XpresSpa Group, Inc. (NASDAQ: XSPA) Q1 2022 earnings call dated May. 16, 2022
Call participants:
James Berry — Chief Financial Officer
Scott Milford — President and Chief Executive Officer
Raphael Gross — Investor Relations, ICR
Presentation:
Operator
Greetings, and welcome to the XpresSpa Group First Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Monday, May 16, 2022.
I would now like to turn the conference over to James Berry, Chief Financial Officer. Please go ahead.
James Berry — Chief Financial Officer
Good afternoon. Thank you for joining us today and for your interest in XpresSpa Group.
Before our CEO, Scott Milford, offers his prepared remarks, and I review first quarter 2022 financial results, I 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 well as other current and periodic reports that we file with the SEC.
I would now like to turn the call over to Scott.
Scott Milford — President and Chief Executive Officer
Thank you, James, and hello, everyone. We appreciate you all joining us this afternoon. Since taking over as CEO in late January, my team and I have been laying the foundation for our future by developing a set of strategic imperatives to accelerate our Company’s evolution so that we can become a leading health and wellness provider for people on the go.
Today, my intention is to walk you through our first quarter performance and the progress we have made on the four business transformation strategies I laid out on our last earnings call. As we execute these strategies, we are thankful to have available capital to enable us to adjust the pace of our work in light of changing market conditions for our business, even as we continue repurchasing our undervalued stock through our buyback program. Of course, it’s important for everyone to be aware that as a public company, we can repurchase our stock during certain limited open window periods. During the first quarter, we repurchased 7.1 million shares during the available open window period, and we’ll continue to repurchase shares as the opportunity arises.
To help set the stage for our discussion today, I’d like to begin sharing our first quarter’s performance. We generated consolidated revenue of $24 million and adjusted EBITDA of $0.4 million. Our quarter end cash balance was $83 million, and we have no long-term debt.
I also want to call out that while the quarterly decline in overall airport testing relative to last year was not surprising as the first quarter is typically the weakest quarter in terms of airport traffic. We did see a decrease that was faster and more significant than we had planned as countries have moved to significantly relaxed their testing requirements. We further see this decreasing trend through April and May for the same reasons.
Regardless of the fact that we are seeing a relaxation in testing requirements, COVID still posed as a risk, both here and abroad. Our relationship with the CDC remains strong, and we continue to support their efforts to build a robust biosafety program through the collection of test samples from international travelers arriving in the U.S. Our intention has been and will continue to be to help keep COVID under control and to help prepare for a potential new threat.
In April, as part of the CDC’s traveler-based surveillance program and together with our partner, Concentric by Ginkgo, we collected, identified and sequenced one of the first samples containing the novel BA.4 sublineage of the Omicron variant, and we delivered it to the CDC’s lab. This sequence represented one of the first of the new Omicron sublineages that was identified in the United States. We’re thrilled that our biosurveillance program continues to play a pivotal role in detecting new variants entering the country, further highlighting the importance of testing. And while testing has been a focus of ours since our business pivot in 2020, our efforts in the past quarter have expanded to include improving the profitability of our legacy spa business and the long-term profitability of the Treat brand as COVID moves from pandemic to endemic. All of these changes are made possible by the capital we have available to accelerate our efforts. We continue to reopen our spas, rehire staff and resume operations, while identifying ways in which we can improve unit economics, which I’ll update everyone on in a moment.
We’ve opened two Treat locations and are preparing for a third later this summer. We are busy putting our attention on long-term growth. We cannot ignore that a primary driver of our forecasted revenue for 2022 has been impacted by the continued swift relaxation of testing requirements overseas. As a result of this, we anticipate revenues to be lower than we originally forecasted and we’ll not be delivering more specific guidance at this time.
I recognize the expected change in revenue is not what any of us desires. However, we had anticipated the eventual leveling off of testing and are already actively engaged in deploying strategies that we believe will help to secure our growth in the future. As I stated in our last earnings call, the work my team and I are doing now will help build a sustainable growth engine for our business in the future.
And now, I’d like to shift gears and talk about what we are putting in place to help us achieve this long-term goal. Our first strategic imperative is organizing our business for growth. As a management team, we are aggressively identifying areas of savings within our current business to ensure we can effectively meet the changing operating landscape. We are looking across XpresSpa Group and asking ourselves these questions. Does this drive revenue in alignment with our vision? Will it work for or support the integration of any businesses we acquire or partner with? Will it grow our existing in airport business? Or will it help us grow our out-of-airport business?
