Earnings Call Transcript - LGMK Q2 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the Nxt-ID Investor Webcast. At this time, all participants are in a listen-only mode. After speakers’ presentation, there will be a question-and-answer session. I would now like to turn the conference to your host CEO, Vin Miceli. Sir, you may begin.

Vin Miceli, CEO

Thank you, Valerie. Good afternoon, everyone, and thank you for joining the Nxt-ID Inc. webcast to discuss the company's unaudited operating results for the six and three months ended June 30, 2020, and to provide a general and corporate update on the overall status of our business. This is Vin Miceli, and I am here today with Kevin O’Connor. As we've done in our prior webcast, I will provide the financial update along with some summary commentary, and Kevin will provide you with a closer look at the LogicMark operation as well as an update on our new product development initiatives. Before we get started, I'm required to read the forward-looking disclosure statement. 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 several factors that will cause 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. So right now, I'd like to just take you through some highlights of the first six months and second quarter results. These may sound redundant as you probably already had a chance to look at our most recently filed second quarter 10-Q. But nonetheless, I will go through them and add some additional color where I think it might be helpful. In terms of revenues for the six and three months ended June 30, 2020, they came in at $6.2 million for the first six months and $2.5 million for the second quarter, obviously significantly lower than the comparable 2019 numbers. The first six months was down about $2.4 million versus last year, and the second quarter was down $2 million. Regarding our gross profit, for the first six months of 2020, it came in at $4.6 million and $1.8 million for the second quarter, also down significantly versus the comparable ‘19 periods at $6.6 million and $3.4 million. The good news regarding gross profit is that our gross profit margin percentage remained above 70%, which is very healthy; the problem obviously was the miss in revenue for us. Operating expenses for the six and three months ended June 30th were down significantly at $3.7 million for the six months and $1.9 million for the second quarter of 2020 compared to $5.5 million and $2.8 million for the comparable 2019 period. Again, we've talked a lot about the reduction in the overhead structure of the company, and that's completely the reason for the huge reduction in operating expenses. Operating income for the six months of 2020 came in at just under a million dollars at $936,000, and for the three months ended June 30, 2020, we actually had a small operating loss of about $100,000 compared to $1.1 million in operating income for the six months of 2019 and $600,000 for the second quarter of 2019. Non-GAAP operating income for the six months ended June 30, 2020, adjusted for depreciation, amortization, and other non-cash charges was approximately $1.4 million and $0.1 million respectively compared to $1.9 million and $1 million for the same comparable 2019 periods. Net cash provided by operating activities in the six months ended June 30th was $6.6 million compared to $0.7 million in the six months ended June 30, 2019. During the first six months of 2020, we repaid $1.2 million in term debt in that six-month timeframe. Moving over to the balance sheet, and I'll just hit a couple of the key balance sheet line items. We closed the quarter at about $1.4 million in cash. We had about $1.8 million in payables, down about $300,000 from the end of last year. Debt was about $12.2 million at June 30th, and our stockholder equity was about $6.7 million at June 30th. So obviously, 2020 thus far has been a very challenging year, while at the same time, a very dynamic one for the company, and for the entire world for that matter. If you'll recall, approximately nine months ago, I laid out three key objectives that we believe that at the time were absolutely imperative for the company to accomplish in order to stabilize and begin growing the business. Those three key objectives were as follows: we needed to rightsize to remain business after the sale of Fit Pay by significantly reducing the company's operating expenses or overhead; to continue building shareholder value by paying down our term loan facility; and finally, to assess the company's new product development efforts to determine which of these initiatives would add sustainable revenues to the company in the quickest or shortest amount of time. In terms of rightsizing the business, we actually reduced our operating expenses by over $4 million on an annual basis, which in retrospect was absolutely paramount to the company, especially in light of the current COVID environment. To date, we have also paid down approximately $4.7 million of our term debt facility, $1.5 million of which was paid thus far in 2020. The pay down is obviously an integral part of the overall equation here and is very important to us as we look forward to moving the business forward. In Q1 of 2020, we began to see the positive results from some of our efforts. We actually had positive net income and earnings per share for the first time in the company's history. Then, as we all know, COVID-19 struck and began to negatively impact the company's revenues and operating results around mid-March 2020. The company's second quarter 2020 sales and operating results were significantly impacted by COVID, just like the financial results of many other companies. In spite of our revenues being significantly lost, our results were still very close to breakeven for the first six months of 2020. Another way to look at it is, had we not reduced our operating expenses to the level we did, and assuming that all else remained constant, our loss per share would have been in the neighborhood of $0.08 as compared to an actual loss per share of $0.01. With respect to our new products, we're encouraged by the future prospects of our new 4G product as well as the Wi-Fi product. We believe that the 4G product is a very solid value proposition, and we're very confident that it will allow us to further penetrate the VA channel, while the Wi-Fi product offers multiple sales channel possibilities, including direct-to-consumer, medical distribution and various assisted and independent living facilities, as well as other healthcare facilities. So with that, I'll now turn it over to Kevin who will provide an update on the LogicMark operation as well as dive deeper into the new product development initiatives.

