XpresSpa Group(XWEL) - 2021 Q4 - Annual Report

Part I Item 1. Business XpresSpa Group operates as a global travel health and wellness company with three main segments: XpresSpa, XpresTest, and Treat - The company operates through three main segments: XpresSpa (premium spa services), XpresTest (medical diagnostic testing), and Treat (a new travel, health, and wellness brand)[18][19][22] - In response to the pandemic, the company launched XpresCheck® Wellness Centers via its XpresTest subsidiary, with 15 operating locations in 12 airports as of the report date[21][29] - The company initiated a biosurveillance monitoring program with the CDC at four major U.S. airports, with the contract totaling $5.6 million after an extension[30] - In January 2022, the company acquired HyperPointe, a digital healthcare and data analytics agency, for $5.6 million in cash and $1 million in stock[38][39] - The company's go-forward strategy includes integrating products across its three brands, expanding health and wellness services outside of airports, and pursuing international expansion[42][48][49] - During 2021, the company repurchased 4.7 million shares for $7.8 million and in March 2022, it repurchased an additional 7.1 million shares for $11.1 million[37] Asset Impairment Charges (2020 vs. 2021) | Asset Type | 2021 Impairment | 2020 Impairment | | :--- | :--- | :--- | | Property and equipment | $90,130 | ~$5.0 million | | Operating lease right of use assets | $747,497 | ~$6.3 million | | Intangible assets (XpresSpa trademarks) | $0 | ~$3.9 million | Item 1A. Risk Factors The company faces significant risks related to its financial condition, business operations, and capital stock Risks Related to Financial Condition and Capital Requirements Financial stability is threatened by COVID-19's impact, an unremediated material weakness, significant capital needs, and potential limitations on NOL usage - The COVID-19 outbreak has materially and adversely impacted the business, particularly the spa segment, due to travel restrictions and temporary closures[83][84] - A material weakness in internal control over financial reporting, identified in 2020, was not fully remediated as of December 31, 2021[85][87] - The company has significant Net Operating Loss (NOL) carryforwards of approximately $207.2 million whose usability may be limited by Section 382 ownership change rules[88] - The business is capital-intensive, requiring substantial expenditures for new brand concepts and expanding operations, and may need to raise additional capital[92][93] Risks Related to Business Operations Operational risks stem from a limited history in diagnostic testing, reliance on third parties, extensive healthcare regulations, and dependence on air travel - The company has a limited operating history in the diagnostic testing and vaccination industry, which presents substantial risks and uncertainties[98] - The XpresCheck and Treat businesses rely on long-term contracts with professional medical practices and a limited number of suppliers for test kits and lab materials[99][101] - The business is subject to extensive and complex healthcare regulations, including CLIA, FDA oversight, and HIPAA, where non-compliance could result in severe penalties[111][114][115] - The legacy XpresSpa business is highly dependent on the volume of air travel and time passengers spend in airports, which have been negatively impacted by COVID-19[133][134] - Laws regulating the corporate practice of medicine could restrict how the XpresCheck and Treat businesses are conducted, potentially requiring restructuring[196][197] Risks Related to Capital Stock The company's common stock is subject to high price volatility, potential delisting from Nasdaq, and anti-takeover provisions - The market price of the company's common stock has been and is expected to continue to be highly volatile[200][206] - The company's ability to raise additional equity capital is constrained by a limited number of authorized but unissued shares[202] - The company has no current plans to pay dividends on its common stock[204] - Failure to meet Nasdaq's continued listing requirements, such as the minimum $1.00 bid price, could result in the delisting of the common stock[209] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - Not applicable[221] Item 2. Properties The company leases 52 spa and clinic locations across 24 airports in the U.S, Netherlands, and UAE, plus its corporate headquarters - As of December 31, 2021, the company had 52 leased spa and clinic locations in 24 airports across the