Earnings Call Transcript - VRME Q3 2022

Operator, Operator

Good morning, and welcome to the VerifyMe Third Quarter 2022 Financial Results Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Nancy Meyers, Senior Vice President, Finance and Investor Relations. Please go ahead.

Nancy Meyers, Senior Vice President, Finance and Investor Relations

Good morning, everyone, and thank you for joining us today for our earnings call presentation. On the call today we have Scott Greenberg, Executive Chairman; Patrick White, CEO; Margaret Gezerlis, CFO; and Curt Kole, Executive Vice President, Sales and Global Strategy, to give you an update on our third quarter 2022 results. 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 Scott Greenberg for some opening remarks.

Scott Greenberg, Executive Chairman

Thank you, Nancy. Good morning, and welcome to our third quarter 2022 earnings conference call. The results and future outlook clearly show that we are making progress in transforming the company from a technology start-up to a revenue-generating operating company, focused on logistics, systems, customer engagement, and authentication. Today, Patrick will give an operations update, Margaret will give a financial review, and new to our mix, Curt Kole will give an introduction and a further update on PeriShip. Then we will follow with a Q&A session. Next slide, please. The next slide really just shows the financial and equity snapshot. The symbols VerifyMe indicate that we currently have 9 million shares outstanding. Our cash balance at the end of September was $3.7 million, and Margaret will talk about this in detail. The good news on our debt is that even though our debt is roughly the same as it was last quarter, it has now been turned over to long-term debt, and we have a commercial relationship with PNC Bank. Our revenue trailing 12 months is $10.1 million, and the Insider Beneficial Ownership is approximately 20%. We did announce a share repurchase program on our last call, and there is approximately $1.4 million remaining under the plan. With that being said, I'll now turn it over to Patrick.

Patrick White, CEO

Thank you, Scott. Good morning, everyone. Thank you for joining us today. Let's review our third quarter financial performance. Our quarterly consolidated revenue was an all-time record of $5.2 million, an increase of 1,638% compared to $0.3 million for the three months ended September of 2021. This, of course, was primarily attributable to the acquisition of the PeriShip Global Logistics business, which we acquired in April 2022. Gross profit from operations was also a record $1.9 million. That equates to an overall gross margin of 36% for the three months ended September of 2022 compared to $0.2 million or 62% from our legacy business for the three months ended in September 2021. The net loss was just $0.6 million or a $0.06 fully diluted loss per share for the three months ended September 2022. That compares to a net income of $7.2 million or $0.95 fully diluted earnings per share for the three months ended in September of 2021. The profit we recorded last year included approximately $8.2 million non-cash fair value gain related to the SPAC, which we wrote off in the second quarter of this year. Adjusted EBITDA was almost breakeven as we reported a small $198,000 loss or a 35% improvement over the second quarter of 2022. Our cash, as Scott mentioned, at the end of the quarter was a healthy $3.7 million. It's also important to note that we entered into a banking facility that paid off a note from the purchase of PeriShip, in which we were able to record a negotiating line canceling gain of $300,000. Additionally, we obtained a $1 million revolving line of credit to back our cash position for operations. Let's now turn to the next slide of business highlights. First and foremost, we entered into a multiyear contract extension with our Global Logistics strategic partner, FedEx, which is also our largest customer of PeriShip. This extension now covers our relationship through 2026. Secondly, historically, PeriShip has never really amortized before. We rolled out a social media campaign focused on increased visibility and engagement to attract new proactive PeriShip customers. The initiative is already providing leads and new customer sign-ups. It's important to note that these new PeriShip global customers we are onboarding will positively impact our revenue in Q4 and beyond. The PeriShip business has an immediate sales cycle. For your information, a typical new account takes only one to two weeks to begin a new client relationship. We also reported that our VerifyMe division, which has a growing mature pipeline of prospects, signed a new contract from that prospect list, providing brand protection for an international $3.4 billion luxury apparel company. This is our second win in the apparel industry this year. The initial order is for one SKU valued at 3.8 million units. That particular order is in process and will be reflected in our Q4 numbers. Finally, as Scott mentioned, we have taken advantage of the undervalued stock price as we repurchased 74,530 shares of our common stock under the share repurchase program during the quarter. Let's go to the next slide, and I'm very pleased to introduce you to Curt Kole, the Executive Vice President of Sales & Global Strategy at PeriShip Global. Curt, the floor is yours.

