ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless otherwise stated, dollar amounts are provided in thousands, except share and per share data.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with, and is qualified in its entirety by, our consolidated financial statements (including notes to the consolidated financial statements) and the other consolidated financial information appearing elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. Actual results and timing of events could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
On October 25, 2022, we changed our name to XWELL, Inc. (formerly known as XpresSpa Group, Inc.) (“XWELL” or the “Company”) from XpresSpa Group, Inc. Our common stock, par value $0.01 per share, which had previously been listed under the trading symbol “XSPA” on the Nasdaq Capital Market, now trades under the trading symbol “XWEL” since the opening of the trading market on October 25, 2022. Rebranding to XWELL, Inc. aligned our corporate strategy to build a pure-play health and wellness services company, both in the airport and off-airport marketplaces.
XWELL’s subsidiary, XpresSpa Holdings, LLC (“XpresSpa”) has been a global airport retailer of spa services through its XpresSpa spa locations, offering travelers premium spa services, including massage, nail and skin care, as well as spa and travel products.
Following a non-essential closure of all spas during the COVID-19 pandemic, XpresSpa reopened 25 domestic locations and operated nine international locations as of December 31, 2022 as described under “Recent Developments - XpresSpa Spa Services” below.
Following the temporary closure of all global XpresSpa locations due to the categorization by local jurisdictions of the spa locations as “non-essential services” in connection with the outbreak of COVID-19, we launched our XpresCheck®segment through XWELL’s subsidiary XpresTest, Inc. (“XpresCheck” or “XpresTest”).The XpresCheck Wellness Centersoffered COVID-19 and other medical diagnostic testing services to the traveling public, as well as airline, airport and concessionaire employees, and TSA and U.S. Customs and Border Protection agents during the pandemic.
At one point, XpresCheck had 15 locations open in 12 airports across the United States. Following the relaxation of testing requirements by the US and other countries in 2022, XpresCheck locations began to close. As of March 31, 2023, all XpresCheck locations have been closed except for one location serving our military forces being stationed overseas and flying out of of Seattle, WA.
Treat, which is operating through XWELL’s subsidiary Treat, Inc. (“Treat”) launched in 2021 as our travel, health and wellness brand transforming the way we provide care to our customers through a suite of health and wellness services supported by an integrated digital platform and a relevant retail offering to the traveling public.
Treat’s on-site centers (currently located in JFK International Airport, and in Salt Lake City International Airport) provide access to health and wellness services for travelers. Our teams provide travel-related diagnostic testing for virus, cold, flu and other illnesses as well as hydration therapy, IV drips, and vitamin injections. Travelers can purchase time blocks to use our wellness rooms to engage in interactive services like self-guided yoga, meditation and low impact weight exercises or to relax and unplug from the hectic pace of the airport and renew themselves before or after their trip.
Treat offers a website (www.treat.com) and mobile app to complement the offering with relevant health and wellness content designed to help people on the go with information that could impact their travel. The platform provides travelers
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access to a comprehensive online marketplace of services including global illness tracker tools such as the COVID-19 Requirements Map and a scheduler to arrange for direct care at one of our on-site locations.
XWELL’s subsidiary, gcg Connect, LLC, operating as HyperPointe segment, which was acquired in January 2022, provides direct to business marketing support across a number of health and health-related channels. From the creation of marketing campaigns for the pharmaceutical industry, to learning management systems to website and health related content creation, HyperPointe is a complementary service provider to XWELL’s health-focused brands as well as prodiving the majority of services to the external community.
Although we recognize four segments of business, our strategy for the future is to create and leverage a fully integrated set of products and services that are both profitable and scalable across our portfolio of brands. Additionally, we are expanding our retail strategy, not only adding more products for sale but aligning those products more efficiently to our service offerings. This product strategy includes, for example, adding muscle relaxation patches to a neck or back massage to continue treatment after the delivery of the service.
We also plan to build our capability for delivering health and wellness services outside of the airport. We believe operating outside of the airport complements our offering and represents the fastest way to scale the XWELL family of brands.
We will be looking to further expand internationally. With international travel slowly returning to pre-pandemic levels, we continue to be opportunistic in our approach, by taking advantage of the current market to growth. We believe a strategy for international expansion further advances our ability to expand our other brands including biosurveillance outside of the US.
These strategic imperatives will be accomplished through development of an infrastructure specifically focused on enabling scalable and efficient growth.
Recent Developments
XpresSpa Spa Services
There are currently 25 operating XpresSpa domestic locations. During 2022, we sold one location in Austin-Bergstrom International Airport to its franchisee which now operates both locations at this airport. As we continues to monitor fluctuating airport volumes, we will also continue to review operating hours to optimize revenue opportunity.
There are also 10 international locations operating, including 2 XpresSpa locations in Dubai International Airport in the United Arab Emirates, 3 XpresSpa locations in Schiphol Amsterdam Airport in the Netherlands and 5 XpresSpa locations in Istanbul Airport in Turkey. The Company had signed for 5 locations at Istanbul Airport in Turkey of which 4 opened during the fourth quarter of 2022, with the remaining one location opening in January 2023.
We have received rent concessions from landlords on a majority of our leases, allowing for the relief of minimum guaranteed payments in exchange for percentage-of-revenue rent or providing relief from rent through payment deferrals. The periods of relief from these payments, which began in March 2020, ranged from three to twenty-eight months enabling us to receive minimum guaranteed payment concessions of approximately $431 and $2,078 during 2022 and 2021, respectively.
