Q3 2023 VerifyMe Inc Earnings Call
Participants
Nancy Meyers; CFO; VerifyMe, Inc.
Adam Stedham; CEO; VerifyMe, Inc.
Jack Vander Arde; Analyst; Maxim Group
Jeff Porter; Analyst; Porter Capital
Ephraim Berenbaum
Presentation
Operator
Good morning, everyone and welcome to the VerifyMe third quarter 2023 financial results conference call. (Operator Instructions) We've also note today's event is being recorded.
And at this time, I would like to turn the floor over to Nancy Meyers, CFO. Ma'am, please go ahead.
Nancy Meyers
Thank you, and good morning, everyone 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 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 under 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 Stedham for some opening remarks.
Adam Stedham
Thanks Nancy. Welcome everybody. Happy to have an opportunity to discuss our third quarter with you. I'm pleased with our organic revenue growth and gross margin improvement in the quarter. More importantly, I'm excited about the success we're having implementing our strategy.
My second quarterly call since becoming the CEO of VerifyMe, during that first call, we described our new structure and strategy. In addition, we stated that we anticipated scheduling a more detailed explanation of our overall strategy, to take advantage of the opportunity in front of us. Currently, we anticipate having that call towards the middle of January.
So during the call today, I'll discuss the overall business outlook, our capital position, and then I'll provide an update on each of the operating segments. After that, Nancy will provide a more detailed third quarter financial overview.
So as I look out for the business, and as I think about the outlook of the business, I reiterate our expectations for 2023 revenues of approximately $26 million, and a positive adjusted EBITDA. In addition, I expect double-digit organic growth in 2024. Now we'll discuss those growth plans more, during our strategy call in January.
So at this point, I'll shift the conversation to discuss our capital position. As a company, we're focused on revenue growth, margin improvement and cash flow generation. So, and I remind everyone that Q4 is our strongest cash flow quarter of the year.
So since our last call, we completed a relatively small capital raise, that raise provided strength to our balance sheet at favorable terms for the company. But more importantly, it engaged insiders as well as outside investors that have a history of profitably investing with the new leadership of VerifyMe.
In addition to the completion of that convert, we just completed the renewal of our line of credit facility with PNC Bank. At this point, I feel very confident we have sufficient access to capital, to pursue all of our strategy.
So now I'd like to discuss the segments a bit. I'll shift to our precision logistics segment, and discuss it in a bit more detail. Overall, the business is tracking with our plan. We expect to have organic growth in 2023, and we anticipate a higher growth rate in 2024. We've improved our margin profile with operating efficiency as well as pursuing higher value customers. So I'd like to talk about that a little bit more.
One item I'd like for you to know about these higher value customers, is it many of them don't experience the same revenue increase due to holiday shipments in Q4, that other customers may. Therefore, we're not anticipating as large of a Q4 uptick with those customers relative to Q3 as we experienced in 2022.
So since our last call, I'm even more convinced about the meaningful growth opportunities associated with servicing the perishable market, and the needs of the perishables delivery market. In addition, we have the ability to expand our relationship with the world's largest air freight company, in a way that is beneficial for both companies' customers and shareholders. So we're very excited about the positioning, the advancement, and the continued opportunity inside of precision logistics.
So let's shift the conversation a bit, and talk about the authentication segment. Through three quarters, our 2023 revenues have been below expectations. Now a significant contributing factor to this situation is reduced revenues with existing customers. But I want to point out that we have not lost any customers in this segment. So there are actually two underlying factors to the revenue decline with these customers. And I'd like to explain them a little bit more.
So during 2022, we had customers placing large orders for traceability products, and it's taking them longer to use up their inventory than they anticipated. We continue to have supplier relationships with these companies, and they've been working through their inventory throughout the year. So our insight into their current inventory levels gives us confidence regarding 2024 revenues.
So in addition to that, the inventory situation with those existing customers, our APAC business has been impacted in 2023 by economic and weather conditions. Looking where we are now, I'm reassured that we're now seeing our volume forecast increasing in the region, and we're winning new customers.
So in summary, 2023 has been a slow year for our existing authentication customer base. However, the customer base has remained solidly intact, and we're seeing an upturn in pipeline and new customers.
We've also launched our new strategy that we alluded to on our last call, and this involves a combination of a change in pricing strategy as well as sales strategy. We're experiencing a significant increase in our sales pipeline, and I look forward to updating you as this pipeline converts to backlog. So I'd like to wrap up by discussing how we believe our technology stack, and strategy will allow us to expand our relationships and opportunities in the US market.
