LogicMark Inc (LGMK) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NXT-ID IR update webcast call.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session and instructions will follow at that time.

(Operator Instructions).

I would now like to turn the conference over to your host, Mr. Gino Pereira, Chief Executive Officer.

Mr. Pereira, you may begin.

Thank you very much.

Good afternoon.

Thank you, everyone, for joining our call today to discuss NXT-ID's financial operational results for the year 2016 and the fourth quarter.

Hopefully, you had a chance to review our press release earlier today and the updated investor presentation that we posted to our website this morning.

During this afternoon's call, we will be making forward-looking statements, which consist of statements that cannot be confirmed by reference to existing information, including statements regarding our beliefs, goals, expectations, forecasts, projections and future performance and the assumptions underlying such statements.

Please note that there are a number of factors that could cause the actual results to differ materially from our forward-looking statements, including the factors identified and discussed in our SEC filings.

Please recognize that except as required by applicable law, we undertake no duty to update any forward-looking statements and you should not place any undue reliance on such statements.

With me today on the call is Vin Miceli, our Chief Financial Officer.

I will begin the call and then turn the call over to Vin for a review of our financial results before we turn the conference over for Q&A.

So with that, thank you very much.

I think we have made very significant progress in 2016.

I mean Vin will talk about the revenues, etc.

But, in particular, strategically, our acquisition of LogicMark really helped us -- helps in the execution of our strategic vision and I will get into the detail of that a little bit later in this call.

And in this call, I really want to focus more specifically on our strategy and plans for 2017, address the issues that are facing the corporation today and hopefully answer any questions that you have about NXT-ID.

So NXT-ID is primarily a security technology company.

And as we are growing and evolving, all of our expansion is based around our core technology, and our core technology is in certain sections.

They encompass payments, they encompass encryption, miniaturization, sensor development, advanced biometrics, connected IoT devices and cloud services.

So a lot of the technology that you see today is very prevalent in devices that are coming to market.

Really we see ourselves as having four branches of activities, one of which is in finance and that is evidenced by the smartcards and smart wallets that we have.

We have an expanding healthcare division under LogicMark, which is a personal emergency response company providing security to elderly people or people that need monitoring.

We are going to be expanding into the IoT market as that is going to be a growing market with wearables.

And of course, at our core, we have a security division under 3D-ID and although we haven't devoted a lot of resources to that to date, as we bring on these other sections of the business, we will start to devote more attention to our security authentication part of the business.

So I would like to start by talking about the payments.

Currently, with our payments opportunity, we have a major customer, which is WorldVentures Marketing.

They are a leading seller of vacation club memberships and they currently have about 500,000 members and representatives and members in 28 countries.

So in December of 2015, we entered into a strategic alliance with them to produce a custom smartcard called flye and we have a purchase order for up to $15 million for that smartcard.

By the end of March this year, we will have delivered approximately 40,000 of those cards to them as they build up inventory for their launch.

They actually have a large event this weekend I believe in Dallas for which there are about 30,000 attendees and they will be speaking to their membership more about their plans for launching this card.

So that development is going well.

It is in extensive beta testing at the moment and we continue to make tweaks on it so that they can have the best product that they can possibly have when it comes time for them to fully launch it and we continue to make deliveries to build up their inventory before they do that.

So that is our major current payment customer and a valuable customer at that.

Looking forward into the future of payments, I mean there is a lot of -- it is a big moving target.

So one of the technologies that we have that we believe very strongly in is our technology called Wi-Mag.

And Wi-Mag allows us -- it is a wireless magnetic stripe technology.

And that allows us to make payments on devices through a contactless way, but on regular point-of-sale terminals.

So it is very similar to what Samsung Pay can do.

There are very few companies out there in the world today that have this technology to date and we are in the process of talking to a number of potential customers for it, but we believe that it is, going forward, going to be something that is significant in the world of payments.

