8-K: VerifyMe Announces Q3 2024 Results, Discontinues Codes Business

VerifyMe reported its Q3 2024 financial results, including a net loss of $2.4 million, and announced the discontinuation of its codes business within the Authentication segment.

Summary

• VerifyMe reported a Q3 2024 revenue of $5.4 million, slightly down from $5.6 million in Q3 2023.
• Gross profit for Q3 2024 was $1.9 million, or 35%, compared to $2.0 million, or 37%, in Q3 2023.
• The company experienced a net loss of $2.4 million in Q3 2024, which includes $1.8 million in one-time adjustments, compared to a net loss of $0.9 million in Q3 2023.
• Adjusted EBITDA for Q3 2024 remained flat at $0.2 million, the same as Q3 2023.
• The company has decided to discontinue the codes portion of its Authentication segment, including the Amazon Transparency opportunity, due to the significant investment required.
• VerifyMe recorded a $1.8 million charge related to the decision to sell or close the Trust Codes Global Limited (TCGL) business, consisting of a $901 thousand intangible asset impairment and a $1,351 thousand goodwill impairment, partially offset by a $475 thousand gain in contingent consideration.
• Cash expenditures related to closing TCGL are expected to be less than $50,000 if a sale is not achieved.
• The company's cash balance was $2.6 million as of September 30, 2024.
• The Precision Logistics segment accounted for 98% of the revenue for the quarter.
• Proactive services revenue grew 9% in Q3 2024 compared to Q3 2023.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative due to the increased net loss, decreased revenue, and the discontinuation of a business segment. However, the positive adjusted EBITDA and strategic shift towards Precision Logistics provide some optimism.

Positives

• The company achieved its fifth consecutive quarter of positive adjusted EBITDA.
• Proactive services within the Precision Logistics segment showed organic growth and profit improvement.
• The company is redirecting investment from the underperforming codes business to more promising areas like Precision Logistics.
• Year-to-date Adjusted EBITDA at the end of Q3 2024 exceeds the whole year 2023 Adjusted EBITDA.
• The company anticipates a positive adjusted EBITDA for the full year of 2024.
• The company is reviewing strategic growth opportunities with bankers and advisors.

Negatives

• The company experienced a net loss of $2.4 million in Q3 2024, significantly higher than the $0.9 million loss in Q3 2023.
• Revenue decreased slightly from $5.6 million in Q3 2023 to $5.4 million in Q3 2024.
• Gross profit margin decreased from 37% in Q3 2023 to 35% in Q3 2024.
• The Authentication segment has not achieved expected growth.
• The company is discontinuing the codes portion of its Authentication segment, indicating a failure in that area.
• The company recorded a $1.8 million charge related to the decision to sell or close the TCGL business.
• The company's cash balance decreased from $3.1 million at the end of 2023 to $2.6 million as of September 30, 2024.

Risks

• The company's reliance on one key strategic partner for shipping services in the Precision Logistics segment poses a risk.
• Competition, including from the key strategic partner, could impact the company's performance.
• Seasonal trends in the business could affect revenue and profitability.
• Severe climate conditions could disrupt operations.
• Economic factors such as recessions, inflation, and global instability could negatively impact the company.
• The company's history of losses and ability to use net operating losses to offset future taxable income are risks.
• The company faces risks related to intellectual property litigation and the ability to protect its technology.
• The company's ability to comply with Nasdaq listing standards is a risk.
• The company's ability to manage growth effectively and expand sales and marketing capabilities is a risk.
• The company's ability to acquire new customers and enter into contracts with future partners is a risk.

Future Outlook

The company anticipates a positive adjusted EBITDA for the full year of 2024 and expects adjusted EBITDA growth in 2025 compared to 2024. They also anticipate being net cashflow neutral in 2024.

Management Comments

• Adam Stedham, VerifyMe's CEO and President, stated that the company reported third quarter positive adjusted EBITDA and continues to project a positive adjusted EBITDA for the full year of 2024.
• The CEO also mentioned that the company believes the Proactive services within Precision Logistics represent a significant opportunity for organic growth and cashflow creation.
• The CEO stated that the decision to discontinue the codes portion of the Authentication Segment is believed to contribute to further growth in Adjusted EBITDA and shareholder value.
• The CEO noted that the company has engaged with bankers and advisors regarding strategic growth opportunities.

Industry Context

The decision to discontinue the codes portion of the Authentication segment and focus on Precision Logistics reflects a shift in strategy to align with market opportunities and improve profitability. This move is likely influenced by the competitive landscape and the need to optimize resource allocation.

Comparison to Industry Standards

• It is difficult to make a direct comparison to industry standards without knowing the specific peer group of VerifyMe. However, the company's focus on logistics and authentication is similar to companies like Zebra Technologies and Impinj, which provide tracking and identification solutions.
• The company's adjusted EBITDA of $0.2 million in Q3 2024 is relatively low compared to larger players in the logistics and authentication space. For example, Zebra Technologies reported an adjusted EBITDA of $250 million in their most recent quarter.
• The decision to discontinue the codes business is a significant strategic shift, and it is not clear how this compares to industry norms. However, it is common for companies to divest underperforming business units to focus on core competencies.
• The company's revenue of $5.4 million in Q3 2024 is relatively small compared to larger companies in the logistics and authentication space. For example, Impinj reported revenue of $75 million in their most recent quarter.

Stakeholder Impact

• Shareholders may be concerned about the increased net loss and the discontinuation of the codes business.
• Employees in the codes business and TCGL may be affected by the closure or sale of those operations.
• Customers of the codes business will need to find alternative solutions.
• Suppliers to the codes business and TCGL may be impacted by the closure or sale of those operations.
• Creditors may be concerned about the company's increased losses and reduced cash balance.

Next Steps

• The company will close the Trust Codes Global Limited (TCGL) business by the end of November 2024, unless a purchaser is found.
• The company will redirect investment from the codes portion of the Authentication segment to Precision Logistics and other strategic growth options.
• The company will continue to review strategic growth opportunities with bankers and advisors.
• The company will host an earnings conference call and webcast on November 12, 2024.

Key Dates

Keywords

VerifyMe, Financial Results, Q3 2024, Adjusted EBITDA, Precision Logistics, Authentication Segment, Trust Codes Global, Impairment, Net Loss, Revenue, Gross Profit