Instead of supporting three distinct brands, Treat, XpresCheck and XpresSpa, we are integrating them more holistically so that we can leverage things like our patient scheduler, for example, in a much more efficient way. This includes investments we are making in the process of making to build an efficient supply chain that serves our brands collectively, hiring key leaders with experience in brand and sales building, such as our new Chief Marketing Officer, Pablo Henderson [Phonetic], who will join us shortly, and further investments we’re making in technology to streamline infrastructure that is currently largely manual and cost ineffective.
Our second imperative is increasing revenue by growing our airport business. These efforts are focused on building on our wellness business by expanding services and improving our retail offering. We’re currently focused on aggressively rebuilding our retail capability to offer more relevant products to consumers across our brands. As we mentioned last quarter, we’re testing touchless services in our XpresSpas to drive additional sales and save on labor costs. We are also looking to add health and wellness services to select XpresSpas to drive revenue. This may include products from our Treat brand, like hydration therapies and vitamin shops. But we are also looking at adding other more lucrative aesthetic services like Botox and facials.
We continue to review our existing portfolio of airport locations and are making the difficult decisions required to permanently close existing stores that may not serve our long-term strategy, while identifying new airport locations, as well as acquisitions of other spas to grow our footprint. Notably, this airport expansion effort extends beyond the U.S. market as we are also focusing on developing our international portfolio with existing partners. Our overarching goal here is to maximize the revenue potential of our spa business through higher-margin services and a stronger retail offering, which I will elaborate on in just a minute, reducing costs where we can by closing suboptimal spas and acquiring better locations for new spas that can build revenue for us in the future.
Our third strategic imperative is increasing revenue with a stronger retail presence. We recently hired a seasoned retail growth expert to help us rebuild our retail business, both online and in-store. Our in-store retail offering will be more relevant to the services we offer and provide opportunity for add-on sales to grow average basket value. We are developing bundled products in a kit-like format that are tailored to travelers and serve a variety of health and wellness needs and are planning to begin deployment during the busy summer travel season. Historically, our retail strategy has not been a core strength of our business despite having access to millions of potential buyers in our airport. And rather than focus our efforts on selling higher-margin products with a lower labor cost, we relied on pushing higher cost services in the hopes of driving more revenue. We believe we can reinvent our retail offering and add new and creative services that attract consumers without adding significantly more costs to our labor model.
Our fourth strategic imperative is expanding out-of-airport revenue. This will be where we put a good deal of our energy through the balance of 2022 and into next year. We believe in order for us to grow, we must put our capital to work through acquisitions. So while we may consider opportunistic acquisitions within the airport, our desire is to expand outside the airport. We believe an out-of-airport strategy allows us to scale our growth faster with fewer constraints. We are now in the process of identifying a banking partner and have already begun discussions with potential companies that, we believe, may be accretive to our business.
Our effort to grow the Treat brand also has helped fuel our B2B business outside of the airport. We now have an integrated set of products and services that we can sell to businesses looking to offset the rising cost of healthcare, while offering an attractive benefit to companies that will help them retain labor. We will also focus this effort with our existing government relationships in order to maximize that potential.
My team and I are committed to delivering on these strategic imperatives, and I will continue to report on our progress as we achieve key milestones in our evolution. I am very fortunate to work with such a dedicated group of leaders in the pursuit of growth. And I want to thank the hard work and dedication of our support and field teams, who, each and every day, deliver on our vision to transform care for people on the go.
And now, let me share a business update on current operations, beginning with XpresCheck. We have 15 locations across 12 airports, and we’ll continue to review the portfolio of locations and adjust according to the needs and requirements of the market and CDC. As testing numbers decline, we will look at ways to optimize costs associated with operating our XpresCheck business. This may include closing some locations. We’re identifying more creative ways to continue to deliver necessary testing in a more cost-effective manner. We will report more specific details about these efforts in the future.
