LogicMark Inc (LGMK) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the conference call to discuss the full year ending December 2018 and update of previously announced spinoff conference call.

(Operator Instructions) As a reminder, this conference may be recorded.

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

Sir, you may begin.

Thanks very much.

Good afternoon.

Thank you, everyone, for joining our call today.

During this afternoon'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 other SEC filings.

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

And so following our usual protocol, with me on the call today is Vin Miceli, our Chief Financial Officer; Mike Orlando, Chief Operating Officer and President of Fit Pay; and Stanley Washington, Chief Revenue Officer and Head of our Health Care Division.

So I'll begin the call, then turn it over to Vin Miceli for a review of our financial results, then to Mike Orlando and Stan Washington for an update on Payments and Health Care, respectively, and we'll take a few questions from the analysts on the call.

And so as we published in our results, we had a steady year of growth.

Our revenues were up about 7% from continuing operations.

Our gross profit was up higher than that at about 12%, and we managed to reduce our operating expenses from continuing operations by about $1.4 million for the year.

Our operating income from continuing operations was about $600,000 compared to a loss of about $2.2 million for the same period in the previous year.

So overall, a steady growth year for us.

The spinoff, to give you an update on the spinoff, we are making progress on that, albeit slower than ideally we would like.

We previously announced that we had a term sheet for a refinancing of the company's current term loan, which would allow us to proceed with the spin-off.

We expect that transaction to close in about -- within the next 2 weeks.

So it's moving forward.

The next step for us is to file a registration statement with the SEC to register the shares for the spinoff company.

We anticipate filing that in the next week, and we are dependent on an SEC review of that filing.

So once the SEC has completed their review, we will be able to announce more details in terms of the date of the spinoff and the record date in terms of the receiving the dividend from the spinoff.

So we expect to have more definitive news very shortly.

So I'm going to turn the call over now to Vin Miceli to talk in a bit more detail about financial operations.

Okay.

Thank you, Gino.

Again, Vin Miceli, CFO for Nxt-ID.

Going to provide a summary of the full year results for 2018 as compared to the full year results of 2017 and focus on the continuing operations of the company.

So to get started, revenues from our continuing operations for the 12 months ended December 31, 2018, came in at about $17.1 million.

And that was compared to $16 million for 2017, representing an increase in our revenues of just under 7%.

And the increase is primarily attributable to LogicMark's increased sales volume to the VA as well as to a shift -- a favorable shift in product sales mix from land-based products to cellular, mobile-type products, which typically have a higher selling price associated with a money per-unit basis.

The company's gross profit margin was -- continues to be very healthy and for the full year 2018, it was approximately 72%.

In the comparable 2017 period, the same gross profit margin percentage was 68% and again, the increase primarily due to the increased sales volume, the favorable shift in product sales mix and also in 2017, the company recorded a $300,000 E&O, in excess and obsolete inventory reserve for some of our LogicMark inventory.

In terms of our operating expenses from our continuing operations, as Gino pointed out, they were down about $1.4 million.

They came in at $11.7 million compared to $13.1 million in 2017.

The decrease in the SG&A is primarily attributable to lower stock comp expense and bad debt reserves that were recorded in 2017.

Operating income from our continuing operations for the 12 months ended December 31, 2018, was just under $600,000 compared to an operating loss of $2.2 million for the comparable '17 period.

The increase in gross profit, again, is attributable to the strong sales volume and our favorable margin mix and the -- coupled with the lower operating expenses experienced in '18.

Interest expense for the 12 months ended December 31, '18, was about $3 million lower and came in at $4.7 million compared to $7.7 million for the 2017 period.

The decrease in interest expense, as everyone knows, was primarily attributable to the lower interest expense incurred on the refinanced term loan versus the interest expense incurred on both the revolving credit facility that we had in the past and the convertible exchange notes.

In summary, the net loss from continuing operations for the 12 months ended December 31, 2018, was approximately $1.3 million compared to a net loss from continuing operations in 2017 of $8.5 million.

So with that, I'm going to go over and hit some of the highlights on our balance sheet.

At 12/31/2018, our cash and restricted cash came in at about $1.6 million.

We had some relatively flat other working capital line items like AR inventory, prepaids, overall pretty much flat year-over-year.

