XpresSpa Group Inc (XSPA) Q3 2022 Earnings Call Transcript

XpresSpa Group Inc (NASDAQ:XSPA) Q3 2022 Earnings Call dated Nov. 10, 2022.

Corporate Participants:

Omar Haynes — Interim Chief Financial Officer

Scott Milford — President and Chief Executive Officer

Joseph Calabrese — Investor Relations

Presentation:

Operator

Greetings and welcome to XWELL’s Third Quarter 2022 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open to questions that were received from investors via email. As a reminder, this conference call is being recorded on Thursday, November 10, 2022.

I would now like to turn the conference over to Omer Haynes, Interim Chief Financial Officer for XWELL. Please go ahead, sir.

Omar Haynes — Interim Chief Financial Officer

Good day, everyone. Welcome to our conference call to review XWELL’s third quarter 2022 operating results. Joining me on today’s call is Scott Milford, XWELL’s Chief Executive Officer. We have posted our third quarter earnings release on the Investors Relations section of our website, located at www.xwell.com. A link to the webcast of today’s conference call can also be found on our site.

Before turning the call over to Scott for his prepared remarks, we 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 revised 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, 2021, as amended, as well as other current and periodic reports that we file with the SEC.

With that said, I’d now like to turn the call over to Scott.

Scott Milford — President and Chief Executive Officer

Thank you, Omar. Good afternoon, everyone. We appreciate you joining us today. Since our second quarter earnings conference call, we’ve made considerable progress executing against our four key imperatives. And more importantly, we continued laying the foundation to enter 2023 as a leaner business with a path to return to profitability.

As outlined on previous calls, we’re rolling out our new retail strategy, enhancing our spa and wellness locations and adding new customers, while simultaneously reducing overhead costs. Illustrating the progress we’re making on our transformation efforts, we recently unveiled a new corporate identity and began trading under a new NASDAQ ticker symbol, XWEL, for XWELL, on October 25. The seamless evolution to XWELL captures our emphasis on wellbeing and our commitment to being a leading authority in delivering innovative wellness solutions for people on the go.

Supporting our efforts, we just opened a new treat location in Concourse B at Salt Lake City Airport in Utah. This opening reaffirms XWELL’s commitment to the company’s transformation and focus on evolving our existing brands to include more desirable services and products aimed at capturing more customers.

Taking a closer look at our existing brands, our spa business continues to improve as we staff up to meet continued demand. Our wellness footprint currently includes 20 spas in the United States and 8 internationally.

We’re also growing in advance of the holiday travel season. We reopened three XpresSpa locations during the third quarter and we’re expanding internationally. This includes the launch of five new XpresSpas in Istanbul Turkey, three of which are already open, with two more expected to open by year end. As one of the largest and fastest growing airports in Europe, Istanbul is an ideal location for us to extend our international presence.

Regarding 2023 growth, we plan to open our 12th international location at Abu Dhabi International Airport in the first quarter of 2023. Further, over the next 18 to 24 months, we’ll continue to explore opportunities for expansion overseas, as we believe the unit economics and appeal of our retail offering in the US create a significant opportunity for growth.

Supporting our position as a leading authority in the health and wellness industry, we’re refining our airport retail ecosystem to attract more customers and drive revenue. This includes integrating our treat and spa businesses into a unified offering, as well as rolling out new enhancements focused on driving customer engagement and broader differentiation.

With almost a year of collecting and analyzing quantitative and qualitative data on our first treat location in New York, we are in the process of positioning the treat business as a premium wellness provider that is a complementary extension to our core spa business.

I’m also excited to share that, throughout the quarter, XWELL made substantial progress building a completely new retail business. Initially, we piloted our new retail strategy at our treat locations. And after realizing substantial growth in retail sales, we began rolling out new products to our XpresSpa locations.

New retail products began hitting our shelves in August, ranging from individual travel and wellness items, more comprehensive traveler kits designed to holistically address a wider set of travel specific needs.

As part of our reinvention of retail, we introduced products online through our treat.com retail platform, and continue to leverage our expertise and technology to meet consumer demand, as well as achieve our aggressive retail revenue goals.

Further, in September, we rolled out an expanded line of products dedicated to women’s health, a category where we see significant opportunity. This includes personal hygiene, pregnancy prevention, reproductive health, first aid, and additional wellness products.

It’s important to note that revenue from retail sales has historically accounted for approximately 17% of our total revenue. We’re very encouraged by the positive momentum we’ve achieved to date from our new retail offerings. Illustrating the meaningful role retail can have on our top line for the 2023 first quarter, we expect to grow retail revenues by approximately 15% to 25% sequentially.

