VerifyMe, Inc. (NASDAQ:VRME) Q3 2023 Earnings Call Transcript

VerifyMe, Inc. (NASDAQ:VRME) Q3 2023 Earnings Call Transcript November 8, 2023

VerifyMe, Inc. misses on earnings expectations. Reported EPS is $-0.09 EPS, expectations were $-0.08.

Operator: Good morning, everyone and welcome to the VerifyMe Third Quarter 2023 Financial Results Conference Call. [Operator Instructions] Please also note that this event is being recorded. And at this time, I would like to turn the floor over to Nancy Meyers, CFO. Ma’am, please go ahead.

Nancy Meyers: Thank you and good morning, everyone 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.

Adam Stedham: Thanks, Nancy. Well, welcome, everybody. Happy to have an opportunity to discuss our third quarter with you. I’m pleased with our organic revenue growth and gross margin improvement in the quarter. More importantly, I’m excited about the success we’re having in implementing our strategy. So my second quarterly call since becoming the CEO of VerifyMe, during that first call, we described our new structure and strategy. In addition, we stated that we anticipated scheduling a more detailed explanation of our overall strategy to take advantage of the opportunity in front of us. Currently, we anticipate having that call towards the middle of January. So during the call today, I’ll discuss the overall business outlook, our capital position, and then I’ll provide an update on each of the operating segments.

After that, Nancy will provide a more detailed third quarter financial overview. So as I look out for the business and as I think about the outlook of the business, I reiterate our expectations for 2023 revenues of approximately $26 million and a positive adjusted EBITDA. In addition, I expect double-digit organic growth in 2024. Now we’ll discuss those growth plans more during our strategy call in January. So at this point, I’ll shift the conversation to discuss our capital position. As a company, we’re focused on revenue growth, margin improvement and cash flow generation. So — and I remind everyone that Q4 is our strongest cash flow quarter of the year. Since our last call, we completed a relatively small capital raise that raise provided strength to our balance sheet at favorable terms for the company.

But more importantly, it engaged insiders as well as outside investors that have a history of profitably investing with the new leadership of VerifyMe. In addition to the completion of that convert, we just completed the renewal of our line of credit facility with PNC Bank. At this point, I feel very confident we have sufficient access to capital to pursue all of our strategy. So now I’d like to discuss the segments a bit, and I’ll shift to our Precision Logistics Segment and discuss it in a bit more detail. Overall, the business is tracking with our plan. We expect to have organic growth in 2023, and we anticipate a higher growth rate in 2024. We’ve improved our margin profile with operating efficiencies as well as pursuing higher-value customers.

So I’d like to talk about that a little bit more. One item I’d like for you to note about these higher-value customers is that many of them don’t experience the same revenue increase due to holiday shipments in Q4 that other customers may. Therefore, we’re not anticipating as large of a Q4 uptick with those customers relative to Q3 as we experienced in 2022. So since our last call, I’m even more convinced about the meaningful growth opportunities associated with servicing the perishable market and the needs of the perishable delivery market. In addition, we have the ability to expand our relationship with the world’s largest air freight company in a way that is beneficial for both companies’, customers and shareholders. So we’re very excited about positioning the advancement and the continued opportunity inside of Precision Logistics.

So let’s shift the conversation a bit and talk about the Authentication segment. Through three quarters, our 2023 revenues have been below expectations. Now a significant contributing factor to this situation is reduced revenues with existing customers. But I want to point out that we have not lost any customers in this segment. So there are actually two underlying factors to the revenue decline with these customers, and I’d like to explain them a little bit more. So during 2022, we had customers place large orders for traceability products, and it’s taken them longer to use up their inventory than they anticipated. We continue to have supplier relationships with these companies, and they’ve been working through their inventory throughout the year.

So our insight into their current inventory levels gives us confidence regarding 2024 revenues. So in addition to that, the inventory situation with those existing customers, our APAC business has been impacted in 2023 by economic and weather conditions. Looking where we are now, I’m reassured that we’re now seeing our volume forecast increasing in the region and we’re winning new customers. So in summary, 2023 it’s been a slow year for our existing authentication customer base. However, the customer base has remained solidly intact, and we’re seeing an upturn in pipeline and new customers. We’ve also launched our new strategy that we alluded to on our last call, and this involves a combination of a change in pricing strategy as well as sales strategy.