We purchased Trust Codes business in March. Since that time, we focused on integrating their technology stack, into our existing authentication customers and defining a clear food traceability strategy, along with optimizing our ink strategy.
We believe the current landscape to increase regulations as well as increasing counterfeit and diversion activity, creates a compelling opportunity for this segment. Our technology's ability to identify fraud or abnormal behavior, while tracing an items churning from production through to the consumers' hands, meets the needs of consumers, regulators, and the brands. The integration of our custom software, our patented technologies, and cloud environment, positions us very well to solve the challenges that the marketplace is experiencing.
So as for the technology stack strategy itself, we've recently made announcements regarding our relationship with Amcor, and we anticipate there will be other announcements in Q4. This newly integrated VerifyMe traceability cloud is founded on end-to-end GS1 traceability, and machine learning detection of anti-tamper -- of counterfeit and abnormal behaviors.
The traceability platform is interoperable with major retailers, anti-counterfeit solutions. So this interoperability will enable our customers to benefit from anti-counterfeit protections more easily, faster, and without requiring significant changes to their existing manufacturing and packaging processes.
So our approach provides customers with an effective and efficient method, to provide their consumers with traceability, and compelling consumer engagement. So we're excited about the outlook for our authentication segment, very similar to our excitement of our outlook for the precision logistics segment.
So at this point, I'll turn the call over to Nancy for some specific financial details about the third quarter.
Nancy Meyers
Thank you, Adam. For today's call, I will touch on the financial highlights from the quarter. Third quarter revenue increased by 7% to $5.6 million versus prior year of $5.2 million. The year-over-year increase was primarily due to growth in the premium services in our precision logistics segments.
The precision logistics revenue increased $0.4 million or 8% year over year. Authentication revenue decreased by less than $1 million in the quarter. As Adam mentioned, we have seen less than expected in this segment, but continue to work with existing customers and new growth opportunities.
Gross profit increased $0.4 million to $2.3 million in 2023 versus $1.9 million in 2022. As a percentage of revenue, gross profit increased to 41% in 2023 versus 36% in 2022. The year-over-year increase is mainly due to the shift in customer mix and service offerings in our precision logistics segment. You can expect some variability of gross margin in the logistics segment, as shifts in customer mix and service offerings occur.
General and administrative expenses for the third quarter of 2023 are $2.8 million compared to $2.2 million in 2022. The increase relates primarily to the acquisition of Trust Codes Global that we completed in March of 2023. Severance expense of $0.2 million, and additional stock compensation in the quarter.
Sales and marketing expenses for the third quarter of 2023 are $0.4 million compared to $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 loss for the quarter was $0.9 million versus $0.6 million in 2022. However, 2023 results include the $0.2 million of severance expense, and 2022 included a gain on extinguishment of debt of $0.3 million. Excluding these nonrecurring items, our net loss improved year over year by $0.2 million.
Our adjusted EBITDA increased by $0.4 million to positive $0.2 million in the third quarter of 2023 compared to a loss of $0.2 million in the third quarter of 2022.
As mentioned by Adam, last quarter, 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. And it is beginning to show in our Q3 results.
On the last slide is our balance sheet as of September 30, 2023. Our cash as of September 30 is $3 million, a decrease of $0.4 million from $3.4 million on December 31st, 2022. Through the nine months of 2023, we had a capital raise of $1.1 million through a convertible note, net borrowings of $0.1 million, severance payments of $0.2 million.
Acquisition, professional expenses, and cash infusion into our Trust Codes acquisition of $1.2 million. Our debt, including our convertible note and line of credit drawdown is $3.1 million, and we have a further $0.5 million available to us under the credit line.
As noted previously, our precision logistics segment is seasonal, with the fourth quarter being our strongest. We anticipate our receivables, unbilled revenue, and payables, to increase significantly in the fourth quarter. We recently renewed our line of credit with PNC until September 30 of 2024.
On August 25, 2023, we entered into a convertible note, purchase agreement, with certain investors for the sale of converts convertible promissory notes for the aggregate principal of $1.1 million, of which approximately 40% was purchased by related parties.
The notes are unsubordinated, unsecured obligations of the company, that mature on August 25 of 2026, unless earlier converted or repurchased at a conversion price of $1.15 per share of common stock. However, the company may not redeem the notes prior to the maturity date.
