LogicMark Inc (LGMK) 2017 Q4 法說會逐字稿

Welcome to the NXT-ID Annual Update Conference Call.

(Operator Instructions)

I would now like to discuss this conference call, Mr. Gino Pereira, CEO of NXT-ID.

Thank you, everybody, for joining our call today. We're going discuss NXT-ID's audited financial and operational results for the year ended December 31, 2017 and give a general update on the progress of our business.

During this morning's call, we'll 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 will cause actual results to differ materially from our forward looking statements, including the factors identified and discussed in our earnings release today and in our other SEC filings, in particular the 10-K, which for 2017 was refilled today.

Please recognize and accept 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 on the call today is Vin Miceli, our Chief Financial Officer; Michael Orlando, our Chief Operating Officer and President of FitPay in our Payments division and Stanley Washington, a former board member who joined our executive staff in January as Chief Revenue Officer and head of our Healthcare division.

I'll begin the call then turn the call over to Vin for a review of our financial results, then to Mike and Stan for an update on Payments and Healthcare respectively. And then we'll take a few questions from analysts on the call.

Although the second half of the year was not as strong as the first half, revenue wise, this was a year of tremendous progress for us as a Company, at $23.3 million in revenue which is over three times the level that we had last year. And we had positive adjusted EBITDA of almost $2 million, despite absorbing the overhead from the FitPay acquisition.

And for a definition of adjusted EBITDA, please refer to the press release this morning for what it contains.

The FitPay transaction also represented a milestone in the Company's development. We now have a payment platform that's approved by the major card networks and a fintech division staff with experience and knowledgeable industry veterans.

Mike Orlando also joined our board and became our Chief Operating Officer and has contributed to our strategic direction and operational structure, and for that, I'd like to thank him. In Healthcare, LogicMark continued to outperform in its traditional market with record revenues. And in 2018, we're devoting significantly more resources to its growth.

Stanley Washington, with his extensive business development experience has joined us to focus on that growth. And so we're growing a strong business and putting in place everything that we need to do to achieve that.

In addition, our balance sheet significantly improved since last year, and we're close to refinancing our revolver at an effective interest rate that's substantially lower than our current rate, which will further improve our cash flow. I'm very confident in our strategic plan and growth prospects for 2018 and beyond. And I'd like to thank everybody that contributed to that, on the NXT-ID staff.

With that, I'm going to turn it over to Vin to go over the financials in a little bit more detail.

Again, Vin Miceli, Chief Financial Officer of the Company speaking. I'm going to go over the major highlights of our financial highlights for the year '17 compared to '16.

Our revenues again, for the full year of 2017 were $23.3 million, compared to $7.7 million for the comparable 2016 period. The large increase in revenues for the full year '17 versus '16 was primarily attributable to the inclusion of LogicMark's operating results for the full year '17, as compared to a partial post acquisition period in 2016 only.

In addition, the Company had Flye Smart Card sales for the full year '17, as opposed to Q4 of '16 only.

Our gross profit margin was very strong and ended the year just under 50% compared to 43% for 2016. The favorable gross margin was directly attributable to the strong LogicMark product sales and also the profit margin earned on the sales to WorldVentures.

It should also be noted that our gross margin for '17 was negatively impacted by a couple of inventory adjustments totaling $1.4 million. Excluding these adjustments, our gross margin for '17 would have been approximately, 56%.

Operating expenses for '17 we're about $15.3 million, up approximately $5.3 million on a year over year basis. Again, the primary reason for that significant increase was the fact that we had LogicMark operating results in for a full year, and we also had the FitPay layering on of their SG&A come on in '17 with no comparable number in '16. In our minds, those were the two primary drivers for the large increase in spend.

In terms of interest expense, interest expense was about $4 million higher in '17. And again, if you'll recall, we used our revolver facility and our seller notes in part fund the LogicMark transaction. And again, that was only for a partial year in '16 whereas in '17, we had a full year's worth of interest expense.

Looking over to our balance sheet, we ended the year with cash at about $5.6 million, which was very, very strong for us. Looking to some of the other working capital items, receivables were up about $600,000 over the previous year. And that's obviously attributable to the large increase in revenues on a year over year basis.

Inventory was down considerably, which was due to the product sales and also to the inventory adjustments that I referred to earlier. In terms of the intangibles, when you actually look at our filing later today, you will see that our intangible assets were up considerably. Those increases, I should say, in good will and other intangibles are directly attributable to the FitPay acquisition that occurred back in late May of '17.

