Earnings Call Transcript - VRME Q1 2025

Operator, Operator

Good day, and welcome to VerifyMe First Quarter 2025 Financial Results Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Nancy Meyers, Chief Financial Officer. Please go ahead.

Nancy Meyers, CFO

Good morning, everyone, and thank you 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 answer 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 Stedham, CEO

Thank you, Nancy. So during the first quarter of 2025, our revenue decreased approximately 23% versus the first quarter last year. Now this decline in revenue was due to discontinuing the Trust Codes operations, customer in-sourcing in 2024, and then some overall softening of customer shipments. The decline was most pronounced in our premium services, which was down 47% versus the comparable quarter. Now as a reminder, these services have been down significantly in the last two quarters due to the previously announced in-sourcing of a large client by our large airfreight partner. The negative comparison for this will continue into Q2 of 2025. However, we have reduced operating expenses by approximately 28% versus Q1 of 2024. We're managing our costs in alignment with these revenues. In addition, we've improved the gross margin of our proactive services within our Precision Logistics segment. From an organic growth perspective, we believe this service line presents the best opportunity for growth, and we're pleased with the improvements in gross margin percentage. So while we're not immune to the current macroeconomic environment, the positive cash flow from this operating business, coupled with our elevated cash level on the balance sheet, provides a strong backdrop to create shareholder value. At the end of the first quarter, we had a cash balance of $5.7 million. We have no bank debt, and we have a remaining convertible note of $0.8 million, but it's held by insiders and affiliates. So at this point, I'd like to discuss our initiatives for creating value for our shareholders. We continue to pursue efforts to expand our revenues with directly contracted PeriShip customers. Our strategy in this area includes three elements. The first element of the effort is optimizing our direct customer marketing and sales approach. We previously announced that we would pilot efforts for increased marketing as well as adding additional outside sales representatives. So the marketing efforts are generating increased inbound lead activity, and we expect to refine our business development approach around leveraging marketing efforts to generate inbound sales leads and then those will be handled by an inside sales team. So the second element of our organic growth strategy is developing relationships with additional freight carriers and third-party logistics companies. Now as we've engaged with more customers that are contracting directly with PeriShip, these customers have expressed a desire to leverage PeriShip's value-added services in combination with logistics and freight carriers that are in addition to the single airfreight partner that PeriShip currently leverages. Therefore, we've begun conversations with additional airfreight carriers and third-party logistics companies. We don't know where these conversations may lead, but we will keep you updated as the conversations progress. Now the third element of our organic growth strategy is integrating with technology platforms that are related to e-commerce shopping carts and shipping management software applications. We have projects underway currently to integrate our technology platform with the e-commerce platforms of Shopify and WooCommerce, and we're evaluating other e-commerce and logistics-related software platforms that are leveraged by potential PeriShip customers. So 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 has $5.7 million of cash as of the end of the first quarter in 2025. We do not anticipate requiring cash to support the annual operating and public company expenses of VerifyMe in 2025. So we continue to have conversations with both transformative and tuck-in potential acquisitions. It's very difficult to predict the timing or probability of these types of activities. With that said, we continue to believe that the strength of our balance sheet, our anticipated annual cash flow from operations, and the executive team's experience with creating value through acquisitions positions the company to provide very meaningful shareholder returns from the current share price. So at this point, I'll turn the call back over to Nancy, so she can review the financial details of the first quarter.

