VerifyMe, Inc. (VRME) Q1 2024 Earnings Report, Transcript and Summary

Good day, and welcome to the VerifyMe First Quarter 2024 Financial Results Conference Call. [Operator Instructions] Please note that today's event is being recorded. I would now like to turn the conference over to Nancy Meyers, CFO. Please go ahead.

Thank you. 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 answer 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 report on Form 10-Q. I will now turn the call over to Adam Stedham for some opening remarks.

Thank you, Nancy, and welcome, everyone. I'm pleased to report that in Q1 2024 we realized an increase in year-over-year revenue and a significant improvement in gross profit, gross margin percentage and adjusted EBITDA. It's noteworthy this is now the third consecutive quarter of positive adjusted EBITDA and even more meaningful, we're experiencing an increase in our sales pipeline. We previously announced that we anticipate our H2 2024 growth rate will exceed our H1 growth rate. We continue to believe this is the trend and the increases in sales pipeline are a key enabler of that growth. Q1 2024 adjusted EBITDA did not convert efficiently into cash flow from operations in Q1 and that's primarily due to the timing of working capital items. We continue to anticipate that we'll have positive cash flow for 2024, as the timing of these items balance out, and we continue to experience year-over-year growth. As a company with no net debt, that is generating cash with meaningful growth prospects, I think our current valuation represents a significant opportunity for our shareholders. At the end of Q1 2024 we had $2.8 million of cash and only $2.4 million in debt, and this includes the convertible note which we anticipate will likely get converted into stock rather than being repaid in cash. At this point, I'll touch on our capital strategy. We continue to have our announced buyback program in place and we continue to evaluate our strategy around repurchasing shares. Thus far in 2024, the company has repurchased minimal shares. We continue to monitor all available options to utilize our capital to maximize shareholder value. So let's shift the conversation to our 2 operating segments: The Q1 2024 improvement up and down the income statement is the result of our focus on creating the foundation for the company throughout 2023. We focus on operational efficiency and our go-to-market strategy for our PeriShip business within the Precision Logistics segment. We vertically integrated the Trust Codes technology stack with all of our existing customers in our Authentication segment, as well as redefining our go-to-market strategy for both our traceability products as well as our ink products. Now, looking at Precision Logistics, this segment generated $5.6 million in revenue in Q1 of 2024 versus $5.4 million in revenue in Q1 2023. As we look across the marketplace, partial shipping volumes with the major shippers are down in 2024 versus 2023. We're pleased that due to multiple factors related to our differentiated offering, we continue to experience revenue growth in this environment. We believe this environment provides a good opportunity to add new customers as well as increase our share of wallet with existing customers. So as we look at the business, we had almost 3% more customers ship packages in Q1 2024 versus Q1 2023. With that said, our same customer shipping volumes were down about 2% in Q1 2024 versus Q1 2023. So therefore, we're in a market in which our strongest opportunity to grow our revenues is by expanding our customer base. So we're focusing our efforts to add new customers in the region between Maine and Pennsylvania. We added a new additional sales representative in May, and we're expected to add 2 additional sales resources in June. We believe our plans of expanding our sales force with a targeted geographic approach will create the most value for the company. Our successes and lessons learned from this year will guide plans related to geographic expansion in 2025. So we're pleased with the efficiencies and improved gross margin percentages we've achieved in the Precision Logistics segment. But we still believe that we have the capacity to further increase our revenues without an associated increase in operating costs. This leverage should enable us to grow revenues and maintain our margin profile, even if softer overall partial shipping volumes create pricing pressure in the industry this year. So now, let me shift over to our Authentication segment. After spending much of last year on internally focused initiatives, I'm pleased with the pipeline expansion in this segment. The Authentication segment generated $150,000 in revenue in Q1 2024 versus $250,000 in Q1 2023. We anticipate the quarterly revenue growth for this segment to increase meaningfully each quarter of this year. We have multiple sales opportunities in the pipeline related to our new integration with the Amazon transparency. We're refining our sales model and developing a better understanding of the sales cycle associated with this specific service. So we continue to believe our relationship with Amazon creates a significant opportunity to create value for Amazon; our mutual customers; and consumers of our customers' brands; and most importantly, VerifyMe shareholders. In addition to the Amazon relationship, we continue to see positive trends for our APAC business, strategic relationships and in ink sales. We generated 5% revenue growth in APAC in Q1, and we anticipate continued growth throughout 2024. We're currently working with our strategic partners to define marketing plans to highlight how our technology adds value to their equipment. And then as for ink, in Q1, we attended the Dscoop Conference in Indianapolis. Dscoop is the community of 16,000 Hewlett-Packard industrial print and large-format customers and partners. Participation in this conference is a part of the new go-to-market strategy for our ink products that we discussed with you at the Analyst Day. We believe this conference was a good success for us. I look forward to our future earnings calls and sharing details associated with converting our current pipeline into sales. We continue to also believe the Authentication segment has growth opportunities related to food and agriculture traceability. This traceability aligns to the GS1 standards. So in June, the company is participating in the GS1 conference in Orlando. We believe this conference will create sales opportunities just as the Dscoop Conference created ink sales opportunities. So at this point, I'll turn the call back over to Nancy Myers, our CFO, and she'll provide more detailed financial information.

