XpresSpa Group, Inc.
Q4 2020 Earnings Call Transcript

Published: 31 Mar 2021

[Operator:]

Greetings, and welcome to XpresSpa Group Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. James Berry, Chief Financial Officer. Thank you, sir. You may begin.

[James Berry:]

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 fourth quarter 2020 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.

[Doug Satzman:]

Good afternoon. First, I would like to welcome Mr. James Berry, our new CFO, to his first XpresSpa earnings call. Welcome, James. This afternoon, I’d like to provide a brief update on our legacy spa business before moving on to where we currently stand with XpresCheck. Afterwards, I will share some preliminary thoughts, including some near-term steps that we’re taking in evolving our business model to capitalize on what we view as a substantial opportunity in the travel, health and wellness space in a post-COVID world. So starting with our legacy XpresSpa business. While airport traffic begins to recover, COVID-19 cases continue to decline. And as more and more people get vaccinated, the consensus across the travel industry is that it will likely take until late 2022 to early 2023 before we can return to pre-pandemic travel volumes. We are certainly encouraged that traffic has picked up recently, perhaps due to in part to spring break excursions and that the airport and airline employees are returning to work, still we have a long way to go. And based on historical seasonal patterns, traffic is likely to taper off again in the near-term before the summer. Beginning last July, we reopened two international XpresSpa locations to test the waters. Specifically, we opened our spas in Dubai International Airport, where we have been providing limited spa services and selling various spa products, such as neck pillows and travel blankets. Then in late September, our sole domestic XpresSpa franchisee reopened in Austin, Bergstrom International Airport. However, all three of these locations continue to underperform despite increasing the airport traffic and are not close to break-even profitability. Given these circumstances and what we believe will be continued customer uneasiness, having one-to-one close personal interactions with massage therapists and cosmetologist in an airport setting, we currently do not have plans to reopen our spas for traditional services in the near-term.

[James Berry:]

Thank you, Doug. As Doug referenced earlier, we had negligible revenue during the fourth quarter given very limited operations and our aforementioned inability to recognize revenue under our management services agreement. As a result of the uncertainties around the cash flow of the XpresCheck business, we concluded that the collectability criteria to qualify as a contract under ASC 606 was not met during the fourth quarter 2020, and therefore no revenue associated with the monthly management fees was recognized from the management services agreements. Instead for the fourth quarter 2020, we have recognized management fees paid of $900,000 as a deposit contract liability. As of December 31, 2020, management fees not recognized as revenues was $3.4 million. However, we do expect to be able to recognize revenue in the first half of 2021 after reassessment of the management service agreements relative to ASC 606. As a result, reported revenues during the three months ended December 31, was $323,000 compared to $10.9 million in the corresponding period for 2019. The decrease in revenue was primarily due to the adverse impact of COVID-19, and are temporarily closing substantially all global spa locations due to the categorization of the spa locations by local jurisdiction as non-essential services. The decrease was offset by revenue generated by services and products of $246,000 and $68,000, respectively, through sales and marketing agreements with strategic spa partners in the recently reopened spas in Dubai and $9,000 dollars for others. Cost of sales decreased to $2.4 million from $9.2 million in the prior-year fourth quarter. The decrease was due to the reduction in variable costs associated with the decline in the XpresSpa revenues and decreases in occupancy costs as a result of rent concessions received from the airports. They were partially offset by the cost of sales provided pursuant to the XpresCheck management services agreement of $1.2 million. On impairment and disposals of assets, expense increased to $9 million from $5.2 million in the prior year fourth quarter. The expense was related to the impairment of our XpresSpa trade name due to changing business climate due to the COVID-19 pandemic, and impairment of leasehold improvements made to certain XpresSpa locations, operating lease right of use assets where management determined that the locations’ discounted future cash flows were not sufficient to support the carrying value of these assets over the remaining lease term and trademark. General and administrative expenses were flat at approximately $5 million for both of the comparable periods. Operating losses from operations increased to $17.5 million compared to $10.1 million in the prior year fourth quarter. Net loss attributable to common shareholders was $15.7 million compared to net loss attributable to common shareholders of $7.1 million in the prior year fourth quarter. Finally, with respect to our GAAP financials, our liquidity remained strong with cash and cash equivalent equivalents totaling approximately $89.8 million as of December 31, 2020. For further details, please refer to our Annual Report on Form 10-K filed today. Let me now conclude with the non-GAAP financial metrics with respect to XpresCheck that we believe will be helpful in providing greater 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 performance, we have opted to disclose recent and current average daily patient testing volume along with other relevant non-GAAP financial metrics. During the fourth quarter 2020, average daily patient testing volumes for XpresCheck Wellness Center was approximately 70 to 100 people with higher volumes during the November and December holiday travel period. This reflects a significant increase from the average daily patient testing volume generated in the third quarter 2020 of 30 to 50 people and was due largely to the rollout of the COVID-19 rapid testing, along with an increase in the airline industry traffic over the three-month period. Notably, the number of higher revenue/higher margin COVID-19 rapid tests as a percentage of total tests averaged 55% during the fourth quarter of 2020 and 67% in December of 2020. COVID-19 rapid tests did not become readily available at XpresCheck Wellness Centers until early October 2020. During the first 12 weeks of the first quarter 2021, the average revenue per patient was $150 while higher revenue/higher margin COVID-19 rapid tests as a percentage of total tests averaged 73%. Total XpresCheck pro forma patient services revenue for the three months ended January 31, 2021 was $3.3 million while pro forma XpresCheck gross profit was $1.2 million, representing a 36.5% margin. Total patient volume was 22,344 including 14,998 rapid test volumes during that period. The improvement in the four-wall performance of XpresCheck has slowed the Company’s monthly cash burn and exceeds the pre-pandemic gross profit margin of the legacy XpresSpa locations. So with that, we appreciate your time this afternoon and are now ready to take your questions.

