Earnings Call Transcript - LGMK Q1 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Nxt-ID IR Update Call. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your host, Vincent Miceli. Please go ahead.

Vincent Miceli, Host

Thank you. Good afternoon, and thank you, everyone, for joining our call today to discuss Nxt-ID's unaudited financial and operating results for the 3 months ended March 31, 2021, and a general update on the business. As we've done in the past, Vin will discuss the financial summary, and I will then hand the call over to Kevin O'Connor, who will provide an update on the LogicMark business. During this afternoon's call, Kevin and I 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 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 before I head into the financial summary, I would just like to preface that discussion with a quick reminder that when you look at the comparability to the first quarter of 2020, the first quarter of 2020 was, for all intents and purposes, a pre-COVID-19 quarter for us, or at least 85% of the quarter was pre-COVID, and so the results are obviously much more favorable. From a comparability standpoint, it's questionable as to whether or not we're really comparing apples to apples or apples to oranges, if you will. You should also be reminded that Q1 2020, from a profitability standpoint, was the first time in the company's history that it had positive net income. So without further ado, I'll head into the numbers. Revenues for the 3 months ended March 31, 2021, came in at approximately $2.4 million compared to $3.7 million for the same 2020 period. Gross profit for the 3 months ended March 31, 2021, came in at $1.6 million compared to approximately $2.8 million for the same period. Operating expenses, namely SG&A for the 3 months ended March 31, 2021, were approximately $2.3 million compared to $1.8 million for the comparable 2020 period. That increase of roughly $0.5 million is all noncash related and actually had to do with stock compensation expense. From a cash standpoint, the numbers were virtually spot on to the same 2020 period from last year. The operating loss for the 3 months ended March 31, 2021, came in at about $783,000. For the 3 months ended March 31, 2020, operating income was approximately $1 million. Interest expense for the 3 months ended March 31, 2021, came in just under $900,000 versus about $600,000 from the first quarter of 2020. The increase was all noncash-related as well. As you know, from our correspondence and SEC filings, we prepaid a significant amount in the first quarter of 2021, specifically $5 million, and the accounting rules require that we accelerate the amortization of the deferred debt-related costs on the company's balance sheet. Once again, all noncash related, which is a good thing. Non-GAAP operating income for the 3 months ended March 31, 2021, adjusted for things like depreciation and amortization of intangibles and any other related noncash items was approximately breakeven in the first quarter of 2021 compared to approximately $1.3 million for the same 2020 period. Non-GAAP net loss for the 3 months ended March 31, 2021, adjusted for the same type of noncash items was approximately $312,000 compared to net income of approximately $860,000. Net cash used in operating activities for the 3 months ended March 31 was approximately $1 million. That $1 million was to pay down a significant portion of our accounts payable that was carried over from year-end 2020, which was about $0.5 million. Additionally, in an effort to bolster our inventory levels as we start to come out of the COVID-19 environment, we increased our inventory deposits by a couple of hundred thousand dollars as well. As I mentioned already, in Q1, we prepaid roughly $5 million. In addition, we made $0.5 million worth of scheduled amortization payments, which was one of our key objectives that we laid out about 1.5 years ago. The cash balance at March 31 was approximately $8.5 million. Also, in May of this year, we prepaid another $3 million with some of that cash that we had on the books at March 31. So we've made substantial strides in reducing our leverage and significantly reducing the debt. With that, I'll turn it over now to Kevin O'Connor, who will provide an update on the LogicMark business.