On the current liabilities side, very pleased we actually had a roughly $3 million reduction in our current liabilities, mainly to paying down some of our payables, our accruals, and some of our current debt, which was very encouraging.

On the long term liability side, as Gino pointed out, we significantly delevered the revolving facility. We actually paid down about $3.7 million in debt, which was a great achievement for the Company.

And we ended the year with a very strong stockholder equity number, just about $19.1 million versus $2.8 million a year ago, so very encouraged by the strength of our balance sheet. It's getting stronger and we're very encouraged by that.

In terms of the cash flow, I'll just hit some major items that I believe are the key items here. You'll be able to look at this in great detail later today. But in terms of the cash flow, we actually used about $5.6 million in operations during the year. We had a very small investing amount of about $150,000, which was mainly related to our FitPay acquisition.

But in terms of financing, net/net, we had about $8.1 million in net cash flow generated to the Company, mainly due to the offerings that we did offset in part by the debt delevering -- all netted to about $8.1 million.

Again, we ended the year at about $5.6 million in cash, a good number to have heading into '18 here for us.

With that, I'll turn it back over to Gino Pereira.

Guys, we can see, I think the Company has made tremendous progress in 2017. And so, for a little bit more color on the individual divisions, I'd like to turn the call over to Mike Orlando to chat about our fintech and payments division.

Good morning, everyone. Q4 was a significant milestone for the Payments division. As we announced that we launched our commercial platform and took our first customer live which is Garmin and powering Garmin Pay behind the vivoactive 3 new sport watch.

We became now the first independent platform to launch a token service with the major payment networks, Visa and MasterCard. And in doing so, launched four countries in 15 banks on launch day, which was also a significant milestone; first Company to do that in multiple regions, multiple countries.

We ended the year in eight countries in 60 different banks. Those included Bank of America, ANZ in Australia and Corner Bank in Europe.

For us, this is the beginning of what's been a huge amount of effort and work on behalf of my team, so I want to thank everybody on the FitPay in the Payments division side. And now, we see the opportunities to bring the rest of our integrated partners live in the coming year.

We also announced a new product called Flip, which is the first contactless payment capable device for cryptocurrency. We're really excited about this opportunity, as it places us in a new place of delivering product to the marketplace, which has a need of allowing the customers and users of Bitcoin to convert those Bitcoins into USD and use those for everyday purchases and to make contactless payments at over 10 million locations globally.

And then lastly, from an operational perspective, we integrated the product and engineering teams amongst NXT-ID and FitPay, and this will allow us to achieve efficiencies in how we bring any solutions to market, both on the platform side, as well as the hardware side. And we also on the backend, we integrated things like payroll, HR, that'll help us save costs down the road, as we start to leverage the combined Company from how we bring new products and new offerings to the marketplace.

And that's it, Gino.

And then now over to Stan to bring us up to date on what's going on with LogicMark and Healthcare.

As Gino has indicated, LogicMark saw record performance last year, and it continues to see strong growth as we enter into 2018. A lot of this is driven by the increased desire for connectivity overall in the US, but particularly by older Americans. Also the growth in telehealth and the rising cost of healthcare as well.

As a result, in 2017 Q4, we were up over 24% year over year, and saw strong revenue also of over 13% year over year for the last year, which drove very strong gross margin increase for us as well for the business. We see very strong performance continued in the governmental channels. This has continued from last year, as we continue to move into '18.

And increased volume that has allowed us to really keep our costs flat and expand from a headcounts perspective year over year. Our operations have really been built to scale, based on the demand that we continue to see in the market.

And we had very strong retail expansion and have been really pushing strongly into new retail channels. And as we look into 2018, particularly in Q1, we're ahead of our estimates, in terms of our performance for this particular year. We're continuing to really drive into new channels and expansion in healthcare.

And I'd like to take a quick minute to congratulate and thank the LogicMark Team for the strong work and performance in 2017 and of course, the work that continues to perform strongly here in 2018.

With that, I think we can open it up for questions from analysts.

(Operator Instructions)

Brian Kinstlinger, Maxim Group.

One quick question on WorldVentures, I'm just curious, I read with the press release, when you expect to begin to make additional deliveries, is that second half of the year? And then also, what's been the feedback from the consumer for that product?

The WorldVentures product, as you know, was kind of a very cutting edge as a whole, had a number of features on it that had never been seen before in smart cards. The release that is out currently by WorldVentures is a beta release. It's not a full market release. But they've still taken obviously, substantial deliveries of the beta product.

