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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 March 31, 2023

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 31st Street, 11th Floor, New York, NY

 

10001

(Address of principal executive offices)

 

(Zip Code)

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

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 May 12, 2023, 83,418,535 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

24

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

Item 4.

Controls and Procedures

28

PART II. OTHER INFORMATION

30

Item 1.

Legal Proceedings

30

Item 1A.

Risk Factors

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

Item 3.

Defaults Upon Senior Securities

30

Item 4.

Mine Safety Disclosures

30

Item 5.

Other Information

30

Item 6.

Exhibits

30

2

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1.Condensed Consolidated Financial Statements (Unaudited)

XWELL, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and per share data)

    

March 31, 

    

December 31, 

2023

2022

Current assets

 

  

 

  

Cash and cash equivalents

$

9,869

$

19,038

Marketable Securities

25,241

23,153

Accounts receivable

2,015

2,858

Inventory

 

995

 

1,161

Other current assets

 

1,773

 

1,122

Total current assets

 

39,893

 

47,332

Restricted cash

 

751

 

751

Property and equipment, net

 

4,326

 

3,666

Intangible assets, net

 

3,629

 

4,008

Operating lease right of use assets, net

 

7,759

 

8,276

Goodwill

4,024

4,024

Other assets

 

2,213

 

2,369

Total assets

$

62,595

$

70,426

Current liabilities

 

  

 

  

Accounts payable

$

2,318

$

2,312

Accrued expenses and other current liabilities

4,014

5,719

Current portion of operating lease liabilities

2,376

2,586

Deferred revenue

345

339

Total current liabilities

 

9,053

 

10,956

Long-term liabilities

 

 

Operating lease liabilities

 

10,951

 

11,521

Total liabilities

20,004

22,477

Commitments and contingencies (see Note 11)

 

  

 

  

Equity

 

  

 

  

Common Stock, $0.01 par value per share, 150,000,000 shares authorized; 83,352,580 and 83,232,262 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively

833

832

Additional paid-in capital

 

468,306

 

467,740

Accumulated deficit

 

(433,621)

 

(428,112)

Accumulated other comprehensive loss

 

(664)

 

(534)

Total equity attributable to XWELL, Inc.

 

34,854

 

39,926

Noncontrolling interests

 

7,737

 

8,023

Total equity

 

42,591

 

47,949

Total liabilities and equity

$

62,595

$

70,426

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

3

Table of Contents

XWELL, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(In thousands, except share and per share data)

Three months ended March 31, 

    

    

2023

    

2022

    

Revenue, net

 

 

  

 

  

 

Patient services revenue

$

131

$

19,389

Services

5,772

3,777

Products

 

596

 

345

 

HyperPointe Services

561

523

Other

3

14

Total revenue, net

 

7,063

 

24,048

 

Cost of sales

 

  

 

  

 

Labor

 

4,378

 

5,462

 

Occupancy

 

1,213

 

1,068

 

Products and other operating costs

 

950

 

8,517

 

Total cost of sales

 

6,541

 

15,047

 

Gross Profit

522

9,001

Depreciation and amortization

 

587

 

1,264

 

Loss on disposal of assets

132

-

General and administrative

 

6,091

 

10,188

 

Total operating expenses

 

6,810

 

11,452

 

Operating loss

 

(6,288)

 

(2,451)

 

Interest income, net

 

393

 

7

 

Foreign exchange gain (loss)

85

(2)

Other non-operating expense, net

 

(19)

 

(316)

 

Loss before income taxes

 

(5,829)

 

(2,762)

 

Income tax expense

 

-

 

-

 

Net loss

(5,829)

(2,762)

Net loss (income) attributable to noncontrolling interests

 

320

 

(1,521)

 

Net loss attributable to XWELL, Inc.

