XWELL Inc (XWEL) 2021 Q3 法說會逐字稿

Greetings, and welcome to XpresSpa Group Third Quarter 2021 Earnings Conference Call. (Operator Instructions)

I would now like to turn the conference over to Mr. Doug Satzman for opening remarks. Please begin, sir.

This is James Berry, the Chief Financial Officer, and good afternoon. Thank you for joining us today and for your interest in XpresSpa Group. Before our CEO, Doug Satzman, provides a business update, and I briefly review third quarter 2021 financial results. I first need to advise you of the following. Comments made on today's call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current assumptions and opinions and involve a variety of known and unknown risks and uncertainties. Actual results may differ materially from those contained in or suggested by such forward-looking statements. Important factors that might cause such differences include those set forth from time to time in our SEC filings, including our report on Form 10-K for the year ended December 31, 2020, as well as our earnings release and 10-Q issued this afternoon, along with other current and periodic reports that we file with the SEC.

I would now like to turn the call over to Doug.

Thank you, James, and hello, everyone. We appreciate you taking the time today to join us this afternoon. Let me begin by expressing my appreciation to both our institutional and retail shareholders and for their continued confidence in us and for their support as we execute our business plan. I know that I speak for the entire Board and management team when I say that our interests are firmly aligned and that we are all working very hard every day to significantly enhance the value of our company. With that in mind, let's now briefly discuss our extraordinary financial results.

This was a record-breaking quarter for XpresSpa Group across both sales and profitability, and I couldn't be prouder of our teams for getting us here. This is a truly remarkable achievement. We generated our highest quarterly topline ever with a consolidated revenue surpassing $26.8 million, including a $25.4 million contribution from XpresCheck and a $1.4 million contribution from our legacy XpresSpa business. We also achieved our first ever full quarter of profitability as measured by both net income and adjusted EBITDA. Net income came in at $5.6 million and adjusted EBITDA reached $8.7 million in Q3. In fact, based on the performance of this third quarter, XpresSpa Group has reached a record year-to-date consolidated revenue of $44.4 million with a year-to-date net income of $74,000 and a year-to-date adjusted EBITDA of $6.6 million. At the segment level, XpresCheck generated operating profit of $12 million or 47.4% of XpresCheck revenue, which demonstrates its incredibly strong profitability and margin. Our liquidity position also remains strong.

Our cash balance has grown to $109.2 million, and we have had positive working capital of $96 million and under $6 million of debt. James will walk through all the financials in greater detail shortly, including a change in how we are recognizing revenue for XpresCheck. We believe this change will result in reporting that more clearly reflects the full COVID-19 testing economics in terms of patient volumes and per test charges. But first, I would like to discuss our 3 distinct brands and how they each contribute towards sustainable revenue streams to XpresSpa Group as we work towards our goal of generating $500 million in annual revenue by 2025.

Recall that on the onset of the pandemic in March 2020, we began our pivot from a company with a singular operating concept, XpresSpa to a leading global health and wellness holding company that is now operating 3 distinct brands, XpresCheck, XpresSpa and Treat. Our intention is to generate -- is for each to generate healthy unit level economics and operate adjacent to the others. But together, they will collectively leverage an efficient corporate structure, along with our relationships and experience operating in global airports.

With an ambitious target to reach in the next few years, we truly believe that we are just getting started and have a runway of meaningful growth ahead of us. This is particularly true for XpresCheck and Treat, which we believe have the potential each to contribute more than $200 million towards our long-term revenue goal of $500 million by 2025. Today, XpresCheck is the largest COVID testing company in US airports, currently operating 14 locations in 12 airports. This includes our recent conversion of a legacy XpresSpa in Hartsfield-Jackson Atlanta International Airport in Concourse E, which opened in October.

