XpresSpa Group, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; this is an annual filing, not a standalone fourth-quarter report. The company, formerly FORM Holdings Corp., rebranded in January 2018 and focused on XpresSpa airport wellness services. Share figures and per-share amounts reflect the 1-for-20 reverse split effective February 22, 2019.
Business context
XpresSpa operated 56 locations at year-end, including 51 domestic and five international locations, across 23 airports and one off-airport site. Its services—primarily massage and nail care—generated about 83% of 2018 spa revenue; retail products generated about 17%. The company sold Group Mobile in March 2018, had sold FLI Charge in 2017, and discontinued separate reporting of its intellectual-property segment, which management said was no longer a focus and was not expected to produce material revenue.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Total revenue | $50.1 million | $48.8 million |
| Products and services revenue | $49.3 million | $48.4 million |
| Operating loss from continuing operations | $34.7 million | $14.7 million |
| Net loss attributable to the company | $37.2 million | $28.8 million |
| Net loss per share | $25.60 | $25.88 |
| Cash used in operating activities | $6.6 million | $12.2 million |
| Cash used in investing activities | $1.9 million | $5.4 million |
| Cash provided by financing activities | $5.6 million | $6.1 million |
Revenue grew 2.6% year over year, but comparable-store sales fell 3.2%. Reported store margin was $9.9 million, or 20.2% of spa products-and-services revenue. FY2018 adjusted EBITDA loss, a non-GAAP measure, was $2.7 million versus $3.5 million in 2017. The filing reports fourth-quarter revenue of $11.5 million and adjusted EBITDA loss of $481,000; it does not provide a clear comparable prior-year fourth-quarter value in the supplied text.
The company recorded a $19.6 million goodwill impairment, reducing goodwill to zero, and $2.1 million of fixed-asset impairment within depreciation expense. Depreciation and amortization totaled $9.5 million, up from $8.0 million. General and administrative expense declined 2.0% to $16.2 million. Total consolidated assets were $30.6 million, versus $65.2 million a year earlier; total liabilities were $17.4 million and stockholders’ equity was $13.1 million at year-end.
Cash and cash equivalents were $3.4 million, down from $6.4 million. Current assets were $5.8 million against current liabilities of $16.7 million, a $10.9 million working-capital deficit. The cash-flow statement reports $3.9 million of cash, cash equivalents and restricted cash combined at year-end, including $487,000 of restricted cash. About $1.14 million of cash was held in overseas accounts and was not FDIC-insured; access could be subject to approval and distribution procedures.
Debt included a $6.5 million senior secured note to related party Rockmore, bearing 11.24% interest and due December 31, 2019, and convertible notes with a $1.986 million year-end book balance, bearing 5% interest and due November 2019. The company also raised $3.0 million through Series E preferred stock issued to Calm.com. In 2018, it received $4.35 million gross proceeds from convertible notes and warrants and settled some note payments by issuing common shares.
Changes, outlook and key risks
- Revenue increased modestly, but same-store sales weakened; six locations opened and six underperforming locations closed during 2018.
- Operating loss widened substantially, largely reflecting the goodwill impairment, higher depreciation and amortization, and continuing operating losses. The net loss from discontinued operations improved to $1.1 million from $12.3 million.
- The auditor reported substantial doubt about the company’s ability to continue as a going concern, citing recurring operating losses and the working-capital deficit. Management expected cost reductions, strategic partnerships, and monetization of investments or other assets to support liquidity for 12 months after issuance, but cautioned that the outcomes were uncertain.
- The going-concern explanatory paragraph was described as a covenant breach under the Rockmore note; if not remedied within 30 days after the report date, it could become an event of default. Acceleration of that debt could trigger a default under the convertible notes and potentially make amounts immediately payable in cash.
- Management’s plan was to improve store productivity, grow through new locations and franchising, and leverage retail partnerships. A first franchisee was signed in November 2018, with its first location expected to open in spring 2019. No quantified revenue or earnings guidance was provided.
- Key operating risks include dependence on airport passenger traffic and concession leases, minimum annual rent guarantees, competition for locations, labor availability and costs, ACDBE partner requirements, and the need for additional capital. The filing also identifies cybersecurity, supplier, regulatory and litigation risks.
- Material legal matters include disputes with former Atlanta ACDBE partner Cordial, a wage-and-hour class action awaiting court action on settlement terms, shareholder litigation, a Route1 indemnity dispute, and a lawsuit relating to the Excalibur acquisition. Management recorded $290,000 for legal matters at year-end and did not expect outstanding matters to have a material adverse effect, while noting outcomes are uncertain.
- Subsequent events included the CEO transition, a 1-for-20 reverse stock split, and a February 2019 agreement to receive $1.1 million from FLI Charge in exchange for releasing royalty rights and cancelling warrants. The company also paid former CEO Edward Jankowski $375,000 over 12 months plus up to 12 months of COBRA coverage.
Investor verification priorities
- Confirm post-filing liquidity, cash availability, and whether the company cured or otherwise addressed the Rockmore covenant breach and the November/December 2019 debt maturities.
- Review subsequent operating results, comparable-store sales, store closures/openings, and whether the franchise location opened and contributed revenue.
- Check the terms and potential dilution from convertible notes, warrants and preferred stock, including share issuances used for debt repayment; the filing lists 1.93 million common shares outstanding as of March 15, 2019.
- Assess whether anticipated asset monetizations and strategic partnerships generated the liquidity management expected, and whether cash held overseas was accessible when needed.
- Track developments and potential exposure in the Cordial, Chen, Binn, Route1 and other disclosed legal matters.