UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
FORM 10-K(Amendment No. 2)
(Mark One)
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
(Mark One)
For the fiscal year ended December 31, 20172023
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___ to ______to _____
Commission file number 001-34785
XWELL, INC.
XpresSpa Group, Inc.
(Exact name of registrant as specified in its charter)
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Delaware | | 20-4988129 |
(State or other jurisdiction of incorporation or
| | (I.R.S. Employer Identification No.) |
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New York, NY | 10001 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (212) 309-7549(212)-750-9595
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Name of each exchange on which registered | |
Common Stock, par value $0.01 per share | | 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“large accelerated filer,” “accelerated“accelerated filer,” “smaller“smaller reporting company,” and “emerging“emerging growth company”company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ◻ | Accelerated filer | ◻ | |
Non-accelerated filer | ⌧ | 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. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
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, 2023, the last business day of the registrant’s most recently completed second quarter, was $16,663,729 computed by reference to the closing sale price of such shares$4.00 per share on the Nasdaq Stock Market LLC on June 30, 2017 was $26,336,000.
2023.
As of March 15, 2018, 26,581,067April 29, 2024, 4,183,435 shares of the registrant'sregistrant’s common stock are outstanding.
DOCUMENTS INCORPORATED BY REFERENCEREFERENCE: None
The following documents (or parts thereof) are incorporated by reference into the following parts of this Annual Report on Form 10-K: Certain information required in Part III of this Annual Report on Form 10-K is incorporated from the Registrant’s Proxy Statement for the 2018 Annual Meeting of Stockholders.
TABLE OF CONTENTS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
1
Explanatory Note
This Amendment No. 2 on Form 10-K/A (this “Form 10-K/A”) amends the Annual Report on Form 10-K of XWELL, Inc. (“XWELL” or the “Company”) for the fiscal year ended December 31, 2023 as originally filed with the Securities and Exchange Commission (the “SEC”) on April 16, 2024, as amended on April 17, 2024 (collectively the “Original Filing”). This Form 10-K/A amends the Original Filing to include the information required by Part III of the Original Filing because the Company has not filed and will not file a definitive proxy statement within 120 days after the end of its 2023 fiscal year. In addition, this Form 10-K/A amends Item 15 of Part IV of the Original Filing to include new certifications by our principal executive officer and principal financial and accounting officer under Section 302 of the Sarbanes-Oxley Act of 2002, as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Except for the foregoing, we have not modified or updated disclosures presented in the Original Filing in this Form 10-K/A. Accordingly, this Form 10-K/A does not modify or update the disclosures in the Original Filing to reflect subsequent events, results or developments or facts that have become known to us after the date of the Original Filing. Information not affected by this Form 10-K/A remains unchanged and reflects the disclosures made at the time the Original Filing was filed. Therefore, this Form 10-K/A should be read in conjunction with any documents incorporated by reference therein and our filings made with the SEC subsequent to the Original Filing.
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Forward-Looking Statements
This Form 10-K/A 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:
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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. TheseSuch statements are based on currentmanagement’s expectations and assumptions based on information currently available to us. Such forward-looking statements are subject to certain factors, risks and uncertainties assumptions (thatthat may never materialize or may prove incorrect) and other important factors that could cause actual results, outcome of events, timing and the timing of certain eventsperformance to differ materially from future resultsthose expressed or implied by such forward-looking statements. These forward-lookingForward-looking statements are not guaranteesshould be evaluated together with the many uncertainties that affect our business, particularly those mentioned in the Risk Factors in Item 1A of future performance,our Original Filing 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 and Current Reports on Form 8-K8-K. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. All subsequent forward-looking statements attributable to us or to any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to 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.
section.
All references in this Annual Report on Form 10-K10-K/A to “we,” “us” and “our” refer toXpresSpa Group, XWELL, Inc. (prior to January 5, 2018, known as “FORM Holdings Corp.”), a Delaware corporation, and its consolidated subsidiaries unless the context requires otherwise.
Overview
On January 5, 2018, we changed our name to XpresSpa Group, Inc. (“XpresSpa Group” or the “Company”) from FORM Holdings Corp. Our common stock, par value $0.01 per share, 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-play health and wellness services company, which we commenced following our acquisition of 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 is a leading airport retailer of spa services. 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 offers 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 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 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.
Our Strategy and Outlook
Wellness
XpresSpa is a leading airport retailer of spa services and related products. It is 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:
For over 15 years, increased security requirements have led travelers to spend more time at the airport. In addition, in anticipation of the long and often stressful security lines, travelers allow for more time to get through security and, as a result, often experience increased downtime prior to boarding. Consequently, travelers at large airport hubs have idle time in the terminal after passing through security.
XpresSpa was developed to address the stress and idle time spent at the airport, allowing travelers to spend this time productively, by relaxing and focusing on personal care and wellness. We believe that XpresSpa is well positioned to benefit from consumers’ growing interest in health and wellness and increasing demand for spa services and related wellness products.
Intellectual Property
Our intellectual property operating segment is engaged in the monetization of patents related to content and ad delivery, remote monitoring and computing technologies.
Recent Developments
Rebranding
On January 5, 2018, we changed our name to XpresSpa Group, Inc. from FORM Holdings Corp, which aligned our corporate strategy to build a pure-play health and wellness services company. Our common stock, par value $0.01 per share, which had previously been listed under the trading symbol “FH” on the Nasdaq Capital Market, has been listed under the trading symbol “XSPA” since January 8, 2018.
Dispositions
On October 20, 2017, we sold FLI Charge to a group of private investors and FLI Charge management, who now own and operate FLI Charge. On March 22, 2018, we sold Group Mobile to a third party. We will not 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 $250,000 in cash and 250,000 shares of Marathon common stock valued at approximately $1,000,000 at the time of the transaction. Pursuant to the sale, we 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.
Capital Raise
On July 26, 2017, we 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 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, 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.
Competition
Wellness
XpresSpa operated 56 locations, which includes 51 domestic locations and 5 international locations as of December 31, 2017. Our domestic units operate within many of the largest and most heavily trafficked airports in the United States. The balance of the North American market is highly fragmented and is represented largely by small, privately-owned entities that operate one or two locations in a single airport. Only two other market participants operate 10 or more airport locations in the United States. The largest domestic competitor operates 14 locations in seven airports. Outside of North America, this same competitor operates 22 locations in eight international airports.
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 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 XpresSpa is well positioned to benefit from consumers’ growing interest in health and wellness and increasing demand for spa services 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.
In addition, a confluence of microeconomic events has created favorable conditions for the expansion of retail concepts at airports, in particular, retail concepts that attract higher spending from air travelers. The competition for airplane landings has forced airports to lower landing fees, which in turn has necessitated augmenting their retail offerings to offset budget shortfalls. Infrastructure projects at airports across the country, again intended to make an airport more desirable to airlines, require funding from bond issuances that in turn rely upon, in part, the expected minimum rent guarantees and expected income from concessionaires.
Equally as important to the industry growth is XpresSpa’s flexible retail format. XpresSpa opens multiple locations annually, which have ranged in size from 200 square feet to 2,600 square feet, with a typical size of approximately 1,200 square feet. XpresSpa is able to adapt its operating model to almost any size location available in space constrained airports. This increased flexibility compared to other retail concepts allows XpresSpa to operate multiple stores within an airport, from which it enjoys synergies due to shared labor between stores.
XpresSpa believes that its operating metrics represent an attractive return on invested capital and, as a result, is pursuing new locations at airports and terminals around the country. Historically, XpresSpa has won approximately four out of every five requests for proposal (“RFP”) in which it has participated.
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-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 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.
Employees
As of March 15, 2018, we had 697 full-time and 148 part-time employees. 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. 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, 12th Floor, New York, New York 10017. Our telephone number is (212) 309-7549 and our website address iswww.xpresspagroup.com. We also operate the websitewww.xpresspa.com. References in this Annual Report on Form 10-K to our website address does not constitute incorporation by reference of the information contained on the website. We make our filings with the Securities and Exchange Commission, or the SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, other reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, and amendments to the foregoing reports, available free of charge on or through our website as soon as reasonably practicable after we file these reports with, or furnish such reports to, the SEC. In addition, we post the following information on our website:
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.
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Our business, financial condition, results of operations and the trading price of our common stock could be materially adversely affected by any of the following risks as well as the other risks highlighted elsewhere in this Annual Report on Form 10-K. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may materially affect our business, financial condition and results of operations.
Risks Related to our Financial Condition and Capital Requirements
We may not be able to raise additional capital. Moreover, additional financing may have an adverse effect on the value of the equity instruments held by our stockholders.
We may choose to raise additional funds in connection with any potential acquisition of operating businesses or other assets. In addition, we may also need additional funds to respond to business opportunities and challenges, including our ongoing operating expenses, protection of our assets, development of new lines of business and enhancement of our operating infrastructure. While we may need to seek additional funding, we may not be able to obtain financing on acceptable terms, or at all. In addition, the terms of our financings may be dilutive to, or otherwise adversely affect, holders of our common stock. We may also seek additional funds through arrangements with collaborators or other third parties. We may not be able to negotiate arrangements on acceptable terms, if at all. If we are unable to obtain additional funding on a timely basis, we may be required to curtail or terminate some or all of our business plans. Any such financing that we undertake will likely be dilutive to our current stockholders.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
As of December 31, 2017, we had federal net operating loss carryforwards (“NOL”s) of $159,007,000 which expire 20 years from the respective tax years to which they relate. 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 States tax laws limit the time during which these 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. 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 business and financial condition.
On December 22, 2017, President Trump signed into law the “Tax Cuts 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 changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest and net operating loss carryforwards, allows for the expensing of capital expenditures, and puts into effect the migration from 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 the 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 impact of the TCJA is uncertain and our business and financial condition could be adversely affected.
Global economic and market conditions may adversely affect our business, financial condition and operating results.
Our business plan depends significantly on worldwide economic conditions and our success is dependent on consumer spending, which is sensitive to economic downturns, inflation and any associated rise in unemployment, decline in consumer confidence, adverse changes in exchange rates, increase in interest rates, increase in the price of oil, deflation, direct or indirect taxes or increase in consumer debt levels. As a result, economic downturns may have a material adverse impact on our business, financial condition and results of operations. Moreover, uncertainty about global economic conditions poses a risk as businesses and individuals may postpone spending in response to tighter credit, negative financial news and declines in income or asset values. This could have a negative effect on corporate and individual spending on health and wellness and travel. These factors, taken together or individually, could cause material harm to our business, financial condition and results of operations.
Risks Related to our Business Operations
XpresSpa is reliant on international and domestic airplane travel, and the time that airline passengers spend in United States airports post-security. A decrease in airline travel, a decrease in the desire of customers to buy spa services and products, or decreased time spent in airports would negatively impact XpresSpa’s operations.
XpresSpa depends upon a large number of airplane travelers with the propensity for health and wellness, and in particular spa treatments and products, spending significant time post- security clearance check points.
If the number of airline travelers decreases, if the time that these travelers spend post-security decreases, and/or if travelers ability or willingness to pay for XpresSpa’s products and services diminishes, this could have an adverse effect on XpresSpa’s growth, business activities, cash flow, financial condition and results of operations. Some reasons for these events could include:
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:
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XpresSpa’s operating results may fluctuate significantly as a result of the factors discussed above. Accordingly, results for any period are not necessarily indicative of results to be expected for any other period or for any year.
XpresSpa’s expansion into new airports or off-airport locations may present increased risks due to its unfamiliarity with those areas.
XpresSpa’s growth strategy depends upon expanding into markets where it has little or no meaningful operating experience. Those locations may have demographic characteristics, consumer tastes and discretionary spending patterns that are different from those in the markets where its existing operations are located. As a result, new airport terminal and/or off-airport operations may be less successful than existing concession locations in current airport terminals. XpresSpa may find it more difficult in new markets to hire, motivate and keep qualified employees who can project its vision, passion and culture. XpresSpa may also be unfamiliar with local laws, regulations and administrative procedures, including the procurement of spa services retail licenses, in new markets which could delay the build-out of new concession locations and prevent it from achieving its target revenues on a timely basis. Operations in new markets may also have lower average revenues or enplanements than in the markets where XpresSpa currently operates. Operations in new markets may also take longer to ramp up and reach expected sales and profit levels, and may never do so, thereby negatively affecting XpresSpa’s results of operations.
