XpresSpa Group, Inc. — FY2019 Form 10-K Summary
Reporting period: Year ended December 31, 2019. The filing was signed April 20, 2020. Financial amounts below are in U.S. dollars; unless noted, figures are in millions. The filing issuer is XpresSpa Group, Inc. (ticker XSPA).
Business context
The company operated one reportable segment: XpresSpa airport spa services and related products. At year-end it had 51 locations in 25 airports across the United States, Netherlands and United Arab Emirates, down from 56 locations a year earlier. Services, primarily massage and nail care, generated about 82% of revenue; products generated 15% and other revenue 3%.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $48.515 | $50.094 |
| Store margin | $10.661 (22.0%) | $10.643 (21.2%) |
| Operating loss from continuing operations | $(15.872) | $(34.725) |
| Net loss | $(20.530) | $(36.746) |
| Net loss attributable to common shareholders | $(21.223) | $(37.205) |
| Adjusted EBITDA loss | $(3.323) | $(2.663) |
| Net cash used in operating activities | $(0.113) | $(6.566) |
| Net cash used in investing activities | $(2.275) | $(1.866) |
| Net cash provided by financing activities | $1.165 | $5.644 |
- Revenue declined 3.2%. Comparable-store sales rose 2.9%; the company attributed this to higher traffic, average ticket and sales of newer products. Four locations opened and nine underperforming locations closed during 2019.
- Store margin improved slightly despite lower revenue. Cost of sales fell 4.0%, while operating results also benefited from lower general and administrative expense and the absence of 2018’s $19.630 million goodwill impairment.
- FY2019 included $6.090 million of impairment and asset-disposal charges, including charges associated with certain spa assets and investments. Interest expense rose to $2.900 million from $1.827 million. Non-operating expense was $1.904 million, including debt-conversion and financing-related charges, partly offset by fair-value gains.
- Year-end cash and cash equivalents were $2.184 million; restricted cash was an additional $0.451 million. Current assets were $3.933 million versus current liabilities of $16.220 million, a $12.287 million working-capital deficit. Total liabilities were $31.260 million and total stockholders’ equity was a deficit of $2.536 million.
- Year-end debt carrying value, net of discounts, was $5.762 million: $4.580 million for the B3D senior secured note and $1.182 million for the Calm convertible note. The notes’ stated principal amounts were higher than their carrying values. B3D debt bore 9% interest and was due May 2021; Calm’s $2.5 million note bore 5% interest and was due May 2022.
Material changes and unusual items
- In 2019 the company refinanced and amended its B3D debt, extending maturity and reducing the stated interest rate from 11.24% to 9%. It also issued Calm a $2.5 million convertible note and warrants. The filing reports a $1.584 million debt-conversion expense related to conversion of prior 5% secured notes.
- The company recorded a $1.1 million payment from FLI Charge in 2019 in exchange for releasing future royalty obligations and cancelling warrants; this was included in other revenue.
- CEO Douglas Satzman replaced Edward Jankowski in February 2019. Management closed nine locations following a portfolio review and reported an estimated $0.360 million annual occupancy-cost reduction from relocating its New York support center.
- The company adopted lease accounting standard ASC 842 in 2019, recognizing operating lease assets and liabilities. At year-end, operating lease liabilities were $9.495 million, with $3.669 million classified as current.
Outlook, risks and contingencies
- Going concern: The auditor’s report included a substantial-doubt paragraph, citing recurring operating losses, working-capital deficiency and stockholders’ deficit. Management expected ongoing losses and negative operating cash flow and stated that further financing might be required. Failure to obtain financing could lead to curtailment, restructuring, bankruptcy or liquidation.
- COVID-19 subsequent event: The company temporarily closed all global spa locations effective March 24, 2020, describing the closures and travel restrictions as materially adverse and as causing a liquidity crisis. It was evaluating impairment of approximately $16.318 million of long-lived assets and could record an additional impairment charge.
- The company reported approximately $9.440 million in gross financing during 2020 through the filing date, from an accounts-receivable advance, additional B3D funding and common-stock offerings. It said additional financing could still be needed. These financings and conversions may materially dilute shareholders.
- The company was pursuing discussions with COVID-19 testing partners for a possible U.S. airport testing model. No quantified forecast or reopening timetable was provided.
- Nasdaq had notified the company of a minimum-bid-price deficiency, with a stated compliance deadline of June 30, 2020. The company also reported deficit stockholders’ equity, a separate potential continued-listing concern.
- Management concluded internal control over financial reporting was ineffective because of a material weakness in the financial close and reporting process and insufficient accounting and controls personnel. The weakness resulted in proposed audit adjustments involving lease accounting, asset impairment and accrued liabilities. Remediation plans were still being developed.
- Legal matters included a $1.800 million accrued litigation liability. In a wage-and-hour collective action, 304 individuals had joined by April 3, 2020. Other disclosed proceedings included disputes involving Cordial, Route1, former shareholders and a former acquisition-related counterparty.
Most important facts for investors to verify
- Current liquidity, cash burn and financing availability after the disclosed 2020 raises, including the terms and repayment burden of the receivables advance and B3D debt.
- Whether spa locations reopened, whether airport traffic recovered, and the resulting revenue, cash-flow and impairment effects.
- Progress in resolving the going-concern uncertainty and any B3D covenant or default issues.
- Nasdaq listing compliance and the impact of stock issuances, conversions and warrants on share count and dilution.
- Remediation of the material weakness, and developments in the significant litigation and recorded legal reserve.