XpresSpa Group(XWEL) - 2023 Q4 - Annual Report

PART I Item 1. Business XWELL, Inc. is a global wellness company with four main operating segments: XpresSpa® (airport spa services), XpresTest® (bio-surveillance and formerly COVID-19 testing), Naples Wax Center (off-airport hair removal boutiques), and Treat™ (airport wellness centers) - XWELL operates four reportable segments: XpresSpa®, XpresTest®, Naples Wax Center, and Treat™[23] - As of December 31, 2023, XpresSpa had 21 domestic locations (19 company-owned, 2 franchises) and 11 international locations[26] - XpresTest has transitioned from COVID-19 testing to conducting a bio-surveillance monitoring program with the CDC, with a contract renewed in August 2023 for approximately $7.0 million and expanded in March 2024 by an additional $4.0 million[28][29] - In September 2023, XWELL acquired Naples Wax, LLC for $1.624 million to expand its wellness services beyond airports[4] - The company's strategy includes expanding its off-airport presence through acquisitions and new concepts like TreatStudios, which leases space to wellness service providers[105][107][118] - As of December 31, 2023, the company had approximately 266 full-time and 71 part-time employees[125] Item 1A. Risk Factors The company faces significant risks, including identified material weaknesses in internal financial controls which led to a restatement of Q3 2023 financials, dependence on capital to fund operations, reliance on government contracts for its bio-surveillance business, and compliance with complex healthcare regulations (HIPAA, FDA), alongside operational risks related to air travel volume, supply chain disruptions, and the ability to manage new acquisitions and off-airport expansion, with additional risks noted for stock price volatility and potential delisting from Nasdaq if listing requirements are not met Risks Related to Financial Condition and Capital The company has identified five material weaknesses in its internal controls over financial reporting, impacting areas such as lease accounting, financial closing processes, IT vendor oversight, revenue processes, and foreign subsidiary controls, which led to a restatement of Q3 2023 financials due to an error in applying GAAP for segment impairment analysis, resulting in a $1.613 million increase in net loss, while its ability to use significant Net Operating Loss (NOL) carryforwards of approximately $249 million is potentially limited under Section 382, and the business requires substantial capital for growth and maintenance, with future funding not guaranteed, which could constrain operations and expansion plans - Management identified five material weaknesses in internal controls over financial reporting as of December 31, 2023, including deficiencies in accounting for leases, financial close monitoring, IT vendor controls, revenue processes, and foreign subsidiary oversight[60][61][62] - A misapplication of GAAP related to the impairment of the Treat business segment for Q3 2023 required a restatement, increasing the net loss for that quarter by $1,613 thousand[65][66] - As of December 31, 2023, the company has estimated total Net Operating Loss (NOL) carryforwards of $150.9 million (expiring) and $98.0 million (indefinite), but their usability may be limited by Section 382 ownership change rules[70] - The company's bio-surveillance activities are partially funded by government contracts, which are subject to budget appropriations and may not be available in the future, posing a risk to that revenue stream[78][81][85] - The business requires substantial capital for maintenance and growth, and the company may not be able to access additional capital on acceptable terms, which could require curtailing business plans[76][77][83] Risks Related to Business Operations The company's operations are subject to numerous risks, including complex legal and regulatory compliance, particularly for its XpresTest segment which handles hazardous materials and is governed by FDA and healthcare laws like HIPAA and CLIA, with a key risk being dependence on third parties for critical services and the security of their IT systems, while the business is highly reliant on volatile air travel passenger volume, and expansion into new off-airport locations and integrating acquisitions like Naples Wax Center present challenges that may not generate positive returns, additionally facing risks from supply chain disruptions, protection of customer data, and potential litigation - The XpresTest business is subject to extensive and complex laws and regulations, including CLIA, FDA, and HIPAA, with