No real flux in our intangibles in our goodwill other than regular amortization expense.

In terms of the liabilities, not a whole lot of movement year-over-year on a continuing ops basis.

And the debt was still at the same $16 million.

We're hoping to look at getting that refinanced soon as well.

Equity was just under -- stockholders' equity was just under $15 million for the year.

And one other additional comment I'd like to make is on a continuing ops basis, the company's operating cash flow for the full year 2018 was a use of cash of about $50,000.

So we're, on a continuing ops basis, very encouraged by the operating cash flow of the company.

And I think once the spinoff comes to fruition, I think that the company will be much better aligned and positioned to generate and use the sources of cash that it has.

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

Gino?

Thanks very much, Vin.

Mike Orlando's going to give us an update on the FinTech side of the business.

Yes.

Thanks, Gino and good afternoon, everyone.

So the payments division, we continue to make strides in expanding our platform and capabilities and partnerships throughout the latter part of 2018 and in the beginning of 2019.

First and foremost, Garmin continues to add new devices to their portfolio, and we continue to expand on the network of banks that -- in countries that support the capability of Garmin Pay.

So right now, we are in 15 devices or as Garmin has announced, Fit support for 15 devices with Garmin Pay.

And we'll be in 300 country -- excuse me, 300 banks for credit and debit, and that represents 44 different countries in virtually every continent on the globe now.

We announced in late January, support for South America.

So that part of our portfolio continues to grow and expand and is really the strength behind driving now Garmin Pay but other partnerships as we bring them to market.

We also expanded company networks that we support, so Maestro and Discover are both on board, and that allows us to drive new growth, particularly in Europe with regard to the Maestro network and high use of debit cards and the affiliation of debit cards to wearables, smartwatch devices in that region.

So that was a big milestone for us.

We've also been spending quite a bit of time bringing new customers to market.

We announced in early January, SwatchPay.

So that project was -- a lot of work went into that project during all of 2018 and, well, that launch is another big milestone for us.

It's early yet in that relationship, and we're only in one country today, but we expect them to continue to grow their footprint throughout Europe and U.S. and other parts of Asia over the course of 2019 and into 2020.

We also have been working on expanding new commercial opportunities and revenue streams using our tokenization platform.

If you'll recall, we announced in October as a launch partner with Visa for their card-on-file and credential-on-file program, which essentially allows e-commerce and merchants that have large portfolios of credit cards for billing -- ongoing billing purposes to use our tokenization services as part of their transactions.

We look -- that will expand the capabilities beyond this kind of physical wearable devices into a whole new breadth of merchants and business opportunities as we bring on Visa and the other networks for the same capabilities.

And then on the device side, we spend a lot of time bringing Flip to market.

And it was a much more difficult project than we had anticipated when we first announced it, but we're pleased that we've finally been able to -- we're getting shipments on that and proving out not only our capabilities on the wallet side, but the crypto to USD conversion solution that we have and are looking to continue to grow that product throughout this year.

I would say that as we look at all of 2018, for us, it was continuing to build on the foundation that we've had with the company, both on the platform and partnerships, increasing our influence within the card networks and banks, which for us is a real key capability as we bring new devices and new partners to market to leverage that network, to quickly bring those devices and users on board to our platform and to the other payment wallets that we'll deliver.

And then lastly, around expanding the capabilities in new revenue streams that we've had.

So excited about what we've done and really bullish about what we see coming down the pipe for 2019 and into 2020.

And Gino, I'll turn it back to you.

Thanks very much, Mike.

And finally, over to Stan Washington to give us an update on what's been going on in the health care side.

Thank you, Gino.

As a quick recap, going into 2018, we had 3 primary objectives.

One was to drive deeper penetration into the government and VA channels; the second was to expand our direct-to-consumer platform and to drive more coverage into retail; and thirdly, we wanted to build revenue through new products and our strategic -- widening our strategic partners within the B2B and key vertical categories as well as some really key emerging markets.

I think for 2018, we performed really well among those 3 priorities.

Overall, revenue for 2018 was up 6.7%.

We had a strong performance on our gross margin, which increased by just shy of 4% at 3.8% year-over-year, and we've been able to continue to maintain a strong gross margin at 73%.

