Business context and reporting period
XpresSpa Group, Inc. (the filing registrant; Nasdaq: XSPA) reported for the quarter and nine months ended September 30, 2018. The company had shifted to a single operating segment focused on airport spa services, with 57 locations (52 domestic and 5 international). It completed the sale of Group Mobile in March 2018; FLI Charge had been sold in October 2017. Results below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $12.922 | $12.852 | $38.560 | $36.863 |
| Operating loss, continuing operations | $(2.885) | $(3.523) | $(29.009) | $(12.479) |
| Net loss attributable to company | $(3.187) | $(4.697) | $(30.643) | $(18.132) |
| Basic and diluted loss per share | $(0.11) | $(0.20) | $(1.12) | $(0.87) |
| Adjusted EBITDA loss (non-GAAP) | $(0.360) | $(0.610) | $(2.182) | $(2.983) |
- Q3 revenue rose 0.5%; management attributed the modest increase to additional locations, partly offset by lower comparable-store sales amid airline reconfigurations and passenger-traffic changes. Nine-month revenue grew 4.6%, primarily from new locations.
- Management’s adjusted gross profit was $2.963 million in Q3 (22.9% of revenue), versus $2.305 million (18.2%) a year earlier. This is a non-GAAP presentation; GAAP cost of sales was $9.985 million in Q3.
- Nine-month operating and net losses include a $19.630 million goodwill impairment, reducing goodwill to zero. The impairment followed business restructuring, a declining share price, and a CEO change. Q3 had no goodwill impairment.
- Cash and cash equivalents were $2.525 million at September 30, down from $6.368 million at year-end 2017. Nine-month cash used in operations was $4.628 million, including $6.129 million used by continuing operations; investing used $1.775 million and financing provided $2.765 million. Capital expenditures were $2.682 million.
- Current assets were $4.027 million and current liabilities $9.291 million, a reported-balance working-capital shortfall of $5.264 million. Management noted that some current liabilities would not be settled in cash or were not expected to settle within 12 months.
- Debt included a $6.5 million related-party senior secured note, bearing 11.24% interest and extended to December 31, 2019, and convertible notes with a $2.008 million carrying value at September 30. The convertible notes bear 5% interest, mature November 16, 2019, and have monthly principal repayments; the company may elect stock repayment subject to conditions. The filing states that the notes are secured.
Changes, outlook, risks and unusual items
- Q3 cost of sales declined 4.7% year over year, which management linked to streamlined store processes and lower warehousing and shipping costs. Nine-month cost of sales increased 0.7%, with new-store labor and occupancy costs partly offset by those efficiencies. Management expects cost of sales to grow with revenue and its percentage of revenue to decline gradually as store performance improves.
- Nine-month general and administrative expense fell 4.6%, reflecting lower corporate and stock-based compensation costs; offsets included $350,000 of severance, $348,000 of one-time professional fees, and $359,000 of business-analytics project costs. Q3 included $348,000 of one-time professional fees and $104,000 of project costs.
- In May 2018, the company received $4.350 million gross proceeds from a financing involving 5% secured convertible notes and warrants. The warrants and note conversion terms create potential dilution; 24.5 million potentially dilutive instruments were excluded from loss-per-share calculations as anti-dilutive.
- On November 12, 2018, after quarter-end, Calm.com invested $2 million in Series E convertible preferred stock. A further $1 million purchase was contemplated by December 31, subject to conditions. The preferred shares are convertible at $0.62 per common share, rank senior to Series D and common stock for specified rights, and include potential redemption and protective provisions. Management’s liquidity outlook includes the Calm proceeds and states that available cash, expected operating cash flows, and anticipated investment liquidations should fund planned operations and liabilities for at least 12 months after filing.
- Liquidity risks include low cash relative to current liabilities, scheduled debt payments, restricted availability of $1.081 million held in overseas accounts, and reliance on future operating cash and investment proceeds. Management also cited access to additional financing and possible contract renegotiations.
- The company accrued $290,000 for potential legal losses. Disclosed matters include Cordial-related disputes and litigation, a wage-hour settlement awaiting court approval, two remaining claims in the Binn litigation after other claims were dismissed, and a Route1 indemnity dispute and counterclaim. Management said it did not expect the matters to have a material adverse effect, while cautioning outcomes are uncertain.
- Management reported disclosure controls were effective as of September 30, 2018 and no material change in internal control during the quarter. No numeric revenue or earnings guidance was provided.
Important facts for investors to verify
- Whether operating cash flow, planned investment liquidations, and the Calm financing are sufficient to meet liquidity needs and scheduled debt repayments.
- The terms, timing, and actual completion of Calm’s possible additional $1 million investment, and the potential dilution and seniority effects of Series E preferred stock.
- Convertible-note repayments, conversions, outstanding principal and share issuance; reconcile the notes’ carrying value with contractual principal and repayment terms.
- Comparable-store sales, passenger-traffic trends, new-store economics, and whether cost reductions translate into sustained margin improvement.
- Developments in the goodwill impairment assumptions, investment valuations, and the disclosed legal matters and $290,000 contingency accrual.