VerifyMe, Inc.

Good day and welcome to the VerifyMe Second 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. 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 today's event is being recorded. I'd 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 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. 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 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.

Thank you, Nancy. Welcome, everyone. I'm pleased to report that although Q2 2024 revenue is effectively flat with 2023, we had significant improvement in gross margin, gross profit, and adjusted EBITDA, or gross margin percentage, that is. Noteworthy is that This is now the fourth consecutive quarter of positive adjusted EBITDA. Given the previously announced change to a large single contract that was subcontracted to us from FedEx, we anticipate the adjusted EBITDA for Q3 may be slightly negative, but we anticipate H2 and full-year positive adjusted EBITDA. We previously announced that we anticipate mid-single-digit revenue growth in 2024 over 2023. As we further evaluate the progress within the authentication segment and the fluctuations in existing customer shipments for precision logistics, we now believe 2024 revenue will be roughly in line with 2023, which is much like H1 2024. With that said, we anticipate our gross profit, gross margin percentage, and adjusted EBITDA will exceed 2023. I'll address the revenue drivers a bit more in a minute. However, I would like to point out that we continue to have confidence in 2025 because we do not believe the types of unexpected items that have impacted our revenue growth in 2024 are likely to repeat or impact results to the same extent in 2025. Now, our current cash net of debt is slightly better than this point last year. We anticipate that we would be roughly flat to slightly positive for cash net of debt for 2024. And we continue to have sufficient cash flow to execute all of our organic current growth plans. We continue to have our announced buyback in place, and we're evaluating 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 the shareholders' value. So let's shift the conversation to our two operating segments. The precision logistics segment Q2 2024 revenue is above Q2 2023, just as in Q1 2024. However, the revenue is not experiencing the growth we had previously expected. One contributor to this is the previously announced change to the one FedEx contract. But the second factor is partial shipping volumes in the marketplace are down in 2024 versus 2023. So for H1 2024, our shipments with existing customers are down 9% versus H1 2023. However, we've increased our customers within our proactive service line by 7% in H1 2024 versus 2023. We're pleased with the contribution of our new sales efforts, but the incremental contribution has been offset thus far by year-over-year reductions in volume with existing customers. In time, we anticipate these volumes will increase and add to the growth contributed to our new sales efforts. But for now, we're in a market in which our strongest opportunity to grow our revenues is by expanding our existing customer base. So we continue to focus our efforts on adding new customers in the region between Maine and Pennsylvania. That's our plan for the remainder of 2024 and then expand in 2025. We did add two additional sales representatives. As we announced, we expected to hire on our last call. We continue to believe our plans for expanding our sales force with a targeted geographic approach will create the most value for the company. And our successes and lessons learned from this year will guide our plans for geographic expansion in 2025. So now let me shift to authentication segment for a bit. We've made significant progress on a very involved effort to formalize our relationship with Amazon. I realize that the effort has taken longer than we anticipated, but we believe the time and energy we're dedicating to this initiative is critical, and it's a critical element of our plans to deliver meaningful shareholder value. We anticipated this process and the subsequent revenue generation would occur sooner but the length of the process does not in any way undermine the long-term opportunity associated with the relationship. We continue to believe our relationship with Amazon creates significant opportunity to create value for Amazon, our mutual customers, end consumers of our customers' brand, and most importantly to you, Verify Me shareholders. In addition to the Amazon relationship, We continue to see positive trends for our APAC business, our other strategic relationships, regulatory controls, and ink sales. We anticipate that our H2 and full-year 2024 revenues for authentication will exceed our revenues for the same period in 2023, and I look forward to updating you on these important events as time goes on in the near future. So at this point, I'd like to turn the call back over to Nancy Myers, our CFO, to provide a more detailed financial report.

