Inspirato rporated(ISPO) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements (unaudited) Unaudited Q3 2023 financials show decreased assets, a widened deficit, and a significantly increased net loss primarily due to asset impairments and reduced cash Consolidated Balance Sheets As of September 30, 2023, total assets decreased to $353.3 million, cash declined, and the total deficit significantly widened to $141.6 million Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2022 | Sep 30, 2023 (Unaudited) | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $80,278 | $49,694 | | Total current assets | $116,881 | $79,928 | | Total assets | $430,367 | $353,329 | | Liabilities & Equity | | | | Total current liabilities | $278,118 | $243,663 | | Convertible note | $0 | $25,000 | | Total liabilities | $505,357 | $494,893 | | Total deficit | $(74,990) | $(141,564) | Consolidated Statements of Operations and Comprehensive Loss Q3 2023 revenue decreased 11% to $82.6 million, with net loss widening to $25.4 million, largely due to a $34.3 million asset impairment charge Key Operating Results (in thousands, except per share amounts) | Metric | Q3 2022 | Q3 2023 | Nine Months 2022 | Nine Months 2023 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $93,132 | $82,598 | $258,903 | $258,390 | | Gross Margin | $30,173 | $20,600 | $91,234 | $41,600 | | Asset Impairments | $0 | $4,294 | $0 | $34,348 | | Net Loss | $(7,252) | $(25,422) | $(36,491) | $(77,997) | | Net Loss per Share | $(1.13) | $(4.87) | $(6.99) | $(12.87) | Consolidated Statements of Cash Flows Net cash used in operating activities was $45.4 million for the nine months ended September 30, 2023, with overall cash decreasing by $30.6 million Cash Flow Summary (in thousands) | Activity | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | | :--- | :--- | :--- | | Net cash used in operating activities | $(48,279) | $(45,405) | | Net cash used in investing activities | $(9,865) | $(10,731) | | Net cash provided by financing activities | $58,933 | $25,553 | | Net (decrease) in cash | $789 | $(30,583) | Notes to Consolidated Financial Statements (unaudited) Key notes detail a 1-for-20 Reverse Stock Split, new 'Rewards' loyalty program, $25 million convertible note, significant asset impairments, and a class-action lawsuit - A 1-for-20 Reverse Stock Split of the company's common stock became effective on October 16, 2023. All historical share and per-share amounts have been adjusted to reflect this split[27] - In August 2023, the company launched a member loyalty program, 'Rewards'. This created a new performance obligation, resulting in the deferral of $6.8 million in revenue upon implementation[39][56] - On September 29, 2023, the company issued a $25.0 million, 8% Senior Secured Convertible Note due 2028 to an affiliate of Capital One, receiving net proceeds of $23.0 million[66][67] - The company recorded right-of-use asset impairments of $34.0 million and property and equipment impairments of $0.3 million for the nine months ended September 30, 2023, primarily related to underperforming properties in a single geographic location[86] - A class action lawsuit was filed against the company and certain officers in February 2023, alleging violations of the Exchange Act related to prior financial restatements[88] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 2023 revenue decline, reduced gross margin due to impairments, declining subscriptions, and strategic initiatives including a new loyalty program and Capital One investment Overview and Key Business Metrics The company, providing luxury travel, saw strategic developments including a reverse stock split and new loyalty program, but key metrics like subscriptions and ARR declined - The company executed a 1-for-20 reverse stock split, effective October 16, 2023[117] - Launched 'Rewards', a new member loyalty program, in August 2023 to incentivize repeat business[122] - Secured a $25.0 million strategic investment from a Capital One affiliate via a convertible note issued on September 29, 2023[124] Active Subscriptions by Type | Subscription Type | Sep 30, 2022 | Sep 30, 2023 | | :--- | :--- | :--- | | Legacy | 9,800 | 8,300 | | Pass | 3,800 | 2,700 | | Club | 2,600 | 3,500 | | Total | 16,200 | 14,500 | - Annual Recurring Revenue (ARR) decreased to $140.3 million at September 30, 2023, from $166.7 million at September 30, 2022[130] Results of Operations Q3 2023 revenue decreased 11% to $82.6 million, gross margin fell to 25% due to impairments, and G&A expenses rose while other operating expenses decreased Comparison of Q3 2022 vs Q3 2023 (in thousands) | Metric | Q3 2022 | Q3 2023 | Change | | :--- | :--- | :--- | :--- | | Revenue | $93,132 | $82,598 | $(10,534) | | Gross Margin | $30,173 | $20,600 | $(9,573) | | Gross Margin % | 32% | 25% | -7 pp | | Net Loss | $(7,252) | $(25,422) | $(18,170) | - The nine-month gross margin decreased from 35% in 2022 to 16% in 2023, largely due to $34.3 million in asset impairments and higher lease expenses[174][182] - General and administrative expenses for Q3 2023 increased by 39% YoY to $23.5 million, mainly due to a $4.1 million increase in equity-based compensation expense, including severance charges for departing executives[166] Liquidity and Capital Resources The company holds $49.7 million in cash, bolstered by a $25 million convertible note, and believes