing the net income (loss) attributable to common shareholders for the period by the weighted-average number of shares of Common Stock outstanding during the period. Diluted net income (loss) per share is computed by dividing the net loss attributable to the Company for the period by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing the net loss attributable to the Company for the period by the weighted-average number of shares of common stockCommon Stock plus dilutive potential common stockCommon Stock considered outstanding during the period. However, as the Company generated net losses in all periods presented, some potentially dilutive securities that relate to the continuing operations, including certain warrants and stock options, were not reflected in diluted net loss per share because the impact of such instruments was anti-dilutive. (v) Commitments and contingencies Liabilities for loss contingencies arising from assessments, estimates or other sources are to be recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs expected to be incurred in connection with a loss contingency are expensed as incurred. (w) Variable Interest Entities (w) Reclassification
Certain balances have been reclassifiedThe Company evaluates its ownership, contractual, pecuniary, and other interests in entities to conformdetermine if it has any variable interest in a variable interest entity (“VIE”). These evaluations are complex and involve judgment. If the Company determines that an entity in which it holds a contractual or ownership interest is a VIE and that the Company is the primary beneficiary, the Company consolidates such entity in its consolidated financial statements. The primary beneficiary of a VIE is the party that meets both of the following criteria: (i) has the power to presentation requirements, including presentationmake decisions that most significantly affect the economic performance of discontinued operationsthe VIE; and assets and liabilities held for disposal with respect(ii) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE. Management performs ongoing reassessments of whether changes in the facts and circumstances regarding the Company’s FLI Chargeinvolvement with a VIE will cause the consolidation conclusion to change. Changes in consolidation status are applied prospectively.
Table of Contents XpresSpa Group, Inc. and Group Mobile businesses, as well as consistent presentation of cost of salesSubsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except for share and general and administrative expenses to align the presentation for operating segments.per share data)
(x) Fair value measurements The Company measures fair value in accordance with FASB ASC 820-10,Fair Value Measurements and Disclosures. FASBDisclosures. ASC 820-10 clarifies that fair value is an exit price, representing the amount that would be received by selling an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, FASB ASC 820-10 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value: Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. Level 2: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. Level 3: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date. The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. (y) Reclassification (y) Recently issued accounting pronouncements
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 entity expects to be entitled in exchange for those goods or services. This guidance was amended in July 2015 and is effective for annual reporting periods beginning after December 15, 2017. The Company is currentlyCertain balances in the final stage2020 consolidated financial statements have been reclassified to conform to the presentation in the 2021 consolidated financial statements, primarily the classification and presentation of assessingdeferred revenue. Such reclassifications did not have a material impact on the impact of the adoption on its consolidated financial statements.
(z) Recently adopted accounting pronouncements Accounting Standards Update No. 2020-10—Codification Improvements Issued in October 2020, this release updates various codification topics by clarifying or improving disclosure requirements to align with the SEC’s regulations. The Company adopted ASU 2020-10 as of the reporting period beginning January 1, 2021. The adoption of this update did not have a material effect on the Company’s consolidated financial statements. Accounting Standards Update No. 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 Issued in January 2020, the amendments in this update affect all entities that apply the guidance in Topics 321, 323, and 815 and (1) elect to apply the measurement alternative or (2) enter into a forward contract or purchase an as option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting. The Company applies the guidance included in Topic 815 to its derivative liabilities but does not expect for there to be an impactintend on revenue recognition for its wellness operating segment, asapplying the revenue is recognized when the service is performed and payment is collected from the customer. The Company does not expect for there to be an impact on revenue recognition for its intellectual property operating segment, as revenue is recognized upon execution of a settlement and/or licensing agreement, receipt of an upfront fee, and when all other revenue recognition criteria have been met, asthe Company has no further obligation, including no express or implied obligation on our part to maintain or upgrade the related technology, or provide future support or services. ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory
This standard requires an entity to measure in-scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling pricenew measurement alternative included in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.update. The new standard is effective for fiscal years beginning after December 15, 2020, and interim periods within those years beginning after December 15, 2016.fiscal years. Adoption of this ASUstandard did not have a material impact on the Company’s consolidated financial statements.
Table of Contents XpresSpa Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except for share and per share data) ASUAccounting Standards Update No. 2015-17, 2019-12—Income Taxes (Topic 740): Balance Sheet Classification of DeferredSimplifying the Accounting for Income Taxes
This standard simplifiesIssued in December 2019, the presentation of deferred income taxes by eliminating the separate classification of deferred income tax liabilities and assets into current and noncurrent amounts in the consolidated balance sheet. The amendments in the update require that all deferred tax liabilities and assets be classified as noncurrent in the consolidated balance sheet. The amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods within those fiscal years and may be applied either prospectively or retrospectively to all periods presented. Early adoption is permitted. The Company adopted ASU No. 2015-17 prospectively effective December 31, 2016. Adoption of this ASU did not result in any adjustment to the consolidated balance sheet as the Company records a full valuation allowance of its total deferred tax assets.
ASU No. 2016-01, Financial Instruments – Overall (Topic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
This standard which amends various aspects of the recognition, measurement, presentation, and disclosure for financial instruments. With respect to the Company’s consolidated financial statements, the most significant impact relates to the accounting for equity investments. It will impact the disclosure and presentation of financial assets and liabilities. The amendments in this update are effective for annual reporting periods, and interim periods within those years beginning after December 15, 2017. Early adoption by public entities is permitted only for certain provisions. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.
ASU No. 2016-02, Leases (Topic 842)
This standard provides new guidance related to accounting for leases and supersedes United States GAAP on lease accounting with the intent to increase transparency. This standard requires operating leases to be recorded on the balance sheet as assets and liabilities and requires disclosure of key information about leasing arrangements. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of operations and comprehensive loss. The adoption will require a modified retrospective approach as of the beginning of the earliest period presented. The new standard is effective for the fiscal year beginning after December 15, 2018, with early adoption permitted. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements, but the Company expects that it will result in a significant increase in its long-term assets and liabilities.
ASU No. 2016-06, Derivatives and Hedging: Contingent Put and Call Options in Debt Instruments
This standard clarifies the steps required to assess whether a call or put option meets the criteria for bifurcation as an embedded derivative. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. 2020. The amendments in this update simplify the accounting for income taxes by removing certain exceptions to guidance in Topic 740. The specific areas of potential simplification were submitted by stakeholders as part of the FASB’s simplification initiative. Adoption of this ASUstandard did not have a material impact on the Company’s consolidated financial statements.
ASU(z) Recently issued accounting pronouncements
Accounting Standards Update No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements2020-06—Debt--Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) Issued in August 2020, this update is intended to Employee Share-Based Paymentreduce the unnecessary complexity of the current guidance thus resulting in more accurate accounting for convertible instruments and consistent treatment from one entity to the next. Under current GAAP, there are five accounting models for convertible debt instruments. Except for the traditional convertible debt model that recognizes a convertible debt instrument as a single debt instrument, the other four models, with their different measurement guidance, require that a convertible debt instrument be separated (using different separation approaches) into a debt component and an equity or a derivative component. Convertible preferred stock also is required to be assessed under similar models. The Financial Accounting This standard provides new guidance Standard Board (“FASB”) decided to simplify the accounting for stock-based payments and addressesconvertible instruments by removing certain separation models currently included in other accounting guidance that were being applied to current accounting for convertible instruments. Under the treatment of income tax consequences including classification of awards as either equity or liabilities, and classification onamendments in this update, an embedded conversion feature no longer needs to be separated from the statement of cash flows in financing or operating cash flows, respectively. The standard permits the Companyhost contract for convertible instruments with conversion features that are not required to elect a policy whereby forfeitures arebe accounted for as they occur rather than onderivatives. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost and a convertible preferred stock will be accounted for as a single equity instrument measured at its historical cost, as long as no other features require bifurcation and recognition as derivatives. The FASB also decided to add additional disclosure requirements in an estimated basis. attempt to improve the usefulness and relevance of the information being provided.
The new standard is effective for the fiscal yearyears beginning after December 15, 2016, with early2021, and interim periods within those fiscal years. The Company does not believe the adoption permitted. Adoption of this ASU did notstandard will have a material impact on the Company’s consolidated financial statements. ASU No. 2016-13, Financial Instruments -Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
This standard changes the impairment model for most financial assets that are measured at amortized cost and certain other instruments, including trade receivables, from an incurred loss model to an expected loss model and adds certain new required disclosures. Under the expected loss model, entities will recognize estimated credit losses to be incurred over the entire contractual term of the instrument rather than delaying recognition of credit losses until it is probable the loss has been incurred. The new standard is effective for the fiscal year beginning after December 15, 2019, with early adoption permitted. The Company is currently in the process of evaluating the potential impact of the adoption on its consolidated financial statements.
ASU No. 2016-15, Statement2021-04: Issuer's Accounting for Certain Modifications or Exchanges of Cash Flows (Topic 230): ClassificationFreestanding Equity Classified Written Call Options In May 2021, the FASB issued ASU 2021-04, "Issuer's Accounting for Certain Modifications or Exchanges of Certain Cash Receipts, Cash Payments, and Restricted Stock This standard providesFreestanding Equity Classified Written Call Options'" ("ASU 2021-04"), which introduces a new way for companies to account for warrants either as stock compensation or derivatives. Under the new guidance, to help clarify whether certain items should be categorizedif the modification does not change the instrument's classification as operating, investing, or financing inequity, the statementcompany accounts for the modification as an exchange of cash flows. This ASU No. 2016-15 provides guidancethe original instrument for a new instrument. In general, if the fair value of the "new" instrument is greater than the fair value of the "original" instrument, the excess is recognized based on eight specific cash flow issues.the substance of the transaction, as if the issuer has paid cash. The neweffective date of the standard is effective for the fiscal yearinterim and annual reporting periods beginning after December 15, 2017, with early2021 for all entities. The Company is currently evaluating the impact of the new guidance and does not expect the adoption permitted. Adoption of this ASU did notguidance will have a material impact on the Company’s consolidated financial statements.
ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business
This standard provides new guidance to clarify the definition of a business by providing guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions of assets or businesses. Under the new standard, to classify the acquisition of assets as a business, there must be an input, a substantive process that results in outputs, with outputs being defined as the key elements of the business. If substantially all the fair value of the assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, this would not qualify as a business. The new standard is effective for the fiscal year beginning after December 15, 2017, with early adoption permitted. The Company is currently in the process of evaluating the potential impact of the adoption on its consolidated financial statements.statements and disclosures.
ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
This standard provides new guidance to eliminate the requirement to calculate the implied fair value of goodwill, or the Step 2 test, to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The loss recognized should not exceed the total goodwill allocated to the reporting unit. The new standard is effective for the fiscal year beginning after December 15, 2019, with early adoption permitted. The Company is currently in the process of evaluating the potential impact of the adoption on its consolidated financial statements.
Table of Contents ASU No. 2017-09, Stock Compensation (Topic 718): Scope of Modification AccountingXpresSpa Group, Inc. and Subsidiaries
This standard provides guidance about which changes to the terms or conditions of a stock-based payment award require an entity to apply modification accounting in Topic 718. 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 2017-09 is effectiveNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except for annual periods,share and interim periods within those annual periods, beginning after December 15, 2017; early adoption is permitted. Adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.per share data) ASU No. 2017-12, Derivatives and Hedging (Topic 815):Targeted Improvements to Accounting for Hedging Activities
This standard was created to provide more specific guidance and to simplify the application of hedge accounting in current U.S. GAAP to facilitate financial reporting that more closely reflects an entity’s risk management activities. The new standard is effective for the fiscal year beginning after December 15, 2018. The Company is currently in the process of evaluating the potential impact of the adoption on its consolidated financial statements.
ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
This standard provides guidance on the reclassification of certain tax effects from AOCI to retained earnings in the period in which the effects of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recorded. The new standard is effective for the fiscal year beginning after December 15, 2018. The Company is currently in the process of evaluating the potential impact of the adoption on its consolidated financial statements.
Note 3. Net Lossearnings/(loss) per Share of Common Stock The table below presents the computation of basic and diluted net lossesearnings/(losses) per common share: | | | | | | | | | Year ended | | | December 31, | | | 2021 | | 2020 | Basic numerator: | | | | | | | Net income (loss) attributable to XpresSpa Group, Inc. | | $ | 3,349 | | $ | (90,488) | Less: deemed dividend on warrants and preferred stock | | | — | | | (945) | Net income (loss) attributable to common shareholders | | $ | 3,349 | | $ | (91,433) | Basic denominator: | | | | | | | Basic weighted average shares outstanding | | | 104,306,173 | | | 44,567,542 | Basic earnings/(loss) per share | | $ | 0.03 | | $ | (2.05) | Diluted numerator: | | | | | | | Earnings/ (loss) attributable to common shareholders | | $ | 3,349 | | $ | (91,433) | Diluted denominator: | | | | | | | Diluted weighted average shares outstanding | | | 105,076,758 | | | 44,567,542 | Diluted earnings/(loss) per share | | $ | 0.03 | | $ | (2.05) | | | | | | | | | | | | | | | Net income (loss) per share data presented above excludes from the calculation of diluted net income (loss), the following potentially dilutive securities, having an anti-dilutive impact, in case of net loss | | | | | | | Both vested and unvested options to purchase an equal number of shares of Common Stock | | | 2,614,766 | | | 1,353,888 | Unvested RSUs to issue an equal number of shares of Common Stock | | | 521,049 | | | 0 | Warrants to purchase an equal number of shares of Common Stock | | | 37,338,164 | | | 48,044,381 | Total number of potentially dilutive securities excluded from the calculation of earnings/(loss) per share attributable to common shareholders | | | 40,473,979 | | | 49,398,269 |
Note 4. Variable Interest Entities Through its XpresCheck Wellness Centers the Company provides services pursuant to contracts with PLLCs which in turn contracts with physicians and other medical professional providers to render COVID-19 and other medical diagnostic testing services to airline employees, contractors, concessionaire employees, TSA officers and U.S. Customs and Border Protection agents, and the traveling public. The PLLCs collectively represent the Company’s affiliated medical group. The PLLCs were designed and structured to comply with the relevant laws and regulations governing professional medical practice, which generally prohibits the practice of medicine by lay persons or entities. All of the issued and outstanding equity interests of the PLLCs are owned by a licensed medical professional nominated by the Company (the “Nominee Shareholder”). Upon formation of the PLLCs, and initial issuance of equity interests, the Nominee Shareholder contributes a nominal amount of capital in exchange for their interest in the PLLC. The Company then executes with each PLLC a MSA, which provide for various administrative services, management services and day-to-day activities of the practice to be rendered by the Company through its XpresCheck Wellness Centers. Table of Contents XpresSpa Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except for share and per share data) The Company also has exclusive responsibility for the provision of common stock: all nonmedical services including contracting with customers who access the PLLCs for a medical visit, handling all financial transactions and day-to-day operations of each PLLC, overseeing the establishment of COVID-19 and other medical diagnostic testing services policies, and making recommendations to the PLLC in establishing the guidelines for the employment and compensation of the physicians and other employees of the PLLCs. Until June 30, 2021, MSA Fees were commensurate with the expected level of activity required to be billed by XpresCheck Wellness Centers. Therefore, these PLLCs were assessed not to be variable interest entities prior to July 1, 2021. Effective, July 1, 2021, contractual arrangements between the company, the company’s affiliated medical group and nominated shareholder were modified in a manner that changes the characteristics or adequacy of the nominee shareholders equity investment at risk and residual returns. Therefore, due to reassessment triggered by the development on July 1, 2021, the Company determined that the PLLCs are now variable interest entities. Notwithstanding their legal form of ownership of equity interests in the PLLC, the primary beneficiary of the affiliated medical group is the Company as it meets both of the following criteria: (i) has the power to make decisions that most significantly affect the economic performance of the affiliated medical group; and (ii) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the affiliated medical group. The Company consolidated the PLLCs under the VIE model since the Company has the power to direct activities that most significantly impact the PLLCs economic performance and the right to receive benefits or the obligation to absorb losses that could potentially be significant to the PLLCs. | | | For the years ended December 31, | | | | | 2017 | | | 2016 | | | Basic numerator: | | | | | | | | | | Net loss from continuing operations attributable to shares of common stock | | $ | (16,563 | ) | | $ | (19,282 | ) | | Net loss from discontinued operations attributable to shares of common stock | | | (12,277 | ) | | | (4,724 | ) | | Net loss attributable to the Company | | $ | (28,840 | ) | | $ | (24,006 | ) | | Basic denominator: | | | | | | | | | | Basic shares of common stock outstanding | | | 22,286,983 | | | | 15,167,292 | | | Basic loss per share of common stock from continuing operations | | $ | (0.74 | ) | | $ | (1.27 | ) | | Basic loss per share of common stock from discontinued operations | | | (0.55 | ) | | | (0.31 | ) | | Basic net loss per share of common stock | | $ | (1.29 | ) | | $ | (1.58 | ) | | | | | | | | | | | | Diluted numerator: | | | | | | | | | | Net loss from continuing operations attributable to shares of common stock | | $ | (16,563 | ) | | $ | (19,282 | ) | | Net loss from discontinued operations attributable to shares of common stock | | | (12,277 | ) | | | (4,724 | ) | | Net loss attributable to the Company | | $ | (28,840 | ) | | $ | (24,006 | ) | | | | | | | | | | | | Diluted denominator: | | | | | | | | | | Diluted shares of common stock outstanding | | | 22,286,983 | | | | 15,167,292 | | | Diluted loss per share of common stock from continuing operations | | $ | (0.74 | ) | | $ | (1.27 | ) | | Diluted loss per share of common stock from discontinued operations | | | (0.55 | ) | | | (0.31 | ) | | Diluted net loss per share of common stock | | $ | (1.29 | ) | | $ | (1.58 | ) | | | | | | | | | | | | Net loss per share data presented excludes from the calculation of diluted net loss the following potentially dilutive securities, as they had an anti-dilutive impact: | | | | | | | | | | Both vested and unvested options outstanding to purchase an equal number of shares of common stock of the Company | | | 4,317,942 | | | | 3,679,101 | | | Unvested RSUs to issue an equal number of shares of common stock of the Company | | | 365,565 | | | | — | | | Warrants to purchase an equal number of shares of common stock of the Company | | | 3,087,500 | | | | 3,506,679 | | | Preferred stock on an as converted basis | | | 3,364,328 | | | | 3,931,416 | | | Conversion feature of senior secured notes | | | — | | | | 79,295 | | | Total number of potentially dilutive instruments, excluded from the calculation of net loss per share | | | 11,135,335 | | | | 11,196,491 | |
Note 4.The aggregate carrying value of total assets and total liabilities included on the consolidated balance sheets for the PLLCs after elimination of intercompany transactions were $3,033, included in Cash and Cash Equivalents,
| | | December 31, | | | | | 2017 | | | 2016 | | | Cash denominated in United States dollars | | $ | 3,924 | | | $ | 16,981 | | | Cash denominated in currency other than United States dollars | | | 2,108 | | | | 694 | | | Credit and debit card receivables | | | 336 | | | | 235 | | | | | $ | 6,368 | | | $ | 17,910 | |
Note 5. Business Combinations
XpresSpa acquisition
On August 8, 2016, the Company signed an agreement to acquire XpresSpa.On December 23, 2016, the Company completed the acquisition of XpresSpa for a total purchase consideration of $37,400, which includes:
| · | $1,734 in cash which was invested on August 8, 2016. |
| · | 2,500,000 shares of the Company’s common stock, par value $0.01 per share (“XSPA Common Stock”). |
| · | 494,792 shares of the Company’s Series D convertible preferred stock (“XSPA Preferred Stock) with an aggregate initial liquidation preference of $23,750.