Curt Kole, Executive Vice President, Sales and Global Strategy

Patrick, thank you, and welcome to everyone this morning. It's a pleasure to be joining you for the first time. Let's talk a little about the business we're in, how we got here, our relationship with existing customers and our outlook going forward. We've been in the business for 22 years, and this organization has been purpose-built for what we do. We occupy a space that straddles direct reporting on line of sight for in-transit shipments, as well as the alignment with our customers directly in the delivery of logistics management. We're big believers in that relationship. We're well aligned with those folks, and we're proud of it. We currently have about 400 active customers, and the retention of those customers is over 80%, which speaks to our relationship with them. We're fortunate to be the distributors and managers of the largest vaccine company in the United States for the production of flu. On a year-over-year basis, we've been able to help them reduce reshifts, a direct metric of how successful their outbound customer experiences. As we approach the fourth quarter, this becomes our busiest time of the year, which is the natural peak in the parcel business. We've aligned ourselves with the VerifyMe suite of services in an add-on basis, and we currently have several customers engaged in discussions to incorporate those services from a customer experience perspective, serialization, and dedication. We're working with FedEx on developing a program to address small and medium customers, which constitute 50% of the opportunities they address. It's a highly underserved segment that we're purpose-built to address as an outsourced third-party relationship and attract those customers. That's a summary of the PeriShip highlights. I’m going to turn the speaker back to Scott and Patrick. Thank you.

Patrick White, CEO

Thank you, Curt. I'd like to turn now to our PeriShip sales by market sector slide. This slide shows the various market sectors that PeriShip's clients are categorized. As you can see, 70% of PeriShip's 400-plus clients provide revenue from the food and beverage industry. The second largest segment is the pharmaceutical industry, which logs in at 17%. One of our strategic goals is the growth of the 17% pharma and the 7% healthcare segments. The healthcare segment has built-in protections from economic conditions, very large values, government backing, and they have a need for all of our technologies. Curt's team is focusing on building those segments, and this chart gives you a periodic view of their successful transition. Now, I want to turn the presentation back over to Scott, who will walk you through the outlook.

Scott Greenberg, Executive Chairman

Thank you, Patrick. As you can see from the results, the adjusted EBITDA in Q3 of a loss of $198,000 is approaching breakeven. As Curt and Patrick mentioned, the fourth quarter is typically our strongest quarter. The seasonality of the business, combined with the addition of new customers in Q4, is expected to show significant improvement in both revenue and adjusted EBITDA. Not only do we believe that we're benefiting from seasonality, but as Curt mentioned, some of the new customers onboard should also be beneficial. Additionally, the legacy business of VerifyMe is gaining traction and is now projected to grow at least 50% per annum in 2022 and in 2023, which is a decrease from our prior estimates of 100%. While this is less, getting to 50% in 2022 relies on a very strong fourth quarter for the VerifyMe technology. Based on these positive developments, the company will review its revenue forecast for 2023 after completing the fourth quarter and will report back to our shareholders. With that, I'd like to turn it back to Margaret.

