XpresSpa Group, Inc. — Q1 2019 Form 10-Q
Period: Three months ended March 31, 2019. Amounts are in thousands of dollars unless stated otherwise. The filing identifies the registrant as XpresSpa Group, Inc. (ticker XSPA); the request metadata names XWELL.
Business context
The company operated airport spa and wellness services through 55 locations in 24 airports, plus one off-airport New York City location. It reported one operating segment, XpresSpa, following the sale of its former technology businesses. A 1-for-20 reverse stock split took effect in February 2019; share and per-share amounts reflect the split.
Financial results and liquidity
- Revenue: $12.230 million, down 2.9% from $12.600 million. Products and services revenue was $11.046 million versus $11.800 million; other revenue was $1.184 million versus $0.800 million.
- Profit and margins: Operating loss was $2.117 million, versus $23.056 million in Q1 2018; the prior-year period included a $19.630 million goodwill impairment. Net loss attributable to the company was $2.973 million, or $1.61 per share, compared with $23.933 million, or $18.00 per share. Management reported a 17.8% gross margin on products-and-services revenue, versus 17.7% a year earlier, and an adjusted EBITDA loss of $364,000 versus $1.461 million. Adjusted EBITDA is a non-GAAP measure.
- Cash flow: Operating activities provided $184,000, compared with $3.697 million used in continuing operations in Q1 2018. Investing activities used $575,000 and financing activities used $166,000. Cash, cash equivalents and restricted cash declined $578,000 to $3.312 million; cash and cash equivalents alone were $2.884 million.
- Balance sheet and debt: Total assets were $38.260 million and total liabilities were $27.235 million. Current assets of $4.996 million compared with current liabilities of $17.030 million, a $12.034 million working-capital deficit. Debt included a $6.500 million senior secured note and $1.695 million of convertible notes. Adoption of the lease accounting standard added $9.565 million each in operating lease right-of-use assets and liabilities.
Changes versus Q1 2018
- Revenue declined $370,000, with management citing store closures during renovations and fewer locations. Comparable-store sales fell 1.3%; the company had 55 locations versus 57 a year earlier.
- Cost of sales fell 6.9% to $9.098 million, and general and administrative expense fell 21.7% to $3.600 million, which management attributed to store-level and corporate cost reductions.
- Interest expense rose to $611,000 from $183,000, primarily reflecting $394,000 of amortized debt discounts and issuance costs.
- The company received $1.1 million in February 2019 to release FLI Charge from future royalty obligations and cancel related warrants. The income statement reported $1.184 million of other revenue; the filing does not clearly reconcile that reported amount with the stated cash proceeds.
Outlook, risks and unusual items
- Management expected net losses to continue, while targeting improved store productivity, new locations and franchising. The first franchise location was scheduled to open in summer 2019. No quantified financial guidance was provided.
- The filing states that historical results raise substantial doubt about the company’s ability to continue as a going concern. Management expected strategic partnerships, cost actions and monetization of investments or other assets to address liquidity needs over the following 12 months, but acknowledged that these actions might not generate the required funds.
- On April 16, 2019, the company failed to make a required minimum payment on its convertible notes, triggering a default. As of May 15, no investor had notified the company of an election to accelerate repayment. Separately, the going-concern issue raised a covenant/default risk under the senior secured note; acceleration could trigger a default under the convertible notes. The filing’s descriptions of the senior-note covenant’s default status are not fully consistent.
- The senior secured note had $6.5 million principal, was secured by substantially all XpresSpa assets, and was due December 31, 2019. The company also disclosed multiple pending legal matters, including disputes with Cordial, former shareholders, Route1 and others; outcomes were uncertain.
- CEO Edward Jankowski resigned in February and Douglas Satzman was appointed CEO. Jankowski was entitled to $375,000 in termination payments over 12 months and company-paid COBRA coverage for up to 12 months.
Investor verification priorities
- Confirm the status of the convertible-note default, any acceleration notices, and the senior secured note covenant/default and maturity risks.
- Assess available liquidity, including overseas cash availability, the working-capital deficit, and whether planned asset monetizations or partnerships materialized.
- Reconcile the reported $1.184 million of other revenue with the $1.1 million FLI Charge settlement proceeds.
- Track comparable-store sales, location closures and openings, and whether the planned franchise launch occurred.
- Review the filing’s inconsistent working-capital figures: the balance sheet implies a $12.034 million deficit, while MD&A also states $12.024 million.