Pursuant to the terms of the agreement governing the XpresSpa acquisition, in February 2017, the total number of shares of XSPA Preferred Stock was decreased from 494,792 shares to 491,427 shares with an aggregate initial liquidation preference of $23,588, which are initially convertible into 3,931,416 shares of XSPA Common Stock, at a conversion price of $6.00 per share. Each holder of XSPA Preferred Stock is entitled to vote on an as converted basis.
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| · | five-year warrants to purchase 2,500,000 shares of XSPA Common Stock, at an exercise price of $3.00 per share, each subject to adjustment in the event of a stock split, dividend or similar events. |
Of the shares of XSPA Preferred Stock issued, 230,208 shares, with an estimated fair value of $11,050, were placed into an escrow that will be released over an 18-month period once certain conditions are satisfied. The escrow will be used to obtain necessary lease consents from the airports and to cover potential liabilities that may arise after the acquisition but pertain to the activities before the acquisition.
The fair value of the purchase consideration was determined based on the following:
| · | The fair value of the shares of XSPA Common Stock was determined by multiplying the Company's closing stock price of $2.09/share on the acquisition date by the number of shares of XSPA Common Stock issued. |
| · | The fair value of the warrants was determined using the Monte-Carlo simulation, which calculated the fair value based on the difference between the projected share price, derived from the estimated future market cap, and the exercise price of $3.00/share. |
| · | The fair value of XSPA Preferred Stock was also determined using the Monte-Carlo simulation, from which the Company’s future market cap and derived share price in each year for the seven years following the acquisition date were ascertained. The Company also determined the future market cap and derived share prices for periods prior to the end of the seven-year term, assuming early conversion. The fair value was then calculated by multiplying the number of converted shares by the Company’s closing stock price as of the time of conversion. In the scenario that the shares of XSPA Preferred Stock will convert at the end of the seven-year term, the fair value was calculated by establishing the implied share price and the relevant premium to the conversion ratio. The fair value is then discounted as of the acquisition date. |
The transaction was accounted for using the acquisition method of accounting$683, included in accordance with ASC 805, Business Combinations, which requires that one of the two companies be designated as the acquirer for accounting purposes based on the evidence available. In this transaction, XpresSpa Group was treated as the acquiring entity for accounting purposes. In identifying XpresSpa Group as the acquiring entity, the companies took into account the composition of XpresSpa Group’s Board of Directors, the designation of certain senior management positions, including its Chief Executive OfficerAccounts payable, accrued expenses and Chief Financial Officer, as well as the fact that XpresSpa Group’s existing stockholders own approximately 67% of XpresSpa Group after completion of the acquisition on a fully diluted basis.
Assets acquired and liabilities assumed were recorded at their fair valuesother, respectively, as of the acquisition date.December 31, 2021. The fair value of the purchase price consideration was allocated as follows:
| Acquisition of XpresSpa on December 23, 2016: | | Fair
Value | | | Cash | | $ | 1,734 | | | XSPA Common Stock | | | 5,225 | | | December 2016 Warrants | | | 2,689 | | | XSPA Preferred Stock | | | 27,752 | | | Total fair value of the purchase consideration | | $ | 37,400 | |
The purchase price for the acquisition was allocated to the net tangible and intangible assets basedtotal revenue included 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 fair value of the purchase price was allocated as follows
| | | Fair Value | | | Assets | | | | | | Cash and cash equivalents | | $ | 2,114 | | | Accounts receivable | | | 71 | | | Inventory | | | 2,580 | | | Prepaid expenses | | | 1,216 | | | Restricted cash | | | 638 | | | Property and equipment | | | 16,308 | | | Intangible assets | | | 13,620 | | | Goodwill | | | 20,303 | | | Security deposits for leases | | | 392 | | | Total assets | | | 57,242 | | | | | | | | | Liabilities | | | | | | Accounts payable | | | 4,118 | | | Accrued expenses | | | 4,586 | | | Debt | | | 6,500 | | | Total liabilities | | | 15,204 | | | | | | | | | Net assets | | | 42,038 | | | Noncontrolling interests | | | (4,638 | ) | | Total fair value | | $ | 37,400 | |
The fair value of the noncontrolling interests as of the acquisition date of $4,638 was estimated based on the business enterprise value analysis of XpresSpa as of the acquisition date. The analysis was performed using the income approach and the implied internal rate of return from the fair value of the total purchase consideration of $37,400 and was based on the proportionate share of each individual location’s business enterprise value of the total business enterprise value of XpresSpa.
The allocation of the purchase price was based upon a 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). The principal area of potential purchase price adjustments relates to the consideration placed in escrow. Acquisition costs representing direct legal, accounting, diligence and tax fees of $2,597 were expensed as incurred. Of this amount, the Company incurred $1,353 of these costs, which are included in general and administrative expense in the consolidated statements of operations and comprehensive loss. income (loss) for the PLLCs after elimination of intercompany transactions was $50,689 for the twelve months ended December 31, 2021.
Note 5. Cash, Cash Equivalents, and Restricted Cash | | | | | | | | | December 31, 2021 | | December 31, 2020 | Cash denominated in United States dollars | | $ | 102,560 | | $ | 88,636 | Cash denominated in currency other than United States dollars | | | 2,133 | | | 1,158 | Restricted cash | | | 751 | | | 701 | Credit and debit card receivables | | | 813 | | | 7 | Total cash, cash equivalents and restricted cash | | $ | 106,257 | | $ | 90,502 |
The remaining $1,244Company places its cash and temporary cash investments with credit quality institutions. At times, such cash denominated in United States dollars may be in excess of coststhe Federal Deposit Insurance Corporation (“FDIC”) insurance limit. At December 31, 2021 and 2020, deposits in excess of FDIC limits were incurred$103,339 and $88,556. As of December 31, 2021 and 2020, the Company held cash balances in overseas accounts, totaling $2,113 and $1,158, respectively, which are not insured by XpresSpa priorthe FDIC. If the Company were to distribute the amounts held overseas, the Company would need to follow an approval and distribution process as defined in its operating and partnership agreements, which may delay and/or reduce the availability of that cash to the acquisition.Company. Table of Contents XpresSpa Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In April 2017, the Company learned new information about legalthousands, except for share and other professional costs, which existed as 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 XSPA Preferred Stock, which was previously issued to the XpresSpa Sellers in conjunction with the acquisition of XpresSpa. The Company reduced the number of the XSPA 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 goodwill and equity.per share data) In October 2017, the Company recorded a $235 reduction of construction-in-progress within property and equipment and an increase to goodwill. This represents amounts as of the acquisition date that were related to two old projects for stores that never actually opened. As such, these balances should have been written-off prior to acquisition date, more specifically, when it was known that the related stores were not going to open.
Note 6. IntangibleOther Current Assets As of December 31, 2021, and Goodwill Intangible assets
The following table provides information regarding2020, the Company’s intangibleother current assets which consistwere comprised of the following:
| | | | | | | | | December 31, 2021 | | December 31, 2020 | Prepaid expenses | | $ | 1,047 | | $ | 1,135 | Other | | | 48 | | | 186 | Total other current assets | | $ | 1,095 | | $ | 1,321 |
| | | December 31, 2017 | | | December 31, 2016 | | | | | | | | Gross
Carrying
Amount | | | Accumulated
Amortization | | | Net
Carrying
Amount | | | Gross
Carrying
Amount | | | Accumulated
Amortization
and Impairment | | | Net
Carrying
Amount | | | Weighted average amortization period (years) | | | Trade name | | $ | 13,309 | | | $ | (2,269 | ) | | $ | 11,040 | | | $ | 13,309 | | | $ | (49 | ) | | $ | 13,260 | | | | 6.00 | | | Customer relationships | | | 312 | | | | (156 | ) | | | 156 | | | | 312 | | | | — | | | | 312 | | | | 2.00 | | | Software | | | 233 | | | | (4 | ) | | | 229 | | | | — | | | | — | | | | — | | | | 4.68 | | | Patents | | | 26,897 | | | | (26,775 | ) | | | 122 | | | | 27,026 | | | | (26,879 | ) | | | 147 | | | | 11.45 | | | Total intangible assets | | $ | 40,751 | | | $ | (29,204 | ) | | $ | 11,547 | | | $ | 40,647 | | | $ | (26,928 | ) | | $ | 13,719 | | | | | |
The Company’s trade name relates to the value of the XpresSpa trade name, customer relationships represent the value of the 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 assetsPrepaid expenses are amortized over their expected useful lives. During the year-ended December 31, 2017, the Company recorded amortization expense of $2,403. During the year-ended December 31, 2016, the Company recorded amortization and impairment expense of $13,146 related to its intangible assets.
In May 2016, the Company determined that there were impairment indicators related to certain of its patents. A significant factor considered when making this determination occurred on May 6, 2016, when the Company changed its name to FORM Holdings Corp. and concurrently announced its repositioning as a holding company of small and middle market growth companies. The Company 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, the Company determined that the patent portfolios, which together represent an asset group, were subject to impairment testing. In the first step of the impairment test, the Company utilized its projections of future undiscounted cash flows based on the Company’s existing plans for the patents. As a result, it was determined that the Company’s projections of future undiscounted cash flows were less than the carrying value of the asset group. Accordingly, the Company performed the second step of the impairment test to measure the impairment by calculating the asset group’s fair value as of May 6, 2016. As a result, following amortization for the month of April, the Company recorded an impairment charge of $11,937, or 88.7% of the carrying value of the patents prior to impairment. This resulted in a new carrying value of $1,526 on May 6, 2016. The impairment charge is included in depreciation, amortization and impairment in the consolidated statements of operations and comprehensive loss. Following the impairment, the Company reevaluated the remaining useful life and concluded that there were no changes in the estimated useful life.
On December 5, 2016, the Company entered into an agreement with Nokia to assign Nokia rights related to certain patents previously purchased from Nokia. The carrying value of the patents assigned to Nokia prior to the agreement was $1,186, which offset the $1,750 of royalty payable and resulted in a gain of $564 on the disposal of assets, which is included in general and administrative expense in the consolidated statements of operations and comprehensive loss. The Company retained selected patents previously purchased from Nokia with a carrying value of $50 as of December 31, 2016 that are no longer subject to any royalty payments to Nokia.
There were no impairment indicators related to any of the Company’s amortizable intangible assets during the year ended December 31, 2017 for the Company’s continuing operations.See “Note 17 –Discontinued Operations and Assets and Liabilities Held for Disposal” for impairment charges pertaining to discontinued operations for the year-ended December 31, 2017.
Estimated amortization expense for the Company’s intangible assets for each of the five succeeding years and thereafter at December 31, 2017 is as follows:
| Years ending December 31, | | Amount | | | 2018 | | $ | 2,438 | | | 2019 | | | 2,279 | | | 2020 | | | 2,275 | | | 2021 | | | 2,273 | | | 2022 | | | 2,219 | | | Thereafter | | | 63 | | | Total | | $ | 11,547 | |
Goodwill
The following table provides information regarding the Company’s goodwill, which relates to the acquisition of XpresSpa completed in December 2016. There were no indicators of impairment of goodwill as of December 31, 2017 for the Company’s continuing operations.See “Note 17 –Discontinued Operations and Assets and Liabilities Held for Disposal” for impairment charges pertaining to discontinued operations for the year-ended December 31, 2017.
| Goodwill as of December 31, 2015 | | $ | — | | | Acquisition of XpresSpa | | | 20,303 | | | Goodwill as of December 31, 2016 | | | 20,303 | | | Adjustments to XpresSpa goodwill | | | (673 | ) | | Goodwill as of December 31, 2017 | | $ | 19,630 | |
The adjustments to XpresSpa goodwill in 2017 are described in detail in “Note 5 – Business Combinations.”
Note 7. Segment Information
The Company’s continuing operating segments are defined as components of an enterprise about which separate financial information is available that is regularly evaluated by the enterprise’s chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance. The Company concluded that it conducts its business through two operating segments, which are also its reportable segments: wellness and intellectual property.