To reiterate, COVID-19 is still with us, which is why we continue to help develop a biosurveillance effort with the CDC at four of our major airports through a $5.6 million contract that involves pool testing in over 20 countries, and we continue to work with the CDC to identify other at-risk countries. We recognized $1.6 million in revenue in the fourth quarter last year and $1.4 million in the first quarter this year, with the remainder being recorded in the second quarter. We believe this contract is demonstrative of the confidence that they have placed in us and are hopeful that it will lead to renewal in the near term and that it will lead to an expansion of the program with a goal of having a continuous biosurveillance program deployed in the U.S.
Turning now to our existing airport spa business. We currently have 19 spas operating domestically, including two franchise locations, and we’ll have at least 23 of our spa locations reopened over the summer to take advantage of that important travel season. Performance continues to improve. As a result, we are slowly returning to pre-pandemic scheduling. And while sales volumes were about 50% of pre-pandemic levels earlier, we are starting to see a rebound. We will continue to monitor sales by hour and optimize where we are able to ensure productivity and revenue are maximized. We are seeing renewed interest in wellness services among travelers, along with a willingness to spend additional dollars on products and services that will improve their overall well-being while they travel. We continue to evaluate touchless services such as light therapy, [Indecipherable] and virtual reality goggles, which we began adding to our spas late last year. We expect to add more of these types of on-trend services in addition to new retail, which will drive more sales in our stores.
Internationally, there are also six XpresSpa locations currently operating. These consist of three in Dubai International Airport; and three in Schiphol Amsterdam Airport. However, we also have five XpresSpa locations that will be opening at Istanbul Airport with the first to open later this summer. These newest XpresSpas are all designed to improve a traveler’s peace of mind and well-being at this major airport hub. We believe international expansion is an important part of our continued growth as margins tend to be higher, cost of operations generally lower. These factors, coupled with a more sophisticated international traveler, who is willing to experience new technologies and spend more on wellness, will serve our growth efforts in the future.
As you know, our third business brand, Treat, opened its first unit in JFK Airport in December 2021. Designed for people on the go, looking for a one-stop travel health and wellness solution through a suite of integrated services, the JFK location has received positive feedback from customers. We’re seeing continued interest in our vitamin IVs, our B12 and C injections and in our retail offerings. As we continue to evaluate this business, we are already making adjustments to our offerings with the goal of adding some of our more successful spa services into the Treat menu and are in discussions to add aesthetic services as well, further leveraging that space with higher-margin products. In April, we opened a second brick and mortar location, this time in Phoenix Sky Harbor Airport. We expect to introduce some of the learnings we have from JFK into the Phoenix Treat location to further improve that business.
Our third Treat location will open in Salt Lake City, post security in a former XpresSpa location. It is our first location value engineered from our original design at about half the cost of JFK. Because it has a more open floor plan, we can provide some of our more popular spa services, as well as offer health and wellness services in the same room, providing a greater opportunity to meet travel demand. It will also offer a greater assortment of retail products. This will likely be our default design going forward, since it is more inviting to passersby, as they will be able to see more retail and more activity to catch somebody’s eyes. We will continue to evaluate the Treat model as we evolve the product and service offerings in our current locations. We will also use the opportunity to align spa services with some of the more popular Treat offerings to further integrate our new and legacy businesses under a unified menu.
As we said before, we expect to see a modest revenue contribution from Treat this year, but view an integrated product and service strategy as a midterm play with long-term value creation. This is because an integrated wellness offering extends our health and wellness leadership position in travel, offering multiple revenue channels outside of just operating inside the airports. This integrated product strategy that we offer in our Treat locations will serve as a basis for our B2B offering outside the airport.
Finally, recall that in January, we acquired HyperPointe, a leading digital healthcare and data analytics relationship marketing agency, servicing the global healthcare and pharmaceutical industry. Under the leadership of Ezra Ernst, HyperPointe will continue to play an important role in our ongoing biosafety strategy. Additionally, we are beginning to look for ways to further integrate our two organizations to optimize our business for growth. During the first quarter, HyperPointe contributed $523,000 to total revenue of the XpresSpa Group.
Before I turn the call over to James, let me reiterate that our plan is to expand our services and products both in and out of airports, while pursuing accretive acquisitions and other strategic transactions to further broaden our offering. If we are able to realize this vision and we are working hard every day to do so, we will be able to increase value for all XpresSpa stakeholders. And whenever possible, we will repurchase shares under our authorization. We are doing this because we believe there is a disconnect between the stock’s current value and its intrinsic value. Again, we are not always in a position to act even when the stock price declines because we are subject to blackout periods.
