Earnings Call Transcript - LGMK Q1 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the Nxt-ID Investor Update Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker for today, Mr. Vin Miceli. Sir, you may begin.

Vin Miceli, CEO

Thank you, Valerie. Good afternoon, all. And thank you for joining our call today to discuss Nxt-ID’s unaudited financial and operating results for the three months ended March 31, 2020, and to provide a general update on the business. 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 there are a number of factors that will cause actual results to differ materially from our forward-looking statements, including 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. So, again, thank you for joining. I am here today with Kevin O’Connor. We will use the format that we have used in the past. I will provide an update on the financial results for the first quarter of 2020, and then I’ll turn the call over to Kevin, who will provide a current update on the business over at LogicMark. Kevin will turn it back over to me for some closing remarks. And then, we’ll open the call up for some Q&A. So, with that, I’ll start with the financial results for the first quarter. As we included in our press release, revenues for Q1 came in at about $3.7 million compared to $4.2 million for the three months ended March 31, 2019. If you recall from the call that we had back in early April, Kevin and I had given our investors some preliminary indication that we started to see some softening in our revenues around the middle point of March. In estimating that number, I believe the miss was about $400,000 in revenue that we did not get because of the COVID pandemic. Obviously, that’s just an estimate. I think it’s a fairly conservative estimate, but it puts it a little bit more in perspective. More importantly, the contribution margin that was missed from the missing revenue was probably somewhere in the neighborhood of $300,000, based on our gross profit margin. So, hopefully, that gives you a little bit more insight. The gross profit for the quarter this year came in at $2.8 million versus $3.2 million for the 2019 comparable period. The gross profit margin percentage continues to be very strong at approximately 75%, which is a staple for the business, just very strong margins. We missed out on roughly $300,000 of additional profit, which translated into about a penny of additional EPS. Operating expenses for the three months ended March 31, 2020, were approximately $1.8 million compared to approximately $2.7 million for the same 2019 period. No surprise here. We talked extensively about the progress that we made in reducing our overhead, operating expenses, and positioning the business for future growth. No surprises there. Again, on an annual basis, I expect the SG&A expenses or operating expenses to be down somewhere in the neighborhood of $4 million on an annual basis. Operating income for the three months ended March 31, 2020, was approximately $1.1 million compared to $0.5 million for the comparable 2019 period. I firmly believe, without factoring in the COVID impact, our operating income would have been somewhere in the neighborhood of $1.3 million. Non-GAAP operating income for the three months this year came in at about $1.3 million compared to about $0.9 million for the comparable period. Net cash provided by operating activities for the three months ended March 31, 2020, was $0.5 million compared to about $0.8 million for the same 2019 period. If everyone recalls, one of the key financial objectives that I had when I started to take over as CEO was to minimize or reduce the working capital deficiency that the Company had. Although we still have a deficiency, we were able to reduce it by $300,000 in the quarter, which was a big undertaking for us. In terms of debt, we paid down about $700,000 of term debt in the first quarter. We need to deleverage the business, or the debt, I should say. We did a great job in Q1. We paid down about $700,000. Included in that number was a prepayment of about $150,000. I could have done another quarter of $1 million, but I thought it better, with the COVID pandemic going on, to preserve some cash. The Company’s current cash balance at the end of March came in at just above $1.4 million. Our cash position currently is right around $1.4 million, and our equity has actually grown, which came in at about $7.3 million. So, we’re quite pleased with that. Again, favorable earnings per share of about $0.013. Without COVID, we would have been somewhere in the $0.025 range in EPS. In terms of the government loan, we were fortunate enough to receive about $350,000 in loan proceeds under the CARES Act. We made it on the second round, got some funding that will help us tremendously going forward. More importantly, we’ll look to get those loan proceeds waived. However, we have to wait a 60-day period. We’ll start that process in July of this year. That should offset some of the impact that we will incur in Q2. So, with that, I’ll turn it over to Kevin. Kevin will provide an update on the business over at LogicMark.

