VerifyMe, Inc. (VRME) Q2 2023 Earnings Report, Transcript and Summary

Welcome to the VerifyMe Second Quarter 2023 Financial Results Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Nancy Meyers, Chief Financial Officer. Please go ahead.

Good morning, everyone and thank you for joining us today for our earnings call presentation. On the call today, I'm joined by Adam Stedham, CEO and President, who will give an operations and strategic update. Following our management presentation, we will have a Q&A session. I would like to bring your attention to the note on forward-looking statements on Slide 3. Today's presentation and the answers to questions include forward-looking statements. It should be understood that actual results could differ materially from those projected due to a number of factors, including those described under the forward-looking statements caption and on the Risk Factors of the company's annual report on Form 10-K and quarterly reports on Form 10-Q. I will now turn the call over to Adam Stedham for some opening remarks.

Thank you, Nancy and welcome, everyone. In the last 1.5 months since becoming CEO, I've worked with the VerifyMe leadership team to refine and clarify the strategy across our business segments. We announced in July, we've streamlined our company into 2 business segments, the Authentication and Precision Logistics segments. This is intended to accelerate growth by leveraging our technology, expanding our marketing capability and optimizing overhead expenses. These segments fit together to enable our mission of ensuring real products are in the right place, in the right condition, at the right time. I'm excited to share our strategy with you. But first, let me discuss Q2 a little bit. Nancy will give specific details but I want to provide an overall context. During the quarter, our revenues came in slightly below our expectations, partly due to the timing of customer orders and the temporary impact of the business due to the acquisition integration and reorganization. In addition, within our Precision Logistics business, we're seeing an emerging shift in service mix from our proactive services to our premium services. As a reminder, our premium services generate significantly lower revenues since they only incorporate the service component of our offering but they don't include the freight charges. Therefore, they have a much higher gross margin. Our proactive services do include the associated freight charges and freight component of the service. As a result of this, we anticipate our overall business will achieve revenues of $26 million in 2023 and we continue to anticipate positive adjusted EBITDA for the year. Our revenues could exceed this level but this is my first call with all of you and I want to set expectations correctly. Obviously, to achieve this revenue, we'll need to experience significant increases in revenue in H2. This will be driven by both increases associated with normal seasonality of our business as well as the contributions from our unfolding strategy. So at this point, I'd like to take a minute to explain why I'm excited by and confident in that strategy. In April of 2022, the company announced the acquisition of PeriShip, a non-asset logistics business specializing in logistics for time and temperature-controlled shipping using proprietary predictive analytics software. In March of 2023, the company announced the acquisition of Trust Codes Limited, a company specializing in unique item-level codes for brand protection, data intelligence and brand enhancement technology with specific expertise in the agriculture, food and beverage industry. These acquisition have contributed to our year-over-year revenue growth but more importantly, they position the company to execute our strategy going forward. At this point in time, over 3/4 of the customers in each of VerifyMe's operating segments are within the agriculture, food and beverage industry verticals which had a growing need for our customers -- or our company's solutions. The traceability of products in these verticals is a growing requirement in the U.S. market and around the world due to the digitization of supply chains and increasing regulatory requirements such as the Food Safety Modernization Act. This act focuses on reducing contamination and ensuring rapid response to areas of concern and higher-risk food categories. The company's ability to meet these requirements along the entire supply chain provide our customers with proven solutions to meet these requirements. In addition, these technology offerings create marketing and sales synergy between our Precision Logistics segment and our Authentication segment which will further the potential for our organic growth. So at this point, I'd like to discuss each of our segments a little bit more. First, I'll begin with our Precision Logistics segment. I'm beginning with this segment because it may feel newer and less familiar for many of you. We continue to benefit from the strong customer relationships that PeriShip has built over the years. The Precision Logistics segment provides customers with specific technologies and services that are designed to meet the needs of products that have specific time and temperature requirements. The growing market of small- and medium-sized companies selling perishable products that have these distribution requirements provides a significant opportunity for our business. Our service includes both pre- and post-shipment offerings across web portal access, weather monitoring, temperature control, full customer support and last mile resolution. Now I appreciate that the non-asset logistics business is very competitive. However, I've met with and spoken to our customers and I hear them articulate how our specific combination of services enables them to address the challenges they face tracking and shipping their specific products. I believe our combination of services and the relationships we enjoy provide a differentiation that will enable us to experience growth rates that exceed the industry. Currently, the segment has 5% year-over-year organic pro forma growth and we expect this to increase. In addition, we're optimistic about the opportunities for cross-selling and integrating services across both our segments, particularly within agriculture, food and beverage customers. So now I'd like to shift the conversation a little bit and begin to speak about our Authentication segment. In many ways, this segment represents the historical VerifyMe company. With that said, the services have been transformed by the acquisition of Trust Codes and I'm eager to share the details of this transformation. The segment focuses on providing customers with traceability, brand protection and brand enhancement services. The Trust Codes' GS1-validated technology platform provides customers with end-to-end traceability which is a key strategic and regulatory imperative for food and agriculture enterprises. Some of you may not be familiar with GS1, although you probably encounter barcodes based upon the GS1 standard daily. For context, a pack of Wrigley's gum in Ohio in 1974 became the first scanned and barcoded product. The organization that sparked that transformation, we now know as GS1. So GS1 standards are the most widely used supply chain standards in the world used in retail, such as the UPC barcode and in health care and supply chain. This is relevant because Trust Codes is one of very few platforms to be validated by GS1 as complying with global GS1 standards. Now many organizations claim to offer GS1 compliance but very few have been validated by GS1 and this is an important credibility factor and differentiator for our authentication customers. Now Trust Codes has nearly a decade of demonstrated agricultural food and beverage traceability technology and services. This traceability enables customers to meet current and evolving traceability requirements. The brand -- the segment's brand protection services build upon our traceability offerings by including anti-counterfeit and anti-diversion technologies. These technologies enable companies to use unique per item QR codes as well as covert marketing [ph]. Our systems can track and identify authenticated codes as well as identify fake websites that are used to validate fake QR codes on product packaging. This combination enables brand owners to take swift action to protect their brand from counterfeits, ensuring product safety for their customers as well as identifying pads used for diversion. Through the segment's brand enhancement services, we harness the expertise of brand protection and traceability to provide a means for our customers to effectively engage with their consumers in a contextual manner. The unique per item QR codes provide an avenue for the brand to personalize the way they educate, engage and delight their customers with further capabilities such as controlled product loyalty, cross-selling and gamification. Furthermore, they can utilize a data-driven approach to further educate their consumers on efforts in the area of sustainability and environmental practices. So this combination of services in our Authentication segment supports our existing customers as well as capturing new opportunities by enabling the customers to meet evolving regulatory requirements and consumer expectations in the marketplace. As our collaboration discussions continue and our product integration testing continues, we're optimistic that this will lead to growing revenues in H2 of 2023 and meaningful revenue opportunities for us in 2024. So at this point, I'd like to turn the call over to Nancy, our CFO, to review our second quarter financial details.

