XWELL, Inc. Q1 FY2021 Earnings Call

Greetings, and welcome to XpresSpa Group's First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, James Berry, Chief Financial Officer.

Good afternoon. Thank you for joining us today and for your interest in XpresSpa Group. Before our CEO, Doug Satzman, provides an update on our business and I briefly review our first 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 that 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 good afternoon, everyone. Let me begin by sharing some of our brief thoughts on where we currently stand with respect to our airport-based XpresSpa and XpresCheck businesses. Afterwards, I'd like to introduce and share some of our thoughts on our new brand, Treat, and how we intend to capitalize on what we think is a substantial opportunity in the travel health and wellness space that can transform the way people access healthcare through technology and personalized services as we are entering a post-COVID world. Beginning with the spa business, we're encouraged to see that the airport traffic is recovering nicely. But even with the year-over-year and sequential increases in passengers, we are still far away from 2019 industry performance. And even with a growing proportion of people being vaccinated, it is still likely to take until next year before passenger volumes reach pre-pandemic levels. We currently have three XpresSpa's open, two in the United Arab Emirates in Dubai International Airport, where we've been providing select spa services and selling various retail products, such as neck pillows and travel blankets; and one in Austin, Texas, operated by a franchisee. They are still underperforming despite the modest increase in airport traffic. We believe this is because despite the vaccination rollout, there are still some passengers who are not enthusiastic at this moment in time about having such close interactions with massage therapists and cosmetologists in an airport setting. We have run analysis on moderate-volume scenarios based on passenger traffic, and none of them project an acceptable financial outcome at this point. We will continue to reevaluate each airport on a month-by-month basis, evaluating select reopenings in the future based on customer traffic patterns and consumer confidence. Accordingly, we are having ongoing discussions with various airports to monitor passenger traffic and recovery as some continue to extend rent relief. But fundamentally, we believe that we are in a new environment that is in need of more relevant retail and services. Companies that can anticipate evolving consumer needs can innovate and offer new services to meet these emerging needs will be the future winners. Therefore, we're extremely excited about our developing path and to be introducing you to our new concept, which I'll detail shortly. But first, let's discuss XpresCheck. With the addition of our two most recent pop-up locations in Seattle-Tacoma International Airport and San Francisco International Airport, we are now operating 13 XpresCheck Wellness Centers, seven days a week across 11 airports. As travel returns, our operational hours have also expanded to meet these needs, but we have been deliberate to open in the terminals and operate when they are the busiest. Encouragingly, we have benefited from the popularity of rapid COVID testing on-site at the airport. This is, by far, the most preferred testing option and commands a substantially higher price point of $200 to $250 versus $75 for the standard PCR test or a blood antibody test. Roughly three-fourths of all tests are now rapid, which has helped improve gross profit margin while reducing our monthly cash burn. Recall that we do not report revenue on a per patient basis or service, but rather receive our revenues as a management service fee from the state-licensed physicians. This is because XpresCheck operates as a management service organization, or an MSO. This is a healthcare-specific administrative and management service engine that provides a range of administrative and management functions with the company management services agreement contracting with a physician as governed by state-by-state regulations. In the first quarter of 2021, we reassessed our 2020 management services agreements and the agreements for our new locations. Adjusting them as necessary to better reflect the actual patient volumes we are seeing in our locations. In doing so, we were able to recognize revenue for the first quarter of 2021 related to XpresCheck for the first time since we launched the concept last June. James will provide details shortly. This is certainly a welcome change from the last few quarters and ahead of our original projection of being able to recognize revenue by the first half of this year. On a related note, we also substantially narrowed our net loss compared to last year. While what I'm about to say is not directly related to revenue recognition, our transition to a fee-for-service model on all testing, not just rapid tests, that began on March 8 has helped improve cash flow. Now all patients pay XpresCheck directly at the time of service, and then they are able to submit their testing fees to insurance for reimbursement on their own. However, external lab fees are still submitted for insurance reimbursement through our partner lab companies. James will discuss some XpresCheck metrics around COVID-19 testing shortly. But let me reiterate that even with the rollout of vaccines to more and more segments of the population, on-site COVID testing at airports will still be an important and necessary service for airline employees, staff, and passengers for the foreseeable future at our existing locations. This is particularly true for international travel, which represents most of our current patient base as many countries outside the U.S. still require COVID testing prior to arrival, but they have not been able to get their own populations vaccinated efficiently. This situation may continue for a long time as many countries are far from reaching herd immunity. Since late January, we've been working with United Airlines, Delta Air Lines, KLM Royal Dutch Airlines from our JFK Terminal 4 location, our Newark Liberty International Airport locations, and our Boston Logan International Airport locations for flights to the Netherlands. The Netherlands COVID-19 testing policy for international passengers requires a negative COVID PCR test within 72 hours before departure as well as a negative COVID-19 rapid test 4 hours before departure. This was the strictest travel requirement globally at the time. We are collaborating with these major airlines to meet the rapid 4-hour test requirements at these select airports. In April, we signed an agreement with Delta Air Lines to administer the new rapid antigen test for customers traveling from John F. Kennedy International Airport to Milan Malpensa and Rome-Fiumicino International Airport. Now let's discuss the introduction of our new brand, Treat, and how we're working on bringing to market a more comprehensive travel health and wellness concept designed for a post-pandemic world. Our intention here is to become the leader in what we view as an emerging new category with health-focused travel and personal wellness services that would still include COVID-19 testing and other related services. We believe that there is a coming convergence of customer need and want states. People want to return to travel but need to do so safely and responsibly. Our new model is positioned to meet consumers at this precise intersection and deliver on their travel health and wellness needs throughout their journey. Treat will be a multichannel business and lifestyle brand, bringing together virtual and on-site integrated care services at airports as well as content and support through our newly developed digital platform relevant to the post-COVID-returning traveler. Travel wellness was a skyrocketing trend prior to COVID-19, and adding health to that combination will enable it to rise again. We will provide a content-rich website with current global travel health information, original travel health and wellness editorial content, and a curated retail shop with emerging products targeting the savvy traveler living a wellness lifestyle. The initial website is expected to launch in June, representing Phase 1 of our concept introduction. Travelers will be able to access healthcare records and real-time information all in one place. Right now, people are using multiple sources and possibly multiple apps. We are currently building a mobile app with unlimited access to on-demand virtual care and established telemedicine providers, access to virtual wellness care such as guided meditations and yoga, and to a travel wallet for medical records and test results. The mobile app is expected to launch later this summer and represents Phase 2 of our concept rollout. We will have a strong presence on social media, engage in email and paid marketing campaigns, and provide a biweekly newsletter to our opt-in audience and digital subscription members. The on-site locations in airports will offer integrated health and wellness, personalized services in a premium environment. Upon entering, customers will see a beautifully curated retail environment and check-in area and will be greeted by our wellness concierge. Travelers will be able to access appointments for COVID-19 testing but also travel vaccines, traveling anxiety care, inoculations, metabolic panel testing, and the like from a list of convenient care services. They will also be able to book time in a wellness room with services like wellness coaching, yoga classes, mindfulness sessions, and specialized services like Vitamin IV Therapy. The first two Treat locations are slated to open in late summer or early fall, representing Phase 3 of our concept rollout. We would then follow that up over time by converting some legacy XpresSpa locations into Treat locations and/or open additional locations in suitable terminals and airport venues. Most importantly, we are building the one travel brand that provides access to integrated care and can seamlessly fit into a health and wellness lifestyle. Over the long term, we envision Treat's digital channels will provide more significant growth opportunities for revenue and profit than just our airport real estate alone. This is because we believe this customer is everywhere, not just a captive audience sitting in airports. The success of this revenue stream will be achieved through both subscription-based services that provide care and tools supporting travel health and wellness. Let us also share that while we are not actively pursuing acquisitions given our strong liquidity and eagerness for profitable growth, we will consider acquisitions and other investments to further broaden our service and retail offerings. We are excited about this new brand and the future of XpresSpa Group. With that, I'll turn it over to you, James.