[Operator:]

At this time, we will be conducting a question-and-answer session. Michelle , you may proceed with questions.

[Unidentified Analyst:]

Hi, Doug. The first question we have coming in, perhaps reopening spas at the moment is not a good idea, but once the vaccine is rolled out and available to everyone by the summer, why not try and open a few locations? Don’t you think people will begin to resume normal activities at some point? And don’t you think that spas will be more relevant then?

[Doug Satzman:]

Thank you for the question. It’s a tough one. We opened a couple spas to see how they would do, they are underperforming. I’m not convinced that people will be rushing even when they have vaccinations to have such close intimate interaction. Even if 10% to 20% of our traffic that use to come to us besides, they’re going to wait until next time, that can be a material difference in our economic model. One of our major competitors in other airports, they opened a handful of spas during the holiday of November and December and then they reclosed them again in January. But the short answer is, the world has changed and we will be reopening, but in a new format, in a new world with more relevant services and more relevant retail. We’re extremely excited about the new path that we’re going down and where we’ll be able to leverage a lot of our existing real estate as well as get access to a lot of new real estate, just like we do with XpresCheck.

[Unidentified Analyst:]

Great. And the next question. Did you receive any stimulus as it relates to COVID testing in the airports? Did you apply and were you expecting to?

[Doug Satzman:]

We haven’t received any new stimulus from the recent bills that came. We have been speaking with the Trump administration and the Biden administration, and various government departments. We have ongoing discussions with the CDC and HHS. We want to avoid further pandemics. And we think that we are well positioned and they’re very interested to support their agency efforts with the number of people that we have access to. So more to come.

[Unidentified Analyst:]

Great. And how long are these various XpresCheck contracts? Are they all 12 months from the commencement of operations? If COVID testing is here to stay, why not open a few pop - more pop-ups to capitalize on the opportunity in the near-term?

[Doug Satzman:]

So let me repeat the question back. How long are the contracts and are they all 12 months, and then why not open a few more pop-ups? Did I get that?

[Unidentified Analyst:]

That is correct.