Further, focused on providing an incredible seamless customer experience, we’re integrating new technologies into select spa locations. As one example, we recently announced plans to introduce fully autonomous express manicures into select XpresSpa wellness centers through a new partnership with Clockwork.

As we refresh our spa offering, the use of innovative technology is a key strategy that we intend to leverage further, as it not only complements our existing services, but also allows us to more efficiently manage the labor and demand in our wellness locations.

We’re in the final phase of deploying new therapeutic massage and muscle recovery services provided through high tech autonomous chairs. We’re also incorporating VR technology and content to create a completely new and therapeutic experience for travelers.

In addition to enhancing the experience to attract more customers and incremental sales, we’re also rolling out a new loyalty program under our parent, XWELL moniker. This offering will work across all our brands, providing repeat users with retail discounts and free services based on use.

Taken together, we believe these steps will help drive operational excellence by increasing brand visibility, augmenting foot traffic and interest, which will, in turn, drive future revenue growth and margin.

I’d now like to update you on the progress we’re making to grow our business outside of the airport. This past September, we retain the services of Benchmark, a top ranked M&A adviser to help us identify potential acquisition targets. Our intent is to acquire a company that will accelerate our ambition to diversify and grow our revenue base as well as drive long-term customer demand. Our thoughtful approach to acquisitions is focused on identifying complementary profit-generating businesses with solid growth potential that will advance XWELL’s off-airport strategy.

While we can’t provide any assurance that a transaction will be consummated, we absolutely believe XWELL remains well positioned to accelerate our growth by pursuing value accretive opportunities.

Regarding our fourth key imperative, we’ve been embracing a lean and agile approach to our business and optimizing our available capital to achieve our goal of reaching sustainable profitability. As discussed last quarter, we identified meaningful potential savings that we believe could be eliminated from the business without compromising our other strategy.

The work required to achieve this savings began in earnest during the third quarter, enabling us to remove approximately $1 million from our cost structure in the quarter. Although we experienced some delays in being able to close unprofitable XpresCheck units, those hurdles have been cleared. And we expect to accelerate our savings in Q4, allowing us to shed additional costs from the system, which we expect will accelerate our path towards profitability.

Specifically, during the quarter, we closed five unprofitable XpresCheck locations, and expect to close another seven during Q4. This will leave us with two remaining XpresCheck locations and five biosurveillance stations serving the XpresCheck business.

The decision to close these unprofitable locations simplifies and optimizes our operating model for speed and growth, while still enabling us to efficiently evolve XpresCheck into a full service biosurveillance business, serving our partnership with Ginkgo and CDC.

Financially speaking, during the third quarter, we recognized $1.8 million of revenue under our biosurveillance partnership. As announced in August, the new two-year contract received initial funding of approximately $16 million and the total contract value has the potential to reach approximately $61 million. We’re excited to be able to continue to evolve our XpresCheck segment to serve the traveler based genomic sequencing program and look forward to seeing it expand with additional surveillance efforts in order to combat potential threats.

To further illustrate these ongoing efforts, we continue to work with airlines to collect, cast and sequence wastewater samples from selected international flights to monitor for pathogens, including COVID-19 and also others. The program and collection methodology is one of the first of its kind globally, and will allow for passive monitoring of samples from international flights in order to continue to be prepared now and for any future pandemics. And our recent pilot program to test arriving passengers for flu pathogens further demonstrates the potential application of this program to combat pathogens coming into the country.

Before I pass the call back over to Omar to review our specific financial results, I want to reiterate my opening comment regarding our plan to emerge as a leaner and profitable company. We’ve taken measured steps so far this year to not only remove costs from our business without interrupting operations, but also build a necessary foundation to grow revenue through executing our retail strategy, improving unit economics in our spas, reshaping the approach of our treat business and growing our international business.

We are confident these measures and our continued focus on revenue optimization will result in a profitable business as we come out of a historically slower travel period in Q1 and realize the full benefits of our efforts during the remainder of 2023.

I’ll now turn the call over to Omar for an update on our financial results for the quarter.

Omar Haynes — Interim Chief Financial Officer

Thank you, Scott. I’m now going to provide a brief synopsis of our third quarter results. In the third quarter, total revenue was $10.7 million compared to $26.8 million in the prior year third quarter. This decline is primarily driven by softening in demand at our XpresCheck testing facilities.

Q3 2022 revenue primarily consists of $4 million in revenue from reopened XpresSpa locations as well as our treat location, $0.7 million in revenue related to our acquisition of HyperPointe earlier this year, $1.8 million in revenue from our biosurveillance partnership, and $4.3 million from our XpresCheck location.