XpresSpa’s growth strategy is highly dependent on its ability to successfully identify and open new XpresSpa locations.
XpresSpa’s growth strategy primarily contemplates expansion through procuring new XpresSpa locations and opening new XpresSpa stores and kiosks. Implementing this strategy depends on XpresSpa’s ability to successfully identify new store locations. XpresSpa will also need to assess and mitigate the risk of any new store locations, to open the stores on favorable terms and to successfully integrate their operations with ours. XpresSpa may not be able to successfully identify opportunities that meet these criteria, or, if it does, XpresSpa may not be able to successfully negotiate and open new stores on a timely basis. If XpresSpa is unable to identify and open new locations in accordance with its operating plan, XpresSpa’s revenue growth rate and financial performance may fall short of our expectations.
Our profitability depends on the number of airline passengers in the terminals in which we have concessions. Changes by airport authorities or airlines that lower the number of airline passengers in any of these terminals could affect our business, financial condition and results of operations.
The number of airline passengers that visit the terminals in which we have concessions is dependent in part on decisions made by airlines and airport authorities relating to flight arrivals and departures. A decrease in the number of flights and resulting decrease in airline passengers could result in fewer sales, which could lower our profitability and negatively impact our business, financial condition and results of operations. Concession agreements generally provide for a minimum annual guaranteed payment (“MAG”) payable to the airport authority or landlord regardless of the amount of sales at the concession. Currently, the majority of our concession agreements provide for a MAG that is either a fixed dollar amount or an amount that is variable based upon the number of travelers using the airport or other location, retail space used, estimated sales, past results or other metrics. If there are fewer airline passengers than expected or if there is a decline in the sales per airline passenger at these facilities, we will nonetheless be required to pay the MAG or fixed rent and our business, financial condition and results of operations may be materially adversely affected.
Furthermore, the exit of an airline from a market or the bankruptcy of an airline could reduce the number of airline passengers in a terminal or airport where we operate and have a material adverse impact on our business, financial condition and results of operations.
We may not be able to execute our growth strategy to expand and integrate new concessions or future acquisitions into our business or remodel existing concessions. Any new concessions, future acquisitions or remodeling of existing concessions may divert management resources, result in unanticipated costs, or dilute the ownership of our stockholders.
Part of our growth strategy is to expand and remodel our existing facilities and to seek new concessions through tenders, direct negotiations or other acquisition opportunities. In this regard, our future growth will depend upon a number of factors, such as our ability to identify any such opportunities, structure a competitive proposal and obtain required financing and consummate an offer. Our growth strategy will also depend on factors that may not be within our control, such as the timing of any concession or acquisition opportunity.
We must also strategically identify which airport terminals and concession agreements to target based on numerous factors, such as airline passenger numbers, airport size, the type, location and quality of available concession space, level of anticipated competition within the terminal, potential future growth within the airport and terminal, rental structure, financial return and regulatory requirements. We cannot provide assurance that this strategy will be successful.
In addition, we may encounter difficulties integrating expanded or new concessions or any acquisitions. Such expanded or new concessions or acquisitions may not achieve anticipated turnover and earnings growth or synergies and cost savings. Delays in the commencement of new projects and the refurbishment of concessions can also affect our business. In addition, we will expend resources to remodel our concessions and may not be able to recoup these investments. A failure to grow successfully may materially adversely affect our business, financial condition and results of operations.
In particular, new concessions and acquisitions, and in some cases future expansions and remodeling of existing concessions, could pose numerous risks to our operations, including that we may:
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In connection with acquisitions or other similar investments, we could incur debt or amortization expenses related to intangible assets, suffer asset impairments, assume liabilities or issue stock that would dilute the percentage of ownership of our then-current stockholders. We may not be able to complete acquisitions or integrate the operations, products, technologies or personnel gained through any such acquisition, which may have a materially adverse impact on our business, financial condition and results of operations.
If the estimates and assumptions we use to determine the size of our market are inaccurate, our future growth rate may be impacted.
Market opportunity estimates and growth forecasts are subject to uncertainty and are based on assumptions and estimates that may not prove to be accurate. The estimates and forecasts in this annual report relating to the size and expected growth of the travel retail market may prove to be inaccurate. Even if the market in which we compete meets our size estimates and forecasted growth, our business could fail to grow at similar rates, if at all. The principal assumptions relating to our market opportunity include projected growth in the travel retail market and our share of the market. If these assumptions prove inaccurate, our business, financial condition and results of operations could be adversely affected.
Our business requires substantial capital expenditures and we may not have access to the capital required to maintain and grow our operations.
Maintaining and expanding our operations in our existing and new retail locations is capital intensive. Specifically, the construction, redesign and maintenance of our retail space in airport terminals where we operate, technology costs, and compliance with applicable laws and regulations require substantial capital expenditures. We may require additional capital in the future to fund our operations and respond to potential strategic opportunities, such as investments, acquisitions and expansions.
We must continue to invest capital to maintain or to improve the success of our concessions and to meet refurbishment requirements in our concessions. Decisions to expand into new terminals could also affect our capital needs. Our actual capital expenditures in any year will vary depending on, among other things, the extent to which we are successful in renewing existing concessions and winning additional concession agreements.
We cannot provide assurance that we will be able to maintain our operating performance, generate sufficient cash flow, or have access to sufficient financing to continue our operations and development activities at or above our present levels, and we may be required to defer all or a portion of our capital expenditures. Our business, financial condition and results of operations may be materially adversely affected if we cannot make such capital expenditures.
XpresSpa currently relies on a skilled, licensed labor force to provide spa services, and the supply of this labor force is finite. If XpresSpa cannot hire adequate staff for its locations, it will not be able to operate.
As of March 15, 2018, XpresSpa had 697 full-time and 148 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.
Our business is subject to various laws and regulations, and changes in such laws and regulations, or failure to comply with existing or future laws and regulations, could adversely affect us.
We are subject to various laws and regulations in the United States, Netherlands and United Arab Emirates that affect the operation of our concessions. The impact of current laws and regulations, the effect of changes in laws or regulations that impose additional requirements and the consequences of litigation relating to current or future laws and regulations, or our inability to respond effectively to significant regulatory or public policy issues, could increase our compliance and other costs of doing business and, therefore, have an adverse impact on our results of operations.
Failure to comply with the laws and regulatory requirements of governmental authorities could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability. In addition, certain laws may require us to expend significant funds to make modifications to our concessions in order to comply with applicable standards. Compliance with such laws and regulations can be costly and can increase our exposure to litigation or governmental investigations or proceedings.
XpresSpa’s labor force could unionize, putting upward pressure on labor costs.
Currently, XpresSpa stores in two airports have a labor force which is unionized. Major players in labor organization, and in particular “Unite Here!” which represents approximately 45,000 employees in the airport concessions and airline catering industries, could target XpresSpa locations for its unionization efforts. In the event of the successful unionization of all of XpresSpa’s labor force, XpresSpa would likely incur additional costs in the form of higher wages, more benefits such as vacation and sick leave, and potentially also higher health care insurance costs.
XpresSpa competes for new locations in airports and may not be able to secure new locations.
XpresSpa participates in the highly competitive and lucrative airport concessions industry, and as a result competes for retail leases with a variety of larger, better capitalized concessions companies as well as smaller, mid-tier and single unit operators. Frequently, an airport includes a spa concept within its retail product set and, in those instances, XpresSpa competes primarily with BeRelax, Terminal Getaway, Massage Bar and 10 Minute Manicure.
We may not be able to predict accurately or fulfill customer preferences or demands.
We derive a significant amount of our revenue from the sale of massage, cosmetic and luxury products which are subject to rapidly changing customer tastes. The availability of new products and changes in customer preferences has made it more difficult to predict sales demand for these types of products accurately. Our success depends in part on our ability to predict and respond to quickly changing consumer demands and preferences, and to translate market trends into appropriate merchandise offerings. Additionally, due to our limited sales space relative to other retailers, the proper selection of salable merchandise is an important factor in revenue generation. We cannot provide assurance that our merchandise selection will correspond to actual sales demand. If we are unable to predict or rapidly respond to sales demand or to changing styles or trends, or if we experience inventory shortfalls on popular merchandise, our revenue may be lower, which could have a materially adverse impact on our business, financial condition and results of operations.
XpresSpa’s leases may be terminated, either for convenience by the landlord or as a result of an XpresSpa default.
XpresSpa has store locations and kiosks in a number of airports in which the landlord, with prior written notice to XpresSpa, can terminate XpresSpa’s lease, including for convenience or as necessary for airport purposes or operations. If a landlord elects to terminate a lease at an airport, XpresSpa may have to shut down one or more store locations at that airport.
Additionally, XpresSpa leases have numerous provisions governing the operation of XpresSpa’s stores. Violation of one or more of these provisions, even unintentionally, may result in the landlord finding that XpresSpa is in default of the lease. Violation of lease provisions may result in fines and, in some cases, termination of a lease.
XpresSpa’s ability to operate depends on the traffic patterns of the terminals in which it operates, and the cessation or disruption of air traveler traffic in these terminals would negatively impact XpresSpa’s addressable market.
XpresSpa depends on a high volume of air travelers in its terminals. It is possible that a terminal in which XpresSpa operates could become subject to a lower volume of air travelers, which would significantly impact traffic near and around XpresSpa locations and therefore its total addressable market. Lower volume in a terminal could be caused by:
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:
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 would negatively impact XpresSpa’s cost of labor.
XpresSpa compensates its licensed technicians via a formula that includes commissions. As a result, an increase in the minimum wage would 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 is unable to protect its customers’ credit card data and other personal information, XpresSpa could be exposed to data loss, litigation and liability, and its reputation could be significantly harmed.
Privacy protection is increasingly demanding, and the use of electronic payment methods and collection of other personal information, including order history, travel history and other preferences, exposes XpresSpa to increased risk of privacy and/or security breaches as well as other risks. The majority of XpresSpa’s sales are by credit or debit cards. Additionally, XpresSpa collects and stores personal information from individuals, including its customers and employees.
In the future, XpresSpa may experience security breaches in which credit and debit card information or other personal information is stolen. Although XpresSpa uses secure private networks to transmit confidential information, third parties may have the technology or know-how to breach the security of the customer information transmitted in connection with credit and debit card sales, and its security measures and those of technology vendors may not effectively prohibit others from obtaining improper access to this information. The techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and are often difficult to detect for long periods of time, which may cause a breach to go undetected for an extensive period of time. Advances in computer and software capabilities, new tools, and other developments may increase the risk of such a breach. Further, the systems currently used for transmission and approval of electronic payment transactions, and the technology utilized in electronic payments themselves, all of which can put electronic payment at risk, are determined and controlled by the payment card industry, not by XpresSpa. In addition, contractors, or third parties with whom XpresSpa does business or to whom XpresSpa outsources business operations may attempt to circumvent its security measures in order to misappropriate such information and may purposefully or inadvertently cause a breach involving such information. If a person is able to circumvent XpresSpa’s security measures or those of third parties, he or she could destroy or steal valuable information or disrupt XpresSpa’s operations. XpresSpa may become subject to claims for purportedly fraudulent transactions arising out of the actual or alleged theft of credit or debit card information, and XpresSpa may also be subject to lawsuits or other proceedings relating to these types of incidents. Any such claim or proceeding could cause XpresSpa to incur significant unplanned expenses, which could have an adverse effect on its business or results of operations. Further, adverse publicity resulting from these allegations could significantly harm its reputation and may have a material adverse effect on it. Although XpresSpa carries cyber liability insurance to protect against these risks, there can be no assurance that such insurance will provide adequate levels of coverage against all potential claims.
Negative social media regarding XpresSpa could result in decreased revenues and impact XpresSpa’s ability to recruit workers.
XpresSpa’s affinity among consumers is highly dependent on their positive feelings about the brand, its customer service and the range and quality of services and products that it offers. A negative customer experience that is posted to social media outlets and is distributed virally could tarnish XpresSpa’s brand and its customers may opt to no longer engage with the brand.
XpresSpa employs people in multiple different jurisdictions, and the employment laws of those jurisdictions are subject to change. In addition, its services are regulated through government-issued operating licenses. Noncompliance with applicable laws could result in employee lawsuits or legal action taken by government authorities.