The changing face of mobile payments today we really moved on or we are moving on from purely smartcards to being able to do payments on multiple devices.

You see obviously being able to do payments over the phones.

There is talk of being able to do payments on cars -- in automobiles, strangely enough.

But that could be something like driving through a Starbucks and just automatically the device in your vehicle will pay for your coffee or McDonald's or wherever else you go.

The smart watches, activity trackers, jewelry, there are multiple ways that the payment industry is changing and becoming digital and becoming more secure as a result of that.

So recently, we did announce that we have a letter of intent to merge -- acquire a company called Fit Pay.

And that is actually another -- LogicMark was a transformational acquisition for us.

I believe that Fit Pay is another transformational acquisition for us.

Fit Pay is a technology platform that adds contactless payment capability to wearable devices.

And they integrate into IoT devices so customers can use them to buy from more than 10 million merchants in the world today.

And what is important is that they already have collaborative agreements and approval from major payment partners, so Visa, MasterCard, Discover, UnionPay.

I mean there are -- as well as chip manufacturers.

So they have today a device that is able to make contactless payments and in combination with our Wi-Mag technology, I think that makes us incredibly strong and we are really looking forward to completing this acquisition and really rolling out and establishing ourselves in that field.

That also leads us into the Internet of Things.

I should mention just before that, the other attraction of Fit Pay for us as a growing emerging company is they have a tremendous management team, very experienced folks out of Visa, formally out of startups that have been sold very successfully for large sums of money.

So it really does help to beef up the management team, help -- we run pretty lean here, so it will be really nice to have the additional brainpower, help, resources and I think that will help grow the Company at a much faster rate than we have before.

So it is all very exciting for us and we are looking forward to integrating both of our companies together.

The IoT market everybody talks about these days, this Internet of Things and the world of connected devices.

And there are projections that say there will be about $6 trillion to be spent on IoT solutions over the next five years.

And so there are some very big numbers.

But importantly IoT cannot succeed without security.

There is nobody that is going to connect their device to anything else if it is going to get hacked every five seconds because now it becomes more personal than just your credit card, a piece of plastic.

These are devices that you wear, they could provide access to your house, it becomes much more personal.

So security in the wearables market is going to be very, very important and we believe we can play an important role there.

Again, both in combination with NeXt IT and Fitbit.

I mean NeXt IT is a development partner with Cisco and through -- there are large distribution opportunities for us.

We have developed our own hardware and software stack that can be used to enable not only payments, but NFC and Bluetooth communication.

And of course, Fit Pay today has certified solutions for rapid deployment.

So we think that we can make a splash in this space relatively quickly and we look to bring some new technology behind that and expand and grow into that sector.

The IoT and the payments section of our business will be run by the executives of Fit Pay who are tremendously experienced and well-connected in this area.

In the -- so out of these other areas that we look to expand into, so healthcare is one where we started with our acquisition of LogicMark, which has been a tremendous acquisition for us.

Obviously, they are in the personal emergency response space and they are in a market where there are very favorable market dynamics.

I mean the population is growing older and more and more people are leading an active lifestyle and they need a way to ensure that -- to try and keep safe.

If they have an accident, they need a way to communicate and to be helped.

LogicMark has performed fantastically for us since our acquisition.

Just in March, we had record revenues from the company and the company has been performing extremely strongly since we acquired them as well as before.

The gross margins are high in this business, about 70%.

And it is a tremendous company for us in that it provides very stable revenues and cash flow and it provides an opportunity for further growth.

So there are a number of channels in this space in which we are looking to expand the LogicMark product offering and technology to.

And we are actively working on those now.

So we think there is a lot of runway to grow.

One of the main attractions of LogicMark is that the vast majority of LogicMark sales are what they call non-monitored devices.

So with a non-monitored device, you pay one price and you don't pay any more.

Now most of this industry works off of the basis of monitored sales.