Thank you, Adam. First quarter revenue increased by 2% to $5.8 million versus prior year of $5.7 million. The Precision Logistics revenue increased by 4% from $5.4 million to $5.6 million. Authentication revenues decreased from $0.2 million to $0.1 million as a large order from Q1 2023 has slipped into Q2 and Q3 for 2024. As Adam mentioned, our pipeline is growing in this segment, and we anticipate growth in Q2 and through the remainder of 2024. Gross profit increased by $0.7 million or 49% to $2.3 million in Q1 2024 versus $1.5 million in Q1 2023. As a percentage of revenue, gross profit increased to 39% in 2024 versus 27% in 2023. The year-over-year increase in gross profit is mainly due to the shift in customer mix and service offerings in our Precision Logistics segment as well as process improvements the company has made. The gross profit from prior year has been adjusted and has been decreased by 4% from $1.8 million to $1.5 million. This was to better align our variable direct operating costs related to our service centers in Precision Logistics as they are directly related to providing the service to the customer that generates revenue. We have internally reorganized and are able to clearly identify these costs. While we believe there are economies of scale as we continue to grow, we understand these costs could fluctuate. For Q2 and Q3 of 2024, we anticipate our gross margin to remain relatively consistent. When you review our operating cost component of the statement of operations, you will see we have added a new line item for segment management and technology. We have reclassified our operating costs to provide visibility of those costs that are directly related to our 2 segments in line with new accounting standards. These costs are further broken out between the 2 segments in a footnote of our 10-Q. This is in line with how the segments are being reviewed for performance and allocation of resources are managed. General and administrative expenses now include those costs that are shared across both segments as well as public company costs. Segment management and technology expenses increased by $0.2 million to $1.3 million in Q1 2024 versus $1.1 million in Q1 2023, primarily as a result of Trust Codes being included for the full quarter in 2024. General and administrative expenses decreased by $0.3 million to $1.1 million in Q1 2024 versus $1.4 million in Q1 2023. The decrease primarily relates to severance expense and onetime professional fees for the Trust Codes' acquisition in Q1 2023 that did not recur. Sales and marketing expenses decreased by $0.1 million to $0.4 million in Q1 2024 versus $0.5 million in Q1 2023. The decrease is primarily related to a reduction in employees and consultants in the Authentication segment. Our net loss for the quarter improved by $1 million to a loss of $0.6 million or $0.05 per diluted share versus $1.6 million in Q1 2023 and a loss of $0.17 per diluted share. Our adjusted EBITDA increased by $0.6 million to a positive $0.1 million for the first quarter of 2024. On the last slide is our balance sheet as of March 31, 2024. Our cash as of March 31, 2024, is $2.8 million, a decrease of $0.3 million from $3.1 million on December 31, 2023. During the first quarter of 2024, our use of cash included $0.2 million in repayment of debt and interest. Due to the seasonality of our Precision Logistics segment; our AR, unbilled and accounts payable are much higher at year-end compared to the other 3 quarters. As of March 31, 2024, we have $1.3 million remaining on our loans and $1.1 million on our convertible note. There are no borrowings under our line of credit, and we have $1 million available to us. With that, I would like to turn the call back to Adam.