XpresSpa must comply with a variety of employment and business practices laws across the United States, Netherlands and United Arab Emirates. XpresSpa monitors the laws governing its activities, but in the event it does not become aware of a new regulation or fails to comply with a regulation, it could be subject to disciplinary action by governing bodies and potentially employee lawsuits.
XpresSpa is not currently cash flow positive and will depend on funding to open new locations. In the event that capital is unavailable, XpresSpa will not be able to open new locations.
Throughout its operating history, XpresSpa has not generated sufficient cash from operations to fund its new store development. As a result, it will be dependent upon additional funding for its new location growth until such time as it can produce enough cash to profitably fund its own location growth.
XpresSpa sources, develops and sells products that may result in product liability defense costs and product liability payments.
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 a court will find our patents invalid, not infringed or unenforceable and/or that the USPTO or other relevant patent offices in various countries will either invalidate the patents or materially narrow the scope of their claims during the course of a reexamination, opposition or other such proceeding. In addition, even with a positive trial court verdict, the patents may be invalidated, found not infringed or rendered unenforceable on appeal. This risk may occur either presently or from time to time in connection with future litigations we may bring.
Patent litigation is inherently risky and the outcome is uncertain. Some of the parties that we believe infringe on our patents are large and well-financed 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:
Therefore, there is no assurance that we will be able to monetize an acquired patent portfolio and recoup our investment.
We and our subsidiaries have been, are, and may become involved in litigation that could divert management’s attention and harm our businesses.
Litigation often is expensive and diverts management’s attention and resources, which could adversely affect our businesses. We may be exposed to claims against us even if no wrongdoing has occurred. Responding to such claims, regardless of their merit, can be time-consuming, costly to defend, disruptive to our management’s attention and to our resources, damaging to our reputation and brand, and may cause us to incur significant expenses. Even if we are indemnified against such costs, the indemnifying party may be unable to uphold its contractual obligations.
New legislation, regulations or court rulings related to enforcing patents could harm our business and operating results.
Intellectual property is the subject of intense scrutiny by the courts, legislatures and executive branches of governments around the world. Various patent offices, governments or intergovernmental bodies may implement new legislation, regulations or rulings that impact the patent enforcement process or the rights of patent holders and such changes could negatively affect licensing efforts and/or litigations. For example, limitations on the ability to bring patent enforcement claims, limitations on potential liability for patent infringement, lower evidentiary standards for invalidating patents, increases in the cost to resolve patent disputes and other similar developments could negatively affect our ability to assert our patent or other intellectual property rights.
It is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any of the proposals will become enacted as laws. Compliance with any new or existing laws or regulations could be difficult and expensive, affect the manner in which we conduct our business and negatively impact our business, prospects, financial condition and results of operations.
Our failure or inability to protect the trademarks or other proprietary rights we use, or claims of infringement by us of rights of third parties, could adversely affect our competitive position or the value of our brands.
We believe that our trademarks and other proprietary rights are important to our success and our competitive position. However, any actions that we take to protect the intellectual property we use may not prevent unauthorized use or imitation by others, which could have an adverse impact on our image, brand or competitive position. If we commence litigation to protect our interests or enforce our rights, we could incur significant legal fees. We also cannot provide assurance that third parties will not claim infringement by us of their proprietary rights. Any such claim, whether or not it has merit, could be time consuming and distracting for our management, result in costly litigation, cause changes to existing retail concepts or delays in introducing retail concepts, or require us to enter into royalty or licensing agreements. As a result, any such claim could have a material adverse impact on our business, financial condition and results of operations.
Future acquisitions or business opportunities could involve unknown risks that could harm our business and adversely affect our financial condition and results of operations.
We have in the past, and may in the future, acquire businesses or make investments, directly or indirectly through our subsidiaries, that involve unknown risks, some of which will be particular to the industry in which the investment or acquisition targets operate, including risks in industries with which we are not familiar or experienced. Although we intend to conduct appropriate business, financial and legal due diligence in connection with the evaluation of future investment or acquisition opportunities, there can be no assurance that our due diligence investigations will identify every matter that could have a material adverse effect on us. We may be unable to adequately address the financial, legal and operational risks raised by such investments or acquisitions, especially if we are unfamiliar with the relevant industry. The realization of any unknown risks could expose us to unanticipated costs and liabilities and prevent or limit us from realizing the projected benefits of the investments or acquisitions, which could adversely affect our financial condition, liquidity, results of operations, and trading price.
Anti-takeover provisions of Delaware law, provisions in our charter and bylaws, and our stockholder rights plan could prevent or frustrate attempts by stockholders to change our Board of Directors or current management and could delay, discourage or make more difficult a third-party acquisition of control of us.
We are a Delaware corporation and, as such, certain provisions of Delaware law could prevent or frustrate attempts by stockholders to change the Board of Directors or current management, or could delay, discourage or make more difficult a third-party acquisition of control of us, even if the change in control would be beneficial to stockholders or the stockholders regard it as such. We are subject to the provisions of Section 203 of the Delaware General Corporation Law (“DGCL”), which prohibits certain “business combination” transactions (as defined in Section 203) with an “interested stockholder” (defined in Section 203 as a 15% or greater stockholder) for a period of three years after a stockholder becomes an “interested stockholder,” unless the attaining of “interested stockholder” status or the transaction is pre-approved by our Board of Directors, the transaction results in the attainment of at least an 85% ownership level by an acquirer or the transaction is later approved by our Board of Directors and by our stockholders by at least a 66 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. Although this is not the purpose of the Section 382 Rights Plan, it could have the effect of making it uneconomical for a third party to acquire us on a hostile basis.
These provisions of the DGCL, our certificate of incorporation and bylaws, and our Section 382 Rights Plan may delay, discourage or make more difficult certain types of transactions in which our stockholders might otherwise receive a premium for their shares over the current market price, and might limit the ability of our stockholders to approve transactions that they think may be in their best interest.
Our confidential information may be disclosed by other parties.
We routinely enter into non-disclosure agreements with other parties, including but not limited to vendors, law firms, parties with whom we are engaged in negotiations, and employees. However, there exists a risk that those other parties will not honor their contractual obligations to not disclose our confidential information. This may include parties who breach such obligations in the context of confidential settlement offers and/or negotiations. In addition, there exists a risk that, upon such breach and subsequent dissemination of our confidential information, third parties and potential licensees may seek to use such confidential information to their advantage and/or to our disadvantage including in legal proceedings in which we are involved. Our ability to act against such third parties may be limited, as we may not be in privity of contract with such third parties.
Risks Related to our Capital Stock
Stock prices can be volatile, and this volatility may depress the price of our common stock.
The stock market has experienced significant price and volume fluctuations, which have affected the market price of many companies in ways that may have been unrelated to those companies’ operating performance. Furthermore, we believe that our stock price may reflect certain future growth and profitability expectations. If we fail to meet these expectations, then our stock price may significantly decline, which could have an adverse impact on investor confidence. We believe that various factors may cause the market price of our common stock to fluctuate, perhaps substantially, including, among others, the following:
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 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:
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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.
As of December 31, 2017, XpresSpa had 56 company-operated stores in the United States, Netherlands and United Arab Emirates. All of the stores 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. We believe that our facility is adequate to accommodate our business needs.
Wellness
Cordial
Effective October 2014, our wholly owned-subsidiary, XpresSpa, terminated its former ACDBE partner, Cordial Endeavor Concessions of Atlanta, LLC (“Cordial”), in its Atlanta Terminal A (and future Terminals D, E and F) store locations.
Cordial filed a series of complaints with the City of Atlanta, both before and after the termination, in which Cordial alleged, among other things, that the termination was not valid and that XpresSpa unlawfully retaliated against Cordial when Cordial raised concerns about the joint venture. In response to the numerous complaints it received from Cordial, the City of Atlanta required the parties to engage in two mediations.
After the termination of the relationship with Cordial, XpresSpa sought to substitute two new ACDBE partners in place of Cordial.
In April 2015, Cordial filed a complaint with the United States Federal Aviation Administration (“FAA”), which oversees the City of Atlanta with regard to airport ACDBE programs, and, in December 2015, the FAA instructed that the City of Atlanta review XpresSpa’s request to substitute new partners in lieu of Cordial and Cordial’s claims of retaliation. In response to the FAA instruction, pursuant to a corrective action plan approved by the FAA, the City of Atlanta held a hearing in February 2016 and ruled in favor of XpresSpa such substitution and claims of retaliation. Cordial submitted a further complaint to the FAA claiming that the City of Atlanta was biased against Cordial and that the City of Atlanta’s decision was wrong. In August 2016, the parties met with the FAA. On October 4, 2016, the FAA sent a letter to the City of Atlanta directing that the City of Atlanta retract previous findings on Cordial’s allegations and engage an independent third party to investigate issues previously decided by Atlanta. The FAA also directed that Atlanta determine monies potentially due to Cordial.
On January 3, 2017, XpresSpa filed a lawsuit in the Supreme Court of the State of New York, County of New York against Cordial and several related parties. The lawsuit alleges breach of contract, unjust enrichment, breach of fiduciary duty, fraudulent inducement, fraudulent concealment, tortious interference, and breach of good faith and fair dealing. 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.). Plaintiffs claim that they and other spa technicians around the country were misclassified as exempt commissioned salespersons under Section 7(i) of the federal Fair Labor Standards Act (“FLSA”). Plaintiffs also assert class claims for unpaid overtime on behalf of New York spa technicians under the New York Labor Law, and discriminatory employment practices under New York State and City laws. On July 1, 2015, the plaintiffs moved to have the court authorize notice of the FLSA misclassification claim sent to all employees in the spa technician job classification at XpresSpa locations around the country in the last three years. Defendants opposed the motion. On February 16, 2016, the Magistrate Judge assigned to the case issued a Report & Recommendation, recommending that the District Court Judge grant the plaintiffs’ motion. On March 1, 2016, the defendants filed Opposition to the Magistrate Judge’s Report & Recommendation, arguing that the District Court Judge should reject the Magistrate Judge’s findings. On September 23, 2016, the court ruled in favor of the plaintiffs and conditionally certified the class. The parties held a mediation on February 28, 2017 and reached an agreement on a settlement in principle. On September 6, 2017, the parties entered into a settlement agreement. On September 15, 2017, the parties filed a motion for settlement approval with the Court; this motion is pending. In October 2017, XpresSpa 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.
Intellectual Property
Our intellectual property operating segment is engaged in litigation, for which no liability is recorded, as we do not expect a material negative outcome.
Corporate
Binn v. FORM Holdings Corp. et al.
On November 6, 2017, Moreton Binn and Marisol F, LLC, former stockholders of XpresSpa, filed a lawsuit against the Company and its directors in the United States District Court for the Southern District of New York. The lawsuit alleges violations of various sections of the Exchange Act, material omissions and misrepresentations (negligent and fraudulent), fraudulent omission, expropriation, breach of fiduciary duties, aiding and abetting, and unjust enrichment in the defendants’ conduct related to the Company’s acquisition of XpresSpa, and seeks rescission of the transaction, damages, equitable and injunctive relief, fees and costs, and various other relief. On January 17, 2018, the defendants filed a motion to dismiss the 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.
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 us or one of our subsidiaries, we will investigate the allegation and vigorously defend ourselves.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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 the periods indicated, the high and low sales prices for our common stock as reported by 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 |
Stockholders
As of March 15, 2018, we had 50 stockholders of record of the 26,581,067 outstanding shares of our common stock. This does not reflect persons or entities that hold their stock in nominee or "street" name through various brokerage firms.
Dividend Policy
We have never declared or paid any cash dividends on our capital stock, and do not anticipate paying any cash dividends on our capital stock in the foreseeable future. We currently intend to retain future earnings, if any, to finance our operations and to expand our business. Any future determination to pay cash dividends will be at the discretion of our Board of Directors and will be dependent upon our financial condition, operating results, capital requirements and other factors that our Board of Directors considers appropriate.
Issuer Purchases of Equity Securities
None.
Unregistered Sales of Equity Securities
None.
ITEM 6. SELECTED FINANCIAL DATA
Not required as we are a smaller reporting company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 part of a rebranding that aligned our corporate strategy to build a pure-play health and wellness services company. We have two operating segments: wellness and intellectual property.
