XpresSpa Group, Inc. (now XWELL, Inc.) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The filing was signed July 6, 2020; the company said COVID-19-related demands on management contributed to the filing delay. Financial amounts below are in $ thousands, except per-share data and percentages. Share and per-share figures reflect the subsequent 1-for-3 reverse split.
Business context
The company operated airport spa and retail locations as a single reporting segment. COVID-19 reduced airport travel and customer demand; all global spa locations were temporarily closed effective March 24, 2020. The company later launched XpresCheck, a proposed airport COVID-19 testing business, with its JFK pilot opening June 22, 2020.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Revenue | $7,718 | $12,230 | Down 36.9% |
| Cost of sales | $7,168 | $9,098 | Down 21.2% |
| Gross profit (revenue less cost of sales) | $550 | $3,132 | Gross margin 7.1%, versus 25.6% |
| Operating loss | $(3,948) | $(2,117) | Operating margin approximately (51.2%), versus (17.3%) |
| Net loss | $(10,724) | $(2,844) | Includes $5,369 noncash loss on revaluation of warrants and conversion options |
| Net loss attributable to XpresSpa Group | $(10,616) | $(2,973) | Basic and diluted loss per share: $(1.74) versus $(4.82) |
| Adjusted EBITDA loss | $(2,503) | $(493) | Non-GAAP measure |
| Net cash used in operating activities | $(3,517) | $184 | Investing cash use was $584 |
| Cash and cash equivalents at March 31 | $3,855 | — | Restricted cash was a further $451 |
| Total liabilities / stockholders’ deficit | $32,928 / $(3,738) | — | Current liabilities $16,103; working capital deficit $10,654 |
Cash, cash equivalents and restricted cash increased by $1,671 during the quarter, principally from $5,785 of financing cash flow, including equity proceeds, borrowing and funding advances. Cash paid for interest was $169. The balance sheet showed $4,880 of net convertible notes and a $910 merchant account advance; operating lease liabilities totaled $8,867.
Material changes versus the prior comparable period
- Revenue fell 36.9%; comparable-store sales declined 26.5%. Management attributed the downturn primarily to COVID-19, customer concerns, travel restrictions and the March 24 closures. The company had 51 locations open during the quarter versus 55 a year earlier.
- Prior-year revenue included a one-time sale of intellectual property rights. Services revenue declined to $6,686 from $9,628; product revenue declined to $891 from $1,418.
- Operating loss widened despite lower general and administrative costs ($3,233 versus $3,600). Interest expense rose to $1,061 from $611, and derivative revaluation shifted from a $152 gain to a $5,369 loss.
- Common shares outstanding at March 31 were 18.6 million, compared with 5.2 million at December 31, 2019, reflecting equity offerings, warrant exercises and debt conversions. The filing identifies 25.3 million potentially dilutive securities excluded from diluted loss per share as anti-dilutive.
Outlook, liquidity and risks
- Management said subsequent equity offerings raised approximately $43.05 million gross and that subsequent transactions reduced the $9.975 million of principal debt reported as owed at March 31 by $9.075 million, including conversion of the B3D and Calm notes and repayment of the Credit Cash advance. It stated these actions addressed the working-capital deficiency and mitigated the previously reported substantial doubt about the company’s ability to continue as a going concern, with liquidity expected to cover at least twelve months from issuance of the statements. Management nevertheless expected net losses in the foreseeable future and could not assure longer-term liquidity.
- A June 2020 registered offering and concurrent warrant placement generated approximately $40 million gross; the filing also describes an April offering and a $5.653 million PPP loan received in May. PPP forgiveness was not assured. These are post-quarter events, not Q1 operating results.
- Landlords granted rent relief or deferrals on many leases, generally for three to ten months from March 2020. The company reported approximately $75 of rent not paid in March due to concessions.
- Management performed an impairment assessment after identifying a triggering event and recorded no impairment at that time, based on its expectation of resuming normal operations. The pandemic’s duration, travel recovery and any further restrictions remained uncertain.
- XpresCheck was an early-stage initiative with no established operating history in diagnostic testing. The filing warned of execution, demand, supplier and professional-practice arrangements, licensing, regulatory, privacy, testing accuracy and capital-spending risks.
- Legal matters included wage-hour litigation, the Cordial dispute, and other claims. The company recorded legal accruals of $1.457 million; it disclosed a $1.5 million demand in the Jenkins and Jones matter and said an adverse judgment could not be ruled out.
- Disclosure controls were ineffective as of March 31, 2020 because of a previously reported material weakness in financial close and reporting, including insufficient accounting and controls personnel. Management described remediation efforts.
No quantitative operating guidance was provided. Management said it intended to reopen spa locations when restrictions lifted and airport traffic supported operations, while exploring partnerships, streamlining operations and funding XpresCheck.
Investor verification priorities
- Confirm post-quarter cash, working capital, debt conversions and repayments, and whether the stated twelve-month liquidity expectation remains supportable.
- Track spa reopening, airport passenger traffic, comparable sales, cash burn and the economics and execution of XpresCheck.
- Assess dilution from offerings, warrant exchanges and exercises, convertible securities, and the post-split share count.
- Monitor rent concessions and deferrals, lease obligations, potential impairment indicators, and any changes in going-concern or liquidity disclosures.
- Review progress remediating the material weakness and developments in material litigation, particularly the Cordial and wage-hour matters.