XWELL, Inc.
Q1 2017 Earnings Call Transcript

Published: 15 May 2017

[Executives:]

Andrew Perlman – Chief Executive Officer Anastasia Nyrkovskaya – Chief Financial Officer Ed Jankowski – Vice President and Chief Executive Officer of XpresSpa Darin White – Vice President and President of Group Mobile

[Analysts:]

Mark Robbins – Analyst Jason Richmond – Analyst

[Operator:]

Thank you for joining us for today's call. Before I turn the call over to the company, 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, and involve a variety of known and unknown risks and uncertainties. Actual results may differ materially from those contained in or suggested by such forward-looking statements. Important factors that might cause such differences include those set forth from time to time in the company's SEC filings including the company's report on Form 10-K for the year ended December 31, 2016, and other current and periodic reports the company files with the SEC. At this time, I'd like to introduce Andrew Perlman, the Chief Executive Officer of FORM Holdings.

[Andrew Perlman:]

Good afternoon, and thank you all for taking the time to join us for investor update and earnings call. I would like to update our shareholders on our first quarter 2017 results, and review some of the near-term growth opportunities we see in our business segments that should drive revenues, and result in enhanced profitability. Joining me today on the call are members of FORM Holdings, XpresSpa, and Group Mobile management. We have Anastasia Nyrkovskaya, FORM Holdings Chief Financial Officer; Ed Jankowski, FORM Senior Vice President and XpresSpa's Chief Executive Officer; and Darin White, FORM Vice President and President of Group Mobile. To begin, let me say I appreciate the feedback and support of our shareholders that we received. We made several important transformative strategic changes in the last year that established our presence in the travel, health and wellness industries, and redefined our presence in the technology industry. Today, FORM has two key revenue drivers; XpresSpa, which was acquired in December 2016, and is the leading airport spa company in the world, and Group Mobile, which we've evolved into a rugged computing full-service integrated solutions provider poised for self-sustaining growth. Since executing on these acquisitions, we've been in a curative transition as we've refined our go-forward model, to review the associated cost structures, and approach completion of our strategic shift towards two key operating segments; wellness and technology. We continue to anticipate that FORM will generate over $79 of consolidated revenue this year, 2017. And I'm proud that we've achieved $14.7 million of revenue in the first quarter. When we acquired XpresSpa, we bought a market leader. But being able to acquire a company that defines a category meant that we were also buying a company that came with a variety of challenges and opportunities. For instance, in the acquired XpresSpa, the company had lackluster morale, four active litigations, and a labor dispute. By the end of the first quarter, we've made tremendous strides in improving recruiting and retention, all [indiscernible] litigation and the resolution of a union arbitration that we inherited at XpresSpa has been resolved, and are showing strong growth in comp and total store sales. Our Technology segment is now comprised of our primary asset Group Mobile and our developmental assets FLI Charge. As you mentioned our goal is to pay back expenses related to businesses [indiscernible] sufficient returns above our cost to capital. Our third and final operating segment is intellectual property which houses our remaining IP assets, but we've already made significant progress towards our goals of extracting expense synergies in the first quarter. Much of this work was completed subsequent to the quarter end and we expect by the end of the second quarter we will complete the right-sizing of the business' cost structure and to find our capital allocation framework for future investments to ensure that we are achieving the best possible returns on our capital for shareholders. I look forward to sharing the details of our company's evolution with you going forward. With that, I'd like to dive into our segments and provide some updates on financial performance as well as our strategic outlook for each starting with wellness. XpresSpa will be the platform by which the company will accelerate its growth in the travel, health, and wellness industries. XpresSpa provide air travelers with premium health and wellness services as well as a branded line of exclusive luxury travel products and accessories at its 53 locations across 22 major airports in the United States, Holland and United Arab Emirates as of the first quarter end. Counter to the instability of traditional retail, which has been exacerbated by shifting shopping preferences and the proliferation of e-commerce software, the airport retail market continues to grow due to an increased travel security and screening requirements that are creating a captive environment within airport terminals globally. In response to these changes, airport consumers are demanding greater access to innovative and upscale retail, food, and services options. In fact, the North American airport retail market is on pace to grow at a 19% compound annual growth rate to $9.9 billion annually and 2020 according to new market research and micro market monitor. Expressed by its flexible operating model with compelling store economics is a perfect partner for airport operators looking to stay on trend with the powerful health and wellness movement. Within airport retail, XpresSpa is the market leader in its category with 49 locations domestically as of the first quarter, a number we believe we can grow to over a 100 locations over the course of the next three years. We've increased penetration of existing airports deployment of mobile kiosks and expansion into airports not presently served by XpresSpa. I want to reiterate that we believe that XpresSpa's unit opportunity can exceed 250 spas over the long term of which 150 will be domestic and 100 international. Opening spa's in new airports not presently served by XpresSpa