Turning to expenses. Our total cost of sale decreased to $9.3 million from $13.7 million in the prior year third quarter. The principal factor leading to this decline was the closure of underperforming XpresCheck locations.

As we’ve discussed on prior calls, the cost of testing kits and location level labor costs remain the largest factors in our cost of sales.

Switching to general and administrative. These expenses totaled $6.4 million compared to $5.2 million for the year prior comparable period. The $1.2 million variance was primarily due to certain non-recurring credits that were recorded in Q3 2021.

We recorded an operating loss in the quarter of $7.6 million compared to an operating profit of $7.1 million in the prior year third quarter. Our net loss attributable to common shareholders for Q3 was $7.2 million compared to net income of $5.6 million in the prior year third quarter. As Scott discussed, it’s important to note that we continue to strategically invest in our long term growth initiatives.

Additionally, on the capital management front, we have successfully remove approximately $1 million in costs from our system and began to see the benefits of those initiatives in the late third quarter. Scott also mentioned we have begun shuttering unprofitable XpresCheck location, which will yield further savings in the fourth quarter of this year.

With respect to our GAAP financials, our liquidity remains strong, with cash and cash equivalents totaling $49.4 million, working capital of $44.2 million and no long term debt.

I will now provide an update regarding our stock buyback program. Year-to-date, we have purchased approximately 19.5 million shares outside of blackout periods. As of November 9, approximately 0.8 million shares remain available under the $25 million share repurchase program that was announced on August 31, 2021 and subsequently increased on May 20, 2022.

On a non-GAAP basis, adjusted EBITDA was minus $4.5 million compared to adjusted EBITDA of $8.7 million in the prior-year third quarter. We define adjusted EBITDA as earnings before interest, taxes, depreciation and amortization expense and adjusted for stock based compensation and impairment of assets. We consider adjusted EBITDA to be an important indicator, but please understand that it does not contain transactions not related to our core cash operating activities.

We also furnished in the earnings release metrics, with respect to patient testing, along with the percentages that are opting for rapid testing.

This concludes our financial review. Let’s open the call up for questions.

Questions and Answers:

Joseph Calabrese — Investor Relations

Thanks, Omar. Scott, an investor pointed out new language on the website about how XWELL’s brands are conveniently located around the world and are assumed to be in local communities as well. They were hoping you could share some insight regarding this.

Scott Milford — President and Chief Executive Officer

Thanks, Joe. Absolutely. Our expansion into local communities is part of our overall strategy to expand outside the airport. It’s something I’ve discussed during prior earnings call. And strategically, I believe extending our innovative wellness presence outside of the airport is a natural extension for our brands.

The question is when. We’re still laying the groundwork to be able to do this effectively. Off-airport is very appealing to us. And I also think it’s appealing to our customers. And as the right opportunity presents itself, we plan to make a strategic acquisition or make an investment in an off-airport, health and wellness business.

Joseph Calabrese — Investor Relations

Thanks, Scott. Speaking of acquisitions, we have a question regarding the M&A agreement with Benchmark. I don’t know if you’re willing to talk about timing on that, but there’s interest from investors in hearing more.

Scott Milford — President and Chief Executive Officer

Sure. As I mentioned earlier, in September, we engaged Benchmark to help us identify potential new acquisition opportunities. We’ve maintained that growth by acquisitions is something that we fully tend to take advantage of, and we’re actively focused on it. As of today, I don’t have any definitive agreement in place. So I’m not able to comment on anything specific regarding timing. We are looking at three to four potential opportunities. But I can’t really speak to those opportunities just yet. I can say that acquisitions are a core component of our overall growth strategy and growth outside the airport is key to that.

Joseph Calabrese — Investor Relations

Thanks, Scott. We have an email asking if you could comment on plans to increase XWELL’s global reach.

Scott Milford — President and Chief Executive Officer

Sure. For those of you that might be new to our story, our health and wellness brands operate outside the US in Dubai, the Netherlands and, of course, now Istanbul, as I mentioned earlier. We’ve been expanding our addressable market and our international customer base for some time. Last month, we opened two XpresSpa locations in Istanbul and I was fortunate enough to be able to attend those openings. We just opened our third location in that same airport today. And we’re opening two more locations in that airport before the end of the year.

We believe there’s opportunity for additional growth in that large airport, but also additional growth potentially in Istanbul’s original airport. And we’re taking that momentum into the new year, with the planned opening of our 12th international location, as I referenced, in Abu Dhabi International Airport.

