VerifyMe Inc. (NASDAQ: VRME), a provider of authentication and verification services, has reported a positive start to 2024 with its Q1 financial results. The company witnessed increased year-over-year revenue, significant improvements in gross profit, and a higher gross margin percentage. Adjusted EBITDA also saw a positive trend, although it did not translate into cash flow effectively due to timing issues. VerifyMe's CEO, Adam Stedham, remains optimistic about the company's growth prospects and anticipates stronger performance in the second half of the year.
Key Takeaways
- Year-over-year revenue growth and improvements in gross profit and gross margin percentage.
- Adjusted EBITDA increased but did not efficiently convert to cash flow due to timing.
- $2.8 million in cash and $2.4 million in debt at the end of Q1 2024.
- Precision Logistics segment revenue up to $5.6 million; authentication segment at $150K.
- Company aims for double-digit top-line growth in both segments.
- No new borrowings from the line of credit, with $1 million available.
- Plans to add two salespeople to drive revenue growth.
Company Outlook
- VerifyMe expects its H2 2024 growth rate to outpace H1.
- The company continues to evaluate capital strategies, including a buyback program.
- Positive cash flow anticipated for the full year 2024.
- Double-digit top-line growth targeted for both Precision Logistics and authentication segments.
Bearish Highlights
- Q1 adjusted EBITDA did not efficiently convert into cash flow.
- Authentication segment revenue declined from $0.2 million to $0.1 million.
- Gross margin may face erosion due to potential pricing pressure in the market.
Bullish Highlights
- Precision Logistics segment saw a 4% revenue increase in Q1.
- Life sciences and higher-end product markets show resilience to economic conditions.
- Company maintains optimism for financial guidance and future growth.
Misses
- Net loss reported at $0.6 million for Q1 2024.
- Sales cycle for authentication products is longer than anticipated.
Q&A Highlights
- Stedham expressed that despite longer sales cycles, the conversion rate remains steady.
- The company is focusing on specific market segments for revenue growth, which may slow down the sales process but is not a concern for the business.
- Stedham concluded by reiterating excitement for the company's prospects in the upcoming quarters.
VerifyMe, with its ticker VRME, is navigating a competitive market landscape with strategic focus and operational efficiency. The company's leadership is steering toward double-digit growth by expanding its customer base and maintaining resilience in select market segments. Despite some challenges, the outlook for VerifyMe remains positive as it continues to capitalize on its strengths in the Precision Logistics and authentication segments.
InvestingPro Insights
VerifyMe Inc. (NASDAQ: VRME) has demonstrated some promising signs of growth in the early part of 2024, as highlighted in the company's Q1 financial results. To provide a deeper understanding of the company's financial health and market performance, InvestingPro offers the following insights:
- The company's Market Cap stands at 17.1 million USD, reflective of its position in the market.
- Revenue growth over the last twelve months (as of Q4 2023) was reported at 29.31%, indicating a strong year-over-year performance.
- Despite these positive revenue figures, the company's P/E Ratio (Adjusted) for the same period is -4.8, suggesting that profitability is still a challenge.
InvestingPro Tips for VRME emphasize that while the company operates with a moderate level of debt, analysts do not expect it to be profitable this year, and it has not been profitable over the last twelve months. Nonetheless, the stock has seen a strong return over the last three months with a price total return of 45.69%, and a significant uptick over the last six months at 57.94%. It is also worth noting that VRME does not pay a dividend to shareholders.
For readers looking for more comprehensive analysis and additional InvestingPro Tips, there are 7 tips available for VRME at https://www.investing.com/pro/VRME. These tips could provide further guidance on the company's performance and potential investment opportunities. Remember to use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
Full transcript - Laserlock Techs Inc (VRME) Q1 2024:
Operator: Good day and welcome to the VerifyMe First Quarter 2024 Financial Results Conference Call. All participants will be in listen only mode. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Nancy Meyers, CFO. Please go ahead.
Nancy Meyers: Thank you, and good morning everyone. Thank you for joining us today for our earnings call presentation. On the call today, I'm joined by Adam Stedham, CEO and President who will give an operation 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 three. Today's presentation and the answer to [Audio Gap] the reports on form 10-Q. I will now turn the call over to Adam Stedham for some opening remarks.