Margaret Gezerlis, CFO

Thanks, Scott, and good morning, everyone. Thank you for joining. As you have heard from Scott and Patrick, we continue to show improved results and have a positive outlook for the next quarter. Our Q3 revenue showed an improvement of 16% compared to Q2 2022, and we had a significant improvement on the bottom line. Our adjusted EBITDA loss improved by 35%, and as Scott said, we are approaching breakeven. Our business is seasonal, with the fourth quarter expected to be our strongest quarter this year and to have a positive adjusted EBITDA by the end of Q4. I'd like to note that the significant loss in Q2 2022 primarily related to the SPAC, resulting in a $11 million loss when we decided not to extend the timeframe in which the SPAC could complete an initial business combination.

Operator, Operator

We will now begin the question-and-answer session. Our first question will come from Mike Petusky with Barrington Research. You may now go ahead.

Mike Petusky, Analyst

Hi, good morning. I would like to understand the fourth quarter revenue and margin expectations better. For someone new to this business, how does seasonality typically work over the full year? Additionally, I have a question about how this business performs during a recession and what strategies could be implemented to manage potential impacts. Thank you.

Scott Greenberg, Executive Chairman

So let me start by addressing the recession. While I can't claim that any business is recession-proof, 18% of our revenues come from pharmaceuticals, and an overall 25% from Pharmaceutical and Healthcare. The second thing that we hope for, as Curt touched on, is that we are an outsourcing company that typically can work with companies that are handling these types of services in-house. When the economy is difficult and they look for ways to save money, one way is by outsourcing services they currently do internally. So our goal is to increase our percentage of that revenue stream in a downturn. As far as the revenue and percentages in gross margin, I will hand it over to Margaret.

Margaret Gezerlis, CFO

Thanks, Scott. As we move into Q4, we expect that it's going to be a strong business. In terms of exact percentages, we don't have that analysis yet. It's difficult to understand because it's a new business for us. Historically, it has been around 33% to 35% internally. We do expect our gross profit margin to stay consistent with what it was this quarter, around that 36%.

Scott Greenberg, Executive Chairman

In our model, while we're building our revenue stream, we have been able to increase, at least in the first few quarters, the gross margin percentage over the historic gross margin percentage. Now, our goal is that once we have that in good shape, we can start increasing the revenue stream. The mix where Margaret said that about 33% of the revenue is typically generated in the fourth quarter for PeriShip is correct. On the VerifyMe side, you heard in my presentation that we should get at least 50% overall growth for the year. So based upon that, if you run the numbers, we're expecting a very strong quarter from the PeriShip business, up from the VerifyMe business, partially due to the cannabis industry where we are getting a lot of orders.

Mike Petusky, Analyst

Okay. Can I just ask what kind of step down is typical in terms of revenues and margins going from Q4 to Q1?

Scott Greenberg, Executive Chairman

As far as margins go, we see them remaining stable on a quarterly basis; we haven't seen significant variations as a percentage. But on the revenue side, if you take out the 33% that we have in Q4, the other quarters tend to have less seasonality.

Patrick White, CEO

Let me just interject that Q4, of course, is energized by gift-giving for the holidays, and Q1 is energized with returns. PeriShip has a strong first quarter historically in their mix, but as far as margins, as Scott mentioned, they're pretty consistent across all four quarters.

Mike Petusky, Analyst

Okay. Sorry. I'm new to the company. If you're modeling on a quarterly basis, is it fair to say Q4 is strongest, Q1 is next strongest, and the other two quarters are roughly equivalent?

Patrick White, CEO

That's fair. Curt, do you have any color on that?

Curt Kole, Executive Vice President, Sales and Global Strategy

No, Patrick, I think you hit it on the head. We don't see a significant drop-off from Q4 to the following quarters. We notice softer quarters in the summer when demand is less. So your assessment that Q4 is strongest and Q1 follows suit is accurate.

Mike Petusky, Analyst

Okay. Thank you so much, guys. I really appreciate it.

Patrick White, CEO

Thanks, Mike.

Margaret Gezerlis, CFO

Thanks, Mike.

Operator, Operator

Our next question will come from Dan Orlow with Shield Street. You may now go ahead.