non-compliance potentially leading to severe penalties[97][99] - The company depends on third parties for critical services like supplies and transport for its bio-surveillance business, and any failure or security breach by these third parties could materially harm operations[103][104] - Business success is heavily dependent on international and domestic air travel passenger volume and the time they spend post-security, where a decrease in travel due to economic conditions, health crises, or terrorism could negatively impact operations[157][158] - Capital expenditures for new TreatStudios and Naples Wax locations may not generate a positive return, and the company will incur significant additional costs for this expansion[155][156] - Failure to protect customer credit card data and other personal information could lead to data loss, litigation, liability, and significant reputational harm[39][220][221] Risks Related to Capital Stock The company's common stock is subject to price volatility and has historically traded in low volumes, with a significant risk of potential delisting from Nasdaq if the stock price fails to meet the minimum bid requirement, a situation the company has faced previously and addressed with a reverse stock split in September 2023, while there are no current plans to pay dividends, and anti-takeover provisions in Delaware law and the company's charter could discourage or prevent a change in control, furthermore, as a smaller reporting company, reduced disclosure requirements may make the stock less attractive to some investors - The company's stock price is volatile and may be depressed, where failure to meet the continued listing requirements of Nasdaq, such as the $1.00 minimum bid price, could result in delisting[239][244][245] - The company effected a 1-for-20 Reverse Stock Split on September 28, 2023, to regain compliance with Nasdaq's minimum bid price rule, but there is no assurance this will result in a sustained price increase[248] - The company has no current plans to pay dividends on its common stock and intends to retain future earnings for operations and growth[242][243] - As a "smaller reporting company," the company has reduced disclosure obligations, which may make its common stock less attractive to investors[257][264] Item 1B. Unresolved Staff Comments Not applicable - The company reports no unresolved staff comments[271] Item 1C. Cybersecurity XWELL has established a cybersecurity program based on the NIST Cybersecurity Framework, overseen by a Director of Data Privacy & Security and a Privacy & Compliance Committee, employing a defense-in-depth strategy with tools like firewalls, MFA, EDR (CrowdStrike), and SIEM (Barracuda), with the Audit Committee of the Board providing oversight and receiving regular updates, while key identified risks include data exfiltration from unmanaged devices, potential understaffing due to budget cuts, and risks associated with managing protected health information, and the company also has a third-party risk management program to assess vendors, maintaining cyber insurance to mitigate potential impacts despite no major incidents having occurred - The company's cybersecurity program, established in 2022, is based on the NIST Cybersecurity Framework and is overseen by the Director of Data Privacy & Security and a Privacy & Compliance Committee[273] - A defense-in-depth strategy is implemented using technologies such as Intrusion Detection Firewalls, Multi-Factor Authentication (MFA), Endpoint Detection and Response (EDR) with CrowdStrike, and Security Information Event Management (SIEM) with Barracuda[276] - The Audit Committee of the Board of Directors is responsible for the oversight of cybersecurity risks and receives regular reports from the internal committee[281] - Material cybersecurity risks include potential data exfiltration, insufficient staffing and tools due to budget reductions, and risks of managing protected health information in-house[279] Item 2. Properties As of December 31, 2023, XWELL operated from its Global Support Center in New York City and had 37 leased spa and wellness centers across 18 airport and off-airport locations in the United States, Netherlands, Turkey, and the United Arab Emirates, with leases typically having terms of 5-10 years, and some operating on a month-to-month basis - As of December 31, 2023, XWELL had 37 spas and wellness centers in 18 airport and off-airport locations across the US, Netherlands, Turkey, and UAE[286] - All locations are leased, with typical terms of 5-10 years, and the company believes its facilities are adequate for its