VRME

Good day and welcome to the VerifyMe Third Quarter 2025 Financial Results Conference call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jennifer Cola, CFO. Please go ahead.

Good morning, everyone, and thank you for joining us today for our Third Quarter 2025 Earnings Call Presentation. On the call today, I'm joined by Adam Stedham, CEO and President, who will give an operations and strategic update, and I will provide a financial update. Following our management presentation, we will have a Q&A session. I'd like you 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 materially differ from those projected due to a number of factors, including those described under the forward-looking statements and risk factors captions in 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 strategy.

Thank you, Jen. I'm pleased with the success of our operating model combined with our sales and marketing plans in the third quarter. I do realize the third quarter revenue was down due to previously announced contract losses and changes associated with the transition from our previous Proactive shipping partner. That statement is a common theme in our last several earnings calls, and I think it's good for us to review the past year to put our enthusiasm about the future into context. During Q1 of 2025, the company's revenue was down versus the previous year, and our gross margin was 33%. The revenue and gross margin were significantly impacted by the insourcing decision of our previous exclusive shipping partner. During the second quarter of 2025, PeriShip revenue decreased approximately 14% versus the second quarter the previous year, and the major contributing factor was the previously announced customer losses from 2024. However, the gross margin had improved to 35% in the second quarter versus 33% in the first quarter. During the third quarter of the year, revenue was down only approximately 7% from the prior year because of our sales and marketing efforts. Although these efforts were successful, they have only partially offset the previously announced contract changes and changes by our previous shipping partner. Our gross margin continues to improve, our operating costs continue to reduce, and our adjusted EBITDA has improved. We are in the midst of a transition to our new Proactive shipping partner. We anticipate this will have a material impact on Q4 2025 and Q1 2026 revenues, and at this point, we're not in a position to provide guidance for 2026, but we do expect to provide that guidance during our next earnings call. We believe our new shipping partner relationship positions the company in a far better position long term, but we need a bit more time to define the opportunity and provide appropriate guidance. I look forward to calls in which we can report that our efforts are providing quarterly growth rather than only offsetting the impact of changes related to our shipping partner. As for our balance sheet, we continue to have plenty of cash to fund our organic and strategic growth strategies. We've received our first quarterly interest payment from our short-term note with Zen Credit in November and continue to believe this deployment of capital is very positive for shareholders. At this point, I'll turn the call over to Jen, our CFO, for more specific financial details of the third quarter.

Thank you, Adam. Our third quarter revenue was $5.0 million versus the prior year of $5.4 million, a decrease of $0.4 million. This decrease was primarily due to $0.8 million of previously disclosed discontinued services with two Proactive customers, partially offset by increased revenues from new and existing customers within our Precision Logistics segment. Gross profit increased by $0.2 million to $2.1 million in Q3 2025 compared to $1.9 million in Q3 2024. As a percentage of revenue, gross margin increased to 41% in Q3 2025 from 35% in Q3 2024. This increase was primarily attributable to improvements in negotiated rates with a primary supplier during Q2 2025, which was reflected during the full third quarter of 2025. This is our third consecutive quarter of improved gross profit. While we expect Q4 2025 and Q1 2026 revenue to decrease compared to prior year as a result of transitioning our Proactive services to a new shipping supplier, we expect our gross margin as a percentage of revenue to remain consistent with our current performance. As previously disclosed, in September 2025, we were notified by our primary Proactive shipping supplier that it would no longer provide shipping services in support of our Proactive services. As a result, we accelerated our efforts to implement services with an additional supplier, and we completed an analysis of the goodwill and intangible assets associated with our PeriShip business. Based on our analysis, we determined an impairment had occurred and recognized a one-time non-cash impairment expense of $3.9 million during Q3 2025. This compares to a one-time non-cash impairment expense of $1.9 million related to our Authentication business in Q3 2024. This $3.9 million impairment charge includes a reduction in carrying value of certain goodwill and intangible assets in our PeriShip business, as well as the accelerated amortization of certain supplier-specific technology development projects that will no longer be utilized. Excluding this impairment, our operating expenses were $1.7 million in Q3 2025 compared to $2.5 million in Q3 2024. This decrease in operating expense is primarily related to the divestiture of our Trust Codes business during December 2024 and cost-cutting measures in our Precision Logistics segment. Our net loss for the quarter, including the $3.9 million one-time non-cash impairment expense, was $3.4 million, or a net loss of $0.26 per diluted share in Q3 2025, compared to a net loss of $2.9 million, or $0.23 per diluted share in Q3 2024. Excluding impairment, our operating income for the quarter was $0.5 million in Q3 2025 compared to an operating loss of $0.2 million in Q3 2024. Our adjusted EBITDA improved to $0.8 million in Q3 2025 compared to $0.2 million in Q3 2024 as a result of our continued efforts to improve gross margins, reduce operating expenses, and develop operational efficiencies. On the last slide is our balance sheet as of September 30, 2025. Our cash balance as of September 30, 2025, was $4.0 million. On August 8, we entered into a $2.0 million short-term promissory note in exchange for regular interest payments at an improved interest rate. We received our first quarterly interest payment in November. Also, as previously described, we recognized an impairment of goodwill and intangible assets of $3.9 million. During Q3 2025, we generated $0.2 million of cash from operations compared to $0 in Q3 2024. We expect to use a portion of our available cash to fund our operations in Q4 2025 as we continue to transition customers from our previous Proactive shipping provider to our new Proactive shipping provider, but we expect to remain cash flow positive for the full year of 2025. We also continue to have $1 million available under our line of credit, and we have no borrowings outstanding. With that, I'd like to turn the call back over to Adam.