is one of the key elements to our growth strategy we think that our success in executing these openings speaks to the value, the airport authority see and our superior luxury spa offering she's complementary to their strategy if you can see in retail and service offerings. The great example of this is our first location in Phoenix is Sky Harbor International Airport which opened just last week and a second location that's currently under construction, and so, it's open later this quarter. Our entry into Phoenix to XpresSpa in 13 of the top 15 airports in United States further solidifying our dominant market position. Phoenix's Sky Harbor is among the 11 busiest airports in the United States and top 30 worldwide serving well in excess of 40 million passengers per year. Year per recently completed a significant renovation to Terminal four its largest and in better conditions its services and amenities for its growing passenger volume. XpresSpa location is ideally located near the hub of terminal four extended detail adjacent to host of other retail and food offerings positioning expressed by maximize customer impressions and further raise the profile of the XpresSpa brand. We continue to expect five new locations to open in 2017. In the first quarter we added one location, in the second quarter will be adding two Phoenix locations and are remaining two locations are scheduled to open this fall. One of which will be an additional location in New York's JFK International Airport and the other is opening of our first in line spa location in Charlotte's Douglas Airport which complements an existing kiosk location already in service. In addition to the scheduled openings we see additional opportunities at several other potential locations outside the RFP process that we may be able to act on before the year ends. Driving the higher spa density at key airports is a [indiscernible] component to our growth strategy. JFK is an outstanding example of the density we can achieve within airports in fact once the additional JFK build out its complete you'll have nine spas operating within JFK which speaks to the unique dynamic at consistent demand in your report environment. Counter to prevail in terms across the retail landscape that can be characterized by excess of square footage and lower per square foot productivity the captive environment within the airport and the consistent turnover of traffic affords retail and service providers a unique set of circumstances to drive. Take JFK for example, by eight spas are within Terminal four [indiscernible] despite the addition of fifth location and four other spas continue to generate positive comparable store sales, you think that there is power in creating more of grand visibility which is allowing expressed to be more approachable to new customers and more convenient for existing patrons. Notably the company has traditionally never participated in traditional advertising and promotional campaigns which gives us confident that XpresSpa's genuinely aligned with consumer trends. This also speaks to the exciting opportunity we have with customer identification and targeted marketing with our new technology platform is implemented later this year. Next I'd like to speak to our store level economics and some of the strategic initiatives we have in place to try efficiencies and support long term comparables store sales growth. XpresSpa unit has strong store level economics with modest CapEx requirements that deliver strong cash on cash returns further demonstrating uniqueness of the captive airport retail environment our spas ramped quickly and are performing near our chain average by the end of the first year in operation. This dynamic allows us to generate impressive cash on cash returns that will allow for full pay back in two to two and a half years with typical lease terms of seven years. Moving forward, we expect to build out the new spa locations to cost less than $500,000 per spa and produce in excess of $1 million in revenue with the store level contribution margin of 20%. We are comfortable that we maintain -- we will maintain and improve upon the store level profitability over time as we continue to refine our operating model and implement initiatives that not only drive margins but improve sales. We had tremendous opportunity to improve the operational aspects of the business as part of our ongoing process of refinement XpresSpa's leadership team has been utilizing the regimented framework to measure each individual units to ensure that it is positioned to maximize returns on capital. The analysis identified two units that were normally within our system that we've been classifying as kiosks, these units were located within Interline employee lounge and the result of the test performed by the previous management team. Their performance was not meeting our criteria and as a result those two units have been closed following the end of the quarter. Another example of our leadership team's initiative in earning out areas for cost savings in the procurement of our XpresSpa branded merchandize and we signed our exclusive partnership with Capelli New York, Global designers and manufacturers of on-trend private label and branded products to co-produce and sell XpresSpa's line of branded travel and spa products and accessories which include neck, blankets, trousers and masks among others. XpresSpa elected compartment of Capelli to enhance its product offerings and distribution well also known fixed operating cost that will effectively broaden overall gross margins. Additionally, Capelli recognize the value of the XpresSpa brand and developed and expanded collection in XpresSpa branded products to be sold through their premium retail distribution network via a licensing agreement, Capelli has developed similar product line extensions for well known brands such as Cover Girl, Badgley Mischka, HEAD, Sondra Roberts and U.S. Army, among others and we are thrilled for the XpresSpa brand to reach beyond the airport retailer. Management has also been instrumental in attracting new change in labor management. Our employees drive our business and our most important assets and we cannot provide the services of people demand and we cannot drive revenue, to