FORM Holdings Corp. (XpresSpa; now identified in request as XWELL) — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. The filing is by FORM Holdings Corp.; it describes XpresSpa as its wellness business. Unless noted otherwise, financial amounts below are in millions of dollars.
Business context and financial results
The company reported wellness (XpresSpa), technology (Group Mobile, including acquired Excalibur), and intellectual-property operations. XpresSpa was acquired in December 2016, so prior-year comparisons do not include its results. FLI Charge was classified as discontinued operations and was sold after quarter-end.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $17.731 | $3.101 | $48.683 | $16.478 |
| Gross profit | $3.356 | $0.383 | $9.237 | $5.493 |
| Operating loss, continuing operations | $(4.011) | $(3.363) | $(14.624) | $(15.907) |
| Net loss attributable to the company | $(4.697) | $(5.261) | $(18.132) | $(20.023) |
| Net loss per share | $(0.20) | $(0.34) | $(0.87) | $(1.35) |
| Operating cash flow, continuing operations | Not provided for the quarter | Not provided for the quarter | $(11.889) | $(3.247) |
Q3 consolidated gross margin was 18.9%; segment gross margins were 18.2% for wellness and 20.0% for technology. Q3 revenue increased 471.8%, principally reflecting the inclusion of XpresSpa and 178.6% technology-segment growth; intellectual-property revenue fell to $0.2 million from $1.35 million. For the nine months, revenue increased 195.4%, while cost of sales increased 259.1%. The filing attributes the lower 2017 nine-month operating loss versus 2016 in part to the prior-year $11.937 million patent impairment.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $10.072 million, down from $17.910 million at year-end 2016. Total current assets were $17.865 million and current liabilities $10.655 million.
- Cash used in operating activities was $10.959 million for the nine months, including $11.889 million used by continuing operations and $0.930 million provided by discontinued operations. Investing activities used $2.889 million; financing activities provided $6.130 million. The resulting cash decrease was $7.838 million.
- Long-term debt was $6.5 million, unchanged from year-end. It is related-party debt owed to an entity controlled by a company director; the maturity was extended from May 2018 to May 2019. The company reported $0.550 million of nine-month interest expense.
- The August 2017 stock offering generated net proceeds of $6.584 million. Management stated that, based on current plans, it expected sufficient funds for at least 12 months after the financial-statement date.
Changes, outlook and notable matters
- Excalibur was acquired in February 2017 for consideration valued at $2.125 million, including shares and contingent consideration. Group Mobile is being evaluated for strategic alternatives, with the company seeking one or more transactions in Q1 2018; possible options include a sale, merger, spin-off or other separation.
- XpresSpa operated 51 locations at quarter-end. It opened three flagship locations and closed three temporary kiosks during the first nine months; management expected some store maintenance and renovations in Q4. Management said it expected cost of sales to rise with revenue and, over time, cost of sales as a percentage of revenue to decline as wellness store performance improves.
- Q3 wellness results included $0.2 million of hurricane-related costs and $0.329 million of acquisition-integration costs. Excluding the hurricane costs, the filing says wellness gross profit would have been $2.505 million, or 19.7% of segment revenue. The company also reported $0.290 million of technology reorganization and personnel realignment costs.
- FLI Charge was sold on October 20, 2017 for $1.25 million payable in installments, with a security agreement, a perpetual 5% royalty on specified gross revenue, and a warrant tied to certain future events. The company was still evaluating the gain on sale. The business had a $2.321 million net loss for the nine months and the company recorded a $1.092 million noncash impairment in Q2.
- Management noted that new revenue-recognition guidance, to be adopted January 1, 2018, may affect Group Mobile contract revenue recognition; its assessment was preliminary. Deferred tax assets from U.S. operations were fully offset by a valuation allowance.
- Legal matters include pending Cordial and former-attorney litigation, a wage-hour settlement awaiting court approval, and a lawsuit filed by former XpresSpa shareholders on November 6, 2017. The company recorded $0.745 million for legal matters at quarter-end and stated that outcomes are uncertain.
Important facts for investors to verify
- Whether the reported 12-month liquidity expectation remains supportable given continuing operating cash outflows, capital needs, and working-capital requirements.
- How much of reported revenue growth and segment performance reflects acquisitions, and the underlying comparable-store and organic technology trends.
- Progress and economics of any Group Mobile strategic transaction, and the ultimate proceeds and gain or loss from the FLI Charge sale.
- Potential cash and financial-statement effects of the legal proceedings, related-party debt, and adoption of the new revenue-recognition standard.
- Dilution: common shares outstanding rose from 18.3 million at December 31, 2016 to 26.5 million at September 30, 2017; substantial options, warrants, restricted stock units, and convertible preferred shares were excluded from diluted loss per share as anti-dilutive.