XpresSpa Group, Inc. (now XWELL, Inc.) — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. The filing registrant was XpresSpa Group, Inc. (Nasdaq: XSPA). Unless otherwise stated, financial amounts below are in thousands of dollars.
Business context
The company operated three segments: XpresSpa airport spa services, XpresTest/XpresCheck airport diagnostic testing, and Treat, a developing travel-health and wellness brand. Most spa locations remained closed or operated on reduced schedules. XpresCheck became the principal revenue driver during the quarter.
Financial results and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $26,767 | $201 | $44,371 | $8,062 |
| Operating income (loss) | $7,057 | $(9,223) | $1,935 | $(22,655) |
| Net income (loss) | $6,595 | $(6,643) | $1,057 | $(75,839) |
| Net income (loss) attributable to company | $5,597 | $(6,110) | $74 | $(74,805) |
| Adjusted EBITDA, non-GAAP | $8,699 | $(5,148) | $6,622 | $(11,965) |
- Q3 gross profit was $13,105, or approximately 49% of revenue; nine-month gross profit was $18,849, or approximately 42%. Operating margins were approximately 26% and 4%, respectively. These results reflect the inclusion of clinic patient revenue and associated costs.
- XpresTest generated $25,351 of Q3 revenue and $42,199 for the nine-month period. XpresSpa revenue was $1,415 in Q3 and $2,172 year to date; Treat reported no revenue.
- Nine-month operating cash flow was positive $5,967; investing cash flow was negative $2,372; financing cash flow was positive $15,779. Cash, cash equivalents and restricted cash totaled $109,912 at September 30.
- Cash and cash equivalents excluding restricted cash were $109,161; current assets were $113,100 and current liabilities $17,198, yielding working capital of $95,902, versus $78,302 at December 31, 2020.
- Debt was $5,653, consisting of the PPP loan, classified as current. Operating lease liabilities totaled $10,953, including $2,797 current. Total liabilities were $25,354.
Material changes versus prior period
- Revenue increased sharply as XpresCheck activity expanded and the company recognized $25,351 of patient-services revenue in Q3. The prior-year quarter had only $201 of revenue.
- Effective July 1, 2021, the company determined that the affiliated professional corporations were variable interest entities and consolidated them. Their Q3 revenue and net loss included in the statements were $25,351 and $455, respectively. The company had recognized $16,843 of XpresTest management-fee revenue in the first half of 2021, including $3,186 of catch-up revenue relating to 2020.
- Operating results also benefited from the absence of prior-year impairment charges and lower depreciation and amortization. The nine-month comparison is additionally affected by a $50,917 warrant and conversion-option revaluation loss in 2020, absent in 2021.
- Cash increased from $89,801 at year-end 2020. Warrant exercises generated approximately $19,161 of gross proceeds during the first nine months; the company also issued additional shares and had 105,327,379 shares outstanding at quarter-end versus 94,058,853 at year-end.
Outlook, risks and unusual items
- No overall financial guidance was provided. Management expected approximately $1,500 of revenue in Q4 from a $2,000, eight-week CDC biosurveillance pilot, subject to achievement of contractual milestones. It also planned two additional spa reopenings for the remainder of 2021.
- Most reopened domestic spas were operating about eight hours daily versus 16 hours pre-pandemic, with sales volumes at roughly 30%–60% of pre-pandemic levels. Management cited a mid-October price increase and planned tests of touchless massage services and new retail products.
- Management said the duration and severity of COVID-19 impacts, airport traffic recovery, spa reopening economics, and the success of XpresCheck remain uncertain and could materially affect liquidity and results. Rent concessions continued; the company reported $1,568 of minimum-rent concessions for the first nine months of 2021.
- The company authorized repurchases of up to 15 million shares through September 15, 2022, without an obligation to repurchase a set amount. It repurchased 250,000 shares for $450 during Q3.
- Potential dilution remained substantial: approximately 37.99 million warrants were outstanding at September 30, in addition to options and restricted awards. The filing’s reported diluted EPS does not include anti-dilutive securities.
- Management reported that disclosure controls and internal control over financial reporting were ineffective at September 30 due to an unremediated material weakness in the financial close and reporting process and insufficient accounting-control personnel. Remediation efforts were underway, but management had not concluded they were effective.
- Accrued litigation liabilities were $890, down from $2,221 at year-end. Management did not expect outstanding legal matters, based on its current knowledge, to have a material adverse effect, while noting outcomes are uncertain. The filing also describes a wage-hour matter with settlement approval and distribution occurring after quarter-end.
Important facts for investors to verify
- How much of Q3 revenue and operating profit is attributable to consolidated medical practices, and how sustainable are patient testing volumes and related margins?
- Whether the expected CDC pilot milestones and approximately $1,500 of Q4 revenue were achieved.
- Cash availability and use, including cash held by consolidated entities, overseas balances, and the company’s planned capital allocation and buybacks.
- Potential dilution from outstanding warrants, options and equity awards, alongside the increase in common shares outstanding.
- Progress in remediating the material weakness and whether subsequent filings report effective controls.
- Developments in the pandemic, airport traffic, spa reopenings, rent concessions and unresolved legal matters.