Looking ahead, we expect to add at least 4 to 6 XpresCheck locations in 2022. It is important to note our first 3 XpresCheck locations cost more than $500,000 each to open. But since then, we have developed a modular set that has cut the build-out cost in half, enabling a significantly faster payback. Currently, an XpresCheck location is averaging less than a 3-month payback period, which is truly amazing. While our initial concept launch was certainly very challenging, XpresCheck has since vastly surpassed all of our expectations and we think it will remain a vital and necessary service going forward, even as vaccination rates rise. COVID-19 testing has become a standard requirement for international travel, similar to extended security measures that came out of 9/11.

Even when vaccinated, often a negative COVID test prior to entry is still required. International travel represents a significant portion of our patient base as many countries outside the US require a PCR test prior to arrival. We do not foresee this policy changing in the near future because even in countries like Israel, which have a much higher vaccination rate than the US, they do not want to expose their citizens or other countries to this additional risk. Of course, this is even more true for the rest of the world, where vaccination rates are lower than in the US. And it's important to remember that we've built the infrastructure in airports that can test for other future infectious diseases that could arise and threaten border safety.

Since our launch of XpresCheck in June 2020, XpresCheck has administered nearly 300,000 COVID tests. Specific to third quarter, patient volume increased 23% to 113,000 compared to 92,000 in the second quarter. While increased airport traffic, particularly to international destinations has significantly boosted our patient volumes since we launched XpresCheck, what has been driving our success in dollar terms is the majority of our patients are choosing the rapid PCR test, which is at a substantially higher price point of $200 to $250 per test versus the $75 standard PCR test. This has dramatically elevated the margin profile of the business and through the first 9 months of the year enabled us to generate $6 million in operating cash flow. Notably, we administered 789 rapid PCR tests per day during the third quarter versus 402 in the second quarter, representing a 96% sequential increase.

As a percentage of all COVID tests, rapid PCR tests were 67% during the third quarter and have grown to 77% in September. As we enter one of the seasonally busiest travel periods of the year, we would expect testing volumes to rise further before slowing down again early next year due to the resumption of more normal seasonal traveling patterns in Q1. Furthermore, the CDC has also revised its policy towards non-US citizens this month to allow for international tourists who are fully vaccinated to enter the US with a negative COVID-19 test. While XpresCheck does not directly benefit of this additional incoming traffic into the US, we do believe that we will benefit when these international tourists return home, depending on their respective country's COVID-19 testing requirements for reentry.

Also driving XpresCheck's success is our ability to form working relationships with major airlines and government agencies. We have arrangements with several airlines such as United, Delta and El Al through which we provide COVID testing for passengers traveling to select locations. We have a contracted relationship with the Center for Disease Control and Prevention, the CDC. As we first announced in August, we received approval for a $2 million contract with the CDC for biosurveillance tracking at 3 major airports, JFK International Airport, Newark Liberty International Airport and San Francisco International Airport.

We are very pleased to have been granted this contract as it demonstrates the confidence that they have placed in the XpresCheck brand. This is an 8-week program aimed at identifying existing and new COVID variants such as including the highly contagious Delta variant that could start surfacing or resurfacing in the US. The pilot has shown positive results. So far during this pilot, we are seeing increasing numbers of participation and are testing multiple methods to maximize results. We also anticipate that this program may be expanded to monitor other countries or regions where we can see an uptick in COVID infections like in the UK, Germany, Eastern Europe and South Africa.

The revenue recognition associated with this contract is based on certain milestones specified in this contract. And the 3 launches only began in September -- and as the 3 launches only began in September, we were not able to recognize any revenue during the third quarter related to this agreement. However, we should be able to recognize about 75% of revenue during our fourth quarter. Importantly, the CDC program can similarly be implemented for any incoming port beyond airports coming into this country. Upon the CDC's discretion, if this program eventually expands, we could see this as a potentially significant business line extension for XpresCheck with the foundation of this government contract already in place.

Turning now to our legacy airport spa business. We are beginning to see early signs of encouragement with regards to the reopening of previously high-performing XpresSpa locations. In fact, we believe there is a path towards restoring segment profitability over time, which has led us to reopen additional select spas with several more to come. However, looking forward, we expect XpresCheck and Treat to be our predominant businesses through 2025 and beyond. As discussed on our last conference call, by July 1, we reopened 4 top-performing XpresSpa locations in the US with modified hours while limiting our services to massage, manicure and pedicure.

