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Edited Transcript of NXTD earnings conference call or presentation 19-Nov-19 9:10pm GMT

Q3 2019 NXT-ID Inc Earnings Call

MELBOURNE Nov 26, 2019 (Thomson StreetEvents) -- Edited Transcript of NXT-ID Inc earnings conference call or presentation Tuesday, November 19, 2019 at 9:10:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kevin O’Connor

Nxt-ID, Inc. - President of Logicmark

* Vincent S. Miceli

Nxt-ID, Inc. - President, CFO, CEO & Director

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Conference Call Participants

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* Michael Keelan Diana

Maxim Group LLC, Research Division - MD

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to the Nxt-ID IR Update Webcast and Conference Call. (Operator Instructions) Please be advised that today's conference may be recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. Vin Miceli, CEO. Thank you. Please go ahead, sir.

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Vincent S. Miceli, Nxt-ID, Inc. - President, CFO, CEO & Director [2]

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Thank you, Dan. Good afternoon, all, and thank you for joining our call today to discuss Nxt-ID's unaudited financial and operating results for the 9 months and 3 months ended September 30, 2019, and to provide a general update on the overall business.

During this afternoon's call, we 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 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, I'm sorry, on such statements.

So again, thank you for joining the call today. Very excited to be here and to give you an update. Again, Vin Miceli here. I'm here today with Kevin O'Connor, President of our LogicMark operation. And the format for today's call will be as follows. I will provide a brief update on the third quarter financials. I'll then turn the call over to Kevin, who will provide an update on the status of the LogicMark business. I'll take the call back and describe briefly the sale of Fit Pay and our initiatives on a post-Fit Pay basis, where we see the business going, what initiatives have we put in place, et cetera, et cetera.

So with that, I'd like to get started on the third quarter highlights and review those with you. Revenue from our continuing operations for the 9 and 3 months ended September 30 came in at approximately $13.1 million and $4.4 million, respectively, up slightly in both periods as compared to 2018.

The gross profit from our continuing operations for the 9 and 3 months ended September 30 was approximately $9.9 million and $3.3 million, respectively, compared to $9.5 million and $3.2 million for the same 2018 periods. The gross profit margins continue to be well in excess of 75% -- or I'm sorry, in excess of 70% or right around 75%, which is just very, very strong.

Operating expenses from continuing operations for the 9 and 3 months ended September 30 were approximately $8.1 million and $2.6 million, down versus the prior period from $8.6 million and $3.0 million for the comparable '18 periods. Operating income from continuing operations for the 9 and 3 months ended September 30 was $1.8 million and $0.7 million, respectively, compared to operating income of $0.9 million and $0.2 million for the same 2018 periods.

And so on a sequential basis, what we've seen is that, quarter-to-quarter, the company has made strides in terms of generating additional operating income. Now it was a little bit flat in Q2, mainly because of the expenses related to the Fit Pay -- the attempted Fit Pay spin-off. But nonetheless, sequentially, we are making progress. And it confirms in our minds that a lot of our efforts are starting to show results through the financial statements, which is obviously very important.

From a non-GAAP -- on a non-GAAP operating income basis, which really, in essence, is adjusted EBITDA, our continuing operations generated $2.9 million and $1.1 million of non-GAAP operating income, which was up substantially from $2.3 million and $0.6 million for the comparable '18 periods. So I think really, really showing some strength there. And it's interesting to note on -- this is an interesting statistic or metric, if you will, at least 1 that I use quite a bit. And I think if you look at our overall loss per share, the expenses that we incur that are really noncash-related comprised like $0.04 of the $0.11 that we had in loss per share. So I think it's very important. This is an interesting metric that I think is very important to take note of.

And lastly, as it relates to our income statement, I'd just like to explain briefly. I know in the third quarter, our interest expense versus the prior year 3 months was up considerably. And just like to explain so everybody understands what the drivers there were, 3 things mainly. One is that the debt -- the term loan debt that we currently have is about 1.2, 1.5 basis points higher than what it was under the previous term loan facility.

Secondly, we had prepaid a big chunk of term loan facility in the third quarter with the proceeds that we received from the Fit Pay sale. And so under GAAP, we were required to accelerate the amortization on the noncash interest expense component. And that was roughly about $280,000 in the quarter. And then lastly, when we made the prepayment in the third quarter, we incurred a 7% prepayment penalty by the lender. So that was also part of interest expense in Q3. So that will sort of bridge the large increase there in Q3 this year versus Q3 last year.

