Earnings Call Transcript - VRME Q1 2023

Operator, Operator

Good day everyone and welcome to the VerifyMe First Quarter 2023 Financial Results Conference Call. All participants will be in a 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. Please go ahead.

Nancy Meyers, Moderator

Good morning, everyone. And thank you for joining us today for our earnings call presentation. On the call today we have Scott Greenberg, Interim CEO and Executive Chairman; Keith Goldstein, President and Chief Operating Officer; Margaret Gezerlis, CFO, and Curt Kole, Executive Vice President Sales and Global Strategy to give an update on our first quarter 2023 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, Interim CEO and Executive Chairman

Thank you, Nancy. I'd like to welcome you to our first quarter of 2023 earnings call. We will provide a business and financial update and then have a Q&A session. Through our internal investments and acquisition of PeriShip and Trust Codes, we believe that VerifyMe is developing a unique platform. Our goal is to increase market share and revenue with both a complete solution and an increased sales and marketing effort from the past. The first quarter of 2023 results and the pursuit of new opportunities continue to lead us to a positive future outlook. I believe the presentations today will demonstrate that the company has crossed a bridge from a technology startup to an operating company. Based upon our latest projections, the company continues to target a positive adjusted EBITDA for 2023 and revenue growth of approximately 40%, both through the acquisitions and organic growth. Our 2023 goal is to continue to integrate and focus on the technologies that we purchased. Next slide, please, Nancy. Just a little bit about the financials and equities snapshot. Our stock price on May 4 was $1.86, and our shares outstanding are 9.4 million, which gives us a market cap of approximately $17.5 million. Our cash balance as of March 31, 2023, was approximately $3.1 million. Our total debt was approximately $2.3 million as of March 31, 2023. And we do have an additional $500,000 available under our line of credit with PNC Bank. In the first quarter, we had a substantial increase in revenue; our revenue went from $200,000 to $5.7 million. And our insider beneficial ownership is approximately 16%. With that being said, I now like to turn the call over to Keith Goldstein.

Keith Goldstein, President and Chief Operating Officer

Great. Thank you, Scott. And for those of you who have joined the call today, it's a pleasure to speak with you about VerifyMe. I'd like to provide a business update since our Q4 earnings call about six weeks ago on March 28. During the last call, I discussed our acquisition of Trust Codes, a software-as-a-service solution company providing brand protection, unit-level traceability, and consumer engagement. That, coupled with the acquisition of PeriShip just over a year ago, has allowed VerifyMe to transition from a product-based brand protection company to a software-driven company, providing end-to-end supply chain assurance and trust. So what does this mean? Well, a few years ago, VerifyMe's product portfolio consisted primarily of covert inks read with patented devices for brand protection. This is great technology with a specific use case. Large companies recognize this and have benefited from our offerings. Recognizing this, we embarked on broadening our offerings. We acquired PeriShip, which has a unique predictive analytics platform, providing shipping, monitoring and intervention services. We take in shipping data and programmatically analyze it with key data elements like traffic and weather provided by our in-house meteorologists to help our customers know when to ship perishable items, saving on costly spoilage. We intervene in our reach into the network to get products to their intended destinations on time, if needed, positively impacting the environment by reducing re-ships and thereby carbon emissions. And ultimately, improving the customer and consumer experience. Real-life examples of this are in the vaccine space, where we provide guidance and mentorship, reducing the risk of spoilage, and in the apparel space, where a tuxedo must arrive on time for that Saturday wedding. Now, add Trust Codes's capabilities to provide supply chain transparency, with unit-level product traceability, authentication, consumer engagement, and brand-centric storytelling, all delivered to a smartphone, and it makes VerifyMe an end-to-end software-driven supply chain provider. Our transition to this software-driven logistics company was deliberate with a goal to create a broad solution set for supply chain assurance, with the ability to generate recurring revenue and customer stickiness. Our covert ink is still an important part of securing the supply chain, but it now plays a supporting role rather than a primary role for the company. We're integrating the three businesses, as Scott said, together to bring a unified message and solution to the market. As we look to generate customer revenue, one of the industry verticals that we are focusing on is the food and beverage market. According to Technavio, a market research firm, the U.S. perishable goods transportation market is estimated to be valued at $4 billion in 2022 and grow with a CAGR of 8% to 2027. We have strong reference accounts in many food and beverage categories including beef, fruit, honey, nutraceuticals, wine, and infant formula. These products can all benefit from our supply chain assurance services, whether it's getting something perishable to its destination on time, providing consumers comfort that what they're purchasing is genuine, or helping a brand manage an unfortunate recall down to the unit level. Our Trust Codes platform is one of the few cloud-based item-level traceability and authentication platforms that is currently GS1 validated for its end-to-end traceability solution. GS1 is a non-profit organization that develops and maintains the global standards for barcodes, and everybody's probably familiar with the UPC or Universal Product Code; it's the black and white picket-fence barcode visible on virtually everything we buy. It is scanned billions of times each day around the globe. While the UPC code has been around for 50 years, this is a long time, and as the industry has developed and evolved, so has digital barcode technology, adding functionality that is meaningful for supply chain participants. As a result, industry and GS1 are moving towards two-dimensional barcodes like the QR code, which will ultimately replace the UPC code on products. What this means is that more information can be layered into the barcode to meet the demand of regulators, consumers, and brands for more product information, supply chain transparency, traceability, authentication, and recall management. As such, GS1 has come out with this program called Sunrise 2027, and they've laid out plans to help ensure that these 2D barcodes will be usable at retail points of sale by 2027. So the goal here is to replace UPCs with 2D barcodes. And while this is a massive undertaking, we don't know if all businesses will be compliant by then, we do know that many large U.S. retailers are already embracing this. And VerifyMe has the technology advantage with the Trust Codes platform, being GS1 standards-based and already oriented for this migration. The last business update I have relates to adopting a carrier-agnostic approach for our PeriShip predictive analytics platform for shipping, monitoring and intervention services. To date, our solution has been built around one major freight logistics provider. Over the past few months, we've made significant strides in developing the ability to provide our premium monitoring services for other shipping companies, which will provide new sales opportunities for us to grow our business. With that, I'll hand it over to Curt Kole to speak about sales and marketing initiatives.

