Identiv, Inc.

Good afternoon. Welcome to Identiv's presentation of its first quarter 2024 earnings call. My name is Matthew, and I'll be your operator this afternoon. Joining us for today's presentation are the company's CEO, Stephen Humphries, CFO, Justin Scarpullo, and President, IOT Solutions, Kirsten Newquist. Following the management's remarks, we will open the call for questions. Before we begin, please note that during this call, management may be making references to non-GAAP financial measures or guidance including non-GAAP-adjusted EBITDA, non-GAAP gross margin, and non-GAAP operating expenses. In addition, during the call, management will be making forward-looking statements. Any statement that refers to expectations, projections, or other characteristics of future events, including the pending asset sale transaction, future business and market conditions and opportunities, and future plans and prospects, including with respect to the transaction and identities post-closing business, is a forward-looking statement. Actual results may differ materially from those expressed in the forward-looking statements. For more information, please refer to the risk factors discussed in documents filed from time to time with the SEC, including the company's latest annual report on Form 10-K and quarterly report on Form 10-Q. In addition, risks related to the asset sale are included in the preliminary proxy statement filed with the SEC April 30, 2024, and our first quarter 10-Q once filed, and will be included in the definitive proxy statement once filed. Identiv assumes no obligation to update these forward-looking statements which speak as of today. I will now turn the call over to CEO Stephen Humphreys for his comments. Sir, please proceed.