Thank you, Adam. For today's call, I will touch on the financial highlights from the quarter. Second quarter revenue increased by 19% to $5.3 million versus prior year of $4.5 million. The year-over-year increase was primarily due to growth in the Precision Logistics segment and the inclusion of the PeriShip acquisition for the full second quarter of 2023. Precision Logistics revenue increased $0.9 million or 23% year-over-year. Authentication revenue decreased $0.1 million in the quarter due to timing of orders. Gross profit increased $0.1 million to $1.8 million in 2023 versus $1.7 million in 2022. As a percentage of revenue, gross profit declined to 34% in 2023 versus 37% in 2022. Our net loss for the quarter was $0.9 million, an improvement over prior year of $0.5 million after adjusting for the loss on the SPAC in 2022. Our adjusted EBITDA was a loss of $0.4 million in the second quarter 2023 compared to a loss of $0.3 million in the second quarter of 2022. We experienced increased integration and operating expenses with the acquisition of Trust Codes that had a $0.2 million impact on adjusted EBITDA in the quarter. Excluding this factor, the adjusted EBITDA loss decreased by $0.1 million. As mentioned by Adam, we implemented plans to optimize overhead expenses beginning in the quarter to ensure that our operating cost savings materialized in improved adjusted EBITDA going forward. Our cash as of June 30, 2023, is $2.7 million, a decrease of $0.7 million from $3.4 million on December 31, 2022. Through the first half of 2023, we have repaid $0.3 million on the term note and interest. As mentioned, last quarter, we paid cash and deal costs of $0.6 million related to the Trust Codes acquisition and $0.3 million related to the integration and operation of Trust Codes. We drew down $0.8 million on the revolving line of credit as of June 30, 2023. Our debt, including our line of credit drawdown, is $2.4 million and we have a further $0.3 million available to us under this line. On the next slide, we have our main operating expenses in general and administrative and sales and marketing. General and administrative expenses for the second quarter of 2023 are $2.3 million which is down 7.6% year-over-year from $2.5 million in 2022. We incurred PeriShip acquisition costs of $0.5 million in 2022 that did not recur in 2023. We incurred a full quarter of Precision Logistics labor and expenses as well as integration costs related to Trust Codes which was partially offset by the reduced employee costs in the Authentication segment. Sales and marketing expenses for the second quarter of 2023 are $0.5 million, up 13.2% year-over-year from $0.4 million in 2022. In 2023, we had the full quarter of Precision Logistics expenses, partially offset by reduced employee costs in the Authentication segment. We do anticipate having additional travel costs related to our reorganization in the third quarter of 2023. On the last slide is a snapshot of our balance sheet as of June 30, 2023, of which we previously discussed our cash position and debt. Overall, during the quarter, we have reviewed and tightened our operating plan. We have continued to show improvement and look forward to sharing the results of the second half of the year which is our strongest half for both of our reporting segments. With that, I would like to turn the call back to Adam.