It's very much dependent on what country they sell the products at, because the card itself does not work with an EMV chip. And so, in countries where you have a strong EMV use, such as the United States and Europe, the payment capability of the card is a lot more restricted, whereas in the Fareast, it works very well.

They're seeing a lot higher acceptance out in the Fareast than they are in Europe and the US. Having said that, it's not just designed as a payment card; it's also a loyalty card, and there are a number of other features on it. And those features work well.

Mix in general is positive. But it does have some limitations, in terms of payment capability in certain countries.

And then can you talk -- I know you can't give specific numbers -- but can you talk qualitatively about the adoption for the payments function and Garmin watch and how significant of it might be to revenue in the first half of the year and maybe the first and second quarter here?

Yes, we've been very impressed by the adoption rate of the vivoactive 3 thus far. And then they launched a second device in Q1, and that activity has continued to grow with the second device.

I think what's interesting about the users of the Garmin product specifically, and then if you look across our other portfolio customers is they're buying now products with very specific functions, and the Garmin vivoactive 3 is targeted at a very specific audience that's buying that not only for fitness tracking, but for other types of sports and activity tracking.

And the payment capabilities is a key component of that, wherein you see other pays launch in the marketplace it was an add-on to a Smartphone or other types of capabilities and really tangential to what they were buying that product for.

And then the Garmin, it's really the first product that's been out there where payments has been a co-offering, and they launch with that as part of it. And so, we've seen significantly higher adoption rates in that product than what was witnessed in the other pays at launch.

Now the volumes are lower because it's not an iPhone, but at the same time, we're both encouraged by that number of users as well as the activity, meaning the number of transactions and how often the consumers are using it to pay throughout the week.

And so, has the publicity with Garmin -- and clear in the press that you are the payments platform to it -- has that created additional OEMs to approach you about your solution?

Absolutely, yes, absolutely. Both. We were dark for a long time, in terms of who some of our customers had been, and that's really just the market; we're not allowed to talk about our customers really until products get launched.

And so with the Garmin announcement, it really put a spotlight on not only our capabilities, but also the fact that we had talked about the Company and the platform and what we were doing, but getting to commercial delivery is a very different perspective in the lens that people view you from.

And so, we've got we've had a significant amount of increase of attention both from the companies and larger branded products coming to us and talking to us about their plans for 2018, 2019 products.

Some of those we've signed, again, limitations we can't talk about, but we will here in the coming months, coming quarters when those products get launched in the marketplace.

And then can you share with us the timeline for cryptocurrency payments technology? When do you expect to move from preorders to production? And how do you price that product?

Yes, we'll go into production in Q2, probably towards the latter half of Q2 AND begin shipments of those products about the same time. On the pricing of the products, there's a per device cost right now, so we're in a preorder mode at [$14.50]. And then there's a fee structure behind that in terms of an exchange fee and a monthly account maintenance fee for that product.

And then quickly on the numbers, you guys mentioned an inventory adjustment, was that the fourth quarter? Because that's the quarter where the gross margin seemed low.

Yes --

With the first quarter already over and the discussion around WorldVentures, does 1Q look more like the second half of the year? Or does it look more like the first half of the year?

It's more like the second half of the year. The important thing to note is that we're obviously building this business for the long term. And we're putting in place the structure and everything we need to do that. We still have a limited number of customers, so when a single customer is not in a mode where it's ordering, that definitely adversely affects our revenue.

But as we bring on more customers, as we believe will be evident over 2018, that kind of yoyo effect will definitely even out. But for the moment we're still in the initial stages of bringing on additional customers for our products.

Kris Tuttle with SoundView.

A lot of my questions on the payment side have been answered.

I wanted to ask a little more about the healthcare business, and, Stanley, maybe you could talk a little more about how the LogicMark products, traditionally, how they might change into a more broader role in healthcare, either for at home or chronic care or other kinds of things?

We've seen Teledoc and other kind of new companies do pretty well in some of these new modalities of treatment, so I'm curious to know how you see this maybe unfolding over the next year or two?

Yes, great question. What I'll do is I'll answer part of that, and then I'm also going to kick it over to Mike because there's some exciting thinking that is coming out of the ability to really infuse the technology from the FitPay side also into what we're doing in healthcare.

But you're correct, there's been a great amount of opportunity, particularly in the monitored space. Today, LogicMark's business s primarily non-monitored. We're selling devices that don't require really an ongoing subscription.