Thanks, Operator, and thank you all for joining us. The first quarter of 2024 was one of the most important in our company's history. We completed an extensive, year-long strategic review and took actions that we think will serve all of our stakeholders very well. We're divesting assets relating to our security and logical reader products for a cash price of $145 million, generating capital to invest in our IoT business. We also completed a thorough search for a new leader for our IoT business who will take over as CEO of the remaining Identiv business when the transaction closes. We believe we put Identiv on a path to realize its opportunity to create major value by investing in the growth of a key business that's increasingly central to the digital transformation of some of the world's largest industries. Now, that's a big statement, but we believe it's accurate for three reasons. The scope of the market opportunity, our competitive advantages, and soon our access to the capital and the focus and leadership to deliver on the opportunity. We'll go into details throughout the call, but first let me outline specifically what steps culminated in and around Q1. We undertook a strategic review of our business starting early last year. We looked at every combination of our business assets, including market opportunities and our competitive positioning, with one criterion. What is the highest expected value creation opportunity available to us to deliver to our investors? We looked at divesting each part of our business, including divesting all of the business. We looked at each path for capital formation, value creation, and ROI. We went in-market to assess current values and competitive dynamics. We evaluated competitive companies both to assess their strategic directions and the effect on our value creation opportunity and to assess our opportunity to realize near-term value for our assets. In consultation with our largest investor and with our financial advisor, Imperial Capital, we ultimately focused on the actions we announced last month. raise the maximum capital possible to invest in and focus on our specialty IoT business, ensure a strong balance sheet for that business, and bring on highly experienced leadership to direct this investment and navigate the company's future growth trajectory. We believe this transaction positions us to build an enduring, leading IoT company that's core to enabling the digital transformation taking place in particular across healthcare, pharmaceuticals, and medical devices, but also a critical enabler in other industries' digital transformations. In order to secure the investment for the IoT business, one of the requirements was that I join the buyer. So last year, we launched an executive search process to find a world-class leader for our specialty IoT business to take over as CEO when the transaction closes. We needed the best possible leader to take advantage of our unique opportunity to be a linchpin technology provider in the digital transformation we're targeting. We found that leader in Kirsten Newquist. Kirsten is the ideal profile to lead the business to maximize our value creation opportunity. She spent 17 years at Avery Dennison leading their medical business as well as in their SmartTrack RFID business, one of the strongest companies in the space. She deeply understands the key customers and influencers across the digital transformation of healthcare while also knowing intimately the operations of RFID businesses. She's a pragmatic and disciplined business person who also sees strategic opportunities to transform industries. She has the rare ability to define a vision and then to build and execute plans to make the vision happen. We're convinced she's the right leader for the business and to realize Identiv's market opportunity. So Kirsten will be speaking more about her background and why she chose to join Identiv after the financial review. Now, in the interest of time, we won't go through the details of our strategic assessments, executive recruiting, and everything else. So for more details, please review the preliminary proxy statement we filed last week. We've put a lot of information into it, including a thorough description of the IoT business going forward, as well as the timeline and alternatives we assessed and the basis for the board's decision to proceed on this path to maximize shareholder value. Today, we'll focus on Q1 and subsequent events as they relate to our business' future. Investors need clear visibility on the likelihood to close of the transaction and of the post-close business going forward, so we'll focus on those topics. I'll go through relevant business results in Q1 and the status and outlook for the transaction, and then after Justin's comments, I'll turn the call over to Kirsten to discuss the IoT business, her near-term priorities, and long-term vision for the business. So for Q1, our business continued on a solid footing, but there was some effect due to the ramp in activity on the transaction and recruiting our future CEO. We managed both activities, which involved key management and diligence meetings, as well as in CEO interviews and onboarding. And we couldn't disclose it at the time, but of course this was going on in Q4 as well as in Q1. So our overall business performance was consistent despite these distractions, with total revenues within our guidance range at $22.5 million, and solid gross margins. Our GAAP gross margin was 37% and non-GAAP gross margin was 40%, our highest non-GAAP gross margin since Q3 2020, reflecting margin strength in our premises segment as well as within identity readers. In premises, we also had to contend with the federal government's continuing resolution budgetary uncertainty. We've been pleased with the premises' business strength, which we think puts us in a good position to continue strongly into Q2 and for the rest of 2024. Now, notably, software services and recurring revenues grew to 27% of premises revenues in the first quarter. This reflects three other trends we saw in Q1. Strong interest in our Primus product line, cloud as an interest area in nearly all of our new business opportunities, and high interest levels in video in the federal space as we deployed demo platforms of Velocity Vision across three more federal agencies. We also continue to see growth from our newest integrators, from our smaller geographic regions, and in particular across K-12 schools, utilities, and transportation, especially in airports. Now, our identity business, which includes our access card and identity readers in addition to IoT, continue to perform consistently overall, even with the internal demands of recruiting a new leader. Our IoT team continue to build our position as a specialty IoT leader with another successful presence at RFID Journal. We also joined the Axia Institute in Michigan State, and we continued our webinar series with sessions shared with STMicro and another with NXP and Axia Institute next week. We secured a new two-year customer contract for a smart home application, and we also shipped another 5 million units to Williott in Q1. Now, as we said on our Q4 earnings call, we expect these to be the last Williott units for at least a few quarters as they work on producing their Gen 3 chip. This last batch for Williott was produced in our new Thailand facility. It demonstrated our ability to rapidly ramp up even very complicated products in Thailand to take advantage of our lower costs there for nearly all of our production over time. Now competitively, as we've expected due to the large capacity buildups by some companies that we described on prior calls, we've seen a couple of companies become aggressive on pricing. Now this capacity was added mostly for UHF products, but some of it can be applied to HF applications. This affects some of our standard lower margin products, but doesn't affect our more complex specialty IoT devices. Then lastly, our logical access readers within our identity segment performed very well. Our FIDO dual factor security keys expanded sales and pipeline opportunities, especially in Europe. In the Americas, our contactless readers are our main growth drivers, including our deployment company-wide across one of the world's largest online retailers in Q1 and Q2, and this could continue into 2024 with further follow-on orders. So, returning to our strategic transaction, in terms of timeline to close, we believe we're moving the process on the shortest possible timeline, given the statutory requirements for a shareholder vote and other regulatory processes. In terms of certainty to close, clearance of these approvals and, of course, the stockholder vote are the only major terms needed to proceed. We believe we're on a good path both in terms of timing and certainty. We're on track for the Q3 close estimate we provided, and should things progress smoothly, we have a decent shot at an early Q3 close date. That forms the foundation for our IoT business going forward. So after Justin's comments on our financial results, I'll turn the call over to Kirsten so you can hear directly from her the path and opportunity we'll be focused on. Justin, over to you.