So you pay something for the device and you pay something every month until you stop using it or the contract terminates.

So we believe we have an incredible value proposition for certain sectors of the population that do not require daily monitoring.

And that is an angle that we aim to exploit and push and as I mentioned before, the margins are very healthy even though it is a one-time sale and I think we can gain significant marketshare in certain places by pushing that paradigm.

The future -- looking into future developments in healthcare, there is always the development of [purse] type devices.

I think in the future we will find them doing many more things than just something that you use in the unfortunate occasion if you have an accident.

I think there will be devices that actually actively monitor your health and provide you some warnings perhaps ahead of time before you have that accident that you are maybe not stable or there are certain biomedical factors that are not going according to plan.

So you should take a look at them before you actually have that accident.

So that is really a goal that we are working on and it is future product development.

And then biometrics, healthcare is on the rise because the healthcare has emerged as an increasing target in identity theft.

The value of a medical record is many, many times that of the value of a stolen credit card.

So what we are seeing is that there are more and more sophisticated attacks on medical ID databases.

And so this is where our core technologies in terms of encryption and biometric identification to be able to make sure that the user is who they are supposed to be and that the information that is being transmitted is appropriately treated and encrypted I think has value in the market going forward.

And we are starting to work with some healthcare providers to really understand that marketplace and to start some pilot programs to roll this out.

And finally, in the area of government contracting, which is really kind of the genesis of the Company, it is an area where we have been successful in our previous lives, but with the excitement of all of the large markets that we have in front of us, we haven't had the resources to really develop fully.

NXT-ID is currently a subcontractor to [Patel] on a large contract with a value of just under $1 billion and we are -- but those get awarded on the basis of task orders that are led by the government and we have not yet bid on any of the task orders that are coming.

They are not all relevant for us, so not the whole $1 billion is allocated to biometrics by any means.

But, definitely, it is an area where I think it's valuable to the Company because it really helps us to continue to expand and develop our cutting edge R&D capability supported by government contracts and it allows us to work with large multinational corporations.

And so we get to improve our intellectual capital, as well as develop steady flows of income going forward.

So with that in mind, our intention once we have Fit Pay assimilated into our Company, LogicMark is on the path to expanded distribution, we will then turn some attention to developing our 3D-ID subsidiary to explore government contracting, physical, biomedical -- sorry -- physical, biometric, security and access control.

So that is the plan there and those are kind of the three main pillars that we are looking to expand the business into.

So that is the update, that is what we are looking to do.

We are very, very excited for the future.

The Company is certainly in its best shape since incorporation and we are excited and looking forward to what the year has to bring.

So with that, I will turn it over to Vin Miceli who will talk a little bit about the 2016 numbers.

Thank you, Gino.

Good afternoon, all, thank you for joining the call with us today.

Again, my name is Vin Miceli and I am the Chief Financial Officer of NXT-ID.

I would like to speak briefly here and go over the results, our 2016 results, income statement results and then I will focus on some highlights of our balance sheet at 12/31/16.

So just to encapsulate and expound a little on what Gino has already indicated, revenues for the fourth quarter and the year ended December 31, 2016 were approximately $4.6 million and $7.7 million respectively.

Revenues for the comparable 2015 periods were $83,000 and $617,000.

So quite a dramatic increase.

On a sequential basis, revenues for the fourth quarter of 2016 increased approximately $1.5 million over the third quarter of 2016 and primarily the $1.5 billion increase is the fact that we acquired LogicMark late in July and didn't have a full third quarter.

And also we began shipping product to World -- smartcards to WorldVentures, which enhanced Q4 revenue.

So sequentially things are on the uptick, which we are awfully encouraged by.

In terms of gross profit margin, the margin was about 43% in both the fourth quarter and the full year.

And as I am sure everybody is fully aware, margins in 2015 were actually negative margins.

So quite an enhancement on a year-over-year basis.