As we continue to look forward and think about where are those channel opportunities for us to continue to drive greater revenue, and we are definitely taking a strong look at home healthcare market and also looking at really converting and boosting our products a little bit more on the monitored side as well.

It's a very competitive space, but we believe that we have a strong advantage in our ability to infuse our technology, create a much more elegant, more nimble, flexible product and really move really strong down that particular path. And we have a very strong amount of momentum today, particularly coming out of our government sector.

And I think as we continue the push further there, gives us an opportunity also to really pivot a bit more and move more succinctly into really I think a lot of what we're talking about. This is something that we have been thinking about for some time now, so I think you'll start to see a bit more momentum there in 2018.

And we have some development work that we're focused on, and we're really starting to look at our technology roadmap as well, in a new way, in a way that we had not done yet, in 2017 to really help us drive and create a much more competitive offering in 2018.

And, Mike, you may just want to just quickly just touch on how we think about our technology roadmap and how that potentially will also support what we're doing in healthcare?

On the technology side, we've got both the hardware and software development teams that are focused on how do we continue to bring not only our payments capabilities, but how do we extend that into some of the authentications technologies that we have together? And then how do those capabilities cross over between the two businesses?

And so, on the healthcare side obviously as we move more towards a form factor of these [purse] devices, that's more everyone's style and more usable for the consumer the payments capabilities of those devices becomes an inherent feature, a need that we could do.

If you think about an FSA account that gets preloaded in the purse devices that's also doing other types of things, so as you're at the doctors and not having to select through your wallet or purse and which card I need to pay with that can get charged to my FSA account is the default payment model at my physician's office.

At the same time, the ability to provide authentication technologies within those products and then extend those out to other partners we may interact with becomes the key component as the data and other types of things that we may want to incorporate into our healthcare system, healthcare partners becomes more prevalent in the current development cycles.

Brian Kinstlinger with Maxim Group.

Since we don't have a 10-K yet, I was just wondering, I heard a lot of the numbers in the balance sheet, but what I didn't hear is just a little bit on the capital structure. We got the cash, but maybe go through the debt and are all the preferreds gone?

Yes, so all of the preferreds were converted out in accounts in '17, so really now, in terms of debt, we're left with the revolver debt, which is down to $12 million. We actually delevered the revolver by $3 million during the year. And we also have a small piece of seller debt remaining. And that's it. That's the extent of it on the debt side.

All of the preferreds are gone. All of the convertible notes are gone. The balance sheet is really starting to firm up here. And we're definitely encouraged by it.

And you had mentioned refinancing, the revolver; is that a 2Q event? Is it a second half of the year event? When do you foresee that happening?

That's a Q2 event.

Q2, and then finally, just to make sure I have it right, shares outstanding, is that about 19 million or is that about 20 million? Where are we at as we enter the March quarter?

Right as of today, we have about 24 million shares outstanding--

Kris Tuttle with SoundView.

I had one question on the financing side as well, and I'm certainly not espousing this, but a number of companies have recognized the opportunity to do things like token offerings and so on.

Given that you guys have some innovative products like the Flip coming out, I mean it is something that makes a little more sense maybe for you, than some of the companies that have done it, was curious to know if you guys have looked at that and what your thoughts are about doing something like that this year?

Obviously as a Company that is centered around authentication, blockchain is a technology which we're very interested in. We've started taking a serious look at blockchain. We're looking at a number of blockchain opportunities.

As Mike said earlier, we have an initial coin conversion product that we're bringing to market. We expect blockchain to be a part of our future, both in the payment side and in the healthcare side, as we develop that over the years. Naturally along with that, comes the question of is it appropriate to do an ICO?

There's a lot of movement in that space today. We're a public Company, so my feeling is that any coin offering that we do would have to be done under a security token; not a utility token. We need to really understand what the SEC is looking for, for investor protection. And we need to make sure that any offering the we have falls within those guidelines. I think those are unclear at the moment.

The other thing that's unclear is where a registered coin would trade. I think that it's definitely something that is fairly high on our radar, but until we have some clarity as to what the regulatory landscape looks like around it, I think we'll just continue to learn and gather information and improve our basic competence in blockchain and really focus on the commercial use of that technology.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Gino.

Okay, I think we'll wrap for the morning. Thank you very much, everyone, for your participation. And we look forward to our next call. To be continued, as they say.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect.