Quarterly Report (10-q)

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___

Commission file number: 001-34785

XWELL, Inc.

(Exact Name of Registrant as Specified in its Charter)


Delaware		20-4988129
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

254 West 31^st Street, 11th Floor, New York, NY		10001
(Address of principal executive offices)		(Zip Code)

(Registrant’s Telephone Number, Including Area Code): (212) 750-9595

XpresSpa Group, Inc.

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	XWEL	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer	◻	Accelerated filer	◻
Non-accelerated filer	⌧	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ⌧

As of November 10, 2022, 83,232,262 shares of the registrant’s common stock were outstanding.

Table of Contents

XWELL, Inc. and Subsidiaries

Table of Contents

		Page
PART I. FINANCIAL INFORMATION		3

Item 1.	Condensed Consolidated Financial Statements (Unaudited)	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	40

PART II. OTHER INFORMATION		42

Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3.	Defaults Upon Senior Securities	42
Item 4.	Mine Safety Disclosures	42
Item 5.	Other Information	42
Item 6.	Exhibits	43

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1.Condensed Consolidated Financial Statements (Unaudited)

XWELL, Inc. (Formerly known as XpresSpa Group, Inc.) and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and per share data)


	September 30,		December 31,
	2022		2021
Current assets
Cash and cash equivalents	$	49,429	$	105,506
Accounts receivable		1,309		615
Contract Assets		1,128		-
Inventory		940		1,763
Other current assets		2,375		1,095
Total current assets		55,181		108,979

Restricted cash		751		751
Property and equipment, net		8,102		6,658
Intangible assets, net		4,414		3,732
Operating lease right of use assets, net		10,299		4,336
Goodwill		4,024		-
Other assets		2,205		2,810
Total assets	$	84,976	$	127,266

Current liabilities
Accounts payable, accrued expenses and other	$	7,981	$	12,958
Current portion of operating lease liabilities		2,746		2,736
Deferred revenue		257		549
Current portion of promissory note, unsecured		-		3,584
Total current liabilities		10,984		19,827

Long-term liabilities
Operating lease liabilities		12,465		7,504
Total liabilities		23,449		27,331
Commitments and contingencies (see Note 15)

Equity
Common Stock, $0.01 par value per share, 150,000,000 shares authorized; 83,232,262 and 101,269,349 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively		832		1,013
Additional paid-in capital		467,268		487,306
Accumulated deficit		(414,655)		(395,275)
Accumulated other comprehensive loss		(560)		(312)
Total equity attributable to XWELL, Inc.		52,885		92,732
Noncontrolling interests		8,642		7,203
Total equity		61,527		99,935
Total liabilities and equity	$	84,976	$	127,266

The accompanying notes form an integral part of these unaudited condensed consolidated financial statements.

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XWELL, Inc. (Formerly known as XpresSpa Group, Inc.) and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(In thousands, except share and per share data)


	Three months ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021

Revenue, net
Managed services fees	$	-	$	-	$	-	$	16,843
Patient services revenue		4,607		25,351		31,728		25,351
Services		4,924		1,158		13,488		1,761
Products		542		258		1,308		402
Hyperpointe Services		659		-		1,853		-
Other		4		-		4		14
Total revenue, net		10,736		26,767		48,381		44,371

Cost of sales
Labor		5,222		4,277		16,161		7,419
Occupancy		1,082		587		3,412		1,511
Products and other operating costs		3,035		8,798		17,170		16,592
Total cost of sales		9,339		13,662		36,743		25,522
Depreciation and amortization		1,564		852		4,329		2,542
Impairment of long-lived assets		677		-		677		-
Loss on disposal of assets, net		325		-		273		22
Impairment of operating lease right-of-use assets		38		-		38		-
General and administrative		6,447		5,196		24,193		14,350
Total operating expenses		18,390		19,710		66,253		42,436
Operating (loss) income		(7,654)		7,057		(17,872)		1,935
Interest income, net		114		6		159		31
Other non-operating expense, net		(136)		(381)		(650)		(830)
(Loss) income before income taxes		(7,676)		6,682		(18,363)		1,136
Income tax expense		(3)		(87)		(5)		(79)
Net (loss) income		(7,679)		6,595		(18,368)		1,057
Net loss (income) attributable to noncontrolling interests		500		(998)		(1,012)		(983)
Net (loss) income attributable to XWELL, Inc.	$	(7,179)	$	5,597	$	(19,380)	$	74