XpresCheck Wellness Centers
XpresTest’s business has management services agreements with state licensed physicians and nurse practitioners, under which we administer a COVID-19 rapid PCR test.
During 2022, as countries continued to relax their testing requirements resulting in rapid decline of testing volumes at our XpresCheck locations, we closed all but one XpresCheck Wellness Centers. Therefore, as of the date of this report, there is only one operating XpresCheck location operating in one airport.
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During 2021, XpresTest initiated a $2,001, eight-week pilot program with the CDC in collaboration with Concentric by Ginkgo Bioworks (NYSE: DNA). Under this program, XpresTest conducted biosurveillance monitoring at four major U.S. airports (JFK International Airport, Newark Liberty International Airport, San Francisco International Airport, and Hartsfield-Jackson Atlanta International Airport) aimed at identifying existing and new SARS-CoV-2 variants. On January 31, 2022, we announced the extension of the program, bringing the total contract to $5,534. Approximately $4,166 and $1,368 of the full $5,534 amount was recognized during 2022 and the fourth quarter of 2021, respectively.
During the third quarter of 2022, XpresTest, in partnership with Ginkgo Bioworks in continuation of their support to the CDC’s traveler-based SARS-CoV-2 genomic surveillance program were awarded a new two-year contract. The partnership is expected to support public health and biosecurity services totaling approximately $16,000 (for the first year), with an overall potential to exceed $61,000 based on CDC program options and public health priorities. As COVID-19 sub variants and other biological threats continue to emerge, the partners plan to expand the program footprint and incorporate innovative modalities and offerings, such as monitoring of wastewater from aircraft lavatories. The current contract with Ginkgo Bioworks related to the above partnership contains fixed pricing for which we are entitled to $6,761 for the sample collection (passenger and aircraft wastewater) and $570 for the traveler enrollment initiatives, which represents the amount of consideration to which we are entitled in the first year. We recognize revenue over time for both sample collection performance obligations, using the input method based on time elapsed to measure progress towards satisfying each of the performance obligations. We recognize revenue ratably (straight line basis) over the term of the contract (annual increments). We will recognize revenue over time for the traveler enrollment initiative performance obligation based on the amount for which we have the right to invoice. We recorded $2,617 in revenue during 2022.
Treat
Throughout 2022, our Treat brand opened new locations in Phoenix Sky Harbor (pre-security) and Salt Lake City International Airport. With respect to these locations in Phoenix and Salt Lake City, agreements had already been executed with the aiports and the decision was made to convert these locations to Treat.
By the third quarter of 2022, it became clear that the Treat business was underperforming and as a result, we began to retool the offerings within the Treat locations by providing additional retail as part of our retail strategy expansion as well as lay the foundation to bring more spa-like services into the Treat location in an attempt to unify our core offering.
By the fourth quarter of 2022, the decision was made to close the pre-security Treat location at Phoenix Sky Harbor Airport. As of March 31, 2023, the Treat brand operates 2 locations (JFK International Airport and Salt Lake City International Airport). These remaining Treat locations offer a full retail product offering and a suite of wellness and spa services.
HyperPointe Acquisition
In January 2022, we acquired gcg Connect, LLC d/b/a HyperPointe. HyperPointe is a leading digital healthcare and data analytics relationship marketing agency servicing the global healthcare and pharmaceutical industry. HyperPointe has significant experience in patient and healthcare professional marketing and deep technological experience with CXM (customer experience management) and data analytics. Since June 2020, HyperPointe’s management team and suite of services and technology have been used to develop and deploy the technological infrastructure needed to scale the growth of our XpresTest business HyperPointe’s experience in this space continues to serve the XpresTest business and it plays a critical role in the expansion of our on-going biosurveillance collaboration with the CDC.
The purchase price in the transaction consisted of $7,121 in cash and $906 in common stock, offset by the settlement of intercompany accounts payable of $770 as well as potential additional earn-out payments of up to $7,500 over a three-year timeframe based upon future performance; these earn-out payments may be satisfied in cash or common stock or a combination thereof subject to various terms and conditions.
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HyperPointe currently operates as a segment within XWELL’s corporate structure. Ezra Ernst, who was the chief executive officer of HyperPointe before our acquisition, continues to serve as the chief executive officer of HyperPointe, as well as the chief executive officer of XpresTest, reporting to Scott Milford, XWELL CEO.
Our Strategy and Outlook
We believe that our company is well positioned to benefit from consumers’ growing interest and pent-up demand in travel health and wellness and increasing demand for health and wellness related services and products. Our go-forward plan includes the expansion and integration of products and services across our four brands; the right-sizing of our existing airport portfolio to a leaner and more profitable business; the execution of an ‘off-airport’ strategy through acquisition to deliver more products and services,which will serve as a catalyst for our future growth; the implementation of an international expansion plan; and ensuring we can scale our growth in a responsible way that drives shareholder value. Through right-sizing our existing business, optimizing our cost structure and making acqiuisitions that further leverage the strength of our brand portfolio, XWELL is positioning itself for both financial and operational growth now and in the future.
Year ended December 31, 2022 compared to the year ended December 31, 2021
Revenue
Year ended December 31,
During the year ended December 31, 2022, total revenues decreased $17,790, or 24%. The decrease in revenue was primarily due to reduction in patient service revenue triggered by the rapid decline of the XpresTest segment as countries continued to relax their testing requirements and decreased testing volumes at our XpresCheck locations as we progressed through 2022. We saw an increase in revenue associated with the XpresSpa and Treat locations that opened during and after the third quarter of 2021.
