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Industrials - Security & Protection Services - NASDAQ - US
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EARNINGS CALL TRANSCRIPT
EARNINGS CALL TRANSCRIPT 2017 - Q1
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Executives

Gino Pereira - CEO Vin Miceli - CFO Michael Orlando – COO; President, Fit Pay, Inc..

Analysts

Brian Kinstlinger - Maxim Group Kris Tuttle - SoundView Technology Group.

Operator

Good day ladies and gentlemen and welcome to the NXT-ID IR Update Webcast. [Operator Instructions] As a reminder, this conference maybe recorded. It's now my pleasure to hand the conference over to Mr. Gino Pereira, Chief Executive Officer of NXT-ID. Sir, you may begin..

Gino Pereira

Thank you very much. Good afternoon. Thank you everyone for joining our call today to discuss NXT-ID' financial and operational results for the first quarter 2017 and a general update on the progress of business.

We would normally have had this call a little bit sooner following the first quarter but we did want to hold off little bit pending our completion of the transaction with Fit Pay so that we can provide you with a more rounded view of where the Company is today and where we are going forward.

So during this afternoon's call, we will be making forward-looking statements which consists the 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 number of factors that will cause actual results to differ materially from our forward-looking statements, including the fact as identified and discussed in our earnings release and in other 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 with me on the call today is Vin Miceli, our Chief Financial Officer and Michael Orlando, our new Chief Operating Officer, welcome and President of our recent acquisition Fit Pay.

So I will begin the call to just give a general overview, turn the call over to Vin for a review of our financial results and then to Mike to introduce Fit Pay to our audience. We’ll then turn the call over for Q&A after that. So, with that, thank you very much.

So we have made significant progress in the first quarter following very solid progress that we made in the fourth quarter of last year.

As Vin will tell you our revenues was $6.7 million approximately in the first quarter and compared to the previous quarter and the last quarter of 2016 those revenues were about $4.5 million and if you look back a couple of quarters it was zero a couple of quarters before that, so very steady growth. The contribution continues from LogicMark.

Company continues to perform extremely well. We are on track to have another record or near record month again this year - again this month from LogicMark and WorldVentures continues to make a contribution as we deliver product to them in anticipation of their general launch.

They are going to be launching a further extended beta testing shortly and the momentum for that operation is beginning to grow. So we're pleased with where we are today. We continue to make progress in some of our stated goals in terms of extending distribution for LogicMark.

We've got nothing to announce specifically today but we continue to make good progress along those goals, as well as expanding the market opportunities for the basic NXT-ID Technology surrounding our payment technologies. Then of course the most significant thing that happened this quarter was our acquisition of Fit Pay and we're absolutely thrilled.

We get not only a tremendous developed technology and relationships with Visa MasterCard and many major players in the payment space but also a really very, very talented team both from a management standpoint and an engineering standpoint that is really going to help this company grow more rapidly and provide us with a much more robust staff to cope with growth in the future.

So I'm optimistic, really looking forward to the balance of the year and with that I will turn it over to Vin..

Vin Miceli

Thank you, Gino. Good afternoon all. My name is Vin Miceli, Chief Financial Officer of NXT-ID. I'd like to review with you the first quarter 2017 results. Revenues for the quarter were approximately $6.7 million as compared to 42,000 in the comparable period from last year.

On a sequential basis revenues for the quarter ended 2017 increased approximately $2.1 million over the fourth quarter of 2016.

The large increase in revenues in the quarter ended 2017 versus the first quarter '16 is primarily attributable to the acquisition of LogicMark which became effective back in July of 2016 also contributing as Gino pointed out were the company shipments of smartcards to WorldVentures.

The Company's gross profit margin was approximately 53% in the first quarter ended March 31, 2017 as compared to a negative gross profit margin for the comparable 2016 period and a favorable gross margin was directly attributable to the LogicMark acquisition and the strength of their contribution, as well as the margin earned on the WorldVentures sales.