Curt Kole, Executive Vice President Sales and Global Strategy

Keith, thanks very much. And thanks to everybody for joining the call today. I'm going to touch on a number of the initiatives that we've undertaken, as Keith has summarized, and we're going to talk about what we're doing to approach this market in a different way. We are integrating our sales force, as Keith mentioned; the combination of all three entities puts us in a position that's very unique in the industry. Our ability to deliver end-to-end visibility, unit-level traceability, and a number of the other features that are presented through VerifyMe and Trust Codes. We feel that we're in a very unique position on the path to victory here. We have embarked on a rebranding process to shift our identity messaging. That's expected to roll out in total by the end of Q2 and will include a total overhaul of the PeriShip positioning, as well as reference to the combination in the blended approach that we take going forward. This sales approach offering information logistics is critical to providing solutions and capabilities that we believe are unique to the industry. We're about to see – and starting to see the fruits of our labor. We've spent the last three months with an outreach program, and our marketing efforts from a digital perspective as well as from a print perspective are starting to bear fruit. We're excited about the possibilities going forward. We began to attend trade shows. As things open up, in-person meetings are allowing us to spread our message to be able to deliver the message that we spent 20 years in the logistics business, with the addition of Trust Codes and VerifyMe; we've shifted our focus to an information logistics process, and we believe that this is going to separate us from the pack. Based on recent responses from our customers, we believe we're on the road to success here. I appreciate the opportunity to share this with you and look forward to talking to you more in the future. And with that, I'll flip it back to you, Margaret.

Margaret Gezerlis, CFO

Thanks, Curt. And good morning, everybody. Thank you for joining. Our Q1 financial results – well actually, before we get to the financials, Keith, do you want to talk about the revenue by market sector?

Keith Goldstein, President and Chief Operating Officer

Certainly, the slide that is being presented shows where our revenue is coming from. It really supports what I spoke about with a focus on food and beverage. We do have many existing customers within the PeriShip family and the Trust Codes family that are in that food and beverage market, and they can all benefit from the services that we can offer relative to traceability and secure transport. So that's really one of our key focuses. And with that, Margaret, I'll hand it back to you to cover the financials.