Thanks, Steve. As Steve mentioned, in the first quarter of 2024, we were able to deliver revenue in line with our guidance range, increased company margins, and continued control over our operating expenses. We achieved these results while focusing on both our identity and premises businesses, including our cutting-edge premises products, as well as our continued build-out of our operational Thailand facility. First quarter 2024 revenue was $22.5 million, a decrease of $3.5 million versus Q1 2023. $1.7 million of this decrease was from our premises segment and was primarily related to the federal government continuing resolution that wasn't resolved until March. The remaining $1.8 million decrease in our identity segment was related to our RFID-enabled IoT products, primarily from Williott, offset in part by an increase in our identity breeder product. First quarter 2024 gap and non-gap adjusted gross margins were 37 and 40%, respectively, as compared to 35 and 37%, respectively, in Q1 2023, which included increases in both our premises and identity segment margins. Our Q1 2024 gap and non-gap adjusted gross margins reflect our continued focus on our margin profile. while continuing to increase our investments in technology and manufacturing processes and equipment. GAAP and non-GAAP adjusted operating expenses for the first quarter 2024, which include research and development, sales and marketing, and general and administrative costs total $12.6 million and $10.4 million, respectively, as compared to $11.9 million and $10.6 million in Q1 2023. First quarter 2024 GAAP operating expenses also included 1 million in strategic review related costs. First quarter 2024 GAAP net loss attributable to common shareholders was 4.8 million or 21 cents per share compared to GAAP net loss of 3 million in Q1 2023. Non-GAAP adjusted EBITDA for Q1 2024 was negative 1.4 million compared to negative 0.9 million in the prior year period. This change in non-GAAP adjusted EBITDA is primarily a result of our lower year-over-year identity revenues, which impacted the utilization of our Singapore and Thailand operations. In the appendix of today's presentation, we have provided a full reconciliation of GAAP to non-GAAP financial information, which is also included in our earnings release. Our next slide further analyzes trends by segment, beginning with identity. In Q1 2024, revenue from our identity products totaled $12.8 million, or 57% of companies' net revenue, compared to $14.7 million, or 56% of net revenue in Q1 2023. Identity segment gap and non-gap adjusted gross margins for Q1 2024 were 22% and 26%, respectively, as compared to 21 and 23%, respectively, in Q1 2023. The year-over-year increase in gross margin was primarily attributable to an increase in identity, reader, revenues, and margin, offset in part by increased overhead expenses from our Thailand operations that came online in Q3 2023. Now, turning to the premises segment. In Q1 2024, revenue from our premises products and services accounted for 9.7 million or 43% of companies net revenues compared to 11.3 million or 44% of net revenue in Q1 2023. Premises segment gap gross margin for Q1 2024 was 58%, an increase of 4% compared to Q1 2023. Premises segment non-gap adjusted gross margin for Q1 2024 was 59%, compared to 55% in Q1 2023. The increase in our premises segment related to decreases in inventory, freight, and logistics costs. Moving now to our operating expense management. Our GAAP operating expenses in the first quarter of 2024 as a percentage of revenue was 56%, compared to 46% in Q1 2023. The increase in GAAP operating expenses as a percentage of revenue is primarily related to our strategic review costs. Non-GAAP operating expenses in the first quarter of 2024 adjusted to exclude restructuring, strategic review, and severance costs, and certain non-cash charges consisting of stock-based compensation and depreciation and amortization was 46% of revenue, compared to 41% in Q1 2023. The increase in non-GAAP operating expenses as a percentage of revenue is primarily related to the year-over-year decrease in revenue, as operating expenses were relatively flat. Now, turning to the balance sheet, we exited Q1 2024 with $22.4 million in cash, cash equivalents, and restricted cash, a decrease of $2 million from Q4 2023. In Q4, the decrease in cash was a result of $1.4 million from operating activities $0.2 million from investing activities and $0.4 million from financing activities. Our working capital exiting Q1 was $45.6 million, a decrease of $3.1 million from Q4 2023. As noted previously, our cumulative strategic review costs are $1.4 million exiting Q1 2024. In our 10-K filing, we will be providing a full reconciliation of the year-to-date cash flows. For completeness, We have included the full balance sheet in the appendix of today's earnings release. This leads us to an expected Q2 revenue range of $23 to $25 million. This concludes the financial discussion. I'll now pass the call back to Steve.