business needs[286] Item 3. Legal Proceedings The company is involved in various legal matters arising in the ordinary course of business, which management does not believe will have a material adverse effect on the company, and as of December 31, 2023, a liability of approximately $449 thousand has been recorded for all outstanding legal matters, including a specific lawsuit, OTG Management PHL B v. XpresSpa, involving a claim for accelerated rent between $865 thousand and $2.25 million related to a sublease at Philadelphia International Airport, which was placed on Civil Suspense in January 2024 - The company has recorded a liability of approximately $449 thousand for all outstanding legal matters as of December 31, 2023[288] - A lawsuit was filed by OTG Management at Philadelphia International Airport claiming between $865 thousand and $2.25 million in accelerated rent for an alleged breach of a 12-year sublease, and the case was placed on Civil Suspense on January 9, 2024[289][290][759] Item 4. Mine Safety Disclosures Not applicable - The company reports no mine safety disclosures[291] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the Nasdaq Capital Market under the symbol 'XWEL' since October 25, 2022, following a name change from XpresSpa Group, Inc. ('XSPA'), and as of April 15, 2024, there were 4,183,435 shares outstanding held by 86 stockholders of record, with the company never having paid cash dividends and not anticipating doing so in the foreseeable future, intending to retain any earnings for business operations and expansion - The company's common stock trades on the Nasdaq Capital Market under the symbol 'XWEL' since October 25, 2022[293] - As of April 15, 2024, there were 4,183,435 shares of common stock outstanding[294] - The company has never paid cash dividends and does not plan to in the foreseeable future[295] Item 6. [Reserved] This item is reserved - Item 6 is marked as [RESERVED][40] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations For the year ended December 31, 2023, total revenues decreased by 46% to $30.1 million from $55.9 million in 2022, primarily due to the wind-down of the XpresTest COVID-19 testing segment, with the company recording a net loss of $28.0 million, an improvement from a $32.6 million loss in 2022, and significant impairment charges of $8.9 million were recorded in 2023 across goodwill, intangible assets, and long-lived assets, while the company's strategy is to expand its wellness brands, right-size its airport portfolio, and grow its off-airport presence, and as of year-end 2023, the company had a working capital surplus of $17.2 million, down from $36.4 million in 2022, with cash and marketable securities totaling $23.0 million Results of Operations (2023 vs 2022) Total revenue for 2023 was $30.1 million, a 46% decrease from $55.9 million in 2022, driven by the closure of XpresCheck testing locations, with cost of sales decreasing to $26.4 million from $43.9 million, and operating expenses falling to $31.9 million from $43.2 million, aided by lower G&A costs, while the company recorded significant impairment charges of $8.9 million in 2023, including a $4.0 million goodwill impairment related to the HyperPointe business, and the net loss attributable to XWELL, Inc. was $27.7 million, compared to a net loss of $32.8 million in 2022 Consolidated Statement of Operations (in thousands) | Metric | 2023 | 2022 | Variance | | :--- | :--- | :--- | :--- | | Total Revenue | $30,109 | $55,939 | $(25,830) | | Gross Profit | $3,681 | $12,048 | $(8,367) | | Total Operating Expenses | $31,887 | $43,211 | $(11,324) | | Operating Loss | $(28,206) | $(31,163) | $2,957 | | Net Loss | $(28,029) | $(32,629) | $4,600 | | Net Loss Attributable to XWELL, Inc. | $(27,741) | $(32,837) | $5,096 | Impairment Charges (in thousands) | Asset Class | 2023 | 2022 | | :--- | :--- | :--- | | Goodwill | $4,024 | $0 | | Intangible assets | $2,768 | $110 | | Long-lived assets (Fixed Assets) | $1,159 | $4,559 | | Right-of-use assets | $926 | $1,110 | | Total Impairment | $8,877 | $5,779 | - The 46% decrease in revenue was primarily due to the reduction in patient service revenue from the XpresTest segment as COVID-19 testing requirements were relaxed and locations were closed[404] - General and administrative expenses decreased by 39% ($8.2 million) in 2023, mainly due to reduced costs associated with XpresCheck operations and lower overhead[409][426] Liquidity and Capital Resources As of December 31, 2023, the company had $8.4 million in cash and cash equivalents and $14.6 million in marketable securities, with the working capital