Margaret Gezerlis, CFO

Okay, great. Next slide. It's showing blank. Is everybody seeing it, the financial slides? There we go. Great. So our Q1 revenue was $5.7 million, up from $0.2 million in Q1 of 2022. Gross profit was $1.8 million, or 31% for Q1 2023, up from $0.1 million in Q1 2022. The increase in revenue relates primarily to the acquisition of the PeriShip business in April 2022. Including PeriShip on a pro forma basis, revenue increased by approximately $0.5 million or 9%. We performed well in the fourth quarter, showing solid performance, while the first and second quarters usually have lower revenue. Next slide please. Our gross profit margin has decreased due to the nature of the business and the current product mix. General and administrative expenses have increased to $1.3 million in Q1 2023 when compared to Q1 2022, related primarily to the acquisition of PeriShip business as well as increases in deal costs related to the acquisition of Trust Codes, severance expense, and increased amortization and depreciation expense. Adjusted EBITDA loss was $0.5 million compared to an adjusted EBITDA loss of $1.1 million, that's an improvement of $0.6 million or 56%. Including PeriShip on a pro forma basis, adjusted EBITDA improved by $0.5 million or approximately 40%. Okay, so it's showing blank on me, but I'm hoping that everybody else can see the slide. If so, next slide. That will show the balance sheet. We maintain a strong balance sheet. Our cash is $3.1 million as of March 31, 2023, a decrease of $0.3 million from December 31, 2022. In the quarter, we paid cash of $640,000 for the Trust Codes business acquisition and the related deal costs and $160,000 in repayment of the term note and interest and drew down $500,000 on our revolving line of credit. Our working capital as of March 31, 2023, is $2.1 million, and our debt totals $2.3 million, and we have $500,000 available under our revolving line of credit that we can draw down. As part of the Trust Codes acquisition, we have an increase of $2.1 million in goodwill and intangible assets, and a contingent consideration of $1.1 million on our balance sheet as of the quarter end. The contingent consideration relates to the earnout, which is a cash earnout and equity earnout. We have the option at our discretion to pay the equity consideration in cash. With that, I'd like to open the floor to questions that you might have.

Operator, Operator

We will now begin the question-and-answer session. The first question comes from Mike Petusky with Barrington Research. Please go ahead.

Mike Petusky, Analyst

Good morning. So I wanted to – the general and administrative expenses or the slide that included G&A sort of went by quickly there. How much of that G&A, which looked heavy for the quarter, is non-recurring, like what's the normalized quarterly G&A number to be modeled going forward? Thanks.

Margaret Gezerlis, CFO

Hi, Mike. Thanks for your question. So what we had in the quarter, we had our severance expense that included G&A, which was about $303,000. So that's something that you will see going forward. Then what you want to do is add stock-based compensation for our directors, because in the current quarter they have decided to change the timing of when that compensation comes in. That's going to be about $500,000. Then you have one-time professional fees for the Trust Codes acquisition that comes to about $300,000.

Mike Petusky, Analyst

Okay, so I mean, sort of normalized, what does it look like going forward?

Margaret Gezerlis, CFO

So normally, it looks about $2 million to $2.2 million around there.

Mike Petusky, Analyst

Okay. That's more in line with what I thought. And so going forward, you guys sort of appear to have reaffirmed the previous top-line guide? I mean, do you expect sequential revenue growth in each of the next three quarters? Is that how this should play out?

Margaret Gezerlis, CFO

Yes, so we do still expect our quarters to increase. Our fourth quarter is the strongest, so we expect the most growth in the fourth quarter. But we do expect growth in both the second and third quarters as well.

Mike Petusky, Analyst

Okay. And what was the legacy VerifyMe revenue for the quarter?

Margaret Gezerlis, CFO

The legacy VerifyMe revenue for the quarter was about $200,000. And I apologize, because I think it's my sound that it's not coming out very well. But it's $0.2 million for VerifyMe, for Q1 2023.

Mike Petusky, Analyst

Okay, great. And this may have also been mentioned in the financials, but it was again, it was hard to hear. The PeriShip comparison. I know it wasn't part of the company last year, Q1. But did that business grow year-over-year?

Scott Greenberg, Interim CEO and Executive Chairman

Hey, Margaret, I'll take that. The answer to that is we were very pleased that this is the first quarter that on a comparison basis PeriShip had organic growth. PeriShip's growth was over 8% organic for the quarter compared to the first quarter last year pre-acquisition. So that's pretty exciting news for us.