Thank you, Doug. As Doug said, we were very pleased to have been able to recognize revenue during the first quarter based on reassessment of the management service agreements relative to ASC 606. Specifically, we recognized a total of $8.5 million in the first quarter compared to $7.7 million in the first quarter last year. The increase in revenue was primarily due to the recognition of revenue from 8 of the 11 XpresCheck Wellness Centers that were wholly or partially opened during the quarter, while the majority of XpresSpa locations remained closed, and the ability to recognize $3.2 million of 2020 deferred revenue on underlying management services agreements that met the collectibility criteria during the first quarter of 2021. Management service fees totaled $8.2 million, which included $3.2 million retroactively from last year. We also generated revenue from services and products of $265,000 and $65,000, respectively, from sales and marketing agreements with strategic spa partners related to our two locations in Dubai. Cost of sales decreased to $4.2 million from $7.2 million in the prior year first quarter. This decrease was due to 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 airports. These were offset somewhat by the cost of sales provided pursuant to the XpresCheck management services agreement of $2.7 million. Note that costs associated with the deferred revenues of 2020 were already booked last year, which also favorably impacted cost of sales. Gross profit was $4.4 million compared to $550,000 in the prior year first quarter, primarily due to higher revenue and the impact of the 2020 cost of sales. General and administrative expenses were $4.5 million compared to approximately $3.2 million for the year ago comparable period. The increase was related to start-up costs for the additional XpresCheck Wellness Centers and development costs for Treat. These were offset by reduced variable costs related to closed XpresSpa locations and the realized benefits of cost-cutting and control initiatives instituted throughout 2020, primarily in salaries, occupancy, and professional fees. Operating losses from operations decreased to $921,000 compared to $3.9 million in the prior year first quarter, primarily due to the higher revenue. Net loss attributable to common shareholders was $1.1 million compared to a net loss attributable to common shareholders of $10.6 million in the prior year first quarter, primarily due to higher interest expense, warrant revaluations, and cost of goods sold in 2020. Finally, with respect to our GAAP financials, our liquidity remained strong with cash and cash equivalents totaling $102.6 million as of March 31, 2021. During the first quarter, a total of 11.2 million warrants were exercised for common shares. We received gross proceeds of approximately $19.2 million and paid cash fees of $2.2 million in accordance with the placement agent agreement. On a non-GAAP basis, adjusted EBITDA was a positive $900,000 compared to adjusted EBITDA loss of $2.6 million in the prior year first quarter. This represents an improvement of $3.5 million and is indicative of the profitability of the XpresCheck Wellness Centers. 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 consider adjusted EBITDA to be an important indicator for the performance of our operating business, XpresCheck. In particular, we believe it is useful for analysts and investors to understand that the adjusted EBITDA excludes certain transactions not related to our core cash operating activities, which are primarily related to XpresCheck Wellness Center. We believe that excluding these transactions will allow investors to meaningfully analyze the performance of our core cash operations. For further details, please refer to our quarterly report on Form 10-Q filed today. Let me now conclude with the non-GAAP financial metrics with respect to XpresCheck that we believe will be helpful in providing great transparency in terms of its performance. Although we do not generate revenue directly from patient testing volumes as detailed above, in the interest of providing investors with greater transparency regarding XpresCheck's performance, we have opted to disclose recent and current average daily patient testing volumes, along with other relevant non-GAAP financial metrics. During the first quarter of 2021, average daily patient testing volumes for the XpresCheck Wellness Center was approximately 70 to 100 people. With the additional centers open, total patient volumes grew nearly 2.5 times in the first quarter 2021 versus the fourth quarter of 2020. Notably, the number of higher revenue, higher-margin COVID rapid tests as a percentage of total tests averaged 74% during the first quarter this year. The average revenue per patient was $160 during that quarter, and total patient volume was 38,755, including 28,338 rapid tests. During April, the average revenue per patient was $170, while higher-revenue, higher-margin COVID rapid tests as a percentage of total tests averaged 81%. Total patient volume for April alone was 23,166, including 18,802 rapid tests. And with that, we would be happy to take your questions.