I think further out, we’re considering other overseas markets and continuing to leverage our existing footprint. I think our innovative wellness service offerings resonate with international travelers, and our continued international growth is not only realistic, but a tangible opportunity for us.

Joseph Calabrese — Investor Relations

Great. Thanks for that, Scott. Omar?

Omar Haynes — Interim Chief Financial Officer

Sure.

Joseph Calabrese — Investor Relations

We have a question on labor. Can you comment on staffing trends and if your locations are seeing any challenges with hiring?

Omar Haynes — Interim Chief Financial Officer

Sure. As you know, it’s no surprise that the labor market in general continues to be challenging, especially for airports that were hit hard by the pandemic. To further add complexity, we are staffing for licensed professionals who have picked their environments to work in. Fortunately, we have refined our recruiting tactics, and have made some considerable inroads towards being fully staffed. But, for example, we’ve added incentives and programs to retain and incentivize our staff, like retail sales targets and other bonuses. We have also dedicated resources to training our team members to upsell, which is not only aligned with our growth objectives, but increases their earning potential in lieu of other opportunities that they may have. Staffing and training will continue to be a focus for our business as we complete 2022 and move into 2023.

Joseph Calabrese — Investor Relations

Great. Thanks, Omar. Scott, we have a question regarding your reduction of expenses. Investor was hoping you could share some thoughts into how these actions will get you to profitability quicker than before.

Scott Milford — President and Chief Executive Officer

Sure. The team has worked very hard on this in the balance of the year. And although we didn’t see the results we expected in Q3, which were due in large part to delays in our ability to close unprofitable XpresCheck locations where the cost of labor is significant, we’re pleased with the plan that we have in place. And we’re very confident that the savings we identified will accelerate as we materialize not only the closures, but related infrastructure costs and refinement to our spa economics.

As mentioned, our plan reduces over $1 million a month from our cost structure without compromising the growth of our wellness brands, and investing in marketing, so that we can continue to connect and grow our customer base. And I expect as these cuts further materialize, we’ll actually see an acceleration in our path towards profitability.

Joseph Calabrese — Investor Relations

Thanks, Scott. Next, we have a housekeeping question, asking how they should think of your XpresCheck footprint going forward?

Scott Milford — President and Chief Executive Officer

That’s a great question. Looking back, beginning just over two-and-a-half years now, this company met the COVID-19 pandemic head on, implementing health and wellness and screening, testing through our XpresCheck locations, and also helping to build the nation’s first biosurveillance capability, which is now fully in place. Based on how we see testing evolving globally, we’ve begun shuttering unprofitable XpresCheck locations, as I mentioned.

Now, we realize that that’s a shift for some of you. But it’s the right short and long term economic decision. We’ll enter 2023 with two check locations and five biosurveillance locations serving the XpresCheck business. Keep in mind, though, that we firmly believe a strong biosafety program is critical to the control of COVID-19 and other potential viruses. And as demonstrated by our partnership, XWELL is focused on supporting the invaluable national effort. If the landscape changes again, we can certainly come back and update our approach and our existing locations are available to pivot back into that.

Joseph Calabrese — Investor Relations

Great, thanks for that. Scott, directionally, are you able to make any comments in terms of growth next year?

Scott Milford — President and Chief Executive Officer

Yeah, thanks for the question. We believe there is a lot of opportunity for attractive growth. First, as I’ve said before, we need to refresh our existing core spa locations to attract more customers into our ecosystem and grow the profitability of our existing business. That is, first and foremost, paramount.

I’ve already discussed our growth internationally, and our emphasis on international growth going forward. To reiterate, we continue to have plans to grow through potential acquisitions, as evidenced by our agreement with Benchmark, and also I’ve discussed plans to grow our customer base through our enhanced retail.

That, coupled with how we’re evolving XpresCheck, into a full service biosurveillance business encourages me to see solid momentum in these areas, and we’re confident in our long term strategy. We’re optimistic about finishing the year strong, and in a good place to accelerate our path towards profitability. But there’s still more work to do.

Clearly, we’re entering 2023 as a leaner, more profitable business, and I’m excited about the path ahead. The fastest way for us to grow our overall business is to ensure we create a sustainably profitable core business and use that to expand our brand globally.

On future earnings calls, I think investors are going to want to hear more about how we are delivering operationally to drive revenue, maintaining a disciplined and efficient cost basis, and how we’re progressing on our path towards profitability. I’m going to ask you to stay tuned and I look forward to sharing that progress with each and every one of you in future earnings calls. Thanks.

Operator

[Operator Closing Remarks]