Thanks, Justin. As I mentioned in our opening comments, we believe we're on track to close our strategic transactions. Once closed, the infusion of capital will fortify our balance sheet to support the growth of our specialty IoT business into what we expect to be a key player in the healthcare industry and other high-value end markets. With Kirsten Newquist's leadership and a singularly focused team, we're very confident in our opportunity to transform major industries and the value creation that will come from establishing that business position under her leadership. Now, to be clear, transforming industries takes time, particularly a regulated industry like healthcare, and requires a clear go-to-market strategic plan, laser-focused execution, and investment with a deliberate allocation of resources. Kirsten's been on board all of three and a half weeks, and she's been diving deeply into our IoT business. She's bringing in resources to build out a detailed plan, but as you'll hear, she already has a vision for strategic value creation and the path to get there from our current business position. Kirsten, welcome.

Thank you, Steve, and good afternoon, everyone. I'm very happy to be with all of you today and speak with you about the opportunity we have in front of us for the IoT business. But first, I'd like to take a moment to provide some background about myself and why I joined Identiv at this pivotal moment in the company's history. As Steve mentioned, I came to Identiv after nearly 17 years with Avery Dennison, where I started out in corporate strategy analyzing new growth platforms, including RFID. I ultimately joined the Avery Dennison Medical Division, first as Vice President, Business Development, and ultimately as Vice President and General Manager, which I led for six years with a focused and disciplined approach. During my tenure, I was able to double the sales and significantly increase the EBITDA of the business. I led the launch of many new innovative products including wound dressings and surgical films containing active ingredients, and components for wearable devices such as continuous glucose monitors, all utilizing complex coding, converting, and finishing capabilities under the strict quality and regulatory standards required to produce finished medical devices. My last year at Avery Dennison was spent within the RFID division, Avery Dennison SmartTrack. where I led the healthcare strategy and market development efforts and provided leadership to the product management team. I was familiar with Identa from my involvement in the RFID industry. My decision to join the company was driven by the opportunity to lead an entrepreneurial-oriented public company with a strong portfolio of products and solutions and an exciting and growing IoT industry. Its primary focus on specialty IoT technologies Utilizing HF, NFC, dual frequency, specialty UHF, and BLE, along with its multi-component manufacturing capabilities, sets it apart from competitors who primarily serve high-volume UHF-based applications. Its focus and initial traction in the healthcare sector was particularly interesting given my background in this space. Having worked for many years with the major players involved in the medical device and healthcare industry, I understood and appreciated the position that IDENTIF has built up to this point. It is an area where there are large unmet needs, ranging from medication non-accessibility of care from hospital to the home, the growth in personalized medicine, and the rise in large molecule drugs requiring careful temperature, moisture, and location monitoring that collectively create a growing opportunity space. As the healthcare industry embarks on its digital transformation journey, we see many opportunities for RFID-enabled solutions to become a critical asset in this transformation, including medication authentication and adherence, diagnostic test authentication, blood bag and sample tracking, smart labels for auto-injectors, and condition monitoring of critical drugs. Incorporating RFID into these products and processes provides a persuasive value proposition by reducing medical errors, enhancing patient engagement, and ultimately increasing patient safety. Let me share with you two metrics to give you an order of magnitude on the opportunity space. There are over 5 billion prescriptions filled annually in the U.S. today and over 16 billion syringes used worldwide each year. Initial market penetration in these areas represents a substantial opportunity for identity. We have already experienced interest from the industry and have built up an impressive pipeline of customer-driven NRE projects across these applications. Furthermore, these specialty solutions command higher growth margins, often in excess of 35%. While the opportunities in healthcare are vast and compelling, they tend to be longer term given the regulated nature of the healthcare industry. In fact, the industry is relatively nascent when it comes to RFID Most of these customers are at the beginning of their digital journeys and need to go through several design iterations and run multiple pilots to optimize the technology and fully understand the benefits and ROI. Once the technology is proven out, it takes time to integrate the solution into their manufacturing processes due to the regulatory and quality requirements, and then typically would be launched with a phased rollout. That said, once launched, it is usually very sticky business as the switching costs