$

(5,509)

$

(4,283)

Net loss

$

(5,829)

$

(2,762)

Other comprehensive loss from operations

 

(130)

 

(41)

Comprehensive loss income

$

(5,959)

$

(2,803)

Loss per share

 

  

 

  

Basic and diluted loss per share

$

(0.07)

$

(0.04)

Weighted-average number of shares outstanding during the period

 

  

 

  

Basic

 

83,345,896

 

101,601,913

Diluted

 

83,345,896

 

101,601,913

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

4

Table of Contents

XWELL, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands, except share and per share data)

    

    

Accumulated

    

    

    

Additional

other

Total

Non-

Common stock

paid- 

Accumulated

comprehensive

Company

controlling

Total

    

Shares

    

Amount

in capital

    

deficit

    

loss

    

equity

    

interests

    

equity

December 31, 2022

83,232,262

$

832

$

467,740

$

(428,112)

$

(534)

$

39,926

$

8,023

$

47,949

Issuance of restricted stock units

120,318

1

(1)

Value of Shares Withheld to fund payroll taxes

(22)

(22)

(22)

Stock-based compensation

589

589

23

612

Net loss for the period

(5,509)

(5,509)

(320)

(5,829)

Foreign currency translation

(130)

(130)

11

(119)

March 31, 2023

83,352,580

$

833

$

468,306

$

(433,621)

$

(664)

$

34,854

$

7,737

$

42,591

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

5

Table of Contents

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

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands, except share and per share data)

    

    

    

    

    

    

Accumulated

    

    

    

Additional

other

Total

Non-

Common stock

paid- 

Accumulated

comprehensive

Company

controlling

Total

    

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

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

6

Table of Contents

XWELL, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

Three months ended March 31, 

    

2023

    

2022

Cash flows from operating activities

 

  

 

  

Net loss

$

(5,829)

$

(2,762)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

Depreciation and amortization

 

587

 

1,264

Gain on marketable securities

(206)

Amortization of operating lease right of use asset

416

398

Stock-based compensation

 

612

 

1,543

(Gain) loss on equity investment

(25)

273

Changes in assets and liabilities:

 

 

Decrease (increase) in inventory

166

 

(759)

Decrease (increase) in accounts receivable

843

(906)

(Increase) decrease in other assets, current and non-current

(469)

 

82

Increase in deferred revenue

6

192

Decrease in other liabilities, current and non-current

(2,482)

(1,612)

Increase in accounts payable

516

 

513

Net cash used in operating activities

 

(5,865)

 

(1,774)

Cash flows from investing activities

 

  

 

Acquisition of property and equipment

 

(1,404)

 

(1,659)

Investment in marketable securities

(1,882)

Acquisition of HyperPointe net of cash assumed

(4,853)

Acquisition of intangibles

 

(4)

 

(267)

Net cash used in investing activities

 

(3,290)

 

(6,779)

Cash flows from financing activities

 

 

Repurchase of Common Stock

(11,095)

Contributions from noncontrolling interests

200

Payments for shares withheld on vesting

(22)

(73)

Repayment of Paycheck Protection Program

(2,151)

Distributions to noncontrolling interests

(824)

Net cash used in financing activities

 

(22)

 

(13,943)

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

8

 

(20)

Decrease in cash, cash equivalents and restricted cash

 

(9,169)

 

(22,516)

Cash, cash equivalents, and restricted cash at beginning of the period

19,789

106,257

Cash, cash equivalents, and restricted cash at end of the period

$

10,620

$

83,741

Cash paid for

 

 

Interest

$

$

7

Income taxes

$

Non-cash investing and financing transactions

 

 

Capital expenditures included in Accounts payable, accrued expenses and other current liabilities

$

38

$

765

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. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands, except for share and per share data)

Note 1. Business, Basis of Presentation and Liquidity

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.  The Company filed an amended and restated certificate of incorporation with the Delaware Secretary of State on October 24, 2022 (the “Amended and Restated Certificate”) reflecting the name change. Rebranding to XWELL aligned the Company’s corporate strategy to build a pure-play health and wellness services company, in both the airport and off airport marketplaces.

XWELL is a 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.

XpresSpa

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.

As of March 31, 2023, there were 25 operating XpresSpa domestic locations. During 2022, the Company sold one location in Austin-Bergstrom International Airport to its franchisee which now operates both locations at this airport. As the Company continues to monitor fluctuating airport volumes, the Company will  also continue to review operating hours to optimize revenue opportunity. 

The Company also had 10 international locations operating as of March 31, 2023, including two XpresSpa locations in Dubai International Airport in the United Arab Emirates, three XpresSpa locations in Schiphol Amsterdam Airport in the Netherlands and five XpresSpa locations in Istanbul Airport in Turkey.

XpresTest

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.  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 Center. Therefore, as of March 31, 2023, there was only one operating XpresCheck location operating in one airport.