Looking to operating expenses in the first quarter 2017 they were relatively flat at approximately $2.4 million as compared to the first quarter of 2016. G&A expense and selling and marketing expenses were up slightly approximately 200,000 and that was mainly attributable to the layering affect of bringing on the LogicMark acquisition.

R&D expenses were down significantly in the first quarter I should say versus 2016 and that was mainly attributable to us billing a significant portion of our engineering related efforts to WorldVentures and incurring less testing and prototype materials for the Wocket.

Interest expense in the first quarter ended March 31 was higher by approximately 1.2 million as compared to the same 2016 period.

The increase in interest expense was primarily attributable to the interest expense incurred on both the revolving credit facility and the sellers note both of which financed in part the acquisition of LogicMark, as well as the interest expense related to the convertible exchange notes that were issued back in November of 2016.

The net loss for the first quarter ended March 31, 2017 was 730,000 and we significantly closed the window on that - the loss in the comparable period for 2016 was approximately $5.4 million, so no significant progress there. During the first quarter of 2017, the Company's net loss included approximately $1.2 million in non-cash charges.

Moving over to our balance sheet. Not a lot of activity in movement on some of our balance sheet line items. So I'll just go through and touch upon some of the major items. Cash at the end of March 31 was about $2.5 million. So we were very comfortable with the cash position at March 31.

Receivables were up mainly because of the shipments that we made to WorldVentures in the first quarter, other than that pretty much - there's not a lot of movement in our balance sheet as and what we discussed at the end of the year last year, stockholders equity was about just under $3 million at March 31.

And lastly the cash flow from operations we actually used about 700,000 in cash in the first quarter and that was down significantly from a year ago where we used just about $2 million. So significant progress here in the financials mainly because of the LogicMark contribution and in the revenues being generated to WorldVentures.

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

Gino Pereira

Thanks very much Vin. So as we look towards the balance of the year and what the Fit Pay acquisition also means to NXT-ID, I think what you'll see from us is much more of a concentration around the theme of IoT. Really all the parts of our business touch on IoT in some way shape or form. The Flye Card is an IoT device.

It is connected to a smartphone and IoT is all about connected devices.

Fit Pay comes with payment technology that can be put on many different types of IoT type devices, some of the authentication technologies that we have we believe will be very essential to ensure security around IoT transactions and LogicMark first devices of the future will absolutely be wearable devices that are connected.

So in terms of the theme and direction of the business, we'll actually see a consolidation around the IoT theme and we'll continue to develop that and grow that both organically and through acquisition. So with that, I'd like to actually introduce Mike Orlando to tell us all about Fit Pay and his thoughts for the future with NXT-ID..

Michael Orlando

Thanks Gino. Good afternoon everyone. Pleased to join my first call as part of NXT-ID and we’re very excited about completing the business combination here in the last couple of weeks.

So we further believe that the combination of NXT-ID and Fit Pay will create comprehensive platform to bring essential services to the quickly standing market of Internet-of-Things including payment, security authentication and other co-offerings.

As we look out into the market, there are nearly 5 billion connected devices out there today and that’s going to go five-fold to over 20 billion by 2020. If you look just inside the wearable space, that market will grow to over 500 million devices in that same time period with 65% of those having payment capabilities.

So the collective opportunity will have enormous potential and we believe leveraging the shared resources of our two companies will help position us to make quick inroads in terms of market share and adoption. For those who are not familiar with Fit Pay, our platform is build to solve three major challenges for wearable and IoT OEMs.

Device manufacturers in this really highly competitive markets facing key challenges lending that although there are consumers who own a device, stop using it within six months, they simply get bored with the limited functionality of these devices currently have.

At the same time those features are become quite commoditized and they get increasingly more difficult for an OEM to help differentiate their product from others out in the market. And then third, there is not a real attainable way for them to create recurring revenue streams from their devices.

And so they really have one time at the Apple once they sell their device and yes the next goal is, how to get the person to buy that next instrument from here, the next new device.