If you would like to ask a question, please e-mail [email protected]. Michelle, you may now proceed with questions.

Hi, Doug, how are you today? The first question we have is airport traffic is rising, but your patient volumes are still basically the same as Q4. Do you think we have maxed out on average patient volumes already given the rollout of vaccines?

Thank you, Michelle. Let me start by answering the question. It's hard to predict patient volumes, as we know. And it certainly depends on the spread of new variants and not just related to vaccination rates in the U.S. So while the U.S. is one of the international leaders in vaccine dissemination, like the UK and Israel and a few other countries, most of the world is still one to two years away from being vaccinated and reaching or coming close to herd immunity. It's my opinion that countries will need to continue to protect the potentially large percentage of unvaccinated people in their communities, and that will continue to lead to demand for on-site airport COVID testing.

Great. Thank you, Doug. You recognized about $5.3 million in revenue for Q1 specifically during the quarter, and yet the patient volume times average revenue per patient was about $6.2 million. Can you explain the differential? Is it reasonable to assume that if we take the same metric for April and discount them by 20%, we could reduce April revenue?

I'm going to send this question to you, James.

Thanks, Doug. That's actually a very good question to again describe the managed services arrangement. The non-GAAP patient services revenue presented are revenues to the professional practices. And from that amount, practice expenses, including the licensed providers for the services are paid, and the balance is made available for express tests relating to current and past provided management services. For those centers that we have assessed and meet ASC 606 revenue recognition criteria, those amounts are applied to the accounts receivable created from that revenue recognition. For centers that we've determined have not yet qualified to recognize revenues, primarily those due to limited operating data, those payments are booked as a deposit contract liability. So the amounts are not as straightforward as discounting by 20%.