[Doug Satzman:]

Okay. So our contracts range in time. In some instances, we’re simply amending an existing lease we have. Some are 12-month emergency use provisions. Some have rights to extend. Some are two- and three-year deals. We have a right to terminate if all of a sudden the business dries up. So there really isn’t one answer. The point is, we negotiated flexibility as much as we can with airport leases which often have very defined constructs. Why not open a few more pop-ups? We are watching this carefully and we have hit a lot of the major airports that we’ve been targeting. Some have gained some testing facilities. But more importantly, based on our evaluation of the economic viability of the remaining major hub airports, in this constantly developing international travel requirements, that will tell us at what rate our development for XpresCheck picks back up. Maybe it stops here, maybe it goes further. So it’s – every month or so, and even more frequently, we’re constantly evaluating the run that we have when we sign these contracts, make these investments and certainly look for a return on that investment for our shareholders.

[Unidentified Analyst:]

Okay. Great, Doug. And the next one. Do you have any current authorization to raise additional capital or we seek a new authorization?

[Doug Satzman:]

So - well, we do currently have a shelf. I think everyone is aware. And I’ve been asked this question before. It’s the exact same answer. We do not have immediate plans to raise capital, but we always reserve the right if the opportunity presents itself. I, as the CEO, and our Board has a fiduciary responsibility to take advantage of market conditions when they arise time to time. And I think the company is in a much stronger position now because of the decisions that we’ve made. So, again, we don’t have immediate plans, but we’re always watching.

[Unidentified Analyst:]

Great. Thank you, Doug. And how will you be able to recognize revenue beginning in the first-half of 2021?

[Doug Satzman:]

I’ll ask my colleague James to answer this one.

[James Berry:]

The revenue recognition that governance a contract is called ASC 606, and it requires that the customer has an ability to pay the full amount or substantially the full amount. In 2020, we were not able to meet that criteria. Under 606, you reassess as time goes on and you reassess the contract against the ability to the collectability. And it is based on that, that we now believe and strongly content we will have - be able to recognize that revenue under 606 with the contracts that we have outstanding at this time.

[Unidentified Analyst:]

Great. Thanks, James. And so the next question, is there a meaningful patient volume difference between each location? Is the percentage of those rapid tests stable across the footprint?

[Doug Satzman:]

Okay. So two questions, one is different - is there a meaningful difference between patient volume location by location, and then the percent of rapid test, is that consistent. So it does vary. Larger airports like JFK are - have more humans coming through. They are higher volume. And then Salt Lake City is a less traffic airport than JFK that will similarly have different volumes. It’s interestingly depending on which hubs the airports lean on. One of the reasons we did Salt Lake City is because it’s a delta hub and they funnel a lot of flights through there. For being a medium-sized airport, they’re getting a lot of business. And so we’ve tried to be thoughtful where we place these investments to meet the most travelers and the most needs. So they do vary. We also have locations some that are pre-security, some that are post-security. And when we went into it, we wonder would we see a material difference, if we are post-security, would we miss out on a lot of the traffic. And the revenue or the traffic is similar. I wouldn’t say materially different. So we are pleased about that and continue to operate. Again, these things can change as airlines shift traffic patterns from terminal to terminal and hub airport to hub airport. But generally speaking, many airports are in a similar range, although there are differences based on the overall size of the airport. And then the second question about rapid testing, we have steadily seen this March. And we’ve talked about - I think, James spoke about, at one point, the rapid tests were 55% for Q4 and in December was actually 67%. And then for the first several weeks of Q1, it is up to 73%. Right now, it’s over 80%. So it continues to move up. This is good because it’s a higher cost and a higher margin product. And we feel even better with a rapid PCR test that we just launched on Monday and announced this week for piloting in JFK, and then we’re going to launch it in Houston next week and then we will likely spread it to the rest of our centers and have another premium rapid test that would sit alongside the Abbott ID now and would fall right in line with the trends that we’re seeing consistently across our whole portfolio. On-site rapid testing is the desired state. And I think we’re going to see rapid antigen testing starting to emerge as more destinations accept that a rapid antigen test or antigen test in general is not as sensitive as a molecular or a PCR test, but it’s still pretty good. And so there are some countries that are starting to accept that it’s a little less expensive of a test. So - and some of them, you can operate even faster. So we’re putting our sellers out and learning with the test protocols that are developed only the ones that have the EAU authorization by the FDA and we are shifting our business to adapt to the dynamic environment. That’s it.

[Unidentified Analyst:]

Great. Thank you, Doug. Have you expanded your operating hours as airport passenger volume has increased? Are you staffed differently as different dayparts? What is the new monthly management fee per location?

