Q3 2024 VerifyMe Inc Earnings Call
Hello and welcome to the Verify Me 3rd Quarter 2024 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions.
Speaker Change: To ask a question, you may press star then 1 on your telephone keypad, and to withdraw from the queue, please press star then 2. As a reminder, this conference is being recorded. I would now like to hand the call over to Nancy Meyers. Please go ahead.
Nancy Meyers: Good morning, everyone, and thank you for joining us today for our earnings call presentation. On the call today, I am 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.
Adam Stedham: 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.
Adam Stedham: 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.
Speaker Change: I will now turn the call over to Adam Stedham for some opening remarks.
Thank you, Nancy.
Adam Stedham: I'm pleased with our gross margin, gross profit, and adjusted EBITDA improvement in 2024 versus 2023.
Adam Stedham: These gains have been the result of diligent efforts by the leadership team and I'm pleased with their results.
Adam Stedham: In particular, I'm pleased to report in our Precision Logistics segment that we have seen revenue growth during the third quarter in our proactive services that has come very close to offsetting the loss of the premium customer previously disclosed.
Adam Stedham: Our total year-to-date net cash is slightly down at the end of Q3, but we anticipate that we'll be net cash flow neutral for 2024.
Adam Stedham: Looking at 2024 as a whole, we anticipate our 2024 revenue will be slightly below 2023 revenue. And...
I'm disappointed by the lack of revenue growth.
Adam Stedham: A meaningful contributing factor is the FedEx insourcing of services provided to one of Pariship's premium customers.
Adam Stedham: As just mentioned, we're seeing the results of our expanded sales effort, but the loss of that contract will still drag on the full year results.
Adam Stedham: Now, a larger drag on overall expected revenue growth this year comes from our authentication segment, which, despite robust growth expectations, at the start of this year, it hasn't grown in 2024.
Adam Stedham: Now, this has led us to do a thorough analysis of our competitive positioning in this area.
Verify.me has been focused on anti-counterfeit efforts for many years.
Adam Stedham: Historically, these efforts were highly dependent upon technology partner strategies, which have presented many exciting opportunities, but which ultimately generated limited shareholder value.
Adam Stedham: The partnerships that have created some value for shareholders have been in the distribution partnerships supporting our ink capability.
Adam Stedham: Now, in 2023, as a way to reduce our reliance on third-party technology providers in the code business, we acquired Trustcodes.
Adam Stedham: This transaction was completed with minimal cash, and during 2023, we integrated TrustCodes technology into our business.
Adam Stedham: In addition, throughout 2023 and 2024, we've focused on developing potential sales and distribution partners created by the Trust Code's acquisition.
Adam Stedham: Now, coming into 2024, we anticipate a significant growth of our authentication segment due to leveraging our sales and distribution partnerships and completing our services provider agreement with Amazon Transparency.
Adam Stedham: Disappointingly, organic growth has not materialized for this segment in 2024. We've come to realize that traceability through serialized codes and supporting cloud technology is a very complex sale for customers in the U.S. market.
Adam Stedham: We've also discovered that our authentication segment lacks the size and scope to compete effectively in the enterprise customer market.
Adam Stedham: And then lastly, due to various marketplace dynamics and our company's size and positioning, we do not believe the Amazon Transparency Arrangement presents the tailwinds for the authentication segment that we had previously believed it would.
Adam Stedham: So as we evaluate the current situation, I think we also need to consider that pursuing this vertically integrated code strategy.
Adam Stedham: requires approximately a million dollars per year of cash investment by the company in 2024, again in 2025, and continued cash investments into 2026.
Adam Stedham: So, and I want to help put that required investment into perspective.
Adam Stedham: A million dollars is approximately 8% of the entire market cap of the company, and our code services represent about 1% of our annual revenues.
Adam Stedham: So, as a result, we've been working with multiple advisors to critically assess what are our various options. And we've concluded that a renewed focus on our ink product, which currently represents about 23% of our authentication revenue,
Adam Stedham: or the pursuit of other strategic opportunities related to areas of company or board expertise will provide a better return for our shareholders than continuing to invest in the vertically integrated code strategy.