Unidentified Analyst, Analyst

Hey. Good morning. Congrats on a nice quarter. Obviously, a huge strategic shift in the focus of the business. I’m hoping to carry some questions here. In terms of the four-part element, I'm sorry, I only got time, temperature, criticality, and what was the fourth one?

Scott Greenberg, Executive Chairman

That would be value.

Unidentified Analyst, Analyst

So, as you think about the market opportunity set for you as a technology solution, could you give a sense of how scalable the business model is and how large the addressable market is given your credible history?

Scott Greenberg, Executive Chairman

The area of small and medium-sized customers has been historically ignored, and we're now focusing there. The total revenue and potential there is multiple of what we're currently doing. Thus, I think the opportunity is very significant and large. Since Curt is dealing with that daily, let him expand on that.

Curt Kole, Executive Vice President, Sales and Global Strategy

Thanks, Scott. We are big believers in what's going to take place in our traditional markets. The time, temperature, value, and criticality encompass both the healthcare side of our business. We expect to see significant growth in the perishable market and in the healthcare market, which will be one of the biggest drivers of our growth long-term. We can serve an additional 30% to 40% of the business without adding extra CapEx. We're very optimistic about the future in Q2 and Q3 and our ability to service the small and medium customer market.

Unidentified Analyst, Analyst

Are you saying that there are cross-sell opportunities between the legacy, VerifyMe, and PeriShip technologies?

Scott Greenberg, Executive Chairman

We believe and we're seeing cross-selling now. If you look at the PeriShip deliverables, track and trace, anti-counterfeiting, and customer engagement is another tool to complete their portfolio. While we didn't base the acquisition on this factor, we believe this adds another opportunity. Some of PeriShip's long-term customers are looking at VerifyMe technology, particularly in the food and beverage business.

Unidentified Analyst, Analyst

How does this translate across the company in terms of legacy costs for VerifyMe reallocating internal resources toward potentially certain things?

Scott Greenberg, Executive Chairman

When looking at costs, three elements are involved: public company costs, the direct cost for VerifyMe, and the direct cost for PeriShip’s product line. Upper management is working on the overall plan with each area tracked. The legacy technology for VerifyMe has a much higher gross margin percentage, around 60% or more, allowing incremental revenue to impact expenses significantly.

Unidentified Analyst, Analyst

So, when you say you project a 50% decline in legacy VerifyMe, what are the expectations for the overall revenue?

Scott Greenberg, Executive Chairman

We did about $800,000 in revenue last year with VerifyMe technology. Going into the year, we thought we could grow it by 100%, reaching about $1.6 million. Although we haven’t reached doubling, we anticipate a strong Q4, which brings our overall growth to 50% for the year. While not the 100% we initially anticipated, 50% growth in a year is still a positive sign.

Unidentified Analyst, Analyst

Can you discuss the consolidated rate on the PNC term facility? Was it locked in before rates increased?

Margaret Gezerlis, CFO

Yes, we locked in the PNC loan rate at 7.62%. We have a swap agreement to secure that rate.

Unidentified Analyst, Analyst

That's great. It sounds like you expect a strong Q4 from PeriShip based upon the current pipeline. Is that correct?

Scott Greenberg, Executive Chairman

Yes, while our initial revenue for the first few quarters was lower than expected, the pipeline is growing, and we expect revenue to increase.

Operator, Operator

Our next question will come from Jack Vander with Maxim Group. You may now go ahead.

Jack Vander, Analyst

Okay, great. Thanks, guys. I appreciate the update. First question is on the third quarter revenue. Could you parse out 3Q revenue between organic versus PeriShip revenue?

Margaret Gezerlis, CFO

For the third quarter, we have $5 million for PeriShip and $179,000 for VerifyMe. If you compare this to last year for VerifyMe, it was $300,000, which relates to timing slipping into Q4. We expect a strong fourth quarter because of this.

Jack Vander, Analyst

Are you expecting year-over-year growth in PeriShip?