XpresTest began conducting biosurveillance monitoring with the Centers for Disease Control and Prevention (CDC) in collaboration with Concentric by Ginkgo in 2021 and on January 31, 2022, the Company announced the extension of the initial program, bringing the total contract to $5,534. As of August 2022, the program was renewed in partnership with Ginkgo BioWorks for a new two-year contract term which represents approximately $7,331 in revenue (for the first year) for the XpresTest segment. Funding for the second year is anticipated but has not been confirmed at this time.  

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Treat

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).

In 2022, the Company’s Treat brand opened new locations in Phoenix Sky Harbor International Airport (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, the Company 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 two 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

The Company’s HyperPointe segment, which the Company acquired in January 2022,  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, 2022, as amended. The condensed consolidated balance sheet as of December 31, 2022 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 months ended March 31, 2023 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.

Liquidity and Financial Condition

As of March 31, 2023, the Company had cash and cash equivalents, excluding restricted cash, of $9,869, $25,241 in marketable securities, and total current assets of $39,893. Our total current liabilities balance, which includes accounts payable, deferred revenue, accrued expenses, and operating lease liabilities was approximately $9,053 as of March 31, 2023 and $10,956 as of December 31, 2022. The working capital surplus was $30,840 as of March 31, 2023, compared to a working capital surplus of  $36,376 as of December 31, 2022.

The Company has significantly reduced operating and overhead expenses since the second half of 2022, while it continues to focus on returning to overall profitability.

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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. 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 spas. 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

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 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 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 that we are 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). 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. The Company recorded $1,670 in revenue during the first quarter ended March 31, 2023 related to sample collection performance obligations because the Company’s efforts towards satisfying each of the performance obligations are expended evenly throughout the period of performance.

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 professional limited liability companies (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 its equity holder having insufficient capital at risk, and the Company having a variable interest in 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.

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HyperPointe

Our HyperPointe segment which we acquired in January 2022,  provides broad range of service and support options for our 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 are treated as deferred revenue which was $310 and $322 as of March 31, 2023 and December 31, 2022, respectively.  HyperPointe had unbilled receivables of $295 and $0 as of March 31, 2023 and December 31, 2022, respectively, included in other current assets.

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

(b) Business Combinations

The Company applies the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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.

(c) Goodwill

The Company accounts for goodwill under FASB 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.

(d) Reclassification

Certain balances in the condensed consolidated financial statements for the quarter ended March 31, 2022 have been reclassified to conform to the presentation in the condensed consolidated financial statements for the quarter ended March 31, 2023, primarily the separate classification and presentation of accounts payable, gross profits, and foreign exchange gain (loss). Such reclassifications did not have a material impact on the unaudited condensed consolidated financial statements.

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Recently adopted accounting pronouncements

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13's main goal is to improve financial reporting by requiring earlier recognition of credit losses on financing receivables and other financial assets in scope. The guidance is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. On implementation in 2023, the ASU did not have material impact on the Company’s financial statements.

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”). ASU 2021-08 requires contract assets and contract liabilities acquired in a business acquisition to be recognized and measured in accordance with ASC Topic 606, Revenues from Contracts with Customers, which the Company generally expects will result in the recognition and measurement of contract assets and contract liabilities in a manner that is consistent with the acquiree. For the Company, the amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company implemented the ASU 2021-08 in 2023. Although, the materiality of the application of ASU 2021-08 depends on the recognition and measurement of acquired assets and liabilities associated with future acquisitions, as the Company did not have any acquisition during the first quarter of 2023,  the adoption of  ASU 2021-08 did not have  material impact on the Company’s financial statements.  

Note 3. Potentially Dilutive Securities

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

Three months ended

March 31, 

    

2023

    

2022

Basic numerator:

 

  

 

  

Net loss attributable to XWELL, Inc.