Our wellness operating segment consists of XpresSpa, which is a leading airport retailer of spa services. XpresSpa is a well-recognized airport spa brand with 56 locations, consisting of 51 domestic and 5 international, as of December 31, 2017. XpresSpa offers 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 of revenue, respectively (2016 results include eight days of operations from the acquisition on December 23, 2016 to December 31, 2016).
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 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 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.
Our Strategy and Outlook
We expect most of our revenue 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’ sales in the prior year period (“Comp Store Sales”). The measurement of Comp Store Sales on a daily, weekly, monthly, quarterly and year-to-date basis provides an additional perspective on XpresSpa’s total sales growth when considering the influence of new unit contribution. A reconciliation between Comp Store Sales and total revenue as reported on the financial statements is presented below:
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 December 31, 2017 as compared 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:
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Full-Year 2017 Adjusted EBITDA
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:
We use GAAP and non-GAAP measurements to assess the trends in our business. With respect to XpresSpa, we review its Adjusted EBITDA, a non-GAAP measure, which we define as earnings before interest, tax, depreciation and amortization expense, excluding merger and acquisition, integration and one-time costs and stock-based compensation.
The table below shows the reconciliation from the nearest U.S. GAAP measure to adjusted EBITDA on both a segment and consolidated level.
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. Reconciliations of operating loss for the wellness operating segment and for the overall Company for the year-ended December 31, 2017 to Adjusted EBITDA income (loss) are presented in the tables above.
We consider Adjusted EBITDA to be an important indicator for the performance of our business, but not a measure of performance or liquidity calculated in accordance with U.S. GAAP. We have included this non-GAAP financial measure because management utilizes this information for assessing our performance and liquidity, and as an indicator of our ability to make capital expenditures and finance working capital requirements. We believe that Adjusted EBITDA is a measurement that is commonly used by analysts and some investors in evaluating the performance and liquidity of companies such as us. In particular, we believe that it is useful for analysts and investors to understand this indicator because it excludes transactions not related to our core cash operating activities. We believe that excluding these transactions allows investors to meaningfully analyze the performance of our core cash operations. Adjusted EBITDA should not be considered in isolation or as an alternative to cash flow from operating activities or as an alternative to operating income or as an indicator of operating performance or any other measure of performance derived in accordance with GAAP. In evaluating our performance as measured by Adjusted EBITDA, we recognize and consider the limitations of this measurement. Adjusted EBITDA does not reflect our obligations for the payment of income taxes, interest expense, or other obligations such as capital expenditures. Accordingly, Adjusted EBITDA is only one of the measurements that management utilizes.
Results of Operations
Revenue
We recognize revenue for the wellness operating segment from the sale of XpresSpa products and services at the point of sale, net of discounts and applicable sales taxes. Revenue 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 expenses 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 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.
Cost of sales
Cost of sales for our wellness operating segment consists of store-level costs. Store-level costs include all costs that are directly attributable to the store operations and include:
Cost of sales for the Company’s 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.
Depreciation, amortization and impairment
Property and equipment is stated at cost, net of accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets. The useful lives of our property and equipment is based on estimates of the period over which we expect the assets to be of economic benefit to us. Leasehold improvements are amortized over the shorter of the useful life of the asset or the term of the lease.
Amortization of our intangible assets are recognized on a straight-line basis over the remaining useful life of the intangible assets. Impairment charges related to our 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 and various other professional fees, as well as sales and marketing costs and stock-based compensation for management and administrative personnel.
Non-operating income (expense)
Non-operating income (expense) includes transaction gains (losses) from foreign exchange rate differences, bank charges, 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).
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, 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 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.
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, 2017 compared to the year-ended December 31, 2016
Revenue
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-ended December 31, 2017, we recorded total 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 during the year-ended December 31, 2017, a decrease of $10,725,000 from the same period in 2016. The intellectual property operating segment’s revenue of $11,175,000 for the year-ended December 31, 2016 was mainly due to a one-time payment 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 and 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.
Cost of sales
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, or 483.9%, was primarily due to the direct costs associated with the revenue generated at our XpresSpa locations. For the wellness operating segment, the largest component in the cost of sales are labor costs at the store-level, as our associates receive commission-based compensation as well as additional incentives based on individual and store performance. Cost of sales also includes rent and related occupancy costs, which are also a percentage of sales, as well as product costs directly associated with the procurement of retail inventory and other operating costs.
We expect to continue to recognize higher cost 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 for the year-ended December 31, 2017 was $5,573,000 and includes $3,862,000 of depreciation related to leasehold improvements at XpresSpa locations, which is our main category of property and equipment. Included in the depreciation expense from continuing operations for the year-ended December 31, 2017 is $1,131,000 of accelerated depreciation related to the closure of one of XpresSpa’s JFK locations in June 2017. Amortization expense relating to our intangible assets for the year-ended December 31, 2017 was approximately $2,403,000 of which $2,220,000 related to the amortization of the trade name assets, which were the primary intangible assets acquired in the purchase of XpresSpa in December 2016. There was no impairment expense recorded during the year-ended December 31, 2017.
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, general and administrative expenses increased by $6,875,000, or 70.9%, 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 merger and acquisition costs related to our acquisition of XpresSpa and increased general and administrative costs associated with XpresSpa, which we acquired on December 23, 2016 and, as such, had only eight days of general and administrative expenses 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 year ended December 31, 2016. The net non-operating expense of $928,000 during 2017 was mainly comprised of $731,000 of interest expense related to a credit agreement and secured promissory note (the “Debt”) with Rockmore Investment Master Fund Ltd. (“Rockmore”) and $470,000 of finance expenses recorded by our wellness operating segment. The net non-operating expenses were reduced by a gain of $225,000 on the revaluation of our derivative warrant liabilities and other non-operating income items.
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-operating income (expense) will be affected by the adjustments to the fair value of our derivative instruments. Fair value of these derivative instruments depends on a variety of assumptions, such as estimations regarding triggering of down-round protection and estimated future share price. An estimated increase in the price of our common stock would increase the value of the warrants and thus result in a loss on our statements of operations.
Discontinued Operations
In 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.
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, our estimated aggregate total NOLs were approximately $159,007,000 for United States federal, state and local purposes expiring 20 years from the respective tax years to which they relate. The NOL amounts are presented before Internal Revenue Code, Section 382 limitations (“Section 382”). The Tax Reform Act of 1986 imposed substantial restrictions on the utilization of NOLs and tax credits in the event of an ownership change of a corporation. Thus, our ability to utilize all such NOLs and credit carryforwards may be limited. The NOLs available following our merger completed in 2012 that are not subject to limitation amount to $119,406,000. The remaining NOLs of $39,601,000 are subject to the limitation of Section 382. The annual limitation is approximately $2,000,000.
We did not have any material unrecognized tax benefits as of December 31, 2017. We do not expect to record any additional material provisions for unrecognized tax benefits within the next year.
Liquidity and Capital Resources
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 growth of our business, primarily through opening new XpresSpa locations, maintaining our existing XpresSpa locations, and purchasing inventory for XpresSpa to support anticipated growth in sales 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 of December 31, 2016 to $6,368,000 as of December 31, 2017.
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, | ||||||||||||
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, net cash used in investing activities totaled $5,396,000, of which $4,286,000 was 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.
During the year ended December 31, 2016, net cash provided by investing activities totaled $3,474,000, which 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 spent to acquire property and equipment.
We expect that net cash used in investing activities will increase as we intend to continue to open new stores and develop supporting infrastructure and systems for our wellness operating segment.
Financing activities
During the year-ended December 31, 2017, net cash 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 payments to XpresSpa’s ACDBE partners of $452,000.
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 Policies
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, we believe the following accounting policies 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.
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 expenses 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 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.
Goodwill
Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized.
Goodwill is reviewed for impairment at least annually, and when triggering events occur, in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)Topic 350, Intangibles – Goodwill and Other. 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 not that the fair value of a reporting unit is less than its carrying amount, then we would not need to perform the two-step impairment 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 value of the reporting unit with 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, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to an acquisition price allocation and the residual fair value after this allocation is the implied fair value of the reporting unit goodwill. A significant amount of judgment is required in performing goodwill impairment tests including estimating the fair value of a reporting unit and the implied fair value of goodwill.
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 acquired as part of the acquisition of XpresSpa in December 2016 and are recorded based on the estimated fair value in purchase price allocation. Intangible assets also include purchased patents. The intangible assets are amortized over their estimated useful lives, which are periodically evaluated for reasonableness.
Our intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In assessing the recoverability of our intangible assets, we must make estimates and assumptions regarding future cash flows and other factors to determine the fair value of the respective assets. These estimates and assumptions could have a significant impact on whether an impairment charge is recognized and also the magnitude of any such charge. Fair value estimates are made at a specific point in time, based on relevant information. These estimates are subjective in nature and involve uncertainties and matters of significant judgments and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. If these estimates or material related assumptions change in the future, we may be required to record impairment charges related to its intangible assets.
Fair value measurements
Our derivative warrant liabilities are measured at fair value. Such liabilities are classified within Level 3 of the fair value hierarchy because they are valued using the Black-Scholes-Merton (“Black-Scholes”) and the Monte-Carlo models (as these warrants include down-round protection clauses), which utilize significant inputs that are unobservable in the market. The inputs to estimate the fair value of our derivative 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 management on the respective balance sheet dates:
December 31, 2017:
December 31, 2016:
The fair value measurements of the derivative warrant liabilities are evaluated by management to ensure that changes are consistent with expectations of management based upon the sensitivity and nature of the related inputs. Significant changes in any of those inputs in isolation can result in a significant change in the fair value measurement. Generally, an increase in the market price of our common stock, an increase in the volatility of our common stock, an increase in the remaining term of the warrants, or an increase of a probability of a down-round triggering event would each result in a directionally similar change in the estimated fair value of our derivative warrant liabilities. Such changes would increase the associated liability while decreases in these assumptions would decrease the associated liability. An increase in the risk-free interest rate or a decrease in the positive differential between the warrants’ exercise price and the market price of our common stock would result in a decrease in the estimated fair value measurement of the warrants and thus a decrease in the associated liability. We have not, and do not plan to, declare dividends on our common stock and, as such, there is no change in the estimated fair value of the derivative warrant liabilities due to the dividend assumption. Had we made different assumptions about the inputs noted above, the recorded gain or loss, our net loss and net loss per share amounts could have been significantly different.
Stock-based compensation
Stock-based compensation is recognized 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 of 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 recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not more likely than not to be realized. Tax benefits related to excess deductions on stock-based compensation arrangements are recognized when they reduce taxes payable.
In assessing the need for a valuation allowance, we look at cumulative losses in recent years, estimates of future taxable earnings, feasibility of tax planning strategies, the ability to realize tax benefit carryforwards, and other relevant information. Valuation allowances related to deferred tax assets can be impacted by changes to tax laws, changes to statutory tax rates and future taxable earnings. Ultimately, the actual tax benefits to be realized will be based upon future taxable earnings levels, which are very difficult to predict. In the event that actual results differ from these estimates in future periods, we will be required to adjust the valuation allowance.
Significant judgment is required in evaluating our federal, state and foreign tax positions and in the determination of our tax provision. Despite management's belief that our liability for unrecognized tax benefits is adequate, it is often difficult to predict the final outcome or the timing of the resolution of any particular tax matters. We may adjust these accruals as relevant circumstances evolve, such as guidance from the relevant tax authority, our tax advisors, or resolution of issues in the courts. Our tax expense includes the impact of accrual provisions and changes to accruals that it considers appropriate. These adjustments are recognized as a component of income tax expense entirely in the period in which new information is available. We record interest related to unrecognized tax benefits in interest expense and penalties in the accompanying consolidated statements of operations and comprehensive loss as general and administrative expenses.
We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50 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.
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 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. 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 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. 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 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. We are currently in the process of evaluating the potential impact of the adoption on our consolidated financial statements.
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. We are currently 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. Adoption of this ASU did not have a material impact on our consolidated financial statements.
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. We are currently in the process of evaluating the potential impact of the adoption on our 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. We are currently in the process of evaluating the potential impact of the adoption on our consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required as we are a smaller reporting company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements required by this Item are set forth in Item 15 beginning on page F-1 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Exchange Act that are designed to ensure that information required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of December 31, 2017, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the year ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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 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:
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. 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, management believes that, as of December 31, 2017, our internal control over financial reporting is effective based on those criteria.
