XpresSpa Group(XWEL) - 2020 Q4 - Annual Report

Part I Item 1. Business The company operates airport spa (XpresSpa) and medical testing (XpresCheck) services, pivoting its business model due to the pandemic - The company operates two main segments: XpresSpa (airport spa services) and XpresTest (airport medical diagnostic testing), which operates XpresCheck Wellness Centers[18][20] Revenue Breakdown (2019 vs. 2020) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Total Revenue | $8,385,000 | $48,515,000 | | Revenue from Services | 84% | 82% | | Revenue from Retail Products | 12% | 15% | | Other Revenue | 4% | 3% | - Due to the COVID-19 pandemic, all global XpresSpa locations were temporarily closed effective March 24, 2020, causing a material adverse impact on the business[21][30][31] - In response to the pandemic, the company launched XpresCheck Wellness Centers in airports to offer COVID-19 and other medical diagnostic testing services[18][25][34] - The company is developing a new, broader travel health and wellness brand integrating on-site medical services, telemedicine, and virtual wellness care[26][27][29] - Operations are subject to significant regulation, including spa licensing, public health codes, and the Airport Concession Disadvantaged Business Enterprise (ACDBE) program[58][59][61] Item 1A. Risk Factors The company faces significant risks from the COVID-19 pandemic, a material weakness in financial controls, and new business uncertainties - The COVID-19 pandemic continues to pose a significant risk, causing spa closures and a material adverse impact on cash flows and operations[71][75][76] - A material weakness was identified in internal control over financial reporting for FY2020 due to an insufficient complement of experienced accounting personnel[77][79] - The new XpresCheck diagnostic testing business carries substantial risks, including limited operating history, reliance on key partners, and uncertain market demand[87][92][95] - The business is subject to complex healthcare regulations, including CLIA, FDA rules, and HIPAA, with non-compliance risks of significant penalties[101][102][105] - The ability to use significant net operating loss carryforwards of approximately $151 million may be limited under Section 382 of the Internal Revenue Code[82] - The company's common stock (XSPA) is highly volatile and could be negatively affected by future stock sales and the exercise of a substantial number of warrants[183][184][191] Item 1B. Unresolved Staff Comments The company reports that there are no unresolved staff comments - Not applicable[203] Item 2. Properties The company operates 50 leased spa and clinic locations across 25 airports globally and maintains a corporate headquarters in New York City - As of December 31, 2020, the company had 50 spa and clinic locations in 25 airports across the U.S, Netherlands, and United Arab Emirates[204] - All locations are leased, with average lease terms of 5-8 years, often with renewal options[204] - The company's Global Support Center is located in New York City, with a sublease expiring in September 2023[205] Item 3. Legal Proceedings The company is involved in several legal proceedings, with a recorded liability of approximately $2.221 million as of year-end 2020 - As of December 31, 2020, the company has recorded a liability of approximately $2,221,000 for all outstanding legal matters[208] - The dispute with former ACDBE partner Cordial was settled in November 2019, with all pending litigation dismissed[219] - In the In re Chen et al wage-hour class action lawsuit, the parties entered into settlement agreements and are awaiting preliminary court approval[223] - Multiple lawsuits filed by former XpresSpa stockholders related to the 2016 merger have been dismissed in the company's favor[228][229][231] - In the Rodger Jenkins and Gregory Jones v. XpresSpa Group, Inc case, the court awarded the plaintiffs $750,000 plus interest, which the company plans to appeal[237] Item 4. Mine Safety Disclosures The company reports that this item is not applicable - Not applicable[242] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock (XSPA) trades on Nasdaq, underwent a reverse stock split, and the company does not plan to pay dividends - The company's common stock is listed on the Nasdaq Capital Market under the trading symbol "XSPA"[244] - A 1-for-3 reverse stock split was effected on June 11, 2020[245] - As of March 26, 2021, there were 105,282,382 shares of common stock outstanding[246] - The company has never paid cash dividends and does not plan to in the foreseeable future[247] Item 6. Selected Financial Data This section is not required as the company qualifies as a smaller reporting company - Not required as the company is a smaller reporting company[250] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Pandemic-driven spa closures caused an 83% revenue drop and a $92.2 million net loss, though financing activities improved working capital Key Financial Results (2020 vs. 2019) | Metric (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Total Revenue | $8,385 | $48,515 | | Loss from Operations | $(40,104) | $(15,872) | | Net Loss | $(92,232) | $(20,530) | | Adjusted EBITDA Loss | $(18,210) | $(3,323) | - Revenue decreased by 83% in 2020 primarily due to the temporary closure of all global XpresSpa locations on March 24, 2020[321] - The company recorded impairment charges of $15.4 million in 2020 related to leasehold improvements, right of use assets, and the XpresSpa trademark[324][41][42] - A significant non-cash loss of $51.1 million was recognized in 2020 from the revaluation of warrants and debt conversion options[325] - The company raised approximately $117 million in gross proceeds through several registered direct offerings of common stock and warrants in 2020[261][335] - Net cash used in operating activities increased to $25.0 million in 2020 from $0.1 million in 2019, mainly due to costs for opening new XpresCheck Wellness Centers[339] - Working capital improved significantly from a deficit of $12.3 million to a surplus of $78.3 million at year-end 2020, driven by financing activities[268][336] Item 7A. Quantitative and Qualitative Disclosures About Market Risk This section is not required as the company qualifies as a smaller reporting company - Not required as the company is a smaller reporting company[366] Item 8. Financial Statements and Supplementary Data This section refers to the consolidated financial statements which are included in Item 15 of the report, beginning on page F-1 - The company's consolidated financial statements are located in Item 15, starting on page F-1 of the Annual Report[367] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[368] Item 9A. Controls and Procedures Management concluded disclosure controls were not effective due to a material weakness in the financial close and reporting process - Management concluded that the company's disclosure controls and procedures were not effective as of December 31, 2020[370] - A material weakness in internal control over financial reporting was identified, stemming from deficiencies in the financial close and reporting process[375][384] - This material weakness, also present in 2019, resulted in audit adjustments in areas such as lease accounting, asset impairment, and accrued liabilities[376] - Remediation efforts include appointing a permanent CFO, restructuring accounting processes, and hiring additional experienced accounting personnel[377][379][382] Item 9B. Other Information The company reports no other information for this item - None[386] Part III Item 10. Directors, Executive Officers and Corporate Governance The information required for this item will be included in an amendment to this Annual Report on Form 10-K - Information for this item is incorporated by reference and will be filed in an amendment to the Form 10-K[387] Item 11. Executive Compensation The information required for this item will be included in an amendment to this Annual Report on Form 10-K - Information for this item is incorporated by reference and will be filed in an amendment to the Form 10-K[388] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required for this item will be included in an amendment to this Annual Report on Form 10-K - Information for this item is incorporated by reference and will be filed in an amendment to the Form 10-K[389] Item 13. Certain Relationships and Related Transactions, and Director Independence The information required for this item will be included in an amendment to this Annual Report on Form 10-K - Information for this item is incorporated by reference and will be filed in an amendment to the Form 10-K[390] Item 14. Principal Accountant Fees and Services The information required for this item will be included in an amendment to this Annual Report on Form 10-K - Information for this item is incorporated by reference and will be filed in an amendment to the Form 10-K[391] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists the consolidated financial statements and provides an index of all exhibits filed with the report - This item contains the index to the Consolidated Financial Statements (page F-1) and a detailed list of all exhibits filed with the report[393][394][395] Item 16. Form 10-K Summary The company reports no summary for this item - None[405] Financial Statements and Notes Consolidated Financial Statements Financing activities drove a shift from a stockholders' deficit to a surplus, despite a significant net loss of $92.2 million in 2020 Consolidated Balance Sheet Data (in thousands) | Account | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $89,801 | $2,184 | | Total current assets | $91,779 | $3,933 | | Total assets | $103,133 | $28,724 | | Liabilities & Equity | | | | Total current liabilities | $13,477 | $16,220 | | Total liabilities | $22,762 | $31,260 | | Total stockholders' equity (deficit) | $80,371 | $(2,536) | Consolidated Statement of Operations Data (in thousands) | Account | Year Ended Dec 31, 2020 | Year Ended Dec 31, 2019 | | :--- | :--- | :--- | | Total revenue, net | $8,385 | $48,515 | | Operating loss | $(40,104) | $(15,872) | | Net loss | $(92,232) | $(20,530) | | Net loss per share (Basic & Diluted) | $(2.05) | $(12.99) | Consolidated Statement of Cash Flows Data (in thousands) | Account | Year Ended Dec 31, 2020 | Year Ended Dec 31, 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | $(25,012) | $(113) | | Net cash used in investing activities | $(4,349) | $(2,275) | | Net cash provided by financing activities | $117,225 | $1,165 | Notes to Consolidated Financial Statements Notes detail the pandemic's impact, liquidity measures, significant asset impairments, and the conversion of all major debt to equity - (Note 2) Critical accounting policies include impairment testing for long-lived assets, fair value measurement for derivatives, and revenue recognition[452][462][470] - (Note 6 & 8) In 2020, the company recorded impairment expenses of approximately $4.95 million on property and equipment and $3.93 million on the XpresSpa trade name[506][517] - (Note 9) Due to COVID-19, the company received rent concessions of $2.56 million and recorded an impairment expense of $6.34 million on its right-of-use lease assets[524][528] - (Note 10) All major convertible debt, including the B3D Note ($7.9 million) and the Calm Note ($2.5 million), was converted into common stock during 2020[534][547] - (Note 11) The company conducted multiple registered direct offerings in 2020, raising net proceeds of approximately $110.6 million[437][555][557] - (Note 14) Segment reporting shows the XpresSpa segment generated $8.0 million in revenue with a $30.0 million operating loss, while the new XpresTest segment had an operating loss of $3.5 million[597]