And again, the margin enhancement, as Gino already alluded to, was primarily the result of LogicMark and the handsome margins that they have contributed, that is the primary reason.

Also, the revenue to WorldVentures had a nice earned gross profit margin as well.

One thing to note on the margin side is that, after we acquired LogicMark under the accounting rules, we were required to step, if you will, the inventory up to fair value and because we turned the inventory so quickly that that inventory stepup, if you will, affected our fourth quarter -- actually our post-acquisition period, if you will, by roughly $1 million.

So excluding that one-time what we refer to as nonrecurring charges, the gross profit margin would have been somewhere in the neighborhood of 55%, which is in our estimation very good and very strong.

Looking to the operating expenses, for the fourth quarter, the operating expenses were slightly higher than Q4 2015.

They came in at roughly $2.6 million versus $2.3 million.

And again, the primary reason for this is we added on the LogicMark SG&A.

So that is the primary driver here.

Also, we incurred -- in order to do the acquisition, we incurred somewhere in the neighborhood of $600,000 to $700,000 of additional what I refer to as one-time costs that affected 2016 that obviously won't be there in the future.

So those were probably the two main drivers, if you will.

Operating expenses for the full year, up slightly at $300,000.

They came in at just around $10 million versus $9.7 million last year, again pretty much the major driver here bringing on the layer of expenses related to LogicMark, the costs incurred to do the acquisition.

And so I think those costs are certainly behind us and the good news is we won't have them on a prospective basis.

The other thing to note here is, of the $10 million in operating expenses, roughly $2.1 million of those are non-cash expenses and so I think it is important to note that it is not a true -- the $10 million is not a true cash out the door cash burn type number.

$2.1 million of that number is non-cash.

And in addition, there was cash expenditures of roughly $1 million that we have considered to be non-recurring, if you will, prospectively.

Rounding out the P&L, interest expense was obviously higher year-over-year.

The primary driver there is the leverage, the debt related to doing the acquisition of LogicMark, both the revolver debt, as well as on the seller note.

And lastly, as it relates to our income statement, the Company incurred $2.6 million in charges related to the issuance of convertible notes in 2015.

And again, I would just add or stress that, again, non-recurring, non-cash and should not have that going forward.

Moving over to the balance sheet.

At 12/31, we ended the year with $3.3 million in cash, which, as far back as I can recall, is probably the strongest cash position we have had certainly since I joined the Company and I think we are really encouraged by having that level of cash heading into a new and what is going to be a very exciting year for the Company.

So we are certainly encouraged by that.

Receivables were up to $1.2 million, mainly attributable to the LogicMark receivables, as well as to our buildings to WorldVentures.

Inventory was up substantially over the prior 2015 period mainly in anticipation of getting inventory ready and smartcards ready for shipment to WorldVentures in 2017.

And then as it relates to the assets, we have some intangibles that came out of the acquisition of LogicMark.

On the liability side, we had roughly $2.1 million in accounts payable.

We had roughly $2.9 million in accrued expenses, namely interest expense and accrued dividends on the Series A and B preferred stock.

We also had customer deposits or deferred revenue of $6.1 million and equity at the end of the year was about $2.8 million.

So the balance sheet in my estimation is starting to shape up very nicely as we start to generate more operating results here and so it is really starting to take shape.

Lastly, what I would like to just share is, on an operating cash flow basis in 2016, the Company, with the results of LogicMark for the roughly 5 months, had a cash burn of roughly $1.1 million.

And had we not had some of the nonrecurring -- I know it sounds like would have, could have, should have -- but without that non-recurring cash expenditure number that I alluded to earlier, the cash burn would have been pretty darn close to breakeven.

So again, I think it is a testament to our staff and how everybody is really wanting to make this go.

And I think it is a testament to management's efforts in cost containment and trying to generate new business.

So all in all, I am quite pleased with the results and I -- with that, I would like to turn it back over to Gino for some questions.

Great.