[Doug Satzman:]

Okay. So, we have expanded our operating hours. And there was some questions in the fall, we were running five days a week and started to move to seven days a week in some airports in the fall and now we’re operating in all of them seven days a week. The reason, we weren’t running them all seven days a week before because if this wasn’t that much business. Much as we’d like to think people are traveling, as they’re getting back, we’ve been very careful to operate when it is the busiest. The labor that we have is an expensive task, getting medical assistants and nurse practitioners and others there. So we’re very careful while we invest our labor that we’re going to get a return for it. But as travels coming back, our operational hours have expanded to meet these needs. I think you also asked about do we staff differently, different times of day. No, not necessarily. People come in for six and eight hour - six or eight hour shifts and our staffing model is pretty consistent throughout the day. Even though the airport does have peaks and valleys, it could be really slow for 2.5 hours because there’s no flights and then it’s super busy for 2.5 hours. Unfortunately, you can’t send people on and off the clock two hours at a time when they drive all the way out to the airport. So we have to be thoughtful on how we manage our labor. And we’re continuing to look at our labor as well to ensure our initial assumptions with the number of staff that we need is actually necessary with the demand that’s coming in. I think the last part of the question was around the new monthly management fee per location. So now that we have a good amount of data. Some of our XpresCheck have been open like nine months. Some have been open four months and five months. We have a credible trajectory of or volume of traffic other than maybe the peaks we had during Thanksgiving and Christmas, but now we can even better anticipate and adjust our management fees with our MSA contracts, but also staff our labor efficiently, so again we’re right-sizing the labor spend with the traffic that’s there, while keeping an eye to expanding passenger traffic that’s slowly coming back. I think I got all the questions there.

[Unidentified Analyst:]

Okay. Great. And so the next one, why do you think passengers would want to interact with this travel health and wellness brand outside of the airport environment. Are airport services really only relevant to customers if they address their needs as a captive audience?

[Doug Satzman:]

I think it’s a fair question. But I want -- if you to take a step back and think about as the world returns to travel and begins planning, they will inevitably be looking for tools to help them do that safely and responsibly. We believe the new concept we’re developing includes services and access to travel care and documentation that will be invaluable to that traveler and providing them all everything they need in one place will be another unique. Right now people are using multiple sources, possibly multiple apps. These services paired with on site health and wellness services in airports will help customers return to travel with peace of mind. We believe this customer is everywhere and not just a captive audience sitting in airports.

[Unidentified Analyst:]

Okay. Great. Thank you. And when would you expect the company to be at breakeven?

[Doug Satzman:]

James, this one’s for you. I’m glad to have James now.

[James Berry:]

Before I answer all the questions there. While we are introducing the new brand vision today we’re not providing guidance at this time. So we didn’t give it, yeah, that question, I’m sorry, Michelle.

[Doug Satzman:]

Not yet.

[Unidentified Analyst:]

Okay. And another one, why is now the right time to be hiring senior level people that will likely be very expensive?

[Doug Satzman:]

Well, we are making investments surgically strategically in bringing an expert executive that have done these things in the past that will help us with our new concept and evolve and adapt our XpresSpa and our XpresCheck model into a new more relevant concept. So we haven’t hired like lots of people but we’re being really smart on the leaders that we’re bringing in and they have each made an immediate impact as they’ve come in.

[James Berry:]

Sure.

[Unidentified Analyst:]

Okay. And then, so you don’t have a tech industry background. What gives you confidence that you are the right fit to lead a tech company going forward?

[Doug Satzman:]

Well, I don’t have a medical background either and I didn’t have a spa background either when I joined. As the CEO, it’s important to surround yourself with talent that has this experience and has the ability to execute. And one of the speaking of executives that we hired a gentleman named David Kohel. We brought in as our Chief Technology Officer. He is fantastic. He has been working with consumer brands in the digital space for his whole career. He was a senior executive at Nike, amazing consumer brand and then he was the CTO at ZOOM+Care, which was a regional urgent care powerhouse in the Pacific Northwest and developed a lot of technology and we were one of the early leaders in telemedicine years ago. So David’s coming in and has the -- has architected the plan where we’ll be building some assets. We’ll be buying some assets and partnering some outside companies to bring this future model to reality very soon and that’s why we brought James here. He has a great background that again is helping us model and have a hopefully a strong P&L in the future.