Mike Petusky, Analyst

Was it like 52 something like that?

Scott Greenberg, Interim CEO and Executive Chairman

It's closer to, well, this is consolidated. PeriShip was closer to $5 million and change last year.

Mike Petusky, Analyst

Okay. And PeriShip this quarter was what, 5.5?

Scott Greenberg, Interim CEO and Executive Chairman

Somewhere around there. Yes, it is.

Mike Petusky, Analyst

And 8% is the year-over-year. All right. Well, very, very, very good. Well, thanks, guys. And good job. Thank you.

Scott Greenberg, Interim CEO and Executive Chairman

Thank you.

Operator, Operator

Our next question comes from Jack Vander Aarde with Maxim Group. Please go ahead.

Jack Vander Aarde, Analyst

Okay, great. Good morning, everyone. I appreciate the update. I have a couple of questions. Thank you for the guidance outlook, Scott. In the last quarter and the previous quarters, you mentioned a significant target for organic growth for the legacy VerifyMe business. I understand you are currently working on integrating these three companies. Is the organic growth target for VerifyMe still set at over 50% for 2023?

Scott Greenberg, Interim CEO and Executive Chairman

Yes, the goal is still to achieve 50% growth for the VerifyMe level. Last year, we generated about $1.7 million, which is accurate. Also, I wanted to mention that our business has a seasonal aspect. As we became more involved with VerifyMe and PeriShip, we recognized that the first quarter tends to be the slowest season. After that, we expect growth to build. This is something we've observed across all three businesses, and we anticipate improvement each quarter.

Jack Vander Aarde, Analyst

Okay, great. My next question is about the pipeline. Can you discuss how you measure it and what it looks like for the core Verify and the legacy VerifyMe pipeline for the three combined companies? Is it too early to discuss this?

Scott Greenberg, Interim CEO and Executive Chairman

Yeah. If you look at the pipeline for PeriShip, basically you have the longstanding customers, so they have a very sticky business. But we're working on some new programs and projects that we believe will take us up in that thing. I would say, again, most of PeriShip's business customers you currently have in place. When you're looking at the Trust Codes and VerifyMe business, there you're looking at more of the pipeline in an opportunity. In order to accomplish our goal of the $28 million of revenue, we've looked at the pipeline very carefully. And we discounted it, and we took what we feel we're comfortable with. And that's how we came up with the target number. So obviously, the pipeline is much, much larger than the number we're putting into the revenue projection.

Jack Vander Aarde, Analyst

Yep, understood. And then maybe just a follow-up. It's like a critical piece of the revenue in that relationship with PeriShip. But with FedEx, it's the largest customer. Outside of FedEx, can you talk about how many other customers are material to the revenue of PeriShip or for your guidance for the year? How much does FedEx kind of represent that?

Scott Greenberg, Interim CEO and Executive Chairman

While FedEx is one of our suppliers and contributes to our direct revenue, I believe it's under 15%. While we maintain a strong relationship with FedEx, their total revenue contribution as a customer is below 15%. Most of our interactions are with FedEx's customers, so we do not depend solely on FedEx as a customer.

Jack Vander Aarde, Analyst

Okay, great. That's an important distinction. Okay. Understood. Well, great. I appreciate the update, guys, and happy to hear things are on track. I'll hop back in the queue.

Scott Greenberg, Interim CEO and Executive Chairman

Thank you.

Operator, Operator

As we have no further questions, I would now like to turn the conference back over to Scott Greenberg for any closing remarks.

Scott Greenberg, Interim CEO and Executive Chairman

Okay. Thank you, moderator. As you could hear from today, the company has made significant progress in the last year. You are hearing about all these opportunities in different areas. Some of them are in our legacy business areas like baby formula or where we're getting involved with Trust Codes, who already had a significant client there, as things that we're hoping to leverage into many other areas. The thing to realize overall is that we believe the combination of the three will give us enhanced marketing and sales ability in all three sectors, not just in one specific sector. So our sales force, our marketing, our trade name, and our trade shows are really appearing overall in the whole company. With that, we expect the growth that we're forecasting for the year, and we look forward to updating you next quarter. Again, everybody, thanks for taking your time out of your day. If you have any questions, please feel free to call the company. Thank you.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.