Business Overview and History

VerifyMe, Inc. (VRME) is a provider of brand protection, authentication, and supply chain traceability solutions. The company operates through two primary segments: Precision Logistics and Authentication. While the Precision Logistics segment has shown resilience, the Authentication segment has faced significant challenges, leading the company to reevaluate its strategic priorities.

VerifyMe was incorporated in the state of Nevada on November 10, 1999. The company started out providing basic technology services but has since evolved its business to focus on traceability and customer support services using specialized software and process technology. In 2013, VerifyMe adopted the 2013 Omnibus Equity Compensation Plan, which allowed it to grant awards of stock options, restricted stock, restricted stock units, and other stock-based awards. This provided the company with a way to incentivize and retain key employees.

In 2017, the company’s Executive Committee adopted the 2017 Equity Incentive Plan, which covered the potential issuance of 260,000 shares of common stock. This plan gave VerifyMe more flexibility in providing equity incentives to directors, officers, employees, and consultants. Throughout its history, VerifyMe has faced some challenges. In 2020, the company reported a net loss of $5.9 million as it continued to invest in its technology and grow its business. The company also had to navigate the impacts of the COVID-19 pandemic on its operations and customer base.

In 2022, VerifyMe acquired PeriShip Global, a provider of value-added logistics services for time and temperature-sensitive products. This acquisition bolstered the company’s Precision Logistics segment, which now accounts for the majority of its revenue. The following year, VerifyMe made another significant acquisition when it acquired Trust Codes Global Limited, a company specializing in brand protection, anti-counterfeiting, and consumer engagement technology. This expanded VerifyMe’s capabilities in the authentication segment of its business.

Financials

VerifyMe’s financial performance has been mixed. For the fiscal year 2023, the company reported revenue of $16.6 million, a slight decrease from the prior year’s $19.6 million. Net income for 2023 was a loss of $3.39 million, or a loss of $0.35 per diluted share, compared to a loss of $14.4 million, or a loss of $1.70 per diluted share, in 2022. Operating cash flow for 2023 was -$599,000, while free cash flow was -$2.83 million.

For the third quarter of 2024, VerifyMe reported revenue of $5.43 million, a decrease of $169,000 (3.0%) year-over-year. This decline was primarily due to a decrease in Premium services revenue in the Precision Logistics segment, partially offset by an increase in Proactive services revenue. Gross profit for the quarter decreased by $151,000 to $1.9 million, with gross margin declining from 37% to 35% year-over-year, also due to the loss of a higher-margin Premium services customer. The net loss for Q3 2024 increased by $1.49 million to $2.42 million, primarily due to a $2.25 million goodwill and intangible asset impairment charge in the Authentication segment. Operating cash flow for the quarter was -$10,000, while free cash flow was -$172,000.

The company’s Precision Logistics segment has been the primary driver of revenue, contributing approximately 98% of total revenue in the third quarter of 2024. For this period, the segment generated $5.30 million in revenue, with a gross profit of $1.78 million and a gross margin of 34%. Segment management and technology expenses were $1.01 million, while sales and marketing expenses were $262,000 during the quarter.

The Authentication segment, on the other hand, has struggled to gain traction. In Q3 2024, this segment generated $132,000 in revenue, representing just 2% of the company’s total revenue. Gross profit for the segment was $118,000, resulting in a gross margin of 89%. Segment management and technology expenses were $316,000, while sales and marketing expenses were $139,000 during the quarter. The company recorded a goodwill impairment charge of $1.35 million and an intangible asset impairment charge of $901,000 related to the Authentication segment, due to concerns about the commercial viability of the business and the company’s evaluation of strategic alternatives for the segment.

VerifyMe does not break out performance by geographic markets, as it primarily serves the US market.

Liquidity

As of September 30, 2024, VerifyMe had $2.61 million in cash and cash equivalents, a decrease from $3.1 million at the end of 2023. The company has $1 million remaining on its term loan and $1.1 million in convertible notes outstanding. VerifyMe also has a $1 million revolving line of credit with PNC Bank, which was undrawn as of the end of the third quarter.

The company’s debt-to-equity ratio stood at 0.20 as of September 30, 2024. The current ratio and quick ratio were both 1.74 at the end of Q3 2024, indicating a relatively stable short-term liquidity position.

VerifyMe’s cash flow performance has been mixed, with operating cash flow of -$2.6 million in 2022 and -$3.3 million in 2021. Free cash flow, defined as operating cash flow minus capital expenditures, was -$2.8 million in 2022 and -$3.5 million in 2021. This liquidity position and cash flow generation have raised some concerns about the company’s ability to fund its operations and potential strategic initiatives.