Okay. Thank you, James. The next question we received is do you plan on renewing the XpresCheck leases that are ending the soonest?

Yes. At this point, we're planning and having the conversations with landlords for our first round of lease expirations. But in each instance, it will depend on airport approval. But so far, everyone has been very supportive of the service that we've offered and believe it should continue.

Great. Thank you. I got an e-mail over the weekend offering membership to Treat. Is this the only way you're announcing a new XpresSpa business group?

No. I'm glad someone asked. Our investors were part of an inside audience that were targeted with the first communication as we are now in the preheat phase of our soft launch. By sending those e-mails, going live with three social media channels, and putting up a landing page at treatcare.com, we are starting a multi-week phase of audience gathering, so that when we launch, it isn't with a base of zero people. Beginning in early June, we will broaden our launch with a national digital ad campaign and in-airport marketing campaign as well as the launch of our website. Later in the summer, Phase 3 of the launch will roll out with a big earned media and press push, another campaign driving app downloads, and the launch of our mobile app. Soon after the app, our first on-site location is targeted to open. These phases have been planned to start audience building early in the summer as people start to plan their travel and fall travel and then stagger throughout the season as our technology pieces land. Probably a longer answer than you wanted, but that's the plan.

Thanks, Doug. When do you think we will begin to see revenue from Treat? And will you be reporting it as a separate line item? How long can you run the business with no revenue?

We think the revenue will build with each phase, Phase 1 with the website launch, Phase 2 with the app launch, Phase 3 with our on-site locations. So it will build. We will likely report it as its own segment at a certain point. And then I think the last piece is how long can we run with that revenue. Well, fortunately, XpresCheck is providing us revenue that we can show in our P&L now as well as providing cash flow, which helps support this bridge to this additional concept.

Okay. Great. Thanks, Doug. When do you think you will make the final determination as to reopen the XpresSpas or not? Surely, you do not plan on evolving every location into Treat. So do CDC's new guidelines factor anything into your decision-making process?

Yes. Any reopenings of spas will be related to customer traffic and consumer confidence. We're watching that very closely. It's hard to predict where that will land. Recent CDC guidelines will open up greater confidence in domestic travel. But as I mentioned earlier, that is not where our core of our volume is coming from today, which is from international travelers. And I spoke earlier as to why we think COVID testing requirements will remain in place for the near future.

Great. Thank you. Will XpresSpa expand and focus in other parts of the world, other than the U.S.?

Our XpresSpa portfolio has traditionally operated in the Netherlands and the U.A.E. We will continue to monitor these markets, but they need to recover a bit more like the domestic market. For XpresCheck or Treat, there is significant business to capture domestically first due to the simpler regulatory environment, although we hope to address international expansion over time. My background at Starbucks involved supporting 35 countries in Europe, the Middle East, Russia, and Africa, which makes me familiar with that environment. One of my previous roles was with the travel channel, so I would love to return to that with any of these brands in the future. However, right now, our focus is on the U.S. market.

Great. Thanks, Doug. And will we see more flexible hours of operation at XpresSpa?

I addressed this a bit earlier during my call. We are now operating 7 days a week in all of our existing locations. We are setting the hours based on when the terminals are the busiest. I know there were some that felt we should have been opened 7 days a week many months ago. But frankly, the weekends weren't that busy in most airports. They are busier now, so we've expanded our operating hours. We continue on a site-by-site, even terminal-by-terminal basis, to watch this and then adjust accordingly.

Okay. Great. Thank you. If you believe so much in Treat, why not convert all spas to Treat?

Well, we have to evaluate in real estate case by case. One, it needs airport approval, just as anything that happens in the airports does. But frankly, there are some sites that we do have some kiosks in our system. Treat won't fit in a kiosk, as an example. XpresCheck won't fit in a kiosk either. We also have some real estate that's at the head of a terminal where it's very accessible by travelers from multiple terminals. Some are at the very end, the back end of the terminal. And that may not create a good opportunity where maybe for a spa was fine. But for XpresCheck or Treat, it doesn't work. So it requires a case-by-case analysis. We're going through our portfolio now and including this in some of our early discussions with our airport partners, but I don't expect 100% conversion and probably wouldn't make business sense, anyway.

Great. Thanks, Doug. What will you do with the rest of the real estate? How many leases expire in the near term? And what will you have to decide shortly on the go-forward path to all these locations?