[Unidentified Analyst:]

Okay. Great. And then why haven’t you gotten a COVID vaccine yet at the XpresCheck location. Are you still getting it and if so when?

[Doug Satzman:]

So in order to get the vaccines, your doctors need to be registered and approved state-by-state. Each state has a slightly different application process and procedure. All of our doctors are in this process now. But for example in New York State, our doctor has been approved to do it, but they haven’t admitted the next batch of clinics or doctors to support the distribution of vaccines. So up till now many of the states have been struggling with the demand in the supply chain getting vaccines, so I understand they’re not letting a lot of others in to start distributing the vaccine that as the supply chain writes itself, which we’re starting to see. I’m hopeful that these will get the relief and the approvals to start doing vaccinations on site at the XpresCheck locations, maybe not all of them will go to, but we’d like to get in as many as possible. Our focus in the beginning will be airport employees and airline employees and then we may or may not expand it to the public after that. We just need to see where the demand is, but it starts with having all the licensing that we need, which we started many, many months ago anticipating this coming.

[Unidentified Analyst:]

Great. Thank you, Doug. And then one more, do you have any other airline partnerships rolling out similar to United, JetBlue and Hawaiian Airlines?

[Doug Satzman:]

There are other international carriers that we’re speaking to. Also with some of the domestic major carriers we have a relationship with. We talked to them about extending these relationships. It depends -- often it’s driven by fees they have where destinations often international destinations have changing requirements. So The Netherlands example, when The Netherlands said, okay, it’s clean PCR test isn’t good enough we also need a rapid test four hours before boarding, that’s when we got called by three big airlines to help them in Newark and JFK and in Boston. So it’s often comes through these kind of COVID free safe passages that are drawn up. We talked to. We work with these guys on crew testing time to time, but these aren’t necessarily material announcements on press releases. So we offer a range of services and we are a tool that the airports and airlines use to sell tickets and get people confident and traveling again. So, yes, there’s more, but nothing I can announce before extensions or new deals are signed.

[Unidentified Analyst:]

Great, Doug. And then for the last question, what happened with CommonPass or air bridges to places like London that you’ve spoken about in the past?

[Doug Satzman:]

Yeah. So this is a good example. I have to be really careful when I speak, because these things change so often. So we were lined up to support a Transatlantic flight actually we have two airlines to London and this was felt like it was a sure thing, but this then coincided with the timing of infection rates increasing in the U.K. So the British Government said, they pulled the plug on the program. They were going to loosen restrictions on and have some testing protocol that would allow people to maybe reduce the quarantine when they arrived in the U.K. and then they just stopped it.

[Unidentified Analyst:]

Okay.

[Doug Satzman:]

Understandably because infection rates are going up, so this is constantly the start-stop, start-stop that a lot of these destinations, government, agencies live with. This is why it’s hard for travelers sometimes and it often directly correlates to infection rates rising or falling, vaccination rates increasing, neighboring countries or cities and it’s -- as we all watch in the news quite complicated at times. So air bridges are still a thing that concept that countries and airlines are able to put together to help travelers feel there is a lower risk path to go into these places. And again, we’re uniquely positioned at so many airports to support it on site.

[Operator:]

That’s all the questions we had today. Doug, so if you’d like to just give some closing remarks.

[Doug Satzman:]

Okay. Well, with that, I’d like to thank everyone for their support. In the past, we have a lot of exciting things coming and trust that the management team is working very hard to make sure that XpresSpa Group, the company and our shareholders will have a relevant business in this changing world in a post-COVID environment. Everyone is trying to figure out what it will look like and we clearly see this emerging trend to travel health and wellness. And we are neatly positioned to be an early leader in this space and we’re assembling a team to join me to deliver on this. So very excited about the future even though it’s -- there’s uncertainty, but we’re doing all the homework we can and putting together a great program. So thank you for your time, listening to call and have a great week.

[Operator:]

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation and enjoy the rest of your evening.