Not applicable.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
Our Board of Directors (the “Board of Directors” or the “Board”) currently consists of five (5) members. Prior to each annual meeting of stockholders, the Board of Directors considers the recommendations of the Nominating and Corporate Governance Committee and votes to nominate individuals for election or re-election for a term of one year or until their successors are duly elected and qualify or until their earlier death, resignation, or removal. Election takes place at our annual meeting of stockholders.
Set forth below are the names of our directors and executive officers, their ages (as of the filing date of this Form 10-K/A), their position(s) with the Company, if any, their principal occupations or employment for at least the past five years, the length of their tenure as directors and the names of other public companies in which such persons hold or have held directorships during the past five years. Our executive officers are appointed by, and serve at the discretion of, our Board of Directors. Additionally, information about the specific experience, qualifications, attributes or skills that led to our Board of Directors’ conclusion that each person listed below as a director should serve as a director is set forth below:
| | | | |
Name | Age | Position(s) with the Company | ||
Bruce T. Bernstein*(1)(2)(3)(4) | 60 | Chairman of the Board of Directors | ||
Robert Weinstein*(1)(2)(3)(4) | 64 | Director | ||
Michael Lebowitz* (3)(4) | 51 | Director | ||
Gaëlle Wizenberg*(1)(2)(5) | 49 | Director | ||
Scott R. Milford | 59 | Chief Executive Officer and Director | ||
Suzanne A. Scrabis | | 54 | | Chief Financial Officer |
Ezra T. Ernst | | 55 | | Executive Vice President of XWELL, Chief Executive Officer of XpresTest, Inc. and President and Chief Executive Officer of Hyperpointe |
*Independent director under the rules of The Nasdaq Stock Market (“Nasdaq”)
(1) | Current member of Compensation Committee |
(2) | Current member of Audit Committee |
(3) | Current member of Nominating and Corporate Governance Committee |
(4) | Current member of Strategic Affairs Committee |
(5) | On December 15, 2023, the Board of Directors elected Gaëlle Wizenberg to be a member of the Board of Directors, effective as of January 1, 2024 |
Our Board of Directors has reviewed the materiality of any relationship that each of our directors has with us, either directly or indirectly. Based upon this review, our Board of Directors has determined that the following members of our Board of Directors are “independent directors” as defined by Nasdaq: Bruce T. Bernstein, Gaelle Wizenberg, Robert Weinstein, and Michael Lebowitz.
Bruce T. Bernstein joined our Board of Directors in February 2016 and has served as the Chairman of our Board of Directors since February 2018. Mr. Bernstein has over thirty years of experience in the securities industry, primarily as senior portfolio manager for two alternative finance funds as well as in trading and structuring of arbitrage strategies. Mr. Bernstein has served as President of Rockmore Capital, LLC since 2006, the manager of a direct investment and lending fund with peak assets under management of $140 million. Previously, he served as Co-President of Omicron Capital, LP, an investment firm based in New York, which he joined in 2001. Omicron Capital focused on direct investing and lending to public small cap companies and had peak assets under management of $260 million. Prior to joining Omicron Capital, Mr. Bernstein served as Senior Vice President in the bank’s Global Securities Arbitrage business unit of Fortis Investments, Inc., specializing in equity structured products and equity arbitrage and then President in charge of the
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bank’s proprietary investment business in the United States. Prior to Fortis Investments, Mr. Bernstein was Director in the Equity Derivatives Group at Nomura Securities International specializing in cross-border tax arbitrage, domestic equity arbitrage and structured equity swaps. Mr. Bernstein started his career at Kidder Peabody, where he rose to the level of Assistant Treasurer. Mr. Bernstein also serves as a member of the Board of Directors of Synaptogenix, Inc. (formerly Neurotrope Bioscience, Inc.), Mr. Bernstein is also a member of the board of Summit Digital Health, a laser-based blood glucose monitor distributor, based in New Jersey. Mr. Bernstein holds a B.B.A. from City University of New York (Baruch).
We believe Mr. Bernstein’s extensive experience in the securities industry qualifies him to serve as the
Chairman of our Board of Directors.
Robert Weinstein joined our Board of Directors in February 2020. Mr. Weinstein has extensive accounting and finance experience, spanning more than thirty years, as a public accountant, investment banker, healthcare private equity fund principal and chief financial officer. Since October 2013, Mr. Weinstein has been the Chief Financial Officer of Synaptogenix, Inc. (formerly Neurotrope Bioscience, Inc.), a publicly-traded biotechnology company. From September 2011 to September 2013, Mr. Weinstein was an independent consultant for several healthcare companies in the pharmaceutical and biotechnology industries. From March 2010 to August 2011, Mr. Weinstein was the Chief Financial Officer of Green Energy Management Services Holdings, Inc., a publicly-traded energy consulting company. From August 2007 to February 2010, Mr. Weinstein served as Chief Financial Officer of Xcorporeal, Inc., a publicly-traded, development-stage medical device company which was sold in March 2010 to Fresenius Medical USA, the largest provider of dialysis equipment and services worldwide. Mr. Weinstein received his MBA degree in finance and international business from the University of Chicago Graduate School of Business, is a Certified Public Accountant (inactive), and received his B.S. in accounting from the State University of New York at Albany.
We believe Mr. Weinstein’s extensive financial expertise and healthcare experience qualifies him to serve on our Board of Directors and as a member and the chairperson of the audit committee of our Board of Directors.
Michael Lebowitz joined our Board of Directors in April 2020. An expert in customer experience strategy and innovation, Mr. Lebowitz has a twenty-five year track record in defining creative strategy and vision for some of the world’s most recognizable brands. Mr. Lebowitz founded Big Spaceship, a globally-recognized creative consultancy, in 2000 and has served as Chief Executive Officer of Big Spaceship since its founding. Mr. Lebowitz received his Bachelor’s degree in Film from Vassar College.
We believe Mr. Lebowitz’s extensive experience in the area of creative brand strategy qualifies him to serve on our Board of Directors.
Gaëlle Wizenberg joined our Board of Directors in January 2024. An expert in luxury consumer packaged goods and serial entrepreneur, Ms. Wizenberg founded Objects of Magic LLC, a wellness brand offering team building and office retreats, in August 2022 and has served as CEO since the founding of the company. Prior to this, she founded Charlie Banana Consulting, LLC in July 2019 and served as Director and CEO from July 2019 to March 2024. Additionally, she founded Charlie Banana USA, LLC, a luxury brand of eco-friendly baby products, in 2013 and has served as CEO until 2020 when it was acquired by Proctor & Gamble. Before that, Ms. Wizenberg founded Winc Design Limited, a global cloth diaper manufacturer in 2007 and has served as CEO until 2020. We believe Ms. Wizenberg’s entrepreneurial experience with consumer and wellness brands qualifies her to serve on our Board of Directors.
Scott R. Milford joined the Company in July 2019 andhas served as our Chief Executive Officer and as a member of our Board of Directors since January 19, 2022. Prior to January 2022, Mr. Milford served as our Chief Operating Officer since December 2020. Prior to that, he served as our first Chief People Officer since July 2019. Mr. Milford has over 30 years of experience at high profile and diverse organizations. Prior to joining XWELL, he served as VP, People Operations at SoulCycle from January to July 2019, where he led the creation and deployment of that company’s talent acquisition strategy, the development of an annual performance cycle, and created and deployed the “people strategy” that supported the opening of the brand’s first European studio in London. This included the development of talent acquisition and talent management plans, compensation design and all policies and procedures governing studio operations. Prior to that, he served as Chief People Officer for Bayada, a $1 billion Home Health Care Company, during 2018, where he played a
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significant role in building the organizational infrastructure necessary to scale the business from 400 service offices to 1,000 offices. Previously, he was Senior Vice President – Human Resources for Le Pain Quotidien from 2016 to 2018, where he was responsible for driving operational excellence through strategic HR planning, building organizational and employee capabilities, facilitating change, and building effective working relationships with employees and guests on a global scale. His other relevant experience includes senior leadership positions at Town Sports International, Starbucks Coffee Company, Universal Music Group, Viacom, and Blockbuster Entertainment.
We believe Mr. Milford’s extensive experience in the retail industry and his knowledge of the Company’s business due to his status as an executive officer of the Company qualifies him to serve on our Board of Directors.
Executive Officers
Suzanne A. Scrabishas served as Chief Financial Officer of the Company since July 2023. Prior to July 2023, Ms. Scrabis served as the Program Manager, Technology Platforms for Rockwell Automation in 2020, after serving as Chief Financial Officer for MAVERICK Technologies Holdings, LLC, a privately held independent systems integrator based in Columbia, Illinois from 2006 to 2019. As CFO, she helped lead the acquisition of Maverick Technologies by Rockwell Automation based in Milwaukee, Wisconsin. Before that, she served as the Director of Operations at MAVERICK from 2003 to 2006. Ms. Scrabis also served from 2001 to 2003 as the Director of Logistics for Aurora Foods, a packaged foods manufacturing company that was subsequently acquired by Pinnacle Foods in 2004. Prior to that she served at Ernst & Young as a senior asset manager for the Pacific and New York Metro regions from 1996-2001. Ms. Scrabis holds a Bachelor of Science in Operations Management and Marketing from California State University Long Beach.
Ezra T. Ernst has served as Executive Vice President of the Company and Chief Executive Officer of our subsidiary XpresTest, Inc. since our January 2022 acquisition of gcg Connect LLC d/b/a HyperPointe. He also has served as President and Chief Executive Officer of HyperPointe since March, 2020. Prior to HyperPointe, he previously served as Chief Executive Officer of Physicians Weekly, LLC, a provider of medical news and education for healthcare professionals, from August 2015 to March 2020, Chief Commercial Officer of Treato, a health-related data analytics company, from September 2013 to August 2015 and General Manager at WebMD, an online publisher of health and medical news and information, from December 2008 to January 2013.
Committees of the Board of Directors and Meetings
Meeting Attendance.During the fiscal year ended December 31, 2023, there were three meetings of our Board of Directors as well as thirteen unanimous written consents of the Board of Directors. The various committees of the Board of Directors met a total of eleven times, collectively. Each director attended more than 75 percent of the aggregate of the total number of meetings of the Board of Directors and each director serving on a committee attended more than 75 percent of the total number of meetings held by an applicable committee(s) of the Board of Directors on which such director served during the year ended December 31, 2023. The Board of Directors has adopted a policy under which each member of the Board of Directors is strongly encouraged, but not required, to attend each annual meeting of our stockholders. All five of our 2023 directors attended our 2023 annual meeting of stockholders.
Audit Committee.Our Audit Committee (the “Audit Committee”) met four times during the year ended December 31, 2023. The Audit Committee currently has three members: Robert Weinstein (Chairman), Bruce T. Bernstein and Gaëlle Wizenberg. Effective as of January 1, 2024, Donald E. Stout ceased to be a member of the Board of Directors and all committees thereto, including the Audit Committee. As of January 30, 2024, Gaëlle Wizenberg was elected to be a member of the Audit Committee. Our Audit Committee’s role and responsibilities are set forth in the Audit Committee’s written charter and include the authority to retain and terminate the services of our independent registered public accounting firm. In addition, the Audit Committee reviews our annual and quarterly financial statements, considers matters relating to accounting policy and internal controls and reviews the scope of annual audits.
The Board determined that all members of the Audit Committee qualify as independent under the listing standards promulgated by the SEC and Nasdaq, as such standards apply specifically to members of audit committees. The Board of Directors has determined that both Messrs. Weinstein and Bernstein are “audit committee financial experts,” as defined
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by the SEC in Item 407 of Regulation S-K. A copy of the Audit Committee’s written charter is publicly available through the “Investors — Corporate Governance” section of our website at www.xwell.com/corporate-governance.
Compensation Committee.Our Compensation Committee (the “Compensation Committee”) met one time during the year ended December 31, 2023. This committee currently has three members: Bruce T. Bernstein (Chairman), Robert Weinstein and Gaëlle Wizenberg. Effective as of January 1, 2024, Donald E. Stout ceased to be a member of the Board of Directors and all committees thereof, including the Compensation Committee. As of January 30, 2024, Gaëlle Wizenberg was elected to be a member of the Compensation Committee.