Adam Stedham: So, as a result of this, we'll likely exit that portion of the authentication segment, which would also end our current relationship with Amazon Transparency prior to the end of 2024 by discontinuing the operation or divesting of the business.
Adam Stedham: Now, when I introduced myself to you just over a year ago, I said we believed that our Perryship business presents a strong cash flow business and we believed we could create value through organic and strategic initiatives.
Adam Stedham: We continue to believe this is the case. While the decision to change course on the authentication business is likely to be a surprise to you, I want you to know that we have not made this decision lightly.
Adam Stedham: At the very core of our strategy and efforts is to drive to create shareholder value. We now strongly believe that we'll be able to best create this value by investing in areas outside of the codes portion of our authentication segment.
Adam Stedham: We've engaged with bankers and advisors in seeking alternatives, and at this point we're very optimistic about the opportunities that we see.
Adam Stedham: So, I'd like to shift the conversation a bit to discuss precision logistics.
Adam Stedham: We've increased the number of proactive services year-to-date customers in this segment by 6% over 2023.
Adam Stedham: We also have continued to see increases in proposal activity and precision logistics since it's increasing the size of our sales team.
Adam Stedham: Now, despite our total shipments for existing customers and proactive services being down 4% year-to-date, we're pleased by the shifting trajectory of these volumes.
Adam Stedham: We expect that Q4 of this year will continue to face headwinds, but we believe our execution and differentiation positions us to navigate the situation well.
Adam Stedham: In addition, we believe we're well positioned to benefit from the wins once the overall perishable shipments market shifts.
Speaker Change: So, at this point, I'll turn the call over to Nancy for a detailed review of the third quarter financials.
Nancy Meyers: Thank you, Adam. The third quarter revenue was $5.4 million versus the prior year of $5.6 million, a decrease of $0.2 million.
Nancy Meyers: Revenue in the authentication segment was down slightly year-over-year. In the precision logistics segment, premium revenue was down $0.5 million due to the previously disclosed discontinued contract with one customer, partially offset by a $0.4 million increase in our proactive services revenue.
Nancy Meyers: Gross profit decreased $0.2 million to $1.9 million in Q3 2024 versus $2 million in Q3 2023.
Nancy Meyers: As a percentage of revenue, gross margin was 35% in Q3 2024 versus 37% in Q3 2023.
Nancy Meyers: While the quarter did result in a decrease in year-over-year gross profit with the loss of one customer in premium services, which has higher margins, which we discussed in our last earnings call, the impact was partially mitigated by other process improvements the company has made.
Nancy Meyers: We still anticipate our full year 2024 gross margin to exceed full year 2023, even though we expect Q4 gross margin percentage to be below Q3 due to the seasonality associated with our proactive revenue.
Nancy Meyers: During the quarter, as a result of the analysis of our competitive positioning in the authentication segment, and likelihood that we will exit the code portion of our authentication segment as discussed earlier by Adam,
Nancy Meyers: An event requiring a goodwill and long-lived intangible asset impairment analysis to be completed was triggered. As a result of the analysis, we recorded a $2.3 million goodwill and intangible asset impairment within total operating expenses.
Nancy Meyers: Operating expenses were $4.8 million in Q3 2024 versus $2.9 million in Q3 2023 but included this one-time non-cash, goodwill, and intangible asset impairment in the authentication segment.
Excluding these items, total operating expenses improved by $0.4 million.
Nancy Meyers: General and administrative expenses improved by approximately $0.4 million, primarily due to the severance recorded in 2023 that did not recur in 2024.
Nancy Meyers: Our net loss for the quarter was $2.4 million, or a loss of $0.23 per diluted share.
Nancy Meyers: excluding the non-cash items of the goodwill and intangible impairment as well as gain on fair value of contingent consideration related to the trust code global business
Nancy Meyers: Our net loss for the quarter was $0.6 million versus $0.9 million in Q3 2023, or a loss of $0.09 for diluted share.
Nancy Meyers: On the last slide is our balance sheet as of September 30, 2024.
Nancy Meyers: Our cash as of September 30th is $2.6 million, a decrease of $0.5 million from $3.1 million on December 31st, 2023.