Thank you, Adam. The second quarter revenue was $5.4 million versus the prior year of $5.3 million. Revenue effectively remained flat in both our precision logistics and authentication segments. Growth profit increased 0.5 million or 32% to 2.1 million in Q2 2024 versus 1.6 million in Q2 2023. As a percentage of revenue, growth margin increased to 39% in 2024 versus 30% in 2023. The year-over-year increase in gross profit continues to reflect the shift in customer mix and service offerings in our precision logistics segments. as well as process improvements the company has made. As a result of the previously announced change to one significant subcontract from FredEx, we anticipate H2 growth margins to be below H1 2024. We anticipate our full year 24 growth margin to exceed full year 2023. And Q4 growth margin percentage will be below Q3 due to the seasonality associated with our proactive revenue. Overall, our operating expenses were effectively flat year-over-year at $2.6 million. Our net loss for the quarter improved by $0.6 million to a loss of $0.3 million, or a loss of $0.03 per diluted share, versus a loss of $9 million in Q2 2023, or a loss of $0.09 per diluted share. Our adjusted EBITDA increased by 0.6 million to positive 0.2 million for the second quarter of 2024. On the last slide is our balance sheet as of June 30th, 2024. Our cash as of June 30th is 2.9 million, a decrease of 0.2 million from 3.1 million on December 31st, 2023. During the first six months of 2024, our use of cash included $0.3 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. As of June 30, 2024, we have $1.1 million remaining on our loan 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. So I've now been with the company for about a year, and I continue to be focused on pivoting from transformation to growth. The marketplace adoption of authentication and traceability services continues to be slower than we desire. And in addition, we've had some headwinds for partial shipping volumes. With that said, we've not shied away from the hard work of moving the company forward. We have a healthy balance sheet, a sales strategy that is taking firm hold, and key relationships that are being formalized. Our positioning in the marketplace is growing stronger than it's ever been. So at this point, let's turn the call over and happy to answer any questions.

Thank you. We'll now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. If your question has already been addressed and you'd like to remove yourself from queue, please press star then 2. Once again, ladies and gentlemen, that's star then 1 to ask a question. And we'll pause for just a moment to assemble our roster.

vendery with maximum group please go ahead okay great thank you uh good morning adam and nancy how are you doing i'm doing well i'm doing well um and and congrats you know i know the guidance you've had to lower it a little bit but uh it's good to see a fourth consecutive positive justin eva dot quarter since you've taken over And I am aware of your comments. It sounds like the third quarter EBITDA loss could be, it could be a loss, a slight loss. So I understand that, but good to see that it's supposed to be positive for the year. You know, Adam, I'd really like to get your comments and just your perspective on your experience and expectations following the GS1 conference. Any takeaways you had? Thanks.

So great question. So definitely, it was quite interesting. I think one big takeaway is, and it's impacted us this year, much the same as it seems to be impacting others. If you look at many of the regulations out there and many of the things in terms of the Food Safety Modernization Act, the shift from barcodes to more intelligent codes, Across the industry, the adoption of these things are much slower than everybody expected. There were many conference sessions around why are things so slow. It seems like many of the companies are taking things cautiously because this is an election year. They don't know what's going to happen. They have until the beginning of 2026 to have full adoption, 2027 for others. So many companies are taking a wait and see this year, which has slowed the adoption. Therefore, it's slowed some of the revenue growth of the suppliers to the marketplace. So I thought that was really important. With that said, if you look at the overall landscape, there's not a lot of, there's really no indication that the deadlines are going to delay So that gives us optimism about 2025. Many of the customers are doing their strategic planning and budgeting for 2025 as we speak, and they're having to plan on these requirements going into place January of 2026. So I thought it was a very interesting and insightful overview of what's happening in the industry.

Okay, great. No, I appreciate that color. And, um, you know, without getting too specific, uh, you do sound very optimistic about, uh, 2025 as well, despite maybe a kind of a flat growth for 2024. Um, if I could just circle back maybe to that five year target plan you outlined at your investor day, how do you feel about those targets still? I think it's kind of like a 17% growth CAGR over time, over five years. in marching your way up to certain adjusted EBITDA margins of 15 plus percent. How do you feel about those numbers and just kind of, do you feel like you're still on track as you head into 2025? Thanks.

So I do feel good about that. Assuming that the regulatory environment doesn't have a significant change, assuming that The marketplace and society continues to move forward in terms of food safety and modernization, in terms of the shift in barcodes. If you look at this year and if you look over the five-year period of time, on our precision logistics segment, we knew that some of the work that was being subcontracted to us from FedEx was not going to continue to grow. We've indicated that they were working on an AI solution internally, and so they wouldn't continue to be long-term dependent upon us. It hit us faster this year than we had anticipated, but we didn't anticipate that continuing to grow throughout the five-year period. We anticipated our growth coming from our proactive business. The salespeople we've hired, we're excited about the pipeline. We're excited about the growth that they've had. This year, it's offset by reductions with our existing customer base. But over a five-year period of time, as those incremental sales continue to kick in, as the existing customer base goes through the normal ebbs and flows of the economic cycles and we see those shipments return, We feel very good on that side. So that's precision logistics. Feel very strong there. On the authentication side, as long as there aren't significant changes to the regulatory drivers that we believe are going to drive this business, we continue to have confidence there as well.