We’re experiencing a significant increase in our sales pipeline, and I look forward to updating you as this pipeline converts to backlog. So I’d like to wrap-up by discussing how we believe our technology stack and strategy will allow us to expand our relationships and opportunities in the US market. We purchased Trust Codes business in March. Since that time, we focused on integrating their technology stack into our existing authentication customers and defining a clear food traceability strategy along with optimizing our ink strategy. We believe the current landscape of increased regulations as well as increasing counterfeit and diversion activity creates a compelling opportunity for this segment. Our technology’s ability to identify fraud or abnormal behavior while tracing an item’s journey from production through to the consumer’s hands meets the needs of consumers, regulators and the brands.

The integration of our custom software, our patented technologies and cloud environment positions us very well to solve the challenges that the marketplace is experiencing. So — as for the technology stack strategy itself, we’ve recently made announcements regarding our relationship with Amcor, and we anticipate there will be other announcements in Q4. This newly integrated VerifyMe traceability Cloud is founded on end-to-end GS1 traceability and machine learning detection of counterfeit and abnormal behaviors. The traceability platform is interoperable with major retailer’s anti-counterfeit solutions. So this interoperability will enable our customers to benefit from anti-counterfeit protections more easily, faster. And without requiring significant changes to their existing manufacturing and packaging processes.

So — our approach provides customers with an effective and efficient method to provide their consumers with traceability and compelling consumer engagement. So we’re excited about the outlook for our authentication segment, very similar to our excitement of our outlook for the Precision Logistics segment. So at this point, I’ll turn the call over to Nancy for some specific financial details about the third quarter.

Nancy Meyers: Thank you, Adam. For today’s call, I will touch on the financial highlights from the quarter. Third quarter revenue increased by 7% to $5.6 million versus prior year of $5.2 million. The year-over-year increase was primarily due to growth in the premium services in our Precision Logistics segment. The Precision Logistics revenue increased $0.4 million or 8% year-over-year. Authentication revenue decreased by less than $1 million in the quarter. As Adam mentioned, we have seen less than expected in this segment, but continue to work with existing customers and new growth opportunities. Gross profit increased $0.4 million to $2.3 million in 2023 versus $1.9 million in 2022. As a percentage of revenue, gross profit increased to 41% in 2023 versus 36% in 2022.

The year-over-year increase is mainly due to the shift in customer mix and service offerings in our Precision Logistics segment. You can expect some variability of gross margin in the Logistics segment as shifts in customer mix and service offerings occur. General and administrative expenses for the third quarter of 2023 are $2.8 million compared to $2.2 million in 2022. The increase relates primarily to the acquisition of Trust Coast Global that we completed in March of 2023, severance expense of $0.2 million and additional stock compensation in the quarter. Sales and marketing expenses for the third quarter of 2023 are $0.4 million compared to $0.5 million in 2022. The decrease is primarily related to a reduction in employees and consultants, partially offset by additional travel expenses in the authentication segment.

Our net loss for the quarter was $0.9 million versus $0.6 million in 2022. However, 2023 results include the $0.2 million of severance expense and 2022 included a gain on extinguishment of debt of $0.3 million. Excluding these nonrecurring items, our net loss improved year-over-year by $0.2 million. Our adjusted EBITDA increased by $0.4 million to positive $0.2 million in the third quarter of 2023 compared to a loss of $0.2 million in the third quarter of 2022. As mentioned by Adam, last quarter, we implemented plans to optimize overhead expenses beginning in the quarter to ensure that our operating cost savings materialize and improved adjusted EBITDA going forward, and it is beginning to show in our Q3 results. On the last slide is our balance sheet as of September 30, 2023.

Our cash as of September 30 is $3 million, a decrease of $0.4 million from $3.4 million on December 31, 2022. Through the nine months of 2023, we had a capital raise of $1.1 million through a convertible note, net borrowings of $0.1 million, severance payments of $0.2 million acquisition, professional expenses and cash infusing into our trust codes acquisition of $1.2 million. Our debt, including our convertible note and line of credit drawdown is $3.1 million and we have a further $0.5 million available to us under the credit line. As noted previously, our Precision Logistics segment is seasonal with the fourth quarter being our strongest. We anticipate our receivables, unbilled revenue and payables to increase significantly in the fourth quarter.

