Before the novel coronavirus pandemic, XpresSpa Group, Inc. (XSPA) stock was a play on airport traffic. That's not to say that it was a good play.
By the end of 2019, the operator of airport spas had a market capitalization of only about $12 million. Its 10-K for that year contained a so-called "going concern" warning, driven by a steep working capital deficit and limited access to capital. Same-store sales in the business did grow in 2019, but Adjusted EBITDA loss widened and the company burned over $2 million in cash.
As it turned out, despite crushing declines in airport traffic, it may have been the pandemic that saved the company. XpresSpa Group in late March announced a plan to pivot to in-airport testing for Covid-19. By May, after the company announced a contract at New York City's Kennedy Airport, XSPA stock was soaring to become one of the biggest "pandemic winners" in the market. The company capitalized on those gains to raise much-needed capital via equity offerings.
But the pivot to testing hasn't been enough. Shares are down 84% from admittedly bubbly June highs. A pair of rallies this year, possibly with some help from Reddit, have faded. And it's not just investors who see last year's optimism as wildly overdone.
In fact, XpresSpa management appears to agree. That's the big takeaway from the company's fourth quarter earnings report, and it leaves a shaky bull case, even near the lows.
XSPA 2020 Q4 Earnings
Fundamentally, there wasn't a ton of news in XpresSpa earnings for the fourth quarter or the full year. The company closed all of its locations on Mar. 24 of last year as the scale of the pandemic became clear. Two spas in Dubai International Airport came back online in July, and the only franchise (in Austin, TX) did the same in September. But 42 of the spas remained closed through December.
In that context, neither the 83% decline in full-year revenue nor the massive expansion in Adjusted EBITDA loss ($18.2 million versus $3.3 million in 2019) are a surprise.
The numbers were impacted further by accounting vagaries relating to the XpresCheck business. XpresCheck doesn't report direct revenue per patient. Instead, it books management service fees from the physicians that actually provide the tests. Under ASC 606, the company can't recognize those fees as revenue without satisfying certain criteria around collectability. Commentary after Q3 suggests revenue simply wasn't high enough, and that's backed by disclosures in the 10-K. Per the Q4 release, those uncertainties should be resolved shortly, allowing the company to book XpresCheck revenue in Q1.
On the Q4 conference call, management did give some color on what the results would have been. CFO James Berry said pro forma revenue for the three months ending Jan. 31 was $3.3 million, with gross profit of $1.2 million. Figures cited after Q3 and Q4 concerning fees not yet recognized suggest that in Q4 itself, the company booked about $2.2 million in management service fees against $1.2 million the quarter before.
This seems like reasonably good news. But it might not be. Excluding impairments, depreciation and amortization, XpresSpa's operating expenses for Q4 were nearly $5 million, comparing figures between the 10-K and the most recent 10-Q. Even assuming the testing business ramps, XpresCheck is a long way from getting XpresSpa Group to breakeven even on an EBITDA basis.
The Strategic Shift
Management seems to understand this fact. CEO Doug Satzman said on the call that beyond two pending locations, XpresSpa was "reassessing" its development efforts for the Covid-19 testing business. This seems a more negative perspective than that given after Q3, when Satzman said "we will continue to grow XpresCheck."
The same is true for the spa business. Per the Q4 call, the company isn't going to reopen its spas "in the near term." That too seems a negative update relative to Q3, when the timeline extended only to the end of 2020. Satzman floated the idea of "possible reopenings of select spas in the future," but it seems reasonably clear from the call that the spa business is not going to be a focus going forward. (The weighted-average lease term is only 4.5 years per the K, so even if the company changes its mind on the spa business some leases may expire anyhow.)
Instead, the focus will be on a "travel health and wellness" concept. This concept will marry a digital offering to services provided in-airport, with two locations being turned over by late summer or early fall.
It's difficult - and unfair - to judge the effort before it starts. But the early sense doesn't seem great. Satzman said after Q4 (as he had after Q3) that the three "strategic brand pillars" would be travel, health, and wellness, with the company's expertise and experience in each area providing a competitive advantage.