Segment operating results reflect losses before corporate and unallocated shared expenses, interest expense and income taxes. Corporate and unallocated shared expenses principally consist of costs for corporate functions, rent for office space, stock-based compensation, executive management and certain unallocated administrative support functions.
| | | For the years ended December 31, | | | | | 2017 | | | 2016 | | | Revenue | | | | | | | | | | Wellness | | $ | 48,373 | | | $ | 811 | | | Intellectual property | | | 450 | | | | 11,175 | | | Total revenue | | | 48,823 | | | | 11,986 | | | | | | | | | | | | | Cost of sales | | | | | | | | | | Wellness | | | 38,986 | | | | 404 | | | Intellectual property | | | 357 | | | | 6,334 | | | Total cost of sales | | | 39,343 | | | | 6,738 | | | | | | | | | | | | | Segment operating loss | | | | | | | | | | Wellness | | | (7,250 | ) | | | (192 | ) | | Intellectual property | | | 9 | | | | (7,740 | ) | | Corporate | | | (7,832 | ) | | | (9,776 | ) | | Operating loss from continuing operations | | | (15,073 | ) | | | (17,708 | ) | | Corporate non-operating expense, net | | | (928 | ) | | | (1,571 | ) | | Loss from continuing operations before income taxes | | $ | (16,001 | ) | | $ | (19,279 | ) | | | | | | | | | | | | Assets | | | | | | | | | | Wellness | | $ | 53,414 | | | $ | 57,527 | | | Intellectual property | | | 156 | | | | 940 | | | Corporate | | | 5,224 | | | | 15,894 | | | Assets held for disposal | | | 6,446 | | | | 8,446 | | | Total assets | | $ | 65,240 | | | $ | 82,807 | |
General and administrative costs are allocated among the operating segments and non-operating corporate segment. The non-operating corporate segment does not have any revenue, but does incur expenses such as compensation expenses, rent and infrastructure costs. The non-operating corporate segment’s assets are mainlypredominantly comprised of cash.
The Company currently operates in two geographical regions: United Statesfinanced and all other countries. The following table represents the geographical revenue, regional operating loss, and total asset information as of and for the years ended December 31, 2017 and 2016. There were no concentrations of geographical revenue, regional operating loss or total assets related to any single foreign country that were material to the Company’s consolidated financial statements.
| | | For the years ended
December 31, | | | | | 2017 | | | 2016 | | | Revenue | | | | | | | | | | United States | | $ | 43,555 | | | $ | 11,887 | | | All other countries | | | 5,268 | | | | 99 | | | Total revenue | | | 48,823 | | | | 11,986 | | | | | | | | | | | | | Cost of sales | | | | | | | | | | United States | | | 36,201 | | | | 6,697 | | | All other countries | | | 3,142 | | | | 41 | | | Total cost of sales | | | 39,343 | | | | 6,738 | | | | | | | | | | | | | Segment operating loss | | | | | | | | | | United States | | | (13,507 | ) | | | (17,781 | ) | | All other countries | | | (1,566 | ) | | | 73 | | | Operating loss from continuing operations | | | (15,073 | ) | | | (17,708 | ) | | Corporate non-operating expense, net | | | (928 | ) | | | (1,571 | ) | | Loss from continuing operations before income taxes | | $ | (16,001 | ) | | $ | (19,279 | ) | | | | | | | | | | | | Assets | | | | | | | | | | United States | | $ | 55,152 | | | $ | 71,607 | | | All other countries | | | 3,642 | | | | 2,754 | | | Assets held for disposal | | | 6,446 | | | | 8,446 | | | Total assets | | $ | 65,240 | | | $ | 82,807 | |
Note 8. Revenue from Settlements and Licensing Agreements
On April 25, 2016, the Company entered into a Confidential License Agreement (the “License Agreement”). Pursuant to theprepaid insurance policies which have terms of the License Agreement, the licensee paid the Company a one-time lump sum payment of $8,900 on May 30, 2016. As a result, the Company granted to the licensee a non-exclusive, non-transferable, worldwide perpetual license to certain patents and patent applications.
In 2017, the Company continued to license its intellectual property through one-time licensing agreements from which the Company earned revenue of $300. Additionally, the Company sold one of its patents to a third party for $150.
Note 9. Debt and Senior Secured Notes
Debt
As part of the acquisition of XpresSpa, which was completed on December 23, 2016, the Company recorded the debt described below.
XpresSpa entered into a credit agreement and secured promissory note (the “Debt”) with Rockmore Investment Master Fund Ltd. (“Rockmore”) on April 22, 2015 that was amended on August 8, 2016. Rockmore is an investment entity controlled by the Company’s board member, Bruce T. Bernstein.
The total principal of the Debt is $6,500 payable in full upon maturity on May 1, 2019. In 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. The Debt bears 11.24% interest per year (based on 360 days in a year) that is payable as follows:or less.
| · | 9.24% annual interest, calculated on a monthly basis, which is payable in arrears on the last business day of each month plus |
| · | 2% annual interest, calculated on a monthly basis, which accrues monthly and becomes due and payable on the Debt anniversary dates. |
Effective May 1, 2018, the interest decreases to 10.5% per year (8.5% payable in monthly installments and 2% payable annually) after the Company extended the maturity date of the Debt to May 1, 2019.
The Debt can be prepaid by XpresSpa at a 4% penalty at any point at its election. The Debt is secured by substantially all of the assets of XpresSpa. In addition, XpresSpa needs consent of Rockmore to incur any additional debt, except for:
| · | debt to finance acquisition, construction, or improvement of fixed and capital assets; |
| · | performance bonds, bid bonds, appeal bonds, surety bonds, and similar; |
| · | pension fund and employee benefit plan obligations; |
| · | unsecured debt not exceeding $1,000; |
| · | convertible notes not exceeding $5,000; and |
| · | letters of credit, bank guarantees and others in the ordinary course of business. |
In addition, Rockmore was entitled to certain reporting rights and annual audited financial information, which Rockmore waived in March 2017.
The Debt had a fair value of $6,500 as of the acquisition date, December 23, 2016, and a $6,500 carrying value included in long-term liabilities in the consolidated balance sheet as of December 31, 2017 and December 31, 2016. 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.
During the year-ended December 31, 2017, XpresSpa paid and recorded $731 of interest expense. During the period from the acquisition date to December 31, 2016, XpresSpa paid $100 of accrued interest for December 2016 and January 2017 and recorded $16 of interest expense.
Senior Secured Notes
In July 2016, the Company repaid in full its Senior Secured Notes (the “Notes”) that were due in June 2017.
The table below summarizes changes in the book value of the Notes from December 31, 2015 to December 31, 2016:
| Book value as of December 31, 2015 (net of unamortized portion of debt issuance costs of $73) | | $ | 3,111 | | | Repayments in January and February 2016 | | | (1,190 | ) | | Amortization of discount and issuance costs, included in interest expense | | | 356 | | | Book value of Notes before the Exchange Note Agreement on March 9, 2016 | | | 2,277 | | | | | | | | | Fair value of the considerations provided in Exchange Note Agreement, including: | | | | | | Increase in fair value of May 2015 Warrants due to reduced exercise price | | | 281 | | | Repayment of Notes in shares of common stock | | | 1,267 | | | Repayment of $1,267 of Notes in shares of common stock at a discount to the market | | | 183 | | | Restructuring fee paid | | | 50 | | | Total fair value of the considerations provided | | | 1,781 | | | | | | | | | Book value of Notes after the Exchange Note Agreement on March 9, 2016 | | | 496 | | | Amortization of discount and issuance costs, included in interest expense | | | 1,253 | | | Early repayment fee of 15% of outstanding principal of $1,749 | | | 262 | | | Repayment of Notes in full on July 1, 2016 | | | (2,011 | ) | | Book value of Notes as of December 31, 2016 | | $ | — | |
In March 2016, the Company entered into an Exchange Note Agreement. Pursuant to the Exchange Note Agreement, the Company issued an aggregate of 703,644 shares of its common stock in exchange for the reduction of $1,267 of the outstanding aggregate principal amount of the Notes and $49 of accrued interest. As a result, the outstanding aggregate principal amount under the Notes was reduced from $3,016 to $1,749 as of March 9, 2016.
In addition, in March 2016, the Company agreed to amend the Notes and to maintain a cash balance (including cash equivalents) of not less than $2,900. The Company also agreed to reduce the exercise price of the May 2015 Warrants from $10.00 to $3.00 per share and to remove from the May 2015 Warrants certain anti-dilution features. Other terms of the May 2015 Warrants remained the same. Furthermore, the Company paid a restructuring fee of $50.
In July 2016, the Company repaid in full its Notes that were due in June 2017, including a 15% fee for early repayment. The Company used an aggregate of $2,011 of cash on hand for repayment of the Notes. As a result of the repayment in full of the Notes, all liens on the Company’s assets at the time, including its intellectual property, were released.
Note 7. Property and Equipment Property and equipment are comprised of three categories: leasehold improvements, furniture and fixtures, and other operating equipment as of December 31, 2021 and 2020 as follows: | | | | | | | | | | | December 31, | | | | | 2021 | | 2020 | | Useful Life | Leasehold improvements | | $ | 11,225 | | $ | 8,357 | | Average 5-8 years | Furniture and fixtures | | | 1,146 | | | 362 | | 3-4 years | Other operating equipment | | | 1,027 | | | 388 | | Maximum 5 years | | | | 13,398 | | | 9,107 | | | Accumulated depreciation | | | (6,740) | | | (4,946) | | | Total property and equipment, net | | $ | 6,658 | | $ | 4,161 | | |
Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are depreciated over the shorter of remaining lease term or economic useful life (which is on average 5-8 years). The Company performed assessments of its property and equipment for impairment for the years ended December 31, 2021 and 2020 and based upon the results of the impairment tests, the Company recorded impairment expenses of approximately $90 and $4,954, respectively, which is included in “Impairment/disposal of assets” in the consolidated statements of operations and comprehensive loss. During the years ended December 31, 2021 and 2020, the Company recorded $2,754 and $2,853, respectively, of depreciation expense. Note 8. Other Assets Other assets in the consolidated balance sheets are comprised of the following as of December 31, 2021 and 2020: | | | | | | | | | December 31, 2021 | | December 31, 2020 | Equity investments | | $ | 722 | | $ | 1,768 | Lease deposits | | | 2,030 | | | 736 | Other | | | 58 | | | 85 | Other assets | | $ | 2,810 | | $ | 2,588 |
Table of Contents XpresSpa Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except for share and per share data) As of December 31, 2021 and 2020, the equity investment in Route1 had a readily determinable fair value of $722 and $1,768, respectively. The Company recorded an unrealized loss of $1,046 in 2021 and an unrealized gain of $1,284 in 2020, in connection with the remeasurement of the shares of our common stock and warrants of Route 1 it obtained in the 2018 sale of Group Mobile to Route 1. The loss/gain is included in Other non-operating income (expense), net on the consolidated statement of operations and comprehensive income (loss) for the years ended December 31, 2021 and 2020. Also included in “Other assets” as of December 31, 2021 and 2020 were $2,030 and $736, respectively, of security deposits made pursuant to various lease agreements, which will be returned to the Company at the end of the leases. Note 9. Intangible Assets The following table provides information regarding the Company’s intangible assets, which consist of the following: | | | | | | | | | | | | | | | | | | | | | December 31, 2021 | | December 31, 2020 | | | Gross | | | | | Net | | Gross | | | | | Net | | | Carrying | | Accumulated | | Carrying | | Carrying | | Accumulated | | Carrying | | | Amount | | Amortization | | Amount | | Amount | | Amortization | | Amount | Trade name | | $ | 1,339 | | $ | (1,118) | | $ | 221 | | $ | 1,339 | | $ | (899) | | $ | 440 | Software | | | 3,886 | | | (484) | | | 3,402 | | | 694 | | | (264) | | | 430 | Licenses | | | 116 | | | (7) | | | 109 | | | — | | | — | | | — | Total intangible assets | | $ | 5,341 | | $ | (1,609) | | $ | 3,732 | | $ | 2,033 | | $ | (1,163) | | $ | 870 |
The Company’s trade name relates to the value of the XpresSpa trade name, software relates to certain capitalized third-party costs related to a new website and a point-of-sale system; and licenses relates to certain capitalized costs of foreign acquisitions. In the year ended December 31, 2020, the Company recorded an impairment of the value of the XpresSpa trade name of $3,934, which is included in “Impairment/disposal of assets” on the Company’s consolidated statement of operations and comprehensive income (loss) for the year ended December 31, 2020. The Company did 0t record impairment of the XpresSpa trade name in 2021. The Company’s intangible assets are amortized over their expected useful lives, which is six years for trade names and five and three years for software. During the years ended December 31, 2021 and 2020, the Company recorded amortization expense of $447, and $2,357, respectively, related to its intangible assets. Estimated amortization expense for the Company’s intangible assets at December 31, 2021 is as follows: | | | | Calendar Years ending December 31, | | Amount | 2022 | | $ | 1,476 | 2023 | | | 1,142 | 2024 | | | 1,074 | 2025 | | | 23 | 2026 | | | 17 | Total | | $ | 3,732 |
Table of Contents XpresSpa Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except for share and per share data) Note 10. Leases The Company leases spa and clinic locations at various domestic and international airports. Additionally, the Company leases its corporate office in New York City. Certain leases entered into by the Company are accounted for in accordance with ASC 842. The Company determines if an arrangement is a lease at inception and if it qualifies under ASC 842. The Company’s lease arrangements generally contain fixed payments throughout the term of the lease and most also contain 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 leases that expire, are amended and extended, or are extended on a month-to-month basis. Leases are not included in the calculation of the total lease liability and the right of use asset when they are 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 to determine whether there were any modifications to lease agreements and to assess if any agreements should be accounted for pursuant to the guidance in ASC 842. Upon adoption of ASC 842, the Company used 11.24% as its incremental borrowing rate for its leases. The Company did exercise its option to extend the term of existing lease contracts during the years ended December 31, 2021 and 2020. Since the existing lease liability did not originally consider the extension of the lease term for these leases, the Company reassessed the incremental borrowing rate of 9.0% to be used to calculate the lease liability. The following is a summary of the activity in the Company’s current and long-term operating lease liabilities for the year ended December 31, 2021 and 2020: | | | | | | | | | Year ended December 31, | | | 2021 | | 2020 | Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | Operating cash flows from operating leases | | $ | (4,230) | | $ | (2,344) | Leased assets obtained in exchange for new and modified operating lease liabilities | | $ | (3,646) | | $ | (3,144) | Leased assets surrendered in exchange for termination of operating lease liabilities | | $ | 9 | | $ | 11 |
Table of Contents XpresSpa Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except for share and per share data) As of December 31, 2021, future minimum operating leases commitments are as follows: | | | | Calendar Years ending December 31, | | Amount | 2022 | | $ | 3,506 | 2023 | | | 3,071 | 2024 | | | 2,545 | 2025 | | | 1,760 | 2026 | | | 718 | Thereafter | | | 808 | Total future lease payments | | | 12,408 | Less: interest expense at incremental borrowing rate | | | (2,168) | Net present value of lease liabilities | | $ | 10,240 |
Other assumptions and pertinent information related to the Company’s accounting for operating leases are: | | | | | Weighted average remaining lease term: | | | 4.11 | years | Weighted average discount rate used to determine present value of operating lease liability: | | | 10.06 | % |