Moving over to our balance sheet. Just a couple of key things that I want to make mention of and draw your attention to. One, obviously, the cash came in at about $1.35 million, very pleased with that number. It shows strength in the business and strength in our cash flow management. Also, inventories were up at September 30. We had -- at LogicMark, we had received some large inventory shipments right at month-end or quarter-end, I should say, and that was really the main driver there behind the increase in inventory.

Interestingly enough, we had a very solid October -- month of October. Revenues were well in excess of $1.5 million. And so the inventory levels are interestingly enough right back down to where we would expect them. So interesting how that goes. And cash, by the way, at the end of October was right around $1.5 million as well. So just a continuing strength and confirming in our minds that we're making progress here.

In terms of accounts payable, really up mainly because of the inventory that we received at the end of the month at September 30. And the other big item certainly is the delevering of the debt, which is near and dear to my heart here. We -- since the beginning of the year, we're able to take debt down by about $3.3 million. And just a real testament to everybody's effort here. And mainly, a large part of that delevering came with proceeds received from the sale of Fit Pay. We were able to delever about $2.5 million of our debt. The rest of it was paid with cash flow generated from operations. So again, I think, a good indicator and, certainly, I'm very focused and encouraged by the performance there.

And lastly, on the balance sheet, stockholders' equity, obviously, dipped significantly. And as I'll talk about a little bit later in the call, we obviously sold Fit Pay, and we recognized a fairly significant loss -- noncash loss, I should add. So that is really the primary driver behind the reduction in stockholders' equity.

Moving over to our cash flow statement. I just want to highlight 2 key areas that I think are of real significance and the first being net cash provided by operating activities from the continuing business. This year, we generated about -- I'm sorry, for the first 9 months, I should say, we generated about $1.5 million in operating cash flow, whereas last year, for the same time frame, we actually used $800,000. So that's a flip of about $2.3 million, which is really, really significant. And so I think it's, again, a confirmation that things are getting a little bit brighter for us. And then lastly, to what I've already alluded to, the cash from financing activities clearly reflects the paydown in debt, which I think is critical to building shareholder value on a go-forward basis and really helping to minimize our interest expense going forward.

So with that, I'd like to now turn it over to Kevin, who will provide us with an update on the LogicMark business. Kevin?

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Kevin O’Connor, Nxt-ID, Inc. - President of Logicmark [3]

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Yes. Thanks, Vin. So I'll give kind of a brief overview of the business. I'm not going to go into the financials, obviously, as Vin really touched on them, with LogicMark really being the bulk of the financials within the business. So overall, the LogicMark core business continues to perform really well. There's strong fundamentals. The business, really the entire time that we've been part of Nxt-ID, has performed well. And we've got a strong position that we can build from. So volume remains strong, strong gross profit that Vin touched on, and profitability continues to be very good.

One of the things that we've always been pretty focused on and even more so now is the operational efficiency. It's excellent. And as Vin took over as CEO, Ken, who runs our Louisville operations, and I have been working with Vin, to really take a look at all expenses across the business. So even though we think we've operated really efficiently, one of the things we're really focused on is to literally go line item by line item and look at the fact that everything that we're spending that we're putting it in the right areas and that we're looking to get a return on that.

So we're going through that process now and are optimistic that we can allocate the resources into the right areas to give us the best return, manage our costs, while at the same time, we want to be focused on maintaining a high level of customer support because that's really important. We've got a strong reputation with the customers that we serve of taking good care of them. So we want to make sure that, as we're looking at cost reductions, that we're not cutting too far or cutting in the wrong areas where it's going to impact the level of service to the customers. So we want to make sure we can continue to build on that.

The one thing I'm pretty excited about is, as we've gone through these changes recently is, we now are at a point where I believe that we're going to be able to invest in LogicMark in the right area. So we've got a strong core business. We think that there's good future opportunities. And it's really a matter of being able to invest in the right areas to build on that. And I think we're in a position right now where we can strategically drive the right initiatives and put the resources into the right areas.

So a big part of that is Vin and I've been working really closely with our engineering and product development team to focus on the NPI to make sure that, number one, we're developing the right solutions for the right markets, and that we don't have so many projects going. We've had a lot of things that have, in many cases, been distracting in the past. We're able to really focus on the things that need to be developed and get them delivered because with so many projects in the pipeline, it was difficult to get them out in a timely manner. So working with engineering and product development, looking to streamline that whole process.

