XpresSpa Group, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. The company operated airport spa and retail locations under the XpresSpa brand, with 51 locations (46 domestic and 5 international). Unless noted otherwise, financial amounts are in thousands of dollars. The filing was signed November 14, 2019.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $12,531 | $12,922 | $37,669 | $38,560 |
| Gross profit | $2,842 | $2,937 | $9,029 | $8,439 |
| Gross margin | 22.7% | 22.7% | 24.0% | 21.9% |
| Operating loss | $(1,836) | $(2,885) | $(5,803) | $(29,009) |
| Net loss | $(4,634) | $(3,065) | $(13,571) | $(30,261) |
| Net loss attributable to common shareholders | $(4,844) | $(3,187) | $(14,155) | $(30,643) |
| Adjusted EBITDA (loss), non-GAAP | $(303) | $(363) | $(130) | $(2,564) |
- Revenue mix: Q3 services were $10,230 and products $2,301. Nine-month revenue included $30,704 services, $5,781 products and $1,184 other revenue, including proceeds from the FLI Charge royalty and warrant buyout.
- Cash flow: Continuing-operations operating cash use was $782 for the nine months, versus $6,129 in 2018. Investing cash use was $1,641 and financing cash provided was $1,525. Cash and cash equivalents fell to $2,432 from $3,403 at year-end; cash, cash equivalents and restricted cash totaled $2,883.
- Liquidity: Current assets were $3,976 and current liabilities $7,761, a $3,785 working-capital deficit, improved from $10,899 at December 31, 2018. About $1,606 of cash and cash equivalents was held overseas, and access could be delayed or reduced.
- Debt and leases: Balance-sheet carrying value of debt was $5,199, comprising the B3D note ($4,153 net) and Calm note ($1,046 net). The B3D note’s amended principal was $7,000; the Calm note principal was $2,500. Operating lease assets and liabilities were each $9,818. Future minimum lease payments were $12,233 before $2,415 of imputed interest.
Changes versus prior comparable periods
- Q3 revenue declined 3.0%; nine-month revenue declined 2.3%. Management attributed the decreases primarily to operating 51 locations versus 57 in the comparable 2018 periods.
- Despite fewer locations, nine-month comparable-store sales increased 2.2%, which management attributed to higher average ticket and improved retail supply and service upselling.
- Nine-month cost of sales declined 4.9%, while gross margin improved to 24.0% from 21.9%. General and administrative expense fell 26.0% to $9,204, reflecting lower executive compensation, corporate overhead and professional fees.
- Operating loss improved substantially year over year, largely because the 2018 period included a $19,630 goodwill impairment. However, Q3 net loss widened, with other non-operating expense of $2,161 versus income of $378 a year earlier.
- Nine-month interest expense increased to $2,052 from $1,212. Other non-operating expense was $5,817, including debt-conversion expense, Series F issuance expense, warrant and conversion-option revaluations, and a $1,188 impairment of cost-method investments.
Outlook, financing, risks and unusual items
- Management expected continued net losses. It cited expense reductions, corporate right-sizing, streamlined spa operations and strategic partnerships as liquidity measures, but gave no quantified revenue or earnings guidance and cautioned that planned opportunities might not materialize.
- The 2018 auditor’s report included a substantial-doubt paragraph regarding the company’s ability to continue as a going concern. Management believed its actions would meet near-term liquidity needs, but said it could not predict with certainty whether liquidity would be adequate longer term. Failure to obtain funds could affect access to inventory and services.
- In July, the B3D senior secured note was amended: maturity extended to May 31, 2021, stated interest reduced from 11.24% to 9%, and principal increased by $500 to $7,000. Calm provided $2,500 under a 5% unsecured convertible note due in 2022 and received warrants to purchase 937,500 common shares. These arrangements include conversion rights and potential dilution.
- Shareholders approved key conversion amendments on October 2, 2019, after the quarter. Series D preferred stock converted into approximately 10.96 million common shares, subject to ownership limits; the filing also reports subsequent warrant exercises. The company had 14,452,664 common shares outstanding as of November 12, 2019.
- Unusual charges included $936 of asset impairment for the nine months, mainly related to a closed location, abandoned spa-opening costs and patent assets. Derivative liabilities rose to $6,088 and are valued using Level 3 inputs, so fair-value changes can affect reported earnings.
- Legal matters included disputes involving Cordial, wage-hour litigation, shareholder suits, a Route1 dispute and a contract action. Management recorded a $290 legal reserve and did not expect currently known matters to have a material adverse effect, while noting outcomes are uncertain.
- Management reported disclosure controls and procedures were effective as of September 30, 2019, with no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Assess cash runway and whether operating cash use, overseas cash accessibility, lease commitments and financing needs are consistent with management’s near-term liquidity assumptions.
- Verify the post-quarter share count and potential dilution from Series D conversion, B3D and Calm conversion rights, preferred stock and outstanding warrants.
- Review the amended B3D note’s payment terms and security, the Calm financing terms, and the October 2019 postponement of a $107 B3D interest payment.
- Separate recurring spa performance from one-time proceeds, impairments, financing charges and Level 3 derivative revaluations; assess the sustainability of comparable-store growth and Adjusted EBITDA.
- Monitor developments in the disclosed legal proceedings and any changes to the $290 reserve or going-concern assessment.