And so creating essential capabilities like secure contact with payments and authentication to resist cannot solve all of these problems but the main area of OEMs is that there is really no easy way to enable these services. They are extremely difficult and expensive to implement.

If you just look at the technical and commercial relationships with the card networks and issuing banks, they are very difficult to negotiate and can take up 18 months or more to complete. Now the Fit Pay platform enables OEMs to offer these essential services that are build brand loyalty and make their devices indispensable.

They also provide access to new markets by tying all of these services to other enterprise companies looking to cost promote services and other applications. And at the time we enable avenues for them to create recurring revenue streams by directly monetizing their devices customer base with recurring revenue transactions.

Hopefully lot of this has been to make it really easy and acceptable to integrate to our service with a strong develop of friendly tools and documentation.

At the same time, we’ve been busy over the last two and a half years building a strategic ecosystem with partnerships that include all the major card networks today and technology providers such as GMV, one of the leading provider in mobile security solutions and all of the major secure element and SE provider such as [indiscernible] NXP.

By creating both the technology and infrastructure relationships, we've lowered the barrier that once faced all of these OEMs allowing them to add contact with payments and other secured searches at a much faster pace and at significant lower cost. So we’re in the process of integrating our first group of OEMs to our platform.

Some of these include a number of premier brands that you’ll recognize. We anticipate those products announcements to occur in the third and fourth quarters of this year to coincide with their product shipments.

As I said earlier, our team is extremely excited to join NXT-ID and we look forward to buying capabilities bringing unique highly competitive products and services to royalty market. And with that, I’ll turn it back over to Gino..

Gino Pereira

Thanks very much Mike. So we're very definitely excited about the future contracts that we expect to start shipping before the end of the year and all the development that we have with new products in front of us. And so I think that at this point we could open the call for questions please..

Operator

[Operator Instructions] Our first question will come from Brian Kinstlinger with Maxim Group. Please proceed..

Brian Kinstlinger

Can you talk about where WorldVentures is in their process and who might be using the cards right now during the testing process?.

Gino Pereira

Yes, certainly. So during their testing process WorldVentures actually has seen that their adoption of new members when they're testing with providing them with the Flye Card is significantly higher than without using their traditional marketing methods. So that's very positive.

We all want the product to be the right product, the complete product when it's launched to GA because the volume is so large I mean 500,000 members that we can't really - nobody wants to make a mistake.

So that being properly cautious in how this is rolled out, there are several thousand users out there that are beta testers, that are providing us with feedback and we also continue to add certain functionality on the card that’s taking some time.

So for instance NFC capability requires the approval of payment networks and that’s something that we don't have control over. So as we go through we’ve got our FCC approval from the FCC so we've ticked that hurdle, their app - continues to be developed and is working well right now.

And so as we get these various approvals that make the card closer to 100% functionality that will be the time that they will then move into a more general launch..

Brian Kinstlinger

And Gino do you think that’s three months from now, is it six months from now when do you kind of see in your estimation a timeframe for all the - I'm not sure you call it bugs but all the functionality to be added so that they’re comfortable with their launch go forward?.

Gino Pereira

I think it’s a 2000 - again some of these things are in the hands of payment networks that have schedules and other folks in the queue as well. So I think from our standpoint we believe it's a 2017 event so sometime this year..

Brian Kinstlinger

And then can you talk about how much revenue you generated from World in the March quarter.

And then is that expected to stay relatively even throughout the rest of the quarter this year or will it fluctuate significantly?.

Gino Pereira

So, we basically generated about $2.5 million in the last quarter from shipments to WorldVentures and we expect - so we don’t normally project numbers just because of the state of development we’re in but just in very general terms we would expect something similar in the second quarter.

And then beyond that it really depends on what the launch phase is. So there could be a gap and then when it's launched they could be a spike in revenue depending on when they order it. They could be a spike if they would sooner rather than later.

So that's part of things that depends on the approvals, but generally my expectation through the next quarter is probably a similar type number..