And overall, our focus is really to just continue to build on the strong business and target the NPI investments to get the products designed and released, to take care of the core business that we have, but then also look at broader markets, so we can expand our core. But we think the overall space that we serve today as far as personal emergency response, there are opportunities, and we want to make sure that we've got the right solutions being developed and delivered into the market. And everybody is working in the same direction to make sure that, again, we're putting the resources in the right areas to deliver on that.

So with that, Vin, I'll hand it back over to you, and you can go through the additional details you'd talked about.

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Vincent S. Miceli, Nxt-ID, Inc. - President, CFO, CEO & Director [4]

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Sure. Thank you, Kevin. Thank you. And so, next, I'd like to spend a little bit of time and chat with the investors and the group that -- about the sale of Fit Pay. And I just want to clear up, if I may, if there's any -- we've tried to do a very good job in the external filings, describe what transpired as it relates to the failed spin-off and the ultimate sale of Fit Pay. And so there's a couple of points that I really just want to make sure that everybody is aware of and understand, so that there's no confusion or what have you. And so I think it will just make for a much cleaner, much clearer picture for everyone.

And so back in May, when we went through the refinancing of the company's term loan facilities, the lender that we currently have -- and, certainly, the previous lenders were very concerned about how the cash flow generated from LogicMark was being allocated to the remainder of the business. And so one of the things that was -- became very, very clear was that they -- the lenders wanted to limit the amount of time that it would take in an effort to minimize the amount of cash that would be used elsewhere within the business. And so when we entered into the agreement, the agreement allotted the company 60 days from the effective date of the term loan facility to effectuate, if you will, the spin-off. And so it was 60 days.

And then if the 60 days lapsed and we were not able to complete the spin-off in that time frame, we had an additional 30 days in which we would be required to look for a suitor for the business. So as we got to the -- once we got the refinancing completed and we had the Form 10 file, we were looking to gain bridge loan financing for Fit Pay, and it was quite difficult. What we were finding was we could not gain a lot of traction, and the financing that we were being presented with didn't appear to provide Fit Pay with enough runway to continue on its growth pattern.

And so it really brought into -- and very importantly also was that around the midsummer July, late June, early July time frame, the markets -- the financial markets were starting to soften, if you'll recall. And it made it more difficult to get term sheets that we believed was -- were conducive for Fit Pay to really be successful and to really work with. And quite honestly, it brought in a lot more questions as to whether or not we would be successful bringing Fit Pay public. And so with all of that going on, it was clear that we were not going to be able to get this done in the time allotted by the lender. And so ultimately, we, as you all know obviously, we completed the sale. On September 9, we sold the business to Garmin for roughly $3.3 million.

And so I mean if there is a silver lining here, and I think back on this all the time, I believe that if there is any good news, we were able to take a big chunk of the sale proceeds and delever the business going forward, which should really help the business going forward. And secondly, we obviously don't have the cash requirement -- the operating cash flow requirement that Fit Pay would require.

So I think what's very important is that, as Kevin alluded to, what we did was, after -- on a post-Fit Pay basis, what we did was we really paused for a moment. We went back and we really said to ourselves, "What do we really need to do here to regain shareholder confidence? And what do we really need to do here to position the company in such a way that we could really position ourselves for future growth and really enhance the value of the business?"And what we came away with -- and I know it will sound very generic and what have you, but saying it and doing it are 2 very distinctly different things, at least in my mind. And so I feel compelled to tell you that we broke it down into 3 phases. And Kevin's already alluded to this, so I may sound a little bit redundant, but I think it's worthy of mention again. And so we really boiled it down into 3 basic components. One, how do we rightsize the remaining business? What additional expenses can we take out of the business without harming the business? And really, the basic underlying premise that we used was if we cannot correlate the expense to incremental revenue or to enhance profitability, chances are we probably shouldn't be doing it.

And so as he alluded to, we went line by line -- P&L line-by-line item and really scoured the P&L. And I think we've been very, very successful and -- in that regard. And then, secondly, we have a size -- as our financials would indicate, we have a sizable investment in our R&D efforts. And so one of the things that we view as critical to our future growth here is really getting engaged and really gaining an understanding of what these new product initiatives are really doing and what benefits will they bring to us in the future. And so we're still -- that's still a work in process. And I hope by the time we get to the annual meeting in mid-December, that I can certainly provide you with a more robust description and provide more clarity on where that's all going and where I see it going in the future.