Thank you, Nancy. Q1 was my third quarter with the company, and I'm pleased to be at the pivot point from transformation to growth. Most construction projects, they start by digging a hole and it's always satisfying to see the structure rise from the ground. It's also exciting that the process begins to speed up at that point. I am pleased that due to the hard work of the team, VerifyMe has generated positive adjusted EBITDA each quarter that I've been with the company. I look forward to the next quarterly call and continuing to share our success and share more about the upcoming revenue growth. But for now, let's turn the call over for questions.

[Operator Instructions] And the first question comes from Michael Petusky from Barrington Research.

I may have missed this. What was the percentage sort of growth or negative comp in each of the segments, please?

I'm sorry, say that again?

The percentage revenue growth or negative comp in each of the segments for the quarter?

Okay. Yes. So Precision Logistics increased by 4%, and Authentication was down. It went from $0.2 million to $0.1 million.

What's the percentage by any chance?

I don't, off the top of my head.

Okay. All right. So I guess let me ask this question around Precision Logistics. Adam, are you guys seeing certain industries that are sort of holding up in terms of shipping versus others that maybe are sort of the more problem here? I understand you're dealing with a difficult macro environment. But I'm just curious if there are parts of your business that are holding up or growing better than maybe some others that maybe -- are being more impacted?

So we had a strong concentration in life sciences as well as products that have -- that are a little bit more on the expensive side. The end consumer of those products has a tendency to be a little bit more affluent. And so those 2 areas and those 2 markets are a little bit more resilient, a little less impacted by economic conditions and slowdowns. So that's what we think -- that's what's giving us the strength that we're seeing right now. We do have other products that are aimed at the more general marketplace, and that's where we're seeing the slowdown is in those and maybe baked goods and some of our less expensive products that we ship.

All right. And I know with the investor -- I think, with the Investor Day and then affirmed with the Fourth Quarter Conference Call. I think, you guys are -- have been hoping for double-digit top line growth in both segments, obviously.

Correct.

This is a pretty tough quarter from -- great quarter from a sort of margin perspective, but not a great quarter from a top line growth perspective. Are you guys -- is that more of an aspirational goal at this point? Or do you still feel comfortable? To me, it feels like you maybe possibly you're tracking behind that -- but maybe not, and I don't -- I'm not -- I understand that second half is supposed to be better than the first half, but it does feel like this is possibly maybe tracking behind, but let me know.

No. So actually, we do feel comfortable with it. One of the things that we've pointed out is that we're adding 2 additional salespeople. And so those 2 additional salespeople were not initially part of the plan at that time. So we believe that we will hit the revenue growth target. The way we'll hit the revenue growth target is by making additional investments in sales resources, and we've freed up the room in the income statement to make those investments in the sales resources. So we continue to believe that we will hit the double-digit revenue growth in each segment as well as the company overall. And it will be weighted towards H2 versus H1. Keep in mind, a very large percentage of our revenue is generated in the fourth quarter for Precision Logistics. So naturally, the business cycle for us gives us that opportunity to see a much higher growth rate in H2 than H1.

Can I just ask? Your internal assumptions around the market, does it assume that the macro sort of improves in the second half?

No. I think it assumes that the macro does not significantly erode in the second half. Status quo is the assumption. And if there's an improvement, that's positive. If there's an erosion, that's negative.

[Operator Instructions] The next question comes from Jack Vander Aarde from Maxim Group.

Adam, I'm doing well. It looks like you're 3 for 3 with positive adjusted EBITDA as CEO. So that's great to see. Just a couple of questions. It's good to see the growth in the Precision Logistics business tracking along. In terms of Authentication, you mentioned the pipeline strengthening and you expect revenue growth going forward. Just maybe a couple of things. Recent revenue mix and near-term Authentication revenue growth. Do you -- can you just focus between maybe your expectations of the Trust Codes business versus maybe the ink business and the 2 conferences you mentioned. Do you expect to -- what do you hope to capture from these conferences walking away? Will this set you up for some orders to drive back half growth?

Absolutely. Great question. So we expect to see growth both in the ink segment as well as in the codes -- or the ink portion of our Authentication segment as well as the codes. And when we look at it, what we're finding is that sales cycles are longer than we've expected. So you have kind of a queuing in your pipeline. So our pipeline is building and building. I would have previously expected that some of that pipeline would have converted already. But what we're experiencing is a longer sales cycle on that pipeline. Now importantly, we're not experiencing a lower conversion rate than we expected. So it's not as if we're losing more deals than we expected to lose. The sales cycles are just longer. And when we look at the expansion into the Amazon environment, that's a more complicated sale with a little longer sales cycle that involves more players on the other side as well as within our go-to-market strategy for ink. If you look at where we're targeting the ink sales now, those have a tendency to be longer sales cycle. So I think that's been the biggest [ aha ] for me from an Authentication business perspective is the fact that the sales cycles do take a little longer than I had previously anticipated they would.