surplus at $17.2 million, a decrease from $36.4 million at the end of 2022, and net cash used in operating activities was $16.1 million in 2023, an improvement from $24.2 million used in 2022, primarily due to the wind-down of the cash-intensive XpresCheck business, while net cash provided by investing activities was $5.7 million, mainly from the sale of marketable securities Liquidity Position (in thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $8,437 | $19,038 | | Marketable securities | $14,613 | $23,153 | | Working capital surplus | $17,236 | $36,376 | Cash Flow Summary (in thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(16,074) | $(24,188) | | Net cash provided by (used in) investing activities | $5,650 | $(34,843) | | Net cash provided by (used in) financing activities | $8 | $(27,377) | Critical Accounting Estimates The company's critical accounting estimates involve significant judgment and include the impairment testing of goodwill, long-lived assets, and intangible assets, with these assessments requiring management to make assumptions about future cash flows, revenue growth, and discount rates, and in 2023, a triggering event led to a $4.024 million goodwill impairment charge for the HyperPointe business, while the company also recognized impairment charges of $1.159 million for long-lived assets and $2.768 million for intangible assets based on these estimates - Goodwill is tested for impairment annually or when a triggering event occurs, where a triggering event in Q3 2023 led to a quantitative test and a goodwill impairment charge of $4,024 thousand[436][461] - Long-lived assets are tested for recoverability when indicators of impairment are present, and the company uses a discounted cash flow method to estimate fair value, which in 2023, resulted in impairment charges of $1,159 thousand for long-lived assets and $926 thousand for operating lease right-of-use assets[421][463] - Intangible assets are reviewed for impairment when events indicate the carrying amount may not be recoverable, and in 2023, this review resulted in an impairment charge of $2,768 thousand[439][441] Item 9A. Controls and Procedures Management concluded that as of December 31, 2023, the company's disclosure controls and procedures were not effective due to five material weaknesses, relating to (1) lease accounting, (2) entity-level monitoring of financial closing, (3) controls over service organizations and IT vendors, (4) revenue process controls, and (5) controls over foreign subsidiaries, with a remediation plan underway, which includes engaging outside service providers for valuation and accounting assistance, contracting a consulting firm for financial statement preparation, and enhancing system features for foreign currency - Management concluded that disclosure controls and procedures were not effective as of December 31, 2023, due to several material weaknesses[467] - Five material weaknesses were identified in internal control over financial reporting: 1) Lease accounting (ASC 842), 2) Financial close and reporting process monitoring, 3) Controls over service organizations/IT vendors, 4) Revenue process controls, and 5) Controls over foreign subsidiaries[448][449][469] - A remediation plan has been initiated, which includes engaging outside consulting firms for U.S. GAAP accounting and financial statement preparation, using service providers for key reporting areas like leases and revenue, and turning on multi-currency features in accounting systems[451][452][473] - An incorrect impairment analysis for the Treat segment in Q3 2023, which omitted right-of-use and fixed assets, led to a restatement increasing net loss by $1,613 thousand[447] PART III Items 10-14 Information required for Items 10 (Directors, Executive Officers, and Corporate Governance), 11 (Executive Compensation), 12 (Security Ownership), 13 (Certain Relationships and Related Transactions), and 14 (Principal Accountant Fees and Services) will be provided in an amendment to this Annual Report on Form 10-K and is incorporated by reference - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from an amendment to the Form 10-K to be filed later[454][479][480] PART IV Item 15. Exhibits and Financial Statement Schedules This section contains the consolidated financial statements for XWELL, Inc. and its subsidiaries for the years ended December 31, 2023 and 2022, including the independent registered public accounting firm's report, consolidated balance sheets, statements of operations, changes in equity, and cash flows, along with detailed notes to the financial statements, with all