XpresSpa Group, Inc. — FY2017 Form 10-K
Reporting period: Year ended December 31, 2017. The filing was made under the company’s former name, FORM Holdings Corp.; it changed its name to XpresSpa Group, Inc. in January 2018. Amounts below are in U.S. dollars unless noted.
Business context
The company’s continuing businesses were airport wellness services and intellectual-property licensing. Wellness consisted primarily of XpresSpa, which operated 56 airport locations in three countries at year-end. The company sold FLI Charge in October 2017 and Group Mobile in March 2018; both were reported as discontinued operations. Management said its strategy was to focus on health and wellness, principally XpresSpa.
Key financial metrics
| Metric | FY2017 | FY2016 |
|---|---|---|
| Total revenue | $48.823 million | $11.986 million |
| Continuing-operations operating loss | $(15.073) million | $(17.708) million |
| Continuing-operations net loss | $(16.112) million | $(19.279) million |
| Discontinued-operations net loss | $(12.277) million | $(4.724) million |
| Net loss attributable to the company | $(28.840) million | $(24.006) million |
| Basic and diluted loss per share | $(1.29) | $(1.58) |
| Cash and cash equivalents at year-end | $6.368 million | $17.910 million |
| Net cash used in operating activities | $(12.172) million | $(8.441) million |
- Revenue and margins: Wellness revenue was $48.373 million; intellectual-property revenue was $0.450 million. Wellness generated $9.387 million gross profit, a 19.4% gross margin, and $1.938 million of segment adjusted EBITDA. Consolidated adjusted EBITDA was a loss of $3.505 million, a non-GAAP measure.
- Comparability: XpresSpa was acquired on December 23, 2016, so reported 2016 wellness revenue includes only eight days. On an unaudited full-year basis, XpresSpa revenue was $43.820 million in 2016 versus $48.373 million in 2017; comparable-store sales rose 3%. The reported 307% increase in consolidated revenue is therefore not a like-for-like growth comparison.
- Cash flow and investment: Cash fell by $11.542 million during 2017. Investing activities used $5.396 million, including $4.479 million for property and equipment. Financing activities provided $6.087 million, including $6.584 million net proceeds from a common-stock offering.
- Liquidity and debt: Year-end current assets were $16.093 million and current liabilities $12.497 million; these include assets and liabilities held for disposal. Debt was $6.5 million, secured by substantially all XpresSpa assets, guaranteed by the company, and owed to a fund controlled by a company director. It bore 11.24% interest and matured May 1, 2019. Management stated it expected sufficient funds for at least the next 12 months, while noting XpresSpa had not generated enough operating cash to fund new-store development.
Changes, outlook and notable items
- Wellness revenue increased with a full year of XpresSpa operations, nine new locations opened and five underperforming locations closed. The company reported a 3% increase in comparable-store sales.
- Intellectual-property revenue fell to $0.450 million from $11.175 million; 2016 included a one-time $8.9 million licensing payment. Discontinued operations’ loss increased to $12.277 million, including $8.577 million of impairment charges related to FLI Charge and Group Mobile.
- Management planned to grow wellness through existing-store sales, new locations and a franchising program approved in January 2018. It expected higher wellness cost of sales in 2018 and said general and administrative expense and operating cash use could decline as operations were integrated and divested businesses exited. These are expectations, not guarantees.
- In January 2018, the company sold certain patents for approximately $1.25 million, paid as $0.25 million cash and 250,000 shares of Marathon Patent Group common stock, subject to a 180-day transfer restriction. Group Mobile’s March 2018 sale consideration included Route1 shares, warrants and potential earn-out payments; the shares were subject to resale restrictions.
- Material risks include dependence on airport passenger traffic and concession leases with minimum guarantees; competition for airport locations; staffing and labor costs; ACDBE partner and regulatory obligations; funding needs; and the ability to monetize patents. A March 2018 Nasdaq notice gave the company until September 12, 2018 to regain compliance with the $1 minimum bid-price requirement.
- Legal matters included an appeal in the Cordial dispute, a wage-hour class settlement awaiting court approval, and a shareholder lawsuit concerning the XpresSpa acquisition. Management did not expect outstanding matters to have a material adverse effect, but litigation outcomes are uncertain.
- The company recorded a full valuation allowance against deferred tax assets; federal NOL carryforwards were approximately $159.007 million and may be limited under Section 382. Management said the 2017 tax-reform impact was still being evaluated. The auditor issued an unqualified opinion on the financial statements; management reported effective disclosure controls and internal control over financial reporting.
Investor verification priorities
- Review the audited statements and notes for cash-flow burn, cash availability and the treatment of assets and liabilities held for disposal.
- Verify the related-party debt’s interest, collateral, maturity and repayment terms, and assess funding needs for planned location growth.
- Assess the quality of wellness growth using comparable-store sales and location openings, separating organic performance from the acquisition-driven revenue comparison.
- Check the status and realized value of the Group Mobile and FLI Charge dispositions, including restricted securities, earn-outs, royalties and any remaining obligations.
- Track the Nasdaq bid-price compliance status and developments in the disclosed litigation, tax attributes and patent-monetization program.