Brian Kinstlinger

And then can you maybe talk about the pipeline of customers in that same business I mean what are the prospects of adding a second or third large customer for smartcards this year in 2017?.

Gino Pereira

So the way that we look at our business is not specifically smartcards right, so what we look at ourselves at is the ability to provide OEM manufacturers or to brand product for distribution companies that fulfills a particular purpose for them. So, I don’t necessarily think that we would have additional smartcard customers in that format.

However, we are actively working on the number of very significant - with a number of very significant players talking about potentially slightly different form factors which may be much more IoT type based, might be a watch, it may be something - something of Wocket type platform, may be a ring.

So we’re exploring different form factors that provide the same type of functionality and it really depends on the use case for each particular company. So we are in - actively working on with several of them and my expectation is to have at least an additional success before the end of the year..

Brian Kinstlinger

Lastly, I'm curious as you see it for your existing core business what are the one or two key benefits that that core business is getting from the acquisition of Fit Pay?.

Gino Pereira

When I said that the next idea is really kind of centering around IoT because that's really where our core competencies are, and our technology really lends itself into that space. And IoT is really - we’re at the forefront of IoT development today.

So it's unusual and that - we’re now in a situation where we have product that’s available for sale which a lot of IoT companies don't, they’re still very much in development and that’s where Fit Pay brings to us is a platform that is approved by major credit card vendors and are ready to go today that cuts an awful lot of development time, they bring some really, really good relationships with major financial players and it puts us - it really accelerates our timelines into that market, again notwithstanding the fact that we think we’re getting a terrific group of folks as well, it really helps us to accelerate our development timeline and will allow us to stay in front of this IoT revolution that we see going on..

Operator

[Operator Instructions].

Kris Tuttle

Yes, I’m on the call but I think I’m on the speaker line, so I can’t see the star one. This is Kris Tuttle can I just ask a question or two..

Gino Pereira

Go ahead Kris..

Kris Tuttle

Okay. So I had two, one strategic, one is a lot more tactical. Let me start with the tactical one, the stock has had a lot of interest and over 5,000 followers and a lot of different platforms as the company has gone through I would call it let's say the development phase.

And now that you're kind of a more mature company generating revenues and profits there's a lot of interest in the stock in particular in terms of the debt financing and the prospects for further dilution or in fact may be the opposite.

Can you talk a little bit about how you will look to manage the stock outstanding over the next 12 or 24 months to start to maybe reverse the trend of increasing share count or at least a perception that it’s difficult for people to own the stock longer term because of financing and things like that?.

Gino Pereira

Sure, that’s a good question. So there are couple of things let me take the - probably the easer one initially.

So these are one really surrounds the debt facility that we have which is fairly high interest debt so with our improving operations we’d probably seek to come to an arrangement to refinance that at lower interest rate which we think will increase cash flow fairly significantly. So that is one of our action items for 2017.

As far as the financial structure of the company is concerned, certainly - as a developing company and needing to raise money, some of the structures that we entered into were not particularly ideal.

One of which is that we do have a convertible preferred shareholders and by nature - and who are not long-term investors so by nature of that type of instrument they are fairly consistently selling into the market and that may or may not with other action have an impact on the stock price.

I think our ideal, now that we are moving forward we've got some real momentum behind us in terms of development and business is to seek a financial structure that is more applicable to a growing company with more fundamental investors et cetera. And to potentially remove - or to redeem what's left of some of the preferred stock.

So I think that's something that would definitely make sense for us. The practically how we go about that and the timing is something that we're working through.

So in terms of your dilution question, I think that if we raise cash to repurchase the preferred stock then that's obviously dilution, but in way it’s not because it's the stock that would have been converted is not.

But I think the important thing - where the share price is right now I really do not believe that it reflects the value of the business. And so I think that if we can improve the capital structure over the next several months, we will at least put the company in the best position for its value to improve and that may mean some dilution.