Net (loss) income	$	(7,679)	$	6,595	$	(18,368)	$	1,057
Other comprehensive loss from operations		(102)		(52)		(248)		(63)
Comprehensive (loss) income	$	(7,781)	$	6,543	$	(18,616)	$	994
Loss per share
Basic and diluted loss per share	$	(0.08)	$	0.05	$	(0.20)	$	-
Weighted-average number of shares outstanding during the period
Basic		94,621,339		105,531,418		97,167,867		103,950,731
Diluted		94,621,339		105,957,317		97,167,867		104,301,344

The accompanying notes form an integral part of these unaudited condensed consolidated financial statements.

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XWELL, Inc. (Formerly known as XpresSpa Group, Inc.) and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

(In thousands, except share and per share data)


											Accumulated
							Additional				other		Total		Non-
	Common stock			Treasury Stock			paid-		Accumulated		comprehensive		Company		controlling		Total
	Shares	Amount		Shares		Amount	in capital		deficit		loss		equity		interests		equity
December 31, 2021	101,269,349	$	1,013	—		—	$	487,306	$	(395,275)	$	(312)	$	92,732	$	7,203	$	99,935
Issuance of Common Stock for acquisition	552,487		5	—		—		901		—		—		906		—		906
Vesting of restricted stock units	391,820		4	—		—		(4)		—		—		—		—		—
Value of Shares Withheld to fund payroll taxes	—		—	—		—		(73)		—		—		(73)		—		(73)
Stock-based compensation	—		—	—		—		1,543		—		—		1,543		—		1,543
Net loss for the period	—		—	—		—		—		(4,283)		—		(4,283)		1,521		(2,762)
Repurchase and retirement of common stock	(7,142,446)		(71)	—		—		(11,024)		—		—		(11,095)		—		(11,095)
Foreign currency translation	—		—	—		—		—		—		(41)		(41)		—		(41)
Distributions to noncontrolling interests	—		—	—		—		—		—		—		—		(824)		(824)
Contributions from noncontrolling interests	—		—	—		—		—		—		—		—		200		200
March 31, 2022	95,071,210	$	951	—	$	—	$	478,649	$	(399,558)	$	(353)	$	79,689	$	8,100	$	87,789
Vesting of restricted stock units	289,061		3	—		—		(3)		—		—		—		—		—
Grant of stock options for services	—		—	—		—		15		—		—	`	15		—		15
Stock-based compensation	—		—	—		—		771		—		—		771		549		1,320
Net loss for the period	—		—	—		—		—		(7,918)		—		(7,918)		(9)		(7,927)
Repurchase of common stock	—		—	(1,338,404)		(1,021)		—		—		—		(1,021)		—		(1,021)
Foreign currency translation	—		—	—		—		—		—		(105)		(105)		—		(105)
Distributions to noncontrolling interests	—		—	—		—		—		—		—		—		(132)		(132)
June 30, 2022	95,360,271	$	954	(1,338,404)	$	(1,021)	$	479,432	$	(407,476)	$	(458)	$	71,431	$	8,508	$	79,939
Vesting of restricted stock units	256,251		2	—		—		(2)		—		—		—		—		—
Grant of stock options for services	—		—	—		—		16		—		—		16		—		16
Contributions from noncontrolling interests	—		—	—		—		—		—		—		—		546		546
Stock-based compensation	—		—	—		—		392		—		—		392		91		483
Foreign currency translation	—		—	—		—		—		—		(102)		(102)		(3)		(105)
Net loss for the period	—		—	—		—		—		(7,179)		—		(7,179)		(500)		(7,679)
Repurchase and retirement of common stock	(12,384,260)		(124)	1,338,404		1,021		(12,570)		—		—		(11,673)		—		(11,673)
September 30, 2022	83,232,262	$	832	—		—	$	467,268	$	(414,655)	$	(560)	$	52,885	$	8,642	$	61,527

The accompanying notes form an integral part of these unaudited condensed consolidated financial statements.