Variable lease payments calculated monthly as a percentage of a product and services revenue were $576 and $611 for the years ended December 31, 2021 and 2020, respectively. Rent expense for operating leases for the years ended December 31, 2021 and 2020 were $2,069 and $2,057, respectively. The Company performed assessments of its right of use lease assets for impairment for the years ended December 31, 2021 and 2020. Based upon the results of the impairment tests, the Company recorded impairment expenses of approximately $747 and $6,341 which is included in Impairment/disposal of assets on the consolidated statement of operations and comprehensive income (loss) for the years ended December 31, 2021 and 2020, respectively. Note 11. Long-term Notes and Convertible Notes Total debt as of December 31, 2021 and 2020 is comprised of the following: | | | | | | | | | December 31, 2021 | | December 31, 2020 | Promissory note, unsecured (Non Current) | | $ | — | | $ | 2,355 | Promissory note, unsecured (Current) | | | 3,584 | | | 3,298 | | | | | | | | Total debt | | $ | 3,584 | | $ | 5,653 |
B3D 9% Senior Secured Note due May 31, 2021 On January 9, 2020, as compensation for the consent of B3D to the CC Agreement, the Company entered into the Fifth Credit Agreement Amendment with B3D in order to (i) increase the principal amount owed to B3D from $7,000 to $7,150, which additional $150 in principal and any interest accrued thereon became convertible, at B3D’s option, into shares of the Company’s Common Stock, and (ii) provide for the advance payment of 97,223 shares of Common Stock in satisfaction of the interest payable pursuant to the B3D Note for the months of October, November and December 2020. Table of Contents XpresSpa Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except for share and per share data) The Common Stock was issued to B3D on January 14, 2020. The Company capitalized a $150 fee charged by the lender to consent to the CC Agreement. On March 6, 2020, XpresSpa Holdings entered into the Sixth Credit Agreement Amendment with B3D in order to, among other provisions, (i) increase the principal amount owed to B3D from $7,150 to $7,900, which additional $750 in principal, comprised of $500 in new funding and $250 in debt issuance costs, and any interest accrued thereon became convertible, at B3D’s option, into shares of the Company’s Common Stock and (ii) decrease the conversion rate under the B3D Note from $6.00 per share to $1.68 per share. On March 19, 2020, the conversion rate was further reduced to $0.525 per share after giving effect to certain anti-dilution adjustments. The Sixth Credit Agreement Amendment was accounted for as an extinguishment of debt in the Company’s consolidated financial statements. In March 2020, the Company extinguished debt with a carrying value of $4,829, net of unamortized debt discount of $1,845 and unamortized debt issuance costs of $476. In addition, the Company extinguished $2,048 of derivative liability, which represented the estimated fair value of the conversion option based upon provisions included in the Fifth Credit Agreement Amendment. The Company determined that the conversion option in the Sixth Credit Agreement Amendment should be bifurcated from the host instrument and engaged a third party to assess the fair value of the conversion option. As a result, the Company recorded debt with a carrying value of $3,994, net of a debt discount of $3,656 and debt issuance costs of $250, and a derivative liability of $3,656. The Company recognized a loss on the extinguishment of debt of $273 during the year ended December 31, 2020, and is included in Other non-operating income (expense), net in the consolidated statements of operations and comprehensive loss. Subsequent to the Sixth Credit Agreement Amendment and during the year ended December 31, 2020, B3D elected to convert a total of $7,900 of principal into shares of Common Stock at conversion prices of $1.68 and $0.525. As a result, approximately $15,395 of derivative liability was settled and reclassified to equity, the Company wrote off $3,156 of unamortized debt discount and debt issuance costs, and 13,934,525 shares of Common Stock were issued. The Company recognized a revaluation loss related to the derivative liability of $11,990 during the year ended December 31, 2020, which is included in “Loss on revaluation of warrants and conversion options” in the consolidated statements of operations and comprehensive loss. A total of $884 of accretion expense on the debt discount was recorded in the years ended December 31, 2020, which is included in “Interest expense” in the consolidated statements of operations and comprehensive loss. Total amortization expense related to the B3D Note debt issuance costs was $98 for the year ended December 31, 2020, which is included in “Interest expense” in the consolidated statements of operations and comprehensive loss. Paycheck Protection Program On May 1, 2020, the Company entered into a U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“the PPP”) promissory note in the principal amount of $5,653 payable to Bank of America, NA (“Bank of America”) evidencing a PPP loan (the “PPP Loan”). The PPP Loan bears interest at a rate of 1% per annum. NaN payments were due on the PPP Loan during a six-month deferral period commencing on May 2, 2020. Commencing one month after the expiration of the deferral period and continuing on the same day of each month thereafter until the maturity date of the PPP Loan, the Company is obligated to make monthly payments of principal and interest, each in such equal amount required to fully amortize the principal amount outstanding on the PPP Loan by the maturity date. The maturity date is May 2, 2022. The principal amount of the PPP Loan was subject to forgiveness under the PPP upon the Company’s request to the extent that the PPP Loan proceeds are used to pay expenses permitted by the PPP. Bank of America may have forgiven interest accrued on any principal forgiven if the SBA pays the interest. Currently, the Company is paying its monthly principal and interest related to the PPP Loan when due. The PPP Loan contains customary borrower default provisions and lender remedies, including the right of Bank of America to require immediate repayment in full the outstanding principal balance of the PPP Loan with accrued interest. As of December 31, 2021 and 2020, $4 and $37 of Table of Contents XpresSpa Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except for share and per share data) interest has been accrued, respectively, and is included in Accounts payable, accrued expenses and other in the consolidated balance sheets. Credit Cash Funding Advance On January 9, 2020, certain of the Company’s wholly owned subsidiaries (the “CC Borrowers”) entered into an accounts receivable advance agreement (the “CC Agreement”) with CC Funding, a division of Credit Cash NJ, LLC (the “CC Lender”). Pursuant to the terms of the CC Agreement, the CC Lender agreed to make an advance of funds in the amount of $1,000 for aggregate fees of $160, for a total repayment amount of $1,160. The outstanding repayment amount was secured by substantially all of the assets of the CC Borrowers, including CC Borrowers’ existing and future accounts receivables and other rights to payment. On June 1, 2020, the CC Borrowers entered into a payoff letter (the “Payoff Letter”) with the CC Lender pursuant to which the CC Agreement was terminated. Under the Payoff Letter, the Company repaid the then outstanding $733 owed under the CC Agreement as of June 1, 2020, net of a $91 discount for prepayment, and the CC Lender released all security interests held on the assets of the CC Borrowers, including the CC Borrowers’ existing and future accounts receivables and other rights to payment. The Company recognized a gain of $91 with is included in Other non-operating income (expense), net in the consolidated statements of operations and comprehensive loss. Calm Note On July 8, 2019, the Company entered into a securities purchase agreement with Calm.com, Inc. (“Calm”) pursuant to which the Company agreed to sell (i) an aggregate principal amount of $2,500 in an unsecured convertible note (the “Calm Note”), which was convertible into shares of Series E Convertible Preferred Stock at a conversion price of $6.00 per share of Common Stock equivalent (the “Series E Preferred Stock”) and (ii) warrants to purchase 312,500 shares of the Company’s Common Stock at an exercise price of $6.00 per share (the “Calm Warrants”). On March 6, 2020, the exercise price of the Calm Warrants was reduced to $1.68 per share and on March 19, 2020 further reduced to $.0525 per share, after giving effect to certain anti-dilution adjustments. On April 17, 2020, the Company amended and restated the Calm Note 10.in order to provide, among other items, the conversion of the Calm Note directly into Common Stock instead of into shares of the company’s Series E convertible preferred stock. Interest on the Calm Note was payable in arrears and would have been paid in cash, shares of Series E Preferred Stock or a combination thereof. The Company recorded derivative liabilities for the conversion feature and the Calm Warrants related to the issuance of the Calm Note on July 8, 2019, resulting in a debt discount of $1,369. During the year ended December 31, 2020, the Company recorded accretion expense on the debt discount of $187, which is included in Interest expense in the Company’s consolidated statements of operations and comprehensive loss. During the year ended December 31, 2020, the Company recorded amortization expense on the debt issuance costs of $30, which is included in Interest expense in the Company’s consolidated statements of operations and comprehensive loss. In 2020, the holder of the Calm Note elected to convert all $2,500 of principal into shares of Common Stock at a conversion price of $0.525. As a result, $9,200 of derivative liability was settled and reclassified to equity, the Company wrote off $947 of unamortized debt discount and $154 of unamortized debt issuance costs, and 4,761,906 shares of Common Stock were issued. The Company assessed the fair value of the conversion option in the Calm Note at each conversion date as well as at the end of each reporting period, resulting in a revaluation loss related to the derivative liability of $8,985 in 2020 which was included in Loss on revaluation of warrants and conversion options in the consolidated statement of operations and comprehensive loss. Loss on revaluation of warrants and conversion options The Company engaged third-party valuation experts to provide the fair value of certain components of the debt, equity and derivative securities transactions as of each of the conversion, exercise and exchange dates during the year ended December Table of Contents XpresSpa Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except for share and per share data) 31, 2020. Loss on revaluation of warrants and conversion options is comprised of adjustments to the fair value of the derivative conversion option of the debt instruments and the fair value of the warrants, including losses of $11,990, $8,985, $15,480 and $14,692 related to the B3D Note, the Calm Note, the Calm Warrants and the Class A Warrants, respectively, during the year ended December 31, 2020. Note 12. Stockholders’ Equity and Warrants Share Repurchase Program During 2021, the Company executed on its share repurchase program, repurchasing and redeeming 4,702,072 shares at average cost of $1.66 per share, for a total of $7,825. During March 2022, the Company continuing to execute on its share repurchase program, repurchased 7,142,446 shares at average cost of $1.55 per share, for a total of $11,095 Warrants The following table represents the activity related to the Company’s warrants during the year ended December 31, 2021: | | | | | | | | | | | | | Weighted average | | Exercise | | | No. of warrant | | exercise price | | price range | December 31, 2020 | | 48,044,381 | | $ | 2.71 | | $ | 0.525 - 300.00 | Granted | | 1,172,088 | | $ | 2.01 | | $ | 1.70 - 2.125 | Exercised | | (11,273,529) | | $ | 1.71 | | $ | 1.70 - 2.125 | Expired | | (125,246) | | $ | 2.52 | | $ | 0.525-300 | December 31, 2021 | | 37,817,694 | | $ | 2.99 | | $ | 0.525 - 6.566 |
Table of Contents XpresSpa Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except for share and per share data) The Company’s outstanding equity warrants as of December 31, 2021 consist of the following: | | | | | | | | | | | | | | | | | | contractual | | | | | No. outstanding | | Exercise price | | life | | Expiration Date | June 2020 Investor Warrants (a) | | 7,614,700 | | $ | 5.2530 | | 0.21 | years | | March 17, 2022 | June 2020 Placement Agent Warrants (a) | | 609,176 | | $ | 6.5663 | | 0.21 | years | | March 17, 2022 | June 2020 Placement Agent Tail Fee (a) | | 133,258 | | $ | 5.2530 | | 0.21 | years | | March 17, 2022 | August 2020 Investor Warrants | | 11,216,932 | | $ | 3.0200 | | 0.66 | years | | August 28, 2022 | August 2020 Placement Agent Warrants | | 897,355 | | $ | 3.9375 | | 0.66 | years | | August 28, 2022 | August 2020 Placement Agent Tail Fee | | 222,222 | | $ | 3.0200 | | 0.66 | years | | August 28, 2022 | December 2020 Investor Warrants | | 13,927,453 | | $ | 1.7000 | | 0.97 | years | | December 21, 2022 | December 2020 Placement Agent Warrants | | 1,769,608 | | $ | 2.1250 | | 0.97 | years | | December 21, 2022 | December 2020 Placement Agent Tail Fee | | 254,902 | | $ | 1.7000 | | 0.97 | years | | December 21, 2022 | January 2021 Placement Agent Warrants | | 510,588 | | $ | 2.1250 | | 1.08 | years | | January 28, 2023 | January 2021 Placement Agent Tail Fee | | 35,000 | | $ | 1.7000 | | 1.08 | years | | January 28, 2023 | February 2021 Placement Agent Warrants | | 284,000 | | $ | 2.1250 | | 1.12 | years | | February 11, 2023 | February 2021 Placement Agent Warrants | | 48,000 | | $ | 2.1250 | | 1.13 | years | | February 16, 2023 | February 2021 Placement Agent Tail Fee | | 248,500 | | $ | 1.7000 | | 1.12 | years | | February 11, 2023 | February 2021 Placement Agent Tail Fee | | 42,000 | | $ | 1.7000 | | 1.88 | years | | February 16, 2023 | December 2021 Placement Agent Tail Fee | | 4,000 | | $ | 2.1250 | | 1.99 | years | | December 27, 2023 | | | 37,817,694 | | | | | | | | |
| (a) | These warrants lapsed without being exercised as of the date of this report. |
During 2021, holders of the Company’s December 2020 Investor Warrants, December 2020 Placement Agent Warrants and December 2020 Placement Agent Tail Fee Warrants exercised a total of 11,273,529 warrants for common shares. The Company received gross proceeds of approximately $19,245. In accordance with the placement agent agreements with H.C. Wainwright & Co., LLC and Palladium, the Company paid cash fees of $2,162 and issued 846,588 warrants to H.C. Wainwright & Co., LLC at an exercise price of $2.125 per share and 325,500 warrants to Palladium at an exercise price of $1.70 per share. Table of Contents XpresSpa Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except for share and per share data) Warrant Exchanges On March 19, 2020, the Company entered into separate Warrant Exchange Agreements (the “March Exchange Agreements”) with the holders of certain existing warrants (the “March Exchanged Warrants”) to exchange warrants for shares of the Company’s Common Stock, subject to receipt of the approval of the Company’s stockholders, which was obtained on May 28, 2020. The holders of March Exchanged Warrants exchanged each of the March Exchanged Warrants for 1.5 shares of the Company’s Common Stock. Pursuant to the March Exchange Agreements, the holders exchanged 1,942,131 of the March Exchanged Warrants for an aggregate of 2,913,197 shares of the Company’s Common Stock, which had an aggregate fair value of $6,434. On June 4, 2020, the Company entered into a Warrant Exchange Agreement (the “June Exchange Agreement”) with the holder of certain existing warrants (the “June Exchanged Warrants”) to exchange the June Exchanged Warrants for shares of Common Stock. The holders of the June Exchanged Warrants exchanged each of the June Exchanged Warrants for 1.5 shares of the Company’s Common Stock. Pursuant to the June Exchange Agreement, on the closing date the holder exchanged 1,374,750 of the June Exchanged Warrants for an aggregate of 2,062,126 shares of Common Stock which had an aggregate fair value of $11,755. Registered Direct Common Stock Offerings The Company sold a total of 6,511,280 shares of Common Stock and 1,900,625 of pre-funded warrants and received total proceeds of $4,258, net of financial advisory and consulting fees of $626, in connection with three registered direct offerings in March 2020. On April 6, 2020, the Company entered into a securities purchase agreement with certain purchasers, pursuant to which it issued and sold, in a registered direct offering (i) 4,139,393 shares of Common Stock at an offering price of $0.66 per share and (ii) an aggregate of 481,818 pre-funded warrants exercisable for shares of Common Stock at an offering price of $0.63 per pre-funded warrant. The Company received proceeds of $2,806, net of $244 in financial advisory consultant fees. On June 17, 2020, the Company entered into a securities purchase agreement pursuant to which the Company agreed to issue and sell 7,614,700 shares of the Company’s Common Stock at an offering price of $5.253 per share (the “Registered Offering”). In a concurrent private placement (the “Private Placement” and together with the Registered Offering, the “Offerings”), the Company agreed to issue to the purchasers who participated in the Registered Offering warrants (the “Warrants”) exercisable for an aggregate of 7,614,700 shares of Common Stock at an exercise price of $5.25 per share. Each Warrant will be immediately exercisable