Thank you, Jen. So we've covered several items during the call, and I'd like to summarize our situation prior to opening the call for questions and answers. The company has a strong balance sheet with no bank debt. We have deployed some of our capital to improve the rate of return, and we feel confident we have the ability to pursue both an organic and strategic growth strategy. We're in the middle of a transition from our previous Proactive shipping partner to our new Proactive shipping partner. We believe the new relationship provides a substantially better platform for sustained organic growth over the long term. We anticipate experiencing a transitional revenue impact associated with the effort and the timing of customer transitions, but the company continues to believe we will be cash flow positive in both 2025 and 2026. At this point, we'll open the call up for questions and answers.

[Operator Instructions] Our first question comes from Michael with Barrington Research. Please go ahead.

I was wondering if you guys would be willing to sort of size up the Proactive business that sort of came to completion at the end of September. I mean, how much did that contribute to the third quarter revenue, if you wouldn't mind?

I'm not sure I completely understand what you're asking, but are you saying what was the....

What was the revenue contribution? Yes, what was the revenue contribution of the Proactive business that's no longer, going forward, no longer going to be part of the mix?

No, so we don't have that in a way that we can present it for guidance. The reason is, this isn't a cliff type of conversation. It's a sliding scale. If I said what percentage of the customers have signed up one day or today, that wouldn't be a proper assessment of how many had signed up on November 1 versus how many will have signed up on October 1 or December 1. We continue to transition customers on an ongoing basis. I will say that we had approximately 7-10 days of shipping time in the third quarter that were negatively impacted by the transition. If you go back and look at the date of our discontinuing of our previous shipping partner relationship, that happened towards the end of the third quarter of the -- third month of the quarter, around September 24.

Okay. So Adam, I just want to make sure I'm, I guess, processing this correctly. Are you essentially saying, "Hey, we expect to transition all the customers that were associated with the business that came to an end at the end of September or towards the end of September onto the new shipping partner?"

No, we can't say that we expected to transition all of our customers. Some of our customers will never transition over to the new partner, and we have other customers that the new partner has brought that are going to come through that. There is going to be some offset. The challenge we face right now is a timing conversation. The peak season -- if you look at the overall shipping industry, the overall shipping industry is capacity-constrained during the peak season, Christmas shipping season. There are a percentage of customers that we have who are concerned about shipping or changing right before the peak season. We're doing everything we can to help them transition, to get over those concerns. Many of them have gotten over those concerns. Some are still having and have ongoing conversations. Others are saying, "We want to stay with you and we'll switch, but we're going to do it after the Christmas shipping season." Right now, it's a very dynamic situation, and we're in the midst of all those changes, so it's very difficult for us to predict what will happen in Q4 and Q1. We do believe that the loyalty we have with our customer base has been very positive. The feelings of our ability to transition everyone over or transition a meaningful percentage over and then have other customers come on board from the assistance of our new shipping partner, we feel very good about that. Over nine months, over the next three to six months, it's really a dynamic situation, and we're not in a position to give guidance on that.