With that, I would like to turn the call back to Adam.
Adam Stedham
Thanks, Nancy. So as I mentioned earlier, we plan to have a call to share our strategy for 2024 and beyond in January. After that we'll likely have our Q4 2023 earnings call in March, and our Q1 2024 earnings call in May. That cadence will bring us together every other month for the next several months.
So we have multiple exciting activities we're pursuing, and I very much look forward to having that opportunity to share them with you during that cadence of calls. I believe the company is very much on track if we live in an environment, in which the consumer has less trust that they'll receive real products, at the right time, in the right place, and in the right conditions.
In addition, companies are experiencing increased regulation, and growing losses due to spoilage, counterfeiting, and divergence. We have proven solutions to address all of these issues. And in the end, helping to solve significant issues, bring significant value to both our consumers, and to our shareholders. And I look forward to updating on that, as time goes on.
So at this point, we'll open up for questions from the audience.
Question and Answer Session
Nancy Meyers
(Operator Instructions) Jack Vander Arde, Maxim Group.
Jack Vander Arde
Okay, great. It looks like VerifyMe is doing pretty well as well. So good to see the results, and happy to hear about the double-digit organic outlook for 2024. I'll be brief. I only have a couple of questions.
Just to confirm regarding that 2024 organic outlook, do you expect both segments to contribute to that organic growth, and then I imagine the authentication business because it's smaller likely, is it reasonable to assume that will outpace the precision logistics business. Whatever you could share at this time.
Adam Stedham
Tell you spot on. We absolutely expect both segments to contribute to that double-digit organic growth. And we would expect the growth rate for our authentication business, to be higher than the growth rate of our precision logistics business absolutely.
Jack Vander Arde
Okay. Makes sense. I appreciate the color there. And then, you know, I look forward to hearing more about the strategy, and the pipeline conversion opportunities, and status update in January that you alluded to. But is there any way you can maybe quantify the size, or just the growth of the pipeline that you mentioned earlier from some of these new customers that you were talking about?
Adam Stedham
So yes, I would say that the pipeline, and there's two factors whenever you look at pipeline. One is size, and one is quality. So quality is a very nebulous thing, but the quality of our pipeline is much higher. And then the size of the pipeline, I would say roughly doubles -- the size of the qualified pipeline, roughly doubles what we've experienced in the past. And I would expand on that just to clarify, particularly on the ink side.
Really what we're looking to do, is have a strategy where we influence having our products specified earlier in the process, and by having the ink specified in the process, we think that will significantly improve the quality and potential conversion rate of our pipeline.
Jack Vander Arde
Okay. Excellent color there. I appreciate that, Adam. And then just one more for me. Given the recent convertible capital raise in insiders participating in the deal, which is a positive sign in my view. Do you have a sense of just what the current overall insider ownership level is, and maybe that's a question for offline, but unless you have it up, it would be helpful.
Adam Stedham
That's fine. So our current insider ownership is approximately 20%, slightly below, but rounds to approximately 20%, which by the way is about 80% higher, than it was a year ago. And I would expect that the insider ownership will actually go up, as we go forward.
Jack Vander Arde
Okay. Great. Great to hear. I appreciate the time, Adam, and I look forward to hearing more, in mid-January. Thank you.
Adam Stedham
Thank you.
Operator
(Operator Instructions) [Jeff Porter, Porter Capital].
Jeff Porter
Thanks. I'd like to focus on understanding of what reasonable expectations are for gross margin, two parts in that. I believe in the past you've talked about in the precision logistics business, sort of trying to convert customers into more of the premium specialized function. And then also, can you give me a sense of what the gross margins are in the authentication business?
Adam Stedham
So I'll talk about the precision logistics first. So if you look at our precision logistics business, our gross margins have been going up, and that's quite deliberate. Now you mentioned the distribution between premium and proactive. So absolutely that contributes to gross margin because our premium customers, we don't have the freight moving through, so it runs at a higher gross margin.
But it would be overly simplistic to say that, the gross margin improvement is because of that change alone. In addition to that, when you look at the shipments and if you look at our customers, when we talk about more ideal customers for us, the amount of margin is based upon the weight, the distance, the additional services that you want, the specialty handling, how quickly the shipment takes place.
So we've done a lot of work to identify the ideal customer profile, the customer that we provide the most value to them. And therefore, it will provide the most significant contribution to our shareholders in the company, by servicing those customers.