Nancy Meyers: During the first nine months of 2024, our use of cash included $0.5 million in repayment of debt and interest. Due to the seasonality of our precision logistics segment, our AR, unbilled revenue, and accounts payable are higher at year-end compared to the other three quarters.
Nancy Meyers: As of September 30, 2024, we have $1 million remaining on our loan and $1.1 million on our convertible note.
Nancy Meyers: There are no borrowings under our line of credit and we have $1,000,000 available to us.
Speaker Change: With that, I would like to turn the call back to Adam.
Thank you, Nancy.
Adam Stedham: As for the decision that's related to our authentication segment, I can't overemphasize the amount of evaluation and analysis that's gone into this decision.
Adam Stedham: I'm committed to pursuing organic and strategic initiatives that will create value for Verify.Me! shareholders.
Adam Stedham: I continue to believe we can create meaningful value for our shareholders, and our best opportunity to create this value is to redirect our investment into areas other than the codes portion of the authentication segment.
Speaker Change: Over the last 15 months, we've been focused on creating this value for shareholders by strengthening the operations of our precision logistics business and investing in the codes portion of our authentication.
Speaker Change: However, more recently, we've begun to increase our investment in sales and marketing within precision logistics business, and I feel this focus is starting to yield results. I'm optimistic about the conversations that we're having with advisors and bankers.
Speaker Change: And so, at this point, I'll turn the call over to questions from our analysts.
Speaker Change: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys.
Speaker Change: To withdraw your question, you may press star, then two. At this time, we will pause momentarily to assemble our roster.
You
Speaker Change: Today's first question comes from Michael Petoskey with Barrington Research. Please go ahead.
Speaker Change: Good morning. So, I'm curious on the remaining authentication business. Is that adjusted EBITDA positive or is it adjusted EBITDA negative? Sort of what will remain of that business?
Speaker Change: At this point, it would be adjusted EBITDA negative at the beginning of the year, depending upon our current backlog of revenue that we're pulling into the year, but as we evaluate that, we're obviously looking to drive to a point of being adjusted EBITDA positive in 2025.
Speaker Change: Okay, so yeah, essentially the road I want to go down is does it does it make sense for that that segment itself to exist? Given that it's such a tiny part of revenue. I understand it's gross margin accretive, but it's not if it's not a bit Adjusted EBITDA accretive, right? Yeah
Speaker Change: Yeah, you bring up a good a very good question and in terms of which is really more of a reporting and how we discuss the company and people view it given the low percentage of our total revenues
Speaker Change: It may not make sense to discuss it in a discreet manner, but given the history of the company and authentication services and the patents that we have in that area, at this time we still want to keep people informed by discreetly talking about it.
Speaker Change: Yeah, I was in questioning talking about, I guess the question I had was, does it make sense?
Speaker Change: As part of part of verify me going forward given given how Little it contributes and the fact that it's a drag-on adjusted even job, but it sounds like you're hopeful. It won't be going forward
Speaker Change: Right, and we're looking at, we're definitely considering that, and if there was a path, whatever the path is that we think would create the most value for our shareholders relative to that portion of the business.
Thank you.
Speaker Change: I also want to just ask real quick, you know, I guess the FedEx premium decision, you know, we're now maybe a couple quarters removed from from that decision. And obviously, there's still some premium business.
Speaker Change: that you guys have and I'm just curious because at the time of the FedEx announcement, I think you were
Speaker Change: hopeful that in the near term the remaining premium business would sort of stick around but maybe not as high you know you maybe didn't have quite as high conviction on the longer term I'm just wondering is there any update in terms of your sort of outlook on that piece of your business
Speaker Change: going forward, and I'm particularly asking around, you know, hey, should I be thinking about this as part of the business for 25 and 26 and going forward.
Speaker Change: Right. Great, great question. So, as a reminder, if we go back to our strategy, James, we have two types of premium customers.
Speaker Change: What a premium customer means is simply we get paid for our service independent of any shipping costs, whereas proactive, we get paid for shipping and our service.
Speaker Change: So, there are direct premium customers. What that means is the customer pays us directly to provide our service, and they pay FedEx
Speaker Change: or whomever else directly to for the shipping. That's direct premium. And then indirect premium is we are subcontracted by FedEx to provide a service as a resell.