Adam, just from a modeling perspective for your investors, for analysts, I mean, would you guys be willing to share what the revenue contribution last year's Q4 from the FedEx business that left on September 24, what that revenue contribution was in last year's Q4? I really think, honestly, for investors, for analysts, I think that's an important piece.

All of our Proactive customers went through FedEx last year. None of our Proactive customers are going through FedEx this year. They are transitioning to our new shipping partner. Are you saying exactly what percentage of customers are currently shipping with us now that were not shipping with us in Q4 last year? That is not a number that we have or we are prepared to give. Keep in mind, we have added customers since Q4 of last year, so there has been a turnover. It is not really a comparison that we can do.

Right. No, no. Adam, I understand that. All I'm interested in, and I suspect more people than just me are interested in this, is the revenue contribution from that business in Q4 of last year. I mean, is that a figure you guys can share or no?

Are you asking what percentage of our Q4 revenue last year was Proactive?

Yes, connected to the business that ended on September 24, yes.

Keep in mind, let's revisit what Proactive is. We have a shipping partner relationship with a major shipping partner. We have contracts with all of those companies ourselves. They do not end through that ship; they do not flow through that shipping partner. The premium flows through that shipping partner. That's not impacted by what we're doing. The Proactive, all of these customers that we have our contracts with ourselves, who historically are used to processes and systems to where their packages ship with our previous partner, now have the opportunity to shift and ship with our current partner. It's not as if our shipping partner canceled these contracts. The contracts were with the companies. The question is, are they willing to move their shipping over to our new partner? The percentage of that is not something we can accurately predict for Q4. That is why we're saying we can model more effectively during our next earnings call, but we can't accurately predict it for this quarter. It's a dynamic situation right now. That is where we're at.

In terms of the cash on the balance sheet and the fact that you guys are generating some positive cash flow, I mean, where are you in the process in terms of potential M&A? Are there assets where there are actually discussions happening, or is that more likely to happen after sort of you get a little farther down the road with the new shipping partner and get farther into the next year?

No, no. The timing of any of these things is very difficult, if not impossible, to predict. There have been significant ongoing conversations. I mean, you'll see some elevated legal costs. You'll see some elevated costs in the business that reflect meaningful ongoing conversations related to those types of activities.

Are there any hurdles for those assets that you're considering in terms of cash flows or profitability, or is every case a little different? Or are there certain things that you will not sort of bend on in terms of what you're looking for in a potential acquisition?

If it was a bolt-on acquisition, it has to be virtually immediately accretive due to synergies. Otherwise, I wouldn't do it. If it's a transformative acquisition, which I think would be desirable given the subscale nature of the company, something more transformative would be desirable to help address our subscale size. Then it's more difficult to model that out. It really ties to what's the overall value of the transformation as a whole.

Okay, great. Last one real quick for Jen, and I'll let other people ask questions. In terms of that OPEX improvement, which to me seems great, how much of that, approximately $800,000, was associated with Trust Codes, and how much it was just sort of pure you guys doing a better job in terms of your managing the OPEX?

Sorry, just pulling up my file here. So we had about $500,000 of operating expense associated with Trust Codes in Q3 of 2024.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Adam Stedham, CEO, for any closing remarks.

Thank you. I appreciate everybody joining the call today. Once again, we are in a transition. It's just been a really positive experience working with our new shipping partner. The commitment that our partner has to the small- and medium-sized customer and to the customer that requires a cold chain strategy is very deep and very strong. We are very pleased that we fit into that committed strategy they have. We think that positions us very well long-term. We are in the midst of a transition from our previous Proactive shipping partner. That relationship was a couple of decades old. Those transitions always have a couple of bumps, and we're working through those diligently. We do feel that our sales and operating model has consistently, quarter over quarter, been able to provide new customers, organic growth in terms of new customers, frequently or typically offset by reductions due to changes that were outside of our control. They have continued to, quarter over quarter, provide additional gross margin percentage and reduced operating costs and improved efficiencies. We feel that the underlying business is moving in the right direction, and our partnership relationship has substantially moved in the right direction. We look forward to our next call when we'll update everyone on the transition and where we are and give specific guidance for 2026. Thank you.

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

Good day, and welcome to the VerifyMe Second Quarter 2025 Financial Results Conference Call. [Operator Instructions] 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.

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 answer to questions [Technical Difficulty] 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.