Overall, the government channel performed well, with continued expected growth into 2019 through deeper penetration and expansion not just within the VA, but additional verticals within the government channel itself, other departments.

We launched our retail partnerships with Walmart.com and are looking forward to the launch -- effective launch of Best Buy, which will be happening shortly this year.

We've continued to drive much more efficiency on our use of resources and managing cost across LogicMark, and we've been able to do that overall while still driving and increasing our volume.

Looking forward, we have been able to develop new products for 2019, which we hope to launch into the government channel and some of these other key market segments that we have been targeting.

We've expanded our business model to create new partnerships in retail as well and key verticals, and really are looking to drive this with some, we think, robust products that will really hit the market sometime this year.

Key verticals that we've been targeting are hospitality and real estate, along with other loan worker channels, which we believe will provide very key growth opportunities as we get further into 2019.

And in terms of mobile PERS, mPERS, we've expanded our features and design and are looking to introduce new products through key partnerships that we have put in place and are working to close as we get into the rest of this year as well.

Finally, we've been really working to design new products overall that will serve, I think, the growing needs of veterans as the key pillar of our growth strategy moving forward, a much deeper penetration into the veteran marketplace overall and looking, again, to continue our position as the leading provider of emergency communication devices to the VA.

Thank you, Gino.

Thanks very much, Stan.

So in summary, I think a solid year for us.

We continue to build on our foundations whilst we're working on new products for the future.

I think both sides, both health care and FinTech, have some exciting new products in the pipeline that we think could substantially contribute to the continued growth of the company.

So we're enthusiastic about everything that we have going on, focused on getting the spinoff completed as quickly as possible.

And whilst we're focused on increasing revenue, we're also focused on reducing our costs and improving our bottom line.

And I think that 2019 is looking strong for us, and I think we have a bright future going forward.

So thank you very much, everyone, and we can take questions from analysts.

(Operator Instructions) Our first question is from Michael Staiger of Odeon Capital.

I just wanted to ask a kind of a high-level question.

To what extent can you guys give us an idea of what the spinco will look like into 2019 and 2020 so we potentially can model it and put a value on it?

We'll start with that.

So I think that it's a little tricky at the moment.

Essentially, the spinco consists of Fit Pay as an organization, plus our financial assets that have contributed from Nxt-ID as well as intellectual property that was developed by Nxt-ID earlier that's going to be a key in some new product launches coming up.

The company is still in an early stage but has a tremendous amount of -- a tremendous advantage in so far as its relationships with banks and credit cards and credit card companies.

And so I think that 2000 -- in general, I think 2019 is going to be a continued year of development while increasing revenues.

And I think in 2020 and beyond, we'll start to see some of the multiplier effects come into play.

So Mike, I don't know if you want to add any more to that.

No, no, yes, I'd agree with you, Gino.

As we've continued to evolve the customers and partnerships, we're strengthening our foothold in the device market, expanding into other revenue streams, as I mentioned, card-on-file, e-commerce.

And so we're getting to that point toward the end of this year, early 2020, that inflection point where all the catalysts will start to take off for us.

So -- and as we get more towards sharing information publicly about the spinoff as a separate company, I think we'll be able to give more visibility into what that's going to look like.

And then a follow-up on the LogicMark side.

It looks like there you've done really well with this government channel.

Is there more opportunities across other government agencies to facilitate growth?

And would you anticipate, with some of the announcements with respect to, I guess, the retail channel, what kind of uptake are you expecting in '19 from that side moving forward and margin opportunity as well?

Stan, do you want to take that one?

Yes.

Good question.

Specific to the government channel, yes, in addition to the VA specifically as a standalone channel, we see other opportunities in other key agencies and have already aggressively been working down that path.

So we do feel very confident that we'll be able to drive more opportunities as we get further into this year and that those opportunities will help us drive strong incremental revenue.

That is, again, a core aspect, I think, of our growth strategy.

There is a higher degree of -- or rather more penetration opportunities, specifically within veterans and the VA, but we also see that opportunity in other -- with other agencies from a federal government standpoint, so that's a key area of growth.

On the retail side, we are really looking to accelerate the retail partnerships that we've put in place.

Walmart.com is live and up and running, and we're looking to continue to ramp it up.

We've got digital advertising and programs already in place to drive that revenue.