These 4 locations operated throughout the third quarter, while 2 additional spas were opened by mid-September. Since the beginning of the fourth quarter, another 4 additional locations were reopened. And as of today, there are currently 10 domestic XpresSpa company-operated locations and 1 US franchise location. We're planning 2 additional XpresSpa openings before the end of the year. Internationally, there are 6 XpresSpa locations operating. These consist of 3 in Dubai International Airport and the United Arab Emirates and 3 in Schiphol Amsterdam Airport in the Netherlands. We are considering further expansion to other major global hubs in the future.

Our domestic XpresSpa locations are operating approximately 8 hours per day during the busiest hours compared to the 16 hours per day pre-pandemic, with sales volumes about 30% to 60% of pre-pandemic levels. We implemented a price increase in mid-October and are also planning to test some new touchless massage services and new retail items during the fourth quarter. Our operations team is continuing to review opportunities to find further efficiencies beyond operating during only the airport's busiest times. And as vaccinations rates increase and airport traffic approaches pre-pandemic levels, especially during the holiday season, we see a return for some travel spa services at our airports. Of course, we'll continue evaluating each spa location monthly and review learnings as the portfolio is reactivated.

Now let's discuss our new brand Treat, a comprehensive travel, health and wellness concept, providing access to integrated care services that can seamlessly fit into a health and wellness lifestyle. Empowering travelers to take a health first approach to the journey ahead, treat acts like a wellness concierge, providing medical care and wellness services to customers to return to travel. Treat-in airport wellness centers will offer services such as testing, travel vaccines, anxiety care, emergency prescriptions, vitamin IV therapies as well as private virtual wellness services, including fitness, yoga and guided meditation services.

Treat wellness centers will also include a highly curated assortment of premium health and wellness items in their on-site retail collection. Through our analysis, we believe airport passengers typically have a dwell time of around 70 minutes between clearing security and boarding their flights. Right now, there are not many options inside the airport to occupy passengers during this dwell time beyond eating and drinking and shopping. We see a clear need and one that can be filled in the travel in a post-pandemic world.

As we previously disclosed, we launched Treat.com website on June 1, 2021. The Treat mobile app was then launched on August 16, 2021. We have offered select freemium memberships for targeted customers as we launch the initial app. With treat membership, customers will receive 1 free annual rapid PCR test valued at $250, an annual flu vaccine and unlimited on-demand virtual care to name a few of the benefits. We expect to launch Phase III in December when we open our first in-airport wellness center in JFK Terminal 4, followed by Phoenix Sky Harbor Airport in the first quarter of next year. We then intend to roll treat wellness centers across additional major US airports in 2022 and 2023 and beyond, sometimes leveraging our existing real estate, other times securing new locations. Over the long term, we envision that Treat's digital products will provide more significant growth opportunities for revenue and profit than our airport real estate. The success of this revenue stream will be achieved through both subscription-based services that provide care and digital tools supporting travel, health and wellness.

As XpresSpa Group looks to the future, in combination with our strong liquidity position and interest and growth, we are also considering accretive acquisitions and other strategic transactions to further broaden our service and retail offerings and would invest in new opportunities beyond this new evolving concept. So as you can see, we have a clear vision with focus on elevating our brands, being nimble and further expanding our services and products inside and outside the airports to increase value for all XpresSpa shareholders, Importantly, we have built an extremely strong management team over the past year, which is already contributing to the outstanding results we're seeing today, while laying the foundation for the long-term success of this developing global omnichannel company. We believe that our portfolio of health and wellness brands will enable us to build and enhance shareholder value over the long term.

With that, I'll turn it to James.

Thank you, Doug. I certainly share Doug's enthusiasm for our outstanding financial results, and I'm pleased to be sharing them with you now in greater detail. Let me first explain a change to our accounting practice that enabled us to recognize revenue that more closely reflects our actual patient volumes and how much we are charging patients per test. Recall that we have entered into management services agreements with professional corporations that actually provide the healthcare services to the patients.