provide some further context on our labor opportunity, XpresSpa offers products where demand outstrip supply, we're simply executing on our workforce expansion initiatives of improving recruitment and retention of employees, the company should be able to better address this demand, improve customer service and ultimately allow us to drive revenue growth. There is also significant opportunity for XpresSpa to improve pricing strategies through optimization and price through elasticity analyses to which will ensure that we are maximizing returns on investments at each individual location. While there is so much to deal, the proactive efforts the leadership team has made to improve our corporate culture and communicate the value we place on our workforce has helped us drive same-store sales. Today the growth in the number of services we are able to provide is solely driven by recruiting retention, the great example is possible is our location in Atlanta's Hartsfield-Jackson International Airport, we made a concerted effort to build out the team at this store at the beginning of the year ultimately hiring 10 personnel to-date, these employees were instrumental in driving an acceleration in comparable store sales from modest to positive in January to north of 30% in April and proud to say all 10 remain with us today and did our operating team an ideal case study to try and replicate across our network. One of the initiatives that we are developing the new store prototype is designed to provide consumers with a more approachable format while communicating our complete line of services. We opened the first of these prototypes in Philadelphia International Airport in February and we are very encouraged by the initial response and these stores provide an increased emphasis on [indiscernible] by providing a dedicated service area with clean and attractive workstations and immediately communicate our offering to substantial consumers, the initial enhancements in productivity we are seeing are extremely encouraging and we look forward to sharing updates in the future. Management recognizes the power of technology in today's interconnected marketplace and it has commenced upgrades to both its legacy IT infrastructure and point of sales systems which we will roll out in the fourth quarter of 2017. These systems will enable management to better understand the demands on each spa rising opportunities and optimizing labor needs in conjunction with employments. So we can bring a level of consistency to our customers and allow us to execute on our promise of timeliness, which is essential to our efforts to put the express back in XpresSpa. These systems will also allow more complete solution for the company's traveling customers permitting reservations and opening up targeted digital marketing to approximately 150,000 affinity members already in our system. Shifting towards the segment level financials for the first quarter of 2017, we generated revenues of $11 million which represents an increase of 18.3% versus the prior year period. As a reminder, the Easter holiday shifted out the first quarter and into second quarter this year which we estimate impacted first quarter revenues by approximately $0.5 million. First quarter comparable store sales were up 7.2% negatively impacted by the aforementioned Easter shift as well as major snowstorm in the Northeast in March. Before it returned to normalized levels and we are reiterating our forecast calling for annual and comparable store sales increases of approximately 10% in the full year 2017 and $50 million of revenue. As a reminder of historical seasonal cadence suggest that approximately 21% of revenues are realized in the first quarter. We generated a gross profit of approximately $2.2 million representing 20% of sales which includes our store labor as a component of cost of sales. Our operating loss for the first quarter is $2.4 million, this includes $1.1 million of non-cash depreciation related to retail improvements and additional $600,000 of amortization associated with intangible assets such as our brand and customer relationships and $500,000 of merger, acquisition and integration costs, tracking these expenses are operating loss for $172,000. As we alluded to, we incurred heightened level of expenses in the first quarter most notably with respect to the merger, acquisition and integration cost and our expectation is for this to moderate significantly in the second quarter of 2017 and demonstrate our progress towards achieving segment level of profitability. Now I'd like to transition and speak about our technology segments. As a reminder, our new reporting segment includes our primary growth asset Group Mobile as well as our developmental asset FLI Charge. To summarize, our financial results for the Technology segment on a go forward basis will largely reflect the performance with Group Mobile however in the short term, the operating expenses will appear disproportionately high as we continue our efforts to payback expenses and the terminal transit path for the FLI Charge business. We expect this work to be completed by the end of the second quarter, in the first quarter of 2017 our technology segment generated $3.5 million of revenue, which was consistent with our expectation and represents an increase of 174% versus the prior year period. Bookings and customer commitments for the first quarter were $4.1 million representing an increase of 97% and demonstrate the traction at our fully integrated solutions platform having with our customers. Gross profit was $600,000, representing 16% of sales and increase of 300 basis points versus the prior year period's margin of 13% and was a result of our services business driving improved margin mix. Operating loss in the technology segments was $1.5 million compared to a loss of $1.1 million in the prior year quarter. The increase in operating loss is primarily attributable to development activities for FLI Charge and expansion work of the workforce at Group Mobile, we remain confident in our initial 2017 projection in Group Mobile to generate in excess of $20 million in revenue. We anticipate significant sequential revenue growth in the second quarter just consistent with past seasonality in the