Our Compensation Committee’s role and responsibilities are set forth in the Compensation Committee’s written charter and includes reviewing, approving and making recommendations regarding our compensation policies, practices and procedures to ensure that legal and fiduciary responsibilities of the Board of Directors are carried out and that such policies, practices and procedures contribute to our success. Our Compensation Committee also administers our 2012 Employee, Director and Consultant Equity Incentive Plan (the “2012 Plan”) and our 2020 Equity Incentive Plan (the “2020 Plan”). The Compensation Committee is responsible for (1) the determination of the compensation of our Chief Executive Officer, and conducts its decision-making process with respect to that issue without the Chief Executive Officer present, (2) the determination of the compensation of the executive officers of the Company other than the Chief Executive Officer based upon the recommendation of the Chief Executive Officer and such other customary factors that the Committee deems necessary or appropriate, and (3) the establishment and review of general compensation policies with the objective of attracting and retaining superior talent, rewarding individual performance and achieving our financial goals. The Compensation Committee has the authority to directly retain the services of independent consultants and other experts to assist in fulfilling its responsibilities. During fiscal year 2023, the Compensation Committee did engage a third-party compensation consultant, StreeterWyatt Analytics, to review the Board’s compensation structure as well as benchmark it against the Company’s peer group.
The Board determined all members of the Compensation Committee qualify as independent under the Nasdaq listing standards. A copy of the Compensation Committee’s written charter is publicly available through the “Investors — Corporate Governance” section of our website at www.xwell.com/corporate-governance.
Nominating and Corporate Governance Committee. Our Nominating and Corporate Governance Committee (the “Nominating and Corporate Governance Committee”) met one time during the year ended December 31, 2023. This committee currently has three members: Bruce T. Bernstein (Chairman), Michael Lebowitz and Robert Weinstein. Effective as of January 1, 2024, Donald E. Stout ceased to be a member of the Board of Directors and all committees thereof, including the Nominating and Corporate Governance Committee. As of January 30, 2024, Michael Lebowitz was elected to be a member of the Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee’s role and responsibilities are set forth in the Nominating and Corporate Governance Committee’s written charter and include authority to:
● | identify and nominate members of the Board of Directors; |
● | oversee the evaluation of the Board of Directors and management; |
● | develop and recommend corporate governance guidelines to the Board of Directors; |
● | evaluate the performance of the members of the Board of Directors; and |
● | make recommendations to the Board of Directors as to the structure, composition and functioning of the Board of Directors and its committees. |
Our Nominating and Corporate Governance Committee and Board of Directors may therefore consider a broad range of factors relating to the qualifications and background of nominees, which may include diversity, which is not only limited to race, gender or national origin. Our Nominating and Corporate Governance Committee’s and Board of Directors’ priority in selecting Board members is identification of persons who will further the interests of our stockholders through his or her established record of professional accomplishment, the ability to contribute positively to the collaborative culture among Board members and professional and personal experiences and expertise relevant to our growth strategy.
In addition, under our current corporate governance policies, the Nominating and Corporate Governance Committee may consider candidates recommended by stockholders as well as from other sources such as other directors or officers, third
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party search firms or other appropriate sources. For all potential candidates, the Nominating and Corporate Governance Committee may consider all factors it deems relevant, such as a candidate’s personal integrity and sound judgment, business and professional skills and experience, independence, knowledge of the industry in which we operate, possible conflicts of interest, diversity, the extent to which the candidate would fill a present need on the Board of Directors, and concern for the long-term interests of the stockholders. In general, persons recommended by stockholders will be considered on the same basis as candidates from other sources.
The Board determined that all members of the Nominating and Corporate Governance Committee qualify as independent under the Nasdaq listing standards. A copy of the Nominating and Governance Committee’s written charter is publicly available through the “Investors — Corporate Governance” section of our website atwww.xwell.com/corporate-governance.
The Strategic Affairs Committee.The Strategic Affairs Committee (the “Strategic Affairs Committee”) met four times during the year ended December 31, 2023. This committee was formed in September 2021 to assist the Board in reviewing, analyzing, considering and assessing, potential acquisitions, joint ventures, strategic investments, divestitures and other strategic transactions. The Strategic Affairs Committee currently has three members: Bruce T. Bernstein (Chairman), Robert Weinstein and Michael Lebowitz. The Strategic Affairs Committee’s responsibilities include, among others:
● | assisting management with the identification of potential acquisition, joint venture, strategic investment, divestiture and other strategic transaction opportunities and review transaction candidates with management, when and as appropriate; |
● | evaluating strategic transactions received by the Company or proposed by management; and |
● | overseeing and coordinating the process of reviewing, analyzing and responding to proposals received by the Company or proposed by management with respect to such potential acquisition, joint venture, strategic investment, divestiture and other strategic transaction opportunities. |
Board Leadership Structure and Role in Risk Oversight
Effective as of February 5, 2018, the Board appointed Bruce T. Bernstein as the non-executive Chairman of the Board of Directors.
The leadership structure of the Board currently consists of a Chairman of the Board who oversees the Board meetings. We separate the roles of Chairman of the Board and Chief Executive Officer in recognition of the differences between the two roles. Our Board believes this division of responsibility is an effective approach for addressing the risks we face. All of our Board committees are comprised of only independent directors. All Board committees are chaired by independent directors who report to the full Board whenever necessary. We believe this leadership structure helps facilitate efficient decision-making and communication among our directors and fosters efficient Board functioning at meetings.
Our management is primarily responsible for managing the risks we face in the ordinary course of operating our business. The Board oversees potential risks and our risk management activities by receiving operational and strategic presentations from management which include discussions of key risks to our business. The Board also periodically discusses with management important compliance and quality issues. In addition, the Board has delegated risk oversight to each of its key committees within their areas of responsibility. For example, the Audit Committee assists the Board in fulfilling its oversight of the quality and integrity of our financial statements and our compliance with legal and regulatory requirements relating to our financial statements and related disclosures. The Compensation Committee assists the Board in its risk oversight function by overseeing strategies with respect to our incentive compensation programs and key employee retention issues. We believe our Board leadership structure facilitates the division of risk management oversight responsibilities among the Board committees and enhances the Board’s efficiency in fulfilling its oversight function with respect to different areas of our business risks and our risk mitigation practices.
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Involvement in Certain Legal Proceedings
Information called for by this Item may be foundNone of our directors or executive officers has been involved in any of the following events during the past ten years:
● | any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; |
● | any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offences); |
● | being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his or her involvement in any type of business, securities or banking activities; or |
● | being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated. |
Family Relationships
There are no family relationships among our definitive Proxy Statementdirectors and executive officers.
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Board Diversity Matrix
The Nasdaq diversity matrix is set forth below as required under the listing requirements of Nasdaq.
| | | | | | | | |
Board Diversity Matrix (As of April 29, 2024) | ||||||||
Total Number of Directors - 5 |
| |
| |
| |
| |
| | Female | | Male | | Non-Binary | | Did Not Disclose Gender |
Part I: Gender Identity | | | | | | | | |
Directors | | 1 | | 4 | | | | |
| | | | | | | | |
Part II: Demographic Background | | | | | | | | |
African American or Black | | | | | | | | |
Alaskan Native or Native American | | | | | | | | |
Asian | | | | | | | | |
Hispanic or Latinx | | | | | | | | |
Native Hawaiian or Pacific Islander | | | | | | | | |
White | | 1 | | 4 | | | | |
Two or More Races or Ethnicities | | | | | | | | |
LGBTQ+ | | | | | | | | |
Did Not Disclose Demographic Background | | | | | | | | |
Delinquent Section 16(a) Reports
Section 16(a) of the Exchange Act requires our directors and officers, and persons who own more than ten percent of our common stock, to file with the SEC initial reports of ownership and reports of changes in connection withownership of our 2018 Annual Meetingcommon stock. To our knowledge, based solely on our records and a review of Stockholdersthe copies of such reports furnished to us, during the fiscal year ended December 31, 2023, we believe that all reports applicable to our officers, directors and greater than ten percent stockholders which were required to be filed withpursuant to Section 16(a) of the SEC under the captions “Management and Corporate Governance Matters,” “Section 16(a) Beneficial Ownership Reporting Compliance,” and “CodeExchange Act were filed on a timely basis.
Code of Conduct and Ethics”Ethics
We have adopted a Code of Conduct and Ethics that applies to all of our employees, including our principal executive officer and principal financial and accounting officer. The text of the Code of Conduct and Ethics is incorporatedposted on the “Investors — Corporate Governance” section of our website at www.xwell.com/corporate-governance, and will be made available to stockholders without charge, upon request, in writing to the Corporate Secretary at 254 West 31st Street 11th Floor, New York, New York 10001. Disclosure regarding any amendments to, or waivers from, provisions of the code of conduct and ethics that apply to our directors, principal executive and financial officers will be included in a Current Report on Form 8-K within four business days following the date of the amendment or waiver, unless website posting or the issuance of a press release of such amendments or waivers is then permitted by reference in this Item 10.Nasdaq rules.
Insider Trading Policy
We have adopted an insider trading policy governing the purchase, sale, and/or other dispositions of our securities by our directors, officers and employees. The insider trading policy is designed to promote compliance with respect to insider trading laws, rules and regulations.
10
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table summarizes the total compensation awarded or paid by us during the years ended December 31, 2023 and 2022 to (i) our principal executive officer, (ii) the two most highly compensated executive officers other than the principal executive officer who were serving as executive officers at December 31, 2023, and (iii) up to two additional individuals for whom disclosure would have been provided under clause (ii) but for the fact that the person was not serving as an executive officer at the end of the year ended December 31, 2023 (collectively, the “named executive officers”).
| | | | | | | | | | | | | | |
|
| |
| |
| Non-Equity |
| |
| | | |
| |
| | | | | | Incentive Plan | | Option | | Restricted Stock | | All Other | | |
| | | | Salary | | Compensation | | Awards | | Unit Awards | | Compensation | | Total |
Name and principal position | | Year | | ($) | | ($) | | ($)(1) | | ($)(1) | | ($)(5) | | ($) |
| | | | | | | | | | | | | | |
Scott R. Milford(2) |
| 2023 |
| 425,000 |
| 52,379 |
| 39,150 | | — | | — |
| 516,529 |
Chief Executive Officer | | 2022 |
| 413,462 |
| 181,704 |
| 36,290 | | 615,500 | | — |
| 1,246,956 |
| | | | | | | | | | | | | | |
Suzanne A. Scrabis(3) | | 2023 | | 135,367 | | 784 | | 6,525 | | 22,800 | | — | | 165,476 |
Chief Financial Officer | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Omar A Haynes(4) |
| 2023 |
| 317,893 |
| 26,244 |
| 8,700 | | 25,450 | | — |
| 378,286 |
Former Interim Chief Financial Officer | | 2022 | | 251,250 | | 101,856 | | 36,290 | | 65,000 | | — | | 454,397 |
| | | | | | | | | | | | | | |
Ezra T. Ernst(5) |
| 2023 |
| 375,000 |
| 27,379 | | 8,700 | | — | | — | | 411,079 |
Executive Vice President of XWELL, Chief Executive Officer of XpresTest and President and Chief Executive Officer of HyperPointe |
| 2022 | | 318,425 | | — | | 362,900 | | — | | — | | 681,325 |
| | | | | | | | | | | | | | |
(1) | Amounts represent the aggregate grant date fair value in accordance with FASB ASC Topic 718. For the assumptions made in the valuation of our equity awards see Notes 2 and 15 to our consolidated financial statements included in the Original Filing. |
(2) | Mr. Milford is currently our Chief Executive Officer, effective as of January 19, 2022. Prior to that, he served as our Chief Operating Officer since December 14, 2020. Compensation for the year ended December 31, 2023 includes equity awards of stock options. Compensation for the year ended December 31, 2022 includes equity awards of stock options and restricted stock. |
(3) | Ms. Scrabis is our current Chief Financial Officer, effective as of July 10, 2023. Compensation for the year ended December 31, 2023 includes equity awards of stock options and restricted stock. |
(4) | Mr. Hayneswas our former Interim Chief Financial Officer, effective as of June 13, 2022. On July 10, 2023, upon the appointment of Suzanne A. Scrabis to the role of Chief Financial Officer, Mr. Haynes resumed his former role as Vice President of Treasury & Finance, effective as of the same date. Compensation for the year ended December 31, 2023 includes equity awards of stock options and restricted stock. Compensation for the year ended December 31, 2022 includes equity awards of stock options and restricted stock. |
(5) | Mr. Ernst has served as the Executive Vice President and the Chief Executive Officer of XpresTest Inc. since January 9, 2022. Compensation for the year ended December 31, 2023 includes equity awards of stock options. Compensation for the year ended December 31, 2022 includes equity awards of stock options. |
11
Narrative Disclosure to Summary Compensation Table
Scott R. Milford
Information calledOn July 8, 2019, we entered into an employment agreement with Mr. Milford, pursuant to which he agreed to serve as our Chief People Officer for an annual base salary of $280,000 and $300,000, for the year ended July 31, 2020 and the year ending on July 31, 2021, respectively. After July 31, 2021, Mr. Milford continued to be employed by this Itemthe Company as an ‘at will’ employee, subject to annual review by the Compensation Committee. Mr. Milford was also entitled to a one-time 10% minimum guaranteed bonus for 2019 to be calculated off his base salary as of his July 8, 2019 commencement date as well as to participate in any annual bonus or other incentive compensation program that the Company may be foundadopt from time to time for its executive officers. Mr. Milford was promoted to Chief Operating Officer in our definitive Proxy StatementDecember 2020; no changes to his compensation were made at that time in connection with our 2018 Annual Meetingthe promotion.