and will expire 21 months from the issuance date. The Offerings closed on June 19, 2020 with the Company receiving gross proceeds of $40,000 before deducting placement agent fees and related offering expenses of $4,414. In connection with the Registered Offering, warrants to purchase 133,258 shares of our Common Stock were issued to Palladium Capital Advisors, LLC (“Palladium”) (the “Palladium Warrants”) at an exercise price equal to $5.25 per share and warrants to purchase 609,176 shares of our Common Stock were issued to H.C. Wainwright & Co., LLC (the “H.C.W. Warrants”) at an exercise price equal to $6.5663 per share pursuant to the respective placement agent agreements. Palladium Capital Advisors, LLC and H.C. Wainwright & Co., LLC are also entitled to additional warrants upon the holders’ exercise of warrants pursuant to the respective placement agent agreements. On August 25, 2020, the Company entered into a securities purchase agreement pursuant to which the Company agreed to issue and sell in a registered direct offering 10,407,408 shares of the Company’s Common Stock and warrants exercisable for an aggregate of 11,216,932 shares of Common Stock at a combined offering price of $3.15 per share. The Warrants Table of Contents XpresSpa Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except for share and per share data) have an exercise price of $3.02 per share. The Company also offered and sold to certain purchasers pre-funded warrants to purchase an aggregate of 809,524 shares of Common Stock, in lieu of shares of Common Stock. Each pre-funded warrant represented the right to purchase 1 share of Common Stock at an exercise price of $0.001 per share and was exercised in August 2020. The offering closed on August 28, 2020 with the Company receiving gross proceeds of $35,333 before deducting placement agent fees and related offering expenses of $3,914. In connection with the August offering, warrants to purchase 222,222 shares of our Common Stock were issued to Palladium at an exercise price equal to $3.02 per share and warrants to purchase 897,355 shares of our Common Stock were issued to H.C. Wainwright & Co., LLC at an exercise price equal to $3.9375 per share pursuant to the respective placement agent agreements. Palladium Capital Advisors, LLC and H.C. Wainwright & Co., LLC are also entitled to additional warrants upon the holders’ exercise of warrants pursuant to the respective placement agent agreements. On December 17, 2020, the Company entered into a securities purchase agreement pursuant to which the Company agreed to issue and sell, in a registered direct offering 24,509,806 shares of the Company’s common stock, par value $0.01 per share and warrants exercisable for an aggregate of 24,509,806 in a registered direct offering. The combined purchase price for 1 share of common stock (or common stock equivalent) and a warrant to purchase 1 share of common stock is $1.70. Each Warrant is immediately exercisable and will expire 24 months from the issuance date. The offering closed on December 21, 2020 with the Company receiving gross proceeds of approximately $41,667 before deducting placement agent fees and related offering expenses of $5,118. In connection with the December offering, warrants to purchase 754,902 shares of our Common Stock were issued to Palladium at an exercise price equal to $1.70 per share and warrants to purchase 1,960,784 shares of our Common Stock were issued to H.C Wainwright & Co., LLC at an exercise price equal to $2.13 per share pursuant to the respective placement agent agreements. Palladium Capital Advisors, LLC and H.C. Wainwright & Co., LLC are also entitled to additional warrants upon the holders’ exercise of warrants pursuant to the respective placement agent agreements. Series E Convertible Preferred Stock
During 2020, the Company issued 10,123 shares of Series E Preferred Stock. Subsequent to the issuance, all outstanding shares were converted into 510,460 shares of Common Stock during 2020. Series F Convertible Preferred Stock The Series F Preferred Stock has a par value of $0.01 per share, a stated value of $100 per share, and was initially convertible into Common Stock at an exercise price of $6.00 per share. On March 6, 2020, the exercise price was reduced from $6.00 to $1.68 and on March 19, 2020 was reduced again to $0.525 after giving effect to certain anti-dilution adjustments. As a result, the Company recorded a deemed dividend of approximately $140 which represents the fair value transferred to the Series F shareholders from the anti-dilution protection being triggered. During the year ended December 31, 2020 all 8,996 shares of outstanding shares of Series F Convertible Preferred Stock was converted into 1,221,945 shares of Common Stock. Reverse Stock Split On June 10, 2020, 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-3 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. Table of Contents XpresSpa Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except for share and per share data) Note 13. Fair Value Measurements The following table presents the placement in the fair value hierarchy of the Company’s assets and liabilities measured at fair value on a recurring and nonrecurring basis as of December 31, 20172021 and December 31, 2016: | | | | | | Fair value measurement at reporting date using | | | | | | | | Quoted prices in | | | | | | | | | | | | | | active markets | | | Significant other | | | Significant | | | | | | | | for identical | | | observable | | | unobservable | | | | Balance | | | assets (Level 1) | | | inputs (Level 2) | | | inputs (Level 3) | | | December 31, 2017: | | | | | | | | | | | | | | | | | | May 2015 Warrants | | $ | 34 | | | $ | — | | | $ | — | | | $ | 34 | | | | | | | | | | | | | | | | | | | | | December 31, 2016: | | | | | | | | | | | | | | | | | | May 2015 Warrants | | $ | 259 | | | $ | — | | | $ | — | | | $ | 259 | |
The Company measures its derivative warrant2020. Assets and liabilities at fair value. The May 2015 Warrants were classified within Level 3 because they were valued using the Black-Scholes model, which utilizes significant inputs that are unobservable. These derivative warrant liabilities were initially measured at fair value on a nonrecurring basis relate primarily to tangible property and equipment and other intangible assets, which are markedremeasured when the derived fair value is below carrying value in the consolidated balance sheets. For these assets, the Company does not periodically adjust carrying value to market at each balance sheet date.fair value except in the event of impairment. If it is determined that impairment has occurred, the carrying value of the asset is reduced to fair value and the difference is included in Impairment / disposal of assets in the consolidated statements of operations and comprehensive loss.
| | | | | | | | | | | | | | | | | | 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) | As of December 31, 2021: | | | | | | | | | | | | | Recurring fair value measurements | | | | | | | | | | | | | Equity securities: | | | | | | | | | | | | | Route1, Inc. | | $ | 722 | | $ | — | | $ | 722 | | $ | — | Total equity securities | | | 722 | | | — | | | 722 | | | — | Total recurring fair value measurements | | $ | 722 | | $ | — | | $ | 722 | | $ | — | | | | | | | | | | | | | | As of December 31, 2020 | | | | | | | | | | | | | Recurring fair value measurements | | | | | | | | | | | | | Equity securities: | | | | | | | | | | | | | Route1 | | $ | 1,768 | | $ | — | | $ | 1,768 | | $ | — | Total equity securities | | | 1,768 | | | — | | | 1,768 | | | — | Total recurring fair value measurements | | $ | 1,768 | | $ | — | | $ | 1,768 | | $ | — |
In addition to the above, the Company’s financial instruments as of December 31, 20172021 and December 31, 20162020 consisted of cash and cash equivalents, receivables, accounts payable and Debt.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 year ended December 31, 2017:
| | | May 2015
Warrants | | | December 31, 2016 | | $ | 259 | | | Decrease in fair value of the warrants | | | (225 | ) | | December 31, 2017 | | $ | 34 | |
Valuation processes for Level 3 Fair Value Measurements
Fair value measurement of the derivative warrant liabilities falls within Level 3 of the fair value hierarchy. The fair value measurements are evaluated by management to ensure that changes are consistent with expectations of management based upon the sensitivity and nature of the inputs.
December 31, 2017:
Description | | Valuation technique | | Unobservable inputs | | Range | | May 2015 Warrants | | Black-Scholes | | Volatility | | | 39.64 | % | | | | | Risk-free interest rate | | | 1.88 | % | | | | | Expected term, in years | | | 2.34 | | | | | | Dividend yield | | | 0.00 | % |
December 31, 2016:
Description | | Valuation technique | | Unobservable inputs | | Range | | May 2015 Warrants | | Black-Scholes | | Volatility | | | 45.15 | % | | | | | Risk-free interest rate | | | 1.57 | % | | | | | Expected term, in years | | | 3.34 | | | | | | Dividend yield | | | 0.00 | % |
Sensitivity of Level 3 measurements to changes in significant unobservable inputs
The inputs to estimate the fair value of the Company’s derivative warrant liabilities were the current market price of the Company’s common stock, the exercise price of the derivative warrant liabilities, their remaining expected term, the volatility of the Company’s common stock price and the risk-free interest rate over the expected term. Significant changes in any of those inputs in isolation can result in a significant change in the fair value measurement.
Generally, an increase in the market price of the Company’s shares of common stock, an increase in the volatility of the Company’s shares of common stock, and an increase in the remaining term of the derivative warrant liabilities would each result in a directionally similar change in the estimated fair value of the Company’s derivative warrant liabilities. Such changes would increase the associated liability while decreases in these assumptions would decrease the associated liability. An increase in the risk-free interest rate or a decrease in the differential between the derivative warrant liabilities’ exercise price and the market price of the Company’s shares of common stock would result in a decrease in the estimated fair value measurement and thus a decrease in the associated liability. The Company has not, and does not plan to, declare dividends on its common stock and, as such, there is no change in the estimated fair value of the derivative warrant liabilities due to the dividend assumption.
Other Fair Value Measurements
December 31, 2017:
The following table presents the placement in the fair value hierarchy of the contingent consideration assumed by the Company following the acquisition of Excalibur Integrated Systems, Inc. (“Excalibur”), which is measured at fair value on a recurring basis:
| | | | | | Fair value measurement at reporting date using | | | | | | | | Quoted prices in | | | | | | | | | | | | | | active markets | | | Significant other | | | Significant | | | | | | | | for identical | | | observable | | | unobservable | | | | | Balance | | | assets (Level 1) | | | inputs (Level 2) | | | inputs (Level 3) | | | December 31, 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 11. Warrants
The following table summarizes information about warrant activity during the years ended December 31, 2017 and 2016:
| | | No. of warrants | | | Weighted average
exercise price | | | Exercise
price range | | | December 31, 2016 | | | 3,506,679 | | | $ | 4.77 | | | $ | 3.00 – 17.60 | | | Granted | | | — | | | $ | — | | | $ | 3.00 | | | Exercised | | | — | | | | — | | | | — | | | Expired | | | (419,179 | ) | | $ | 17.60 | | | $ | 17.60 | | | December 31, 2017 | | | 3,087,500 | | | $ | 3.03 | | | $ | 3.00 – 5.00 | |
The Company’s outstanding equity warrants as of December 31, 2017 consist of the following:
| | | No. outstanding | | | Exercise price | | | Remaining
contractual life | | Expiration Date | | October 2015 Warrants | | | 50,000 | | | $ | 5.00 | | | 3.29 years | | April 15, 2021 | | December 2016 Warrants | | | 2,500,000 | | | $ | 3.00 | | | 3.98 years | | December 23, 2021 | | Outstanding as of December 31, 2017 | | | 2,550,000 | | | | | | | | | |
The Company’s outstanding derivative warrants as of December 31, 2017 consist of the following:
| | | No. outstanding | | | Exercise price | | | Remaining contractual life | | Expiration Date | | May 2015 Warrants | | | 537,500 | | | $ | 3.00 | | | 2.34 years | | May 4, 2020 |
Note 12. Stock-based Compensation
The Company has a stock-based compensation plan available to grant stock options and RSUs to the Company’s directors, employees and consultants. Under the 2012 Employee, Director and Consultant Equity Incentive Plan (the “Plan”), a maximum of 1,560,000 shares of common stock may be awarded. In 2015 and 2016, the Company amended the Plan so that a maximum number of shares of common stock that may be awarded was increased to 7,100,000. As of December 31, 2017, 2,111,437 shares were available for future grants under the Plan.
Total stock-based compensation expense for the years ended December 31, 2017 and 2016 was $2,745 and $2,570, respectively, of which stock-based compensation expense included in the discontinued operations was $568 and $122, respectively.
The following table illustrates the stock options granted during the year ended December 31, 2017:
| Title | | Grant date | | No. of options | | | Exercise price | | Fair market value at grant date | | Vesting terms | | Assumptions used in Black-Scholes option pricing model | | Directors, management, and employees | | January 2017 | | | 1,545,000 | | | $2.12 – $2.15 | | $0.89 – $0.96 | | Over one year for directors; Over three years for management and employees | | Volatility: 44.27% – 44.90% Risk free interest rate: 1.95% – 2.16% Expected term, in years: 5.29 – 5.79 Dividend yield: 0.00% | | Consultant | | December 2017 | | | 50,000 | | | $1.10 | | $0.65 | | Over three years | | Volatility: 48.33% Risk free interest rate: 2.35% Expected term, in years: 10.00 Dividend yield: 0.00% |
The following table illustrates the RSUs granted during the year ended December 31, 2017.
| Title | | Grant date | | No. of RSUs | | | Fair market value at grant date | | | Vesting term | | Management and employees | | January 2017 | | | 400,942 | | | $ | 2.12 | | | Over one year, vesting on one-year anniversary of grant date |
The following tables summarize information about stock options and RSU activity during the year ended December 31, 2017:
| | | 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 | | | | 1,595,000 | | | $ | 2.09 | | | $ | 1.10 – 2.15 | | | $ | 0.92 | | | Vested/Exercised | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | Forfeited | | | (35,377 | ) | | $ | 2.12 | | | | (939,791 | ) | | $ | 6.52 | | | $ | 1.55 – 41.00 | | | $ | 4.29 | | | Expired | | | — | | | | — | | | | (16,368 | ) | | $ | 43.66 | | | $ | 9.94 – 55.00 | | | $ | 22.02 | | | Outstanding as of December 31, 2017 | | | 365,565 | | | $ | 2.12 | | | | 4,317,942 | | | $ | 5.67 | | | $ | 1.10 – 41.00 | | | $ | 3.86 | | | Exercisable as of December 31, 2017 | | | — | | | | | | | | 3,011,692 | | | $ | 7.33 | | | $ | 1.55 – 41.00 | | | | | |
| | | Non-vested stock options: | | | Non-vested RSU: | | | | | No. of options | | | Weighted average
grant date
fair value | | | No. of RSUs | | | Weighted average
grant date
fair value | | | Balance at January 1, 2017 | | | 2,011,667 | | | $ | 1.78 | | | | — | | | $ | — | | | Granted | | | 1,595,000 | | | $ | 0.92 | | | | 400,942 | | | $ | 2.12 | | | Vested | | | (1,609,792 | ) | | $ | 1.20 | | | | — | | | | — | | | Forfeited | | | (690,625 | ) | | $ | 1.33 | | | | (35,377 | ) | | $ | 2.12 | | | Balance at December 31, 2017 | | | 1,306,250 | | | $ | 1.19 | | | | 365,565 | | | $ | 2.12 | |
The following table summarizes information about employee and non-employee stock options outstanding as of December 31, 2017:
| Exercise price range | | | No. options outstanding | | | No. options exercisable | | | Weighted average remaining contractual life (years) | | | $ | 0.01-10.00 | | | | 3,786,376 | | | | 2,480,126 | | | | 5.92 | | | $ | 10.00-20.00 | | | | 65,566 | | | | 65,566 | | | | 0.20 | | | $ | 20.00-30.00 | | | | 40,000 | | | | 40,000 | | | | 5.57 | | | $ | 30.00-40.00 | | | | 369,500 | | | | 369,500 | | | | 5.35 | | | $ | 40.00-50.00 | | | | 56,500 | | | | 56,500 | | | | 6.14 | | | | | | | | 4,317,942 | | | | 3,011,692 | | | | | |
As of December 31, 2017, the total aggregate intrinsic value of options outstanding was $14 and there was no aggregate intrinsic value associated with the options exercisable, as they were out-of-the-money. As of December 31, 2016, the total aggregate intrinsic values of options outstanding and options exercisable were $1,636 and $514, respectively. There were no options exercised during the years ended December 31, 2017 and 2016.
The total fair value of stock options that vested in the years ended December 31, 2017 and 2016 was $1,932 and $1,703, respectively. As of December 31, 2017, there was approximately $1,558 of total unrecognized stock-based payment cost related to non-vested options, shares, and RSUs granted under the incentive stock option plans. Overall, the cost is expected to be recognized over a weighted average of 1.32 years.