Best Buy should be coming online officially soon, and we're looking also at other potential opportunities that we think will continue to help and expand the business.

This does, I think, as we think about how we are going to introduce new products and we talk more about direct-to-consumer versus, say, B2B, it really, I think, does help us as we think about how we're going to grow revenue and how that mix of revenue, I think, continues.

And that should continue, I believe, to have a strong positive effect on our margin but ultimately, the expansion of further growth.

And to add to that -- sorry, just add to that, the development of direct-to-consumer business, we foresee us doing through partnerships with various established companies.

We're not attempting to go direct-to-consumers on any wide-scale basis on a -- but leveraging relationships that we're developing.

Correct.

And then one quick housekeeping question.

When can we expect to hear about Q1 results in the future?

I'd assume this -- we're talking about 2018 results right now.

But the March quarter, when do you expect to give us some clarity on what's happening there?

I think we generally -- the March quarter is always hard on the heels of the year-end, so it's always scrambled to get that done following the audited results.

So you could expect that around about the filing deadline, which, I believe, Vin, is probably mid-May, right?

Around May 15th...

Right, yes.

Our next question comes from Kris Tuttle of SoundView.

Just a couple.

So we've spent a lot of time on the year, which is great, and I was just curious if we kind of think about LogicMark for a second as a standalone business and kind of how it's been running and if you kind of look at Q4 and Q1, absent discontinued ops, that sort of stuff, what's the reasonable ballpark top line growth rate to kind of think about for that business right now?

I think there are 2 -- you kind of have to separate them into 2 things.

I think that the traditional VA business, I think we can expect continued growth in line with the percentage growth that we've experienced before, so 7% last year, 7% to 10% in the coming year.

Where I think that there is a lot of potential are some of the new channels that we're introducing that too early to forecast.

So we're optimistic that they will contribute very significantly to overall growth.

The timing of some of those product introductions are probably -- well, they're certainly in the second half of the year.

And one of the major products that we're working on is, with a large partner, is probably a fourth quarter introduction.

But I do think that they have the potential to be -- to contribute substantially to the business.

It's just, it's a little too early for us to be able to say quite how much.

Okay.

And do you have any anecdotal kind of feedback on how the Walmart relationship has -- you guys launched there, have you seen traffic or results?

Have there been, like, feedback about how it could be done differently?

Just what kind of observations do you have now that you guys are kind of at least dabbling in there with real customers?

Yes.

So it's -- so we're introducing that on a kind of a -- it's like a slow burn to gather information and then reinvest on -- based on the information and the feedback that we get back.

So we're launching the website, we've experimented with a couple of things like a landing page now that we've attached to some of the advertising.

The click-through rate on the advertising is pretty encouraging, and so -- and the sales have slowly started to grow.

But at this stage, for us, it is still a learning process.

So as we try different digital strategies and get results, we'll obviously focus on the ones that are more successful.

It's still a bit of a learning process for us, but we're approaching it in a prudent manner.

Okay.

And I had a couple questions on the Fit Pay side of things.

So you're now shipping the Flip, and I guess Apple has made some noise with this whole Apple Bank and cardless and signature-less kind of payments.

And I'm curious to know, if you look at the Flip or other things that you -- you guys are into tokenization, obviously.

What are your expectations for the Flip and things like it kind of as a -- what -- how much can they contribute to the Fit Pay business in the next year or 2?

Yes.

So I think that Flip is an interesting introduction.

We launched the form factor, but certainly, the capabilities that sit behind it, our ability to load devices and use those devices in a contactless environment.

And whether we load those devices with a cryptocurrency, which is [the intend] and the Flip, or [CI] currencies or other type of funding models, we believe that the growth of contactless acceptance will continue to drive these different devices and various types of form factors.

So our goal for Flip is really twofold: to get our foot in the water in terms of having a crypto conversion product and being able to use that in a contactless world and providing utility to Bitcoin users to be able to spend their cryptocurrencies with everyday purchases.

But moreover, was really establishing the technology components to our platform to allow us to expand to different types of devices, different types of partnerships that may want to utilize these devices, so different distribution models, and continue to grow that.

So as much as with the device, it's really about getting the platform and all the partnerships that we needed in place to make that happen.

Okay.

And you mentioned SwatchPay is launched and you said they're in one country.