With that, I’ll turn it over to James, excuse me.
James Berry — Chief Financial Officer
Thank you, Scott. I’m going to provide a brief synopsis on our first quarter results, but please refer to the 10-Q that we filed this afternoon for greater details. Revenue rose to $24 million in the first quarter of 2022 compared to $8.5 million in the prior year first quarter. The increase was primarily due to the recognition of revenues from XpresCheck locations, although we also generated $2.6 million in revenue from our reopened XpresSpa location and $0.5 million related to the HyperPointe business we acquired early in the quarter.
Cost of sales increased to $15 million from $4.2 million in the prior year first quarter. The increase was primarily due to higher costs to operate the XpresCheck locations and the reopening of certain XpresSpa locations that were temporarily closed during the first quarter of 2021. Note that the largest component in the cost of sales are cost of testing kits and labor costs at the location level.
General and administrative expenses were $10.2 million compared to $4.5 million for the year ago comparable period. The increase was related primarily due to the functional costs associated with the operations of XpresCheck and Treat wellness centers, XpresSpa locations and the newly acquired HyperPointe segment.
We reported an operating loss in the quarter of $2.5 million compared to an operating loss of $0.9 million in the prior year first quarter. We generated net loss attributable to common shareholders for the quarter of $4.3 million compared to $1.1 million in the prior year first quarter.
Finally, with respect to our GAAP financials, our liquidity remains solid with cash and cash equivalents totaling $83 million, and we have no long-term debt. Operating cash flow also improved to minus $1.8 million from minus $3.5 million, and we deployed $11.1 million for share repurchases. During the first quarter, we repurchased 7.1 million shares outside of blackout periods. As of May 16, 2022, 3.2 million shares remain available under the $15 million share repurchase program announced on August 31, 2021. Given the current share price, which we view as substantially undervalued, we intend to be active during the next open window period.
On a non-GAAP basis, adjusted EBITDA was $0.4 million compared to adjusted EBITDA of $0.9 million in the prior year first quarter. We define adjusted EBITDA as earnings before interest, taxes, depreciation and amortization expense and adjusted for stock-based compensation and impairment disposal of assets. We consider adjusted EBITDA to be an important indicator, but please understand that it does exclude certain 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 and rapid PCR tests.
Finally, as Scott referenced, we anticipate revenues to be lower than we originally forecasted.
Thank you for your time this afternoon. I will now turn the call over to Investor Relations to ask questions from our retail shareholders, who are invited to submit questions ahead of today’s call.
Questions and Answers:
Raphael Gross — Investor Relations, ICR
Thank you, James. The first question is as follows. When will you be changing the Company name and ticker to something more relevant to where you are headed?
Scott Milford — President and Chief Executive Officer
Thank you for that question. I’m really excited to be able to share that we’ve kicked off work already to start a rebranding exercise. We have identified an agency and are already well underway. Once we hire Pablo and he joins us on May 31, this will be one of his first priorities to have him lead this exercise for us so that we can finalize it and conclude it.
Raphael Gross — Investor Relations, ICR
Great. Next question is about cash. You’ve earned a lot of cash compared to the fourth quarter of last year, and your core business is deteriorating. Should you really be looking at acquisitions at this point in time?
Scott Milford — President and Chief Executive Officer
Let me say that we absolutely believe that growth through acquisition is the right path for us to achieve longer-term revenue and profitability. To ensure that we’re optimizing the cash we do have on hand, we’re going to continue cutting costs throughout the organization and making sure that our resources that, we believe, we need to drive the most opportunity for accretive revenue generation are firmly in place.
Raphael Gross — Investor Relations, ICR
Okay. Next question is about evolving your existing business from XpresCheck into Treat. Are you not confident enough in Treat that you need to look elsewhere for revenue? I’m assuming that means through acquisitions.
Scott Milford — President and Chief Executive Officer
Yeah. So we actually think we can do both at the same time. I think it’s important to note with our XpresCheck leases, they were created at a time and with specific limits on the types of services that we could offer, so we may not be able to include integrated services at every XpresCheck location. So, as a result of that, I think we’re going to be offering additional services and reinvented retail where we can and work with airports to see if we can expand those services at the same time, while we also look outside of the airport to expand our business.
Raphael Gross — Investor Relations, ICR
A question on the CDC. When do you expect to hear from them on renewing the current contract, which expires shortly? And as of now, are you going to stop the biosurveillance work at the end of June when the contract ends?
Scott Milford — President and Chief Executive Officer
We expect to hear about this at any time, that is the intention. And we’re going to continue to refine schedules, stretch available labor dollars, as well as even reducing the number of flights that we’re screening. So, in the past, where we may have screened five or six flights coming in from India, we may reduce that down to two, still allowing us to pool test, but stretching that available labor out enough and long enough so that we can secure hopefully the renewal of the contract.
Raphael Gross — Investor Relations, ICR
Next question, are you considering a reverse stock split? And if so, do you need shareholder approval? How concerned are you about getting a notice for delisting?
Scott Milford — President and Chief Executive Officer
We are very sensitive to the stock price right now. And my team and I are focused on delivering strategies that we’ve outlined in our earlier comments that we believe will drive shareholder value long-term. We got very little credit for the results that we’ve delivered over the last year, but we’re confident that the strategies that we’re developing now and deploying now will reverse the current trend and help drive long-term value on our stock price.
Raphael Gross — Investor Relations, ICR
Okay. How many XpresSpas are not currently open? And what do you plan to do with them? Why would you be acquiring other non-XpresSpa airport spas when you have your own airport locations that are sitting dormant? Is it because of better real estate? Why can’t you just take over the real estate without having to acquire anything?
Scott Milford — President and Chief Executive Officer
Okay. That’s a big question. So let me see if I can answer it altogether. So we currently have 11 spas that are in various stages of decision-making around possible closure. Some of those we may reopen. Others are either poor site locations or require very high cost to operate. And so, we’re using this opportunity now to make tough decisions to reduce our exposure later. The pandemic affected a number of businesses, including some of our competitors who may not have the financial means to have stayed closed and now they might be looking for ways to exit. We’re going to be opportunistic in these instances. If it allows us to enter a new airport or improve our airport locations, we’re going to take advantage of that, and we’ll explore multiple paths to increase our footprint and keep cost of entry down.
Raphael Gross — Investor Relations, ICR
Okay. How much of the Treat revenue is actually COVID testing versus other services at this point? And also, are you making any money from the digital component of Treat? Or is this really going to be a retail play versus a digital play in terms of Treat?
Scott Milford — President and Chief Executive Officer
So I’m going to answer the latter part of the question first. We fully expect to leverage both retail and digital in the Treat brand. We’re in the process now of retooling our digital assets to better align with the product, services and evolution of Treat as we see it now that we have a couple of retail units under our belt open.
In reference to the first part of the question, when Treat opened, a significant portion of the revenue was testing-related. It has begun to shift as testing a slowdown and more wellness services are being purchased. Right now, about 66% of our Treat revenue is from testing and 34% is from other services in retail. But those percentages themselves are even shifting as more customers are exploring Treat’s other services like hydration therapy and vitamin boosts.
Raphael Gross — Investor Relations, ICR
Okay. If COVID testing is waning, how does the recent HyperPointe acquisition even help your overall business?
Scott Milford — President and Chief Executive Officer
So when we made the HyperPointe acquisition, it was done in part to help support our overall development of our biosecurity programs and designed to protect travelers. That strategy was and continues to remain an important part of our business. And while testing requirements may relax, it doesn’t reduce the need for building out that strategy. I think as we continue to optimize costs within our own G&A structure, we’ll leverage resources between HyperPointe and XpresSpa in a more holistic way to ensure that we can keep costs in line with the revenue that they drive.
Raphael Gross — Investor Relations, ICR
Thanks, Scott. I’m not seeing anymore questions at this time.
Scott Milford — President and Chief Executive Officer
Thank you very much.
Raphael Gross — Investor Relations, ICR
I believe that concludes our call for this evening. I appreciate everyone’s participation. I think you now can disconnect your lines.
Scott Milford — President and Chief Executive Officer
Thank you very much.
Raphael Gross — Investor Relations, ICR
Thank you.
Operator
[Operator Closing Remarks]