So as I mentioned before, it's going to depend on traffic rates and consumer confidence returning, but they're all at different places. Some airports are granting lease extensions because of COVID. Some are working to re-merchandise. So it requires an airport-by-airport, almost terminal-by-terminal analysis and negotiations, and our teams are very, very focused on that right now.

Great. Thanks, Doug. Does XpresSpa see the possibility for testing for FTDs?

FTDs are on the list of potential services for Treat. I'm not sure if we'll be launching with that service. We have started with a range of convenient care services that we think will have the most demand, and we want to launch with those, and then we can add in other services to either supplement our launch services or maybe replace ones that aren't as active. FTD testing is on the board, but I can't commit yet whether that will be part of launch or maybe after, if at all.

Great. Thanks, Doug. And is XpresSpa tapping into the CBD market at all?

Yes and no. We tried it. We did a pilot with XpresSpa before COVID, and we had mixed results. We were much more optimistic. It was probably at the height of people's interest in testing and trying out CBD products. I'm not here to say whether they work or they don't. I know that they just didn't sell very well for us before. It's not on our immediate launch plan for any of our brands, but that doesn't mean it couldn't appear in the future. Also, not every state allows CBD to be sold, anyway. There are even some airports that didn't support it when we did our pilot, even though the state allowed it. So I'm not convinced it's a big opportunity.

Great. Thanks, Doug. And how do you think Treat will compete with airline lounges?

That's an interesting one. I think we're going to be a more viable and interesting alternative than some of the airport lounges. Frankly, when you look at it, people typically get to the airport with a lot of time. They don't want to be rushed, especially if you're someone with anxiety when you travel. We expect to see more of that as people begin to travel post-COVID. But your options are you either go sit and eat and drink somewhere for a while before you get on a plane, or you can sit and eat and drink some more. I think less people might be doing that in the future, but that's just my conjecture. The big gap is wellness services or you sit in an airport lounge, waiting not at the gate and tucked away a little bit with a salad bar with tongs and free drinks again. So again, that's great for some people, but there's this gap in alternative opportunities. Wellness treatments and other things we'll be offering, I think, will be a very interesting alternative to airport lounges, especially if you want to go into a private room and basically run time for a various number of services we'll be offering.

Okay. Great. Thanks, Doug. Are you planning on doing a reverse stock split given where the shares are currently trading?

So just to be clear, and I think most people are aware of this, but in order to do a stock split or a reverse stock split, we would need shareholder approval. We have not determined if we will seek it for our next shareholder meeting, and the date for that has not been determined yet. So again, anything that we do that requires shareholder approval, we always get ahead of time. This is one of those questions that require shareholder authorization.

Thanks, Doug. How much are the two locations that are being built going to cost? Where are they located?

Well, we're in negotiations with two airports right now. Our drawings are being developed, so I can't share the price yet. Likely, the first couple will cost a little more, and then you value engineer. You roll a concept out, and you see what works and what doesn't work. But I don't have cost to share yet as it's still in the negotiation phases again with the airports and getting quotes from our general contractors and finalizing the designs.

Great. Thanks, Doug. And then would XpresSpa be shy to start their own beverage?

Would XpresSpa be shy to start their own beverage? I know these are being submitted in writing as would we start our own beverage. Generally, airports have restrictions on certain items. It's not easy for us to come and open and add a lot of food and beverage. There are other operators that get protected on those services. We may have a private-labeled alkaline bottled water with benefits, we'll see. But I don't intend to put a lot of resources in developing a beverage line, especially if some leases or airports would restrict it based on other food operators.

Okay. Great. Is XpresSpa strictly located in airports, or are you considering expanding into waterport testing?

Waterport, I'm guessing these are seaports, cruise line terminals, ferry terminals like airports on the water. Right now, we are purely focused on our bread-and-butter, in airports. We are very experienced airport operators. It's where we have our current relationships. And frankly, airports receive many, many more customers and much more traffic than ferry terminals or even cruise line terminals. So in the early phases, we want to fish where the most fish are. But one of the important parts about the Treat concept development is the digital footprint that we're investing in. We will have additional lines of revenue that will come in for travelers, whether they're flying or taking a boat or driving somewhere. But it will expand beyond literally the airports where we have these locations with the tools and services that anyone can use pretty much anywhere.

And that was our last and final question, Doug. Now turning it back to you for closing remarks.

Okay. Well, thank you very much for calling in and your continued interest in XpresSpa Group. I hope you are as excited as our management team is about continuing to pivot again and grow our business and provide more sources and more lines of revenue over this year and as we look to 2022 and 2023. Thank you very much for your time, and we'll end here.

Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you very much for your participation, and have a great day.