business. However given the pace of the company's growth and our robust pipeline, we expect some lumpiness as we closed on some merger contracts. From the margin perspective, the added services component to Group Mobile's business is already visible and its gross margins which are well above industry norms for resellers in the low double digits. We expect that Group Mobile expand its mix of service solutions over time, the company should enjoy further gross margin expansion. This improves gross margin profile combined with expected revenue growth listed on the path to achieve segment level profitability and full Year 2017. From a strategic standpoint, we're continuing to pursue alternative paths for FLI Charge that maximize value for our shareholders that being cognizant of the ongoing costs associated with supporting its growth initiatives. And such following the end of the first quarter we've realigned the businesses operating structure which will curtail Forms future capital requirements so we can deploy our capital in a fashion at maximize return on investment. Mobile's leadership is poised to further penetrate its markets following the recent addition and Excalibur Integrated Systems which provide an important and complementary services business. The broader business is only to be is only just beginning to realize the benefits with extended service capabilities and teams actively building these integral mobile's legacy business with the key focus on creating enhanced for customers through bundling techniques. Is solidify Group Mobile's evolution from a reseller to a full service integrated solutions provider and it's expected to better align the company with its customers going forward. We're adding a higher growth mix, higher margin business to drive possibility. Commensurate with its comprehensive platform, the company's been busy plenty agreements and partnerships in place. Just last week we announced the Group Mobile was awarded its sales and services contract to outfit the Florida Marine Law Enforcement Agency with the [indiscernible] PC devices. Subsequent to the quarter end we also received orders from large repeat customers such an ET systems, Molly Corporation, Nissan, and Shaw the division of [indiscernible]. Group Mobile also finalized a partner supplier agreement with Hewitt Packer control our Group Mobile begin offering its value added services to H.P. customers globally. Additionally teams finalize strategic relationship with DT research one of the leading OEM manufacturers [indiscernible] industry. Finally the team has responded to emerging trends with the enterprise customers and started testing a technology as a service model, similar to software as a service, recurring nature of these hardware licensing agreements are attractive and further supports our goal to improve our product and service offering for our customer, which will ultimately translate the margin enhancements through more attractive revenue streams. Our program is still on its infancy and it's a sign of our teams [indiscernible] that we are excited about and hope will continue to develop into a scalable business. FORM's capital structure remains sound. With its current assets of $17.7 million, a cash balance of $11.7 million, a net operating loss carry-forward of $139 million, and $6.5 million of long-term debt as of March 31, 2017. This month, we agreed to extend the term of our note by an additional year to 2019. This extension is provided with no exchange of consideration, and is a favorable transaction that supports our balance sheet. Total cash used by operating activities for the first quarter was $4.9 million, compared to the comparable prior year's use of cash of $5.4 million. Management has a heightened focus on curtailing expenses wherever necessary [indiscernible] transitionary integration process effected the first quarter significantly. Related to the first quarter, there were several temporary outside uses of cash that aggregate in the amount of $2.8 million compared to total cash used in the first quarter of $6.2 million. Our Wellness segment accounted for the vast majority, with $2.4 million of this amount, and includes acquisition and integration related professional service fees of $800,000, leases and tax related matters of $500,000, severance of $100,000, CapEx of $900,000, and interest paid of $150,000. Within our technology segment, we repaid a line of credit related to our acquisition of Excalibur in the amount of $400,000. During the second quarter we anticipate some of these excess expenditures to continue but at a moderating pace, and estimate less than $1 million of incremental excess spend related to the completion in several initiatives. Consistent with my initial remarks, all outstanding litigation that we inherited at XpresSpa has been resolved. And by the end of the second quarter, we will have rightsized each business units' respective cost structure, and refined our capital allocation framework for future investments to ensure that we are achieving the best possible returns on capital for our shareholders. We expect to realize improved cash flow in the second half of 2017 due to these changes, and begin enjoying the resultant leverage of our fixed cost base as revenues grow, providing the foundation for outstanding operating margin, and ultimately consolidated profitability as we realize scale. In closing, I would like to reiterate how excited we are about our operating businesses. XpresSpa takes us to the epicenter of the fast growing travel, health and wellness industry, with a highly productive store model. Group Mobile has made significant improvements that are driving growth and enhancing profitability. These two core businesses are expected to generate in excess of $70 million of revenue in 2017. With the majority of our restructuring efforts nearly complete, our immediate is building these core businesses, while seeking strategic alternatives for FORM's remaining non-core assets. We see an immediate opportunity to leverage our platform, begin realizing synergies, and drive our culture of operational excellence. We look forward to updating FORM's shareholders on our pursuit to enhance shareholder value. Operator, you can now open up the call for Q&A.

