XWELL, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Amounts are in USD millions unless otherwise noted. The company changed its name from XpresSpa Group, Inc. to XWELL, Inc. on October 25, 2022, and its Nasdaq ticker changed from XSPA to XWEL.
Business context
XWELL operates airport-focused spa, diagnostic testing, travel wellness, and digital healthcare services through XpresSpa, XpresTest, Treat, and HyperPointe. The January 2022 HyperPointe acquisition added healthcare marketing and data services. The company is repositioning as a health and wellness services business, including potential growth outside airports.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $10.736 | $26.767 | $48.381 | $44.371 |
| Gross profit (revenue less cost of sales) | $1.397 | $13.105 | $11.638 | $18.849 |
| Gross margin | 13.0% | 49.0% | 24.1% | 42.5% |
| Operating income (loss) | $(7.654) | $7.057 | $(17.872) | $1.935 |
| Net income (loss) | $(7.679) | $6.595 | $(18.368) | $1.057 |
| Net income (loss) attributable to XWELL | $(7.179) | $5.597 | $(19.380) | $0.074 |
| Adjusted EBITDA, non-GAAP | $(4.567) | $8.699 | $(9.209) | $6.622 |
Q3 revenue fell 60%, principally as COVID-19 testing volumes declined after countries relaxed travel testing requirements. Nine-month revenue grew 9%, reflecting earlier growth in testing, reopened spa locations, and HyperPointe; this did not translate into improved profitability. XpresTest recorded Q3 revenue of $6.079 million versus $25.351 million a year earlier. Q3 XpresSpa revenue was $3.557 million, Treat $0.425 million, and HyperPointe $0.675 million.
Q3 operating expenses included $1.040 million of impairment and asset disposal charges related primarily to XpresCheck closures, and depreciation and amortization of $1.564 million. General and administrative expense was $6.447 million, up from $5.196 million. Basic and diluted loss per share was $0.08 for Q3 and $0.20 for the nine-month period.
Cash, liquidity, and capital structure
- At September 30, 2022, cash and cash equivalents were $49.429 million, plus $0.751 million of restricted cash. Total current assets were $55.181 million and current liabilities $10.984 million, yielding working capital of $44.197 million, down from $89.152 million at December 31, 2021.
- Operating cash flow was a use of $17.406 million for the first nine months, compared with $5.967 million provided in the prior-year period. Investing cash use was $10.929 million, including $4.853 million for HyperPointe net of cash acquired; financing cash use was $27.656 million.
- The company repurchased and retired 19.5 million shares for $23.789 million during the nine months. Shares outstanding declined from 101.3 million at year-end 2021 to 83.2 million at September 30, 2022.
- The $3.584 million Paycheck Protection Program loan was repaid in May 2022; no debt was reported at September 30, 2022. Operating lease liabilities totaled $15.211 million on a present-value basis.
- Total assets were $84.976 million and total equity was $61.527 million at September 30, 2022.
Material changes, outlook, and risks
- Testing business: XWELL closed or consolidated five underperforming XpresCheck centers as testing demand fell; two centers were moved into Treat. Eight XpresCheck locations were operating as of the report date. Management cited the decline in testing volumes as the primary driver of the sharp Q3 revenue decrease.
- Expansion and contracts: XpresSpa had 20 operating domestic and eight international locations. Three additional Istanbul locations opened after quarter-end. A new CDC-related biosurveillance partnership with Ginkgo Bioworks was described as expected to support approximately $16 million of services, with potential exceeding $61 million subject to program options and public health priorities. These are prospective contract amounts, not guaranteed revenue.
- Liquidity outlook: Management stated it believed available liquidity was sufficient to fund operations for the 12 months following issuance of the financial statements. That assessment depends on XpresSpa profitability, Treat market acceptance, and continued travel demand. Management also said it expected net losses in the foreseeable future. No quantitative full-year revenue or earnings guidance was provided.
- Control weakness: Management concluded disclosure controls were not effective at September 30, 2022 because a material weakness in the financial close and reporting process, identified in 2019, remained unremediated. The company cited insufficient accounting and controls personnel and ongoing remediation efforts.
- Contingencies: The company recorded an $0.845 million legal accrual. A California wage-and-hour class/PAGA settlement was approved in September 2022, with funding expected by year-end. OTG Management sued over a Philadelphia airport sublease and claimed accelerated rent of $0.864 million to $2.250 million; the company’s response deadline was extended to January 3, 2023. Management said outstanding matters were not expected to have a material adverse effect, while noting outcomes are uncertain.
- Other items: The HyperPointe acquisition included potential earn-out payments of up to $7.5 million over three years; management estimated the earn-out’s fair value at zero at September 30, 2022. The company also disclosed that deposits above FDIC insurance limits were $46.509 million.
Most important facts for investors to verify
- Whether cash burn moderates and management’s 12-month liquidity assessment remains supportable, particularly given the $23.789 million spent on share repurchases.
- Whether XpresSpa and Treat can achieve sustainable profitability as airport activity and service demand evolve.
- The pace and economics of declining XpresTest demand, remaining center closures, and revenue recognition under the new CDC-related contract.
- Progress in remediating the material weakness and restoring effective disclosure controls.
- Developments in the Philadelphia lease litigation, the approved employee settlement, and any resulting cash obligations.