But it's certainly fair to question how much experience and expertise the company actually has. What was then Form Holdings (and was formerly a "patent troll" named Vringo) only acquired XpresSpa in late 2016. Since then, the company hasn't been profitable and hasn't grown all that quickly. The pivot into testing was a wise move, but largely the only move the company had after being backed into a proverbial corner by the pandemic and a stretched balance sheet.
The move into digital channels, meanwhile, has no real precedent in the current business. Indeed, in the Q&A of the Q4 call, one analyst asked Satzman why he felt he was the "right fit" to lead a tech company given his lack of a tech background. Satzman replied, "Well, I don't have a medical background either and I didn't have a spa background either when I joined [XpresSpa Group]."
That's not quite the argument that Satzman might hope. Again, before the pandemic XpresSpa was near bankruptcy under Satzman's leadership (though to be fair he was only appointed in February 2019). The testing business obviously wasn't the success that some investors hoped it would be. It's fair to wonder whether a chief executive with a medical or wellness background might have had better success.
That same problem holds for the broader argument that XpresSpa is somehow well-positioned to pivot into this supposedly exciting market (Satzman called it a "skyrocketing trend category" pre-pandemic) because of its expertise and experience.
That expertise is relatively limited. The experience comes from running a company that to be blunt simply didn't succeed.
It's likely that an investor's perception of the new business is driven in large part by her perception of the old business. Any investor skeptical toward XpresSpa and XSPA stock before the Q4 release almost certainly will remain so: Satzman simply didn't prove enough detail or enough concrete evidence to suggest this plan will work. On the other hand, an investor who believed in the model either pre- or post-pandemic might see something here.
XSPA Stock Forecast
That said, it does seem like Q4 earnings discouraged at least a few former optimists. XSPA stock dropped 9% the day following the after-hours release; it's now down 26% since earnings. Obviously, many XSPA shareholders before Mar. 31 no doubt were hoping for better news on the testing front. Given what seem like firm strategy changes in both of the existing businesses, it's not surprising that some have moved on.
More may well do so. The current XSPA stock price still applies a reasonable amount of value to the operating business. The share count at Mar. 26 was 105.3 million, providing a market capitalization of $144.3 million. (There are another 48 million warrants outstanding, but essentially all are out-of-the-money at this point.) Cash at year-end was just shy of $90 million.
The operating business then has a valuation of about $54 million - but that's a conservative estimate. Based on results in the testing business, XpresSpa is going to burn cash this year. Capital expenditures for the new initiative likely will total at least several million dollars (reorienting locations for testing cost nearly $200,000 each).
It's difficult to see the spa business or the testing business contributing at all to that valuation. The spa business will be dormant for some time to come, it appears. The testing business is a long way from consistent operating profitability, and the decision to stop rolling out new centers doesn't suggest that XpresSpa believes it can get there.
To buy XSPA stock here, an investor has to believe that this future integrated concept will wind up being worth more than $60 million at a bare minimum. (That's the simplistic way of looking at; adjust for risk and the time to profitability and the actual required value is far higher.) That's a tough case to make. As Satzman himself put it after Q3, going forward XpresCheck will be "essentially operating as a startup business."
It's a startup business with a relatively niche addressable market: the travel wellness market unequivocally is not the travel and wellness markets. It's led by executives with minimal tech expertise (though the company has brought on a CTO). And the new business has to manage through a period of tremendous uncertainty with a yet-to-be-determined business model while satisfying regulators and investors. It's difficult to imagine seasoned venture capitalists funding that business at anywhere close to a $60 million valuation, if at all.
To be fair, XpresSpa does at the least have the balance sheet to go forward with its plans, though Satzman retained the right to go back to the market for additional equity offerings going forward. (He referenced "market conditions," which suggests the stock probably needs to rally for the company to make that move. That's not a good thing from a short-term perspective, however: XpresSpa reversed a midday rally on Dec. 17 by selling stock into it.)
A balance sheet isn't enough, however. Not when an undefined concept still is being slapped with a $60 million price tag.
The Q4 earnings release didn't create that problem. But it probably made that problem much more obvious. That's the most likely reason why XSPA stock has declined since the report - and why it probably has more room to fall.