These MSAs, which may be modified based upon certain conditions to find that we provide all of the non-licensed staff, equipment supplies, office space and management services in return for a management fee. Accounting standards require that we assess these arrangements to determine if there exists a variable interest in a variable interest entity or VIE. These evaluations are complex and involve judgment. Effective July 1, we determined that these [PCs and VIE, DCCs RVIEs] because their equity holders have insufficient capital at risk, and we have a variable interest in them. Prior to that, our MSA fees were commensurate with the expected patient traffic and the associated billings so the PCs were not assessed, that were assessed should not be VIE.

Now the contractual arrangements between us, the medical groups and the nominated shareholders have been changed in a way that changes the characteristics or adequacy of the nominee shareholders equity investments at risk and residual returns. This is because the nominees shareholders, notwithstanding their legal form of ownership of equity interest in the PCs are not the primary economic beneficiary. The primary beneficiary of the affiliated medical groups is the company as it meets both of the following criteria, has the power to make decisions that most significantly affect the economic performance of the affiliated medical group and has the obligation to absorb losses. Given the change, we are able to recognize revenue for the third quarter of 2021 of $26.8 million compared to $0.2 million in the third quarter of the prior year. The increase in revenue was primarily due to the recognition of and consolidation of revenue from 12 XpresCheck locations totaling $25.4 million. We also generated revenue from services and products of $1.4 million related to the reopened XpresSpa locations.

Cost of sales did increase to $13.7 million from $1.4 million in the prior year third quarter. The increase in cost was primarily due to the cost of sales incurred in the XpresCheck, offset by the decrease in variable costs associated with the decline in XpresSpa revenues and decreases in occupancy costs as a result of rent concessions received from the Air Force. General and administrative expenses were $5.2 million compared to $4.4 million for the year ago comparable period.

The increase was related primarily due to start-up costs associated with XpresCheck, development of Treat and additional legal fees related to the resolution of certain XpresSpa litigation matters, offset by reduced variable costs related to the closed XpresSpa location and the realized benefits of cost cutting and control initiatives instituted throughout 2019 and 2020, primarily in salaries, occupancy and professional fees. We are proud to report that we realized operating profits in the quarter of $7.1 million compared to an operating loss of $9.2 million in the prior year third quarter, primarily due to the higher revenue and recognized loss on revaluation of warrants and conversion options in 2020. We also are very proud to report net income attributable to common shareholders for the quarter of $5.6 million compared to a net loss attributable to common shareholders of $6.1 million in the prior year third quarter.

Finally, with respect to our GAAP financials, our liquidity remains strong with cash and cash equivalents totaling $109.2 million as of September 30, 2021. Also during the third quarter of 2021, the company repurchased 250,000 shares of its common stock outside of blackout periods. As of September 30, 2021, 14.75 million shares remained available under the $15 million share repurchase program announced on August 31, 2021. Management will continue to use its discretion outside of blackout periods in determining the conditions under which shares may be repurchased from time to time, if at all. We continue to believe the stock price is undervalued and presents a good investment opportunity with tools like a share repurchase program.

On a non-GAAP basis, adjusted EBITDA was $8.7 million compared to adjusted EBITDA loss of $5.1 million in the prior year third quarter. This represents an improvement of $13.8 million and is indicative of the XpresCheck's profitability. We define adjusted EBITDA as earnings before interest, taxes, depreciation, amortization expense and adjusted for stock-based compensation and impairment and disposal of assets. We do consider adjusted EBITDA to be an important indicator for the performance of our operating business XpresCheck. In particular, we believe it's useful for analysts and investors to understand that adjusted EBITDA excludes certain transactions not related to our core cash operating activities which are primarily related to our XpresCheck wellness centers. We believe that excluding these transactions allow investors to meaningfully analyze the performance of our core cash operations. For further details, please refer to our annual report on Form 10-Q filed today.