current liquidity is sufficient for the next 12 months - As of September 30, 2023, the company had $49.7 million of cash and cash equivalents[193] - In September 2023, the company received net proceeds of approximately $23 million from the issuance of a $25 million convertible note[191] Cash Flow Summary (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | | :--- | :--- | :--- | | Net cash used in operating activities | $(48,279) | $(45,405) | | Net cash used in investing activities | $(9,865) | $(10,731) | | Net cash provided by financing activities | $58,933 | $25,553 | - Management believes its cash and cash equivalents on hand will be sufficient to meet working capital and capital expenditure requirements for at least the next 12 months[194] Non-GAAP Financial Metrics Non-GAAP metrics show Adjusted EBITDA loss worsening to $9.2 million in Q3 2023, with a Free Cash Flow outflow of $56.1 million for the nine-month period Adjusted EBITDA Reconciliation (in thousands) | | Q3 2022 | Q3 2023 | Nine Months 2022 | Nine Months 2023 | | :--- | :--- | :--- | :--- | :--- | | Net loss and comprehensive loss | $(7,252) | $(25,422) | $(36,491) | $(77,997) | | Adjusted EBITDA | $(6,765) | $(9,165) | $(22,593) | $(23,959) | Free Cash Flow Reconciliation (in thousands) | | Nine Months 2022 | Nine Months 2023 | | :--- | :--- | :--- | | Net cash used in operating activities | $(48,279) | $(45,405) | | Free Cash Flow | $(58,144) | $(56,136) | Quantitative and Qualitative Disclosures About Market Risk The company's market risks are primarily interest rate and foreign currency, both considered immaterial due to fixed-rate debt and limited foreign exposure - The company has no financial statement risk associated with interest rate changes on its $25.0 million note, as it bears a fixed rate. However, the note's fair value is subject to change with market interest rates and stock price fluctuations[216] - Foreign currency risk is considered immaterial. A hypothetical 10% change in the U.S. dollar against the Mexican Peso and Euro would not have had a material impact on the financial statements for the nine months ended September 30, 2023[217] Controls and Procedures Management concluded disclosure controls were ineffective as of September 30, 2023, due to material weaknesses in accounting, financial reporting, and IT controls, with remediation ongoing - Management concluded that disclosure controls and procedures were not effective as of September 30, 2023, due to ongoing material weaknesses[218] - The material weaknesses relate to: (1) accounting for leases under ASC 842, (2) financial closing and reporting processes, and (3) IT general controls, including user access and segregation of duties[221] - A remediation plan is in progress, involving increased finance headcount, employee training, and the engagement of third-party consultants to design and implement an improved control framework[222] PART II. OTHER INFORMATION Legal Proceedings The company faces a class action lawsuit filed in February 2023 alleging misleading statements related to prior financial restatements - A class action lawsuit was filed on February 16, 2023, alleging violations of the Exchange Act (Section 10(b) and 20(a)) against the company and individual defendants[226] - The complaint alleges that prior public statements were misleading due to misrepresentation and failure to disclose adverse facts related to the restatement of financial statements for the periods ended March 31, 2022, and June 30, 2022[228] Risk Factors Key risk factors include dependency on key personnel, uncertainty of the 'Rewards' program, need for additional capital, potential dilution from convertible notes, and Nasdaq listing standards compliance challenges - The company's success is highly dependent on retaining its senior management team, especially after recent significant leadership changes, including a new CEO and CFO in 2023[229] - The new 'Rewards' loyalty program, launched in August 2023, carries risks as the company has limited experience operating such a program, and its ability to enhance member loyalty and offset costs is uncertain[231] - The company may require additional capital to continue operations, and any future equity or debt financing could result in significant dilution to existing stockholders or more restrictive debt covenants[232][233] - The conversion of the $25 million note could be significantly dilutive to common stockholders and may depress the market price of the Class A Common Stock[234] - The company faces challenges in complying with Nasdaq listing standards, noting a recent notice of non-compliance with the majority independent board requirement as of September 2023[248] Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds were reported - No unregistered sales of equity securities or use of proceeds were reported for the period[250] Defaults Upon Senior Securities No defaults upon senior securities were reported - The company reported no defaults upon senior securities[251] Mine Safety Disclosures This item is not applicable to the company - This item is not applicable to the company[252] Other Information This item is not applicable to the company - This item is not applicable to the company[253] Exhibits This section lists exhibits filed with the Quarterly Report on Form 10-Q, including corporate documents, debt agreements, and certifications