Q2 2023 VerifyMe Inc Earnings Call

Welcome to the verified me second quarter 2023 financial results Conference call.

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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.

On the call today I'm joined by Adam Instead of a 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 three today's presentation and 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 in 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 Adam person opening remarks.

Thank you Nancy and welcome everyone.

In the last month and a half since becoming CEO I've worked with the verify any leadership team to refine and clarify the strategy across our business segments.

We announced in July we've streamlined our company into two 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 well.

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 brake component of the service.

As a result of this we anticipate our overall business wasn't cheap 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 will need to experience significant increases in revenue in H two.

This will be driven by both increases associated with normal seasonality of our business as well as the contributions from unfolding strategy.

So at this point.

Like to take a minute to explain why I am excited by and confident in that strategy.

In April of 2022, the company announced the acquisition of Paris ship, 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 Trustco limited.

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 acquisitions 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 three fourths of the customers in each of terrified me operating segments are within the agriculture, food and beverage industry verticals, which have a growing need for our customers or our company solutions.

So 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 does that 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 and 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. The Perry ship 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.

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 this segment has 5% year over year organic pro forma growth and we expect this to increase.

In addition, we are optimistic about the opportunities for cross selling and integrating services across both our segments, particularly within agriculture food and beverage customers.

And now I'd like to shift the conversation a little bit and began to speak about our authentication segment.

In many ways. This segment represents the historical verified me company.

With that said the services had been transformed by the acquisition of trusts codes and I'm eager to share the details of this transformation.

This segment focuses on providing customers with traceability.

Brand protection and brand enhancement services.

The Trustco G. S. One 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 G. S. One although you probably encounter barcodes based upon the G. S. One standard daily.

For context.

Heck of Wrigley's gum in Ohio, and 1974 became the first scan and bar coded product the organization that spark that transformation, we now know as G. S. One.

G. S. One 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 G. S. One as complying with global G. S. One standards now many organizations claimed to offer G. S. One compliance, but very few have been validated by G. S. One.

And this is an important credibility factor and differentiator for our authentication customers.

Now trust codes has nearly a decade of demonstrated agriculture, 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 marking.

Our system can track and identify authenticated codes as well as identify fake websites that are used to validate fake QR codes on product package at.

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 this segment's brand enhancement services, we harnessed 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 our data driven approach to further educate their consumers on efforts in the area of sustainability and environmental practices.

So this combination of services and our authentication segment supports our existing customers as well as capturing new opportunity 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 H, two or 2023 and meaningful revenues opportunities for us in 2024.

So at this point I'd like to turn the call over to Nancy.

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 or one five months.

The year over year increase was primarily due to growth in our precision logistics segments and the inclusion of the Terry ship acquisition for the full second quarter 2023.

Precision logistics revenue increased zero point $9 million or 23% year over year authentication revenue decreased 0.1.

Corner due to timing of orders.

Gross profit increased $1 million to $1 8 million in 2023 versus $1 7 million in 2020 two.

As a percentage of revenue gross profit declined 34% in 2023 versus 37% in 2020 two.

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 this back in 2020 killed.

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 Trustful and how does your appoint 2 million dollar impact on adjusted EBITDA.

In the quarter, excluding this factor in the adjusted EBITDA loss decreased five airplanes.

Compared to the second quarter of 2022.

As mentioned by Adam we implemented plans to optimize overhead expenses beginning in the quarter to ensure that our operating cost savings materialize in improved adjusted EBITDA.

Going forward.

Yeah.

Our cash as of June 30th 2023, it's $2 7 million a decrease of 0.7 million from $3 4 million on December 31st 2022 due.

Through the first half of 2023 we have repaid zero point $3 million on the term notes and interest as mentioned last quarter, we paid cash and deal costs of <unk> 6 million related to the truckload acquisition and 0.3 million related to the integration and operation of trust that we.

We do we drew down 0.8 million on our revolving line of credit as of June 30th 2023.

Our debt, including our line of credit dry more than $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 and general and administrative and sales and marketing.

General and administrative expenses for the second quarter of 2023, or $2 3 million, which is down seven 6% year over year from $22 5 million in 2022.