[Operator:]

Thank you. The floor is now open for questions. [Operator Instructions] And our first question comes from Mark Robbins. You may now state your question, Mark.

[Mark Robbins:]

Hi, Andrew. I noticed in your presentation you talked a bit about the good store unit [ph] economics. Had at a lot of new stores and I noticed you also mentioned opening a new location in Phoenix. Just wanted to get a feel for what sort of performance you're seeing there. And yes, let's go with that.

[Andrew Perlman:]

Sure, thanks for the question. As I mentioned earlier, the new location is Phoenix is in one of the busiest airports in America, and actually, in fact, the world. We actually included in the press release that we'd issued around opening the store in Phoenix and images of the store. And it's a beautiful store, and I think one of the things that again differentiates what happens in the airport, and with services from outside of the airport is because we have fixed traffic. Our stores ramp up very quickly. And in fact, we actually opened the store in Phoenix fully staffed. And so it actually is performing almost in line with what we would expect from a mature store in just the first week of operation. So, we're very excited about the early performance. I think it's too early to state numbers; it's only been opened for a few days. But, again, we're seeing performance out of the new stores that is almost exactly at the level of that of a mature store. And in some cases, because the layouts are actually even better in the new stores beyond what we would expect out of the base of the new stores.

[Ed Jankowski:]

I can also add that we opened up a kiosk in Charlotte in December of last year, and we were asked by the airport why we're under construction for the in-line which will open up in the third quarter. We were asked to come up with a kiosk concept, which we did very inexpensively, it was about $125,000. And it was literally just to get our foot in the door in Charlotte. And year-to-date, that kiosk is performing annualized at about $1 million, which really pleasantly surprised us, and also gave us hope for the kiosk moving forward in other locations.

[Mark Robbins:]

Great. Thanks a lot.

[Operator:]

Thank you. And our next question comes from Jason Richmond. You may now state your question, Jason.

[Jason Richmond:]

Hi, good afternoon. You referenced, I believe, some additional stores outside of the RFP process. Can you please elaborate on that?

