VerifyMe, Inc. (NASDAQ:VRME) Q4 2023 Earnings Call Transcript

VerifyMe, Inc. (NASDAQ:VRME) Q4 2023 Earnings Call Transcript March 21, 2024

VerifyMe, Inc. misses on earnings expectations. Reported EPS is $-0.09 EPS, expectations were $-0.08182. VRME isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to the VerifyMe Year-End 2023 Financial Results Conference Call. [Operator Instructions] Please note that today’s event is being recorded. I would now like to turn the conference over to Nancy Meyers, CFO of VerifyMe. Please go ahead.

Nancy Meyers: Thank you. Good morning, everyone, and thank you for joining us today for our earnings call presentation. On the call today, I’m joined by Adam Stedham, CEO and President, who will give an operations and strategic update. Following our management presentation, we will have a Q&A session. I would like to bring your attention to the note on forward-looking statements on Slide 3. Today’s presentation and the answers to questions include forward-looking statements. It should be understood that actual results could differ materially from those projected due to a number of factors, including those described under the forward-looking statements caption and on the Risk Factors of the company’s annual report on Form 10-K and quarterly reports on Form 10-Q. I will now turn the call over to Adam Stedham for some opening remarks.

Adam Stedham: Thank you, Nancy, and welcome, everyone. We recently had an extensive strategy call. So I anticipate this particular earnings call will be a little shorter than typical. During that strategy call, we stated that we expected to finish 2023 with more than $25 million in revenue and better than breakeven adjusted EBITDA. We finished 2023 with $25.3 million in revenue and $0.4 million in adjusted EBITDA, which was supported by very healthy profits in Q4, and Nancy will discuss those more. Now during the strategy call, we also indicated we anticipate double-digit revenue growth in 2024. I reaffirm the expectation for double-digit revenue growth in 2024. Now I do anticipate our H2 growth rate to exceed our H1 growth rate.

Now the company had positive cash flow from operations in 2023, as for Q4, our ending total cash was $3.1 million. Our current maturities of long-term debt was $0.5 million, and our total debt was $2.5 million. So as a result, we had cash net of debt of $0.6 million as compared to a negative $0.1 million at the end of September 2023. So keep in mind, this net cash position includes proceeds from convertible notes of $1.1 million, and the company anticipates the majority of these notes will be converted as opposed to repaid with cash at maturity. So in summary, as a company, we’re generating cash, and we anticipate we will continue to generate cash throughout 2024. So at this point, I’d like to discuss our capital strategy a little bit. In Q4 of 2023, the company announced a share buyback program.

Since putting that plan in place and entering a trading blackout, the share price has primarily traded above the short-term buyback price that we established. We continue to have our announced buyback program in place and we’ll continue to evaluate our strategy around repurchasing shares. Throughout 2024, we’ll monitor all available options to utilize our capital to maximize shareholder value. So at this point, let’s shift the conversation to our 2 operating segments. During 2023, we primarily focused on creating the foundation for the company. We focused on operational efficiency and our go-to-market strategy for our PeriShip business and Precision Logistics. We completed the Trust Codes acquisition for Authentication segment and we vertically integrated the Trust Code technology stack with all of our existing customers.

In addition, we defined a strategy to integrate this technology platform into commercial relationships across specific target industries. So the Precision Logistics segment, it completed 2023 with $24.7 million in revenue versus a pro forma fiscal 2022 revenue of $24 million. During 2023, we improved the gross margin significantly for Precision Logistics. Our Q1 2023 gross margin was 29%, and the average gross margin across quarters 2, 3 and 4 was 36%. Now a small contributing factor to this improvement was the discontinued relationship with some lower-margin customers. This did result in some impact on our Q4 2023 revenue in this segment. The Precision Logistics segment generated $8.6 million in revenue in Q4 2023. The net result for 2023 was the Precision Logistics segment experienced organic growth over our pro forma 2022 numbers, experienced a significant increase in gross margin dollars in 2023 versus 2024, including in Q4 2023 as compared to Q4 2022.

So — now let me shift to our authentication segment. The segment generated approximately $150,000 in revenue in Q4. We pointed out in our strategy call that the APAC portion of this segment had been experiencing challenges associated with difficult market conditions. We also discussed that we’re seeing those conditions improve, and we anticipate they will contribute to our organic growth in 2024. This continues to be our feeling, our experience and our expectation for 2024. In addition, we’ve added 3 sales associates to the team within this segment to accelerate our growth by increasing awareness of our industry-leading technology stack. During our technology — or the strategy call where we discussed our technology, we stated that we now have all of our existing customers transitioned onto the Trust Codes technology platform.