$

(5,509)

$

(4,283)

Net loss attributable to common shareholders

$

(5,509)

$

(4,283)

Basic and diluted denominator:

 

 

  

Basic and diluted weighted average shares outstanding

 

83,345,896

 

101,601,913

Basic and diluted loss per share

$

(0.07)

$

(0.04)

Net loss per share data presented above excludes from the calculation of diluted net (loss) income, the following potentially dilutive securities, having an anti-dilutive impact, in case of net loss

 

  

 

  

Both vested and unvested options to purchase an equal number of shares of Common Stock

 

7,694,370

 

4,062,699

Unvested RSUs to issue an equal number of shares of Common Stock

 

326,388

 

367,189

Warrants to purchase an equal number of shares of Common Stock

 

4,000

 

29,460,560

Total number of potentially dilutive securities excluded from the calculation of earnings/(loss) per share attributable to common shareholders

 

8,024,758

 

33,890,448

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Note 4. Cash, Cash Equivalents, and Restricted Cash

    

March 31, 2023

    

December 31, 2022

Cash denominated in United States dollars

$

7,405

$

16,344

Cash denominated in currency other than United States dollars

 

2,335

 

2,562

Restricted cash

751

751

Credit and debit card receivables

 

129

 

132

Total cash, cash equivalents and restricted cash

$

10,620

$

19,789

The Company places its cash and temporary cash investments with credit quality institutions. At times, such cash denominated in United States dollars may be in excess of the Federal Deposit Insurance Corporation (“FDIC”) insurance limit. At March 31, 2023 and December 31, 2022, deposits in excess of FDIC limits were $7,286 and $16,069, respectively. As of March 31, 2023 and December 31, 2022, the Company held cash balances in overseas accounts, totaling $2,335 and $2,562 respectively, which are not insured by the FDIC. If the Company were to distribute the amounts held overseas, the Company would need to follow an approval and distribution process as defined in its operating and partnership agreements, which may delay and/or reduce the availability of that cash to the Company.

Note 5. Intangible Assets

The following table provides information regarding the Company’s intangible assets subject to amortization, which consist of the following:

March 31, 2023

December 31, 2022

Gross

Net

Gross

Net

Carrying

Accumulated

Carrying

Carrying

Accumulated

Carrying

    

Amount

    

Amortization

    

Amount

    

Amount

    

Amortization

    

Amount

Trade names

$

302

$

(30)

$

272

$

302

$

(24)

$

278

Customer relationships

1,510

(602)

908

1,510

(542)

968

Software

 

4,199

 

(1,785)

 

2,414

 

4,485

 

(1,761)

 

2,724

Licenses

54

(19)

35

55

(17)

38

Total intangible assets

$

6,065

$

(2,436)

$

3,629

$

6,352

$

(2,344)

$

4,008

The Company’s trade name relates to the value of the HyperPointe trade name, software relates to certain capitalized third-party costs related to a new website and a point-of-sale system; and licenses relates to certain capitalized costs of foreign acquisition.

The Company’s intangible assets are amortized over their expected useful lives, which is six years for trade names and five and three years for software, whereas the intangibles obtained as a result of the HyperPointe acquisition have an estimated life of 5 to 12 years. The Company recorded amortization expense of $382 and $393 during the three months ended March 31, 2023 and 2022, respectively.

Estimated amortization expense for the Company’s intangible assets at March 31, 2023 is as follows:

Calendar Years ending December 31, 

    

Amount

Remaining 2023

$

1,124

2024

 

1,462

2025

 

411

2026

 

317

2027

77

Thereafter

238

Total

$

3,629

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Note 6. Leases

The Company leases spa and clinic locations at various domestic and international airports. Additionally, the Company leases its corporate office in New York City. Certain leases entered into by the Company are accounted for in accordance with ASC 842- Leases (“ASC 842”). The Company determines if an arrangement is a lease at inception and if it qualifies under ASC 842. The Company’s lease arrangements generally contain fixed payments throughout the term of the lease and most also contain a variable component to determine the lease obligation where a certain percentage of sales is used to calculate the lease payments. The Company enters into leases that expire, are amended and extended, or are extended on a month-to-month basis. Leases are not included in the calculation of the total lease liability and the right of use asset when they are month-to-month.

All qualifying leases held by the Company are classified as operating leases. Operating lease right of use assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company records its operating lease right of use assets and operating lease liabilities based on required guaranteed payments under each lease agreement. The Company uses its incremental borrowing rate, which approximates the rate at which the Company can borrow funds on a secured basis, using the information available at commencement date of the lease in determining the present value of the guaranteed lease payments. The interest rate implicit in the lease is generally not determinable in transactions where a company is the lessee.

The Company reviews all of its existing lease agreements on a quarterly basis to determine whether there were any modifications to existing lease agreements and to assess if any leases should be accounted for pursuant to the guidance in ASC 842. The Company recalculates the right of use asset and lease liability based on the modified lease terms and adjusts both balances accordingly.

