VerifyMe, Inc.

Welcome to the Verify Me Second Quarter 2023 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. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. 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 Sedum, 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 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 reports 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 month and a half 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 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 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 H-2. 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 Paraship, 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 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 VerifyMe's operating segments are within the agriculture, food, and beverage industry verticals. which have 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 Pariship 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. 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. 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 Code 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 healthcare 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 agriculture, food, and beverage traceability technology and services. This traceability enables customers to meet current and evolving traceability requirements. 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 markings. 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 paths 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 revenues 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 Perryship 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 of 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 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 and improved adjusted EBITDA going forward. Our cash as of June 30th, 2023 is 2.7 million, a decrease of 0.7 million from 3.4 million on December 31st, 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 code 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 30th, 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 prairieship 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 is 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 two 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're 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.

Thank you. We will now begin the question and answer session. If you'd like to ask a question, please press star then 1 on your telephone keypad. We do ask that you pick up your handset before pressing the keys. If your question has already been addressed and you'd like to adjourn your question, please press star then two. Once again, ladies and gentlemen, that's star then one if you have a question. And today's first question comes from Jack Vanderaar with Maxim Group. Please go ahead.

Okay, great. Well, welcome aboard, Adam, and congrats to both you and Nancy on your new executive roles. Thank you, Jack. A couple questions. Absolutely. A couple questions from me. I'll start with a first question, more of a clarification. I believe I heard precision logistics business, or 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's great to hear, you know, I understand the second quarter is a little slower than expected, but great to hear that you maintain the four-year guidance for at least $26 million of revenue, still on track with positive EBITDA for the year. And I know the fourth quarter is obviously the seasonally much, you know, it's significantly the strongest quarter. But how does maybe – anything you can 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 on the third quarter? Without putting, you know, you on the spot too much, if there's any comments you could provide, it 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 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 too ahead of 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 and growth in 2024? Sure.

So there's two 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're 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 strategy 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 um i

You provided a helpful overview of kind of the two new segments or the resegmentations of the business, and that was very helpful. But more of just a general question overall is just, you know, what's the status of the overall plan related to the kind of the historical, what I used to call the core Verify Me proprietary ink solutions? Is this still part of the story, or is it – how does that play a role, I guess, going forward?

So it's absolutely part of the story. And I'd like to answer it in two 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've vertically integrated the Trust Code 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 for 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, and I look forward to tracking the story. Thank you. Thank you.

And ladies and gentlemen, as a reminder, if you would like to ask a question, please press star than 1 at this time. We will pause momentarily to assemble our roster. And ladies and gentlemen, as a final reminder, if you would like to ask a question, please press star than 1. Our next question comes from Michael Maggio, a private investor. Please go ahead.

Thanks for taking my inquiry. Just a Simple question. How are we set for capital? 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 comment on any potential secondary financing or what we're looking at. In general, What I would say is we feel that 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.

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.

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. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.