Thanks, Nancy. Less than 2 months ago, I joined VerifyMe because I saw a company positioned to benefit from helping customers adjust to the changing landscape driven by both macro trends and regulations in food traceability and ever-increasing consumer expectations. As an existing Board member, I had developed enough understanding of the business to take that step. Since joining the company as CEO, I've become more convinced that our capabilities provide a solid bedrock for substantial growth. And we are well positioned with the proven global technologies and services our customers need to obtain the services that are required in the marketplace and to enable us to have the growth that we desire. In Q4, I anticipate scheduling a more detailed explanation of our overall strategy to take advantage of this opportunity. In the meantime, we anticipate providing multiple updates and announcements on our progress. So at this point, I'd like to open up the call for questions.

[Operator Instructions] And today's first question comes from Jack Vander Aarde with Maxim Group.

Okay, great. Well, welcome aboard, Adam and congrats to both you and Nancy on your new executive roles. A couple of questions from me. I'll start with a first question, more of a clarification. I believe I heard Precision Logistics business or basically the PeriShip business organic growth I think you said it was up 5% this year. Is that 5% year-to-date? Or is that 5% in the quarter? Can you just help me understand?

So it's 5% year-to-date. Correct. Pro forma 5% year-to-date.

Got you. Okay, great. Okay. And then you mentioned -- it's great to hear -- I understand the second quarter is a little slower than expected but great to hear that you maintained the full year guidance for us $26 million of revenue, still on track for positive EBITDA -- for the adjusted EBITDA for the year. And I know the fourth quarter is obviously the seasonally much -- significantly the strongest quarter. But how does maybe -- anything you could provide just to get an understanding of how does 3Q look? Are you expecting sequential growth, flat growth? Is there potential for positive adjusted EBITDA in the third quarter? Without putting you on the spot too much, is there any comments you could provide would be helpful.

We absolutely expect that Q3 will be stronger than Q2, we anticipate -- and Q4 will be stronger than Q3. The specifics of the adjusted EBITDA right now, some of that's going to have to do with when expenses hit and just how things flow, so I couldn't really predict that. But I should -- I believe you would model that we're going to have a stronger Q3, even a stronger Q4 and set the stage for 2024 that's much stronger than 2023.

Okay, great. That's helpful color. I appreciate that. And then speaking of 2024 before I get ahead -- too ahead of my skis, it does sound like you're pretty confident with your set up for growth. Are you able to maybe -- I'm just kind of wondering what's driving that confidence? Are you able to quantify or provide any color on maybe your overall pipeline of revenue opportunities and scale or just anything that's contributing to that confidence and the growth in 2024?

So there's 2 factors that are driving that: one is we do enjoy a relationship with the largest freight airline company in the world and we're speaking with them around strategies to help us and them meet the needs in this specific niche, perishable market. And so we are confident and enthusiastic about where that will lead and it's too early to give any details on that. And so we expect to share more about that in our Q4 strategies reveal. On top of that, if you look at the implementation of the regulatory requirements and how companies are adjusting to it and the amount of time it takes them to adjust to it, many of our customers and potential customers are just now looking to implement the tools, techniques, practices to meet these regulatory requirements. So as they implement those, that will drive revenue growth for us. And we'll be able to see the growth, particularly associated with some of the Trust Codes' components.

Okay, excellent. That's helpful. And then just one more, if I may. It was -- you provided a helpful overview of kind of the 2 new segments or the resegmentation of the business and that was very helpful. But more of just a general question overall is just, what's the status of the overall plan related to the kind of the historical, what I used to call the core VerifyMe proprietary ink solutions. Is this still part of the story? Or is it -- is it -- how does that play a role, I guess, going forward?

So it's absolutely part of the story. So -- and I'd like to answer it in 2 different ways, right? So one, Trust Codes doesn't change who VerifyMe was. VerifyMe always leveraged third-party software to meet the needs of its customers. What we've done is we vertically integrated the Trust Codes software because we think it's more fit-for-use for exactly what we're trying to do which we think much -- it positions the company in a far better way. So that's part of the answer. Now specific to the ink, we're currently developing our overall ink strategy. I absolutely continue to believe that our product meets a specific need in the prevention of diversion and counterfeit of products and we intend to share more about that ink strategy in Q4 as well.

Okay, fantastic. Well, I appreciate the color and congrats on your new role again. Look forward to tracking the story.

[Operator Instructions] Our next question comes from Michael Najeal [ph], a private Investor.

Just a simple question. How we set forth capital? Is there -- do we have adequate capital to reach positive working cash flow? Or are there any additional secondary financing that might be necessary or in the offing moving forward?

So we really don't -- we don't comment on any potential secondary financing or what we're looking at. In general, what I would say is we feel very comfortable with our cash position. We monitor our cash position as well as our uses of cash within the overall strategy. And so as we look at our strategy and cash management inside of that assuming current macroeconomic environment and the overall that there's not a drastic change to the macroeconomic environment, we feel comfortable with our cash position and the cash strategy that goes with it.

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

So -- well, thank you. So it was good to join everybody for the first call and look forward to additional calls. Look forward to the strategies, passion. Once again, I can simply reiterate that I came to the company with an excitement about the opportunity. I'm more excited now than when I joined. So I look forward to talking to all of you as time goes on. Thank you.

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.