Supplemental cash flow information related to leases for the three months ended March 31, 2023 and 2022 were as follows:

Three months ended March 31, 

    

2023

    

2022

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases

$

(973)

$

(1,010)

Leased assets obtained in exchange for new and modified operating lease liabilities

$

$

305

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As of March 31, 2023, operating leases contain the following future minimum commitments:

Calendar Years ending December 31, 

    

Amount

Remaining 2023

$

2,533

2024

 

3,092

2025

 

2,690

2026

 

1,631

2027

 

1,508

2028

1,129

Thereafter

 

3,328

Total future lease payments

 

15,911

Less: interest expense at incremental borrowing rate

 

(2,584)

Net present value of lease liabilities

$

13,327

Other assumptions and pertinent information related to the Company’s accounting for operating leases are:

Weighted average remaining lease term:

5.99

years

Weighted average discount rate used to determine present value of operating lease liability:

 

7.56

%

Cash paid for minimum annual rental obligations was $662 and $271 for the three months ended March 31, 2023 and 2022, respectively.

Variable lease payments calculated monthly as a percentage of product and services revenue were $345 and $364 for the three months ended March 31, 2023 and 2022, respectively.

Note 7. Variable Interest Entities

Through its XpresCheck Wellness and Treat 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 provide 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.

The Company also has exclusive responsibility for the provision of all non-medical 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 shareholder were modified in a manner that changes the characteristics or adequacy of the nominee shareholder’s 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 now variable interest entities. Notwithstanding their legal

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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 included on the condensed consolidated balance sheets for the PLLCs after elimination of intercompany transactions was $147, included in cash and cash equivalents as of March 31, 2023. The aggregate carrying value of total assets and total liabilities included on the condensed balance sheets for the PLLCs after elimination of intercompany transactions were $275, included in cash and cash equivalents, and $146, included in accrued expenses and other current liabilities, respectively, as of December 31, 2022. The total revenue included on the condensed consolidated statements of operations and comprehensive loss for the PLLCs after elimination of intercompany transactions was $131 and $19,389, for the three months ended March 31, 2023 and 2022, respectively.

Note 8. Stockholders’ Equity and Warrants

During the three months ended March 31, 2022, the Company continued to execute on its share repurchase program, repurchasing 7,142,446 shares at an average cost of $1.55 per share, for a total of $11,095.  The Company did not repurchase any shares during the three months ended March 31, 2023.

On August 16, 2022, the Inflation Reduction Act of 2022 (the “IR Act”) was signed into federal law. The IR Act provides for, among other things, a new U.S. federal 1% excise tax on certain repurchases of stock by publicly traded U.S. domestic corporations and certain U.S. domestic subsidiaries of publicly traded foreign corporations occurring on or after January 1, 2023. The excise tax is imposed on the repurchasing corporation itself, not its shareholders from which shares are repurchased. The amount of the excise tax is generally 1% of the fair market value of the shares repurchased at the time of the repurchase. However, for purposes of calculating the excise tax, repurchasing corporations are permitted to net the fair market value of certain new stock issuances against the fair market value of stock repurchases during the same taxable year. In addition, certain exceptions apply to the excise tax. Exceptions may apply, for example, if the repurchases are less than $1,000 or issued to employees. The U.S. Department of the Treasury (the “Treasury”) has been given authority to provide regulations and other guidance to carry out and prevent the abuse or avoidance of the excise tax.

Warrants

The following table represents the activity related to the Company’s warrants during the three months ended March 31, 2023:

    

Weighted average

    

Exercise

No. of Warrants

exercise price

price range

December 31, 2022

1,172,088

$

2.00

$

1.7 - 2.125

Granted

Exercised

 

Expired

(1,168,088)

2.01

$

1.7 - 2.125

March 31, 2023

4,000

$

2.125

$

2.125

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Stock-based Compensation

The Company has a stock-based compensation plan available to grant stock options and RSUs to the Company’s directors, employees and consultants.

In September 2020, the Board of Directors approved the 2020 Equity Incentive Plan (the “2020 Plan”), a new stock-based compensation plan available to grant stock options, restricted stock and Restricted Stock Units (“RSU’s”) aggregating to 5,000,000 shares of Common Stock, to the Company’s directors, employees and consultants. Shareholder approval of the 2020 Plan was subsequently obtained on October 28, 2020. On October 4, 2022, shareholders approved the amendment to the 2020 Plan to increase the number of shares authorized for issuance under the 2020 Plan by 7,500,000 shares of Common Stock to an aggregate of 12,500,000 shares. Under the 2020 Plan, a maximum of 4,388,329 shares of Common Stock remained available for issuance as of March 31, 2023.  