And then, lastly, and certainly not least, making sure that we have a vehicle in place to continue delevering the debt. Being a finance guy by trade, I feel like that's the -- probably one of the most important things to do. And so especially with 13% debt, it's quite pricey. And so that's obviously very important, very important to all of us as we go forward. So that's the approach that we took, and we're working through that. So far in the roughly 2 months, I think, we've been very successful doing a bunch of modeling and pro forma calculations. And I absolutely positively -- I mean I can't go into too much of the detail, but I can tell you that, essentially, the financial statements are in a complete -- in my estimation, in a complete transformation. So I think as we get to -- head into 2020, we'll be quite pleased with the overall results.

And so what I'd like to really convey here is that I just want to make sure that everybody is onboard with this. I just want to convey that LogicMark, in my estimation, is a very solid company that, as everybody knows, has a very unique, very niche market space that it sells its products into. And as Kevin pointed out -- and he's obviously very correct in it, and if you look at our financials, it comes across loud and clear, it's one of the key highlights in what we've presented in the recently filed SEC filings is the margins at the gross profit level and at the operating income level are just, in my estimation, great.

And I think that, coupled with the fact that we've made considerable reductions in the overhead -- the SG&A overhead, I think those items, coupled with the delevering that we've done in the future interest savings, I think it really positions us well for future growth. And so I feel very compelled to tell you that I'm very encouraged by the results that we have made. I think we have a long way to go. I certainly don't want to give anybody any false expectations. That's not the intention. But the intention is to convey that I believe we're on the right path. I believe we're doing the right things and hopefully on our way back to gaining some shareholder value.

From a financial perspective, I've kind of laid out what I think our top -- 4 or 5 top financial priorities will be as we head into next year and beyond. And again, I can't stress it enough. I want to continue micromanaging cash. I think it's probably the single most important thing we can do for this size of a company and critical to our future growth. And again, as Kevin pointed out, we're really looking at all of the P&L line items. I really want to be disciplined, and we're trying to instill that throughout the organization, be very disciplined when it comes to spending, make sure that we're going to get some return for whatever it is we're spending the money on.

One other thing I'd like to really focus on as we head into 2020 is what can we do to -- right now, we have a working capital deficit. And the way I kind of look at that working capital deficit is a big chunk of that is attributable to the schedule term debt, which, so long as we're making our payments, I really kind of carved that out of the equation. So whatever that residual amount is I'd like to really make strides in reducing that as much as we possibly can. Also, we have a fairly large reduction in Q3 to stockholders' equity. I'd really like to begin to, as we go forward here, begin rebuilding the stockholders' equity with positive earnings. And last, but not least, as I mentioned earlier, continue to delever the debt.

And so with that, I'd like to just mention at the upcoming meeting -- annual meeting, again, I'd like to -- I look forward to meeting many of the shareholders. I would really like to meet with you and provide you with an update on our efforts thus far and also, as I mentioned earlier, provide more clarity on where I see the new product initiatives going -- where Kevin and I see the new product initiatives going and where we think the company's growth will come over starting in 2020 and beyond.

And so with that, I'd like to open it up for questions, if I may.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Michael Diana with Maxim Group.

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Michael Keelan Diana, Maxim Group LLC, Research Division - MD [2]

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Well, first of all, congratulations on becoming CEO. Based on your -- the presentation you just gave, you certainly have hit the ground running, I'd say. Let me ask you 1 thing, just to confirm really, because I think I know the answer. On the sale of Fit Pay to Garmin, was that a clean break, meaning there are no contingent liabilities, expenses or anything else?

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Vincent S. Miceli, Nxt-ID, Inc. - President, CFO, CEO & Director [3]

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That's correct. It was, to use your phraseology, a clean break, and there were no future obligations on the part of Nxt-ID.

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Michael Keelan Diana, Maxim Group LLC, Research Division - MD [4]

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Right. And Michael Orlando's claims have all been taken care of in that sale. Is that right?

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Vincent S. Miceli, Nxt-ID, Inc. - President, CFO, CEO & Director [5]

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Yes. As I mentioned, we completely repaid the seller note at the time of the Fit Pay sale to Garmin. We -- I believe, if my mind serves me correctly, we paid about 400 in -- I want to say it was either 480 or slightly below that, and that basically repaid the entire seller note. And we took $2 million of the proceeds, Mike, or thereabouts, and delevered the term loan facility.

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Michael Keelan Diana, Maxim Group LLC, Research Division - MD [6]

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Right. Okay. And then, obviously, one of the problems before is you were burning a lot of cash or Fit Pay was. So do you have any estimate of like how much per month you're saving by not having Fit Pay?