Cost of sales
Year ended December 31,
We had 33 open XpresSpa locations as of December 31, 2022, and 22 open XpresSpa locations as of December 31, 2021. The largest components in the cost of sales are costs of testing kits and labor costs at the location-level, cost of sales also includes rent and related occupancy costs, which primarily includes rent based on percentage of sales, other product costs directly associated with the procurement of retail inventory, and other operating costs.
Depreciation and amortization
Year ended December 31,
During the year ended December 31, 2022, depreciation and amortization expense increased $2,228, or 69.6%, compared to the depreciation and amortization expense recorded during the year ended December 31, 2021. The increase was. primarily due to depreciation and amortization related to our newly added Hyperpointe and Treat segments.
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Impairment/disposal of assets
Year ended December 31,
Impairment/Loss on disposal of assets $ 6,613 $ 837 $ 5,776
We completed an assessment of our property and equipment, intangible assets and right of use lease assets for impairment both as of December 31, 2022 and 2021. Based upon the results of the impairment test, we recorded an impairment of property and equipment, intangible assets, and right of use lease assets of approximately $4,559, $110, and $1,110, respectively in the year ended December 31, 2022. We recorded an impairment of property and equipment and right of use lease assets of approximately $68 and $747, respectively, in the year ended December 31, 2021. During 2022, the impairment was primarily related to the impairment of leasehold improvements made to our Treat locations and its related operating lease right of use assets where management determined that the locations discounted future cash flows were not sufficient to recover the carrying value of these assets over the remaining lease term. During 2021, the expense was primarily related to the impairment of leasehold improvements made to certain XpresSpa locations and right of use lease assets where as a result of the COVID-19 pandemic, management determined that the location’s discounted future cash flow was not enough to support the carrying value of the leasehold improvements and right of use lease assets over the remaining lease term.
During 2022, as countries continued to relax their testing requirements resulting in rapid decline of testing volumes at Company’s XpresCheck locations, the Company closed all but one XpresCheck Wellness Centers. These closures primarily triggered the loss of $834 on disposal of assets.
General and administrative
Year ended December 31,
During the year ended December 31, 2022, general and administrative expenses increased by $6,970 or 28.8%, primarily due to functional costs associated with the operations of XpresCheck and Treat Wellness Centers, XpresSpa locations, and the newly acquired HyperPointe segment.
Interest income, net
Year ended December 31,
Interest income, net $ 384 $ 43 $ 341
Interest income increased by $341 as a result of increased interest rates and elimination of interest expense since the beginning of May 2022.
Non-operating expense, net
Year ended December 31,
Non-operating expense, net $ (1,795) $ (1,201) $ (594)
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The following is a summary of the transactions included in non-operating income (expense), net for the years ended December 31, 2022 and 2021:
Year ended December 31,
Loss on equity investments $ (618) $ (1,045)
Foreign exchange loss (664) (18)
Bank fees and financing charges (462) (121)
Other (51) (17)
As of December 31, 2022, the equity investment in Route1 had a readily determinable fair value of $104. We recorded an unrealized loss of $618 in connection with the remeasurement of the shares of our common stock and warrants of Route 1 obtained in the 2018 sale of Group Mobile to Route 1. Foreign exchange loss primarily pertains to remeasurement of our operating leases in our XpresSpa locations in Turkey.
Non-operating expense will be affected by the adjustments to the fair value of our equity investment, which could fluctuate materially from period to period. Fair value of these instruments depends on a variety of assumptions.
Income Taxes
As of December 31, 2022, our estimated aggregate total NOLs were $150,926 for U.S. federal purposes, expiring 20 years from the respective tax years to which they relate, and $75,045 for U.S. federal purposes with an indefinite life due to new regulations in the Tax Act of 2017. The NOL amounts are presented before Internal Revenue Code, Section 382 limitations. The Tax Reform Act of 1986 imposed substantial restrictions on the utilization of NOL and tax credits in the event of an ownership change of a corporation. Thus, our ability to utilize all such NOL and credit carryforwards may be limited. The CARES Act was enacted on March 27, 2020 and provides favorable changes to tax laws for businesses impacted by COVID-19. However, we do not anticipate the income tax law changes will materially benefit us.
We did not have any material unrecognized tax benefits as of December 31, 2022. We do not expect to record any additional material provisions for unrecognized tax benefits within the next year.
Liquidity and Capital Resources
As of December 31, 2022, we had approximately $19,038 of cash and cash equivalents, $23,153 in marketable securities, and total current assets of approximately $47,332. Our total current liabilities balance, which includes accounts payable, deferred revenue, accrued expenses, and operating lease liabilities was approximately $10,956 as of December 31, 2022. The working capital surplus was $36,376 as of December 31, 2022, compared to a working capital surplus of $89,152 as of December 31, 2021.
During 2021, holders of our December 2020 Investor Warrants, December 2020 Placement Agent Warrants and December 2020 Placement Agent Tail Fee Warrants exercised a total of 11,273,529 warrants for common shares. We received gross proceeds of approximately $19,245. In accordance with the placement agent agreements with H.C. Wainwright & Co., LLC and Palladium, we paid cash fees of $2,162 and issued 846,588 warrants to H.C. Wainwright & Co., LLC at an exercise price of $2.125 per share and 325,500 warrants to Palladium at an exercise price of $1.70 per share.
Also, during 2021, we executed on our share repurchase program, repurchasing and retiring 4,702,072 shares at an average cost of $1.66 per share, for a total of $7,825.
During 2022, the Company continued to execute on its share repurchase program, repurchasing and retiring 19,526,706 shares at an average cost of $1.22 per share, for a total of $23,789.