Thank you, Jen. So I'm very pleased with the progress we've made in 2025. Our primary organic focus is on PeriShip. And I realized 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 customers' 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 the VerifyMe has reduced our operating expenses by approximately 27% versus Q2 of 2024. We're managing our cost 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. So 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. Now the second element of the organic growth strategy we discussed was developing relationships with additional freight carriers and third-party logistics companies. We're pleased to announce that we now have a relationship with the 2 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. And we had also previously announced that we were integrating with technology platforms related to e-commerce shopping carts and shipping management software applications. So we've 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. 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 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. Therefore, 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 to 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 strategies 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. So 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.

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 2 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 the 1 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.

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 cost, 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 Instructions] And your first question today will come from Mike Petusky with Barrington Research.

A couple of quick one for Jennifer and then I have 1 or 2 for you as well, Adam. Jennifer, do you have the authentication revenue in the quarter?

Yes, it was -- sorry, $27,000.

And then do you have the growth ex the impact of the lost business on PeriShip like -- if you excluded the impact of the business that was lost in '24, do you have sort of a number in terms of just growth rate for that business?

It's hard to answer that in that way because if you look at -- we had the customer that was in-sourced by our shipping partner where the customer we discussed that had to outsource their cold chain strategy. So -- but between the 2, I think -- for one, we could mathematically answer it, but I think it would give an unclear answer. But I think the puts and takes -- single-digit percentage one way or the other, after those puts and takes.

Okay. And then in terms of the other carrier, you seem to suggest -- impact would be at least a couple of months out before that would start to show up. I mean, do you expect that relationship to be material over the next few quarters? Or is that going to be a slow build?

I wouldn't expect it to happen in the next -- I wouldn't expect it to have anything to happen soon because as I said, it's going to take a couple of months to integrate with their technology. In addition to that, historically speaking, shippers are very reluctant to make changes during peak season. The overall shipping marketplace becomes strained between Thanksgiving and Christmas. And so companies, e-commerce companies or companies do a lot of shipping that are aware of this, so they don't make a lot of changes. So that would also create an environment where you wouldn't get a lot of changes there. So it will be -- the build will be pushed further back, start to materialize more noticeably in 2026. The thing I would point out to you though is that if you look at the overall marketplace, the new carrier handles a much larger -- has a much larger percentage of the marketplace than our existing partner does for the specific types of parcel shipments that we service, and that's why we're pretty excited about it.

Okay. And then I guess just last question Adam and I'll let others get on here. Obviously, a good quarter in terms of expense management, the cash generation, the cash build, all of it's great. You've got this cash balance, which is the healthiest it's been -- that I can remember, at least in recent memory. And so I'm just curious, in terms of your capital allocation priorities, I mean, is it -- would #1 be internal investment in PeriShip? Would it be adding on some other business via M&A? Like how are you thinking about that -- utilizing that balance sheet to create shareholder value over the next few years?

Great question. Great question. So the focus of 2025 really has been on transforming PeriShip and getting it to where it has a highly efficient, highly scalable model that can grow from there. We made that pivot as we pivoted out with the divestiture that we had at the end of 2024, so that's where we're focusing this year. Through that, we continue -- we have generated cash through the warrant inducement earlier in the year. We continue to generate cash flow from operations. So that money, the capital that we're making available, we're really not thinking that back into the operating business. We're looking to deploy that in other ways to create value. Now we've evaluated potential acquisitions that are in the same space. And we've looked at other strategic alternatives to put the capital at work. To be quite frank, we're just -- we're trying to be very, very diligent and make sure that whatever we do, we get it right, and it provides a very meaningful return to the shareholders. So without a doubt, we plan on deploying the capital in a way that would provide strategic advantage to our shareholders. But it's not burning a hole -- the money is not burning a hole in our pocket either, and we want to make sure we get it done right. Did that answer the question? I feel like I may not have directly answered it, I want to give you the color of what we're trying to do.

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?

Absolutely. I would very much -- as we said from the beginning, when I first came on board, the plan has been to create shareholder value through a combination of organic and strategic growth. And I continue to be diligently focused on strategic growth and the right opportunity just hasn't materialized yet.

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

Thank you. I appreciate everybody joining the call today. I look forward to our next call and keeping everybody updated on the progress -- with provide -- with our additional freight carrier and thanks again. Bye-bye.

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