XpresSpa Group, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. The filing identifies the registrant as XpresSpa Group, Inc. (formerly FORM Holdings Corp.); it describes a transition to a single operating segment focused on airport spa and wellness services. Unless otherwise noted, financial amounts below are in millions of dollars.
Business context and financial performance
- XpresSpa operated 57 airport locations: 52 domestic and 5 international. Management said approximately 86% of spa revenue came from services and 14% from retail products.
- Total revenue was $12.6, up 13.7% from $11.1. Products and services revenue was $11.8, compared with $11.0; other revenue was $0.8, compared with $0.1. Management attributed growth to store openings and higher comparable-store sales.
- Cost of sales was $9.8, up 9.4%. Management reported gross profit of $2.1 and a 17.7% gross margin, versus $2.1 and 19.6% a year earlier; this margin measure is presented against products and services revenue.
- General and administrative expense fell 8.0% to $4.6. Depreciation and amortization was $1.7, down 4.2%.
- Operating loss from continuing operations was $23.1, including a $19.6 goodwill impairment, versus a $4.6 loss in Q1 2017. Continuing-operations net loss was $23.2; total net loss was $23.9, or $0.90 per share, versus $6.3, or $0.34 per share. Discontinued operations contributed a $0.6 loss.
- Adjusted EBITDA loss, a non-GAAP measure, was $1.5 versus $1.8. It excludes specified items and should not be viewed as a substitute for GAAP results or operating cash flow.
- Cash used in operating activities was $2.3 in total: $3.7 used by continuing operations, partly offset by $1.4 provided by discontinued operations. Investing activities used $0.2 and financing activities used $0.2. Cash and cash equivalents declined $2.8 to $3.6.
- At March 31, cash was $3.6, current assets $6.3, and current liabilities $8.6, a $2.2 working-capital deficit. Debt was $6.5, owed to related-party lender Rockmore Investment Master Fund. Stockholders’ equity was $22.0.
Material changes versus Q1 2017 and year-end 2017
- Revenue increased 13.7%, but the reported gross margin declined from 19.6% to 17.7%; operating loss widened substantially, primarily because of the impairment charge.
- The company recorded a $19.6 goodwill impairment, reducing goodwill to zero. Management cited the strategic transition, declining share price, and CEO change as impairment indicators.
- Cash fell from $6.4 at December 31, 2017 to $3.6 at March 31, 2018. Total assets decreased from $65.2 to $37.5, largely reflecting the impairment and disposition of Group Mobile.
- Group Mobile was sold on March 22, 2018; FLI Charge had been sold in October 2017. Both are presented as discontinued operations. The Group Mobile sale consideration included Route1 shares, warrants, and potential earn-out payments, valued at $1.6; the filing recorded a $0.3 disposal loss.
- The company sold certain patents and received $0.25 cash plus Marathon Patent Group shares valued at $0.45. Other revenue also included a $0.1 patent license payment.
- The company changed its name to XpresSpa Group in January 2018 and its trading symbol to XSPA. Its CEO resigned in April 2018 and the XpresSpa CEO was appointed company CEO.
Liquidity, outlook, risks, and unusual items
- On May 15, 2018, the company agreed to a private placement of up to $4.438 million of 5% secured convertible notes, with expected gross proceeds of $4.35 million, plus warrants. The filing said it expected the transaction to close after filing; it was not reported as closed in this 10-Q.
- The notes are convertible at $0.62 per share, mature in November 2019, and provide for monthly principal payments beginning September 2018. Repayment in shares is permitted subject to conditions and pricing provisions. Warrants cover up to approximately 10.7 million shares at $0.62, creating potential dilution. The new notes are effectively subordinated to the existing Rockmore debt until that debt is repaid.
- Rockmore agreed to extend the $6.5 million debt maturity from May 1, 2019 to December 31, 2019. Management stated that cash, the planned note financing, and future operating cash flows should fund planned operations and scheduled note repayments for at least 12 months after the filing date.
- Liquidity risks include the low cash balance, current-liability excess over current assets, ongoing operating cash use, and $2.7 million held in overseas accounts that is not FDIC-insured and may not be immediately accessible.
- Legal matters include Cordial’s airport-joint-venture litigation, a wage-and-hour settlement awaiting court approval, and litigation by former XpresSpa shareholders. The company recorded $0.25 million for legal matters and stated it did not expect current matters to have a material adverse effect, while noting outcomes are uncertain.
- The filing reported no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective as of March 31, 2018. No specific operating or revenue guidance was provided.
Important facts for investors to verify
- Whether the May 2018 financing closed, its final proceeds and terms, and the cash available after fees and scheduled repayments.
- Whether spa operations can improve gross margin and reduce continuing-operations cash burn while funding planned store openings.
- The potential dilution from note conversions and warrants, including applicable Nasdaq and stockholder-approval conditions.
- The status and realizable value of the restricted Route1 shares, warrants, and earn-out consideration received for Group Mobile.
- Developments in the Cordial, wage-and-hour, and former-shareholder cases, including any changes to recorded contingencies.
- The assumptions underlying the $19.6 million goodwill impairment and any subsequent indicators affecting the remaining asset values.