The Company did not recognize tax benefits related to its stock-based compensation as there is a full valuation allowance recorded.
Note 13. Related Parties Transactions14. Stock-based Compensation On April 22, 2015, XpresSpa entered into the Debt with Rockmore that was amended on August 8, 2016. Rockmore is an investment entity controlled byThe Company has a stock-based compensation plan available to grant stock options and RSUs to the Company’s board member, Bruce T. Bernstein. The Debt had an outstanding balancedirectors, employees and consultants. Under the 2012 Employee, Director and Consultant Equity Incentive Plan, as amended (the “2012 Plan”), a maximum of $6,500 as840,000 shares of both December 31, 2017 and December 31, 2016, which is includedCommon Stock may be awarded.
Awards granted under the 2012 Plan remain in long-term liabilities ineffect pursuant to their terms. Generally, stock options are granted with exercise prices equal to the consolidated balance sheets. Duringfair market value on the year-ended December 31, 2017, XpresSpa paid and recorded $731 of interest expense. During the period from acquisition of XpresSpa on December 23, 2016 to December 31, 2016, XpresSpa paid $100 of interest for December 2016 and January 2017 and recorded $16 of interest expense. In May 2017, per the original agreement and with Rockmore’s consent, the Company elected to extend the maturity date of grant, vest in four equal quarterly installments, and expire 10 years from the Debt from May 1, 2018date of grant. RSUs granted generally vest over a period of one year. Table of Contents XpresSpa Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except for share and per share data) In September 2020, the Board of Directors approved a new stock-based compensation plan available to May 1, 2019. No other material termsgrant stock options, restricted stock and RSU’s to the Company’s directors, employees and consultants. Under the 2020 Equity Incentive Plan (the “2020 Plan”), a maximum of 5,000,000 shares of Common Stock may be issued, subject to receiving shareholder approval which was subsequently obtained on October 28, 2020. The 2012 Plan was terminated upon receipt of shareholder approval of the Debt were modified.2020 Plan. In addition, the Company paid $212September 2020, XpresTest created a stock-based compensation plan available to Mr. Bernstein in March 2017 for legal costs incurred in conjunction with the acquisition of XpresSpagrant stock options, restricted stock and certain legal proceedings related to litigation with Amiral Holdings SAS (“Amiral”) priorRSU’s to the completionXpresTest’s directors, employees and consultants. Under the XpresTest 2020 Equity Incentive Plan (the “XpresTest Plan”), a maximum of such acquisition, as Mr. Bernstein was indemnified by XpresSpa and was a defendant in200 shares of XpresTest common stock may be awarded, which would represent 20% of the Amiral legal proceedings. These costs were included in accounts payable, accrued expenses and other current liabilities in the consolidated balance sheettotal number of shares of common stock of XpresTest as of December 31, 2016. During 2016,2021. Certain named executive officers, consultants, and directors of the Company engaged various partiesare eligible to perform valuations, legal, financialparticipate in the XpresTest Plan. The XpresTest Plan RSAs vest upon satisfaction of certain service and tax due diligence associated with the XpresSpa acquisition and other merger and acquisition projects. Among the service providers, the Company engaged RedRidge Lender Services LLC (“RedRidge”) to perform financial due diligence regarding the acquisition of XpresSpa. Andrew Perlman, the Company’s Chief Executive Officer, and certain members of his family, own a minority equity position in RedRidge, which may be considered a related party.performance-based conditions. The audit committeefair value of the Company’s BoardXpresTest Plan RSAs is determined based on the weighted average of Directors reviewed(i) Fair Value of XpresTest under the Indirect Valuation Method developing assumptions for XpresSpa Net Market Cap and approvedXpresSpa standalone Fair Value, and (ii) Direct Valuation Method developing assumptions for XpresTest Representative Forecasted Revenue for 2021 and Peer companies Revenue’s Multiples. During 2021, XpresTest repurchased 13 common shares, exercised pursuant to the engagement of RedRidge. The feeXpresTest Plan, for the XpresSpa engagement was $101 andgrantees to defray their tax liabilities related to the fees for other engagements were $60,XpresTest Plan RSAs award. As of December 31, 2021 all of which were incurred during the year-ended December 31, 2016XpresTest RSAs have vested
The fair value of stock options is estimated as of the date of grant using the Black-Scholes-Merton (“Black-Scholes”) option-pricing model. The Company uses the simplified method to estimate the expected term of options due to insufficient history and are reflectedhigh turnover in the general and administrative expense in the consolidated statements of operations and comprehensive loss.past. Note 14. Property and Equipment
The following table summarizes information about property and equipment activity duringvariables were used as inputs in the model: | | | | | Share price of the Company’s Common Stock on the grant date: | | $ | 1.19 - 1.61 | | Exercise price: | | $ | 1.19 - 1.61 | | Expected volatility: | | | 123 | % | Expected dividend yield: | | | 0 | % | Annual average risk-free rate: | | | 0.37 | % | Expected term: | | | 5.38 | years |
Total stock-based compensation expense for the years ended December 31, 20172021 and 2016:2020 was $2,856 and $1,328, respectively. Table of Contents XpresSpa Group, Inc. and Subsidiaries | Balance of property and equipment as of December 31, 2015 | | $ | — | | | Additions | | | 75 | | | Additions from XpresSpa acquisition | | | 16,308 | | | Depreciation expense | | | (117 | ) | | Balance of property and equipment as of December 31, 2016 | | | 16,266 | | | Additions | | | 5,104 | | | Depreciation expense | | | (5,573 | ) | | Balance of property and equipment as of December 31, 2017 | | $ | 15,797 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except for share and per share data) The following tables summarize information about stock options and RSU activity during the year ended December 31, 2021: | | | | | | | | | | | | | | | | | | | | | RSUs | | XpresTest RSAs | | Stock options | | | | | Weighted | | | | Weighted | | | | Weighted | | | | | | | | average | | | | average | | | | average | | Exercise | | | No. of | | grant date | | No. of | | grant date | | No. of | | exercise | | price | | | RSUs | | fair value | | RSAs | | fair value | | options | | price | | range | Outstanding as of December 31, 2020 | | 0 | | $ | 0 | | 28.75 | | $ | 11,390.35 | | 1,353,888 | | $ | 3.82 | | $ | 1.53 - 2,460.0 | Granted | | 1,349,167 | | | 1.58 | | 120.00 | | | 5,227.20 | | 1,668,297 | | | 1.56 | | | 1.19 - 1.61 | Exercised/Vested | | (749,167) | | | 1.54 | | (148.75) | | | 6,418.40 | | (8,334) | | | 1.53 | | | | Forfeited | | 0 | | | 0 | | — | | | — | | (183,230) | | | 1.61 | | | | Expired | | 0 | | | 0 | | — | | | — | | (3,750) | | | 50.8 | | | NA | Outstanding as of December 31, 2021 | | 600,000 | | $ | 1.63 | | — | | $ | — | | 2,826,871 | | $ | 2.57 | | $ | 1.19 - 2,460.0 | Exercisable as of December 31, 2021 | | | | | | | | | | | | 1,024,694 | | $ | 3.81 | | $ | 1.19 - 2,460.0 |
The weighted average remaining contractual term for options outstanding as of December 31, 2021 and 2020 was 8.71 years and 9.5 years, respectively. PropertyAs of December 31, 2021, Aggregate Intrinsic Value of Options Outstanding and equipmentVested was $545. As of December 31, 2020, there was 0 aggregate intrinsic value associated with the options outstanding as the exercise price of the options was greater than the Company’s Common Stock price.
Unrecognized stock-based payment cost related to non-vested stock options as of December 31, 2021 and 2020 were $2,088 and $902, respectively. Unrecognized stock-based payment cost related to non-vested RSUs as of December 31, 2021 and 2020 were $978 and $0 respectively. Note 15. Segment Information The Company analyzes the results of the Company’s business through the Company’s 3 reportable segments: XpresSpa, XpresTest, and Treat. The XpresSpa segment provides travelers premium spa services, including massage, nail and skin care, as well as spa and travel products. The XpresTest segment provides diagnostic COVID-19 tests at XpresCheck™ Wellness Centers in airports, to airport employees and to the traveling public. The Treat segment provides access to integrated care which can seamlessly fit into a post-pandemic world and is compriseddesigned to deliver on-demand access to integrated healthcare through technology and personalized services, positioned for a traveler to access health care, records and real-time information all in one place, as well as book appointments in the Company’s on-site wellness centers as they reopen. The chief operating decision maker evaluates the operating results and performance of three categories: leasehold improvements, furniture and fixtures,the Company’s segments through operating income. Expenses that can be specifically identified with a segment have been included as deductions in determining operating income. Any remaining expenses and other operating equipment.charges are included in Corporate and Other. DuringThe Company currently operates in 2 geographical regions: United States and all other countries, which include Amsterdam, and Dubai. The following table represents the geographical revenue, and total long-lived asset information as
Table of Contents XpresSpa Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except for share and per share data) of and for the years ended December 31, 20172021 and 2016, the Company recorded $5,5732020. There were no concentrations of geographical revenue and $117 of depreciation expense from continuing operations, respectively. Included in the depreciation expense from continuing operations for the year-ended December 31, 2017 is $1,131 of accelerated depreciation related to the closure of one of XpresSpa’s JFK locations in June 2017. Thelong-lived assets related to any single foreign country that were material to the JFK location are not included in the net book value ofCompany’s consolidated financial statements. Long-lived assets include property and equipment, restricted cash, equity investments, security deposits and accumulated depreciation,right of use lease assets. | | | | | | | | | For the years ended | | | December 31, | | | 2021 | | 2020 | Revenue | | | | | | | United States | | $ | 71,114 | | $ | 7,051 | All other countries | | | 2,615 | | | 1,334 | Total revenue | | $ | 73,729 | | $ | 8,385 | Long-lived assets | | | | | | | United States | | $ | 9,698 | | $ | 9,019 | All other countries | | | 4,799 | | | 1,380 | Total long-lived assets | | $ | 14,497 | | $ | 10,399 |
The Company’s continuing operating segments are defined as notedcomponents of an enterprise about which separate financial information is available that is regularly evaluated by the enterprise’s CODM in deciding how to allocate resources and in assessing performance. As a result of the table below. In October 2017,Company’s transition to a pure-play health and wellness services company, the Company recorded a $235 reductioncurrently has 3 reportable operating segments: XpresSpa, XpresTest and Treat.
| | | | | | | | | For the twelve months ended | | | December 31, | | | 2021 | | 2020 | Revenue | | | | | | | XpresSpa | | $ | 4,614 | | $ | 8,045 | XpresTest | | | 69,078 | | | 80 | Treat | | | 37 | | | — | Corporate and other | | | — | | | 260 | Total revenue | | $ | 73,729 | | $ | 8,385 | | | | | | | | Operating income (loss) | | | | | | | XpresSpa | | $ | (9,617) | | $ | (29,966) | XpresTest | | | 25,452 | | | (3,494) | Treat | | | (5,735) | | | — | Corporate and other | | | (5,993) | | | (6,644) | Total operating income (loss) | | $ | 4,107 | | $ | (40,104) | | | | | | | | | | | | | | | Depreciation & Amortization | | | | | | | XpresSpa | | $ | 1,281 | | $ | 4,608 | XpresTest | | | 1,858 | | | 585 | Treat | | | 50 | | | — | Corporate and other | | | 12 | | | 17 | Total Depreciation & Amortization | | $ | 3,201 | | $ | 5,210 | | | | | | | |
| | | | | | | | | 2021 | | 2020 | Capital Expenditures | | | | | | | XpresSpa | | $ | 908 | | $ | 1,619 | XpresTest | | | 1,723 | | | 2,726 | Treat | | | 5,904 | | | — | Corporate and other | | | 136 | | | 4 | Total Capital Expenditures | | $ | 8,671 | | $ | 4,349 | | | | | | | | | | | | | | | | | 2021 | | 2020 | Long-lived Assets | | | | | | | XpresSpa | | $ | 8,419 | | | 6,081 | XpresTest | | | 2,246 | | | 2,148 | Treat | | | 2,700 | | | — | Corporate and other | | | 1,132 | | | 2,170 | Total Long-lived Assets | | $ | 14,497 | | $ | 10,399 | | | | | | | | | | | | | | | | | 2021 | | 2020 | Assets | | | | | | | XpresSpa | | $ | 12,351 | | $ | 9,014 | XpresTest | | | 19,349 | | | 2,999 | Treat | | | 5,918 | | | — | Corporate and other | | | 89,648 | | | 91,120 | Total assets | | $ | 127,266 | | $ | 103,133 |
Long-lived assets includes property and equipment, right of use lease assets, security deposits, equity investments and an increase to goodwill, which represents amounts as of the acquisition date of XpresSpa that were related to two old projects for stores that never actually opened. As of December 31, 2017, the Company had capitalized $860 related to construction-in-progress based on percentage of completion of each in-progress project.restricted cash. | | | December 31, | | | | | | | 2017 | | | 2016 | | | Useful Life | | Furniture and fixtures | | $ | 1,164 | | | $ | 716 | | | 3-4 years | | Leasehold improvements | | | 17,704 | | | | 14,732 | | | Average 5-8 years | | Other operating equipment | | | 1,488 | | | | 935 | | | Maximum 5 years | | | | | 20,356 | | | | 16,383 | | | | | Accumulated depreciation | | | (4,559 | ) | | | (117 | ) | | | | Total property and equipment, net | | $ | 15,797 | | | $ | 16,266 | | | |
Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are depreciated over the shorter of remaining lease term or economic useful life (which is on average 5-8 years).
Note 15. Other Current Assets16. Related Parties Transactions AsIn 2018, the Company entered into a collaboration agreement with Calm to the display, market, promote, and offer for sale Calm's products in each of the Company's branded stores worldwide. In connection with the collaboration agreement, the Company began selling Calm subscriptions and certain Calm-branded retail products in its spas, beginning in November 2018. Also, Calm previously held 937,500 warrants to purchase shares of Company's Common stock and a $2,500 unsecured note convertible into the Company's Series E Convertible Preferred Stock (see Note 11, Long-termNotes and Convertible Notes for further details). During the years ended December 31, 2017,2021, and 2016,2020, the Company’s other current assets were comprisedCompany recorded revenue of the following:
| | | December 31, | | | | | 2017 | | | 2016 | | | Prepaid expenses | | $ | 1,212 | | | $ | 1,536 | | | Notes receivable | | | 800 | | | | — | | | Other | | | 108 | | | | 101 | | | Total other current assets | | $ | 2,120 | | | $ | 1,637 | |
Prepaid expenses are predominantly comprised of prepaid insurance policies which have terms of one year or less. The note receivable, which relates to$2 and $11, respectively from the sale of FLI Charge, was collectedCalm's branded products in February 2018.its spas which is included in products revenue in the consolidated statements of operations and comprehensive income/(loss) for the years ended December 31, 2021 and 2020.