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XWELL, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) (Continued)

(Unaudited)

(In thousands, except share and per share data)


											Accumulated
							Additional				other		Total		Non-
	Common stock			Treasury Stock			paid-		Accumulated		comprehensive		Company		controlling		Total
	Shares	Amount		Shares		Amount	in capital		deficit		loss		equity		interests		equity
December 31, 2020	94,058,853	$	941	—		—	$	475,709	$	(398,624)	$	(220)	$	77,806	$	2,565	$	80,371
Warrant exercises, net of costs	11,223,529		112	—		—		16,895		—		—		17,007		—		17,007
Stock-based compensation	—		—	—		—		264		—		—		264		741		1,005
Net loss for the period	—		—	—		—		—		(1,056)		—		(1,056)		248		(808)
Foreign currency translation	—		—	—		—		—		—		(16)		(16)		—		(16)
Contributions from noncontrolling interests	—		—	—		—		—		—		—		—		333		333
March 31, 2021	105,282,382	$	1,053	—	$	—	$	492,868	$	(399,680)	$	(236)	$	94,005	$	3,887	$	97,892
Issuance of Common Stock for services	223,637		2	—		—		318		—		—		320		—		320
Issuance of restricted stock	27,983		—	—		—		—		—		—		—		—		—
Foreign currency translation	—		—	—		—		—		—		5		5		—		5
Net loss for the period	—		—	—		—		—		(4,467)		—		(4,467)		(263)		(4,730)
Stock-based compensation	—		—	—		—		267		—		—		267		61		328
Redemption of certain noncontrolling interests	—		—	—		—		—		—		—		—		(133)		(133)
June 30, 2021	105,534,002	$	1,055	—	$	—	$	493,453	$	(404,147)	$	(231)	$	90,130	$	3,552	$	93,682
Stock grant for services	—		—	—		—		29		—		—		29		—		29
Stock-based compensation	—		—	—		—		767		—		—		767		23		790
Stock option exercises	8,334		—	—		—		13		—		—		13		—		13
Consolidation of Variable Interest Entities	—		—	—		—		—		—		—		—		4,307		4,307
Repurchase and retirement of common stock	(250,000)		(2)	—		—		(448)		—		—		(450)		—		(450)
Issuance of restricted stock	35,043		—	—		—		—		—		—		—		—		—
Foreign currency translation	—		—	—		—		—		—		(52)		(52)		—		(52)
Distributions to noncontrolling interests	—		—	—		—		—		—		—		—		(991)		(991)
Net income for the period	—		—	—		—		—		5,597		—		5,597		998		6,595
September 30, 2021	105,327,379		1,053					493,814		(398,550)		(283)		96,034		7,889		103,923

The accompanying notes form an integral part of these unaudited condensed consolidated financial statements.