are high. We see this industry as a long-term sustainable driver of IDENTA's growth. In parallel, we will also be evaluating the opportunities in three other high-value segments, specialty retail, smart packaging, and smart home devices. As these industries do not have the same regulatory and quality hurdles, we expect their ability to adopt new solutions will be quicker than those we see in the healthcare segment. Many of the technical requirements and design features that we develop for the healthcare applications can be leveraged in these markets and vice versa, and also require custom design, rapid prototyping, and often complex manufacturing processes. We are seeing growing interest for products that we have already developed for these segments. These include our embedded and highly secure authentication tags of consumables for smart home devices, our life of garment tags that withstand the stringent wash and dry cycle requirements for garments and footwear, and our NFC-enabled smart labels for packaging to enhance the consumer experience. In summary, we will proactively go after specific applications and use cases where we know there is strong volume potential and a realistic opportunity for sustainable and predictable higher margin recurring revenue. At the same time, we will continue to support the customers and industries that are at the core of our business today and where we see opportunities to optimize our cost structure and margin profile. One of our most critical short-term initiatives is to accelerate the transition of the majority of our RFID production to our Thailand facility, to capitalize on its much lower cost structure. And we expect that effort to largely be complete by the end of quarter one, 2025. After that, our primary manufacturing will occur in Thailand with a smaller R&D and engineering focused operation in Singapore to support new product development and any customers who require more time to requalify in Thailand. As part of this process, We've begun to exit some of our very low margin business that doesn't justify the expense of relocating to Thailand, nor make financial sense to sustain once we've transitioned. The overhead incurred by maintaining dual manufacturing sites during this transition, coupled with exiting this low margin business, has and will continue to impact our revenue margins into the first half of next year. However, We're confident that our move to Thailand and the reduction of this low margin business will ultimately result in a more streamlined and efficient operation with significantly improved direct margins. I am now in my fourth week with Identiv. I've enjoyed getting to know the team, delving into the company's product portfolio, and absorbing the team's perspectives on the business's potential. The reasons why I joined Identiv are true. strong technology and engineering capabilities, a strategic position within the specialty IoT sphere, and an array of compelling products in development. It's evident to me that we have a dedicated team fueled by a passion for the business. I also see an opportunity to streamline a very wide breadth of business opportunities with the disciplined processes and strategic clarity that are necessary to drive the business towards long-term, sustainable, high margin growth. This will be crucial in realizing our long-term goals. To date, the business has struggled to fully capitalize on its potential, both in terms of revenue and profitability. That said, what this team has been able to accomplish in developing its specialized products and building its opportunity pipeline with limited resources is commendable. Over the next several months, my priorities are to complete my onboarding and business deep dives, and address two important topics. Build a plan to drive business excellence and develop strategic clarity and focus along with a detailed growth and go-to-market plan. It is imperative that our core business is focused, disciplined, and resourced appropriately so it can provide a solid foundation to build upon the longer-term opportunities we will be pursuing. To start, I'm bringing in industry-specific resources with whom I've worked extensively in the past to bring in an outside perspective and complement our internal talent to drive the business excellent initiatives and our strategic process. These consultants are standouts in their respective industries. In addition, our board advisor, Manfred Rietzler, the founder of SmartTrack, one of the trailblazing companies in the RFID space, We'll be participating in our strategic growth process, as will our two board members, Dr. Rick Kuntz, a Harvard-trained and faculty cardiologist who previously was chief medical and scientific officer for Medtronic, and Laura Angelini, who was previously a senior medtech executive with Baxter Healthcare and Johnson & Johnson. I look forward to providing you with timely updates on the development of these plans and the key milestones as we execute against them. And finally, I want to emphasize that at present, we have no immediate plans to pursue M&A. Our primary objective is to gain strategic clarity and drive towards business excellence so any future M&A will be built upon a strong business foundation and aligned closely with our strategic objectives. In closing, I'm looking forward to the opportunities ahead and to fully immerse myself in the business and my role and to meet with the Wall Street community in the coming months. With that, I'll turn the call back over to Steve.

