Q3 2021 XpresSpa Group Inc Earnings Call
[music].
Greetings and welcome to express Bakhmut third quarter 'twenty to 'twenty, One earnings conference call. At this time, all participants are in a listen only mode.
And the answer session will follow the formal presentation.
What should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference being recorded.
I would now like to turn the conference over to Mr. Doug Sussman for opening remarks, please begin sir.
This is James Berry, the Chief Financial Officer, and good afternoon. Thank you for joining us today and for your interest in express back route before our CEO, Doug Sassman provides a business update and I briefly review third quarter 2021 financial results I first need to advise you of the following comments.
Made on today's call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995. These forward looking statements are based on current assumptions and opinions involve a variety of known and unknown risks and uncertainty actual results may differ materially from those contained in or suggested by such forward.
Looking statements important factors that might cause such differences include those set forth from time to time in our SEC filings, including our report on Form 10-K for the year ended December 31, 2020, as well as our earnings release and 10-Q issued this afternoon, along with other current and periodic reports that we filed with the SEC.
I would now like to turn the call over to Doug.
Thank you James and Hello, everyone. We appreciate you taking the time today to join US. This afternoon, let me begin by expressing my appreciation to both our institutional and retail shareholders and for their continued confidence in us and for their support as we execute our business plan.
I know that I speak for the entire board and management team when I say that our interests are firmly aligned and that we are all working very hard every day to significantly enhance the value of our company.
With that in mind.
Let's now briefly discuss our extraordinary financial results. This was a record breaking quarter for express spar group across both sales and profitability and I couldn't be prouder of our teams for getting US here. This is truly a remarkable achievement.
We generated our highest quarterly top line ever with a consolidated revenues, surpassing $26 $8 million, including a 25.4 million dollar contribution from express check and a 1.4 million dollar contribution from our legacy Express Spa business.
We also achieved our first ever full quarter of profitability as measured by both net income and adjusted EBITDA.
Net income came in at $5 6 million and adjusted EBITDA reached $8 $7 million in Q3 in fact based on the performance of this third quarter Express Spar group has reached a record year to date consolidated revenue of $44.4 million with a year to date net.
Income of $74000 in the year to date, adjusted EBITDA of $6.6 million.
At the segment level Express check generated operating profit of $12 million or 47.4% of express check revenue, which demonstrates its incredibly strong profitability and margin.
Our liquidity position also remains strong our cash balance has grown to $109.2 million and we have had positive working capital of $96 million and under $6 million of debt.
James will walk through all the financials in greater detail shortly including a change in how we are recognizing revenue for express check.
We believe this change will result in reporting that more clearly reflects the full COVID-19 testing economics in terms of patient volumes and per test charges.
But first I would like to discuss our three distinct brands and how they each contribute towards sustainable revenue streams to express spar group as we work towards our goal of generating $500 million in annual revenue by 2025.
Recall that on the onset of the pandemic in March 'twenty 'twenty, we began our pivot from a company with a singular operating concept express spa to a leading global health and wellness holding company that is now operating three distinct brands Express check express spa and treat.
Our intention is to generate is for each to generate healthy unit level economics and operate adjacent to the others.
But together they will collectively leverage and efficient corporate structure, along with our relationships and experience operating in global airports.
With an ambitious targets to reach in the next few years, we truly believe that we are just getting started and have a runway of meaningful growth ahead of us.
This is particularly true for express check and treat which we believe have the potential each to contribute more than $200 million towards our long term revenue goal of $500 million by 2025.
Today Express check is the largest COVID-19 testing company in U S. Airports currently operating 14 locations in 12 airports. This includes our recent conversion of a legacy Express Spa in Hartsfield, Jackson, Atlanta International Airport, and concourse E, which opened in October.
Looking ahead, we expect to add at least four to six express check locations in 'twenty 'twenty. Two it is important to note. Our first three express check locations cost more than $500000 each to open.
But since then we have developed a modular set.
That has cut the buildout cost and half, enabling a significantly faster payback.
Currently an express check location is averaging less than a three month payback period, which is truly amazing.
While our initial concept launch was certainly very challenging express check has sense vastly surpassed all of our expectations and we think it will remain a vital and necessary service going forward, even as vaccination rates rise.
COVID-19 testing has become a standard requirement for international travel similar to extended security measures.
That came out of 911 <unk>.
Even when vaccinated.
Often.
Negative Covid test prior to entry it's still required.
International travel represents a significant portion of our patient base as many countries outside the U S require a PCR test prior to arrival.
We do not foresee this policy changing in the near future because even if the countries like Israel, which have a much higher vaccination rates in the U S. They do not want to expose their citizens or other countries to this additional risk.
Of course this is even more true for the rest of the world where vaccination rates are lower than in the U S. And it is important to remember that we've built the infrastructure in airports that can test for other future infectious diseases that could arise and threatened border safety.
Since our launch of express check in June 'twenty 'twenty Express check is administered nearly 300000 COVID-19 tests.
Specific to third quarter patient volume increased 23% 213000 compared to 92000 in the second quarter.
Well, while increased airport trip, a while increased airport traffic, particularly to international destinations has significantly boosted our patient volumes since we launched express check.
What has been driving our success in dollar terms as a majority of our patients are choosing the rapid PCR test, which is at a substantially higher price point of 200 to $250 per test versus the $75 standard PCR test.
This is dramatically elevated the margin profile of the business and through the first nine months of the year enabled us to generate $6 million in operating cash flow.
Notably, we administered 789 rapid PCR tests per day during the third quarter versus 402 in the second quarter, representing a 96% sequential increase.
As a percentage of all Covid tests rapid PCR tests were 67% during the third quarter and have grown to 77% in September.
As we enter one of the seasonally.
Busiest travel periods of the year, we would expect testing volumes to rise further before slowing down again early next year due to the resumption of more normal seasonal travelling patterns in Q1.
Furthermore, the C. D. C is also revised its policy towards non U S. Citizens. This month to allow for international tourists, who are fully vaccinated to enter the U S with a negative COVID-19 test.
While express check does not directly benefit of this additional incoming traffic into the U S. We do believe that we will.
Benefit when these international tourists return home, depending on their respective countries COVID-19 testing requirements for reentry.
Also driving express checks success is our ability to form working relationships with major airlines and government agencies.
We have arrangements with several airlines, such as United Delta and L. All through which we provide COVID-19 testing for passengers traveling to select locations.
We have a contracted relationship with the center for disease control and prevention the C. D C.
As we first announced in August we received approval for a 2 million dollar contract with the CDC for bio surveillance tracking at three major airports.
J F K International Airport Liberty Newark, Liberty International Airport in San Francisco International Airport.
We were very pleased to have been granted this contract as it demonstrates the confidence that they have placed in the express check brand.
This is an eight week program aimed at identifying existing and new COVID-19 variance such as including the highly contagious Delta variant that could start surfacing or resurfacing in the U S. The pilot has shown positive results.
So far during this pilot were seeing increasing numbers of participation and are testing multiple methods to maximize results.
We also anticipate that this program may be extended expanded to monitor other countries or regions, where we can see an uptick in COVID-19 infections like in the U K, Germany, Eastern Europe, and South Africa.
The revenue recognition associated with this contract is based on certain milestones specified in this contract.
And the three launches only began in September.
And as the three launches only began in September we were not able to recognize any revenue during the third quarter related to this agreement. However, we should be able to recognize about 75% of revenue during the fourth quarter.
Importantly, this ADC program can similarly be implemented for any incoming port beyond airports coming into this country.
Upon the C D C is discretion.
If this program eventually expands we could see this as a potentially significant business line extension for express check with the foundation of this government contract already in place.
Turning now to our legacy Airport Spa business.
We're beginning to see early signs of encouragement with regards to the reopening of previously high performing Express mall locations.
In fact, we believe there's a path towards restoring segment profitability overtime, which has led us to reopen additional select spas with several more to come. However, looking forward, we expect express check in treat to be our predominant businesses through 2025 and beyond.
As discussed on our last conference call by July 1st we reopened for top performing express spa locations in the U S with modified hours, while limiting our services to massage manicure and pedicure.
These four locations operated throughout the third quarter, while two additional spas were opened by mid September.
Since the beginning of the fourth quarter. Another four additional locations were reopened and as of today. There are currently 10 domestic express Spa company operated locations and one U S franchise location.
We're planning two additional express spa openings before the end of the year.
Internationally, there are six express ball locations operating these consist of three in Dubai International Airport, and the United Arab Emirates, and three inch Schiphol, Amsterdam Airport and the Netherlands.
We are considering further expansion to other major global hubs in the future.
Our domestic express spa locations are operating approximately eight hours per day during the busiest hours compared to the 16 hours per day pre pandemic with sales volumes about 30% to 60% of pre pandemic levels.
We implemented a price increase in mid October and are also planning to test some new touchless massage services and new retail items during the fourth quarter.
Our operations team is continuing to review opportunities to find further efficiencies beyond the operating.
During only the airports busiest times.
And that's vaccinations rates increase in airport traffic approaches pre pandemic levels, especially during the holiday season, we see a return for some travel spa services at our airports.
Of course, we will continue evaluating each spa location monthly and review learnings as the portfolio is reactivated.
Now, let's discuss our new brand treat.
Comprehensive travel health and wellness concept, providing access to integrated care services that can seamlessly fit into a health and wellness lifestyle.
Empowering travelers to take a health first approach to the journey ahead treat acts like a wellness concierge, providing medical care and wellness services to customers to return to travel.
Treat an airport wellness centers will offer services such as testing.
Travel vaccines anxiety care emergency prescriptions, vitamin IV therapies, as well as private virtual wellness services, including fitness yoga and guided meditation services.
Treat wellness centers will also include a highly curated assortment of premium health and wellness items.
And they are onsite retail collection.
Through our analysis, we believe the airport passengers typically have a dwell time of around 70 minutes between clearing security and boarding their flights right.
Right now there are not many options inside the airport to occupy passengers. During this dwell time beyond eating and drinking and shopping.
We see a clear need and want that can be filled in the travel in a post pandemic world.
As we previously disclosed we launched treat dot com website on June 1st 2021.
Treat mobile App was then launched on August 16th.
2021.
We have offered select premium memberships for targeted customers as we launched the initial app.
With treat membership customers will receive one free annual rapid PCR test valued at $250 in annual flu vaccine and unlimited on demand virtual care to name a few of the benefits.
We expect to launch phase three in December when we opened our first in airport Wellness Center in JFK terminal four.
Followed by Phoenix Sky Harbor Airport.
In the first quarter of next year.
We then intend to roll treat wellness centers across additional major U S airports in 'twenty, 'twenty, two and 'twenty 'twenty three and beyond.
Sometimes leveraging our existing real estate other time, securing new locations.
Over the long term, we envision that treat digital products will provide more significant growth opportunities for revenue and profit than our airport real estate.
The success of this revenue stream will be achieved through both subscription based services that provide care and digital's tools supporting travel health and wellness.
As express spar group looks to the future in combination with our strong liquidity position and interest in growth. We are also considering accretive acquisitions and other strategic transactions to further broaden our service and retail offerings and would invest in new opportunities beyond this new of all.
<unk> concept.
So as you can see we have a clear vision with focus on elevating our brands being nimble and further expanding our services and products inside and outside the airports to increase value for all expressed by shareholders.
Importantly, we have built an extremely strong management team over the past year, which is already contributing to the outstanding results. We're seeing today, while laying the foundation for long term success of this developing global Omni channel company.
We believe that our portfolio of health and wellness brands will enable us to build and enhance shareholder value over the long term.
With that I'll turn it to James.
Thank you Doug I, certainly hear doug's enthusiasm for outstanding financial results and I'm pleased to be sharing them with you now in greater detail.
Let me first explain a change to our accounting practice that enabled us to recognize revenue more closely reflects our actual patient volumes and how much we're charging patients per test Ricky.
Recall that we have entered into management services agreements with professional corporations that actually provide the health care services to the patients. These msas, which may be modified based upon certain conditions define that we provide all of the non licensed staff equipment supply office space and management services in return for a management fee.
Accounting standards require that we assess these arrangements to determine if there exists a variable interest in a variable interest entity or B I E D.
Valuations are complex and involve judgment effective July 1st we determined that these P. CS N V I E D species araby I E.
Because of their equity holders have insufficient capital at risk and we have a variable interest in them prior to that our MSA ease were commensurate with the expected patient traffic and the associated billings of the Pcs were not assess the worst that should not be V. I E.
Now the contractual arrangements between us the medical groups in the nominated shareholders have been changed in a way that changes the characteristic or adequacy of the nominees shareholders equity investment at risk and residual return. This is because the nominees shareholders notwithstanding there.
Legal form of ownership of the equity interest in the P. CS are not the primary economic beneficiary. The primary beneficiary of the affiliated medical groups is the company as it meets both of the following criteria has the power to make decisions that most significantly affect the economic performance of the affiliated medical group and.
Has the obligation to absorb losses.
Given the change we were able to recognize revenue for the third quarter of 2021 of $26 $8 million compared to $2 million in the third quarter of the prior year. The increase in revenue was primarily due to the recognition of and consolidation of revenue from 12 Express check locations totaling 25 point.
$4 million.
We also generated revenue from services and products of $1.4 million related to the reopened expressed about location.
Cost of sales did increase to $13 $7 million from $1 4 million in the prior year third quarter. The increase in cost was primarily due to the cost of sales incurred in the express check offset by the decrease in variable costs associated with the decline in expressed by revenues and decreases in occupancy cost as a result of.
Rent concessions received from the airport.
General and administrative expenses were $5 $2 million compared to $4 4 million for the year ago comparable period. The increase was related primarily due to startup costs associated with express check development of treat and additional legal fees related to the resolution of certain expressed by a litigation matters offset by.
Reduced variable costs related to the closed expressed by location and the realized benefits of cost cutting and control initiatives.
The student throughout 2019, and 2020, primarily in salaries occupancy and professional fees.
We are proud to report that we realized operating profits in the quarter of $7 $1 million compared to an operating loss of $9 $2 million in the prior year third quarter, primarily due to the higher revenue and recognized loss on revaluation of warrants and conversion option in 2020.
We also are very proud to report net income attributable to common shareholders for the quarter of $5 $6 million compared to a net loss attributable to common shareholders of $6 $1 million in the prior year third quarter.
Finally, with respect to our GAAP financials, our liquidity remains strong with cash and cash equivalents totaling $109 $2 million as of September 30th 2021 and.
Also during the third quarter of 2021, the company repurchased 250000 shares of its common stock outside of blackout.
As of September 30th 'twenty, 'twenty $114 75 million shares remained available under the 15 million share repurchase program announced on August 31st 2021 management will continue to use its discretion outside of blackout periods of knee, Germany, the conditions under which shares may be repurchased from time.
At the time if at all.
We continue to believe the stock price is undervalued and presents a good investment opportunity with tools like a share repurchase program.
On a non-GAAP basis, adjusted EBITDA was $8 $7 million compared to adjusted EBITDA loss of $5 1 million in the prior year third quarter. This represents an improvement of $13 $8 million and is indicative of the expressjet profitability.
We define adjusted EBITDA as earnings before interest taxes, depreciation and amortization expense and adjusted for stock based compensation and impairment and disposal of assets.
We do consider adjusted EBITDA to be an important indicator for the performance of our operating business Express check in particular, we believe it's useful for analysts and investors to understand that adjusted EBITDA excludes certain transactions not related to our core capture operating activity, which are primarily related to our express check wellness centers.
We believe that excluding these transactions allows investors to meaningfully analyze the performance of our core cash operation for further details. Please refer to our annual report on Form 10-Q filed today.
We also furnished in the earnings released some interesting metrics with respect to the growth in patients that we have tested over the past three quarters, along with the percentage.
That are opting for rapid and in rapid PCR Chess. Please review these at your convenience, but we think the takeaway here is that we are serving more and more patients and more and more of those are choosing the more lucrative rapid Pcr option.
As it relates to guidance for 2021 and we expect to generate about $60 million in revenue and as Doug mentioned, we are also reiterating our long term revenue target of $500 million by 2025.
Thank you so much for your time. This afternoon, we would now be happy to take your questions and we'll turn the call over to Michele.
Questions that have been published.
Thank you at this time, we'll be conducting a question and answer session. Michelle you May now proceed with the question.
Hi Tech.
First question, we have today is with over 100 million of cash on the balance sheet you were in a great position to be repurchasing shares.
But were not very aggressive in Q3 can we expect more activity in Q4.
Yes. Thanks for the question the share amount repurchased in the third quarter is not a reflection of how aggressive we want to be the repurchase program was officially documented and accounts opened just days prior to the official blackout period, which prevented any further buying until the blackout period ended based on our cash balances.
As current and prospective view of our overall businesses and the current share price.
The company I believe its shares are undervalued and can therefore create shareholder value by purchasing our own stock at a discounted at a discount compared to our intrinsic value.
So expect more.
Thanks, Doug.
Given your enthusiasm for the C. D. C program do you think it will be renewed and then the second part of my question.
You have indications from them with respect to the extension or expansion.
Yeah, well first of all we're very proud of the fact that we works we're working very closely with the CDC and developing and implementing the first national Bio service program that we've ever had in U S. Airports. The pilot is going very well, we've proven that we can execute and implement this new C. D C program.
While incoming passengers participation is increasing each week.
We believe that it may be extended to include a testing program.
For other countries or regions are as flights come in.
You can watch as as Covid cases uptick in some countries I mentioned before like the U K or Germany, or or eastern Europe, even south Africa, but with that said, while we're working very closely with the C. D. C. It's hard to say when this would be expanded and under what terms.
We're having conversations but there's nothing that you know is ready to announce.
Great. Thanks, Doug.
Expect to be profitable on a consolidated basis from now on will you be incurring losses dog treat express going forward.
And will that limit the gains you're making with express check.
Well, let me start by saying, we believe we've turned the corner with our first profitable quarter and year to date, we're marginally profitable. We believe we're in a position to continue expanding and finished the year profitably our.
Our success has come out of a lot of hard work and focus by a highly talented and and nimble management team, who is equally focused on increasing revenue and managing costs in this very difficult environment.
Now to the second part of the question while express check is currently the leader in airport Covid testing, we are determined to build and rebuild each business line to sustain itself and bring long term shareholder value.
So [laughter].
Okay, all right. Thanks, Doug.
That's the tech are still profitable why be distracted by express thought were treated at all why not go into every airport that had a thought and just replace that with an express check.
Let me answer that first by saying Express Express check is front and center and receiving full focus on further expansion, whether it's through additional airport locations or through an expanded partnership with the C. D. C. At a national level Express Spa and treat are not distractions in fact, our conversations with.
Airports incorporate all three businesses today, not every airport once COVID-19 testing only and Ah we require their approval for converting any of our express spa spaces as I've mentioned before gaining new contracts are very difficult, which have allowed us to use our existing <unk>.
Express Spa real estate portfolio and contracts to our advantage and it's allowed us to move as quickly as we have.
But many express spa locations aren't necessarily in the right part of the airport.
Most or pre secure post security and frankly, some are just too small.
So the airports are focusing forward on the future of health care in airports, which is where treat can fill a void by providing so many more additional health and wellness services with that said express check received significant focus and continuing to capture the demand that's continuing to grow and build this profitable line of.
This today.
Thanks, Doug.
Do you think we will begin to see some revenue country.
Well the trade is launching now you know we talked about phases phase one was getting our website up phase two was launching our app in phase III is a getting a first brick and motor location, which is set to open next month, we will see revenue begin to contribute in 2022.
As a reminder, as I've mentioned in the past treat as a mid term play with long term value creation.