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XWELL, Inc. (Formerly known as XpresSpa Group, Inc.) and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	Nine months ended September 30,
	2022		2021
Cash flows from operating activities
Net (loss) income	$	(18,368)	$	1,057
Adjustments to reconcile net loss to net cash used in operating activities:
Items included in net loss not affecting operating cash flows:
Depreciation and amortization		4,329		2,542
Impairment of long-lived assets		715		—
Loss on disposal of assets, net		273		22
Amortization of operating lease right of use asset		1,357		1,162
Issuance of shares of Common Stock for services		31		349
Stock-based compensation		3,346		2,123
Loss on equity investment		528		716
Changes in assets and liabilities:
Decrease (increase) in inventory		794		(1,385)
(Increase) decrease in accounts receivable		(352)		74
(Increase) decrease in contract assets		(1,128)		—
(Decrease) increase in deferred revenue		(1,015)		(890)
Other assets, current and non-current		(1,137)		519
Other liabilities, current and non-current		(3,913)		(3,035)
(Decrease) increase in accounts payable		(2,866)		2,713
Net cash provided by (used in) operating activities		(17,406)		5,967
Cash flows from investing activities
Acquisition of property and equipment		(5,797)		(2,650)
Cash acquired on consolidation of certain Variable Interest Entities		—		2,434
Acquisition of HyperPointe net of cash assumed		(4,853)		—
Acquisition of software		(279)		(2,156)
Net cash used in investing activities		(10,929)		(2,372)
Cash flows from financing activities
Proceeds from direct offerings of Common Stock and warrants exercises, net of costs		—		17,007
Redemption of non-controlling interests		—		(133)
Repurchase of Common Stock		(23,789)		(450)
Contributions from noncontrolling interests		746		333
Proceeds from stock option exercises		—		13
Payments for shares withheld on vesting		(73)		—
Repayment of Paycheck Protection Program		(3,584)		—
Distributions to noncontrolling interests		(956)		(991)
Net cash provided by (used in) financing activities		(27,656)		15,779
Effect of exchange rate changes on cash, cash equivalents and restricted cash		(86)		36
(Decrease)/ Increase in cash, cash equivalents and restricted cash		(56,077)		19,410
Cash, cash equivalents, and restricted cash at beginning of the period		106,257		90,502
Cash, cash equivalents, and restricted cash at end of the period	$	50,180	$	109,912
Cash paid for
Interest	$	10	$	—
Income taxes		5	$	—
Non-cash investing and financing transactions
Capital expenditures included in Accounts payable, accrued expenses and other	$	592	$	—
Issuance of Common Stock on acquisition of gcg Connect, LLC, d/b/a HyperPointe	$	906	$	—

The accompanying notes form an integral part of these unaudited condensed consolidated financial statements.

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XWELL, Inc. (Formerly known as XpresSpa Group, Inc.) and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(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 leading global travel health and wellness services holding company. XWELL currently has four reportable operating segments: XpresSpa^®, XpresTest^®, Treat^™, 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.

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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, Phoenix Sky Harbor International Airport and Salt Lake City International Airport).

The Company’s HyperPointe segment, which the Company acquired in January 2022 (see Note 7. 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 unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Article 8-03 of Regulation S-X, and should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as amended. The condensed consolidated balance sheet as of December 31, 2021 was derived from the audited annual financial statements but does not include all information required by GAAP for annual financial statements. The 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 as well as variable interest entities in which we are the primary beneficiaries. All adjustments that, in the opinion of management, are necessary for a fair presentation for the periods presented have been reflected by the Company. Such adjustments are of a normal, recurring nature. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the entire fiscal year or for any other interim period. All significant intercompany balances and transactions have been eliminated in consolidation.

Recent Developments

XpresSpa

There are currently twenty operating XpresSpa domestic locations and the Company expects to re-open two additional domestic locations in the near-term as airport traffic return to sufficient levels to support operations at a unit level. . During 2022, the Company sold its two franchise locations in Austin-Bergstrom International Airport. A significant number of the domestic XpresSpa locations are operating approximately eight hours per day during the busiest hours (compared to up to sixteen hours per day pre-pandemic). Additionally, XpresSpa implemented a price increase in mid-October 2021 in its efforts to return to profitability. As the Companies continue to monitor fluctuating airport volumes, the Company will also continue to review operating hours to optimize revenue opportunity.