In September 2020, XpresTest created a stock-based compensation plan available to grant stock options, restricted stock  and RSU’s to the XpresTest’s directors, employees and consultants. Under the XpresTest 2020 Equity Incentive Plan (the “XpresTest Plan”), a maximum of 200 shares of XpresTest common stock may be awarded, which would represent 20% of the total number of shares of common stock of XpresTest as of March 31, 2023. Certain named executive officers, consultants, and directors of the Company are eligible to participate in the XpresTest Plan. The XpresTest Plan RSAs vest upon satisfaction of certain service and performance-based conditions. The fair value of the XpresTest Plan RSAs is determined based on the weighted average of (i) Fair Value of XpresTest under the Indirect Valuation Method developing assumptions for XWELL’s Net Market Cap and XWELL’s standalone Fair Value, and (ii) Direct Valuation Method developing assumptions for XpresTest Representative Forecasted Revenue for 2021 and Peer companies Revenue’s Multiple. As of March 31, 2023, there is $167 of unrecognized stock-based compensation related to the XpresTest Plan.

The fair value of stock options is estimated as of the date of grant using the Black-Scholes-Merton (“Black-Scholes”) option-pricing model. The Company uses the simplified method to estimate the expected term of options due to insufficient history and high turnover in the past.

The following variables were used as inputs in the model:

Share price of the Company’s Common Stock on the grant date:

$

0.36 - 0.41

Exercise price:

$

0.36 - 0.41

Expected volatility:

 

119.41-121.04

%

Expected dividend yield:

 

0

%

Annual average risk-free rate:

 

3.65 - 3.96

%

Expected term:

 

6.32 - 6.41

years

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The following tables summarize information about stock options and RSU activity during the three months ended March 31, 2023:

RSUs

XpresTest RSAs

Stock options

    

    

Weighted

    

    

Weighted

    

    

Weighted

    

average

average

average

Exercise

No. of

grant date

No. of

grant date

No. of

exercise

price

RSUs

fair value

RSAs

fair value

options

price

range

Outstanding as of December 31, 2022

281,250

$

0.65

5.00

$

47,570

4,830,029

$

2.00

$

0.65 - 2,460

Granted

138,888

0.36

2,886,388

$

0.40

0.36 - 0.41

Exercised/Vested

(93,750)

0.65

Forfeited

(16,914)

$

1.43

$

1.43

Expired

 

(5,133)

$

50.93

$

1.53 - 1,908

Outstanding as of March 31, 2023

326,388

$

0.53

5.00

$

47,570

7,694,370

$

1.37

$

0.36 - 2,460

Exercisable as of March 31, 2023

3,285,125

$

1.93

$

0.40- 2,460

Total stock-based compensation for the three-month periods ended March 31, 2023 and 2022 is $612 and $1,543, respectively. The Company had $2,992 and $2,506 of unrecognized stock-based compensation related to the XWELL Stock Options, as of March 31, 2023 and December 31, 2022, respectively.

Note 9. Accrued expenses and other current liabilities

As of March 31, 2023 and  December 31, 2022, the Company’s accrued expenses and other current liabilities were comprised of the following:

    

March 31, 2023

December 31, 2022

Litigation accrual

$

449

$

963

Accrued compensation

 

990

 

2,008

Tax-related liabilities

 

547

 

573

Common area maintenance accruals

217

160

Accounts payable accruals

662

754

Gift certificates

 

496

 

496

Credit card processing fees

34

33

Other miscellaneous accruals

 

619

 

732

Total accrued expenses and other current liabilities

$

4,014

$

5,719

Note 10. Income Taxes

The Company’s provision for income taxes consists of federal, state, local, and foreign taxes in amounts necessary to align the Company’s year-to-date provision for income taxes with the effective tax rate that the Company expects to achieve for the full year. The income tax provision for the three-month period ended March 31, 2023 reflects a de minimis estimated global annual effective tax rate.

As of March 31, 2023, deferred tax assets generated from the Company’s activities in the United States were offset by a valuat