Speaker Change: So, we are actually seeing growth of our direct premium customers, and we have increased activity in our pipeline, and so we think that aspect of our premium business
Speaker Change: is going to grow, and it will grow at the same margin profile versus margin profile as our indirect premium. So that's positive for us.
Speaker Change: To this point, the work subcontracted to FedEx has remained stable, and we haven't seen a significant shift of customers.
Speaker Change: With that said, FedEx has made significant investments in an AI product, and that AI product
Speaker Change: has the ability to do some of what we are subcontracted to do. So we don't anticipate at this point there is any near future.
Speaker Change: impact from this and our current strategy is to grow the direct premium at a rate that would offset any decline in the indirect premium.
Speaker Change: That's where we sit now. Does that answer the question? Does that make sense? It does. It does bring one question. How much direct premium revenue do you guys currently sort of have exposure to?
About 10% of the premium revenue is direct premium currently.
Speaker Change: And that's what, like a couple million dollars total that we're talking about.
Speaker Change: No, no, because, um, no, no, I don't mean that the 10% of, but isn't, isn't, isn't premium somewhere around 10, 10, a couple million dollars or my, um, no, it.
It's north of 4, 4 to 5.
Booker.
Speaker Change: Even after the FedEx decision from six months ago? Yes. Okay, got it. Got it. Okay.
Speaker Change: and Dr. Paul Feinberg. That's all I've got. Thank you. All right.
Speaker Change: The next question comes from Jack Van Der Arde with Maxim Group. Please go ahead.
Speaker Change: Okay, great. Hi Adam, I need a few things to take in.
I'm good. Thanks for taking my questions You know
Speaker Change: Adam, I'm going to just kind of touch on this as well a little bit, so I apologize if I'm being redundant or if I have a few things that just aren't ready yet. But in terms of the authentication segment going forward,
Speaker Change: which I understand you're still working through the strategy, obviously, but just a couple things. So, what pieces of that business are still in play for certain? Is it just the inks component of the business, or am I missing something else as well?
Well, it's...
Speaker Change: So right now the Inc. component is in play and the relative patents and the technology and the equipment that supports the Inc. strategy, but keep in mind that historically the company, as I said, has leveraged various partnerships that would allow the Inc. component to join up with other technologies or other strategies.
Speaker Change: So, we do have that that we're analyzing from a partner perspective. Now, we're very cognizant, as I said earlier, that the way those partnerships were created
Speaker Change: in the past, on the code side, didn't create a lot of value. But there were some partnerships that created value, so in terms of distributor partnerships and so on and so forth.
Speaker Change: So that's really where we're at. With that said, we do have expertise in anti-counterfeit, in authentication, and some of the various opportunities that we're looking at.
could be within the overall realm of authentication services.
Speaker Change: Okay, that's very helpful. And then just, you know, just in general, regardless of the specifics, I guess, is it, maybe just for sanity check, do you indeed expect revenue from the authentication segment in 2025? Any sort of ramping up of any of the inks revenue or anything else that's involved? Just to get a baseline there.
Right, we...
Speaker Change: We do expect revenue in 2025, but if you look at it, I don't think it's going to be material for the company as a whole. If you look at our overall revenue,
I don't think it'll be it
This year it's
Speaker Change: with the codes and the ink, so I don't anticipate it'll be a material amount of revenue in 2025, but there will be revenue in 2025.
Speaker Change: Okay, that's helpful, Collar. And then just switching gears to precision logistics, I did see you guys called out the proactive services piece was up 9% year-over-year. And just for a sanity check there, too, so I have it correct, what actually is the mix of the proactive services revenue? Or what's the dollar amount, if you could just give us a sense there?
And so, I mean, I would...
Speaker Change: From a mixed perspective, you're looking at about 20% of the revenue is premium, 80% of the revenue is proactive.
Adam Stedham
Gotcha, okay, that's helpful.
Keep in mind, keep in mind as Nancy said,
Speaker Change: There's a strong seasonality component to proactive in Q4, so that mix changes in Q4 because the proactive goes up substantially and the premium doesn't move in the same way in Q4. In addition to that,
just like everyone else.