We recently renewed our line of credit with PNC until September 30, 2024. On August 25, 2023, we entered into a convertible note purchase agreement with certain investors for the sale of convertible promissory notes for the aggregate principal of $1.1 million of which approximately 40% was purchased by related parties. The notes are unsubordinated unsecured obligations of the company that mature on August 25 2026 unless earlier converted or repurchased at a conversion price of $1.15 per share of common stock. However, the company may not redeem the notes prior to the maturity date. With that, I would like to turn the call back to Adam.

Adam Stedham: Thanks, Nancy. So as I mentioned earlier, we plan to have a call to share our strategy for 2024 and beyond in January. After that, we’ll likely have our Q4 2023 earnings call in March and our Q1 2024 earnings call in May. That cadence will bring us together every other month for the next several months. So we have multiple exciting activities we’re pursuing, and I very much look forward to having that opportunity to share them with you during that cadence of calls. I believe the company is very much on track. If we live in an environment in which the consumer has less trust that they’ll receive real products at the right time, in the right place and in the right condition. In addition, companies are experiencing increased regulation and growing losses due to spoilage, counterfeiting and divergence.

We have proven solutions to address all of these issues. And in the end, helping to solve significant issues bring significant values to both our consumers and to our shareholders. And I look forward to updating on that as time goes on. So at this point, we’ll open up for questions from the audience.

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Q&A Session

Operator: Ladies and gentlemen, at this time, we’ll begin that question-and-answer session. [Operator Instructions] And our first question today comes from Jack Vander Aarde from Maxim Group. Please go ahead with your question.

Jack Vander Aarde: Okay. Great. Hi, Adam.

Adam Stedham: Hi, Jack. How are you?

Jack Vander Aarde: I’m good. I’m doing well. It looks like VerifyMe is doing pretty well as well. So good to see the results and happy to hear about the double-digit organic outlook for 2024. I’ll be brief. I have a couple of questions. So just to confirm, regarding that 2024 organic outlook, do you expect both segments to contribute to that organic growth? And then I imagine the authentication business because it’s smaller, will likely — is it reasonable to assume that will outpace the Precision Logistics business, whatever you could share at this time?

Adam Stedham: Yes, you’re spot on. We absolutely expect both segments to contribute to that double-digit organic growth, and we would expect the growth rate for our authentication business to be higher than the growth rate of our Precision Logistics business. Absolutely.

Jack Vander Aarde: Okay. Makes sense to me. I appreciate the color there. And then I look forward to hearing more about the strategy and the pipeline conversion opportunities and status update in January that you alluded to. But is there any way you can maybe quantify the size or just the growth of the pipeline that you mentioned earlier from some of these new customers that you were talking about?

Adam Stedham: So yes, I would say that the pipeline — and there’s two factors whenever you look at pipeline. One is size and one is quality. So quality is a very nebulous thing, but the quality of our pipeline is much higher. And then the size of the pipeline, I would say, roughly double. So the size of the qualified pipeline roughly doubles what we’ve experienced in the past. And I would expand on that just to clarify, particularly on the ink side really, what we’re looking to do is have a strategy where we influence having our products specified earlier in the process. And by having the ink specified in the process, we think that, that will significantly improve the quality and potential conversion rate of our pipeline.

Jack Vander Aarde: Okay. Excellent color there. I appreciate that, Adam. And then just one more for me. Given the recent convertible capital raise in insiders participating in the deal, which is a positive sign in my view, do you have a sense of just what the current overall insider ownership level is and maybe that’s a question for off-line, but unless you have it off the top. That would be helpful.

Adam Stedham: No, no, no. That’s fine. So our current insider ownership is approximately 20%, slightly below, but rounds to approximately 20%, which, by the way, is about 80% higher than it was a year ago. And I would expect that the insider ownership will actually go up as we go forward.

Jack Vander Aarde: Okay. Great. Great to hear. Well, I appreciate the time, Adam, and I look forward to hearing more in mid-January. Thank you.

Adam Stedham: Thank you.

Operator: [Operator Instructions] Our next question comes from Jeff Porter from Porter Capital. Please go ahead with your question.

Jeff Porter: Thanks. Hi, Adam.

Adam Stedham: Hi, Jeff.

Jeff Porter: I’d like to focus on understanding what reasonable expectations are for gross margin, two parts in that. I believe in the past, you’ve talked about in the Precision Logistics business sort of trying to convert customers into more of the premium specialized function? And then also, can you give me a sense of what the gross margins are in the Authentication business?