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Our primary liquidity and capital requirements are for the maintenance of our current XpresSpa and Treat locations and brand, as well as the expansion outside the airports. During the year ended December 31, 2022, we used $24,188 in operations.
Cash flows
Year ended December 31,
Net cash used in investing activities $ (34,843) $ (5,156) $ (29,687)
Operating activities
During the year ended December 31, 2022, net cash used in operating activities was $24,188 compared to net cash provided by operating activities during the year ended December 31, 2021 of $14,561. The decrease in net cash used in operating activities was primarily due to the operations of our new Treat brand and rapid decline of our XpresCheck business.
Investing activities
During the year ended December 31, 2022, net cash used in investing activities totaled $34,843 compared to net cash used in investing activities during the year ended December 31, 2021 of $5,156. Cash in 2022 was used primarily to invest our cash in marketable securities of approximately $23,153, to acquire leasehold improvements for new openings of Treat locations of approximately $6,464, and the acquisition of our Hyperpointe segment of approximately $4,853.
Financing activities.
Cash provided by financing activities decreased $33,727 primarily due to repurchase of common stock and repayment of Paycheck Protection Program loan.
Off-Balance Sheet Arrangements
We have no obligations, assets or liabilities that would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.
Critical Accounting Estimates
We believe the following accounting estimates to be the most critical estimates we used in preparing our consolidated financial statements for the year ended December 31, 2022.
Variable Interest Entities
The Company evaluates its ownership, contractual, pecuniary, and other interests in entities to determine if it has any variable interest in a variable interest entity (“VIE”). These evaluations are complex and involve judgment. If the Company determines that an entity in which it holds a contractual or ownership interest is a VIE and that the Company is the primary beneficiary, the Company consolidates such entity in its consolidated financial statements. The primary beneficiary of a VIE is the party that meets both of the following criteria: (i) has the power to make decisions that most significantly affect the economic performance of the VIE; and (ii) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE. Management performs ongoing reassessments of whether changes in the facts and circumstances regarding the Company’s involvement with a VIE will cause the consolidation conclusion to change. Changes in consolidation status are applied prospectively.
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Impairment of Long-Lived Assets
Long-lived assets are tested for impairment at the lowest level at which there are identifiable operating cash flows, which is at the individual airport location for the Treat, XpresSpa and XpresCheck businesses. The Company’s long-lived assets consist primarily of leasehold improvements and right to use lease assets for each of its locations (considered the asset group). The Company reviews its long-lived assets for recoverability yearly or sooner if events or changes in circumstances indicate that the carrying value of long-lived assets may not be recoverable. If indicators are present, the Company performs a recoverability test by comparing the sum of the estimated undiscounted future cash flows attributable to the asset group in question to its carrying amount. An impairment loss is recognized if it is determined that the long-lived asset group is not recoverable and is calculated based on the excess of the carrying amount of the long-lived asset group over the long-lived asset groups fair value. The Company estimates the fair value of long-lived assets using the present value income approach. Future cash flow was calculated based on forecasts over the estimated remaining useful life of the asset group, which for each of the Company’s locations, is the remaining term of the operating lease. The Company estimates its weighted average cost of capital as the discount rate since it expects that this rate incorporates not only the time value of money but also the expectations regarding future cash flows and an appropriate risk premium.
The estimates used to calculate future cash flows are subjective in nature and involve uncertainties and matters of significant judgments and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated fair value of each asset group. The Company will calculate the future cash flow using what it believes to be the most predictable of several scenarios. Typically, the changes in assumptions run under different business scenarios would not result in a material change in the assessment of the potential impairment or the impairment amount of a locations long-lived asset group. But if these estimates or related assumptions were to change materially, the Company may be required to record an impairment charge.
Intangible assets
Intangible assets include customer relationships, trade names, and technology, which were primarily acquired as part of the acquisition of XpresSpa in December 2016 and Hyperpointe in 2022 and were recorded based on the estimated fair value in purchase price allocation. In addition, intangible assets include software and website development costs that were capitalized as part of the Company’s development of a mobile application and website for the treat brand. The Company accounts for these costs in accordance with ASC 350-40, Internal-Use Software. The intangible assets are amortized over their estimated useful lives, which are periodically evaluated for reasonableness.
The Company’s intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The fair value is then compared to the carrying value and an impairment charge is recognized by the amount in which the carrying value exceeds the fair value of the asset. In assessing the recoverability of the Company’s intangible assets, the Company must make estimates and assumptions regarding future cash flows and other factors to determine the fair value of the respective assets. These estimates and assumptions could have a significant impact on whether an impairment charge is recognized and also the magnitude of any such charge. Fair value estimates are made at a specific point in time, based on relevant information. During the years ended December 31, 2022 and 2021, the Company recognized impairment of $110 and $0.
Fair value measurements
The Company’s financial instruments consist principally of cash and cash equivalents, receivables, and equity investments, The fair value of a financial instrument is the amount that would be received in an asset sale or paid to transfer a liability in an orderly transaction between unaffiliated market participants. Assets and liabilities measured at fair value are categorized based on whether the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial instruments within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The hierarchy is prioritized into three levels (with Level 3 being the lowest) defined as follows:
Level 1: Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
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Level 2: Observable inputs other than prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated with observable market data.
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs.
There have been no changes in Level 1, Level 2, and Level 3 and no changes in valuation techniques for these assets or liabilities for the years ended December 31, 2022 and 2021.