Speaker Change: We're somewhat assuming what the seasonality will be this year. What
Speaker Change: Christmas shopping patterns, holiday shopping patterns, all of those things will be this year. We're making some assumptions on that, but no one really knows until after the season is over.
Speaker Change: Sure. Okay, that's helpful, Adam. And then, you know, just your comments around gross margin. Obviously, there's some puts and takes here. It sounds like you're expecting the fourth quarter, you know, just given, I guess, the higher volume, maybe also less of the trust codes business as well, but just in general, gross margin sounds like it'll be, it'll tick down a bit, but nonetheless, you still expect positive adjustability of the dollar for the year.
I just want to get your comments because
Adam Stedham
Speaker Change: next year. Are we going to expect a kind of a gradual uplift just due to volume and overhead being absorbed or
Speaker Change: is this kind of, give us a steady state if you could. Thanks.
Speaker Change: And do you think that there's arisen some misplacement in their past experiences? We don't know. Um, I don't think so. We don't know whether there was or if it is that I can't report, uh, going back and reporting on past tension, but there are potentially consequences after career failure. That's my takeaway. Yeah, they're uneven, sometimes.
Speaker Change: I don't think that we'll see a year-over-year gross margin uplift.
next year.
Speaker Change: versus 2024 for two reasons. One is keep in mind our premium business is a much higher gross margin profile than our proactive. And so with the insourcing of the one customer that happened halfway through this year, that creates a comparison where we had a much higher gross margin effect the first half of the year due to that premium customer.
On top of that...
Speaker Change: We expect to see our growth happening in the proactive business.
Speaker Change: So, as the proactive business grows, the percentage of our total revenue that is of the lower gross margin type versus the higher will increase, which would have a downward effect on gross margin. With that said, we expect...
Speaker Change: that through our investments in technology and automation, we are going to see some cost rationalization, which would offset that.
Speaker Change: So, overall, I think we're looking at having a flattening of the gross margin profile going into next year with the exception of the comparison impact of the previously announced premium customer from the first half of the year.
Speaker Change: Okay, understood. I think that's it for me. I appreciate it. I'll have to talk to you in the queue.
All right.
Speaker Change: Thank you. The next question is a follow-up from Michael Patusky with Barrington Research. Please go ahead.
Speaker Change: Thanks, I missed this last question. Oh, no, you're good, Michael. No problem. Thank you. Hey, so, Adam, you alluded to, but if you gave specifics, I apologize, I missed it. I know that you guys had hired a couple of salespeople for business versus logistics in Q2. Had you added to that in Q3?
Adam Stedham: Yes, we had another another person we had in another sales and marketing person in q3
Speaker Change: Okay, and do you have any plans as you sort of look out over the next 6 to 12 months to bolster that or is that going to cover you for the near future?
Speaker Change: We don't have definitive plans. We're evaluating that. I mean, one of the things we're...
Speaker Change: As we're redirecting investment dollars that have not resulted in revenue growth this year, and have not resulted in the results we wanted,
Speaker Change: part of that money could be deployed into sales strategies for the Parachute Business. I mean, it's a significant expense.
Speaker Change: that is going away, which one of the very logical things to do with that would be looking at deploying a portion of that towards organic growth in precision logistics. But we don't have a final plan as of yet.
Speaker Change: And then just last question, do you guys have any plans or have you discussed the idea of sort of doing some kind of reset investor day where essentially you say, hey, a few things have changed in the past year. We want to sort of talk about our go forward outlook.
We absolutely, my expectation
is that our
Speaker Change: so that we have adequate time to not only share the year-end earnings, but we also are able to provide far more insight to the strategy for 2025.
All right, awesome. Thank you
Thank you.
Speaker Change: This concludes our question and answer session. I would now like to turn the call back over to management for any closing remarks.
Speaker Change: Well, thank you very much and as we said, you know, some of the decisions that have been made are probably surprising to people.
Speaker Change: But, with that said, hopefully you understand and you realize how much thought went into it and that, at the end of the day, we're making decisions that are just very, very laser-focused on growing the company, building shareholder value, and providing returns to our shareholders. So, thank you, everybody, for attending today.
Speaker Change: The conference is now concluded. Thank you for your participation. You may now disconnect your lines.
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