Nancy Meyers, CFO

Thank you, Adam. The first quarter revenue was $4.5 million versus the prior year of $5.8 million, a decrease of $1.3 million. The decrease is primarily due to the decreased demand across several of our proactive customers as well as one customer shift to their cold chain strategy, a discontinued contract with one customer in our premium services as has already been disclosed, offset by an increase in remaining premium revenue. Gross profit decreased $0.8 million to $1.5 million in Q1 2025 versus $2.3 million in Q1 2024. As a percentage of revenue, gross margin was 33% in Q1 of 2025 versus 39% in Q1 2024. While the quarter did result in a decrease in year-over-year gross profit percentage, the loss of the one customer in the premium services was partially mitigated by improvements in proactive services. Operating expenses were $2.1 million in Q1 of 2025 versus $2.9 million in Q1 of 2024. This decrease in operating expenses offset the decrease in gross margin in the quarter. In addition to the reduction in operating costs with the divestiture of Trust Codes, the company also implemented cost-cutting measures in precision logistics. Our net loss for the quarter was $0.6 million or a loss of $0.05 per diluted share in both Q1 of 2025 and Q1 of 2024. Although our adjusted EBITDA was lower in Q1 2025 versus Q1 2024, the company continues to take steps to develop efficiencies. On the last slide is our balance sheet as of March 31, 2025, our cash as of March 31 was $5.7 million, an increase of $2.9 million from $2.8 million on December 31, 2024. As noted on our last call, in January, we entered into an inducement letter agreement, and approximately 1.5 million warrants were exercised for net proceeds of $4.3 million. In consideration for the inducement letter agreement, a new unregistered warrant to purchase up to approximately 1.5 million shares at a price of $4 were issued. With these proceeds, we retired all outstanding bank debt. In addition, we have converted approximately a third of our convertible notes and the only remaining convertible notes are held by insiders and affiliated parties. As of March 31, 2025, we had $0.8 million remaining on our convertible notes. There are no borrowings under our line of credit, and we have $1 million available to us. With that, I would like to turn the call back to Adam.

Adam Stedham, CEO

Thank you, Nancy. So at this point, I'd like to share that Nancy Meyers has decided she intends to retire from full-time work this summer. The entire Board of Directors, including myself, thank Nancy for all she's done for VerifyMe. We anticipate we will have a new Vice President of Finance on board next week. Jennifer Cola will fill this role, and we expect she will become CFO of VerifyMe after a transition period with Nancy. After her retirement from full-time work, we anticipate we will continue to have a part-time relationship with Nancy for a period of time. So I've known both Nancy and Jennifer for many years, and the two of them have actually successfully worked together for many years. So I'm confident that the company is very well positioned for a seamless transition and ongoing success.

Nancy Meyers, CFO

Just to add on to that, after four years at VerifyMe, I have made the decision to retire. This journey has been truly rewarding, and I am proud of the progress we've made. As I prepare for this transition, I am committed to ensuring a seamless handover. I will be working closely with Adam and Jennifer to provide guidance and continuity. VerifyMe remains in a strong financial position, and I have full confidence in the team's ability to build on our progress. While I look forward to this next chapter, I am grateful for the support and collaboration I've experienced here. At this point, we will open the call for questions.

Operator, Operator

Thank you. The first question comes from Michael Petusky with Barrington Research. Please go ahead.

Michael Petusky, Analyst

Hi, good morning, everyone.

Adam Stedham, CEO

Hey, Michael, how are you?

Michael Petusky, Analyst

Congratulations on your upcoming retirement, Nancy. I have a couple of questions. Adam, you outlined organic growth opportunities and briefly mentioned that your balance sheet allows for potential external actions. I'm interested in your capital allocation priorities moving forward. Which of those organic opportunities do you consider the most important? Could you elaborate on that a bit?

Adam Stedham, CEO

Absolutely. From an organic perspective, any investments we make are funded by the business itself, so they won’t require capital from our cash reserves, although they will reduce the cash generated from operations. We believe there is minimal investment involved in these initiatives. The company, PeriShip, was built on a crucial relationship with the largest air freight company in the world, and we continue to maintain a strong partnership with them. However, there are substantial opportunities in the market that we haven't been able to pursue because they depend on relationships with other providers. Our primary focus now is on integrating with the e-commerce marketplace, as customers often select shipping options during checkout. We aim to offer our shipping services at that point for shippers and companies adopting an e-commerce strategy. This is essential for us. When interfacing in that environment, these companies already have priorities regarding their freight services, so we plan to establish relationships with all freight providers. This way, customers can choose their preferred freight provider while utilizing our services. Previously, we required customers to select us for both freight and service, but we intend to allow them to use our services regardless of their freight choices. This is where we are heavily investing to unlock potential. Additionally, many of our customers already use multiple freight providers and want to leverage our services more broadly. That's why we are focused on building this capability. On the strategic growth side, one challenge we face is our size; we are a relatively small company in the public equity space. There are opportunities for small acquisitions that could benefit shareholders and create value, but we also recognize that a more transformative approach could yield even greater value as it would help address the challenges posed by our size in this environment. Did that answer your question, Michael?

