Greetings, and welcome to XpresSpa Group's Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn this conference over to James Berry, Chief Financial Officer. Thank you, sir. You may begin.

Good afternoon. Thank you for joining us today and for your interest in XpresSpa Group. Before our new CEO, Scott Milford, offers his prepared remarks and I review fourth quarter and full year 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 that 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 our SEC filings, including our report on Form 10-K for the year ended December 31, 2021, which will be filed by the end of the month as well as our earnings release issued this afternoon, along with other current and periodic reports that we file with the SEC. Please note that the financials mentioned on this call are preliminary. Final financial results and other disclosures will be reported in our annual report on Form 10-K for the year ended December 31, 2021, and may differ from the results and disclosures in the document due to, among other things, the completion of final review procedures, the occurrence of subsequent events or the discovery of additional information. I would now like to turn the call over to Scott.

Thank you, James, and hello, everyone. We appreciate you taking the time to join us this afternoon. Since taking over as CEO in January, I have been working with my leadership team to develop a set of strategic imperatives that we believe will accelerate our evolution as a leading health and wellness provider for people on the go. I'm incorporating my prior experience with XpresSpa as well as my experience leading teams to help us realize the many opportunities we believe are achievable at this company as we pursue generating $500 million in revenue by 2025, and I'll share the strategic imperatives that I believe will get us there in just a moment. But first, I share the collective disappointment in our stock price and want our shareholders to know that we are doing everything we can to strengthen the foundation of our business to improve our stock value and return to our investors. We assured that the interests of the Board and management team are firmly aligned with your desire and that the efforts we engage in to accomplish are designed to have both short- and long-term positive impacts. In the near term, we will continue to be active in repurchasing shares under our prior authorization. We are doing this because we believe there is a disconnect between the stock's current price and our view of its value. Adding further to this, during most of the first quarter of this year, we were subject to blackout periods that restrained our ability to do so even as the share price has declined. However, because we were able to accelerate the delivery of our fourth quarter reporting by two weeks compared to when we would have reported it in previous years, we have a wider window to repurchase shares before the…

Thank you, Scott. As I will now detail, we generated incredibly strong financial results during the fourth quarter last year, marking a fantastic end to what was a great year for our business. Revenues rose to $29.4 million compared to $0.3 million in the fourth quarter of the prior year. The increase was primarily due to the recognition of and consolidation of revenue from the 14 XpresCheck locations plus the CDC contract totaling $26.9 million. We also generated revenue from services and products of $2.4 million related to reopen XpresSpa locations. Cost of sales increased to $15.8 million from $2.4 million in the prior year fourth quarter. The increase was primarily due to the cost of sales incurred in XpresCheck, offset by a decrease in the 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 during COVID. General and administrative expenses were $9.8 million compared to approximately $5 million for the year ago comparable period. This increase was related primarily due to costs associated with XpresCheck, the development of Treat and staffing to the support the record revenues, somewhat offset by reduced variable costs related to the closed XpresSpa location. We are proud to report we realized an operating profit in the quarter of $2.3 million compared to an operating loss of $17.4 million in the prior year fourth quarter, primarily due to higher revenue and recognized loss on revaluation of warrants and conversions options in the prior year in 2020. We generated net income attributable to common shareholders for the quarter of $3.3 million compared to a net loss attributable to common shareholders of $15.7 million in the prior year fourth quarter. Finally, with respect to our GAAP financials, our liquidity remains strong…

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Thierry Wuilloud with Water Tower Research. You may proceed with your question.

Maybe if we can start with the CDC relationship. You've had basically an ad hoc contract with the CDC, but do you think they're looking to develop or to procure more permanent capability to deal with potential new viruses and so on?

I'm happy to answer that. I think the CDC has been very happy with the work that we've done in partnership with them. I think the -- our ability to pivot quickly in the airports that we were initially conducting our pilot and then expanded services were demonstrated by that. We were the first service -- pooling service to identify the BA2 virus and the BA3 virus when it hit our shores. And I think because of that, we were able to deliver a sample to the CDC, and they were able to process that sample within seven days. As a result of that, I think the CDC, again, is very pleased with the progress of the work that's being done, and we look forward to continuing the partnership.