Okay. That makes sense. And then maybe if I just switch gears again, gross margin was another bright spot. It sounds like you expect gross margins to be fairly consistent going forward. But just given what I believe is your expectation for ramping Authentication sales in general, it feels to me like there would be potential upside to that gross margin just given the margins with that revenue stream. Can you just speak to that a bit? Is that a conservative assumption to have gross margins around the current quarter? Or what are your thoughts there?

So actually the gross margin could do a few things. If we start to experience pricing pressure, then we plan on responding to that pricing pressure appropriately in order to continue to hit our revenue target for the year. As a result of that, we could possibly see some gross margin erosion. With that said, we believe that we have capacity in the organization below gross margins to add revenue without incremental cost. So even if we did have to lower our pricing sum to hit our sales target, we believe our bottom line margin percentage should hold true, because we might see gross margin go down slightly as a percentage of revenue, but our cost below gross margin as a percentage of revenue or -- would go down, it's offsetting and we would maintain our bottom line margin profile. So that that's the scenario that would play out if we have to adjust pricing in response to pricing pressures overall in the marketplace. On the other hand, if the economy does maintain status quo and we don't see an increase in pricing pressure, and we're able to maintain -- establish growth with our sales force, and we're able to do that at our current price point, we could see gross margin improve some in the second half of the year. Now obviously, when I say that within your models, you have to adjust for the fact that Q4 has a different margin mix than the other 3 quarters. So that's one thing you need to think about and adjust for in your model. Secondly, our Authentication business has a much higher gross margin than our Precision Logistics business. So if the Authentication grows in the way that we expect it to, you could imagine that as the product or as the segment mix between Authentication and Precision Logistics starts to be a little more balanced and we start to get a little bit more revenue in Authentication compared to Precision Logistics, that would adjust the overall gross margin profile as well. That was a much longer answer than you were probably looking for. So did -- but I just want to make sure you had all the factors for your modeling. Does that make sense?

No, no. That makes complete sense, and I very much appreciate the thorough response. It's good to see you guys continue to execute and look forward to tracking the story.

And the next question is a follow-up from Michael Petusky from Barrington Research.

I didn't catch the first part of the previous question around gross margin, and I want to make sure that I understand your response. The gross margin -- potential gross margin erosion, you were talking about the Authentication business only or both?

No. If -- so, if we think of -- as status quo, our gross margin should maintain.

Yes. Got you.

If we start to experience increased pricing pressure in the marketplace, our strategy will be that we will adjust pricing in accordance with the pressure in the marketplace in order to deliver the revenue growth that we want to deliver. If that happens, we would see some gross margin erosion. We do not believe that we would see bottom line profit erosion because of the offsetting pickup below gross margin. On the other hand, if the economy improves or maintains status quo, we don't expect to see gross margin erosion; accounting for the fact that Q4 has a different product mix and you get a different, you get a different gross margin in Q4 than you do the other quarters. So, except for that one factor.

Is there a side of your business that you're more concerned about the potential of some pricing pressure [ getting difficult ] through the year?

No, not really. But the area that I think is critical is if you're -- if we are targeting the broader market to get our revenue growth, then it's an easier sales process. It's easier to find the customers when the customers grow the customers. We know which segments of the market we think are desirable, in which segments of the market are not really impacted by the overall macroeconomic environment. So we're having -- so we're targeting those segments, but it's a little less efficient sales process because we're targeting specific segments as opposed to being able to target the broader market. So I wouldn't say that there are areas that I'm concerned about. I would just say it's going to be a little bit more laborious to get the revenue growth than we had previously thought it would be.

Okay. All right. But all aspects, I mean, my sense is you've essentially affirmed all aspects of prior financial guidance, whether it's top line or cash flow, et cetera.

Correct. Correct.

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

Thank you. Well, so we do look forward to the remainder of the year, and it's been an exciting journey so far. Our next call will mark the 1-year point for me with the company. I look forward to that call. I look forward to sharing the results with you for the second quarter. So thank you, everyone.

And thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.