Investments in public companies are carried at fair value based on quoted market prices. Investments in equity securities of nonpublic entities without readily determinable fair values are carried at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The Company reviews its equity securities without readily determinable fair values on a regular basis to determine if the investment is impaired. For purposes of this assessment, the Company considers the investee’s cash position, earnings and revenue outlook, liquidity and management ownership, among other factors, in its review. If management’s assessment indicates that an impairment exists, the Company estimates the fair value of the equity investment and recognizes in current earnings an impairment loss that is equal to the difference between the fair value of the equity investment and its carrying amount. Equity investments are recorded in other assets on the accompanying consolidated balance sheets.
Recently adopted accounting pronouncements
Please refer Note 2 to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.
Recently issued accounting pronouncements
Please refer Note 2 to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required as we are a smaller reporting company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements required by this Item are set forth in Item 15 beginning on page F-1 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Exchange Act that are designed to ensure that information required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (Principal Executive Officer) and Interim Chief Financial Officer (Principal Financial and Accounting Officer), as appropriate, to allow timely decisions regarding required disclosure.
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As of December 31, 2022, the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. This type of evaluation is performed on a quarterly basis so that conclusions of management, including our Chief Executive Officer and the Interim Chief Financial Officer, concerning the effectiveness of the disclosure controls can be reported in our periodic reports on Form 10-Q and Form 10-K. The overall goals of these evaluation activities are to monitor our disclosure controls and to modify them as necessary. We intend to maintain the disclosure controls as dynamic systems that we adjust as circumstances merit. Based on the foregoing, our Chief Executive Officer and the Interim Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2022, due to the material weaknesses described below.
Report of Management on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal executive officer and principal financial and accounting officer and effected by our Board of Directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:
Because of our inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2022. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013 Framework). Based on this evaluation, management has concluded controls were not effective as of December 31, 2022, due to identified material weaknesses in internal control over financial reporting. A material weakness is a control deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses identified are disclosed below:
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Remediation Plan for Material Weakness in Internal Control over Financial Reporting
Management is committed to the remediation of the material weaknesses described above, as well as the continued improvement of the Company’s internal control over financial reporting. Management has implemented, and continues to implement, the actions described below to remediate the underlying causes of the control deficiencies that gave rise to the material weaknesses. Until the remediation efforts described below, including any additional measures management identifies as necessary, are completed, the material weaknesses described above will continue to exist. We cannot provide any assurance that the below remediation efforts will be successful or that our internal control over financial reporting will be effective as a result of these efforts. Management has commenced the following actions and will continue to assess additional opportunities for remediation on an ongoing basis:
Changes in Internal Control over Financial Reporting
Based on our evaluation, management concluded that our internal control over financial reporting was not effective as of December 31, 2022 due to a material weaknesses in our internal control over financial reporting
Other than as set forth in the foregoing paragraph, there have been no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
[Not Applicable]
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not Applicable
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information called for by this Item will be included in an amendment to this Annual Report on Form 10-K to be filed with the SEC and is incorporated by reference in this Item 10.
ITEM 11. EXECUTIVE COMPENSATION
Information called for by this Item will be included in an amendment to this Annual Report on Form 10-K to be filed with the SEC and is incorporated by reference in this Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information called for by this Item will be included in an amendment to this Annual Report on Form 10-K to be filed with the SEC and is incorporated by reference in this Item 12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information called for by this Item will be included in an amendment to this Annual Report on Form 10-K to be filed with the SEC and is incorporated by reference in this Item 13.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information called for by this Item will be included in an amendment to this Annual Report on Form 10-K to be filed with the SEC and is incorporated by reference in this Item 14.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Consolidated Financial Statements. For the financial statements included in this Annual Report on Form 10-K, see “Index to the Financial Statements” on page F-1.
(a)(2) Consolidated Financial Statement Schedules. All schedules are omitted because they are not applicable or because the required information is included in the financial statements or notes thereto.
(a)(3) Exhibits. The following exhibits are filed as part of, or incorporated by reference into, this Annual Report on Form 10-K.
Exhibits Index
Exhibit No. Description
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Exhibit No. Description
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Exhibit No. Description
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Exhibit No. Description
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Exhibit No. Description
23.1* Consent of Marcum LLP, independent registered public accounting firm
23.2* Consent of Friedman LLP, independent registered public accounting firm
101.INS Inline XBRL Instance Document.
101.SCH Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
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Exhibit No. Description
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
104 Cover Page Interactive Data File (embedded within the Inline XBRL documents)
* Filed herewith.
** Furnished herewith.
† Management contract or compensatory plan or arrangement.
†† Certain portions have been omitted pursuant to a confidential treatment request. Omitted information has been filed separately with the SEC.
ITEM 16. FORM 10-K SUMMARY
None.
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Exhibit XWELL, Inc. (Formerly known as XpresSpa Group, Inc.) and Subsidiaries
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Friedman PCAOB ID #711)
Consolidated Balance Sheets F-5
Consolidated Statements of Operations and Comprehensive Income (Loss) F-6
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) F-7
Consolidated Statements of Cash Flows F-9
Notes to the Consolidated Financial Statements F-10 - F-42
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Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
XWELL, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of XWELL, Inc. (formerly known as XpresSpa Group, Inc.) (the “Company”) and Subsidiaries as of December 31, 2022, the related consolidated statements of operations, and comprehensive income (loss), stockholders’ equity (deficit), and cash flows for the year ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are two critical audit matters. The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgements. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
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Valuation of Long-Lived Assets
As described in Note 2 to the financial statements, the Company evaluates long-lived assets for recoverability if events or changes in circumstances indicate that the carrying value of long-lived assets may not be recoverable. If indicators are present, the Company performs a recoverability test by comparing the sum of the estimated undiscounted future cash flows attributable to the asset group in question to its carrying amount. An impairment loss is recognized if it is determined that the long-lived asset group is not recoverable and is calculated based on the excess of the carrying amount of the long-lived asset group over the long-lived asset group fair value. The impairment tests require management to make assumptions when estimating the fair value of the asset groups, including financial projections.