And I know, of course, probably the pace of how they roll out is up to them.

But are they talking about rolling this out?

Is it one country a month, one country a quarter?

I mean, how long do you think it'll be before they're in like, let's say, most of the developed countries, U.S. and Europe, that kind of thing?

Yes.

So can't share the expansion plans directly, but I can speak to the model in which SwatchPay is being deployed, and it's through their retail channels.

And so they're selling SwatchPay watches through -- right now, it's a set of 4 variants of a payment watch through their retail channels in Switzerland.

Those are their consumer-direct stores, so wherever they have their own -- a Swatch footprint.

And so their goal is then to continue to do that wherever they have Swatch stores.

Their strength continues to be Europe and Asia, along with the U.S. And so as they add -- as they continue to roll out, they'll expand to places where they have these retail footprints.

Okay.

All right.

I understand that better.

And then the last question I got on my list here is just you talked about the spinoff, and it sounds like we'll have more information about that soon, but are -- so I guess what I'm curious about is the time -- is there a way to minimize the time between the record date and the sort of the actualization of the spinoff and its ability to trade in the market?

If you guys have thought about that, like how short could that be?

I don't know, I'm just -- I'm trying to understand what that kind of -- it's a little bit of an awkward period where the record date has passed, but the spun-off PartX is not yet trading in the market.

Yes.

Well, the time between the record date and -- first of all, we need to wait for the registration statement to be cleared by the SEC.

At the same time, we have an application into the OTC market for PartX, and that application is being processed.

They won't process it further -- it's being processed as far as it can go, and it means they have -- once the registration statement is effective then it can be accelerated.

So we don't -- we obviously have -- we've obviously thought about it and are focused on it and trying to minimize the time between the 2. So I understand that unfortunately, it's -- sometimes it's hard for us to give very tight dates and information just because there are so many moving pieces.

But the objective is to try and minimize the time between that happens.

I don't think that, that really -- I think as long as shareholders have -- and so the record date will kind of reflect that, right?

But the record date has to be done prior to the spinoff itself.

We're trying to minimize the time, but I don't think that it matters as much in terms of individual shareholders.

If they have shares immediately, whether they can trade them immediately or whether they can trade them in 30 days or 60 days.

I think the important feature is that it is going to be traded and therefore, the distribution will have value to shareholders.

It's -- I think that PartX is going to be a growing business for a number of years to come, and I don't think the extra 2 weeks that it's going to take would impact the value to shareholders at all.

(Operator Instructions) We have another question from Michael Staiger.

Just a quick follow-up as well.

On the Fit Pay PartX, your key on activations, I don't know if there's any metrics you have with respect to -- at least I assume so, you have with respect to activations with Garmin and any other pending activations and what kind of brand do you guys make (inaudible) if there's any color you can provide there that might be helpful.

And that's it.

Yes, Michael, you broke up a little bit.

I think the question was any insight we could give into number of activations with Garmin or other partners.

Is that the question?

Yes, yes.

Correct.

Yes, so we can't share those specific numbers, mostly because Garmin and Swatch, they don't share the number of devices sold publicly, and so they've asked us not to share activation numbers on our public calls simply because they don't want people to be able to extract out of our numbers, what their device sales have been.

So we've been asked not to share those with them.

I can say that in terms of relative to other pays in the market, our information is that we seem to be outpacing the other pays in terms of the percentage of activations to numbers of devices sold.

And that -- we believe that that's specifically related to the user experience that Garmin Pay has created in a way that you onboard your new watch to the Garmin Connect feature and how that connects to Garmin Pay and also, the affinity that they have -- Garmin users have to the specific features in the Garmin watches.

And so we're pleased with the activation rates, the card networks seem to be pleased with the activation rates and how we're going, but we can't give specific numbers, unfortunately.

(Operator Instructions) I'm showing no further questions at this time.

I'd like to turn the call back over to Mr. Pereira for any closing remarks.

Yes.

So thank you very much for being on the call.

I think that's all for now, and we will, of course, get you updated information on the spinoff just as soon as we have it.

So thank you very much.

Have a good afternoon.

Thank you.

Ladies and gentlemen, this does conclude today's conference.

Thank you for your participation, and have a wonderful day.

You may all disconnect.