Great. Moving to the COVID test. The Asian countries have been very -- have had many restrictions on travel. And I would imagine at some point in time, those might lift and enable more passenger volumes. Do you have any updates in terms of primarily China and maybe India, the two largest destinations whether we're seeing any signs of making travel easier and changing the requirements?

I have not heard of any changing requirements for travel out of Asia. I think they're still requiring tests out of India. There was a report I read recently about them relaxing some of their requirements towards the end of this month. But I think if you read the news, both in Europe and in Asia, the Omicron variant is starting to grow again. And so, I'm unsure what additional relaxation will happen over time.

Okay. Well, maybe there's been some quarantine requirements. I think if still get relaxed, that might spur some more travel volume.

Yes.

Okay. Maybe just one more question. So XpresCheck has been focused on COVID-19 tests with obviously a lot of success in 2021. You mentioned in the -- in your remark that you were considering maybe adding to the menu there based on what you're seeing is in high demand with the Treat location and maybe with the spa location. Can you give us a bit more color there? How quickly could you add to the menu of services at XpresCheck?

Yes. Thank you for asking that. We are, because of our XpresCheck locations, having medical personnel on the premises and the provider on the premises. We're in a unique -- we have a unique opportunity to be able to deploy some of those Treat services at a much faster pace, things like vitamin IVs, hydration therapy vitamin C and B12 injections to start, and then over time, introducing additional health services, cold, flu testing as well as other diagnostic services that we have rolled out in Treat and can easily bring into the XpresCheck environment.

Our next question comes from the line of Scott Buck with H.C. Wainwright. You may proceed with your question.

So my first question, Scott, given some of the, I guess, tweaks in the strategy, do you feel like the business on the corporate side, you have everything you need? Or is there a requirement of additional investment whether it's headcount or some of type of cost infrastructure to help you grow the business like you'd like to?

Yes. So as we start to lay out the strategic imperatives, I think there's a couple of things that we're going to be looking to make investments in. We had already begun the process of looking for a marketing leader. We think that has been a part of the business that has not had a lot of attention paid to it in the past. And even though we have a group of eyes that walk around the airport that are somewhat contained, we still think that there's an opportunity to help customers identify need and then let them see that we are the provider of that need for them. So that's one of the areas that we're making some investments in. I think the other is investments in our supply chain capability and building a more robust fulfillment capability if we intend, and we fully intend, to improve and increase our retail offering. We need that infrastructure built so that we can optimize delivery and -- which will help save us on margin, but it will also increase the quality of the products and the timing of when the products are delivered to consumers. So those are two of the areas that we're specifically looking to make investments in. And we'll continue to make investments in building up and showing up our digital infrastructure. And instead of it supporting three distinct brands, Treat, XpresCheck and XpresSpa, we'll look to integrate that more holistically so that we can leverage things like our patient scheduler, et cetera, in a much more efficient way.

All right. That's great. That's really helpful color. I know it's early on Treat, and you mentioned we should think of it as a -- providing some incremental revenue this year but not a near-term play. But what has been kind of the initial feedback on that first store at JFK? And then what's been the initial feedback on the online store?

So the feedback on the physical location has been positive. We've seen customers very engaged as they come in. We're actually -- and this is what's informed some of our discussion around the type of customer that we're appealing to. We had initially, in our outset, focused our attention on a -- generally a female SKU demographic that was largely affluent and the organizer and manager of travel. But anecdotally, we're seeing more men come into our location. We're seeing the use of our rooms for just breaks instead of using them for wellness services. They're using the time blocks that they're paying for just to go in and chill out in the room and then leverage other services like our shower, for example. And mind you, we only opened our location in December. So, we're still looking at very early returns on the feedback. We're seeing interest in our vitamin IVs, our B12 and C injections as well. Those kinds of services are starting to bear fruit for us as well as the ubiquitous COVID testing, which is available. I think that, coupled with some interest in our retail, and again, there's opportunity for us to do more work to get the word out around our retail offering and expanding our retail offering, both on the Treat side and on the XpresCheck and XpresSpa side. And so the -- we have a fantastic offering on -- online, but I think there's opportunity for us to continue to look at that and refine it further so that we can add more users down the road as we look at our product -- as we look at the Treat product and make Treats more available to the consumers in other airports.