We identified the valuation of long-lived assets as a critical audit matter because of certain significant assumptions management makes in determining the fair value of the asset groups, including projections. The significant judgments made by management resulted in a high degree of auditor judgment and an increased audit effort in performing procedures.
Our audit procedures related to the Company’s valuation of long-lived assets included the following, among others, (i) obtaining an understanding of management’s process for determining fair value estimates; (ii) evaluating the reasonableness of the significant assumptions used by management related to financial performance and discount rates. Evaluating management’s assumptions related to financial performance involved evaluating whether the assumptions were reasonable considering (i) current and historical trends of the underlying assets; and (ii) engaging in discussions with management to evaluate the Company’s plans to develop an asset or dispose of an asset before the end of its estimated useful life. Professionals with specialized skill and knowledge were used to assist in evaluating the reasonableness of the significant assumptions related to the discount rate.
Valuation of Goodwill
As described in Note 2 to the financial statements, goodwill is not amortized and is reviewed for impairment annually, or more frequently, if facts and circumstances indicate that it is more likely than not that the fair vale of a reporting unit is less than its carrying amount, including goodwill. If it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company performs a quantitative test to identify and measure the amount of goodwill impairment loss. The Company compares the fair value of the reporting unit with its carrying amount. If the carrying amount exceeds fair value, goodwill of the reporting unit is considered impaired, and the excess is recognized as goodwill impairment loss.
We identified the assessment of goodwill impairment as a critical audit matter because of certain significant assumptions management makes in determining the fair value of its reporting units. The significant judgments made by management resulted in a high degree of auditor judgment and an increased audit effort in performing procedures.
Our audit procedures related to the Company’s valuation of goodwill included the following, amount others, (i) obtain an understanding of management’s process for estimating the fair value of the reporting units; (ii) evaluating the appropriateness of the valuation model; (iii) testing the reasonableness of significant assumptions, including income projections and discount rates. Professionals with specialized skill and knowledge were used to assist in evaluating the reasonableness of certain significant assumptions, including the discount rates.
/s/ Marcum llp
Marcum llp
We have served as the Company’s auditor since 2020 (such date takes into account the acquisition of certain assets of Friedman LLP by Marcum LLP effective September 1, 2022)
East Hanover, New Jersey
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
XWELL, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of XWELL, Inc. (formerly known as XpresSpa Group, Inc.) (the “Company”) and Subsidiaries as of December 31, 2021, and the related consolidated statements of operations and comprehensive income (loss), changes in stockholders’ equity and cash flows for the year ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for each of the year ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Friedman LLP
We have served as the Company’s auditor from 2020 to 2022
East Hanover, New Jersey
March 31, 2022
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XWELL, Inc. (Formerly known as XpresSpa Group, Inc.) and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
December 31, December 31,
Current assets
Marketable Securities 23,153 -
Accounts receivable 2,858 615
Property and equipment, net 3,666 6,658
Operating lease right of use assets, net 8,276 4,336
Goodwill 4,024 -
Current liabilities
Accrued expenses and other current liabilities 5,719 7,423
Current portion of operating lease liabilities 2,586 2,736
Deferred revenue 339 549
Current portion of promissory note, unsecured - 3,584
Long-term liabilities
Commitments and contingencies (see Note 19)
Equity
Accumulated other comprehensive loss (534) (312)
Total equity attributable to XWELL, Inc. 39,926 92,732
The accompanying notes form an integral part of these consolidated financial statements
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XWELL, Inc. (Formerly known as XpresSpa Group, Inc.)and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except share and per share data)
Year ended December 31,
Revenue, net
Managed services fees $ - $ 16,843
Hyperpointe Services 2,344 -
Other 6 14
Cost of sales
Products and other operating costs 18,316 25,459
Depreciation and amortization 5,429 3,201
Impairment of long-lived assets 4,669 68
Loss on disposal of assets, net 834 22
Impairment of operating lease right-of-use assets 1,110 747
Interest income, net 384 43
Foreign exchange loss (664) (18)
Other non-operating expense, net (1,131) (1,183)
(Loss) income before income taxes (32,574) 2,949
Income tax expense (55) (56)
Net (loss) income attributable to noncontrolling interests (208) 456
Net (loss) income attributable to XWELL, Inc. $ (32,837) $ 3,349
Other comprehensive loss from operations (222) (92)
Comprehensive (loss) income $ (32,851) $ 2,801
(Loss) income per share
Basic and diluted (loss) income per share $ (0.35) $ 0.03
Weighted-average number of shares outstanding during the period
The accompanying notes form an integral part of these consolidated financial statements.
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XWELL, Inc. (Formerly known as XpresSpa Group, Inc.) and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY(DEFICIT)
(In thousands, except share data)
Accumulated
Additional other Total Non-
Shares Amount Shares Amount in capital deficit loss equity interests equity
The accompanying notes form an integral part of these consolidated financial statements.
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XWELL, Inc. (Formerly known as XpresSpa Group, Inc.) and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share data)
Accumulated Total
Additional other Company Non-
Shares Amount Shares Amount in capital deficit loss interests equity
The accompanying notes form an integral part of these consolidated financial statements.