financial schedules omitted as they are not applicable or the required information is included elsewhere - The consolidated financial statements are included in this report, starting on page F-1[483] - All financial statement schedules are omitted because they are not applicable or the required information is included in the financial statements or notes[499] Consolidated Financial Statements The audited financial statements for the years ended December 31, 2023 and 2022 show a decrease in total assets from $70.4 million to $39.0 million, and a decrease in total equity from $47.9 million to $21.0 million, with the company reporting a net loss of $28.0 million in 2023, compared to a $32.6 million loss in 2022, and a significant event was the restatement of Q3 2023 financials due to an error in accounting for long-lived asset impairment, which increased the previously reported net loss for that period by $1.6 million, while the company also executed a 1-for-20 reverse stock split in September 2023 Consolidated Balance Sheet Highlights (in thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $8,437 | $19,038 | | Total Current Assets | $26,566 | $47,332 | | Total Assets | $38,993 | $70,426 | | Total Current Liabilities | $9,330 | $10,956 | | Total Liabilities | $18,022 | $22,477 | | Total Equity | $20,971 | $47,949 | Consolidated Operations Highlights (in thousands) | Metric | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | | :--- | :--- | :--- | | Total Revenue, Net | $30,109 | $55,939 | | Gross Profit | $3,681 | $12,048 | | Operating Loss | $(28,206) | $(31,163) | | Net Loss | $(28,029) | $(32,629) | - The independent auditor, Marcum LLP, issued an unqualified opinion on the financial statements, stating they present fairly, in all material respects, the financial position of the company[517] - A 1-for-20 reverse stock split was effected on September 28, 2023, and all share and per-share amounts have been retroactively adjusted[320][658] Note 15. Segment Information For 2023, XpresSpa was the largest segment by revenue at $19.1 million, followed by XpresTest at $9.9 million, though XpresTest's revenue saw a steep decline from $40.9 million in 2022, with XpresSpa reporting an operating loss of $13.0 million, while XpresTest had an operating loss of $4.7 million, and the newly acquired Naples Wax Center contributed $0.7 million in revenue and a $0.2 million operating profit, while the Treat segment generated $0.4 million in revenue with a $2.3 million operating loss, and geographically, the United States accounted for $24.9 million of the total $30.1 million revenue in 2023 2023 Financials by Segment (in thousands) | Segment | Revenue | Operating Loss | Long-lived Assets (End of Period) | | :--- | :--- | :--- | :--- | | XpresSpa | $19,067 | $(12,951) | $8,268 | | XpresTest | $9,912 | $(4,701) | $92 | | Naples Wax | $686 | $162 | $1,371 | | Treat | $444 | $(2,315) | $669 | | Corporate & Other | $0 | $(8,401) | $438 | | Total | $30,109 | $(28,206) | $10,838 | Revenue by Geography (in thousands) | Region | 2023 | 2022 | | :--- | :--- | :--- | | United States | $24,944 | $52,250 | | All other countries | $5,165 | $3,689 | | Total Revenue | $30,109 | $55,939 | Note 19. Restatement of Previously Issued Financial Statements (Unaudited) The company restated its previously issued unaudited financial statements for the three and nine-month period ended September 30, 2023, as the restatement was necessary because the company incorrectly accounted for the impairment of long-lived assets in its Treat segment, failing to include right-of-use and fixed assets in its impairment analysis, with this error resulting in an understatement of impairment expenses, and the correction increased the net loss for the quarter ended September 30, 2023, by $1,613 thousand, from a reported $9,978 thousand to a restated $11,591 thousand - The company determined that its previously issued financial statements for the period ended September 30, 2023, should no longer be relied upon and required restatement[370] - The error was due to an incorrect application of GAAP for the impairment of long-lived assets in the Treat segment, which understated impairment expenses[357][370] Impact of Restatement on Q3 2023 (in thousands) | Metric | As Filed | Restatement Adjustment | As Restated | | :--- | :--- | :--- | :--- | | Impairment of long-lived assets | $6,782 | $1,096 | $7,878 | | Impairment of operating lease right-of-use assets | $0 | $517 | $517 | | Net Loss | $(9,978) | $(1,613) | $(11,591) | | Total Assets | $44,550 | $(1,613) | $42,937 | | Total Equity | $27,270 | $(1,613) | $25,657 |