During the fourth quarter of 2021, the Company began testing several new services to take advantage of a growing interest in non-traditional spa services and expansion of its retail offering to align more closely with the services the Company provides. The Company is evaluating the success of these new initiatives at each airport on an on-going basis and will incorporate changes to its approach as more of the portfolio is reactivated.

The Company also has eight international locations operating, including three XpresSpa locations in Dubai International Airport in the United Arab Emirates, three XpresSpa locations in Schiphol Amsterdam Airport in the Netherlands and two XpresSpa locations in Istanbul Airport in Turkey. The Company had signed for 5 locations at Istanbul Airport in Turkey of which 3 of them opened after September 30, 2022: the Company expects to open the remaining two locations before the end of 2022.

XpresCheck Wellness Centers

XpresTest’s business has MSAs with state licensed physicians and nurse practitioners, under which we administer COVID-19 testing options, including a Polymerase Chain Reaction (PCR) test and a rapid PCR test. As of the date of this report, there are eight operating XpresCheck locations operating in eight airports, including one in Orlando International Airport, pre-security, in the South Walk area of the Main Terminal, which opened in March 2022.

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During 2022, as countries continued to relax their testing requirements resulting in rapid decline of testing volumes at the Company’s XpresCheck locations, the Company closed or consolidated its five non performing XpresCheck Wellness Centers and two XpresCheck Wellness Centers were assimilated into the Treat Segment. Also, due to the rapid decline of testing volumes at the Company’s XpresCheck locations, the company absorbed a loss of $1,040 related to the write-off of long-lived assets during the quarter ended September 30, 2022.

During 2021, XpresTest initiated a $2,001 eight-week pilot program with the Centers for Disease Control and Prevention (CDC) in collaboration with Concentric by Ginkgo Bioworks (NYSE: DNA). Under this program, XpresTest is conducting 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, the Company 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 and in continuation of their support to the CDC’s traveler-based SARS-CoV-2 genomic surveillance program were awarded a new contract. The partnership is expected to support public health and biosecurity services totaling approximately $16,000, 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 the Company is 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 that the Company is entitled. The Company recognizes 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. The Company recognizes revenue ratably (straight line basis) over the term of the contract (one year). The Company will recognize revenue over time for the traveler enrollment initiative performance obligation based on the amount for which the Company has the right to invoice. The Company recorded $916 in revenue during the quarter ended September 30, 2022.

Treat

Treat is the Company’s new travel, health and wellness brand transforming the way we access care 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, Phoenix Sky Harbor International Airport and Salt Lake City International Airport) provide access to health and wellness services for travelers. The Treat 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 the Company’s 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 access to a comprehensive online marketplace of services including global illness tracker tools such as the COVID-19 Requirements Map, on-demand chat care by licensed providers, a health wallet to store personal and family health records (including COVID-19 testing results), and a scheduler to arrange for direct care at one of the Company’s on-site locations. The information on the Treat website is not incorporated by reference into this Quarterly Report on Form 10-Q and does not constitute a part of this Form 10-Q.

HyperPointe Acquisition

In January 2022, the Company announced and closed on the acquisition of gcg Connect, LLC d/b/a HyperPointe.

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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 September 30, 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 7. Acquisition of HyperPointe for related discussion.

Liquidity and Financial Condition

As of September 30, 2022, the Company had cash and cash equivalents, excluding restricted cash, of $49,429, total current assets of $55,181, total current liabilities of $10,984 and positive working capital of $44,197 compared to a positive working capital of $89,152 as of December 31, 2021. Management has performed an assessment of the Company’s ability to continue as a going concern. As of the date of the report, the Company believes it has sufficient liquidity to fund operations for the next twelve months from the issuance of these financial statements. The Company’s liquidity projections and actual performance through issuance relies heavily on the success and profitability of the Company’s re-opened XpresSpa locations, and tailored service offerings. In addition, the Company’s future liquidity relies on the market acceptance to the Company’s new travel, health and wellness brand, Treat, which has generated a net loss of $1,290 and $4,049, for the three and nine months ended September 30, 2022, respectively. Furthermore, because the Company relies heavily on international and domestic airplane travel, any such decrease in demand for travel could have a negative impact on the Company’s operations and liquidity.