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XWELL, Inc. (Formerly known as XpresSpa Group, Inc.) and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended December 31,
Cash flows from operating activities
Depreciation and amortization 5,429 3,201
Impairment of fixed assets 4,559 68
Impairment of intangible assets 110 —
Impairment of operating lease right-of-use assets 1,110 747
Loss on disposal of assets, net 834 22
Amortization of operating lease right of use asset 1,844 1,719
Issuance of shares of Common Stock for services 103 379
Loss on equity investment 618 1,046
Changes in assets and liabilities:
Decrease (increase) in inventory 592 (1,106)
Increase in accounts receivable (1,835) (1,124)
Decrease in deferred revenue (933) (365)
Other assets, current and non-current (457) (1,251)
Other liabilities, current and non-current (4,056) (1,211)
(Decrease) increase in accounts payable (3,247) 6,687
Net cash (used in) provided by operating activities (24,188) 14,561
Cash flows from investing activities
Acquisition of property and equipment (6,464) (4,282)
Investment in marketable securities (23,153) —
Acquisition of HyperPointe net of cash assumed (4,853) —
Acquisition of software (373) (3,308)
Net cash used in investing activities (34,843) (5,156)
Cash flows from financing activities
Redemption of non-controlling interests — (502)
Repurchase of Common Stock (23,789) (7,825)
Contributions from noncontrolling interests 1,025 818
Proceeds from stock option exercises — 13
Payments for shares withheld on vesting (73) —
Repayment of Paycheck Protection Program (3,584) (2,069)
Distributions to noncontrolling interests (956) (1,170)
Net cash (used in) provided by financing activities (27,377) 6,350
Cash paid for
Interest $ 10 $ 11
Income taxes 55 $ —
Non-cash investing and financing transactions
The accompanying notes form an integral part of these consolidated financial statements.
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XWELL, Inc. (Formerly known as XpresSpa Group, Inc.) and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for share and per share data)
Note 1. General
Overview
On October 25, 2022, the Company changed its name to XWELL, Inc. (“XWELL” or the “Company”) from XpresSpa Group, Inc. The Company’s common stock, par value $0.01 per share, which had previously been listed under the trading symbol “XSPA” on the Nasdaq Capital Market, now trades under the trading symbol “XWEL” since the opening of the trading market on October 25, 2022. In pursuance, the Company amended and restated its certificate of incorporation filed with the Delaware Secretary of State on October 24, 2022 (the “Amended and Restated Certificate”). Rebranding to XWELL aligned the Company’s corporate strategy to build a pure-play health and wellness services company, both in the airport and off airport marketplaces.
In addition, prior to filing the Amended and Restated Certificate, the Company filed a Certificate of Elimination (the “Certificate of Elimination”) with respect to its Series A Convertible Preferred Stock, par value $0.01 per share, Series D Convertible Preferred Stock, par value $0.01 per share, Series E Convertible Preferred Stock, par value $0.01 per share, and Series F Convertible Preferred Stock, par value $0.01 per share (collectively, the “Eliminated Preferred Stock”) with the Delaware Secretary of State, becoming effective as of at 11:59 p.m., Eastern Time on October 24, 2022.
The Certificate of Elimination (i) eliminated the previous designation of 6,968 shares of Series A Convertible Preferred Stock, none of which were outstanding at the time of filing, (ii) eliminated the previous designation of 500,000 shares of Series D Convertible Preferred Stock, none of which were outstanding at the time of filing, (iii) eliminated the previous designation of 2,397,060 shares of Series E Convertible Preferred Stock, none of which were outstanding at the time of filing, (iv) eliminated the previous designation of 9,000 shares of Series F Convertible Preferred Stock, none of which were outstanding at the time of filing, (v) caused such shares of Eliminated Preferred Stock to resume the status of authorized but unissued shares of preferred stock of the Company and (vi) eliminated all reference to the Eliminated Preferred Stock from the Company’s Certificate of Incorporation filed with the Secretary of State of the State of Delaware and effective prior to the effective time of the Amended and Restated Certificate.
XWELL is a global travel health and wellness services holding company. XWELL currently has four reportable operating segments: XpresSpa®, XpresTest, TreatTM, and HyperPointe which was acquired in January 2022.
XWELL’s subsidiary, XpresSpa Holdings, LLC (“XpresSpa”) has been a global airport retailer of spa services through its XpresSpa spa locations, offering travelers premium spa services, including massage, nail and skin care, as well as spa and travel products. Most of XpresSpa spa locations were closed between March 2020 and September 2021, largely due to the airport traffic remaining at insufficient levels to support operations at a unit level.
During the period between March 2020 and September 2021, when the Company was unable to reopen its spa locations for normal operations, the Company in partnership with certain COVID-19 testing partners, successfully launched its XpresCheck Wellness Centers through its XpresTest, Inc. subsidiary (“XpresTest”), offering testing services, also in airports. XpresTest offers COVID-19 and other medical diagnostic testing services to the traveling public, as well as airline, airport and concessionaire employees, and TSA and U.S. Customs and Border Protection agents. XpresTest has entered into managed services agreements (“MSAs”) with professional medical services companies that provide health care services to patients. The medical services companies pay XpresTest a monthly fee to operate in the XpresCheck Wellness Centers. Under the terms of the MSAs, XpresTest provides office space, equipment, supplies, non-licensed staff, and management services in return for a management fee. Effective July 1, 2021, the Company determined that the medical service companies are variable interest entities (“VIEs”) due to their equity holders having sufficient capital at risk; and the Company having a variable interest in and being a primary beneficiary of the medical service companies. During 2022, as countries continued to relax their testing requirements resulting in rapid decline of testing volumes at Company’s
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XWELL, Inc. (Formerly known as XpresSpa Group, Inc.) and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except for share and per share data)
XpresCheck locations, the Company closed all but one XpresCheck Wellness Centers. Therefore, as of the date of this report, there is only one operating XpresCheck location operating in one airport.