In addition, hopefully, you saw our press release indicating that our technology platform is now integrated into Amazon’s Transparency Program. We’re excited by this recent development, and we’re pleased that Amazon’s review of our platform has confirmed our belief about the significant value it delivers. In addition to that, we believe that we can provide meaningful support for Amazon’s efforts to combat counterfeit products in the marketplace. This support will be good for Amazon. It’s good for the brand sold in the Amazon marketplace, it’s good for consumers, and it should be very good for VerifyMe shareholders. So I look forward to sharing more information about that relationship as it continues to develop. So at this point, I’ll turn the call back over to Nancy Meyers, our CFO, and she’ll provide a more detailed financial report.

Nancy Meyers: Thank you, Adam. For today’s call, I will touch on the financial highlights for the fiscal year and the fourth quarter. Fiscal 2023 revenue increased by 29% to 25.3% versus prior year of $19.6 million due to the acquisition of PeriShip in April of 2022. On a pro forma basis, our Precision Logistics revenue increased by $0.6 million in ’23 versus 2022. During the fourth quarter, revenue decreased in our Precision Logistics segment by $0.3 million from $8.9 million to $8.6 million due to the discontinued relationship with some lower-margin customers in our proactive service revenue, partially offset by an increase in our premium service revenue. Revenue on our authentication segment decreased from $1.4 million to $0.7 million for the fiscal year and from $0.8 million to $0.1 million in Q4 2023 due to a large order in Q4 2022 that did not recur in 2023.

However, we continue to work with this customer and anticipate additional orders in 2024. Gross profit increased $2.5 million to $9 million in fiscal 2023 versus $6.5 million in fiscal 2022. As a percentage of revenue, gross profit increased to 36% versus 33% in 2022. For the fourth quarter, even with the revenue decrease, our gross margin increased by $0.3 million to $3.1 million in Q4 2023 versus $2.8 million in Q4 of 2022. The year-over-year increase is mainly due to the shift in customer mix and service offerings in our Precision Logistics segment as well as process improvements the company has made. You can expect some variability of gross margin in the Precision Logistics segment as shifts in customer mix and service offerings occur. General and administrative expenses for the fiscal year increased by $2.2 million from $10.6 million versus $8.4 million in 2022.

For the fourth quarter, general and administrative expenses increased by $0.5 million to $2.7 million in 2023 versus $2.2 million in 2022. The increases relate primarily to the acquisition of PeriShip Global in April of 2022, Trust Codes Global in March of 2023, severance expense for the year $0.6 million and additional stock compensation. Sales and marketing expenses for the fiscal year decreased to $1.6 million versus $1.7 million in 2022. And for the fourth quarter, they decreased by $0.2 million to $0.3 million versus $0.5 million in 2022. The decrease is primarily related to a reduction in employees and consultants, partially offset by additional travel expenses in the Authentication segment. Our net income for the quarter was less than $0.1 million versus $0.1 million in 2022.

However, our results for 2023 included $0.1 million of loss on equity investment and $0.2 million of impairments of long-lived assets. In Q2, we discussed our efforts to optimize overhead expenses to improve adjusted EBITDA going forward. And as a result, our adjusted EBITDA increased by $1.2 million to positive $0.4 million for the fiscal year 2023 versus a loss of $0.8 million for fiscal year 2022, an increase by $0.4 million for the fourth quarter of 2023 to $1.1 million compared to $0.7 million for the fourth quarter of 2022. 2023 also resulted in our first fiscal year with cash provided by operation activities of $0.2 million for the year and $0.8 million for Q4 2023. On the last slide is our balance sheet as of December 31, 2023. Our cash as of December 31 is $3.1 million, a decrease of $0.3 million from the $3.4 million we had on December 31, 2022.

However, through the 12 months of 2023, we had a capital raise of $1.1 million through the sale of convertible notes, repaid $0.5 million on our loan, paid severance expense of $0.4 million and the acquisition of Trust Codes of $0.6 million. As of December 31, 2023, we have no borrowings under our line of credit and have $1 million available to us. With that, I would like to turn the call back to Adam.

Adam Stedham: Thank you, Nancy. I don’t want to repeat the information we recently covered in our strategy presentation. But suffice it to say we’re optimistic about the new developments we’re seeing in both our authentication and Precision Logistics segments. I’m confident our strategy of integrating our authentication platform into the go-to-market strategy of key industry leaders will generate value. In addition, I believe our Precision Logistics business is transforming into an efficient operation with a clear value proposition and a clear target market. So I’ll simply conclude by saying, I’m excited. I’m excited by the opportunity the company has and our shareholders have in 2024, we’re a company with cash to fund our operations, we generate cash, and we have a proven tech stack that solves real problems that face consumers and companies in today’s environment.

So I look forward to sharing more information with you as the year unfolds, but — at this point, we’ll open up the call for questions.

Operator: [Operator Instructions] Today’s first question comes from Mike Petusky with Barrington Research.

