Earnings Call Transcript - VRME Q2 2025

Operator, Operator

Good day, and welcome to the VerifyMe Second Quarter 2025 Financial Results Conference Call. Please note that this event is being recorded. I would now like to turn the conference over to Jennifer Cola, Chief Financial Officer. Please go ahead, ma'am.

Jennifer Cola, Chief Financial Officer

Good morning, everyone, and thank you for joining us today for our second quarter 2025 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'll 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 includes 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 to discuss the company's strategy.

Adam H. Stedham, Chief Executive Officer

Thank you, Jen. So I'm very pleased with the progress we've made in 2025. Our primary organic focus is on PeriShip. I realize that during the second quarter of 2025, PeriShip revenue decreased approximately 14% versus the second quarter last year. With that said, the major contributing factor was the previously announced large customer losses back in 2024. Outside of those historical customers, new customer sales and expanded revenues with specific existing customers have offset some overall softening of the partial shipment market. I'd also like to point out that VerifyMe has reduced our operating expenses by approximately 27% versus Q2 of 2024. We're managing our costs in alignment with revenues, and we're maximizing the gross margin of our proactive services within our Precision Logistics segment. Our positive adjusted EBITDA in Q2 2025 is an improvement over Q2 2024. So we're taking the steps that are required to ensure we have sufficient resources to invest in our strategies for both organic and strategic growth. During our previous call, I discussed our organic growth initiatives for creating value for our shareholders. Our primary focus is expanding revenues with directly contracted PeriShip customers. These efforts are delivering very positive results. We're pleased with the new customers we're adding in 2025. Our marketing efforts continue to generate increased inbound lead activity, and we believe our business development and marketing approach will be a significant component to meaningful organic revenue growth in 2026. The second element of the organic growth strategy we discussed was developing relationships with additional freight carriers and third-party logistics companies. I'm pleased to announce that we now have a relationship with two freight carriers that handle the overwhelming majority of the non-US Postal Service parcel shipments in the United States. Historically, our single carrier strategy created an environment in which PeriShip did not have the ability to service meaningful portions of the potential target market for our services. The process of integrating our technology and services with our additional freight carrier will take a couple of months, but the addition of a second carrier further reinforces the confidence we have in organic revenue growth in 2026. We had also previously announced that we were integrating with technology platforms related to e-commerce shopping carts and shipping management software applications. We have completed those projects and those integrations that we discussed on our last call, and our technology team is now shifting their focus to technology integrations and upgrades with our shipping carrier relationships. At this point, I'd like to shift the conversation from organic growth efforts to our strategic growth efforts. As I mentioned earlier, the company had $6.1 million of cash at the end of Q2 2025, and we do not require cash to support annual operating or public company expenses. We continue to evaluate transformative and tuck-in acquisitions. However, it's difficult to predict the timing or probability of these activities. Therefore, while we're diligently evaluating these strategic options, we want to realize more benefits from the strength of our balance sheet. We've adopted a treasury strategy that will allow the company to realize better interest income and cash generation from our strong balance sheet. This strategy involves loaning a portion of our available cash to Zen Credit Ventures, in exchange for a 9-month promissory note at a more favorable interest rate than our current high-yield savings account. We anticipate this strategy to improve our annualized interest income from approximately 4% of total available cash to greater than 8%. We don't believe this strategy will have any impact on our ability to pursue strategic options for the company. We continue to have availability under our line of credit with our bank and a good relationship with our bankers, and we feel we have plenty of access to capital to pursue any strategic options we desire. At this point, I'd like to turn the call back over to Jennifer Cola, and she'll review the financial details of the quarter.

Jennifer Cola, Chief Financial Officer

Thank you, Adam. The second-quarter revenue was $4.5 million versus the prior year of $5.4 million, a decrease of $0.9 million. This decrease was primarily due to a previously disclosed discontinued contract in our premium services, discontinued services with two customers in our proactive services, partially offset by increased revenues from new and existing customers in our Precision Logistics segment. Gross profit decreased by $0.5 million to $1.6 million in Q2 2025 compared to $2.1 million in Q2 2024. As a percentage of revenue, gross margin was 35% in Q2 2025 versus 39% in Q2 2024. While the quarter resulted in a decrease year-over-year gross profit percentage, the loss of one customer in our higher-margin premium services was partially offset by margin improvements in our proactive services. We expect the gross profit percentage to increase compared to Q3 and Q4 of 2024, factoring in the seasonal variation in our Precision Logistics segment. Operating expenses were $1.9 million in Q2 2025 compared to $2.6 million in Q2 2024. In addition to a reduction in operating costs resulting from the divestiture of Trust Codes in December of 2024, the company also implemented cost-cutting measures in the Precision Logistics segment. Our net loss for the quarter was $0.29 million or a loss of $0.02 per diluted share in Q2 2025, compared to a net loss of $0.35 million or $0.03 per diluted share in Q2 2024. We purchased 201,000 shares of company stock during Q2 2025 at a cost of $153,000 and have $330,000 remaining under the share repurchase program. Our adjusted EBITDA improved to $0.3 million in Q2 2025 compared to $0.2 million in Q2 2024 as a result of our continued efforts to reduce costs and develop our operational efficiencies. On the last slide is our balance sheet as of June 30, 2025. Our cash balance as of June 30, 2025 was $6.1 million, an increase of $3.3 million from a balance of $2.8 million on December 31, 2024. During Q2 2025, we generated $0.7 million cash from operations compared to $0.4 million in Q2 2024. We expect to have continued positive cash flow from operations in the second half of 2025. On August 8, 2025, to improve our rate of return on our available cash balance, we entered into a $2 million short-term loan agreement and promissory note in exchange for regular quarterly interest payments at an annual interest rate of 16%. We also continue to have $1 million available under our line of credit and have no borrowings outstanding. With that, I'd like to turn the call back to Adam.

