VRME

• Adam noted third quarter revenue was down due to contract losses and shipping partner transition, but gross margin improved, operating costs reduced, and adjusted EBITDA improved. - Transitioning to new Proactive shipping partner is ongoing, expected to impact Q4 2025 and Q1 2026 revenue, with no 2026 guidance yet but to be provided in next call. - Jennifer highlighted revenue decrease due to discontinued services but offset by Precision Logistics, gross profit increase, and gross margin rise. Also mentioned $3.9 million impairment in Q3 2025 and operating expenses down excluding impairment.

• Expect Q4 2025 and Q1 2026 revenue to decrease due to shipping partner transition, but gross margin to remain consistent with current performance. - Not providing 2026 guidance currently, will provide during next earnings call.

Third quarter revenue was $5.0 million versus prior year $5.4 million, a decrease of $0.4 million. This was primarily due to $0.8 million of discontinued services with two Proactive customers, partially offset by increased revenues from Precision Logistics. Gross profit increased to $2.1 million in Q3 2025 from $1.9 million in Q3 2024, with gross margin rising to 41% from 35%. A one-time non-cash impairment expense of $3.9 million was recognized in Q3 2025 related to PeriShip business, compared to $1.9 million in Q3 2024 for Authentication business. Excluding impairment, operating expenses were $1.7 million in Q3 2025 vs $2.5 million in Q3 2024.

• Transitioning to new Proactive shipping partner is a dynamic situation with uncertain revenue impact and customer transition timing. - Difficulty in accurately predicting the percentage of customers transitioning to the new partner, making revenue guidance challenging.

Q: 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?

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

Q: 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?" A: 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.

Q: 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.

A: 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.

Q: 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?

A: 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.

Q: 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?

A: 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.