Okay, great. Very, very much appreciate the color there. And it just, one more point, uh, just kind of for, for, to clarify, just cause I, I may have missed it. Um, did I hear correctly, uh, parcel shipments, um, from in one H 24 from existing customers, those are down 9% year over year, but shipments from new customers were up 7% year over year. Is that correct?

Not exactly. Our shipment volumes, I kind of mixed this up on you. Maybe I should have done it differently. But just so we're all clear, the shipment volumes are down 9% year over year. Our total new customers is up 7%. So we've added a significant number of customers. So on one hand, I'm comparing the volumes with existing customers year over year. And on the other hand, I'm comparing the total number of customers year over year.

Got it. Very much appreciate the clarity there. Makes sense. Well, I appreciate the update and glad to hear you have sufficient cash to continue your organic growth objectives. Thanks, Ed. Thank you.

Thank you. And our next question today comes from Michael John Petoskey with Barrington Research. Please go ahead.

Good morning, Adam. So I'm curious, was there any impact in the quarter from the FedEx premium business or did that business sort of continue as normal through June or did some of that actually get into the quarter?

It did. It did come into the quarter. It transitioned, you know, between midway and two-thirds through the quarter is when it transitioned.

Is there any quantification of that impact by any chance?

I don't think we've put any quantification out publicly on that. Okay.

All right. And then your comments on 25, I'm just curious. You know, there's additional premium business that FedEx, I don't believe, did transition, but sort of remains. And I'm just curious, are your 25 comments, you know, and I may be totally over-reading this, but your confidence around 25, does that indicate that you've been given any sense that, hey, that remaining premium business will continue for the foreseeable future or not?

What I can say, so I can't answer directly, but I'll try to answer indirectly. You know, we're really pleased with the relationship we have with FedEx, and they're very transparent with us about what their strategies are. And we're very aware of when existing contracts with our mutual customers with FedEx come up for renewal and looking at, When those customers come up for renewal in combination with the strategy that FedEx has shared with us, that's what gives us the confidence about 25.

I think we're only talking about maybe a couple, two, three contracts, right, that remain there, that make up the remaining whatever it is, a couple million dollars of premiums? Right.

There's a small number, yes.

It's only a few. So can I ask just sort of for longer-term modeling, I mean, do those contracts start to come up in 26? Is that essentially how we should sort of read your contract?

That's how I would think about it. From a modeling perspective, that's how I would think about it.

Okay. And so intuitively then I would assume that it may be prudent to assume some kind of couple million dollar drag in 26 if one was modeling out multiple years here. Is that fair?

From a modeling exercise perspective, I think that that's a fair way to model. I believe that in the world right now, it's hard to predict six months from now, much less a year and a half from now. The other thing that I would think that you need to think about, if you remember back to the strategy day, there's three components. There's three types of revenue. So there's proactive revenue where we're outselling customers and we're effectively subcontracting FedEx. There is premium revenue, traditional premium revenue, where FedEx has subcontracted us. And that's at an elevated gross margin because of the way it's structured. And then there's a direct premium part of our business as well, which was very small when we had our strategy day. But this is a part of the business that our new sales force is selling today. And on a percentage basis, it's actually the area that's experiencing the most growth for us on a percentage basis, but it's very small at this point. So what direct premium means, just as a reminder, it's much like premium in that we get paid by a customer and it operates at a much higher gross margin because we don't have incremental costs associated with servicing it. They have a contract with FedEx to handle the shipping so that shipping cost doesn't move through us. And they have a contract directly with us to handle all of the value added services that sit on top of the shipping. So although the direct premium, I do think over time where FedEx is subcontracting us, I completely agree that the model should be that that's going to go down over time. Hopefully, over the next quarter and going forward, I'll be able to give you more guidance on the ramp up of the premium, the third leg of our stool, that direct premium, because it is growing in a meaningful way. It's too early to tell, and we don't have enough data to be able to guide you for 2025 and 2026, but we hope to have that by our next call.

Adam, can I just ask a quick question on that? How much of the remaining premium business is direct premium? What percentage, like 10%, a quarter? I mean, what percentage of it is direct premium?

You know, I don't have an exact number, and I don't want to, particularly on this call, I don't want to give you something that is not accurate, because I know you're going to put it into modeling. So... We'll get that number to you so you can incorporate it into your model. Does that work?

Absolutely. I mean, it's fair to say, though, it's not the majority.

Correct, correct. Right, right. Absolutely. It's on the smaller percentage side of it. But we'll get it to you. And we'll get it to both of the analysts, right, just so you both have it for modeling.