So we focused on those customers, and focused on pricing that service correctly, within our -- within the precision logistics business, as well as growing the premium. So both of those have grown the gross margin in that business.
As for our authentication business, the authentication business typically runs at 80% plus, for our gross margins. With that said, if you look at our historical ink pricing which has resulted in relatively lower revenue numbers, than what we had desired. We have changed our ink pricing a bit. It has lowered the gross margin, sum.
It's taken us back to a gross margin that is very aligned to the specialty ink market. So we think that our margin is exactly aligned to our position in the marketplace. And so the ink margin itself gross margins, are going to be down from historical. We think the revenue will be up from historical.
And then the last contributing factor, I'm giving you probably more detail than you want, but it's a complicated question, is as we've integrated the Trust Codes technology stack, instead of using a third party for our technology stack, it will improve the gross margin on the codes and on the business. So some of the gross margin for authentication will be determined by the product mix of whether it's ink, QR codes, tracking, tracing, but historically it's been 80% plus.
Jeff Porter
Okay, one follow-on. We've got a stock price of about above market cap of $10 million, which I think is the same or less than you purchased parachute for a couple of years back, trading less than 0.4 times sales, positive EBITDA company, and I think we're kind of stuck in this small cap value, trap in the market where there's scant attention being paid to these companies.
Do you have any plans to raise the profile of the company, in terms of doing some promotion or Investor Relations, so that we make to make it a healthier stock price?
Adam Stedham
Absolutely. The stock price is a primary focus of mine, at the end of the day at work for the shareholders, and I want the stock price to go up. And we are working with -- we have several plans.
Yes, to raise the profile of the company, you bring up a good point that in general, we find ourselves in a position where a lot of companies are undervalued. I very much believe that our current market cap does not recognize the value of the company.
With that said, though, I believe that the best way to get the value up, is to get the performance up. And I think that Q3 was a step in the right direction. I look forward to continued gains in performance. And I think if we deliver the growth -- the revenue growth next year that we anticipate, as well as the gross margin improvements, and then following on to the overall earnings improvements next year, that will have a significant impact, but we do need to combine that with an effective IR campaign.
Jeff Porter
Thanks. That's all I have.
Adam Stedham
Thank you.
Operator
[Ephraim Berenbaum].
Ephraim Berenbaum
Good morning. Good morning. Thank you. (inaudible) had an announcement, September 5, about the September 11 to 13, where you had a showing Las Vegas with Amcor, following two things. One is, is that something new, your relationship to Amcor, and how does that go?
Adam Stedham
So great question. The relationship with Amcor is new, and that it really came in through the Trust Codes acquisition. And I think it went very well. We met with multiple Amcor customers. And if you look at what we're trying to do from an overall strategy, Amcor is the largest packaging company in the world.
And so they're looking to provide a relatively simplistic, easy to use process for their customers to meet traceability requirements. And so our goal is to enable them to serve their customers by leveraging our technology and a relationship with us. That's beneficial to us because we get the extension of the size of their sales force and the leverage of a company of their size.
And the Amcor relationship is part of a broader strategy that we have of. There's many companies in the packaging space in the retailing space, that are looking to provide a way to help their customers deal with traceability requirements that are coming into play.
And so our strategy is to enable them to efficiently and effectively pass on our solution to their customers, in a way that's profitable to them and us, and serve their customers well, and will enable their customers to meet those traceability requirements. So it was a good conference, positive things coming out of it, and we just have to allow those sales cycles to go through the process.
Ephraim Berenbaum
Is that their salespeople doing the selling?
Adam Stedham
It's a combination of both their salespeople have relationships with their customers, and their customers have these needs. And then we would use our salespeople and our technology folks would talk to their customers, and help their customers understand how our technology integrated into Amcor's solutions, will meet Amcor's customers' needs.
Ephraim Berenbaum
Okay. Sounds good. And I mean they are very big company. So good luck. Thank you.
Adam Stedham
Thank you.
Operator
And ladies and gentlemen, with that we'll be concluding today's question and answer session. I'd like to turn the floor back over to management for any closing remarks.
Adam Stedham
Well, thank you. As we said, we're pleased with the quarter. It's a step in the right direction. It's one step along a long journey, but we think it's a long journey that's going to be exciting for the company, exciting for our customers, and exciting for the shareholders.
And so I look forward to speaking with you, as I said about every other month for the next several months, keeping you updated on all of our progress. So, thank you for joining.
Operator
Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.
