XpresSpa Group, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Financial amounts below are in thousands of dollars unless stated otherwise. The company operated airport spa locations, reporting one segment; it had 54 locations at quarter-end, versus 57 a year earlier.
Financial performance
- Q2 revenue: $12.908 million, down 1.0% from $13.038 million. Gross profit was $3.055 million, or 23.7% of revenue, compared with $2.679 million, or 20.5%, in Q2 2018.
- Q2 operating and net loss: Operating loss was $1.850 million, compared with $3.068 million. Net loss attributable to common shareholders was $6.338 million, versus $3.523 million; basic and diluted loss per share was $3.22 versus $2.62. The larger net loss reflected $3.551 million of other non-operating expense, including debt-conversion expense and investment impairment.
- Six-month revenue: $25.138 million, down 2.0% from $25.638 million. Products and services revenue fell to $23.954 million from $24.838 million; other revenue rose to $1.184 million from $0.800 million, including a $1.1 million buyout of FLI Charge royalty and warrant rights. Gross profit was $6.187 million, or 24.6% of revenue, versus $5.502 million, or 21.5%.
- Six-month loss: Operating loss was $3.967 million, versus $26.124 million, which included a $19.630 million goodwill impairment in 2018. Net loss attributable to common shareholders was $9.311 million, compared with $27.456 million; loss per share was $4.87 versus $19.12.
- Adjusted EBITDA: Q2 was positive $441, compared with negative $538. The six-month measure was negative $52, compared with negative $2.082 million. This is a non-GAAP measure and should be considered alongside GAAP results and cash flows.
- Cash flow: Continuing operations generated $244 of operating cash in the first half, versus $5.061 million used in 2018. Investing used $802, primarily for property and equipment; financing used $453. Cash and cash equivalents were $2.259 million at June 30, down from $3.403 million at year-end 2018.
- Liquidity and balance sheet: Current assets were $3.819 million and current liabilities $8.451 million, a $4.632 million working-capital deficiency. Total assets were $33.279 million and total liabilities $25.054 million. The balance sheet included $8.882 million of operating lease right-of-use assets and an equal lease liability.
- Debt: At June 30, the senior secured note balance was $6.5 million. Convertible notes had been converted in June, with $2.728 million of principal and interest converted into shares and warrants and $129 repaid in cash. The filing reports $1.272 million of first-half interest expense.
Changes, outlook and risks
- Comparable-store products and services sales increased 1.4% in the first half despite three fewer locations, which management attributed to higher average transaction values, improved retail supply and service upselling. Total revenue nevertheless declined, partly due to fewer open spas.
- Management cited expense reductions and streamlined store operations: first-half cost of sales fell 5.9% and general and administrative expense fell 28.3%. The company expects cost of sales as a percentage of revenue to gradually decline, but expects net losses to continue in the foreseeable future. No specific numerical revenue or earnings guidance was provided.
- The company recorded $830 of fixed-asset impairment in Q2: approximately $620 associated with termination of the World Trade Center location lease and $210 for abandoned new-spa work in progress. It also recorded a $1.141 million impairment of its Route1 investment.
- Going concern and liquidity risk: The 2018 audit report had raised substantial doubt about the company’s ability to continue as a going concern. Management said it believed planned actions would meet near-term liquidity needs, but could not predict with certainty whether they would provide sufficient long-term liquidity. Failure to raise funds could impair access to inventory and services. The filing notes $1.269 million of cash held overseas, which may be subject to delays or restrictions on distribution.
- Subsequent financing and debt amendments: On July 8, Calm provided $2.5 million in gross proceeds through 5% unsecured convertible notes due 2022 and warrants to buy 937,500 shares at $2.00. The same day, the B3D secured note was amended to $7.0 million, 9% interest and a May 2021 maturity; it is secured by company and subsidiary personal property and may be convertible at $2.00 per share subject to shareholder approval. Other July amendments proposed reduced conversion or exercise prices and additional preferred-stock and warrant terms, many subject to shareholder approval, with potential dilution.
- Other notable risks include pending litigation, including disputes involving the former Atlanta airport concession partner, Route1, and claims related to the company’s prior merger. Management recorded $250 for legal matters at June 30 and stated outcomes remain uncertain. The company also disclosed a prior default under the convertible notes’ minimum-payment terms; holders did not accelerate, and the notes were subsequently converted.
Investor facts to verify
- Whether the July Calm proceeds and other financing actions provide adequate liquidity beyond the near term, given the working-capital deficit and going-concern uncertainty.
- The final terms and shareholder approval status of the B3D, Calm, Series D, Series E and Series F securities and warrant amendments, including their dilution effects.
- Current cash availability, including access to overseas cash, and the company’s ability to fund operations, lease obligations and planned spa investment.
- Progress and potential financial impact of material litigation and contingencies, particularly the Cordial and Route1 matters.
- How operating performance develops: same-store sales, store count, gross margin, and whether positive operating cash flow can be sustained while losses continue.