Adam Stedham: Thank you Nancy, and welcome everyone. I'm pleased to report that in Q1, 2024, we realized an increase in year-over-year revenue and a significant improvement in gross profit, gross margin percentage and adjusted EBITDA. It's noteworthy. This is now the third consecutive quarter of positive adjusted EBITDA. And even more meaningful, we're experiencing an increase in our sales pipeline. We previously announced that we anticipate our H2 2024 growth rate will exceed our H1 growth rate. We continue to believe this is the trend and the increases in sales pipeline are a key enabler of that growth. Q1, 2024 adjusted EBITDA did not convert efficiently into cash flow from operations in Q1, and that's primarily due to the timing of working capital items. We continue to anticipate that there was positive cash flow for 2024 as the timing of these items balanced out and we continue to experience year-over-year growth. As a company with no net debt that is generating cash with meaningful growth prospects, I think our current valuation represents a significant opportunity for our shareholders. At the end of Q1, 2024, we had $2.8 million of cash and only $2.4 million in debt. And this includes the convertible note, which we anticipate will likely get converted into stock rather than being repaid in cash. At this point, I'll touch on our capital strategy. We continue to have our announced buyback program in place and we continue to evaluate our strategy around repurchase shares. Thus far in 2024, the company has repurchased minimal shares. We continue to monitor all available options to utilize our capital to maximize shareholder value. So let's shift the conversation to our two operating segments. The Q1, 2024 improvement up and down the income statement is the result of our focus on creating the foundation for the company throughout 2023. We focus on operational efficiency and our go-to-market strategy for our PeriShip business within the Precision Logistics segment. We vertically integrated the Trust Codes technology staff with all of our existing customers in our authentication segment, as well as redefining our go-to-market strategy for both our traceability products as well as our heat products. Now looking at Precision Logistics, this segment generated $5.6 million in revenue in Q1 of 2024 versus $5.4 million in revenue in Q1, 2023. As we look across the marketplace, partial shipping volumes with the major shippers are down in 2024 versus 2023. Now, we're pleased that due to multiple factors related to our differentiated offering, we continue to experience revenue growth in this environment. We believe this environment provides a good opportunity to add new customers as well as increase our share of wallets with existing customers. So as we look at the business, we had almost 3% more customers shift packages in Q1, 2024 versus Q1, 2023. With that said, our same customer shipping volumes were down about 2% in Q1, 2024 versus Q1, 2023. So therefore we're in a market in which our strongest opportunity to grow our revenues is by expanding our customer base. So, we're focusing our efforts to add new customers in the region between Maine and Pennsylvania. We added a new additional sales representative in May and we're expected to add two additional sales resources in June. We believe our plans of expanding our sales force with a targeted geographic approach will create the most value for the company. Our successes and lessons learned from this year will guide plans related to geographic expansion in 2025. So we're pleased with the efficiencies and improved gross margin percentages we've achieved in the Precision Logistics segment. But we still believe that we have the capacity to further increase our revenues without an associated increase in operating costs. This leverage should enable us to grow revenues and maintain our margin profile, even if softer overall partial shipping volumes create pricing pressure in the industry this year. So now let me shift over to our authentication segment After spending much of last year on internally focused initiatives, I'm pleased with the pipeline expansion in this segment. The authentication segment generated 150K in revenue in Q1, 2024 versus 250K in Q1, 2023. We anticipate the quarterly revenue growth for this segment to increase meaningfully each quarter of this year. We have multiple sales opportunities in the pipeline related to our new integration with Amazon (NASDAQ:AMZN) transparency. We're refining our sales model and developing a better understanding of the sales cycle associated with this specific service. So we continue to believe our relationship with Amazon creates a significant opportunity to create value for Amazon, our mutual customers and consumers of our customer's brands and most importantly verify these shareholders. In addition to the Amazon relationship, we continue to see positive trends for our APAC business, strategic relationship and in Ink sales. We generated 5% revenue growth in APAC in Q1 and we anticipate continued growth throughout 2024. We're currently working with our strategic partners to define marketing plans to highlight how our technology adds value to their equipment. And then, as for Ink, in Q1, we attended the Dscoop conference in Indianapolis. Dscoop is the community of 16,000 Hewlett Packard industrial print and large format customers and partners. Participation in this conference is a part of the new go-to-market strategy for our Ink products that we discussed with you at the Analyst Day. We believe this conference was a good success for us. I look forward to our future earnings calls and sharing details associated with converting our current pipeline into sales. We continue to also believe the authentication segment has growth opportunities related to food and agriculture traceability. This traceability aligns to the GS1 standards, so, in June, the companies participating in the GS1 conference in Orlando. We believe this conference will create sales opportunities just as the Dscoop conference created Ink sales opportunities. So at this point, I'll turn the call back over to Nancy Meyers, our CFO, and she'll provide more detailed financial information.