Note 2. Significant Accounting and Reporting Policies

(a) Revenue Recognition Policy

XpresSpa

The Company recognizes revenue from the sale of XpresSpa products and services when the services are rendered at XpresSpa stores and from the sale of products at the time products are purchased at the Company’s stores or online usually by credit card, net of discounts and applicable sales taxes. Accordingly, the Company recognizes revenue for the Company’s single performance obligation related to both in-store and online sales at the point at which the service has been performed or the control of the merchandise has passed to the customer. Revenues from the XpresSpa retail and e-commerce businesses are recorded at the time goods are shipped.

The Company has also entered into collaborative agreements with marketing partners whereby it sells certain of its partners’ products in its XpresSpa locations. The Company acts as an agent for revenue recognition purposes and therefore records revenue net of the revenue share payable to the partners. Upon receipt of the non-recurring, non-refundable initial collaboration fee, management records a deferred revenue liability and recognizes revenue on a straight-line basis over the life of the collaboration agreement.

XpresTest

Through its XpresCheck Wellness Centers and under the terms of the Managed Services Agreement (“MSA”) with Professional Limited Liability Companies (“PLLCs”) that in turn contract with physicians and Nurse Practitioners, the Company offers testing services to airline employees, contractors, concessionaire employees, TSA officers and U.S. Customs and Border Protection agents, as well as the traveling public. Under the terms of the MSAs which may be modified for commercial reasonableness and fair market value, XpresTest provides office space, equipment, supplies, non-

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licensed staff, and management services to be used for the purpose of COVID-19 and other medical diagnostic testing in return for a management fee which was deemed a performance obligation for recognizing revenue prior to July 1, 2021.

Effective July 1, 2021 (see Note 3. Variable Interest Entities), the Company determined that the PLLCs are variable interest entities due to their equity holders having insufficient capital at risk, and the Company having a variable interest and being the primary beneficiary of the PLLCs. As a result of this determination, the total revenue of the PLLCs is designated as revenue for the Company. The performance obligation for this revenue is the PLLCs administering COVID-19 tests to airline employees, contractors, concessionaire employees, TSA officers and U.S. Customs and Border Protection agents, as well as the traveling public, with revenue being recognized at the point in time at which the service is performed.

Treat

The Company recognizes revenue from the sale of Treat products and services when the services are rendered at Treat Centers and from the sale of products at the time products are purchased at the Treat Centers or online usually by credit card, net of discounts and applicable sales taxes. Accordingly, the Company recognizes revenue for the Company’s single performance obligation related to both in-centers and online sales at the point at which the service has been performed or the control of the merchandise has passed to the customer. Revenues from the Treat retail and e-commerce businesses are recorded at the time goods are shipped. Also, under the terms of Treat’s contracts with PLLCs, whereby the PLLCs as their performance obligations provide travel-related diagnostic testing for virus, cold, flu and other illnesses as well as hydration therapy, IV drips, and vitamin injections. The Company determined that these PLLCs are variable interest entities due to their equity holders having insufficient capital at risk, and the Company having a variable interest and being the primary beneficiary of the PLLCs. As a result of this determination, the total revenue of the PLLCs is designated as revenue for the Company. This revenue is recognized at the point in time at which the service is performed by the PLLCs.

HyperPointe

The Company’s HyperPointe segment which we acquired in January 2022 (see Note 7. Acquisition of HyperPointe), provides a broad range of service and support options for its customers, including technical support services and advanced services. Technical support services represent the majority of these offerings which are distinct performance obligations that are satisfied over time with revenue recognized ratably over the contract term. Advanced services are distinct performance obligations that are satisfied over time with revenue recognized as services are delivered. Revenue billed in advance is treated as deferred revenue which was $240 as of September 30, 2022. HyperPointe had unbilled receivables of $212 included in Contract Assets as of September 30, 2022.