We also furnished in the earnings release some interesting metrics with respect to the growth in patients that we have tested over the past 3 quarters, along with the percentage that are opting for rapid and rapid PCR tests. Please review these at your convenience, but we think the takeaway here is that we are serving more and more patients and more and more of those are choosing the more lucrative rapid PCR options. As it relates to guidance for 2021, we expect to generate about $60 million in revenue. And as Doug mentioned, we are also reiterating our long-term revenue target of $500 million by 2025.

Thank you so much for your time this afternoon. We would now be happy to take your questions, and we'll turn the call over to Michelle to ask the questions that have been posed.

At this time, we'll be conducting a question-and-answer session. [Michelle], you may now proceed with the question.

The first question we have today is with over $100 million of cash on the balance sheet, you are in a great position to be repurchasing shares, but we're not very aggressive in Q3. Can we expect more activity in Q4?

Yes. Thanks for the question. The share amount repurchased in the third quarter is not a reflection of how aggressive we want to be. The repurchase program was officially documented and accounts opened just days prior to the official blackout period, which prevented any further buying until the blackout period ended. Based on our cash balances, current and prospective view of our overall businesses and the current share price, the company, I believe its shares are undervalued and can therefore create shareholder value by purchasing our own stock at a discounted -- at a discount compared to our intrinsic value. So expect more.

Thanks, Doug. Given your enthusiasm for the CDC program, do you think it will be renewed? And then the second part to my question, when will you have indications from them with respect to the extension or expansion?

Yes. Well, first of all, we're very proud of the fact that we work -- we're working very closely with the CDC in developing and implementing the first national bioservice program that we've ever had in US airports. The pilot is going very well. We have proven that we can execute and implement this new CDC program, while incoming passenger participation is increasing each week. We believe that it may be extended to include a testing program for other countries or regions as flights come in. You can watch as COVID cases uptick in some countries, I mentioned before, like the UK or Germany or Eastern Europe, even South Africa. But with that said, while we're working very closely with the CDC, it's hard to say when this would be expanded and under what terms. We're having conversations, but there's nothing that is ready to announce.

Do you expect to be profitable on a consolidated basis from now on? Or will you be incurring losses on Treat XpresSpa going forward? And will that limit the gains you're making with XpresCheck?

Well, let me start by saying we believe we've turned a corner with our first profitable quarter and year-to-date, we're marginally profitable. We believe we're in a position to continue expanding and finish the year profitably. Our success has come out of a lot of hard work and focus by a highly talented and nimble management team who is equally focused on increasing revenue and managing costs in this very difficult environment. Now to the second part of the question, while XpresCheck is currently the leader in airport COVID testing -- we are determined to build and rebuild each business line to sustain itself and bring long-term shareholder value.

If XpresChecks are so profitable, why be discussed by XpresSpa or Treat at all? Why not go into every airport that had a spa just and replace it with an XpresCheck.

Let me answer that first by saying XpresCheck is front and center and receiving full focus on further expansion, whether it's through additional airport locations or through an expanded partnership with the CDC at a national level. XpresSpa and Treat are not distractions. In fact, our conversations with airports incorporate all 3 businesses Today, not every airport wants COVID testing only. And we require their approval for converting any of our XpresSpa spaces.

As I mentioned before, gaining new contracts are very difficult, which have allowed us to use our existing XpresSpa real estate portfolio and contracts to our advantage, and it's allowed us to move as quickly as we have. But many XpresSpa locations aren't necessarily in the right part of the airport, most are post-security. -- and frankly, some are just too small. So the airports are focusing forward on the future of healthcare and airports, which is where Treat can fill a void by providing so many more additional health and wellness services. With that said, XpresCheck received significant focus in continuing to capture the demand that's continuing to grow and build this profitable line of business today.

Thanks, Doug. When do you think we will begin to see some revenue from Treat?