Nancy Meyers: Thank you, Adam. First quarter revenue increased by 2% to $5.8 million versus prior year of $5.7 million. The Precision Logistics revenue increased by 4% from $5.4 million to $5.6 million. Authentication revenue decreased from $0.2 million to $0.1 million as a large order from Q1, 2023 has slipped into Q2 and Q3 for 2024. As Adam mentioned, our pipeline is growing in this segment and we anticipate growth in Q2 and through the remainder of 2024. Gross profit increased by $0.7 million or 49% to $2.3 million in Q1, 2024 versus $1.5 million in Q1, 2023. As a percentage of revenue, growth profit increased to 39% in 2024 versus 27% in 2023. The year-over-year increase in gross profit is mainly due to the shift in customer mix and service offerings in our Precision Logistics segment, as well as process improvements the company has made. The gross profit from prior year has been adjusted and has been decreased by 4% from $1.8 million to $1.5 million. This was to better align our variable direct operating costs related to our service center in Precision Logistics as they are directly related to providing service to the customer that generates revenue. We have internally reorganized and are able to clearly identify these costs. While we believe there are economies of scale as we continue to grow, we understand these costs could fluctuate. For Q2 and Q3 of 2024, we anticipate our growth margin to remain relatively consistent. When you review our operating costs component of the statement of operations, you will see we have added a new line item for segment management and technology. We have reclassified our operating costs to provide visibility of those costs that are directly related to our two segments in line with new accounting standards. These costs are further broken out between the two segments in a footnote of our 10-Q. This is in line with how the segments are being reviewed for performance and allocation of resources are managed. General and administrative expenses now include those costs that are shared across both segments as well as public company costs. Segment, management and technology expenses increased by $0.2 million to $1.3 million in Q1, 2024 versus $1.1 million in Q1, 2023, primarily as a result of Trust Codes being included for the full quarter in 2024. General and administrative expenses decreased by $0.3 million to $1.1 million in Q1, 2024 versus $1.4 million in Q1, 2023. The decrease primarily relates to severance expense and one time professional fees for the Trust Codes acquisition in Q1, 2023 that did not recur. Sales and marketing expenses decreased by $0.1 million to $0.4 million in Q1, 2024 versus $0.5 million in Q1, 2023. The decrease is primarily related to reduction in employees and consultants in the authentication segment. Our net loss for the quarter improved by $1 million to a loss of $0.6 million or $0.05 per diluted share versus $1.6 million in Q1, 2023 and a loss of $0.17 per diluted share. Our adjusted EBITDA increased by $0.6 million to a positive $0.1 million for the first quarter of 2024. On the last slide is our balance sheet as of March 31, 2024. Our cash as of March 31, 2024 is $2.8 million, a decrease of $0.3 million from $3.1 million on December 31, 2023. During the first quarter of 2024, our use of cash included $0.2 million in repayment of debt and interest. Due to the seasonality of our Precision Logistics segment, our AR unbilled and accounts payable are much higher at year end compared to the other three quarters. As of March 31, 2024, we have $1.3 million remaining on our loan and $1.1 on our convertible note. 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: Thank you, Nancy. Q1 was my third quarter with the company. And I'm pleased to be at the pivot point from transformation to growth. Most construction projects, they start by digging a hole and it's always satisfying to see the structure rise from the ground. It's also exciting that the process begins to speed up at that point. I am pleased that due to the hard work of the team, verifying me has generated positive adjusted EBITDA each quarter that I've been with the company. I look forward to the next quarter we call and continuing to share our success and share more about the upcoming revenue growth. But for now, let's turn the call over for questions.
Operator: We will now begin our question and answer session. [Operator Instructions]. And the first question comes from Michael Petusky from Barrington Research. Please go ahead.
Michael Petusky: Hey, good morning. I may have missed this. What was the percentage sort of growth or negative comp in each of the segments, please?
Nancy Meyers: I'm sorry, say that again.
Michael Petusky: The percentage revenue growth or negative comp in each of the segments for the quarter?
Nancy Meyers: Okay, yes. So decision logistics increased by 4%, and authentication was down. It went from 0.2 to 0.1 million.