On March 28, 2022, the Company and Mr. Milford entered into an executive employment agreement (the “Milford Employment Agreement”), effective as of StockholdersJanuary 19, 2022, the date of Mr. Milford’s assumption of the role of Chief Executive Officer. The Milford Employment Agreement had a term of two years from its effective date of January 19, 2022, and terminated on January 19, 2024. The Milford Employment Agreement entitled Mr. Milford to receive an annual base salary of $425,000. Mr. Milford continues to be filedemployed by the Company as an “at will” employee. He is also 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. Prior to January 19, 2024, Mr. Milford was eligible to earn an annual bonus, the target amount of which is up to one hundred percent (100%) of his base salary, based upon the achievement of performance goals and metrics established by the Board at its sole discretion. Any applicable bonus was determined as soon as reasonably practicable after our annual financial statements were finalized and was split 50/50 between cash and a grant of restricted stock units (“RSUs”) with respect to our common stock.
Prior to January 19, 2024, in the event the Milford Employment Agreement was terminated for good reason by Mr. Milford, or by the Company without cause and Mr. Milford provided the Company with a release of claims, Mr. Milford was 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 agreement contained non-solicitation and non-competition provisions that applied during the term of Mr. Milford’s employment and for six months thereafter. As of January 19, 2024, the Milford Employment Agreement is no longer in effect.
Suzanne A. Scrabis
For her service as Chief Financial Officer, pursuant to an offer letter, dated as of June 26, 2023, by and between us and Ms. Scrabis (the “Scrabis Offer Letter”), Ms. Scrabis receives an annual base salary of $300,000, subject to review by the Compensation Committee. Ms. Scrabis is eligible to receive an annual cash bonus with a target of 50% of her base salary, which was not pro rated for 2023 and half of which amount is guaranteed. For the year ended December 31, 2023, Ms. Scrabis received a cash bonus of $75,000. Ms. Scrabis is additionally eligible to participate in Company’s long-term incentive plan with the SECpotential to receive stock options valued at up to 1.75 times her annual base salary (pro-rated for 2023). Ms. Scrabis received (i) non-qualified stock options to purchase 3,750 shares of common stock with an exercise price of $4.60, and (ii) 5,000 RSUs, with each grant made as of July 10, 2023 and vesting in four quarterly installments on the first, second, third and fourth quarters after the grant date.
In the event Ms. Scrabis terminates her employment for good reason, or by the Company without cause (each as defined in the Scrabis Offer Letter) and Ms. Scrabis provides the Company with a release of claims, Ms. Scrabis will be entitled to receive a payment equal to 50% of her then-current base salary, payable in installments over a period of six months.
Omar A. Haynes
For his service as Interim Chief Financial Officer, which terminated on July 10, 2023, upon the appointment of Suzanne A. Scrabis as our Chief Financial Officer, Mr. Haynes received a base salary of $288,750 annually, that was subject to review by the Compensation Committee of the Company’s board of directors. He was eligible to receive an annual cash
12
bonus with a target of 50% of his base salary and was eligible to participate in any annual bonus or other incentive compensation program that the Company may adopt from time to time for its executive officers.
Ezra T. Ernst
On January 9, 2022, the Company and Mr. Ernst entered into an executive employment agreement (the “Ernst Employment Agreement”), pursuant to which Mr. Ernst serves as the Chief Executive Officer and a director of XpresTest. The Ernst Employment Agreement has a term of three years from the date of closing of the Company’s acquisition of Hyperpointe. Pursuant to the Ernst Employment Agreement, Mr. Ernst is entitled to receive an annual base salary of $375,000. He is also 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. Mr. Ernst is eligible to earn an annual bonus, the target amount of which is up to fifty percent (50%) of his 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 RSUs with respect to the Company’s common stock.
In the event the Ernst Employment Agreement is terminated for good reason by Mr. Ernst, or by the Company without cause and Mr. Ernst provides the Company with a release of claims, Mr. Ernst 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 agreement contains non-solicitation and non-competition provisions that apply during the term of Mr. Ernst’s employment and for six months thereafter.
13
Outstanding Equity Awards at 2023 Fiscal Year End
The following table sets forth information regarding grants of stock options and unvested stock awards outstanding on the last day of the fiscal year ended December 31, 2023, to each of our named executive officers.
| | | | | | | | | | | | |
|
| Option Awards |
| Restricted Stock Unit Awards | ||||||||
|
| |
| |
| |
| |
| Number |
| Market |
| | | | Number | | | | | | of shares | | value |
| | Number | | of securities | | | | | | of units | | of shares |
| | of securities | | underlying | | | | | | of stock | | of units |
| | underlying | | unexercised | | | | | | that | | of stock |
| | unexercised | | options | | Option | | | | have not | | that |
| | options | | (#) un- | | exercise | | Option expiration | | vested | | have not |
Name | | (#) exercisable | | exercisable | | price ($) | | date | | (#) | | vested ($) |
Scott R. Milford (1) | | |
| |
| | | | | — |
| — |
2020 Non-Qualified Stock Options from the 2012 Plan | | 2,916 | | — | | 30.60 | | April 20, 2030 | | | | |
2020 Incentive Stock Options from the 2012 Plan | | 1,605 | | — | | 100.20 | | September 6, 2030 | | | | |
2020 Non-Qualified Stock Options from the 2020 Plan | | 3,210 | | 1,605 | | 100.20 | | October 28, 2030 | | | | |
2021 Non-Qualified Stock Options from the 2020 Plan | | 9,510 | | 9,511 | | 32.20 | | January 21, 2031 | | | | |
2022 Non-Qualified Stock Options from the 2020 Plan | | 1,250 | | 3,750 | | 28.60 | | April 20, 2032 | | | | |
2023 Non-Qualified Stock Options from the 2020 Plan | | 20,625 | | 1,875 | | 8.00 | | January 5, 2033 | | | | |
| | | | | | | | | | | | |
Omar A. Haynes (1) | | |
| |
| | | | | — | | — |
2020 Non-Qualified Stock Options from the 2012 Plan | | 1,666 | | — | | 30.60 | | April 20, 2030 | | | | |
2021 Non-Qualified Stock Options from the 2020 Plan | | 2,717 | | — | | 32.20 | | April 19, 2024 | | | | |
2022 Non-Qualified Stock Options from the 2020 Plan | | 1,250 | | — | | 28.60 | | April 19, 2024 | | | | |
2023 Non-Qualified Stock Options from the 2020 Plan | | 5,000 | | — | | 8.00 | | April 19, 2024 | | | | |
| | | | | | | | | | | | |
Ezra T. Ernst (1) | | | | | | | | | | — |
| — |
Inducement Plan | | 16,666 | | 33,334 | | 32.80 | | January 14, 2032 | | | | |
2023 Non-Qualified Stock Options from the 2020 Plan | | 3,750 | | 1,250 | | 8.00 | | January 5, 2033 | | | | |
| | | | | | | | | | | | |
Suzanne A. Scrabis | | | | | | | | | | 2,500 | | $ 4.56 |
2023 Non-Qualified Stock Options from the 2020 Plan | | 937 | | 2,813 | | 4.60 | | July 10, 2033 | | | | |
(1) | Un-exercisable options vest in equal annual increments over each of the remaining anniversaries of the date of grant. |
Pension Benefits
We do not have any qualified or nonqualified defined benefit plans.
Nonqualified Deferred Compensation
We do not have any nonqualified defined contribution plans or other deferred compensation plans.
Potential Payments upon Termination or Change-In-Control
The following summarizes the payments and potential payments to each of our named executive officers as of December 31, 2023 upon termination or change-in-control. The discussion assumes that such event occurred on December 31, 2023, the last business day of our fiscal year, at which time the closing price of our common stock as listed on Nasdaq was $1.74
14
per share. For a further discussion of these provisions see the “Narrative Disclosure to Summary Compensation Table” above.
Scott R. Milford
As of January 19, 2024, Mr. Milford is not entitled to any payments upon termination or change-in-control.
Prior to January 19, 2024, in the event Mr. Milford’s employment agreement was terminated for good reason by Mr. Milford, or by the Company without cause and Mr. Milford provided the Company with a release of claims, Mr. Milford was entitled to receive a cash severance payment in the amount of one hundred percent (100%) of his then current base salary and one year of COBRA continuation coverage.
Ezra T. Ernst
In the event Mr. Ernst’s employment agreement is terminated for good reason by Mr. Ernst, or by the Company without cause and Mr. Ernst provides the Company with a release of claims, Mr. Ernst shall be entitled to receive a cash severance payment in the amount of one hundred percent (100%) of his then current base salary and one year of COBRA continuation coverage.
Suzanne A. Scrabis
In the event Ms. Scrabis terminates her employment for good reason, or in the event Ms. Scrabis’ employment is terminated by the Company without cause and Ms. Scrabis provides the Company with a release of claims, Ms. Scrabis will be entitled to receive a payment equal to 50% of her then-current base salary, payable in installments over a period of six months.
Omar A. Haynes
Mr. Haynes is not entitled to any payments upon termination or change-in-control.
15
Director Compensation
The following table sets forth the compensation of persons who served as non-employee members of our Board of Directors during the fiscal year ended December 31, 2023.
| | | | | | | | | | |
|
| Fees |
| | | | | |
| |
| | Earned or | | | | | | | | |
| | Paid in | | Restricted Stock | | Option | | All Other | | |
| | Cash | | Unit Awards | | Awards | | Compensation | | Total |
Name | | ($) | | ($)(1) | | ($)(1) | | ($)(6) | | ($) |
Bruce T. Bernstein(2)(6) |
| 166,250 |
| — | | 52,200 | | 120,000 |
| 338,450 |
Donald E. Stout(3) |
| 78,750 |
| — | | 26,100 | | |
| 104,850 |
Robert Weinstein(4) | | 105,000 | | — | | 26,100 | | | | 131,100 |
Michael Lebowitz(5) | | 78,750 | | — | | 26,100 | | | | 104,850 |
(1) | Amounts represent the aggregate grant date fair value of the RSUs and option awards granted during the fiscal year computed in accordance with FASB ASC Topic 718. See Notes 2 and 15 to the consolidated financial statements included in the Original Filing for the assumptions made in the valuation of the equity awards. |
(2) | As of December 31, 2023, Mr. Bernstein held 42,511 unexercised options. |
(3) | As of December 31, 2023, Mr. Stout held 22,670 unexercised options. |
(4) | As of December 31, 2023, Mr. Weinstein held 22,579 unexercised options. |
(5) | As of December 31, 2023, Mr. Lebowitz held 21,996 unexercised options. |
(6) | Consists of $120,000 in cash paid in respect of XpresTest, Inc. board services (as described below). |
In January 2023, the Board and the Compensation Committee engaged StreeterWyatt Analytics, an independent third-party compensation analyst, to evaluate and make recommendations regarding the compensation paid to our directors.