The Company excludes all sales taxes assessed to its customers from revenue. Sales taxes assessed on revenues are included in Accounts payable, accrued expenses and other on the Company’s condensed consolidated balance sheets until remitted to state agencies.

(b) 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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The Company applies the provisions of ASC Topic 805, Business Combinations (“ASC 805”) in the accounting for acquisitions of businesses. ASC 805 requires the Company to use the acquisition method of accounting by recognizing the identifiable tangible and intangible assets acquired and liabilities assumed, and any non-controlling interest in the acquired business, measured at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the aforementioned amounts.

While the Company uses its best estimates and assumptions to accurately apply preliminary values to assets acquired and liabilities assumed at the acquisition date, these estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of the assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded in the consolidated statements of operations.

Accounting for business combinations requires management to make significant estimates and assumptions, especially at the acquisition date, including estimates for intangible assets. Although the Company believes the assumptions and estimates that have been made are reasonable and appropriate, they are based in part on historical experience and information obtained from the acquired companies and are inherently uncertain. Critical estimates in valuing certain of the intangible assets the Company has acquired include future expected cash flows, and discount rates.

(d) Goodwill

The Company accounts for goodwill under ASC 350-30, Intangibles-Goodwill and Other. Goodwill represents the cost of a business acquisition in excess of the fair value of the net assets acquired. 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 value 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 that excess is recognized as a goodwill impairment loss.

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Recently adopted accounting pronouncements

Accounting Standards Update No. 2020-06—Debt--Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40)

Issued in August 2020, this update is intended to reduce the unnecessary complexity of the current guidance thus resulting in more accurate accounting for convertible instruments and consistent treatment from one entity to the next. Under current GAAP, there are five accounting models for convertible debt instruments. Except for the traditional convertible debt model that recognizes a convertible debt instrument as a single debt instrument, the other four models, with their different measurement guidance, require that a convertible debt instrument be separated (using different separation approaches) into a debt component and an equity or a derivative component. Convertible preferred stock also is required to be assessed under similar models. The Financial Accounting Standard Board (“FASB”) decided to simplify the accounting for convertible instruments by removing certain separation models currently included in other accounting guidance that were being applied to current accounting for convertible instruments. Under the amendments in this update, an embedded conversion feature no longer needs to be separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost and a convertible preferred stock will be accounted for as a single equity instrument measured at its historical cost, as long as no other features require bifurcation and recognition as derivatives. The FASB also decided to add additional disclosure requirements in an attempt to improve the usefulness and relevance of the information being provided. The new standard is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. The Company adopted ASU 2020-06 as of the reporting period beginning January 1, 2022. The adoption of this update did not have a material impact on the Company’s condensed consolidated financial statements.

ASU 2021-04: Issuer's Accounting for Certain Modifications or Exchanges of Freestanding Equity Classified Written Call Options

In May 2021, the FASB issued ASU 2021-04, "Issuer's Accounting for Certain Modifications or Exchanges of Freestanding Equity Classified Written Call Options'" ("ASU 2021-04"), which introduces a new way for companies to account for warrants either as stock compensation or derivatives. Under the new guidance, if the modification does not change the instrument's classification as equity, the company accounts for the modification as an exchange of the original instrument for a new instrument. In general, if the fair value of the "new" instrument is greater than the fair value of the "original" instrument, the excess is recognized based on the substance of the transaction, as if the issuer has paid cash. The effective date of the standard is for interim and annual reporting periods beginning after December 15, 2021 for all entities. The Company adopted ASU 2021-04 as of the reporting period beginning January 1, 2022. The adoption of this update did not have a material impact on the Company’s condensed consolidated financial statements.