Table of Contents XpresSpa Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except for share and per share data) Note 16.17. Accounts Payable, Accrued Expenses and Other Current Liabilities As of December 31, 2017,2021, and 2016,2020, the Company’s accounts payable, accrued expenses and other current liabilities were comprised of the following: | | | | | | | | | | | | December 31, 2021 | | December 31, 2020 | Accounts payable | | $ | 5,966 | | $ | 2,440 | Litigation accrual | | | 845 | | | 2,221 | Accrued compensation | | | 2,862 | | | 287 | Tax-related liabilities | | | 603 | | | 551 | Gift certificates and loyalty reward program liabilities | | | 494 | | | 495 | Construction Accrual | | | 930 | | | 347 | Credit card processing fees | | | 501 | | | — | Other miscellaneous accruals | | | 757 | | | 127 | Total accounts payable, accrued expenses and other current liabilities | | $ | 12,958 | | $ | 6,468 |
| | | December 31, | | | | | 2017 | | | 2016 | | | Accounts payable | | $ | 3,362 | | | $ | 5,170 | | | Accrued expenses | | | 3,160 | | | | 3,175 | | | Accrued compensation | | | 1,074 | | | | 1,324 | | | Tax-related liabilities | | | 615 | | | | 673 | | | Gift certificates and loyalty reward program liabilities | | | 474 | | | | 605 | | | Other | | | 51 | | | | 43 | | | Total accounts payable, accrued expenses and other current liabilities | | $ | 8,736 | | | $ | 10,990 | |
Accrued liabilityConcentrations of Supplier Risk
For the XpresTest segment, substantially all supplies for insurancetesting were purchased from one vendor. For the XpresSpa segment, substantially all inventory was also purchased from one vendor. XpresSpa carries several annual insurance policies including indemnity, fire, umbrella, and workers’ compensation. XpresSpa financed a total of $903, or 80%, of the total insurance premiums with a third-party provider, at a rate of 4.50% per year payable in ten monthly installments. As of December 31 2017, XpresSpa had an outstanding balance of its financing arrangement of approximately $722, which is included in accounts payable, accrued expenses and other current liabilities on the consolidated balance sheets, scheduled to be repaid in 2018.
Merchant financing
In April 2016, XpresSpa entered into a merchant financing arrangement with a top tier credit card company for $1,000, which was provided in the form of an advance against certain future credit card transactions. XpresSpa made repayments on a daily basis throughout 2016 from proceeds of certain credit card transactions. As of December 31, 2016, the outstanding balance of the advance was $155. This balance was repaid in full in February 2017. In February 2017, XpresSpa entered into a new merchant financing arrangement with the same party for $500. As of December 31, 2017, the outstanding balance of the advance was $112. This balance was repaid in full in February 2018. No further merchant financing has been obtained.
Note 17. Discontinued Operations and Assets and Liabilities Held for Disposal
FLI Charge
In 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 to discontinued operations of $1,092 relating to FLI Charge’s technology assets and goodwill was recorded during the year-ended December 31, 2017.
On October 20, 2017 (the “Closing Date”), the Company sold FLI Charge to a group of private investors and FLI Charge management, to own and operate FLI Charge. The Company does not provide any continued management or financing support to FLI Charge after the Closing Date.
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 fair value of the total consideration was determined to be $1,052, which resulted in a gain on disposal of $629 in consolidated net loss from discontinued operations. The fair value of the consideration for the FLI Charge disposition was determined using a combination of valuation methods including: (i) the face value of the upfront cash installment of $250; (ii) the present value of the deferred cash installments was calculated by multiplying the face value of the installments by the acquirer’s default probability and discounted by the risk-free rate; (iii) the Black-Scholes model was used to obtain the value of the warrants; and (iv) the value of the 5% royalty was calculated using a discounted cash flow model. The Company’s fair value measurements are evaluated by management to ensure that they are consistent with expectations of management based upon the sensitivity and nature of the inputs.
Group Mobile
In December 2017, the Company concluded that the requirement to report the results of Group Mobile, a wholly-owned subsidiary included in its technology operating segment, as discontinued operations was triggered.
On March 7, 2018 (the “Signing Date”), the Company entered into a membership purchase agreement (the “Purchase Agreement”) with Route1 Security Corporation, a Delaware corporation (the “Buyer”), and Route1 Inc., an Ontario corporation (“Route1”), pursuant to which the Buyer agreed to acquire Group Mobile (the “Disposition”). The transaction closed on March 22, 2018.
In consideration for the Disposition, the Buyer has agreed to issue 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 will feature an exercise price of CAD 5 cents per share of common stock and will be exercisable for a three-year period; and |
| · | certain other payments over the three-year period pursuant to an earn-out provision in the Purchase Agreement. |
The Company will retain certain inventory with a value of $778, which is to be disposed of separately from the transaction with Route1 in the first half of 2018.
Post-closing, the Company owns approximately 6.7% of Route1 Common Stock. The Route1 Common Stock will not be 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 date of closing, subject to a change of control provision. The Company has the ability to sell the Route1 Common Stock and warrants to qualified institutional investors. The Purchase Agreement also contains representations, warranties, and covenants customary for transactions of this type.
The fair value of the total consideration as of the Signing Date was estimated to be $1,925. As a result, a non-cash impairment loss from discontinued operations of $7,485 relating to Group Mobile’s intangible assets and goodwill was recorded as of December 31, 2017. The fair value of the consideration for the Group Mobile disposition was determined using a combination of valuation methods including: (i) the value of the common stock was estimated by multiplying the number of shares as they become tradeable by the price per share as of the Signing Date; (ii) the Black-Scholes model was used to obtain the value of the warrants; and (iii) a Monte-Carlo simulation analysis was performed in order to estimate the value of the earn-out provision. The Company’s fair value measurements are evaluated by management to ensure that they are consistent with expectations of management based upon the sensitivity and nature of the inputs.
The sale of Group Mobile was completed on March 22, 2018. The Company will not have any involvement with Group Mobile post transaction.
Operating Results and Assets and Liabilities Held for Sale
The following table represents the components of operating results from discontinued operations, as presented in the consolidated statements of operations and comprehensive loss for the years ended December 31, 2017 and December 31, 2016:
| | | For the years ended December 31, | | | | | 2017 | | | 2016 | | | Revenue | | $ | 15,454 | | | $ | 6,988 | | | Cost of sales | | | (12,373 | ) | | | (6,081 | ) | | Depreciation and amortization | | | (770 | ) | | | (528 | ) | | Impairment | | | (8,577 | ) | | | — | | | General and administrative | | | (5,986 | ) | | | (5,088 | ) | | Non-operating expense | | | (13 | ) | | | (15 | ) | | Loss from discontinued operations before income taxes | | | (12,265 | ) | | | (4,724 | ) | | Income tax expense | | | (12 | ) | | | — | | | Consolidated net loss from discontinued operations | | $ | (12,277 | ) | | $ | (4,724 | ) |
In addition, the following table presents the carrying amounts of the major classes of assets and liabilities held for sale as of December 31, 2017 and December 31, 2016, as presented in the consolidated balance sheets.
| | | December 31, | | | | | 2017 | | | 2016 | | | Cash | | $ | 150 | | | $ | — | | | Accounts receivable, net | | | 2,920 | | | | 373 | | | Inventory | | | 1,935 | | | | 437 | | | Other current assets | | | 3 | | | | 681 | | | Property and equipment, net | | | 874 | | | | 201 | | | Intangible assets, net | | | 564 | | | | 1,891 | | | Goodwill | | | — | | | | 4,863 | | | Assets held for disposal | | $ | 6,446 | | | $ | 8,446 | | | | | | | | | | | | | Accounts payable, accrued expenses and other current liabilities | | $ | 3,142 | | | $ | 640 | | | Deferred revenue | | | 619 | | | | 143 | | | Liabilities held for disposal | | $ | 3,761 | | | $ | 783 | |
Note 18. Income Taxes For the years ended December 31, 20172021 and 2016,2020, the loss from continuing operationsincome (loss) before income taxes consistsconsisted of the following: | | | 2017 | | | 2016 | | | | | | | | | | | | | | 2021 | | 2020 | | Domestic | | $ | (16,536 | ) | | $ | (19,318 | ) | | $ | 3,137 | | $ | (91,030) | | Foreign | | | 535 | | | | 39 | | | | (188) | | | (1,195) | | | | $ | (16,001 | ) | | $ | (19,279 | ) | | | | | $ | 2,949 | | $ | (92,225) |
Income tax expense attributable to continuing and discontinued operations for the years ended December 31, 20172021 and 20162020 consisted of the following: | | | 2017 | | | 2016 | | | | Continuing operations | | | | | | | | | | | | | | | | | | | | | For the years ended December 31, | | | | 2021 | | 2020 | | Current: | | | | | | | | | | | | | | | | Federal | | $ | — | | | $ | — | | | $ | 0 | | $ | | | State | | | — | | | | — | | | | 56 | | | 7 | | Foreign | | | 62 | | | | — | | | | 0 | | | 0 | | Deferred: | | | | | | | | | | | | | | | | Federal | | | 49 | | | | — | | | | 0 | | | 0 | | State | | | — | | | | — | | | | Foreign | | | — | | | | — | | | | | | $ | 111 | | | $ | — | | | | | | $ | 56 | | $ | 7 |
| | | 2017 | | | 2016 | | | Discontinued operations | | | | | | | | | | Current: | | | | | | | | | | Federal | | $ | 11 | | | $ | — | | | State | | | 1 | | | | — | | | Foreign | | | — | | | | — | | | Deferred: | | | | | | | | | | Federal | | | — | | | | — | | | State | | | — | | | | — | | | Foreign | | | — | | | | — | | | | | $ | 12 | | | $ | — | |
Table of Contents XpresSpa Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except for share and per share data) Income tax expense attributable to continuing operations differed from the amounts computed by applying the applicable United States federal income tax rate to loss from continuing operations before taxes on income as a result of the following: | | | For the years ended December 31, | | | | | | 2017 | | | 2016 | | | | Loss from continuing operations before income taxes | | $ | (16,001 | ) | | $ | (19,279 | ) | | | | | | | | | | | | | | For the years ended December 31, | | | | | 2021 | | 2020 | | Income (loss) from operations before income taxes | | | $ | 2,949 | | $ | (92,225) | | | Tax rate | | | 35 | % | | | 35 | % | | | 21 | % | | 21 | % | | | | | | | | | | | | | | | | | | | | | | Computed “expected” tax benefit | | | (5,600 | ) | | | (6,748 | ) | | | 619 | | | (19,367) | | | State taxes, net of federal income tax benefit | | | (647 | ) | | | — | | | | 1,516 | | | (2,395) | | | Change in valuation allowance | | | (19,554 | ) | | | 6,454 | | | | (10,946) | | | 12,459 | | Expiration of Stock Options | | | | 4,445 | | | — | | | Nondeductible expenses | | | 800 | | | | 270 | | | | 1,104 | | | 10,841 | | | Tax Reform Rate impact | | | 24,486 | | | | — | | | Return to Provision Adjustment | | | | 2,403 | | | — | | | Other items | | | 626 | | | | 24 | | | | 915 | | | (1,531) | | | Income tax expense for continuing operations | | $ | 111 | | | $ | — | | | Income tax expense (benefit) | | | $ | 56 | | $ | 7 | |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 20172021 and 20162020 are as follows: | | | December 31, | | | | | | 2017 | | | 2016 | | | | | | | | | | | | | | December 31, | | | | 2021 | | 2020 | | Deferred income tax assets | | | | | | | | | | | | | | | | Net operating loss carryforwards | | $ | 35,743 | | | $ | 49,433 | | | $ | 48,556 | | $ | 50,446 | | Stock-based compensation | | | 4,238 | | | | 6,125 | | | | 507 | | | 4,765 | | Intangible assets and other | | | 1,020 | | | | 3,356 | | | | 4,235 | | | 9,034 | | Net deferred income tax assets | | | 41,001 | | | | 58,914 | | | | 53,298 | | | 64,245 | | Less: | | | | | | | | | | | | | | | | Valuation allowance | | | (41,209 | ) | | | (58,914 | ) | | | (53,298) | | | (64,245) | | Net deferred income tax assets | | $ | (208 | ) | | $ | — | | | $ | — | | $ | — |
The Company assesses the need for a valuation allowance related to its deferred income tax assets by considering whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. A valuation allowance has been recorded against the Company’s deferred income tax assets, as it is in the opinion of management that it is more likely than not that the net operating loss carryforwards (“NOL”s)("NOL") will not be utilized in the foreseeable future. The cumulative valuation allowance as of December 31, 20172021 is $41,209,$53,298, which will be reduced if and when the Company determines that the deferred income tax assets are more likely than not to be realized. | | | | As of January 1, 2020 | | $ | 51,788 | Charged to cost and expenses | | | 11,984 | Return to provision true-up and other | | | 473 | As of December 31, 2020 | | | 64,245 | Charged to cost and expenses | | | (8,544) | Return to provision true-up and other | | | (2,403) | As of December 31, 2021 | | $ | 53,298 |
Table of Contents XpresSpa Group, Inc. and Subsidiaries The following table presents the changes to the valuation allowance during the years presented:NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except for share and per share data) | As of January 1, 2016 | | $ | 50,807 | | | Charged to cost and expenses – continuing operations | | | 9,468 | | | Charged to cost and expenses – discontinued operations | | | — | | | Return to provision true-up and other | | | (1,361 | ) | | As of December 31, 2016 | | | 58,914 | | | Charged to cost and expenses – continuing operations | | | (19,206 | ) | | Charged to cost and expenses – discontinued operations | | | 1,455 | | | Return to provision true-up and other | | | 46 | | | As of December 31, 2017 | | $ | 41,209 | |
As of December 31, 2017,2021, the Company’s estimated aggregate total NOLs were $159,007$150,926 for U.S. federal purposes, expiring 20 years from the respective tax years to which they relate.relate, and $56,336 for U.S. federal purposes with an indefinite life due to new regulations in the TCJA of 2017. The NOL amounts are presented before Internal Revenue Code, Section 382 limitations (“("Section 382”382"). The Tax Reform Act of 1986 imposed substantial restrictions on the utilization of NOL and tax credits in the event of an ownership change of a corporation. Thus, the Company’s ability to utilize all such NOL and credit carryforwards may be limited. The NOLs available post-merger thatCoronavirus Aid, Relief, and Economic Security Act or "CARES Act" was enacted subsequent to the December 31, 2019 period, on March 27, 2020. The CARES act provided for favorable business provisions. However, the Company completed in 2012 that aredoes not subjectanticipate the income tax provision changes to limitation amount to $119,406. The remaining NOLs of $39,601 are subject tomaterially benefit the limitation of Section 382. The annual limitation is approximately $2,000.Company. The Company files its tax returns in the U.S. federal jurisdiction, as well as in various state and local jurisdictions. XpresSpa Group has open taxThe company is not currently under audit in any taxing jurisdictions. The federal statute of limitations for audit consideration is 3 years for 2014 through 2016. Asfrom the filing date, and generally states implement a statute of December 31, 2017, all tax years for the Company’s subsidiary Innovate/Protect, Inc. are still open. The Company’s Israeli subsidiary filed its income tax returns in Israel prior to closing the business in the first quarter of 2014; there are no open taxlimitations between 3 and 5 years. On December 22, 2017, the United States government enacted the Tax Act, which makes changes to the corporate tax rate, business-related deductions and taxation of foreign earnings, among other changes, that will generally be effective for tax years beginning after December 31, 2017.
As a result of the reduction to the corporate tax rate, the Company was required to remeasure its deferred tax assets and liabilities and any associated adjustment to the valuation allowance. As the Company was in a full valuation allowance in both 2017 and 2016, the net impact to the financial statements associated with the rate change was immaterial.
In response to the Tax Act, the SEC staff issued guidance (SAB 118) on accounting for the tax effects of the new legislation. The guidance provides a one-year measurement period for companies to complete the accounting. The Company reflected the income tax effects of those aspects within the financial statements as provisional amounts and will continue to evaluate the impact on its financial statements as it expects Treasury to provide additional guidance and the Company will continue to pursue additional documentation to either confirm or further refine the anticipated impact of the Tax Act on the organization's financial statements.