Thanks, Kirsten. As you all heard, Kirsten has a very clear vision for the business and firm understanding of our operations. With this clear vision, after just a few weeks on the job, you can see why we're so excited to have her leading Identiv going forward. I'm personally very thankful to have found such an excellent leader to take our business forward and realize the tremendous opportunity we have. Now, before opening the call for discussion, I'd like to make a couple of personal comments. If we meet the schedule we aspire to, this may be my last earnings call for Identiv. If that turns out to be the case, I'd like to thank all of you, our investors, for your support of the business. I'd also like to thank all of our people and our customers and partners for everything we've built together. I'm confident that we've created a path for both of our businesses to thrive and grow with very exciting futures. Both businesses needed capital and focus to achieve their potential, and I believe we found the best path forward to reach that goal. In the case of the physical security business, we've found terrific partners with VitaProtekin 7.2, who are aligned with our vision, our values and culture, and our commitment to invest and grow the business. I'm very excited to work with them after the closing, and especially looking forward to continue to work with and expand our amazing Identiphysical and Logical Security team to build a truly world-leading security business. I'll miss being part of the IoT business and working with our great people there, but Kirsten's an exceptional business leader. With her vision, passion, and disciplined business approach, and with the expected capital resources on the balance sheet to make it happen, I'm confident we'll realize our vision for Identif IoT. So with that, I'd like to open the call for your questions. Operator, please open the question queue.

Certainly. Everyone at this time will be conducting a question and answer session. If you have any questions or comments, please press star 1 on your phone at this time. We do ask that while posing your question, please pick up your handset, if you're listening on speakerphone, to provide optimum sound quality. Once again, if you have any questions or comments, please press star 1 on your phone. Please hold while I poll for questions.

And also, Matthew, I'd like to add that in addition to the speakers here, Kirsten, Justin, and I, we also have Amir Khoshniadi, Dr. Manfred Mueller, and our chairman of the board, Jim Owsley, on the line. So any questions that are appropriate for them, we have everybody here to answer. So thank you again.

Certainly. Your first question is coming from Craig Ellis from B. Reilly Securities. Your line is live.

Yeah, thanks for taking the question. And Steve, if it does prove to be your last call then in a public forum. I'd like to say it was a pleasure interacting with you over the duration of the coverage. And I'll start with a question. Yeah, you're welcome. I'll start with a question for you and then move on to Justin and Kirsten. So looking at revenues, we've got revenues that were inside the range of 1Q and 2Q. We're seasonal. When I look at the year-on-year trends down I think in the low teens in the quarter, but in 2Q, I think we'll be down closer to higher teens. So can you just talk about the things that are happening inside of revenues, whether it be lingering cyclical impacts or some of the mix-out items that might be happening or even maybe on-premises some of the shift to recurring that might be impacting revenues? And do you think here in the second quarter we're at a cyclical bottom or still more effects of that to come?

Yes, so taking those from the top, as you said, there is some rotation out of lower margin business. That's one. We mentioned the continuing resolution on the premises side that did have an effect as well as the shift to recurring. And then when you're a very small company like us and you take half of the executive team a little bit off the playing field, you have some attention-focused shift there. But I think the main underlying, on the premises side, the underlying trends will revert back to the norm. On the identity side, there are some of the transitions that Kirsten mentioned in her update. that are core to how the business is going forward. Do you want to add anything to that?

No, I think you've answered it adequately.

Okay. Moving on to more of a financial question for Justin. Justin, really impressive 10 quarter high gross margin in the quarter. Were there any one-time items in In either of the segment numbers and on OpEx, since there was deal costs that inflated 1Q, at least in the gap numbers, do those mix out in 2Q? And how do we think about some of the intermediate trends for OpEx beyond just what we saw in 1Q? Thank you.

Sure, I'll take that one from the top as well. From a margin perspective, there was not a one-timer within either segment that boosted up our margins. We did start to see, and we noted it in my commentary as well, that identity readers was returning to a pretty healthy margin year over year, and that is expected to continue, so that is not a one-time thing. Item there and I think that that's one of the largest drivers that we have for margin and then on the OpEx side You touched on strategic review costs, you know Those are ongoing as we continue to have proxy filings our definitive proxy statement Hopefully we'll get files here shortly and the amount of administrative administration that we're doing up through the stockholder vote and getting through the the approvals that we need from the government things, those are ongoing into Q2 as well. So that was a one-timer of about $1 million that is included in our gross margin from a non-GAAP perspective. Those are not included in non-GAAP. From operating expenses going forward, I think you asked, that was the last part of your question. We do have a new leader here with Kirsten and Some of the outside consultants, as she mentioned, that would put slight upward pressure on OpEx going forward throughout the next couple quarters.