Thank you very much, Vin.

That was great.

So we are open for questions, operator.

Thank you very much.

(Operator Instructions).

Josh Seide, Maxim Group.

You mentioned in the remarks earlier that the flye card is currently in beta testing with WorldVentures at the moment.

So can you just give us kind of an overall update on initial feedback you have gotten so far with the technology and any updates or enhancements that you have made to the underlying technologies as you have gotten through that process?

Sure, thanks for joining the call.

The hardware has been proven out in these.

What we are really doing is some of the swipe payment technology is being what we call tunes.

So for this new card to make it work well across more -- it has a high success rate, but we want it to be higher, so we are working a little bit of that.

And primarily, most of it is -- it is not just a card, it is also an app that WorldVentures themselves developed.

So it works together as a complete system.

So what we are finding is the usual kind of development bugs, there are some app development bugs as they use them in terms of relaying information between the app and the card that is just -- they are just time-consuming to go through and sort out.

We don't have quite as many engineers as Apple when they do a release.

But they are being knocked down at a pretty good rate; it gets better with every iteration.

And some small functionality things.

So we do some very unique things with the EMV chip.

We use it to turn the card on and off, we have got these interesting sensors on the card itself for switching screens.

And so some of the touch sensitivity type issues, just regular user type issues, when we get feedback, then we work to kind of make those easier.

So they are really just typical normal software, hardware end of development type issues.

Great.

That is helpful.

And can you also give us an update on how the Company is faring with maybe pilots or advanced discussions for the Company's -- for marketing the Company's smartcard or Wi-Mag technologies to additional customers?

So we have -- so with Fit Pay coming onboard, that's -- there is a lot of activity around that combined offering, which we are just in very early stages of exploring.

But in terms of kind of single type suppliers for the technology, most of the interest is actually coming from overseas at the moment from Asia.

And so I will be making a trip to Asia in the next couple of months to continue the initial discussions that we've had to try and push things along to something more concrete.

But these are discussions with major international vendors.

So if we were successful, it would be very meaningful, but having said that, we're not close to being able to predict that at this point.

Great.

That is helpful.

And then in the healthcare space, can you just kind of give us a broad sense of how the Company might leverage its existing expertise in biometrics to kind of enhance the LogicMark lineup or offering going forward?

Sure.

So it is not just biometrics necessarily, but basically all of our technology skill sets.

So what we see is there is a lot of -- and if you look at purse devices, and you remember those old advertisements on television, they really look like pretty unattractive clunky devices.

And so there is a little bit of a stigma with -- sometimes people don't mind wearing them in the house, but if they are active and they go outside, it just doesn't look really great to wear one of these big necklaces.

I mean there is no bling on them at all, right?

So what we are going to work to do is to kind of change form factors.

We are obviously very good at miniaturization, we can get all of these electronics in a smartcard less than one millimeter thick.

And so we are going to work on miniaturization and a lot of the sensor type technologies.

So those would include things like potentially fall detection, even instability before a fall potentially depending on motion sensor.

So there are a number of things that we think we can contribute and then we are starting to do the biometric work on some potential health sensors as well.

So there is a lot of interesting R&D and development work to be done in that field for the future, but I think it is a vast field and I think that more and more people are buying these, particularly if it is a one-off purchase and not something that they have to commit to for two years and it is reasonably priced, it becomes very attractive.

And most of the buyers for these are actually not the elderly folks themselves; it is really their children who, just the way the world is today, families tend to live not in the same town, they feel that their parents are a little further away than they would like.

And so it gives them peace of mind and they do have the disposable income to be able to afford those.

So it is definitely a growing and expanding market and one that we are very excited about.

That is helpful.

Thank you.

Kris Tuttle, SoundView Technology Group.

You guys have given us a lot to look through here.

I wanted to focus in on WorldVentures here for a second, specifically what you expect in terms of shipping in the next couple of quarters as they go into their official launch and kind of get an update on that.