We're very focused on express check today, but we see an open field to extend our health and wellness leadership position in travel.
Leading to complimentary business model that is more robust like treat.
And offers multiple revenue channels not just in the airport, but also outside the airport.
Thanks, Doug.
Next question, we have today.
Can you talk about the opportunity with the C. D. C. As you complete the $2 million pilot program is it going to be rolled out nationally now that the U S open their quarters to foreign travel.
Yeah, well it is.
As the White House continues to take steps to open our borders there also responsible to keep our country safe from further COVID-19 threats as well as infectious diseases entering our country you might have read a little while ago. There was a fear of a bowler taking.
Trip again.
In the natural World. These things do come up there's a recognition that our country was not prepared for this last pandemic and this administration is trying to take the to taking the preparation for future threats very seriously.
Express check is uniquely positioned as the largest and only testing service operating in most of the country's largest airports across multiple states. The CDC has identified our infrastructure and capabilities as a strategic tool to supply critical bio surveillance across the country.
So we're we remain even more optimistic than ever that we can be a very useful tool in and you know national bio surveillance at least in our airports today.
Thanks, Doug and the next one how big can the CDC contract be in terms of revenues to the country.
Well, obviously, we don't know how largest program can become but you can do the math you can see that any expanded program could become big dollars. Currently were engaged in a 2 million dollar eight week program that is focused on three airports testing flights from one country India.
If we were to expand the program and two additional airports to add other countries for extended time or even years you can see how this can multiply.
Great. Thanks, Doug.
It doesn't mean, you have preopening international travel health as the number of passengers fly home would increase substantially which could be required to test before entering their home country.
Absolutely we've been waiting for this the reopening of our country to fully vaccinated international tourists will not only help our economy, but should also create a boost in demand for testing when traveling back to various countries.
We have ensured that we have secured extra supply chain of our rapid PCR test as this has proven to be our highest value product in one of our differentiators from many testing centers outside of airports. So we are prepared and in anticipating a even more activity.
Thank you how sustainable do you view the testing business now that vaccines are rolled out and case numbers are coming down.
Well interestingly, we we've seen our testing numbers go up while vaccination rates go up in case numbers go down with.
With the resurgence of variance as well as breakthrough vaccine cases, most countries require a negative tests prior to entry and similar to our relationship with El Al.
We are having discussions with other countries airlines to test passengers prior to flying to those countries I can't share yet.
There is even a movement with some in Congress here in our country to require negative test prior to boarding domestic flights in the U S.
We do not know how this will play out but think testing will be around for the foreseeable future and some type of bio surveillance program will be implemented for the long term, which express check again is uniquely positioned to play a major role.
Great. Thanks, and then my final question given your market cap is entirely made up of cash have you thought of anything outside of the buyback creates shareholder value for the business. You have the businesses you have is it possible to spin out one of the businesses to unlock value.
Well.
While the market has placed little value on our operating businesses or even future of those businesses were anticipating the market cap. It kept should improve from today's reported results.
However in any case.
We're considering many options in the future and the unplanned expansion and relevance of Covid and other future infectious disease testing across travel may present significant opportunities to create additional shareholder value in 2022 and beyond.
As this management team and board has demonstrated the ability to be agile and opportunistic in this uncertain and fast changing environment I would not rule out any options to unlock value including potential spinoffs.
I have no further questions today.
Oh, well then thank you for those who submitted questions I'm thinking Michel for sorting through I know a lot of them are you know can be similar.
But as we end I want to thank and recognize our shareholders who are have been very supportive as.
As we have grown this business I was very excited to share the results from Q3 and I was brought on.
Two two and a half years ago to turn around this business and revamped the management team and it's great to see the the product and the fruits of all that labor, especially dealing with the pandemic hats off to the team for again remaining.
Opportunistic agile yet still building a mid and long term strategy that's going to go much further than just you know opportunistic during the pandemic. Thank you and look look forward to sharing more results in the future as we continue down this track. Thank you.
Have a great day.
Thank you.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time and thank you for your participation and have a great to have a great day.
Yeah.