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Q&A Session

Mike Petusky: So Adam, I guess on your comment about the second half being likely stronger. I’m assuming that you still expect some growth in the first half. Is that a fair assumption that it’s not really swung towards the second half, so you do expect like at least mid-single-digit growth, something along those lines in first half.

Adam Stedham: Yes. We expect — yes, we definitely expect organic growth in the first half and second half. We just feel we’ll have — if you could — our H2 versus H2 will show more growth than our H1 versus H1, but there’ll be growth in both halfs.

Mike Petusky: And then I guess I’m trying to understand because I sort of expected that you would really, as I was thinking, not just ’24, but over time, I’ve sort of been under the impression that more of the leverage would sort of come on sort of G&A and maybe some of the expense items rather than gross margin. I’m wondering, well, it’s gross margin, is there a chance gross margin actually expands going forward? Because I really assumed as Precision Logistics became a bigger part of the business that most likely that would continue to decline at least slightly. Can you just sort of speak to how you see this playing out both in ’24 and over the sort of the time frame of your longer-term plan?

Adam Stedham: Sure. So the gross margin improvement has primarily been an effort of managing pricing and as well as driving efficiency into the business. It really hasn’t — there’s been no leverage that’s contributed to the gross margin improvement. I completely agree with you that we should be able to generate leverage as revenue grows on the G&A side. We haven’t experienced the revenue growth to this point over 2023 that enabled that. But going forward, I would absolutely expect that our revenue can scale without the proportional scaling of our G&A. So G&A as a percentage of revenue should be able to go down.

Mike Petusky: Is there any chance that number as an absolute number can go down in ’24? Or will that show some level of growth meaning G&A?

Adam Stedham: I don’t see it going down in 2024.

Mike Petusky: This one is for Nancy. The number, I think I heard $0.7 million for fiscal ’23 for authentication and that would equate to, what 246 for the Precision Logistics, Easy for me to say. Is that right? 246.

Nancy Meyers: Yes.

Mike Petusky: Okay. And do you, by any chance, have the number Precision Logistics for ’22, including the time they weren’t a part of you guys, like pre-acquisition. Do you have that full year number by any chance handy?

Nancy Meyers: Yes, that was $24 million.

Mike Petusky: Okay. Okay. So the business did grow.

Nancy Meyers: Yes.

Operator: The next question comes from Jack Vander Aarde with Maxim Group.

Jack Vander Aarde: Congrats on the strong finish to the year. You definitely hit on all your points, I think, from the Investor Day as well. So no real surprises, all good stuff. I guess, I’ll follow-up with a question just on — I had a question about the revenue guidance, obviously, but I think that was kind of covered. Gross margin, I just want to touch on this again as well. So the fourth quarter — a very, very strong record third quarter gross margin, obviously. And I was expecting the fourth quarter gross margin to come down, but it held up — it was much stronger than I thought as well. And it doesn’t really seem to [indiscernible] was mix driven by the authentication segment yet. So just — is this kind of — do you have a [indiscernible] I mean, that’s impossible. — there’s always outliers that can happen, but do you have a sense of a gross margin floor on any given quarter going forward?

Adam Stedham: I mean I think that our current gross margin is a sustainable gross margin going forward. It depending — as you pointed out, as our authentication business begins to grow, and it runs at a substantially higher gross margin than our Precision Logistics business, the gross margin could go up. The larger the percentage of our revenue mix that would be associated with authentication that would have an upward impact on our gross margins. So I do think that we’re at a sustainable level. I don’t see it retracting from here. We are going to — when we announced Q1, we’re going to make some changes to how we calculate gross margin. We could show all of that, and we’ll explain all that on the Q1 call, but that will give you even more insight into how we can drive efficiency and maintain the gross margins. But we don’t think that this is a one-off. We think we’re at a sustainable level that could go up with product mix.

Jack Vander Aarde: Okay. Great. That’s helpful color. And — let’s see, I guess I’ll switch gears here. Precision Logistics segment itself in terms of revenue mix and the actual kind of types of revenue or customer relationships you have, it makes sense that the fourth quarter kind of down year-over-year, just given that particular customer that was a proactive services customer. I think that proactive services was about 80% of your historical mix. Do you have any sort of goal as to like what you expect just from that mix or end goal as you exit 2024? Just to get an idea of like the pace at which you’ll be focusing more on these premium customers.

Adam Stedham: No. We don’t really have a goal. The go-to-market strategy of these 2 lines of business is very different. One, we are supporting our the largest air freight company in the world in their efforts to service their customers. And so the growth of that business is tied to their go-to-market strategy. The other, it’s more direct selling into the marketplace for us. That would be the proactive business. So we don’t really have a target mix because the 2 go-to-market strategies operate somewhat independent of each other, and it’s not a situation where we allocate specific resources to get a specific mix.