XpresSpa Is Trying To Turn Around, But Its Legs and Arms Are Tied

XpresSpa (NASDAQ:XSPA) is trying to redo its business model. It used to be an airport spa company, but Covid-19 destroyed that model. Now it’s becoming an airport Covid-19 testing company. It has already signed up a number of airports in this new model. For owners of XSPA stock, the hope is that this model will work out.

Otherwise, the company is doomed. Certainly, XPSA stock reflects its difficulties. For example, at $1.26, its market capitalization is just $94 million.

The Attempt At a Turnaround

The point is XpresSpa is trying to do a turnaround. It recently raised even more cash to follow through with this.

Fortunately, the company still has $62 million in cash. Otherwise, its market cap would be much lower. The problem is XpresSpa’s revenue fell from $12.5 million last year (quarter ended Sept. 30). But this year for the quarter ending Sept. 30, the company had just $201,000 in revenue.

However, XpresSpa is still burning through a good deal of cash. For example, from its recent 10-Q filing as of Sept. 30, the company showed a negative free cash flow of over $21 million. This was for the first nine months of its operations in 2020.

But a more careful reading of the company’s quarterly statement shows that XpresSpa is not able to record any revenue from its new testing operations.

For example, the company says that it is not allowed to record the management fees it is earnings from airports for delivering Covid-19 tests. These are the management fees it earns but cannot collect from its XpresSpa Wellness Centers and from its medical diagnostic tests. That effectively means it is trying to do a turnaround with its legs and arms tied. It can’t turn around, literally.

The problem seems to be that its Managed Service Agreements require the use of a physician and the requirements of collectability under ASC 606 do not permit this. That is likely because XpresSpa is not a medical practice. Its management fees do not qualify as a contract as a result.

It now has $1.197 million in management fees earned, but are not recognized as revenue. Moreover, the company has not completely clarified this issue, which I find very odd. It is almost as if the company is hiding something that is very important, some underlying issue that needs to be resolved.

What Is Up With XSPA Stock?

For example, why did the company recently announce it had raised another $41.66 million in cash at $1.70 per share? That means it now has cash of $102 million, minus whatever cash it burnt through during Q4.

For example, let’s say that it has burnt through $15 million during Q4. That would imply that its existing cash is $102 million less $15 million, or $87 million.

But its market cap, as of today is just $94 million. That implies that the market thinks its existing business turnaround is worth just $7 million, or less (i.e., $94 million less $87 million).

In other words, the market believes the business turnaround won’t work.

Therefore, this implies that XSPA stock would be worthless if not for the cash on its balance sheet. But here we have a situation where the company is burning through that cash and it cannot recognize any revenue.

That is a definition of a broken company.

If you are an optimist and believe that eventually, XpresSpa can start declaring revenue and that this business will take off, then buy XSPA stock. From that standpoint, it looks like a good deal, assuming the turnaround works.

But the problem is that turnarounds rarely turnaround. Just having a lot of cash on your balance sheet does not guarantee this.

Therefore, buyers should beware with XSPA stock. Unless you have a real gambling spirit there is no bargain element here, despite the large cash amount on the balance sheet.

On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Mark Hake runs the Total Yield Value Guide which you can review here.