We incurred pre ship acquisition costs zero point $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 trusted just partially offset by reduced employee costs in the authentic authentically.

<unk> segment.

Sales and marketing expenses for the second quarter of $2023 5 million up 13, 2% year over year, and <unk> 4 million in 2022.

In 2023, we had the full quarter of precision logistics expenses harsher.

Partially offset by reduced employee costs in the authentication segment.

Okay.

We do anticipate.

Chesapeake, 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 30th 2023.

Of which we just previously discussed our cash position.

Yeah.

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 deer, which is our strongest path for both of our reporting segments.

I would like to turn the call back to Adam.

Thanks Nancy.

Less than two months ago, I joined verify because I saw a company positioned to benefit from helping customers adjust to the changing landscape driven by both macro trends and regulations and 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.

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.

Thank you we will now begin the question and answer session.

If you'd like to ask a question. Please press Star then one on your telephone keypad.

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A question that's already been addressed these like to withdraw your question. Please press Star then two.

Once again, ladies and gentlemen of Starwood one of you I have a question.

And today's first question comes from Josh vendor or Marshall Group. Please go ahead.

Okay great.

Welcome aboard Adam and gratitude to both you and Nancy on your your new executive roles. Thank you, Jeff a couple of questions.

Absolutely a couple of questions for me I'll start with our first question more of a clarification.

I believe I heard precision logistics business or are basically the parachute business organic growth I think you said 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.

Gotcha, Okay great.

Okay, and then you mentioned it it's great to hear.

I understand the second quarter, so a little slower than expected, but great to hear that you maintained your guidance for at least 26 million of revenue still on track with positive EBITDA for the adjusted EBITDA for the year.

And I know the fourth quarters, obviously, the seasonally much at.

Significantly the strongest quarter, but how does maybe anything you can provide just to get an understanding of how high. This week. You look are you expecting sequential growth what growth is there potential for positive adjusted EBITDA in the third quarter.

Without putting you on the spot too much just any comments you could provide would be helpful.

We absolutely expect the Q3 will be stronger than Q2, and we anticipate them 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 couldnt really predict that but I should I believe you would model that we're gonna have a stronger Q3, even a stronger Q4 and set the stage for.

'twenty 'twenty four that's much stronger than 2023.

Okay, Great. That's that's helpful color I appreciate that and then speaking of 2024 before I get ahead to ahead of my my skis.

It does sound like you're pretty confident you're 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 in growth in 2024.

So so there's two factors that are driving that.

One is we do a 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 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 and many of our customers and potential customers are just now looking to implement.

The <unk>.

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.

You provided a helpful overview of kind of the the two new segments or the the re segmentation of the business and that was very helpful. But more of just a general question. Overall, just you know what what's the status of the overall plan related to the kind of the historical what I used to call. It a core verified me proprietary ink solutions is this.

So 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 it in and I'd like to to answer it in two different ways right. So one trust codes doesn't change who are verified me was verified me always.

Leverage third party software to meet the needs of its customers. What we've done is we've vertically integrated the trust coded 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 counterfeit or products and we intend to share more about that.

Strategy in Q4 as well.

Okay Fantastic I appreciate the color and congrats on your new role again, and I look forward to tracking the story. Thank you.

You.

Ladies and gentlemen, as a reminder, if you would like to ask a question. Please press star one at this time, we will pause momentarily to assemble our roster.

Hello, Ladies and gentlemen, as a final reminder, if you'd like to ask a question. Please press Star then one.

Our next question comes from Michael <unk>.

Oh private Investor. Please go ahead.

Well. Thank you for taking my my inquiry I'm just a simple question how are we set for capital.

Is there do we have adequate capital to reach positive working cash flow or are there any additional secondary financings that might be necessary or in the offing moving forward.

So so we really do we we don't comment on any potential secondary financing and what we're looking at in general what I would say is we feel that we feel very comfortable with our cash position and 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 and cash management inside of that assuming current macroeconomic environment and the overall theres not a drastic change to the macroeconomic environment.

We feel comfortable with our cash position and the cash strategy that goes with it.

Okay, great. Thank you.

Thank you 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 strategy session. 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. Thank you all for attending today's presentation. You may now disconnect your lines have a wonderful day.