Michael Petusky, Analyst

Just in terms of external growth, I mean, would you expect that any external growth you guys looked at would in any way be sort of connected to the logistics business? Or could it be something relatively different or adjacent to logistics?

Adam Stedham, CEO

We believe we have not ruled out any options. Our main focus for long-term shareholder value lies in utilizing our cash reserves and the strength of our balance sheet. Additionally, if we pursue successful acquisitions that enhance shareholder value and our stock reaches a suitable price, we can leverage our ATM to generate further value. We recognize the chance to create value both within the logistics sector and potentially beyond it, provided the opportunity is compelling enough. While the criteria for ventures outside of logistics may be more stringent than for those within, that is our current perspective.

Michael Petusky, Analyst

Okay, great. I have a couple of questions, which may be more suited for Nancy, but I'm open to any answers. Do you happen to have the revenue figures for the authentication business for the quarter?

Nancy Meyers, CFO

Yes, that was $26,000.

Michael Petusky, Analyst

$26 million, I almost fell out of my chair.

Nancy Meyers, CFO

Yes.

Adam Stedham, CEO

Me too.

Michael Petusky, Analyst

Okay. So this is sort of related, and this will be the last question. I'll let other people get on. But just in terms of sort of modeling this business out through the rest of the year, I mean, should we look at sort of revenue comps somewhat similar in Q2 and maybe improving to something closer to down 10% in the second half or something to that effect? And then I'm just curious also about OpEx. Obviously, you guys have done a really good job very quickly, it seems like in reducing that figure. I mean, is that a decent baseline figure to model going forward? Or were there one-time aspects to that result? Thanks.

Adam Stedham, CEO

We are not providing revenue guidance this year. However, we anticipate a difficult comparison in Q2 due to a specific customer we previously mentioned. After that, we expect comparisons to become somewhat easier. Our focus is on proactive revenue, which is direct customer revenue. We foresee a decrease in the percentage of revenue from our premium airfreight service. Our operating expenses are well-managed. We have gained a better understanding of our business's scalability and believe that although revenues may decline for now, we can successfully manage costs in response to that. We have made process improvements that should allow costs to remain stable even as we work to increase revenue again. I would expect expenses to remain relatively flat, with challenging revenue comparisons next quarter and more favorable comparisons in the latter half of the year.

Michael Petusky, Analyst

I just have to ask one final question about that last sentence. You wouldn't expect positive revenue comparisons in the second half, would you?

Adam Stedham, CEO

Not organically, no.

Michael Petusky, Analyst

Okay. All right. Very good. Thanks guys. Appreciate it.

Operator, Operator

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

Jack Vander Aarde, Analyst

Okay. Great.

Adam Stedham, CEO

Hey, Jack.

Jack Vander Aarde, Analyst

Hey, Adam. Congratulations to Nancy on her upcoming retirement. It's great to see how well you are managing your expenses in this environment. Adam, last quarter, you mentioned that shipments from your existing precision logistics customers were down about 6% for the full year. However, you did acquire several new customers, with an increase of 6% in that category. It will likely take some time to see the benefits of these new additions, particularly with the current decline in shipments. Can you provide some insights on the new customers you added in the first quarter or in the first half of this year? Additionally, what about the customers you added last year? Are they still with you? Are they ramping up, or is their activity steady? We would love to hear a follow-up on these additions.