Michael Petusky: What's the percentage by any chance?
Nancy Meyers: I don't. I have on top of my head.
Michael Petusky: Okay. All right. So, I guess, let me ask this question around Precision Logistics. Adam, are you guys seeing certain industries that are sort of holding up in terms of shipping versus others that maybe are sort of more problematic? I understand you're dealing with a difficult macro environment, but I'm just curious if there are parts of your business that are holding up or growing better than maybe some others that maybe are being more impacted? Thanks.
Adam Stedham: So we have a strong concentration in life sciences, as well as products that are a little bit more on the expensive side. The end consumer of those products has a tendency to be a little bit more affluent. And so, those two areas and those two markets are little bit more resilient, little less impacted by economic conditions and slowdown. So that's what we think -- that's what's giving us the strength that we're seeing right now. We do have other products that are aimed at the more general marketplace, and that's where we're seeing the slowdown is in those and maybe baked goods and some of our less expensive products that we ship.
Michael Petusky: All right. And I know with the investor, well, I think with the Investor Day and then affirmed with the fourth quarter conference call. I think you guys have been hoping for double digit top line growth in both segments. Obviously, this is a pretty tough quarter from -- great quarter from a sort of margin perspective, but not a great quarter from a top line growth perspective. Are you guys -- is that more of an aspirational goal at this point, or do you still feel comfortable? To me, it feels like maybe possibly you're tracking behind that, but maybe not. And I understand that the second half is supposed to be better than the first half, but it does feel like this is possibly maybe tracking behind, but let me know.
Adam Stedham: No. So, actually we do feel comfortable with it. One of the things that we pointed out is that we're adding two additional sales people. And so those two additional sales people were not initially part of the plan at that time. So we believe that we will hit the revenue growth target. The way we'll hit the revenue growth target is by making additional investments in sales resources. And we've freed up the room in the income statement to make those investments in the sales resources. So we continue to believe that we will hit the double digit revenue growth in each segment, as well as the company overall. And it will be weighted towards H2 versus H1. Keep in mind a very large percentage of our revenue is generated in the fourth quarter for Precision Logistics. So naturally the business cycle for us gives us that opportunity to see a much higher growth rate in H2 than H1.
Michael Petusky: Can I just ask your internal assumptions around the market? Does it assume that the macro sort of improves in the second half?
Adam Stedham: No. I think it assumes that the macro does not significantly erode in the second half. Status quo is the assumption. And if there's an improvement, that's positive. If there's an erosion, that's negative.
Michael Petusky: All right. Very good. Thank you so much. I appreciate it.
Adam Stedham: Thank you.
Operator: [Operator Instructions] The next question comes from Jack Vander Aarde from Maxim (NASDAQ:MXIM) Group. Please go ahead.
Jack Vander Aarde: Okay, great. Hi, Adam. Thanks.
Adam Stedham: Hey, Jack. How are you?
Jack Vander Aarde: I'm doing well. Looks like you're three for three with positive adjusted EBITDA CEO. So that's great to see. Just a couple questions. It's good to see the growth in the Precision Logistics business tracking along. In terms of authentication, you mentioned the pipeline is strengthening and you expect revenue growth going forward. Just maybe a couple things. Recent revenue mix in your term, authentication revenue growth, do you just split this between maybe your expectations of the Trust Codes business versus maybe the Ink business in the two conferences you mentioned? What do you hope to capture from these conferences walking away? We'll just set you up for some orders to drive backup growth? Thanks.
Adam Stedham: Absolutely. Great question. So we expect to see growth both in the Ink segment as well as in the Codes or the Ink portion of our authentication segment as well as the Codes. And when we look at it, what we're finding is that sales cycles are longer than we've expected. So you have kind of a queuing in your pipeline. So our pipeline is building and building. I would have previously expected that some of that pipeline would have converted already. But what we're experiencing is a longer sales cycle on that pipeline. Now, importantly, we're not experiencing a lower conversion rate than we expected. So it's not as if we're losing more deals than we expected to lose. The sales cycles are just longer. And when we look at the expansion into the Amazon environment, that's a more complicated sale with a little longer sale cycle that involves more players on the other side, as well as within our go-to-market strategy for Ink. If you look at where we're targeting the Inc. sales now, those have a tendency to be longer sales cycles. So I think that's been the biggest aha for me from an authentication business perspective is the fact that the sales cycles do take a little longer than I had previously anticipated they would.