Kevin O’Connor, President

Thanks, Vin. So I'll just go over kind of at a high level and then go into the numbers as you really touched on them at this point. But to echo what Vin has said, going into this year, we felt like we were positioned really well and had some nice growth in Q1. And obviously, as COVID impacted pretty much everybody in the economy, we felt like we were nimble enough to adjust and move accordingly. Some of the things that we continued to focus on through the second quarter included our workforce, maintaining a hybrid model with people working from home, as well as staffing our facility in Louisville, ensuring we continued to support the customer needs and maintaining the necessary resources. All mandates from the State of Kentucky, where our Louisville facility is located, were followed. Throughout the process, we maintained a safe and COVID-free workplace up to the current date. We continued the suspension of all business travel and events through Q2 and into Q3, monitoring the situation closely as we approached the end of the year, especially those events catered towards the VA and veteran service organizations. At this point, all major events we would typically participate in have been canceled for the balance of the year. But we're continuing to monitor opportunities while managing employee safety. Some other focus areas through the second quarter included our lease at our facility, which was set to expire at the end of August. Our VP has been focused on finding a new location that would better serve our needs. The previous facility was good, but it really was more space than we needed from an office standpoint, and the warehouse would require some updates as we look to expand our business going forward. We found a great facility relatively close to our current location and successfully negotiated a lease there. The facility had just been completely renovated. We'll save roughly $20,000 a year in rent, and because everything has been updated, we’ll substantially lower our operating costs. This is a positive development as we grow our business. We also managed our headcount effectively. One of the things we looked at was keeping enough people on board to support customers through all the changes happening. We participated in the Payroll Protection Program, which required us to maintain headcount and not eliminate employees. However, we did see some attrition, with some employees choosing to leave for personal reasons, including having kids at home. Since the beginning of COVID, our headcount is down 25%. We maintained all the requirements for the Payroll Protection Plan throughout this process. Managing the transition to the new facility started in June and was completed in July. During this time, we worked closely with our suppliers to manage inventory, ensuring we had the right products ready for production as we welcomed new items. Customer activity through the second quarter has shown trends we've discussed on our last earnings call. In Q1, we experienced a strong start but saw a drop-off from mid-March due to COVID. This decline extended into the second quarter with continued decreases in April and May. However, in June, we began to observe a rebound as the VA started reopening and increasing visits. This positive trend has continued in July, maintaining a run rate from June. We’re cautiously optimistic that we have seen the worst and are now positioned to take advantage of growth. Commercial sales channels actually picked up a little bit. April marked the low point for the commercial channel, but we've seen some smaller businesses, independent pharmacies, and durable medical equipment suppliers looking for additional revenue sources as they were significantly impacted by COVID. Therefore, we're optimistic with our new products that we can continue this growth. As Vin touched on, we’ve made progress through Q2 and into Q3 regarding new product releases, although it’s moving slower than we projected due to various factors. As you know, our products are personal safety devices, so it’s critical that during production and testing, they function properly at all times. We're currently conducting meticulous testing and issued a release stating that we began testing in July. We did some alpha testing, and we’re working with a third-party engineering firm that continues to validate and test our products. We want to be sure that when the product launches, it delivers functionality as specified and provides real value to the markets we serve. Regarding our 4G LTE product, it is in beta testing. It’s performing exceptionally well, and we expect shipments in quantity by late third quarter. This product is currently in production, and we're optimistic about its potential impact. Additionally, we've started preliminary design discussions for a new form factor of our 4G LTE product, ensuring that we have a functioning product in development while looking to add additional options and features for future releases. Our main goal with any product we launch this year is to ensure they deliver a revenue impact and optimize our support channels. We also aim to continue our new product development strategy with our in-house engineering team and third-party partnerships to respond to market demands. Overall, we feel confident that the business is poised to rebound through the end of 2020 and into 2021. We believe we have the right products to drive excitement and revenue for the business.

Vin Miceli, CEO

Thank you, Kevin. Thanks for that great update. So looking to Q2 and as Kevin indicated, the current order intake and the revenues thus far for the third quarter are trending slightly higher than what we experienced in Q2 on a sequential basis. We’re cautiously optimistic at this juncture for Q3. It’s obviously very premature, and we would expect that the financial results for Q3 to be more in line with what we experienced in Q2, possibly slightly better. However, it’s very premature, especially in light of the virus resurgence currently seen in many southern states and some other areas across the U.S. So we remain cautiously optimistic. We’re pleased that the numbers look slightly better at this juncture than they did last quarter. However, we remain cautiously optimistic. In July 2020, as disclosed, we raised approximately $1.8 million in equity financing proceeds. These funds are primarily earmarked for future working capital needs if the virus situation continues beyond the third quarter. We hope to start making some progress with the virus and move beyond this situation. Additionally, we will use some of the proceeds that we raised recently to help us get the 4G and Wi-Fi product initiatives over the finish line. Obviously, these products are critical to our success going forward. As we disclosed as well in the recently filed 10-Q, we have requested a hearing with NASDAQ to provide them with our plan to regain compliance with their listing requirements so that we can remain on a listed national exchange. Our hearing date is scheduled for September 10, 2020. It has been a tough balancing act for us to remain on NASDAQ while allowing the necessary changes to our business model time to take hold, especially with the ongoing COVID pandemic, so we want the impact of any reverse that may be required to remain on NASDAQ as minimal as possible. We are trying to do everything we can to achieve that. So in summary, the company continues to work diligently. We are focused on overcoming this challenging year, and we remain very optimistic about our future with our new products and excited about the business for the remainder of 2020 and as we head into 2021. With that, Valerie, I’d like to open it up to any questions if anyone has any for Kevin and me.

Operator, Operator

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