But I think that in the long term it's a more sound structure, financial structure for the company going forward..

Kris Tuttle

So you think that you got opportunity to start to paydown that high cost debt and possibly do a financing that would take out the preferred although in the short-term that would add more common share so I just want to make sure I heard that right..

Gino Pereira

That's definitely one of the things that we are considering right now. But when we say we are at more common, we save the shares that would have issued had - if the preferred shareholders convert into common right..

Kris Tuttle

It might benefit in terms of limiting the share count?.

Gino Pereira

Right..

Kris Tuttle

Okay.

Yes, you can appreciate these folks who watch the company and make great strides fundamentally and unfortunately not reflected in the share price largely because the others won't have there?.

Gino Pereira

No I understand it's something that we look at every day and it's just something that we have to take a strategic - or I guess it’s a kind of tactical, this is more of a tactical topic but the company needs to be in a particular position to be able to attract the right type of investors to be able to do that because what we certainly don't want to do is to continue the current situation..

Kris Tuttle

My second question is little more on the strategic side. So Fit Pay, great technology, great platform, terrific uptick in terms of how much quality management you guys have.

Can you - I’m not asking for guidance here but I’m thinking what I’m looking for is, as you guys look at the combination and look out a year or two give me a feel for the kind of revenue opportunities you see being possible now that the companies are coming together just to give us some color around what types of opportunities you would like to pursue over the next 12 or 24 months and what those look like in terms of shape or size or color?.

Gino Pereira

So I think that what Fit Pay brings to the table is as I said today is the way to instantly put even technologies on multiple IoT wearable devices. And so it's not just a payment device on a watch. There are multiple situations where that can be combined with authentication type technologies in a band.

So we could see - one use case would be for instance sports arenas or concert arenas where concertgoers would have a Fit Pay band on them that would allow them a special access through a terminal - through NSC, they would be positively identified and then have the ability to buy concessions inside the stadium just by using the band and it’s secure because if it was lost they could then turn off that capability.

So that’s one particular, one specific example.

Fit Pay has a great arrangement with MasterCard on prepaid cards and so a prepaid wearable device could be an ideal way for kids, for parents of college kids or even high school kids to put him on allowance and give him a device where the parents just tops up the money and when it's gone it's gone, but you know exactly how much your kid is spending.

And maybe we can come up with an app to find out what they’re spending it on, but that’s something a little different. But in any case - so there is so many use cases for this type of technology in the future that I really see it as being just wide open.

And so it’s really for us to identify the low hanging fruit just be very concentrated directed to go down and pluck that and turn that into avenue..

Kris Tuttle

Okay.

I mean the one thing that I would just encourage you think about is how you might communicate some of the activities you guys are engaged in over the next few quarters in that area to kind of give us some more concrete feelings about how that technology may play out in 2018 - just of going way comment on that?.

Gino Pereira

That's a valid point and I know that - and I certainly heard from shareholders that they haven’t always been happy with our ability to communicate through press releases part of that is because of just short staffing management, running around trying to get business done.

Part of this sometimes a lot of this has a long gestation period and - there’s not always news to release. However, now that we have really three companies in the group with LogicMark, Fit Pay as well as NXT-ID, so one of the spin-offs from the Fit Pay combination is that we’ll be announcing that - we will have a Vice President of Investor Relations.

His name is Chris Orlando and he has an experienced executive in that field. And so his task will be to improve communications with shareholders and definitely do a better job than I have in the past. So we’ll get back going fairly shortly..

Operator

Thank you. And I’m showing no further questions at this time. So now I'd like to hand the conference back over to Gino Pereira, Chief Executive Officer for closing comments or remarks.

Sir?.

Gino Pereira

I would just like to thank everyone for giving us their time today and I hope it’s been useful and informative and onwards and upwards we’re excited for the future. Thank you very much..

Operator

Ladies and gentlemen, thank you for your participation on today’s conference. This does conclude the program and you may all disconnect. Everybody have a wonderful day..

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