XpresSpa Group, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018. The filing identifies the registrant as XpresSpa Group, Inc. (formerly FORM Holdings Corp.); its principal business was XpresSpa, an airport spa operator with 57 locations—52 domestic and five international.
Financial performance
Amounts below are in millions of dollars except per-share data. Comparisons are with the corresponding 2017 period.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $13.04 | $12.93 | $25.64 | $24.01 |
| Gross profit / margin | $2.68 / 20.5% | $2.53 / 19.5% | $4.70 / 18.9% | $4.68 / 19.6% |
| Operating loss, continuing operations | $(3.07) | $(4.39) | $(26.12) | $(8.96) |
| Net loss attributable to company | $(3.52) | $(7.01) | $(27.46) | $(13.44) |
| Basic and diluted loss per share | $(0.13) | $(0.36) | $(1.03) | $(0.70) |
- Q2 revenue rose 0.9%; management attributed growth from additional locations to some extent offset by lower comparable-store sales, including airline reconfigurations and enplanement changes in three key terminals. First-half revenue increased 6.8%, largely reflecting five net additional locations.
- Q2 cost of sales fell 1.5%, and gross margin improved to 20.5%. First-half cost of sales increased 3.5%, while gross margin declined 0.7 percentage points.
- First-half results include a $19.63 million goodwill impairment, recorded after a decline in the company’s share price and strategic and leadership changes. Goodwill was reduced to zero. Excluding this charge, first-half operating performance still reflected a loss.
- First-half discontinued operations generated a $1.12 million loss, versus a $3.78 million loss a year earlier. Q2 discontinued-operations loss was $0.51 million, versus $2.30 million.
- Management-reported adjusted EBITDA loss, a non-GAAP measure, was $0.36 million in Q2 versus $0.60 million, and $1.89 million for the first half versus $2.37 million.
Cash flow, debt and liquidity
- Cash and cash equivalents were $4.46 million at June 30, down from $6.37 million at December 31, 2017. First-half net cash used was $3.60 million: $3.60 million used in operating activities and $1.09 million used in investing, partially offset by $2.98 million provided by financing.
- Continuing-operations operating cash use was $5.06 million. Capital expenditures were approximately $2.14 million. The company received $4.35 million gross from convertible-note financing and made $1.14 million in distributions to noncontrolling interests.
- Current assets were $6.24 million and current liabilities $9.87 million. Current liabilities included $1.75 million of convertible notes classified as short-term, approximately $1.76 million of obligations not expected to settle in cash, and $0.47 million of liabilities not expected to settle within 12 months.
- Debt included a $6.50 million related-party secured note bearing 11.24% interest, with maturity extended to December 31, 2019, and secured convertible notes issued in May 2018 bearing 5% interest and maturing November 16, 2019. The convertible notes require monthly principal payments of approximately $0.30 million beginning September 2018; subject to conditions, the company could elect to pay in cash or registered shares.
- Management said existing cash, expected operating cash flows and anticipated liquidation of certain investments should fund planned operations and liabilities for at least the next 12 months. This expectation depends on forecast cash flows and access to investment proceeds; $1.23 million of cash was held overseas and could be subject to withdrawal approval processes.
Material developments, outlook and risks
- The company rebranded in January 2018 and completed its shift to a single operating segment focused on XpresSpa after selling FLI Charge in 2017 and Group Mobile in March 2018. It received Route1 shares, warrants and earn-out consideration for Group Mobile; those securities were restricted, and the company reported a $0.30 million loss on disposal.
- Management cited store-level cost initiatives, including reduced warehousing and shipping costs, and expected cost of sales as a percentage of revenue to decline gradually as operating performance improves. The filing provides no quantified revenue, earnings or cash-flow guidance.
- CEO Andrew Perlman resigned in April and XpresSpa executive Edward Jankowski became CEO. CFO Anastasia Nyrkovskaya resigned in June; Janine Canale was named Principal Financial Officer in July. Management identified possible temporary inefficiency during the transition.
- On August 14, 2018, after quarter-end, note investors agreed to waive scheduled payments for September through December 2018, subject to individual investor rights to require up to three payments in shares. The company agreed to an initial payment in shares priced at $0.17, expected to issue 2,067,353 shares. This creates dilution risk.
- Key risks include debt service and security interests over company assets, potential need to pay note installments in cash if shareholder approval for share issuance is not obtained, and litigation. The company accrued $0.29 million for potential legal losses. Matters include disputes with Cordial, a wage-hour settlement awaiting court action, remaining claims in the Binn litigation, and Route1/Group Mobile indemnity claims. Management did not expect the matters, based on its current knowledge, to have a material adverse effect, but outcomes remain uncertain.
- Disclosure controls and procedures were assessed as effective at June 30, 2018. The company noted it was evaluating the expected significant increase in reported lease assets and liabilities under the forthcoming lease accounting standard.
Investor verification points
- Check the subsequent convertible-note amendment, actual share issuance and any remaining investor rights to demand share payments; assess resulting dilution and the ability to make future debt payments.
- Track cash burn, store-level comparable sales, new-store performance and whether gross-margin improvement is sustained.
- Review the assumptions and valuation inputs behind the $19.63 million goodwill impairment and the valuation and liquidity of Route1, Marathon and other investments.
- Monitor litigation developments, especially the Cordial, Binn, wage-hour and Route1 matters, and compare potential exposure with the $0.29 million accrual.
- Reconcile reported debt principal and carrying values, scheduled repayments, collateral and related-party terms; the filing reports the convertible-note accounting carrying amount net of discounts and costs separately from principal terms.