Shifting Strategic Focus

In response to the challenges faced by the Authentication segment, VerifyMe has announced a strategic shift. The company will likely exit the code-based portion of the Authentication business, including its current relationship with Amazon Transparency, by the end of 2024. This decision was driven by the realization that the vertically integrated code strategy required significant cash investment, which the company believes can be better deployed elsewhere.

Instead, VerifyMe plans to focus on its ink product, which currently represents approximately 23% of the Authentication segment’s revenue, as well as pursue other strategic opportunities that leverage the company’s expertise in anti-counterfeiting and brand protection. Management believes this renewed focus on the ink business and exploration of other strategic avenues will provide better returns for shareholders than continuing to invest in the code-based strategy.

In September 2024, the company announced that Paul Ryan, Executive Vice President of the Authentication segment, would be resigning effective December 24, 2024. This change in leadership aligns with the company’s decision to restructure the Authentication segment and explore new strategic directions.

Segment Performance and Outlook

The Precision Logistics segment specializes in providing value-added services for the management of time and temperature sensitive shipments. Through the use of a proprietary software platform, the company leverages predictive analytics from various data sources such as flight tracking, weather, traffic, and carrier feeds to provide real-time visibility and last-mile resolution for its clients’ most critical delivery needs.

The segment offers two main business service models – ProActive Services and Premium Services. ProActive Services clients pay the company directly for carrier services coupled with proactive logistics assistance, while Premium Services clients pay for the company’s complete white-glove shipping monitoring and predictive analytics service. This includes features such as customer web portal access, weather monitoring, temperature control, full service center support, and last mile resolution.

Despite facing headwinds in 2024, including the loss of a premium customer, the Precision Logistics segment has seen a 6% increase in the number of proactive services customers. Management believes the segment is well-positioned to navigate the current market challenges and continues to be the primary driver of the company’s revenue.

The Authentication segment, which specializes in providing traceability solutions to connect brands with consumers through their products, has faced significant challenges. The segment’s offerings include a custom suite of software-as-a-service (SaaS) products that leverage the company’s patented technologies and cloud-based platform to enable brand protection, supply chain control, and enhanced consumer engagement.

However, due to the segment’s underperformance and the high investment required relative to its small contribution to revenue, VerifyMe has decided to exit the code portion of the Authentication segment by the end of 2024, either through discontinuation or divestment.

Guidance and Future Outlook

VerifyMe reported that their gross margin, gross profit, and adjusted EBITDA improved in 2024 compared to 2023, as a result of efforts by the leadership team. However, the company anticipates Q4 2024 to continue facing headwinds, although they believe their execution and differentiation positions them to navigate the situation well.

For the full year 2024, VerifyMe expects revenue to be slightly below 2023 revenue, primarily due to the FedEx insourcing of services provided to one of PeriShip’s premium customers. Despite this, the company expects their full year 2024 gross margin to exceed full year 2023, even though they anticipate Q4 2024 gross margin percentage to be below Q3 2024 due to seasonality.

VerifyMe anticipates being cash flow neutral for 2024, which would represent an improvement from previous years. The company is optimistic about the opportunities they see as they redirect their investment into areas other than the codes portion of the Authentication segment.

Risks and Uncertainties

VerifyMe faces several risks and uncertainties that could impact its future performance. The company’s heavy reliance on a single strategic partner for its Precision Logistics segment, which accounts for the majority of its revenue, exposes it to potential disruptions or changes in the partner’s strategy. Additionally, the company’s ability to integrate and grow the Authentication segment has been a persistent challenge, and the decision to exit the code-based portion of this business carries its own set of risks and uncertainties.

Furthermore, the company’s liquidity position and cash flow generation have raised concerns about its ability to fund its operations and potential strategic initiatives. Maintaining a strong financial position will be crucial for VerifyMe as it navigates the changing landscape and pursues new opportunities.

Conclusion

VerifyMe’s journey has been marked by both successes and challenges. The company’s Precision Logistics segment has demonstrated resilience, but the Authentication segment has faced significant headwinds, leading to the decision to exit the code-based portion of the business. As VerifyMe shifts its strategic focus to its ink product and explores other brand protection and anti-counterfeiting opportunities, the company will need to carefully manage its liquidity and cash flow to ensure it can execute on its revised strategy and create value for shareholders. The coming quarters will be crucial in determining whether VerifyMe’s strategic shift can deliver improved financial performance and position the company for long-term success in the brand protection and logistics markets.

Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.