The Treat segment, which is operating through XWELL’s subsidiary Treat, Inc. (“Treat”) is a travel health and wellness brand that provides access to health and wellness services for travelers at on-site centers (currently located in JFK International Airport and in Salt Lake City International Airport).
By the third quarter of 2022, it became clear that the Treat business was underperforming and as a result, we began to retool the offerings within the Treat locations by providing additional retail as part of our retail strategy expansion as well as lay the foundation to bring more spa-like services into the Treat location in an attempt to unify our core offering.
By the fourth quarter of 2022, the decision was made to close the pre-security Treat location at Phoenix Sky Harbor Airport. As of March 31, 2023, the Treat brand operates 2 locations (JFK International Airport and Salt Lake City International Airport). These remaining Treat locations offer a full retail product offering and a suite of wellness and spa services.
The Company’s HyperPointe segment, which the Company acquired in January 2022 (see Note 10.Acquisition of HyperPointe), provides a broad range of service and support options for our customers, including technical support services and advanced services.
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The consolidated financial statements include the accounts of the Company, all entities that are wholly owned by the Company, and all entities in which the Company has a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation.
HyperPointe Acquisition
In January 2022, the Company announced and closed on the acquisition of gcg Connect, LLC d/b/a HyperPointe.
The purchase price in the transaction consisted of $7,121 in cash and $906 in common stock, offset by the settlement of intercompany accounts payable of $770 as well as potential additional earn-out payments of up to $7,500 over a three-year timeframe based upon future performance; these earn-out payments may be satisfied in cash or common stock or a combination thereof subject to various terms and conditions. As of the acquisition date, and as of December 31, 2022, the Company believes that the fair value of the potential earnout payment is $0.
HyperPointe currently operates as a new operating segment within XWELL. The chief executive officer of HyperPointe before the Company’s acquisition, continues to serve as the chief executive officer of HyperPointe, as well as serving as the chief executive officer of XpresCheck. See Note 10. Acquisition of HyperPointe for related discussion.
Liquidity and Financial Condition
As of December 31, 2022, the Company had approximately $19,038 of cash and cash equivalents, $23,153 in marketable securities, and total current assets of approximately $47,332. The Company's total current liabilities balance, which includes accounts payable, deferred revenue, accrued expenses, and operating lease liabilities was approximately $10,956 as of December 31, 2022. The working capital surplus was $36,376 as of December 31, 2022, compared to a working capital surplus of $89,152 as of December 31, 2021.
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XWELL, Inc. (Formerly known as XpresSpa Group, Inc.) and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except for share and per share data)
The Company has significantly reduced operating and overhead expenses in the second half of 2022, while it continues to focus on returning to overall profitability.
The Company has taken actions to improve its overall cash position and access to liquidity through equity offerings and debt retirements, by exploring valuable strategic partnerships, right sizing its corporate structure and streamlining its operations.
Note 2. Accounting and Reporting Policies
(a) Basis of presentation and principles of consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The consolidated financial statements include the accounts of the Company, all entities that are wholly owned by the Company, and all entities in which the Company has a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation.
(b) Use of estimates
The preparation of the accompanying consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses for the periods presented. Actual results may differ from such estimates. Significant items subject to such estimates and assumptions include the Company’s long-lived assets, intangibles assets, the useful lives of the Company’s intangible assets, the valuation of stock-based compensation, deferred tax assets and liabilities, income tax uncertainties, and other contingencies.
(c) Translation into United States dollars
The Company conducts certain transactions in foreign currencies, which are recorded at the exchange rate as of the transaction date. All exchange gains and losses occurring from the remeasurement of monetary balance sheet items denominated in non-dollar currencies are deemed non-operating income in the consolidated statements of operations and comprehensive loss. During 2022 and 2021, the Company recorded $664 and $18, respectively, in exchange gains and losses occurring from the remeasurement of monetary balance sheet items denominated in non-dollar currencies.
Accounts of the foreign subsidiaries of XpresSpa are translated into United States dollars. Assets and liabilities have been translated primarily at year end exchange rates and revenues and expenses have been translated at average monthly rates for the year. The translation adjustments arising from the use of different exchange rates are included as foreign currency translation within the consolidated statements of operations and comprehensive income (loss) and consolidated statements of changes in stockholders’ equity.
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XWELL, Inc. (Formerly known as XpresSpa Group, Inc.) and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except for share and per share data)
(d) Cash and cash equivalents
The Company maintains cash in checking and money market accounts with financial institutions. The Company has established guidelines relating to diversification and maturities of its investments in order to minimize credit risk and maintain high liquidity of funds. The Company considers all highly liquid investments purchased with an original maturity of three months or less from the time they are acquired to be cash equivalents. The Company had $1,885 of such investments as of December 31, 2022 and $0 as of December 31, 2021.
(e) Accounts Receivables
Accounts Receivables are stated at their carrying values, net of a reserve for doubtful accounts, and primarily emanate from our contracts with customers.
(f) Inventory
All inventory is valued at the lower of cost or net realizable value. Cost is determined using a weighted-average cost method.
(g) Intangible assets