U.S., Netherlands, and UAE[222] - Lease terms are typically 5-8 years, with some stores operating on a month-to-month basis[222] Item 3. Legal Proceedings The company is involved in various legal proceedings, with a recorded liability of approximately $0.8 million for outstanding matters - As of December 31, 2021, the company has recorded a liability of approximately $0.8 million for all outstanding legal matters[224] - The In re Chen et al. class action lawsuit received final court approval for its settlement on October 1, 2021, and the case was marked as closed[225][229] - The Kyle Collins v. Spa Products class action was settled in mediation, with a motion for preliminary approval of the settlement pending[230] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[233] 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 Nasdaq as "XSPA" and a share repurchase program was active in 2021 and early 2022 - The company's common stock is listed on Nasdaq under the symbol "XSPA" and a 1-for-3 reverse stock split was effected on June 11, 2020[235][236] - As of March 28, 2022, there were 95,071,210 shares of common stock outstanding[237] - The company has never paid cash dividends and does not intend to in the foreseeable future[238] Share Repurchase Activity | Period | Shares Repurchased | Average Cost/Share | Total Cost | | :--- | :--- | :--- | :--- | | During 2021 | 4.7 million | $1.66 | $7.8 million | | March 2022 | 7.1 million | $1.55 | $11.1 million | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue increased 779% to $73.7 million in 2021, driving a shift from a net loss to net income of $2.9 million Results of Operations Total revenue surged 779% to $73.7 million in 2021, leading to operating income of $4.1 million and net income of $3.3 million - The 779% increase in total revenue was primarily due to patient service revenue of $50.7 million and managed services fees of $16.8 million from XpresCheck[300] - General and administrative expenses increased by 51.8% to $24.2 million in 2021, mainly due to start-up costs for new brands and legal fees[306] Consolidated Results of Operations (2021 vs. 2020) | Metric (in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Total Revenue | $73,729 | $8,385 | | Total Cost of Sales | $41,385 | $11,983 | | General & Administrative | $24,199 | $15,940 | | Impairment/disposal of assets | $837 | $15,356 | | Operating Income (Loss) | $4,107 | ($40,104) | | Loss on revaluation of warrants | $0 | ($51,147) | | Net Income (Loss) | $2,893 | ($92,232) | | Net Income (Loss) to Shareholders | $3,349 | ($90,488) | Reconciliation to Adjusted EBITDA (Non-GAAP) | Metric (in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Income (Loss) from Operations | $4,107 | ($40,104) | | Depreciation and amortization | $3,201 | $5,210 | | Impairment/disposal of assets | $837 | $15,356 | | Stock-based compensation expense | $2,856 | $1,328 | | Adjusted EBITDA (Loss) | $11,001 | ($18,210) | Liquidity and Capital Resources The company's liquidity improved significantly, ending 2021 with $105.5 million in cash and positive operating cash flow of $14.6 million - As of December 31, 2021, the company had $105.5 million in cash and cash equivalents and a working capital surplus of $89.2 million[315] - During 2021, the exercise of various warrants provided gross proceeds of approximately $19.2 million[316] Cash Flow Summary (2021 vs. 2020) | Cash Flow Activity (in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Net cash from Operating Activities | $14,561 | ($25,012) | | Net cash used in Investing Activities | ($5,156) | ($4,349) | | Net cash from Financing Activities | $6,350 | $117,225 | Critical Accounting Estimates Critical accounting estimates include the evaluation of VIEs, impairment testing of long-lived assets, and fair value measurements - The company's evaluation of its relationship with professional medical service companies (PLLCs) led to their classification as Variable Interest Entities (VIEs) and subsequent consolidation[326] - Impairment testing of long-lived assets and intangible assets is a critical estimate, requiring management to make assumptions about future cash flows[327][330] - Fair value measurements, particularly for equity investments and derivative liabilities, are critical and are categorized using a three-tier hierarchy[331] Item 7A. Quantitative and Qualitative Disclosures About Market Risk This disclosure is not required as the company qualifies as a smaller reporting company - Not required as the company is a smaller reporting company[338] Item 8. Financial