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Vincent S. Miceli, Nxt-ID, Inc. - President, CFO, CEO & Director [7]

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Yes. I think it's -- you could derive it -- you can pretty much derive it, Mike, by looking at the financial statements and looking at the loss from discontinued operations. But on average, I think it's safe to say that the cash burn at Fit Pay was anywhere between $250,000 and $300,000 per month. And as we were getting closer to the sale date, that number was significantly higher.

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Michael Keelan Diana, Maxim Group LLC, Research Division - MD [8]

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Okay. And in the -- in your press release, you mentioned a savings of $380,000 from interest expense. That's cash savings, right?

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Vincent S. Miceli, Nxt-ID, Inc. - President, CFO, CEO & Director [9]

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That's all cash savings, absolutely. And again, we have very -- for lack of a better way to put it to you, our term loan facility, Mike, is quite pricey. And we pay upwards of 13% on the money. And so when you take the $3.3 million of delevering that we had through the first 9 months and you basically weight the seller note, which had a lower interest rate than the 13%. But when you blend that all together, the savings -- the annual savings approximates $380,000. Now also keep in mind that we will take down the term loan facility by roughly another $600,000 in Q4. So as we head into 2020, we'll have a much reduced cash pay interest on a prospective basis, which is obviously pretty important to us.

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Michael Keelan Diana, Maxim Group LLC, Research Division - MD [10]

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Sure. Sure. And you mentioned a prepaid penalty. How much was that approximately?

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Vincent S. Miceli, Nxt-ID, Inc. - President, CFO, CEO & Director [11]

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So yes. Included in the current term loan facility, any prepayments that we make in year 1, we have to pay a prepayment penalty of, I believe, it's 7%. So when we paid down the $2 million, we ended up paying about $140,000 in prepayment penalty, which, as I alluded to before, pointed out, it's part of our interest expense in Q3.

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Michael Keelan Diana, Maxim Group LLC, Research Division - MD [12]

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Sure. And won't be there in Q4, right?

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Vincent S. Miceli, Nxt-ID, Inc. - President, CFO, CEO & Director [13]

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Right.

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Michael Keelan Diana, Maxim Group LLC, Research Division - MD [14]

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Okay. And I know you had an office in Florida. Do you intend to keep that office?

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Vincent S. Miceli, Nxt-ID, Inc. - President, CFO, CEO & Director [15]

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No. So we're just in the final stages of terminating the lease agreement. That was one of the first things that I attempted to do. It won't be a huge savings, but nonetheless, we weren't getting a lot of use out of the property. And so, again, nothing worse in my mind than wasting money. So I think that closing that will go a long way for us. And essentially, we'll save roughly -- all in, we'll save about 15 -- I believe it's 15 or 18 months of rent. And so not a huge deal, but still significant in my mind and very important. We're not wasting dollars that we could put to a better use.

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Michael Keelan Diana, Maxim Group LLC, Research Division - MD [16]

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Sure. Okay. And last one for me. You say in the press release, you're very optimistic about the remainder of 2019. Certainly, you discussed the expenses at length. And I guess, you also -- but as to revenues, you also mentioned October was a good revenue month. So you're also optimistic about the revenue?

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Vincent S. Miceli, Nxt-ID, Inc. - President, CFO, CEO & Director [17]

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Yes. I certainly can't -- I can't speak to what the quarter will look like, Mike. But having October in hand, I think if October is any indication, we had a very strong October. I think if my mind serves me correctly, revenues came in at about $1.540 million or $1.550 million, somewhere around there. But very strong and very encouraging, in my mind. So if that's any indication, we should have a good fourth quarter, but I certainly can't. It's basically a book and burn business. There's not a lot of backlog in the pipeline, so it's very difficult to predict where revenues in the quarter will shake out. But we certainly had a good start to Q4, and I'm pretty happy about that.

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Operator [18]

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(Operator Instructions) And I am not showing any further questions at this time. I would now like to turn the call back over to Vin Miceli for any further remarks.

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Vincent S. Miceli, Nxt-ID, Inc. - President, CFO, CEO & Director [19]

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Thank you, Dan. Thank you, everyone. I, again, thank you very much for being patient with us and giving us a couple of months here to get on the webcast with you and give you an update. I'm positively encouraged by our efforts thus far, and we basically are trying very hard to make improvements here and get back on the right track and build shareholder value. Again, I look forward to seeing some of you at the upcoming annual meeting, really look forward to meeting some of you in bringing and providing an update on where we currently are and where we'll be with -- as we head into 2020. So again, thank you, and have a very good afternoon. Thanks.

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Operator [20]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.