Well, Treat is launching now. We talked about phases. Phase 1 was getting our website up. Phase 2 was launching our app and Phase III is getting our first brick-and-mortar location, which is set to open next month. We'll see revenue begin to contribute in 2022. And as a reminder, as I've mentioned in the past, Treat is a midterm play with long-term value creation. We are very focused on XpresCheck today, but we see an open field to extend our health and wellness leadership position and, leading to complementary business model that is more robust, like treat and offers multiple revenue channels, not just in the airport, but also outside the airport.

Thanks, Doug. The next question we have today is, can you talk about the opportunity with the CDC as you complete the $2 million pilot program? Is it going to be rolled out nationally now that the US opened their borders to find travel?

Yes. Well, as the White House continues to take steps to open our borders, they're also responsible to keep our country safe from further COVID threats as well as infectious diseases entering our country. You might have read a little while ago, there was a fear of Ebola taking grip again. In the natural world, these things do come up. There is a recognition that our country was not prepared for this last pandemic, and this administration is trying to taking the preparation for future threats very seriously. XpresCheck is uniquely positioned as the largest and only testing service operating in most of the country's largest airports across multiple states. The CDC has identified our infrastructure and capabilities as a strategic tool to supply critical biosurveillance across the country. So we're -- we remain even more optimistic than ever that we can be a very useful tool in national biosurveillance, at least in our airports today.

And the next one. How big can the CDC contract be in terms of revenue to the company?

Obviously, we don't know how large this program can become, but you can do the math. You can see that any expanded program could become big dollars. Currently, we're engaged in a $2 million 8-week program that is focused on 3 airports, testing flights from one country, India. If we were to expand the program into additional airports to add other countries for extended time or even years, you can see how this can multiply.

Great. Does the US reopening international travel helped as the number of passengers flying home will increase substantially, which could be required to test before entering their home country?

Absolutely. We've been waiting for this. The reopening of our country to fully vaccinated international tourists will not only help our economy but should also create a boost in demand for testing when traveling back to various countries. We have ensured that we have secured extra supply chain of our rapid PCR test as this has proven to be our highest value product and one of our differentiators from many testing centers outside of airports. So we are prepared and anticipating even more activity...

Thank you. How sustainable do you view the testing business now that vaccines are rolled out and case numbers are coming down?

Well, interestingly, we've seen our testing numbers go up while vaccination rates go up and case numbers go down. With the resurgence of variants as well as breakthrough vaccine cases, most countries require a negative tests prior to entry. And similar to our relationship with El Al, we are having discussions with other countries, airlines to test passengers prior to flying to those countries. I can't share yet. There is even a movement with some in Congress here in our country to require negative tests prior to boarding domestic flights in the US. We do not know how this will play out but think testing will be around for the foreseeable future and some type of biosurveillance program will be implemented for the long term, which XpresCheck again, is uniquely positioned to play a major role.

Given your market cap is entirely made up of cash, have you thought anything outside of the buyback to create shareholder value for the business you have -- the businesses you have? Is it possible to spin out one of the businesses to unlock value?

Well, while the market has placed little value on our operating businesses or even future of those businesses, we're anticipating the market cap should improve from today's reported results. However, in any case, we're considering many options in the future. In the unplanned expansion in relevance of COVID and other future infectious disease testing across, travel may present significant opportunities to create additional shareholder value in 2022 and beyond. As this management team and Board has demonstrated the ability to be agile and opportunistic in this uncertain and fast-changing environment, I would not rule out any options to unlock value, including potential spin-offs.

I have no further questions today, Doug.

Well, then, thank you for those who submitted questions. Thank you, [Michelle], for sorting through. I know a lot of them are -- can be similar. But as we end, I want to thank and recognize our shareholders who have been very supportive. As we have grown this business, I was very excited to share the results from Q3. And I was brought on 2, 2.5 years ago to turn around this business and revamp the management team, and it's great to see the product and the fruits of all of that labor, especially dealing with the pandemic Hats off to the team for, again, remaining opportunistic, agile, yet still building a mid- and long-term strategy that's going to go much further than just being opportunistic during the pandemic. Thank you and look forward to sharing more results in the future as we continue down this track. Thank you. Have a great day.

Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation, and have a great day.