Note 19. Commitments and Contingencies Litigation and legal proceedings
Certain of the Company’s outstanding legal matters include speculative claims for substantial or indeterminate amounts of damages. The Company regularly evaluates developments in its legal matters that could affect the amount of any potential liability and makes adjustments as appropriate. Significant judgment is required to determine both the likelihood of there being any potential liability and the estimated amount of a loss related to the Company’s legal matters. With respect to the Company’s outstanding legal matters, based on its current knowledge, the Company’s management believes that the amount or range of a potential loss will not, either individually or in the aggregate, have a material adverse effect on its business, consolidated financial position, results of operations or cash flows. However, the outcome of such legal matters is inherently unpredictable and subject to significant uncertainties. The Company evaluated the outstanding legal matters and assessed the probability and likelihood of the occurrence of liability. Based on management’s estimates, the Company has recorded $250accruals of $845 and $2,221 as of December 31, 20172021 and $671 as of December 31, 2016,2020, respectively, which areis included in accountsAccounts payable, accrued expenses and other current liabilities in the consolidated balance sheets. The Company expenses legal fees in the period in which they are incurred. Wellness
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. On February 21, 2017, the defendants filed a motion to dismiss. On March 3, 2017, XpresSpa filed a first amended complaint against defendants. On April 5, 2017, Cordial filed a motion to dismiss. On September 12, 2017, the Court held a hearing on the motion to dismiss. On November 2, 2017, the Court granted the motion to dismiss which was entered on November 13, 2017. On December 22, 2017, XpresSpa filed a notice of appeal.
In re Chen et al. OnIn March 16, 2015, four4 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
Table of Contents XpresSpa Group, Inc. and Subsidiaries Intellectual PropertyNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except for share and per share data) 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. The Company’s intellectual property operating segment is engaged in litigation,On August 21, 2019, the Court issued an Order denying the parties’ motion for which no liability is recorded,preliminary approval of the revised settlement, as the Court still had concerns about several of the settlement terms. At the December 6, 2019 status conference with the Court, the Court reiterated its denial of preliminary approval of the proposed settlement agreement. The Court instructed a notice of pendency to be disseminated to putative collective members. Notice was sent out in early February 2020 and approximately 415 individuals have joined the case. On June 6, 2020, the Company does not expectparticipated in a material negative outcome.status conference with the Court, and the parties discussed the possibility of entering into a new settlement agreement that addresses the Court’s concerns. On or about August 5, 2020, the parties entered into settlement agreements and sought a preliminary approval order from the Court. On March 30, 2021, the Court issued an Order conditionally granting the motion for preliminary approval subject to resolution of certain issues pertaining to administration of the settlement. On April 6, 2021, Plaintiffs’ counsel wrote to the Court regarding their proposed resolution on such issues and the Court ultimately granted preliminary approval on May 25, 2021. Notice of the settlement was sent out to the class members on June 22, 2021.
Corporate
On October 1, 2021, the Court issued an Order granting the parties’ motion for final approval of the settlement. There were no appeals and the settlement was effective as of November 2, 2021. The Settlement Administrator has confirmed to the parties that settlement checks have been distributed to the Class on November 5, 2021. The Judge marked the case as closed on the docket on November 10, 2021. BinnKainz 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 with FORM 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. On December 12, 2019, plaintiff filed a motion for reconsideration to vacate the order and judgment, dismissing the action, and for leave to amend the complaint. The motion was fully briefed as of February 6, 2017, Moreton Binn2020. On April 1, 2020, the Court denied plaintiff’s motion in full. On April 10, 2020, plaintiff filed a notice of appeal to the United States Court of Appeals for the Second Circuit. On June 1, 2020, plaintiff filed his appellate brief. On June 16, 2020, the Second Circuit entered the parties’ non-dispositive stipulation, dismissing certain defendant-appellees, including the Company. On July 6, 2020, the remaining defendants filed their opposition brief. On July 27, 2020, the plaintiff filed their reply brief. On July 28, 2020, the Second Circuit marked plaintiff’s reply brief as defective because it was filed a week late. Subsequently, plaintiff has moved to request permission to file a late reply brief. On January 11, 2021, the judgment of the Court was affirmed by the Second Circuit court. Table of Contents XpresSpa Group, Inc. and Marisol F,Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except for share and per share data) Route1 On or about May 23, 2018, Route1 Inc., Route1 Security Corporation (together, “Route1”) and Group Mobile Int’l, LLC former stockholders(“Group Mobile”) commenced a legal proceeding against the Company in the Ontario Superior Court of Justice. Route1 and Group Mobile sought damages of $567,000 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. The Company counterclaimed against the Plaintiffs for amounts owed to the Company in relation to the sale of Excluded Inventory (as defined in the Membership Purchase Agreement) and sought damages thereon. The Company delivered a draft amended counterclaim to the Plaintiffs on or around November 2019 seeking, among other things, damages. The Company sought Plaintiffs’ consent to amend its counterclaim. Examinations for discovery were scheduled to take place in Toronto, Canada in June 2020. The action settled at mediation on or about September 17, 2020. The parties agreed to dismiss the claim and the counterclaim, subject to XpresSpa’s right to commence an application to seek rectification of certain shares and warrants that were issued in connection with the Membership Purchase Agreement. On September 21, 2020, the Ontario Superior Court of Justice entered an Order dismissing, without costs, the action and counterclaim. XpresSpa was granted the Order seeking the rectification of the shares and warrant and that matter was completed in March 2021. Rodger Jenkins and Gregory Jones v. XpresSpa Group, Inc. In March 2019, Rodger Jenkins and Gregory Jones filed a lawsuit against the Company and its directors in the United States District Court for the Southern District of New York. The lawsuit alleges violationsbreach of various sectionscontract of the Securities Exchange Act of 1934, material omissions and misrepresentations (negligent and fraudulent), fraudulent omission, expropriation, breach of fiduciary duties, aiding and abetting, and unjust enrichment in the defendants’ conductstock purchase agreement related to the Company’s acquisition of XpresSpa,Excalibur Integrated Systems, Inc. and seeks rescissionspecific performance, compensatory damages and other fees, expenses, and costs. When this action was first commenced, the plaintiffs had demanded cash or stock in the sum of $750. On or about January 3, 2020, the court granted the plaintiffs’ motion to amend their pleading to increase their total demand to $1,500. On December 11, 2020, the court issued its decision and order on the parties’ respective motions for summary judgment in which the court: (a) awarded plaintiffs damages in the sum of $750, plus prejudgment interest; (b) granted that portion of the transaction, damages, equitableCompany’s motion dismissing Jenkins’s claim for $600 based on his having executed a written waiver of his right to receive that sum; and injunctive relief, fees(c) denied both sides’ motions with respect to Jones’s claim to recover $150 and costs, and various other relief. directed Jones’s claim to be tried. The court had stated that the trial on the remaining portion of Jones’s claim will occur in May 2021. The court held a trial on the remaining portion of Jones’s claim for the “second $750” on May 17-18, 2021. Following the trial, the court dismissed that portion of Jones’s claim. On January 17, 2018,May 28, 2021, the defendantscourt entered judgment against the Company based on its ruling in plaintiffs’ favor as to the “first $750.” The total amount of the judgment, with prejudgment interest, is $948. The rate of post-judgment interest is 0.04 % (i.e. 4/10 of 1%). On June 24, 2021, the Company filed a notice of appeal of the judgment and posted the necessary bond. On August 18, 2021, the parties entered into a Settlement Agreement and Mutual Release (the "Settlement Agreement"). Pursuant to the terms of the Settlement Agreement, all pending litigation was dismissed. On August 18, 2021, satisfaction of judgment was entered with the court. Table of Contents XpresSpa Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except for share and per share data) Kyle Collins v. Spa Products Import & Distribution Co., LLC et al This is a combined class action and California Private Attorney’s General Act (“PAGA”) action. Plaintiff seeks to recover wages, penalties and PAGA penalties for claims for (1) failure to provide meal periods, (2) failure to provide rest breaks, (3) failure to pay overtime, (4) inaccurate wage statements, (5) waiting time penalties, and (6) PAGA penalties of $0.1 per employee per pay period per violation. There are approximately 240 current and former employees in the litigation class. The parties agreed to mediation on May 26, 2020, however, due to COVID-19, the parties subsequently stayed all proceedings. The mediation session occurred on March 18, 2021, and the parties reached a settlement. A revised motion to dismissfor preliminary approval of the complaint. settlement was filed with the Court in February 2022 and this motion is pending. Mary Anne Bowen v. XpresSpa Miami Airport, LLC On FebruarySeptember 7, 2018, the plaintiffs amended their complaint. On February 28, 2018, the defendantsPlaintiff Mary Anne Bowen (“Plaintiff”) filed a motionComplaint in the Eleventh Judicial Circuit Court in and for Miami-Dade County, Florida, asserting two causes of action: (I) Respondent Superior to dismisshold XpresSpa accountable for the amended complaint.actions of its employee; and (II) Negligent Hiring, Retention, and Supervision of an employee. On MarchDecember 21, 2018, the plaintiffsCompany filed a Motion to Dismiss Plaintiff’s Complaint in its entirety, arguing that XpresSpa cannot be held liable for the acts of an employee who was acting outside the scope of his employment (Count I) and that Plaintiff did not sufficiently plead XpresSpa had notice of the employee’s unfitness (Count II). The Motion to Dismiss was granted. However, Plaintiff filed an oppositionAmended Complaint which the Company answered. On June 30, 2021, the parties participated in a mediation session and an agreement was reached on the terms of a settlement. Settlement papers were signed on July 1, 2021, and a stipulation of dismissal was filed with the Court on July 26, 2021. Accordingly, this case is now closed. In addition to those matters specifically set forth herein, the motion to dismiss the amended complaint. The defendants’ reply in further support of the motion to dismiss the amended complaint is due March 30, 2018. The Company and its subsidiaries are involved in various other claims and legal actions that arise in the ordinary course of business. The Company does not believe that the ultimate resolution of these actions will have a material adverse effect on the Company’s financial position, results of operations, liquidity, or capital resources. However, a significant increase in the number of these claims, or one or more successful claims under which the Company incurs greater liabilities than the Company currently anticipates, could materially adversely affect the Company’s business, financial condition, results of operations and cash flows.
In the event that an action is brought against the Company or one of its subsidiaries, the Company will investigate the allegation and vigorously defend itself. Leases The Company is obligated under multiple lease agreements for its XpresSpa retail concessions. The lease agreements for the retail concessions have terms which expire at varying dates through December 31, 2027 and primarily require payment of rent as a percentage of sales and a minimum annual guarantee (“MAG”) rent payment. The MAG rent under the terms of the agreements range from $3 to $320 per year and are adjusted on each anniversary date.
XpresSpa is contingently liable to a surety company under certain general indemnity agreements required by various airports relating to its lease agreements. XpresSpa agrees to indemnify the surety for any payments made on contracts of suretyship, guaranty, or indemnity. The Company believes that all contingent liabilities will be satisfied by its performance under the specified lease agreements. The Company’s corporate headquarters, as well as XpresSpa’s, are located in New York, NY and its lease will expire in October 2019.
Rent expense from continuing operations for operating leases for years ended December 31, 2017 and 2016, were $7,996 and $485, respectively.
As of December 31, 2017, future minimum commitments under noncancelable lease agreements are as follows:
| Years ending December 31, | | Amount | | | 2018 | | $ | 4,533 | | | 2019 | | | 3,380 | | | 2020 | | | 2,678 | | | 2021 | | | 2,046 | | | 2022 | | | 2,250 | | | Thereafter | | | 4,658 | | | Total | | $ | 19,545 | |
Note 20. Subsequent Events InOn January 2018,9, 2022, the Company sold certain patentsentered into an acquisition agreement to Crypto Currency Patent Holdings Companyacquire all of the equity interests in GCG Connect, LLC, d/b/a unitHyperPointe, a New Jersey limited liability company (“HyperPointe”), for an aggregate initial purchase price of Marathon, for approximately $1,250, comprised$6,612, which consisted of $250(i)$5,612 in cash and 250,000(ii) the issuance of 552,487 shares of Marathon common stock of the Company to the equity owners of HyperPointe, plus additional consideration in the form of a potential earnout of up to $7,500 (the “Acquisition”). The portion of the initial consideration for the Acquisition comprising the 552,487 shares of Company common stock was valued at approximately $1,000 based upon a closing reference price of $1.81 as contemplated by the acquisition agreement.
Table of Contents XpresSpa Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except for share and per share data) XpresSpa Group also agreed pursuant to an earnout provision to issue up to an additional $7.5 million in cash or stock if certain earnout performance targets are met during an earnout period ending on the third anniversary of the date of the acquisition agreement. For purposes of the earnout, the Common Stock will also be valued on a per share basis. The earnout payments may be satisfied in (i) cash, (ii) shares of Common Stock (also priced at $1.81), or (iii) any combination thereof, at the election of the equity owners of HyperPointe, provided that in the event (and to the extent) XpresSpa Group does not have sufficient authorized shares of Common Stock that are unissued and not duly reserved for issuance upon options, warrants or other convertible securities, then XpresSpa Group shall be permitted to settle any earnout payments in cash. As a result, XpresSpa Group may issue up to an additional 4,143,647 shares of Common Stock; however, the actual number of shares that will be issued under the earnout, if any, will depend on (i) the extent of fulfillment of the earnout performance targets at the time of calculation of the transaction.Pursuantearnout and (ii) the elections and conditions described in the previous sentence. XpresSpa Group granted an equity award to Ezra T. Ernst, who was previously affiliated with HyperPointe and who was offered employment with the Company in connection with XpresSpa’s acquisition of the equity interests of HyperPointe, as an inducement material to such new employee entering into employment with the Company. The equity award was approved on January 7, 2022, in accordance with Nasdaq Listing Rule 5635(c)(4). The employee received stock options to purchase 1,000,000 shares of XpresSpa common stock. The stock options were issued upon the closing of the acquisition of HyperPointe and employee’s hire date in connection therewith (the "Grant Date"), and all stock options included within the equity inducement award have an exercise price of $1.64 per share, resulting in the fair value of $1,457 which would be charged to expense per the option terms. One-third of the options will vest on each of the first three anniversaries of the Grant Date, subject to the sale, the Company cannot directlyemployee's continued employment with XpresSpa or indirectly offer, sell, pledge or transfer, or otherwise disposeits subsidiaries on such vesting dates. The stock options have a ten-year term. Table of the Marathon common stock for a period of 180 days ending on July 11, 2018.Contents On March 22, 2018, the Company completed the sale of Group Mobile. See “Note 17 –Discontinued Operations and Assets and Liabilities Held for Disposal.”
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned thereunto, duly authorized on the 2931thst day of March 2018. 31, 2022. | XpresSpa Group, Inc. | | | | By: | /s/ Andrew D. PerlmanSCOTT R. MILFORD | | | Andrew D. PerlmanScott R. Milford | | | Chief Executive Officer | | | (Principal Executive Officer) |
Pursuant to the requirements of Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities indicated below and on the dates indicated. Signature | Signature | Title | Title | | Date | | | | | | /s/ ANDREW D. PERLMANSCOTT R. MILFORD | | Chief Executive Officer and Director (Principal | | March 29, 201831, 2022 | Andrew D. PerlmanScott R. Milford | | Executive Officer) | | | | | | | | /s/ ANASTASIA NYRKOVSKAYAJAMES A. BERRY | | Chief Financial Officer (Principal Financial Officer | | March 29, 201831, 2022 | Anastasia NyrkovskayaJames A. Berry | | Officer and Principal Accounting Officer) | | | | | | | | /s/ BRUCE T. BERNSTEIN | | Director Chairman of Board of Directors | | March 29, 201831, 2022 | Bruce T. Bernstein | | | | | | | | | | /s/ JOHN ENGELMANROBERT WEINSTEIN | | Director | | March 29, 201831, 2022 | John EngelmanRobert Weinstein | | | | | | | | | | /s/ SALVATORE GIARDINAMICHAEL LEBOWITZ | | Director | | March 29, 201831, 2022 | Salvatore Giardina Michael Lebowitz | | | | | | | | | | /s/ DONALD E. STOUT | | Director | | March 29, 201831, 2022 | Donald E. Stout | | | | | | | | | | /s/ ANDREW R. HEYER | | Director | | March 29, 2018 | Andrew R. Heyer | | | | | | | | | | /s/ RICHARD K. ABBE | | Director | | March 29, 2018 | Richard K. Abbe | | | | |
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