Got it. Thank you. And then, Kirsten, just a couple questions for you. So one, in a public forum, welcome aboard. Nice to talk to you again. Thank you. You mentioned – yeah, you're welcome. You mentioned two things I wanted to follow up on. One's more of a near-term item. and the other is a longer term item. In the near term, the intent to mix out some of the lower margin business by the first half of next year or into the first half of next year, can you just talk about the size of that business presently and whether or not that impacts any medical business or if it's in other end markets and then related to the medical business Can you just talk about what your vision is for how big that business would be in the next year or so and what you think it could become, if not quantitatively, qualitatively in a three- to five-year period? Thank you.

Yeah, so certainly, so I think in the very short term, as we talked about exiting some of the low margin business, it is truly very low margin business. And as I said, in my previous statements, it doesn't even justify the move into Thailand, nor sustaining it long term. And this is not business in the medical market at all. So it's really that very, very low margin business. And quite frankly, as I've told the team here, we're not here to practice. We're actually here to make money. And so we certainly don't want to take our resources and our budgets and move business that makes no sense for us to continue in for the long term. But it does not include any of the medical business for sure. And so I think in terms of longer term, there's definitely a lot of opportunity as I said in my earlier statement in the medical space. It is a nascent space. We definitely see a lot of the major players, the major pharmaceutical companies, the major medical device companies starting to explore different opportunities. Some of them are small R&D projects. Some of them are pilots that they're really trying to gain experience so that they can work it into a bigger launch. So we certainly see a lot of interest. We see a lot of potential. And, you know, it's hard to quantify exactly where we think it can go in the next three to five years. We'll be doing some work, some deep work over the next four to five months to quantify it for identity and get a little bit more clarity on that. But it definitely could be a significant opportunity just because when you see the volumes that exist in the different categories that we're contemplating, they're really, really large. And we definitely see the interest from the medical device and the pharmaceutical company today.

Thanks for that color. Thank you.

Once again, everyone, if you have any questions or comments, please press star, then one on your phone. Your next question is coming from Michael Pickle from Imperial Capital. Your line is live.

Hi, guys. Thank you for taking the question, and congrats again on the transaction and Kirsten joining the team. I wanted to just get a little bit more clarity on the IoT business. On the call, you guys spoke about it, and the proxy cited a gross margin potential in excess of 35%. And then I also understand Kirsten was saying there could be shorter-term impacts from gross margin as you exit lower-margin projects. We understand that 35% is a long-term target, but can you talk about how we get there? Is it going to be lumpy and project-based or more smoother increases over time?

Yeah, I think there's going to be a combination there, as we talked about. Our increasing focus on healthcare as those start to play out, and move to their next cycle. They are in their infancy today as far as where we are in their product lifecycle. So we know, we feel within our NREs, our new product initiatives, that we have a strong base of healthcare projects that we feel will go to production level and get us to where we need to be. Our healthcare today, as I alluded to and I noted in Q4, our healthcare today, although a smaller percentage of our business is in that 30 to 35% range. So we feel we'll get there with a mixed shift over to healthcare out of our kind of commodity and lower margin one. The second piece of that is going to be our shift from Singapore to Thailand. We've been talking about it for quite a while. And Pearson noted in her analysis as well, when we talked about it today, that We're going to try to accelerate that out of Singapore and into Thailand. Between the overhead and the labor, we'll see significant savings there. It's going to take time, and we'll have some short-term bumps here because we'll be running both through 2024 here through the next couple quarters. But when we are in a longer-term Thailand production facility, we should get some adequate margin points out of that as well. Previously, I think we said 5%, but Our early numbers indicate it could be north of 5% on a long-term basis being in Thailand only. So those two give us confidence that we'll hit our long-term target. As I said, short-term, I think it'll be a little bumpy, but in the longer term, those are a couple of the factors that are contributing to how we get up to the 35%. Got it.