Jack Vander Aarde: Okay. That makes sense. And then maybe if I switch gears again, gross margin was another bright spot. It sounds like you expect gross margins to be fairly consistent going forward. But just given what I believe is your expectation for ramping authentication sales in general, it feels to me like there would be potential upside to that gross margin. Just given the margins with that revenue stream, can you just speak to that a bit? Is that a conservative assumption to have gross margins around the current quarter or what are your thoughts there? Thanks.
Adam Stedham: So actually, the gross margin could do a few things. If we start to experience pricing pressure, then we plan on responding to that pricing pressure appropriately in order to continue to hit our revenue target for the year. As a result of that, we could possibly see some gross margin erosion. With that said, we believe that we have capacity in the organization below gross margin to add revenue without incremental cost. So even if we did have to lower our pricing some to hit our sales targets, we believe our bottom line margin percentage should hold true because we might see gross margin go down slightly as a percentage of revenue. But our cost below gross margin as a percentage of revenue would go down, it's offsetting, and we would maintain our bottom line margin profile. So that's the scenario that would play out if we have to adjust pricing in response to pricing pressures overall in the marketplace. On the other hand, if the economy does maintain status quo and we don't see an increase in pricing pressure and we're able to establish growth with our sales force and we're able to do that at our current price point, we could see gross margin improve some in the second half of the year. Obviously, when I say that within your models, you have to adjust for the fact that Q4 has a different margin mix than the other three quarters, so that's one thing you need to think about and adjust for in your model. Secondly, our authentication business has a much higher gross margin than our Precision Logistics business. So if the authentication grows in the way that we expected to, you could imagine that as the product or as the segment mix between authentication and precision logistics starts to be a little more balanced and we start to get a little bit more revenue in authentication compared to precision logistics, that would adjust the overall gross margin profile as well. That was a much longer answer than you're probably looking for. But I just wanted to make sure you had all the factors for your model. Does that make sense?
Jack Vander Aarde: No, no. That makes complete sense and I very much appreciate the thorough response. It's good to see you guys continue to execute and look forward to tracking the story. Thank you.
Adam Stedham: Thank you.
Operator: And the next question is a follow-up from Michael Petusky from Barrington Research. Please go ahead.
Adam Stedham: Hey, Michael.
Michael Petusky: Hey, thanks. I didn't catch the first part of the previous question around gross margin. I want to make sure that I understand your response. The potential gross margin erosion, you were talking about the authentication business only or both purposes potentially?
Adam Stedham: No. So, if we think of -- at a status quo, our gross margin should maintain.
Michael Petusky: Yes, got you.
Adam Stedham: If we start to experience increased pricing pressure in the marketplace, our strategy will be that we will adjust pricing in accordance with the pressure in the marketplace in order to deliver the revenue growth that we want to deliver. If that happens, we would see some gross margin erosion. We do not believe that we would see bottom line profit erosion because of the offsetting pickup below gross margin. On the other hand, if the economy improves or maintains status quo, we don't expect to see gross margin erosion. And accounting for the fact that Q4 has a different product mix and you get a different gross margin in Q4 than you do the other quarters, so, except for that one factor.
Michael Petusky: Is there a side of your business that you're more concerned about the potential of some pricing pressure, you know, something else for the year?
Adam Stedham: No, not really. What the area that I think is critical is if you're -- if we are targeting the broader market to get our revenue growth, then it's an easier sales process. It's easier to find the customers when the customers grow the customers. We know which segments of the market we think are desirable and which segments of the market are not really impacted by the overall macroeconomic environment. So we're targeting those segments, but it's a little less efficient sales process because we're targeting specific segments as opposed to being able to target the broader market. So I wouldn't say that there are areas that I'm concerned about. I would just say it's going to be a little bit more laborious to get the revenue growth than we had previously thought it would be.
Michael Petusky: Okay. All right. But, but all aspects, I mean, my sense is you've essentially affirmed all aspects of prior financial guidance, whether it's topline or cash flow, et cetera?
Adam Stedham: Correct.
Michael Petusky: Okay. All right. Very good. Thanks guys.
Adam Stedham: Thank you.
Operator: And ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Adam Stedham for any closing remarks.
Adam Stedham: Thank you. Well, so we do look forward to the remainder of the year. And it's, it's been an exciting journey so far. Our next call will mark the one year point for me with the company. I look forward to that call. I look forward to sharing the results with you for the second quarter. So thank you everyone.
Operator: And thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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