Adam Stedham, CEO

We have added new customers, but the rate of new additions in the first quarter has slowed compared to last year. Overall, we are not seeing a significant loss of customers; however, there is a general softening within our customer base. We believe that much of our revenue from direct customers is linked to e-commerce, which in turn is influenced by consumer confidence. Customers need to purchase products online in order to have them delivered, and many of our clients are experiencing some level of softening. Even the new customers we added last year are not meeting their initial projections. While we are successfully acquiring new customers, the additional volume from these new additions is currently not compensating for the decline in our existing customer base.

Jack Vander Aarde, Analyst

I understand. That makes a lot of sense. Thank you for the explanation. On the strategic side, I realize there are limitations on what you can disclose, but I'm curious to learn more. There are certainly many moving parts behind the scenes. Could you provide the most recent public update on the inks business related to that technology? Additionally, is this connected to the strategic discussions? Any information you can share would be appreciated.

Adam Stedham, CEO

We have engaged in discussions with a company in a different segment of the ink industry. We believe that if we could make a synergistic acquisition that allows multiple ink products to be sold to the same customer, it could add value. We are mindful of this opportunity and remain open to it. However, the specific conversation I referenced has not led to any significant outcomes as of now. That said, we believe the value that could arise from an acquisition in precision logistics is much greater, given that the majority of our revenue comes from that area. We are exploring both avenues and considering potential opportunities outside of ink anti-counterfeit or precision logistics. Our goal is to maintain an open and patient mindset as we seek the best opportunities to leverage our assets and enhance shareholder value, particularly given that we feel our current share price does not reflect the true value of the company. We are working to address that.

Jack Vander Aarde, Analyst

I appreciate the information you provided. Since our last conversation in February, there have likely been some strategic changes, particularly related to FedEx and Amazon. How do you feel now compared to three months ago regarding your visibility and overall comfort? You have more cash on the balance sheet and seem to be in a stronger financial position, despite the challenging macro environment. What are your thoughts on the opportunities ahead for VerifyMe compared to a few months ago? Thank you.

Adam Stedham, CEO

Well, I feel good about the opportunity. I think whenever you're dealing with a company our size, if you're being completely realistic and objective, you have to look at things from two situations, what's the downside risk and what's the upside opportunity. So I feel extremely comfortable from a downside risk perspective. I think the strength of the balance sheet, the strength of the business that we have, it puts us in a very comfortable situation there. So now the key is how do we maximize the upside opportunity. What's happening, particularly in the logistics space, I think, is actually favorable for us if we are able to figure out how to take advantage of it. You're seeing tremendous change. You're seeing significant changes in the two plus three, DHL made a major acquisition in the U.S. You're seeing changes with UPS, you're seeing changes with FedEx, you're seeing changes with USPS, you're seeing changes with Amazon. So all of these changes are creating a marketplace that's receptive to looking at new ideas and receptive to looking at approaches to meet the specific needs of their business. And so that's the vertical we fit in. We have a specific client that we meet a specific need for. And historically, at times, they've been unreceptive to a conversation with us either because they wanted a different freight partner than we were aligned to, or they had entered into some other agreement, and they just weren't really open to looking at things in a different way. So what we're finding right now is, although there is some chaos in the marketplace by all of the change that's happening, it's actually creating an environment where potential customers are very receptive to conversations to help them react to everything that is happening in the market. So all in all, I feel very favorable to where we are. I feel extremely comfortable with any downside risk, and I'm very optimistic about the upside potential.

Jack Vander Aarde, Analyst

Okay. Fantastic. I appreciate the color Adam. Thanks.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Adam Stedham for any closing remarks. Please go ahead.

Adam Stedham, CEO

Thank you very much, and thanks, everyone, for joining. So this is our first quarter. We look forward to having a call and updating you on the next call, hopefully, particularly on the strategic side over the next couple of quarters, we'll be able to give some updates on that. Once again, I would like to thank Nancy for all that she's done for us. Jenn Cola is actually sitting in the room with us listening to this call. So I look forward to you all being able to hear from her on the next call. So thanks again and look forward to our next call.

Operator, Operator

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