[Ed Jankowski:]

Well, one of the things that we did to reinvigorate XpresSpa 2.0 are really [indiscernible] XpresSpa 2.0 is we participated in the annual ARN, Airport Revenue News convention which was in New Orleans, in March. And as a result of that, we had a number of airports that were so excited about our new concept, including [indiscernible], and incredibly excited about our temp [ph] locations and our kiosk locations, that they immediately met with us to talk about opportunities that we might have in opening up either temp stores, top-up stores, or kiosks in current locations that are vacant for them. So, for instance, the month of April, we followed up by flying around and meeting with all these airports and identifying spaces that we could open up in the third or fourth quarter that would not be part of the RFP process. So, for example, there are two locations in LAX that we are negotiating to open up temp locations before the end of the year. And then also in Las Vegas, there's one location up here, a temp location, they want us to do a permanent location there. And then they also offered up another temp location. Pittsburg offered us an additional kiosk in addition to the spa we have there. And in Philadelphia, we may have the opportunity to open up a kiosk is Philadelphia also. So that's what we were speaking of when we talked about additional locations that don't require the RFP process.

[Jason Richmond:]

I see. So if it's a temp location, how does that work with respect to lease terms, and can they turn into permanent locations, how does that work?

[Andrew Perlman:]

So, in many cases the airports come to us about a temporary location, and frequently it can turn into a permanent location if the temporary location is performing well. I would also note separately what I was highlighting before, is that a lot of what we're moving to and a lot of the interest is around kiosks, which is a much more flexible operating model, and actually has a better cash-on-cash return even than our inline stores, which are already excellent.

[Jason Richmond:]

I see, interesting. Thank you very much.

[Operator:]

Thank you. And we do have a question from the web. When do you expect to turn into a profit-making entity at the whole company level?

[Andrew Perlman:]

Sure. So, we actually have not given public guidance as to when we will turn to profitability. What we have said publicly is that we expect, certainly at the segment level, that we will turn EBITDA positive within 2017.

[Operator:]

Okay, thank you. [Operator Instructions] Our next question comes from [indiscernible]. You may now state your question, Josh.

[Unidentified Analyst:]

Hi guys. How's it going? I'm trying to square the 25 RFPs in the next 12 months, of which you guys expect to win 80% with the five store opening this year, and with the current capital state of the company? I know you guys said you expect to have enough cash for the next 12 to 18 months. I'm just trying to figure out if you're going to win 20 new stores in the next 12 months that is $500,000, how they'll be funded basically.

[Andrew Perlman:]

Yes, sure. So, the RFP process actually deals with sort of [indiscernible] in the future. So if you talk about the five locations that were run through the RFP process that are opening this year, many of those were won in excess of 12 or even in some cases 18 months ago. So as we look forward right now we're really focused on improving the operations of the business, and our expectation is that the CapEx associated with those RFPs will come well into the 2018, in some cases 2019.

[Unidentified Analyst:]

And do you expect [indiscernible] cash flow from the business?

[Andrew Perlman:]

That will be [indiscernible] but again, our focus right now is improving the operations of the business, and we'd expect our CapEx 12, 18 months out.

[Unidentified Analyst:]

Thank you. One more for you, we've come to one-time costs, we've seen it several quarters in a row, obviously in Q4 2016 it was the merger closing costs, and Q1 2017 is the merger integration cost, it sounds like in your prepared remarks that there's going to be one more quarter, Q2 2016 of -- with some one-time cost, and is that accurate?

[Andrew Perlman:]

Sure, yes. And I will actually go a step further. So two things to note, one in the 10-Q, we actually provided segment level reporting on the P&L. And we also actually provided a table that includes what many of the one-time costs that occurred outside of the norm. So the goal really was to provide that transparency because I think that is absolutely an appropriate question. The second thing which I mentioned as far my remarks before is that we would expect about a $1 million of additional costs that are falling in the second quarter that are related to one-time expenses and then work through it.

[Unidentified Analyst:]

Okay, all right. It feels it actually just hit the sec.gov just now, so haven’t had a chance to look at it, but thank you.

[Andrew Perlman:]

Yes.

[Operator:]

Thank you. And there appear to be no further questions at this time. Thank you for your participation. You may now disconnect your lines at this time. And have a great day.