Based on its review, the director compensation program remained the same:
● | For the Chairman of the Board: $350,000 per year, consisting of: |
o | $150,000 in cash; and |
o | equity awards having a combined value of $200,000, consisting of (i) a grant of a Non-Qualified Stock Option to purchase such number of shares of Common Stock having a grant date fair value of $120,000 and (ii) a grant of RSUs of such number of shares having a grant date value of $80,000. |
● | For the other non-employee Directors: $170,000 per year, consisting of: |
o | $70,000 in cash; and |
o | equity awards having a combined value of $100,000, consisting of (i) a grant of a Non-Qualified Stock Option to purchase such number of shares of Common Stock having a grant date fair value of $60,000 and (ii) a grant of RSUs of such number of shares having a grant date value of $40,000. |
● | The following additional cash payments: |
o | $30,000 in cash to the Chairman of the Audit Committee. |
o | $20,000 in cash to the Chairman of the Compensation Committee. |
o | $20,000 in cash to each member of the Strategic Affairs Committee. |
We reimburse our directors for reasonable out-of-pocket expenses incurred in connection with attendance and participation in Board and committee meetings (including costs of travel, food and lodging).
In addition, Mr. Bernstein received $120,000 in cash compensation in the year ended December 31, 2023 specifically related to the duties, responsibilities and services of Mr. Bernstein beyond the scope of normal Board member services in connection with his role as a non-employee director of XpresTest, which amount was approved in March 2021 following the Board’s review of an analysis and evaluation from StreeterWyatt Analytics of appropriate director compensation specifically related to such duties. The Board concluded at the time, and continued to conclude, that under the captions “Executive Officercircumstances and Director Compensation”in light of the services performed, such compensation represents “ordinary-course compensation” for Mr. Bernstein’s XpresTest board services as a member of the board of directors of XpresTest, and “Managementthat such compensation therefore would not preclude a determination that Mr. Bernstein would be independent for, among other things,
16
membership of the Audit Committee of the Company under Rule 10A-3 under the Securities Exchange Act of 1934, as amended, and Corporate Governance”Nasdaq listing rules, as such compensation represents fees for such XpresTest board services.
In September 2023, the Board reevaluated the Company’s compensation structure. Based on its review, the Compensation Committee recommended, and is incorporated by reference in this Item 11.the full Board approved, a new director compensation program effective October 1, 2023:
● | For the Chairman of the Board: |
o | $75,000 in cash |
● | For the other non-employee Directors: |
o | $35,000 in cash |
● | The following additional cash payments: |
o | $10,000 in cash to the Chairman of the Audit Committee. |
o | $10,000 in cash to the Chairman of the Compensation Committee. |
o | $20,000 in cash to each member of the Strategic Affairs Committee. |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information called for by this Item may be found
The following table provides certain aggregate information, as of December 31, 2023 with respect to all of our equity compensation plans then in our definitive Proxy Statement in connection with our 2018 Annual Meetingeffect:
| | | | | | | |
|
| |
| | |
| No. of securities |
| | | | | | | remaining |
| | | | | | | available for |
| | No. of securities | | | | | future issuance |
| | to be issued upon | | Weighted- | | under equity | |
| | exercise of | | average exercise | | compensation | |
| | outstanding | | price of | | plans (excluding | |
| | options, | | outstanding | | securities | |
| | warrants and | | options, warrants | | reflected in | |
Plan Category | | rights | | and rights ($) | | the first column) | |
Total equity compensation plans approved by security holders (1) |
| 353,149 | | $ | 25.75 |
| 249,899 |
(1) | These plans consist solely of the 2020 Plan, as approved by our Board of Directors in September 2020 and by our stockholders in October 2020. On October 4, 2022, shareholders approved the amendment to the Company’s 2020 Equity Incentive Plan to increase the number of shares authorized for issuance under the Plan by 375,000 shares of Common Stock to an aggregate of 625,000 shares. Under the 2020 Equity Incentive Plan (the “2020 Plan”), a maximum of 249,899 shares of Common Stock remained available for issuance as of December 31, 2023. |
17
Security Ownership of Certain Beneficial Owners and Management”Management
The following table sets forth certain information with respect to the beneficial ownership of common stock as of April 29, 2024, for (a) each stockholder known by us to own beneficially more than 5% of any class of our voting securities, (b) each of our named executive officers, (c) each of our directors, and “Equity Compensation Plan Information”(d) all of our current directors and executive officers as a group.
Beneficial ownership is incorporateddetermined in accordance with the rules of the SEC and includes voting or investment power with respect to the securities. We deem shares of common stock that may be acquired by referencean individual or group within 60 days of April 29, 2024, pursuant to the exercise of options or warrants or the vesting of RSUs, as applicable, to be outstanding for the purpose of computing the percentage ownership of such individual or group, but not for the purpose of computing the percentage ownership of any other person shown in the table.
Except as indicated in footnotes to this table, we believe that the stockholders named in this Item 12.table have sole voting and investment power with respect to all shares of common stock shown to be beneficially owned by them based on information provided to us by these stockholders. Percentage of ownership is based on 4,183,435 shares of common stock issued and outstanding as of April 29, 2024.
| | | | |
|
| Number of |
| Percent of |
| | Shares of | | Shares of |
| | Common | | Common |
| | Stock | | Stock |
| | Beneficially | | Beneficially |
Name and Address of Beneficial Owner(1) | | Owned | | Owned |
5% percent or more beneficial owners: | | | | |
| | | | |
None | | | | |
| | | | |
Directors and named executive officers: |
| |
|
|
| | | | |
Scott R. Milford(2) | | 59,055 | | * |
Suzanne A. Scrabis(3) | | 17,812 | | * |
Ezra T. Ernst(4) | | 49,463 | | * |
Bruce T. Bernstein(5) |
| 81,467 |
| 1.9% |
Donald E. Stout(6) |
| 30,634 |
| * |
Robert Weinstein(7) |
| 30,403 |
| * |
Michael Lebowitz(8) |
| 34,970 |
| * |
Omar T. Haynes(9) | | 6,693 | | * |
| | | | |
All current directors and executive officers as a group (8 individuals)(10): |
| 310,498 |
| 7.4% |
* | Less than 1% |
(1) | Unless otherwise indicated in the footnote below, the business address of the individuals in the table above is c/o XWELL, Inc., 254 West 31st Street, 11th Floor, New York, NY 10001. |
(2) | The number of shares of common stock beneficially owned includes 2,058 shares of common stock and options to purchase 56,997 shares of common stock, which are exercisable within 60 days of April 29, 2024. |
(3) | The number of shares of common stock beneficially owned includes 5,000 RSUs and options to purchase 12,812 shares of common stock, which are exercisable within 60 days of April 29, 2024. |
(4) | The number of shares of common stock beneficially owned includes 1,130 shares of common stock and options to purchase 48,333 shares of common stock, which are exercisable within 60 days of April 29, 2024. |
(5) | The number of shares of common stock beneficially owned includes 38,956 shares of common stock and options to purchase 42,511 shares of common stock, which are exercisable within 60 days of April 29, 2024. |
(6) | The number of shares of common stock beneficially owned includes 7,974 shares of common stock and options to purchase 22,660 shares of common stock, which are exercisable within 60 days of April 29, 2024. |
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(7) | The number of shares of common stock beneficially owned includes 7,824 shares of common stock and options to purchase 22,579 shares of common stock, which are exercisable within 60 days of April 29, 2024. |
(8) | The number of shares of common stock beneficially owned includes 12,974 vested shares of common stock and options to purchase 21,996 shares of common stock, which are exercisable within 60 days of April 29, 2024. |
(9) | The number of shares of common stock beneficially owned includes 5,027 shares of common stock and RSUs and options to purchase 1,666 shares of common stock, which are exercisable within 60 days of April 29, 2024. |
(10) | See footnotes (2) through (9). |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEINDEPENDENCE.
Related Person Transactions Approval Policy
Information called forAll related party transactions must be approved by our Audit Committee or a majority of our independent directors who do not have an interest in the transaction and who will have access, at our expense, to our independent legal counsel.
Transactions with Related Persons
None.
Director Independence and Committee Qualifications
Our Board of Directors has reviewed the materiality of any relationship that each of our directors has with us, either directly or indirectly. Based upon this Item may be foundreview, we believe that Messrs. Bernstein, Weinstein, Lebowitz and Mme. Wizenberg qualify as independent directors in our definitive Proxy Statement in connection with our 2018 Annual Meeting of Stockholders to be filedaccordance with the SECstandards set by Nasdaq, as well as Rule 10A-3 promulgated under the captions “Certain RelationshipsExchange Act. Accordingly, our Board of Directors is comprised of a majority of independent directors as required by Nasdaq rules. Our Board of Directors has also determined that each member of the Audit Committee, the Compensation Committee and Related Person Transactions” and “Managementthe Nominating and Corporate Governance”Governance Committee meets the independence requirements applicable to each such committee member prescribed by Nasdaq and is incorporated by referencethe SEC. Our Board of Directors has further determined that Messrs. Bernstein and Weinstein are “audit committee financial experts” as defined in this Item 13.the rules of the SEC.
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ITEM 14. PRINCIPAL ACCOUNTINGACCOUNTANT FEES AND SERVICES
On May 4, 2020, we approved the engagement of Friedman LLP (“Friedman”) as our independent registered public accounting firm for the fiscal year ended December 31, 2020. This selection was ratified by our stockholders at the 2020, 2021, 2022 and 2023 annual meetings held on October 28, 2020, September 30, 2021 October 4, 2022 and August 22, 2023. In deciding to select Friedman, the Audit Committee carefully considered the qualifications of Friedman, including their reputation for integrity, quality, and competence in the fields of accounting and auditing. Effective September 1, 2022, Friedman combined with Marcum LLP (“Marcum”), and Marcum became our auditors as of October 4, 2022, following the approval of their engagement by our Audit Committee. Further, the Audit Committee reviewed auditor independence issues and existing commercial relationships with Marcum. The Audit Committee concluded that independence of Marcum was not impaired for the fiscal years ended December 31, 2023, and 2022. For the fiscal years ended December 31, 2023, and 2022, we incurred the following fees for the services of Marcum:
Information called
| | | | | | |
|
| 2023 |
| 2022 | ||
| | | | | | |
Marcum: | | | | | | |
| | | | | | |
Audit fees(1) | | $ | 567,070 | | $ | 410,025 |
Audit-related fees(2) | | | 120,915 | | | 80,242 |
Tax fees(3) | | | — | | | — |
All other fees(4) | | | — | | | — |
| | | | | | |
Total | | $ | 687,985 | | $ | 490,267 |
(1) | Audit fees includes fees associated with the annual audits of our financial statements, quarterly reviews of our financial statements, and services that are normally provided by the independent registered public accounting firm in connection with statutory and regulatory filings or engagements. |
(2) | Audit-related fees includes fees for benefit plan audits and lease compliance audits. |
(3) | Tax fees consist of fees for tax services, including tax compliance, tax advice and tax planning. |
(4) | The fees in this category pertain to fees billed for products and services provided by Marcum, other than the services reported in the categories above. |
Pre-Approval Policies and Procedures Audit and Non-Audit Services
Consistent with SEC policies and guidelines regarding audit independence, our Audit Committee is responsible for the pre-approval of all audit and permissible non-audit services provided by this Item may be found in our definitive Proxy Statement in connection withindependent registered public accounting firm on a case-by-case basis. Our Audit Committee has established a policy regarding approval of all audit and permissible non-audit services provided by our 2018 Annual Meetingindependent registered public accounting firm. Our Audit Committee pre-approves these services by category and service. Our Audit Committee pre-approved all of Stockholders to bethe services provided by our independent registered public accounting firms for the years ended December 31, 2023 and 2022.
20
PART IV
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1)
No financial statements are filed with this Amendment No. 2. These items were included as part of the SEC under the caption “Independent Registered Public Accounting Firm” and is incorporated by reference in this Item 14.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1)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.
Original Filing.
(a)(2)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.
None.
(a)(3)Exhibits.
The following exhibits are filed as part of, or incorporated by reference into, this Annual Report on Form 10-K.Amendment No. 2 to the Original Filing.
Exhibits Index
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104
21
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities
22 |