That's very helpful. And then on M&A, clearly, you got quite the bridge to go from -- go to $500 million in revenue by 2025. When you think about M&A, what specifically are you looking for? Is it something -- is it a retail outlet that already has a footprint? Or is it a piece of tech? Or any kind of color you can provide us there would be great.

Yes. I think what we're going to be looking, we're going to be looking for acquisitions that are obviously accretive to revenue and that complement our core business. That may be, as you said, a piece of technology that greatly enhances the offering we're able to give to our consumers. But ideally, what we would likely be looking at is local -- regional players in markets where we can complement our existing health and wellness offering for the consumers, both inside and outside the airport.

I'd like to turn it back over to Investor Relations.

Thank you. I'm going to just read some of the questions that have come in to the e-mail address. First question is the following: Why not change the name of the Company in ticker to something more relevant to where you are headed?

I can take that, James. As I referenced earlier in our first strategic imperative, what we want to do is integrate a core set of products and services across all three brands. Once we start to do that, then it paves the way for us to begin to transition from a family of brands to a single brand with a single name. So it is absolutely our intention to do just that as it makes sense for us to do it and as consumers can relate more to the product offerings we're giving them.

Next question is -- glad to see you're going to be more active repurchasing shares. Wondering if your intention is to exhaust this authorization and then get approval for another authorization.

James, do you -- would you like to answer that?

Sure. As we've stated -- both of us has stated, we firmly believe that our stock is undervalued -- the price of our stock is undervalued to the value that we see in our company. And we will continue to do buyback of shares as it makes sense for the business. We do need to effectively balance any investments that we need for the growth of the business, including acquisitions with the investments in the buyback, each of which is done for the improvement of shareholder value. So it will be an ongoing effort. And our commitment to do both effectively will be in place.

Right. Question on your XpresCheck leases. Are any of them coming due over the next few months? And will you renew them even if they cannot be converted to Treat locations?

Some of our express test leases are month-to-month and -- while others are longer-term leases. And I think it's worth mentioning that while we were at the recent AXN Airport Concessionaires Conference, many of the airport partners expressed the desire to extend our leases in express test with the belief that we're a valuable partner in the airport's longer-term pandemic and virus response program. We'll continue to evaluate the integration of our product and service offerings across the three locations. And we want to make optimized decisions about which leases make more sense and should we extend them, should we renew them and whether or not that allows our other businesses the opportunity to grow.

How do you know that lower testing volume is seasonal or due to relaxation of restrictions or maybe because there's more testing availability outside of the airport? How do you view the testing business now that case numbers are coming down? And maybe you can comment on testing numbers so far to date in the first quarter.

Yes. Good question. Normal airport traffic is lower during the first three months of the year as travelers tend to recover from the holidays. And what we have seen over the past two years is that COVID testing rates tend to rise and fall with seasonal changes in airport traffic. As you mentioned, some of the countries in Western Europe have begun relaxing testing requirements, allowing for more time and advance to travel to secure a test. And this will undoubtedly have an impact on testing levels as we move throughout the balance of the year. It's proven to be challenging to effectively plan ahead of this pandemic. We've already begun to evolve our testing business beyond managing just COVID testing to more of a holistic bio surveillance brand, providing a broader array of health services and products while leveraging the infrastructure to initiate a bio defense component giving us the opportunity to even work with the DoD. I think express test is uniquely suited in our airports as that frontline defense against the next microscopic invasion that hits our shores.

Question on Treat. When do you think you're going to see meaningful revenue from Treat? And then also, when do you think Treat and XpresSpa will be profitable as stand-alone businesses?

XpresSpa is already a profitable business, and we expect that to continue to grow in the coming year based on the investments we're making both in new products and service offerings. And we're really -- we're still learning about Treat. With only a single unit operating right now, we're trying to implement change while we're learning about the business and our changing perspective on consumer taste and preferences. I think personally, travelers now more than ever are focused on products that create or reinforce their sense of well-being, especially when they travel. And we think Treat can address that, and we'll continue to focus on that as we evolve with the expectation that it not only drives revenue, but also eventually becomes a key enabler of our future growth.