Note 3. Variable Interest Entities

Through its XpresCheck Wellness Centers, the Company provides services pursuant to contracts with PLLCs which in turn contracts with physicians and other medical professional providers to render COVID-19 and other medical diagnostic testing services to airline employees, contractors, concessionaire employees, TSA officers and U.S. Customs and Border Protection agents, and the traveling public. The PLLCs collectively represent the Company’s affiliated medical group. The PLLCs were designed and structured to comply with the relevant laws and regulations governing professional medical practice, which generally prohibits the practice of medicine by lay persons or entities. All of the issued and outstanding equity interests of the PLLCs are owned by a licensed medical professional nominated by the Company (the “Nominee Shareholder”). Upon formation of the PLLCs, and initial issuance of equity interests, the Nominee Shareholder contributes a nominal amount of capital in exchange for their interest in the PLLC. The Company then executes with each PLLC a MSA, which provides for various administrative services, management services and day-to-day activities of the practice to be rendered by the Company through its XpresCheck Wellness Centers.

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The Company also has exclusive responsibility for the provision of all nonmedical services including contracting with customers who access the PLLCs for a medical visit, handling all financial transactions and day-to-day operations of each PLLC, overseeing the establishment of COVID-19 and other medical diagnostic testing services policies, and making recommendations to the PLLC in establishing the guidelines for the employment and compensation of the physicians and other employees of the PLLCs. Until June 30, 2021, MSA fees were commensurate with the expected level of activity required to be billed by XpresCheck Wellness Centers. Therefore, these PLLCs were assessed not to be variable interest entities prior to July 1, 2021.

Effective, July 1, 2021, contractual arrangements between the Company, the Company’s affiliated medical group and nominated shareholders were modified in a manner that changes the characteristics or adequacy of the nominee shareholders’ equity investment at risk and residual returns. Therefore, due to reassessment triggered by the development on July 1, 2021, the Company determined that the PLLCs are variable interest entities. Notwithstanding their legal form of ownership of equity interests in the PLLC, the primary beneficiary of the affiliated medical group is the Company as it meets both of the following criteria: (i) has the power to make decisions that most significantly affect the economic performance of the affiliated medical group; and (ii) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the affiliated medical group. The Company consolidated the PLLCs under the VIE model since the Company has the power to direct activities that most significantly impact the PLLCs economic performance and the right to receive benefits or the obligation to absorb losses that could potentially be significant to the PLLCs.

The aggregate carrying value of total assets and total liabilities included on the consolidated balance sheets for the PLLCs after elimination of intercompany transactions were $550, included in Cash and Cash Equivalents, and $168 included in Accounts payable, accrued expenses and other, respectively, as of September 30, 2022. The aggregate carrying value of total assets and total liabilities included on the consolidated balance sheets for the PLLCs after elimination of intercompany transactions were $3,033, included in Cash and Cash Equivalents, and $683, included in Accounts payable, accrued expenses and other, respectively, as of December 31, 2021. The total revenue included on the consolidated statements of operations and comprehensive income (loss) for the PLLCs after elimination of intercompany transactions was $4,607 and $31,728 for the three months and nine months ended September 30, 2022, respectively.

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Note 4. Potentially Dilutive Securities

The table below presents the computation of basic and diluted net loss per share of Common Stock:


	Three months ended				Nine months ended
	September 30,				September 30,
	2022		2021		2022		2021
Basic numerator:
Net (loss) income attributable to common shareholders	$	(7,179)	$	5,597	$	(19,380)	$	74
Basic denominator:
Basic weighted average shares outstanding		94,621,339		105,531,418		97,167,867		103,950,731
Basic (loss) earnings per share	$	(0.08)	$	0.05	$	(0.20)	$	—
Diluted numerator:
(Loss) earnings attributable to common shareholders	$	(7,179)	$	5,597	$	(19,380)	$	74
Diluted denominator:
Diluted weighted average shares outstanding		94,621,339		105,957,317		97,167,867		104,301,344
Diluted (loss) earnings per share	$	(0.08)	$	0.05	$	(0.20)	$	—

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XpresSpa Group Inc