Kevin O’Connor, LogicMark Update

Thanks, Vin. I'll go through a business review of LogicMark. I won't go into the numbers because Vin had just discussed them extensively at the Nxt level, and really, a lot of what rolled out was the LogicMark business. Just as a recap on the business overall, Vin talked about COVID-19, and I'll address it a little bit. We're not hiding behind COVID-19, but we want to ensure that people understand it had a very real impact on the business over the past 14 months. The VA, as many of you know, represents a significant portion of the LogicMark business and is the largest healthcare system in the country. As the country was dealing with COVID, the VA was probably more heavily impacted than most healthcare systems, limiting the number of patient visits. Our products are typically prescribed, or the orders are written for them as veterans visit clinics and medical centers. As that model changed throughout COVID, it had a significant impact. It has been talked about in the business model, and we adjusted our cost structure. We managed costs and really supervised the workforce to support our customers while keeping an eye on overhead. Going into 2021, Vin mentioned the increased inventory. We did bring in additional products because we wanted to ensure that as we were coming out of COVID and ramping back up, we had products to meet the demand. We were cautious throughout 2020 and into 2021 to avoid sitting on excess inventory. I feel strongly that the team in Louisville has done a great job managing that aspect. Through the first four months, this is obviously a Q1 review, but we do have April results. Through the first four months, we've seen the business ramp up nicely. January and February started slow, but we saw a nice uptick in March that continued into April and May. We believe that as the country opens up and the impact of vaccinations grows, the VA specifically is benefiting significantly. They've reopened clinics and are seeing many more patients, so we've prepared to meet that demand accordingly and feel optimistic about continued growth. A couple of items I want to address because we've talked about them in the past and know there have been some questions, I'll provide an update on the GSA contract schedule. We submitted the GSA scheduling contract in the fourth quarter of 2020, around the time we got our 4G LTE product. We had a contracting officer assigned early in Q1. Our hope, and I believe we had given some guidance, was to have GSA approved by the end of March, but that got delayed due to internal updates at GSA. They required every current GSA holder to update their pricing and terms. As a new schedule, we were put on the back burner for review. It's been somewhat frustrating, but the process is moving along. We have a contracting officer assigned, are in communication, and are providing answers quickly to questions that arise. I’m confident it will move through the process and yield a positive outcome. We have a strong offer, and our history with the VA and government agencies is solid. I have no concerns about potential issues arising. As we’ve discussed, we have continued to sell to the VA while going through this process, which hasn’t hindered any sales. Once approval is secured, we will launch a campaign to market through government channels, utilizing the GSA schedule across federal, state, county, and tribal nation agencies. We've prepared a campaign and marketing plan to leverage that opportunity. Again, I remain optimistic about approval and continue to build on our momentum. Another topic we've discussed is product development. I’ll start with an update on our 4G LTE product. We released it in Q4, and in Q1, as we've ramped up, it has performed exceptionally well. We're happy with its operation and it has replaced our 3G unit. Therefore, everything going out the door as a cellular solution is 4G right now. We feel optimistic about its continued ramp-up. The VA has accepted it well, and veterans appreciate its functionality. We foresee ongoing growth this year. The other product we are developing is our WiFi product. We previously discussed its development, testing, and timelines for production and release, and we are still progressing in this area. We encountered issues during field testing. Following the pilot production run, we found performance and functionality concerns. Our engineering team, along with a third-party group assisting us, are addressing these issues. There's a need for readjustment in board design along with some component changes. This process is in progress. Alongside that, we also found design issues with the casing. We’re modifying the board and the casing to enhance manufacturability and ultimately reduce costs. We remain positive about the product and its development. Field testing has been excellent; feedback from testers suggests strong market reception, both at consumer and institutional levels. We’ll continue development and once the new board is ready, it must go through certification before we can test additional units in the field, ensuring solid development of our product. As we launch a new product, being a life safety product, it's critical to ensure operational functionality and fulfill safety needs for users. Throughout development, we’ve focused on the back-end system to ensure it’s accessible through an app, which has progressed very well. It'll be ready once we resolve hardware issues, and along with the WiFi product, the app and back-end portal will serve as a foundational platform for future product launches. We're optimistic about the product category where we intend to enter the market, and we foresee a successful launch. Though we are frustrated by the delays, we are back on track and committed to development, field testing, and updating everyone on progress for the launch. So, Vin, that's all I've got, I'll turn it back over to you.

Vincent Miceli, Host

Great, Kevin, thank you. Sarah, at this point, we can open it up for some questions, if anybody has a question they would like to ask.

Operator, Operator

And there are no questions at this time.

Vincent Miceli, Host

Thank you, Sarah. In summary, I would just like to invite investors, both long-term and new, to reflect on where we were roughly 1.5 years ago when Kevin and I took over management of the business. After our assessment, we identified three key objectives. I often start with SG&A, but this time, I'll highlight new products first. Back in September 2019, we had essentially no products in our pipeline, bar two: the 4G guardian alert and the WiFi product in early development stages. Today, as you know, based on Kevin's insights, we're actively selling these products. The products have proven excellent for the VA and its clinics, providing a strong value proposition for the U.S. government. We've made significant strides there. While we faced challenges with the WiFi product, we hope to return to targeted production by late this year, which is exciting. In terms of debt, when we took over in September, it was at $13.8 million. We are now down to $2.2 million. That represents an interest savings of around $1.5 million based on current rates, marking phenomenal progress. Lastly, when we stepped in, SG&A expenses approximated $11.5 million to $12 million annually; we're currently running at $6.5 million. This reflects remarkable progress in aligning the business for future revenue growth. I wanted to share this quick synopsis as I believe it's indicative of substantial advancements over the last 1.5 years. Finally, I was advised this morning by one of our board members that I am being replaced as the company's CEO. I do not yet know who my replacement will be. Inquiries should be directed to the board. I would like to thank all the investors for their support and loyalty. We are confident the company is well-positioned for revenue growth, and we look forward to propelling it to the next level. With that, I’d like to wish you a great afternoon, and thank you for joining the call.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may now disconnect.