That's very helpful, Collin. Thank you. And just kind of one follow-up to the IoT business in terms of both, I guess, cash deployment expectations and organic investment areas. Can you talk a little bit more about, I guess, you know, what you guys discussed in the proxy in terms of, you know, how you plan? I know I think Kirsten mentioned on the call that the M&A isn't the main priority right now. But I guess what is and can we talk about, you know, where the cash and how it's going to be deployed?

Yeah, so I think my first two parties, as I said a little bit earlier, certainly we got to do some work to ensure that we have strong business excellence and that we have the right processes, the right team, the right resources in place so that we have a really strong foundation to build for the future. So we'll be spending time developing that plan and moving that forward. Secondly, we wanna make sure that we're super clear with our strategic focus. We talk about healthcare as being a great segment for us, but that is a very big segment with very many different use cases and different ways that we can play. We're gonna be doing a lot of deep dive work, as I said, over the next three to four months, really going deep on the applications that we think we have a true competitive advantage and where we can really compete effectively and gain those margins. So we're gonna get very clear with our focus Obviously, we're looking at some non-healthcare related segments as well, but we want to be really, really clear with where we want to proactively go. It doesn't mean that we won't look at other applications, but we want to know where we're going to be driving the market, where we're going to be going after and looking for business. We want to give ourselves time to do that. Part of that strategic process, obviously, we'll also be looking for opportunities to expedite the strategic plan. continue to build value beyond the inlays. I know there's already been a lot of work kind of on building a data management platform, which I think is great, but we need to be very, very clear with where we want to continue to expand it and do that. And so that's part of the strategic work. And coming out of that strategic work, we'll be a lot more clear with how we want to invest the money and where we want to invest it.

Great. Thank you for the color.

Thank you.

Once again, everyone, if you have any questions or comments, please press star, then 1 on your phone. Your next question is coming from Jason Smith from Lake Street. Your line is live.

Hey, guys. Thanks for your time and questions. I just want to follow up on sort of the commentary on the focus on higher margin business within the identity segment going forward. So on a go forward basis, is it fair to assume that any new program you guys look at or take on has to clear a certain gross margin hurdle going forward for you to even look at it?

Yes. We're going to be looking at two things. I think a gross margin hurdle and we'll be looking at it with kind of two different lenses. So obviously if it's for a product that's already developed in a mature industry that's more competitive, that'll be one gross margin target. And as we look at the high value opportunities that require significant customization and that we'll also be investing ourselves to develop them, obviously those margin targets will be quite a bit higher. So we really will have different criteria for different types of products and depending on what the initial investment and effort it is to customize the product.

Got it. And then just as a follow-up, you called out specialty retail, smart packaging, and smart home devices. Obviously, you already have exposure in those today, but to really scale within each of those markets, do you think you need to build out the sales infrastructure in a significant way, or do you have everything in-house today?

Yeah, no, I think definitely. And that's why, you know, once again, our, my initial priority is really getting clarity on our strategic focus. So we've definitely got some really intriguing projects already in those spaces. And so as we're looking at healthcare and the timeline for healthcare and some of the applications there, we definitely think we can pursue some of those other segments proactively as well. Um, but we really have to balance it. Um, and obviously, to be able to go directly into those different segments, we want to build out a business development effort. Those business development efforts have to be tied specifically to the vertical itself. So we're going to have to be really careful with, you know, how many we take on, because obviously there'll be an investment on the business development side of it as we want to go deep into specific segments.

Okay, that makes sense. Thanks a lot. Thank you. That concludes our Q&A session.

I'll now hand the conference back to CEO Stephen Humphreys for closing remarks. Please go ahead.

All right. Thanks, Operator. And thank you all again for joining us. We'll continue to update you all on the business progress and the KPIs as Kirsten laid out in her discussion and on our progress and timeline for closure of our transaction, of course. For details of the transaction and the business going forward, please do review our preliminary proxy that's already on file with the SEC. We expect to file our definitive proxy in the upcoming weeks, and at that point, we'll announce the date for our annual meeting and stockholder vote on the transaction. In terms of investor outreach, we'll be attending the B. Reilly Conference on May 22nd, and Craig Hallam is on track to set up a fireside chat session in early June, and we'll also share business updates following our shareholder vote, of course, and the AGM. And if you have any questions, please don't hesitate to reach out to Sophie and our investor relations team. So thank you all again and have a very good evening.

Thank you, everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.