And then the second part of the question is a little more future-oriented related to the Fit Pay acquisition.

It looks like they have got technologies and things that could directly enhance or impact that card.

And I know that the acquisition isn't finalized yet, but I would like to get your views on both the near term and the longer term assuming the acquisition goes through.

So first of all, I have to start by saying we are too young a company to be able to really put out projections at this point.

We really need things to kind of stabilize a little bit.

Things that are on the uptick, it is a question of -- and the ramp can be very high or less high, but -- so we have visibility to know that it is going forward in a positive manner.

What we don't have visibility on is how high that ramp can go.

So I don't want to really kind of characterize that except to say that, until they -- we are committed to providing them with a fairly substantial inventory, which we will probably complete delivery of by the end of the second quarter.

And from then on, it is really dependent on them as to their full launch date.

So that could be the middle of the year.

It may be in a period, and that is really customer-driven, that is not up to us, but when they are ready, they will then do the main launch.

And once the main launch is done, then I expect our fulfillment rate to increase from where it has been as well.

So there is a little piece in the middle that we are just working through and they are working through as well.

As far as -- sorry -- the Fit Pay technology, I mean that is the -- there is such tremendous synergy between the two companies, as I said not just in the product and technology, but also the management team that is going to be coming across and their employees really round us out to be what I consider to be one of the best rounded development houses in this whole digital payment space.

So we are very, very excited about that.

We think that there is absolutely a potential application for Fit Pay technology on the flye card, which might help it be more complete, if you like, to have more features in a relatively shorter period of time.

They have certified product, so that is definitely very helpful and so, yes, I think it can definitely help to improve the flye product, get it to market a little quicker and I think that our combined technologies give us strong opportunities amongst other OEM vendors with wearable devices.

Okay.

Yes, and I appreciate your comments on the shipments.

But just to make sure I got it right, I mean it is very helpful because what you are saying is you expect more or less of that, so that inventory that you are currently carrying to be run through by the end of Q2 and then it is really going to be based on fulfilling demand from the launched product when it gets launched into the WorldVentures community.

That is correct.

Okay, all right.

Thanks very much.

(Operator Instructions).

Victor Anthony, Aegis.

Just wanted to kind of dig into the wearables market that you talked about in terms of being a growth opportunity.

From a unit growth perspective, looking at your presentation, basically says it will grow to about $600 million by 2020.

So maybe you could just I guess talk a little bit more deeper in terms of how you plan to exploit that market from a revenue perspective.

Right.

So primarily with wearables, there are a lot of wearables in the market and so the question becomes what is a differentiator for a wearable.

So certainly if we have a payment technology that we can put on there, it is a very small form factor, requires very little R&D development expense, that is a distinguisher for a wearables manufacturer.

Whether you are making phones or payment trackers, it is another piece of functionality that you can offer.

And for us, we get paid per device that we put our payment technology on.

So I think that -- and it has -- it has been proven -- Fit Pay has a number of customers and contracts and it appears that the OEM market is very amenable to putting payments on a number of different types of wearables.

So we think that we are in a good position to play a significant role in helping to roll out payment technology in the wearables market.

That is really the main thing.

And then we have got some other technologies alongside of that.

So depending on the wearable and the type of information -- we have certain encryption technologies that could be involved in some of the Bluetooth communication between them if that was something that the customer desired.

We have certain -- so I think that -- but the payment side is actually probably the main driver for us in that sector.

Got it.

Thank you.

I am showing no further questions from the phone lines at this time.

I turn the call back over to you, speakers.

Thank you very much.

And thanks, everybody, for listening on the call; I really appreciate your joining it.

And once again, we are really looking forward to the balance of the year and the future beyond and thank you very much again.

That will be a wrap.

Thanks.

Ladies and gentlemen, this concludes today's conference.

Thank you for your participation.

You may all disconnect and have a wonderful day.