Patrick White, CEO

We are not anticipating year-over-year growth from PeriShip. There were losses of accounts during the transition, but as our team is now in place, we expect trends to move in the right direction.

Jack Vander, Analyst

Do you expect FX headwinds to impact your business in the fourth quarter?

Patrick White, CEO

Currently, we don't have significant FX exposure. Most of our revenue is domestic. We anticipate we won't be significantly affected by currency fluctuations.

Jack Vander, Analyst

Got it. So you have been raising prices to mitigate inflationary pressure?

Patrick White, CEO

Yes, in marking up our services.

Jack Vander, Analyst

Can you provide an update on your relationship with Hewlett-Packard?

Patrick White, CEO

We just concluded the term sheet for a new agreement, which is at HP Legal. We're waiting for them to finish the paperwork for signature. It's a five-year renewal, and their worldwide sales force will be compensated to promote our products globally. They realize that their existing counterfeit feature isn't as robust, and they need a real anti-counterfeiting technology such as ours.

Jack Vander, Analyst

Looking forward to 2023, does the current guidance account for any synergies?

Scott Greenberg, Executive Chairman

We will have new guidance after Q4. All indications suggest growth in both PeriShip and VerifyMe.

Patrick White, CEO

We wanted to present numbers that we are confident we can achieve while showing a dramatic improvement from what we faced previously.

Operator, Operator

Our next question will come from Joel Dixon Matas, a Private Investor. You may now go ahead.

Unidentified Analyst, Analyst

Can you hear me all right?

Patrick White, CEO

Yes.

Scott Greenberg, Executive Chairman

Yes.

Unidentified Analyst, Analyst

How much money does VerifyMe have remaining for buybacks?

Patrick White, CEO

$1.4 million.

Unidentified Analyst, Analyst

So, we have $1.4 million left; how much has been spent on buying back stock?

Patrick White, CEO

The buyback was announced last quarter, but typically we are in a blackout period with earnings and can't purchase until after that point.

Unidentified Analyst, Analyst

What kind of valuation do you think PeriShip has as a standalone?

Patrick White, CEO

We acquired PeriShip for $10.5 million, which does $25 million in revenue. With the extensions in place with suppliers and new customers, we believe its value has increased since the acquisition.

Unidentified Analyst, Analyst

Is there an exit strategy? Are you looking to grow this or sell it?

Scott Greenberg, Executive Chairman

We have a growth strategy focusing on organic growth and potential acquisitions. However, we will always look at alternative ways to provide shareholder value. For now, our plan is to grow the business.

Unidentified Analyst, Analyst

Are there any new customers you could discuss? What about HP?

Scott Greenberg, Executive Chairman

Yes. Recently, we signed a contract with a major apparel company for VerifyMe technology and increased scope with a cannabis company. PeriShip has onboarding customers in the seafood business in Florida and Hawaii and other customers in the alcohol industry.

Unidentified Analyst, Analyst

Are you expecting to expand your locations beyond Connecticut and Texas?

Curt Kole, Executive Vice President, Sales and Global Strategy

We're satisfied with our locations and may need to add personnel, but we're not looking at geographical changes.

Unidentified Analyst, Analyst

VerifyMe has a presence in various countries. Do you have local offices or is it mostly remote contractors?

Scott Greenberg, Executive Chairman

We do not have physical offices outside the US; we operate remotely, including in European, Indian, and Chinese markets. Most work is done remotely with contractors.

Unidentified Analyst, Analyst

Anything about DKSSH in Switzerland? Are they still in play, or is it a dead end?

Scott Greenberg, Executive Chairman

DKSSH is a very large reseller of products into China, and we are working with them using recent ink technology improvements for packaging.

Operator, Operator

I think we are running out of time, so we will have to conclude the questions at this point. Thank you for being on the call. We look forward to updating you on next quarter's results and press releases as we go along. Thank you for joining us today.