Adam H. Stedham, Chief Executive Officer

Thank you, Jen. As I started the call, I'm pleased with the progress in 2025. We're advancing our strategy for developing directly contracted PeriShip customers. I believe this strategy presents the company with the best opportunity for sustainable organic growth. In addition, we continue to have a disciplined approach to managing our costs, margins and evaluating strategic opportunities. The combination of the strength of our balance sheet, anticipated annual cash flow and our executive team's experience with creating value through acquisitions positions the company to provide meaningful shareholder returns for our current share price. So at this point, I think we'll turn the call over for questions and answers.

Operator, Operator

And your first question today will come from Mike Petusky with Barrington Research.

Michael John Petusky, Analyst

A couple of quick ones for Jennifer and then I have one or two for you as well, Adam. Jennifer, do you have the authentication revenue in the quarter?

Jennifer Cola, Chief Financial Officer

Yes, it was $27,000.

Michael John Petusky, Analyst

Do you have the growth rate for the business excluding the impact of the lost business on PeriShip in '24?

Adam H. Stedham, Chief Executive Officer

It's difficult to respond to that directly because we had a customer that was brought in-house by our shipping partner, and we also talked about a customer that needed to outsource their cold chain strategy. While we could calculate a precise figure, I believe it would not provide a clear representation. Overall, the net effect is a single-digit percentage shift in either direction after considering those factors.

Michael John Petusky, Analyst

Okay. Regarding the other carrier, you suggested that the impact would not be seen for at least a couple of months. Do you anticipate that relationship becoming significant in the upcoming quarters, or will it develop gradually?

Adam H. Stedham, Chief Executive Officer

I wouldn't expect it to happen soon because it's going to take a couple of months to integrate with their technology. Historically, shippers are very hesitant to make changes during peak season when the shipping market becomes strained between Thanksgiving and Christmas. Companies, especially e-commerce ones that are aware of this, tend to avoid making significant changes during this time, which means changes will likely be delayed. As a result, the build will probably be pushed further back, becoming more apparent in 2026. However, it's worth noting that the new carrier manages a much larger share of the marketplace compared to our current partner, particularly for the types of parcel shipments we handle, and that's why we're excited about it.

Michael John Petusky, Analyst

Okay. And then I guess just the last question, Adam, and I'll let others get on here. Obviously, a good quarter in terms of expense management and cash generation, the cash build has been great. You have a cash balance that is the healthiest it has been in recent memory. So I'm curious about your capital allocation priorities. Is the number one priority internal investment in PeriShip, or is it adding another business through M&A? How are you thinking about utilizing that balance sheet to create shareholder value over the next few years?

Adam H. Stedham, Chief Executive Officer

Great question. The focus for 2025 is on transforming PeriShip into a highly efficient and scalable model for growth. We made that transition following our divestiture at the end of 2024, which is where our attention lies this year. We have generated cash through the warrant inducement earlier this year and continue to generate cash flow from operations. We're not planning to reinvest that capital back into the operating business; instead, we aim to deploy it in other ways to create value. We have considered potential acquisitions in our sector and explored other strategic alternatives for capital deployment. To be honest, we are being very diligent to ensure that any steps we take are right and yield a significant return for our shareholders. We intend to deploy the capital in a way that offers a strategic advantage to our shareholders, but we are not in a rush; we want to ensure we proceed correctly. Did that address your question? I feel like I may not have answered it directly, but I wanted to provide context on our approach.

Michael John Petusky, Analyst

No. I mean my takeaway from your answer essentially, you'd like to find an asset or assets externally if you can find something you think has a good ROI?

Adam H. Stedham, Chief Executive Officer

Absolutely. As we mentioned from the start, when I joined, our plan has been to create shareholder value through a mix of organic and strategic growth. I remain focused on pursuing strategic growth opportunities, but the right situation has not presented itself yet.

Operator, Operator

This will conclude our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Adam H. Stedham, Chief Executive Officer

Thank you. I appreciate everyone joining the call today. I look forward to our next call and keeping everyone updated on the progress with our additional freight carrier. Thanks again. Goodbye.

Operator, Operator

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