Can you explain how the HyperPointe acquisition helps the overall business?

Yes. So I think in two ways. I think the first is just the technical and organizational synergies created by the acquisition. And we fully intend to exploit one of the key strengths of the HyperPointe business, which is their deep history and relationship with the health care industry. Well, I think that's realized through our expansion of our bio surveillance partnership with the CDC for the development of strategies to further leverage express test health data, for example, with health partners like the pharmaceutical industry. HyperPointe will be directly involved in building new revenue channels for us.

Okay. Question on inflation. Are you concerned about weaker demand for your services because of the high inflation we're experiencing, potentially rising airline prices, price of gas? And are you concerned that, that's going to result in less travel?

Like most other businesses that provide products and services to customers, we are acutely concerned with rising prices and all the inflationary pressures. But I think we're doing two things to help address that, one of which is building our out-of-airport strategy, which we think can help blunt some of the impact of rising fuel costs and potential travel disruptions. And then I think the second is developing a smarter supply chain process, making sure that we're integrating products and services aligning our business under a single consistent operating strategy. All of those things in concert will help us refine and reduce our cost but also help us drive new revenue outside of the airport should the airport be adversely impacted by continued rise in inflationary pressures.

How many more XpresSpas do you plan on reopening? And what do you plan to do with the remaining leases that you have? What are you seeing from these new touchless spa services? And could they be implemented across all of the XpresSpa locations?

Right now, we are planning to open four or five more spas that currently sit on a reopening plan. That could expand as travel continues to rebound and our strategies begin to take effect. There are some spas that we will not reopen, and those will likely be the usual suspects, sites that we don't believe we'll add to our integration strategy or sites that we know will not be successful with additional products and services. And we'll identify opportunities outside the airport, will allow us to apply more selective lens to our reopening strategy inside the airport. And so as we focus on outside, it will allow us to refine our inside-the-airport view of what we open and what we don't. In terms of the touchless services, we're just now starting to execute the rollout of these services. Some of the initial feedback we got from our teams has been positive. And we translate -- once we translate back to customer feedback and sales, we'll look at expanding those services across more spas and potentially even other brands.

Will you convert all your spas into Treat?

So, the plan right now is to convert spa locations to Treat locations where it makes sense and that our strategy is to have a uniform core product and services offering that can be tailored to local demand. So for example, if nail kits are part of our core product offering in all our locations across the U.S., we may offer nail services in our Charlotte location to complement that retail offering, but not offer it in our New York locations where those services are less relevant, but our consumers still find the product to be relevant.

Okay. Final question. As you increase your retail presence outside -- sorry, inside of airports, what does the margin profile look like?

James, would you like to answer that?

Sure. As we look to expand the retail products, the most important thing is that we're going to be looking for the -- customer wants. And as we do that, of course, we're going to be considering the margin associated with it while maintaining an affordability to the traveler. So we will -- we're not looking for the margin to be reduced. And in fact, we most likely will look for those products that can offer us a good margin on the retail. With the exception of sometimes, as Scott mentioned, where they're going to be a tie-in or that type of thing, but we anticipate that the Americans will remain strong. We have great real estate in which to offer the real estate -- to offer the retail. And so we're anticipating maintaining strong or increasing margins.

That's the -- okay.

Just to add to that -- if I could, I'm sorry, just to add to James' point. I think it's worth reinforcing, it's something that, historically, we've never really taken advantage of the real estate that we have and the great real estate that we have, and we fully intend on doing that with a stronger retail offering. And that retail offering will be at margins that will help sustain and grow the business. I just wanted to make sure I shared that final thought.

Right. Those are all the questions that have come in. So I'll turn it back to Laura, operator.

Thank you.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Scott Milford for closing remarks.

Thank you everybody. I appreciate the opportunity to come and share the news of our fourth quarter and our year. We certainly had a successful year, and I'm looking forward as a new leader with a new leadership team to build on that great success. I appreciate everyone's time and joining our call today and I look forward to sharing our progress on our four strategic imperatives during our next call. Thank you very much.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.