Adam, last question, just sort of a follow-up on the earlier analyst question on the longer-term targets. I mean, I don't know that I would take your commentary as an affirmation of the targets you guys put out at the Investor Day. I mean, is it fair to say that now it's – that's aspirational but not necessarily – you know, that you would not be comfortable saying you've affirmed those five-year targets? I mean, is that fair or are you aware?

Right. I think that's fair. I think, in essence, we're on track for our efficiency gains and our margin improvement. We are on track for our strategy improvement. We're not over a five-year period of time significantly changed by the FedEx subcontracting model, all of that. With that said, obviously we're not in this year achieving the revenue that we had desired to achieve this year, so it does back things up a little bit in the model. So I don't necessarily think that the trajectory of the model is shifting, but the starting point of the model is moving to the right a bit because of the revenue gains that aren't materializing this year as we had anticipated.

Let me squeeze one last one in. In terms of authentication and what you're trying to do with Amazon, I guess, is there I understand this is drag, but are you hopeful that you can get where you want to in terms of formalizing that relationship by the year end or by the time you guys report year end? How are you thinking about that?

Yes, definitely by year end. Quite transparently, if We anticipated we would have it by now, but it's complicated. But just because it's complicated doesn't mean that it's not valuable. It just means that it's taking more time than we expected. So without a doubt, by year end, I would anticipate that.

Is this the kind of relationship that you feel like essentially is bigger than the current run rate of the business? I mean, is it of that magnitude?

The run rate of the authentication business or the overall business? No, the authentication business. Absolutely. I think that if it materializes effectively, it should be. I think that the relationship transforms that business. I believe it's a transformative relationship for the very nature of what we're able to provide and the value, what we can provide to a certain subset of consumers. So it absolutely changes. changes the game for that side of the business.

Terrific. All right. Thank you so much. Really helpful.

All right. And Mike, just to give you the direct premium number, it's running about 10%.

Sorry about that, ma'am. As a reminder, if you'd like to ask a question, please press star then 1. Our next question today comes from Jeff Porter of Porter Capital Management. Please go ahead.

Hey, Adam, I'm wondering if you can elaborate in the Amazon perspective relationship. What gives us a competitive advantage there, and are you seeing others that we're competing with for that business?

Yeah. If there were others that were competing for the business, that could very well happen, and we not know of it. So I want to be very transparent about that. With that said, we believe right now we are the only one who is working on this. That's what our current belief is, and that belief is based upon the facts and the conversations that we've had thus far. So that's our current belief. We don't believe that we will be the only one forever. I think that would be naive, but I believe, but as of right now, we are the only one. And what gives us the confidence is, as was previously announced, not necessarily by us, but by one of our customers, we've already demonstrated a proof of concept with one of our customers that's actually integrated in and going live. So that's what gives us the sense of confidence overall.

Great. And could you speak to what the margins on this business prospectively would be?

Not exactly. The margins will be roughly in line with our authentication margins overall. It won't vary tremendously from our existing. And much of the margin depends upon the actual go-to-market strategy. So if we have a customer that wants just codes, that's extremely high gross margin. If they want codes that we put on labels and they buy an integrated label with codes, then there's lower margin because you can't demand the same margin on a label markup that you can on the intellectual property associated with the codes. So it's difficult for us to exactly predict because we don't know the product mix between label and non-label that the consumers will go with or the brands will go with. So based upon that, if we assume it will follow the traditional pattern of the authentication business, then you could model that the gross margins would stay intact of what authentication generates right now.

Okay. That's helpful. Thank you. Thank you.

Thank you. And this concludes our question and answer session. I'd like to turn the conference back over to the company for any closing remarks.

Thank you very much for that. So, as I said, it's been about a year. It's been a really educational year for me. And we're sitting here, and I do believe that we're on track from a strategy perspective. We're on track from an efficiency perspective. And in many of our sales efforts, we're on track from an incremental sales perspective. But those sales have been counterbalanced by some headwinds and part of the business. But none of that changes the optimism on the precision logistics side to realize the growth that we expect to realize over time. And then on the authentication side, we're dealing with a business that continues to be very small, very subscale, dependent upon key relationships that will give us tremendous leverage. And as there's been delays formalizing those relationships, it's delayed our leverage, nonetheless. Nonetheless, we do believe those relationships are going to materialize, and that will result in the leverage that we need to allow this subscale business to grow in a very meaningful way. So I look forward to giving updates on the next call. And then, ideally speaking, we anticipate there will be updates between now and then as well. So thank you very much.

Thank you. 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.