Statements and Supplementary Data This section refers to the consolidated financial statements included in Item 15 of the report - This item directs the reader to the consolidated financial statements located in Item 15 of the Annual Report[339] Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants - None[340] Item 9A. Controls and Procedures Disclosure controls were deemed not effective due to an unmitigated material weakness in internal control over financial reporting - Management concluded that disclosure controls and procedures were not effective as of December 31, 2021[342] - A material weakness in internal controls over the financial close and reporting process, first identified in 2019, remained unmitigated as of December 31, 2021[347][353] - Remediation efforts include appointing a permanent CFO and Corporate Controller, restructuring processes, and using outside service providers[348][350] Item 9B. Other Information This section details the Executive Employment Agreement for CEO Scott R. Milford, appointed effective January 19, 2022 - On March 28, 2022, the company entered into an Executive Employment Agreement with CEO Scott R. Milford, effective January 19, 2022[356] - The agreement includes an annual base salary of $425,000 and an annual bonus target of up to 100% of base salary[358] Part III Items 10-14 (Directors, Executive Compensation, Security Ownership, etc.) Information for these items will be included in an amendment to the Annual Report and is incorporated by reference - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference and will be filed in an amendment to the Form 10-K[363][364][365] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists the exhibits filed with the report and references the consolidated financial statements beginning on page F-1 - This item provides an index of all exhibits filed with or incorporated by reference into the Form 10-K[370][371] - The consolidated financial statements are referenced under this item, beginning on page F-1[369] Item 16. Form 10-K Summary The company indicates there is no Form 10-K summary - None[380] Consolidated Financial Statements and Notes Report of Independent Registered Public Accounting Firm The auditor issued an unqualified opinion, highlighting Critical Audit Matters related to asset valuation and accounting for VIEs - The auditor issued an unqualified opinion on the financial statements[386] - A critical audit matter was the valuation of long-lived assets due to significant management assumptions in estimating fair value[391][392] - A second critical audit matter was the accounting for Variable Interest Entities (VIEs), which required significant auditor judgment[394][396] Consolidated Financial Statements The financial statements show total assets grew to $127.3 million and the company shifted to a net income of $2.9 million in 2021 Consolidated Balance Sheet Data (in thousands) | | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $105,506 | $89,801 | | Total Current Assets | $108,979 | $91,779 | | Total Assets | $127,266 | $103,133 | | Total Current Liabilities | $19,827 | $13,477 | | Total Liabilities | $27,331 | $22,762 | | Total Equity | $99,935 | $80,371 | Consolidated Statement of Operations Data (in thousands) | | Year Ended Dec 31, 2021 | Year Ended Dec 31, 2020 | | :--- | :--- | :--- | | Total Revenue, net | $73,729 | $8,385 | | Operating Income (Loss) | $4,107 | ($40,104) | | Net Income (Loss) | $2,893 | ($92,232) | | Basic and Diluted EPS | $0.03 | ($2.05) | Notes to the Consolidated Financial Statements Key notes detail the consolidation of VIEs, segment performance, warrant activity, and the elimination of convertible debt - Effective July 1, 2021, the company began consolidating its affiliated medical groups as Variable Interest Entities (VIEs), recognizing $50.7 million in patient services revenue[414][452][482] - All outstanding convertible notes were fully converted into common stock during 2020, eliminating that source of debt[510][516] - In 2021, 11.3 million warrants were exercised, generating gross proceeds of $19.2 million, with 37.8 million warrants remaining outstanding[519][521] - The company acquired HyperPointe in January 2022 for an initial price of $6.6 million plus a potential earnout of up to $7.5 million[589][590] Segment Operating Income (Loss) (in thousands) | Segment | 2021 | 2020 | | :--- | :--- | :--- | | XpresSpa | ($9,617) | ($29,966) | | XpresTest | $25,452 | ($3,494) | | Treat | ($5,735) | — | | Corporate and other | ($5,993) | ($6,644) | | Total | $4,107 | ($40,104) |