Kevin O’Connor, COO

Great. Thanks, Vin. I’ll spend a little time touching on Q1 and the performance. But, as Vin went through the financials, I won’t spend any time on the numbers, just review what we did for the first quarter operationally and some of the things that we’ll continue to do in terms of product and business development. First of all, to talk about employee safety and customer support. As we went through Q1, COVID was going to have a significant impact, so we focused on what we needed to do to ensure employee safety was first and foremost, so that we could continue our operation while supporting the business. The way we’re structured at LogicMark is that we have had employees around the country for about eight years now. Our headquarters and fulfillment facility are in Louisville, Kentucky, where we have staff for customer service and sales. We were positioned to be flexible if we needed to adapt and close down. Our number one goal was to keep the fulfillment portion of the business operational. We maintained our staff in Louisville with precautions to ensure that everybody was safe and to continue supporting our customers. We also had people already working from home, so that we could support that if things changed in Louisville. Because we provide products to seniors and the VA, we were considered an essential business in Kentucky, allowing us to stay open. Operations in Louisville are managed consistently with health and safety guidelines, providing proper PPE for everyone. We have not had any issues with employee infections. We closely monitor that as employees come to work every day. We also restricted all travel and business events early on to minimize exposure and manage costs as we went through that. Business continuity is crucial during these challenging times, and we’ve worked closely with our suppliers to minimize any supply chain disruptions. Managing component availability allows us to continue production, but transportation and shipping lead times have been challenging as the availability of shipping has been very restricted, with rising costs. Our operations team, led by Ken in Louisville, did a phenomenal job ensuring that we maintained our product supply without overstocking, as we anticipated a pullback at the end of the quarter and heading into Q2. As Vin mentioned, we have been focused on right-sizing the business and eliminating non-essential costs. We believe this helped us navigate through these times. We have kept everyone on staff and did not eliminate any employees. We feel like we’re in a great position as the business starts to come back to take advantage of the increasing demand. COVID-19 has impacted everyone and particularly exposed vulnerabilities of seniors, whether living alone or in senior facilities. We believe that through our current products and those in our development pipeline, we’re well-positioned to provide solutions as the economy recovers. As far as customer activity goes, we had a good start to the first quarter, especially with the VA. However, when we hit mid-March, they were severely impacted. As you can see, the healthcare systems faced a huge impact, with the VA being the largest healthcare system in the country. We anticipated a pullback in business as they limited appointments and focused on COVID issues or emergency surgeries. As we entered the second quarter, we experienced a slight pickup in our commercial business. We sell through distribution in the durable medical equipment space, through retail partners, and pharmacies. Although there was a significant drop in the VA, we did see a slight pickup in our landline-based product for seniors living alone. We believe that as healthcare systems open back up, we’ll see hospitals and healthcare systems start to bring back patients. The VA will likely follow suit, but they may lag slightly behind the commercial healthcare systems. We are in regular communication with healthcare providers that we work with. We believe that there will be a surge in demand as things normalize. The beginning of the quarter was relatively quiet for commercial channel sales, but we experienced a slight uptick as COVID impacted it. Regarding new product development, we continue to move forward with our in-house engineering team and a third-party engineering resource specializing in audio communication. It's crucial that we achieve 100% accuracy in our audio performance. Our Wi-Fi product is progressing with some minor setbacks as we look to launch in the market. We’re engaging with senior living facilities to understand their needs and ensure we deliver the right solution. With COVID-19 affecting senior facilities in significant ways, our ability to meet in person is limited. However, we are communicating with them and plan to move forward once access is granted, setting up test sites for the Wi-Fi product. We’re excited about that as it fills a niche for in-home use and in senior facilities. The 4G product is still in development, with delays due to supply chain issues on key components. We’re submitting production samples for testing in the next two weeks, and once approved, we’ll do some in-depth field testing and should be ready for production by late Q2. We are also working on another 4G LTE platform that will offer both emergency communication and a health information ecosystem. We're optimistic about a potential large-scale launch in late Q2 or early Q3 of 2021. After reducing our overall cost structure, our strategy in product development is to ensure we have a pipeline delivering short, medium, and long-term solutions, enabling us to roll out new products that meet market needs. Our outlook remains strong for the balance of 2020 as the U.S. opens back up, and we believe we are positioned to manage the impacts of COVID-19 while providing solutions for seniors and the broader healthcare market going forward. Vin, I’ll hand it back to you.

Vin Miceli, CEO

Thank you, Kevin. In summary, I would like to take you through what we’re seeing in Q2. We were quite pleased with the results achieved in Q1, despite the COVID impact. However, Q2 will also be negatively impacted by COVID. Our actual revenues for April were less than our March revenues, and at this juncture, it’s been difficult for us to determine where our May revenues will be at month end based on current trends. I wish I could be more transparent with investors and provide more guidance on Q2 results, but it’s unclear at this point. What I can tell you definitively is that we’re doing all we can to mitigate the COVID impact. We’ve cut additional operating expenses and deferred other operating expenses to help us weather this pandemic. Continuously managing our cash disbursements allows us to preserve our cash position as best as we can. Reducing our operating expenses has helped us immensely during this very difficult time. We are encouraged by many state governments beginning to slowly open back up and the positive impact this has on our business and the overall economy. In summary, as Kevin pointed out, we believe we are well-positioned for growth. We have made substantial progress in streamlining the business by significantly reducing operating expenses and making great strides in deleveraging term debt. We also remain focused on achieving our new product development initiatives and introducing new products in Q3, as Kevin mentioned earlier. With that, I’d like to open it up for Q&A if anyone has questions for Kevin and me.

Operator, Operator

Thank you. Ladies and gentlemen, this does conclude today’s conference. Thank you for participating. You may have a great day. You may all disconnect.