XpresSpa Group, Inc. (Nasdaq: XSPA) — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. The filing identifies the issuer as XpresSpa Group, Inc. Dollar figures below are in USD millions unless stated otherwise.
Business context
The company operated airport spa and retail locations through XpresSpa and launched airport diagnostic-testing centers through XpresTest, under the XpresCheck brand. COVID-19-related travel disruption and closures sharply curtailed the spa business; substantially all spa locations remained closed at quarter-end. JFK and Newark testing centers were operating. The Boston center opened after quarter-end.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $0.201 | $12.531 | $8.062 | $37.669 |
| Operating loss | $(9.223) | $(1.836) | $(22.655) | $(5.803) |
| Net loss attributable to XpresSpa Group | $(6.110) | $(4.844) | $(74.805) | $(14.155) |
| Adjusted EBITDA loss | $(4.569) | $(0.303) | $(10.461) | $(0.130) |
| Basic and diluted loss per share | $(0.10) | $(1.68) | $(2.15) | $(6.33) |
- Q3 revenue fell approximately 98% year over year; nine-month revenue fell approximately 79%. Q3 gross loss was $1.204 million; nine-month gross loss was $1.489 million.
- Nine-month operating cash flow was $(16.926) million, investing cash flow $(3.479) million, and financing cash flow $80.362 million. Cash and cash equivalents were $61.894 million at September 30, excluding $0.701 million of restricted cash.
- Working capital was positive $49.579 million, compared with a $12.287 million deficit at December 31, 2019. Current assets were $63.868 million and current liabilities $14.289 million.
- Total debt was $5.822 million, principally the $5.653 million Paycheck Protection Program loan; the remaining B3D note balance was $0.169 million. The PPP loan bears 1% interest, matures in May 2022, and forgiveness was not assured. Operating lease liabilities totaled $8.188 million.
- Stockholders’ equity was $58.371 million. Common shares outstanding rose to 69.1 million from 5.2 million at year-end, following equity offerings, warrant exercises and debt conversions. The company had 20.8 million warrants outstanding at September 30.
Material changes and unusual items
- COVID-19 closures drove the revenue collapse and asset impairment charges. Q3 impairment/disposal expense was $2.227 million; nine-month expense was $6.319 million.
- Nine-month results included a $50.917 million loss from revaluation of warrants and conversion options, a largely noncash charge. Q3 instead recorded a $2.750 million gain on revaluation.
- The company raised $74.125 million net from registered direct equity offerings during the nine months and converted $10.170 million of B3D and Calm note principal into common stock. B3D converted its remaining $0.230 million balance after quarter-end, terminating the credit agreement and releasing related liens.
- Airport landlords provided minimum-rent concessions of $0.611 million in Q3 and $1.379 million in the first nine months. The company recorded $1.091 million of accruals for legal matters.
- XpresTest management fees of $1.197 million were owed but not recognized as revenue because management concluded collection was too uncertain under the applicable revenue-recognition criteria. Q3 reported no XpresTest revenue; nine-month segment revenue was $0.080 million.
Outlook, risks and controls
Management said 2020 financing actions mitigated the prior-year going-concern doubt and expected liquidity to meet needs for at least 12 months from issuance of the financial statements. It also expected continued net losses and cautioned that pandemic duration, airport traffic, access to capital and the success of XpresCheck could materially affect liquidity and results. No numerical earnings or revenue guidance was provided.
Risks include prolonged spa closures, uncertain demand and economics for testing and vaccination services, dependence on medical-practice and supply partners, regulatory and privacy requirements, and litigation. The filing describes a $1.500 million demand in the Jenkins/Jones matter and other ongoing disputes; outcomes remain uncertain. Management reported disclosure controls were not effective at September 30 due to a previously identified material weakness in the financial close and reporting process, and remediation was ongoing.
Important facts for investors to verify
- Whether XpresCheck can generate collectible management fees and sustainable revenue, given $1.197 million of unrecognized fees and limited reported segment revenue.
- Actual cash burn, operating costs and available liquidity if airport traffic and spa reopenings recover more slowly than expected.
- PPP loan forgiveness status, repayment obligations, and any remaining debt or lien developments after the quarter.
- Potential dilution from outstanding warrants, equity plans and future capital needs; note the 1-for-3 reverse stock split and substantial increase in shares outstanding.
- Progress in remediating the material weakness and resolving significant litigation and other contingencies.