NEWS

VerifyMe: Set For Triple-Digit Revenue Growth

Dec 6, 2021

Arthur Frentzel profile picture

Long Only, Long-Term Horizon, Special Situations

Contributor Since 2012

I have been investing in common stocks for over 40 years.  With all the information that is available today, it is more exciting than ever.  However, due to extreme current valuations of many stocks, increasingly it is a stock pickers game to find names that have not yet been recognized in the market.  The foregoing entails a much greater degree of risk, but also the potential for outsized returns once the risk/reward profile is ascertained in advance of committing funds, which is the goal of my research and writing.  Your comments and input on my articles are greatly appreciated which should enhance learning for everyone.  

Summary

  • Business is gaining rapid traction in providing solutions for the growing counterfeit problem encompassing 1 in 20 products globally.
  • Management has provided guidance of a 100% increase in revenue for 2022.
  • Company has developed a unique platform that offers solutions for product authentication, serialization-track trace, and consumer engagement.
  • Given the opportunity, VerifyMe is significantly undervalued as will be discussed below.
Counterfeit goods. The stamp and an imprint

Waldemarus/iStock via Getty Images

The global counterfeit goods problem is expected to reach approximately $1 to $1.2 trillion USD by 2022. Counterfeits have a huge economic impact which includes the loss of millions of jobs. Much worse, counterfeits cause serious health problems and loss of life with ingestible products like pharmaceuticals, which are the seventh leading counterfeit problem. It is estimated that tens-of-thousands of people die annually due to counterfeit pharmaceuticals. And many manufacturers indicate that counterfeits represent the biggest competitive threat to their brands, more so than traditional competitors.

VerifyMe (VRME) is a tiny company with a market cap of only $24 million, but with a giant opportunity. The company has been in existence for about 20 years but did not have a viable product until Patrick White became CEO in 2017. Since then, the company has developed a leading digital platform with functionality that can be implemented to specific customer needs in combating counterfeits. Mr. White has over 25 years of experience in the security verification industry, which included founding of Document Security Systems that reached $340 million in market cap under his leadership. With product development now complete, the overwhelming focus of the company is in building sales. During a recent Investor Day Presentation, management outlined in detail its strategy and progress in launching a digital platform to address counterfeiting and product diversion from approved supply chains, and much more as will be discussed.

Currently holograms are the primary method of product authentication globally, which are the company's largest competition in the market. However, holograms have major shortcomings. Most notably, holograms can be purchased online by counterfeiters for less than 10 cents each then applied to counterfeit products. Furthermore, holograms do not offer digital tracking or utilization of covert authentication. In contrast, VerifyMe has developed a platform that addresses shortcomings of current methods to address to authentication, tracking, and serialization as illustrated in the graphic below.

VRME simple 3 level approach

(Source: Investor Day Presentation, used by permission)

VerifyMe has begun to solve problems for its rapidly growing customer base in providing authentication that can be achieved by scanning codes with any smart phone worldwide. In addition to traditional QR codes that can be scanned by anyone to verify authenticity, the company produces proprietary codes that are very hard to copy or link to counterfeit websites, which eliminates the ability of many of the bad players to produce counterfeits. VerifyMe also produces NFC/RFID chips that do not require a line-of-sight to be scanned for authentication. Lastly, the company supplies invisible codes that are imbedded in labels, packaging, or the product itself, as shown in the graphic below.

VRME simple 3 level approach level 3

(Source: Investor Day Presentation)

In addition to authentication, the company provides VerifyMe Track Trace™ functionality that can include serialization of a product line. Long overdue, the FDA is currently putting in place requirements for all pharmaceutical products to be serialized as part of the Drug Supply Chain Security Act, which will be required in 2023

All of the features of the VerifyMe security platform can be accessed by brand owners on one dashboard to track products globally for illicit activity including diversion of products outside approved supply chains.

VRMe brand owner monitoring

(Source: Investor Day Presentation)

While the security features of the VerifyMe platform are essential to brand protection, brand owners increasingly want to connect with consumers to enable a total digital solution. Accordingly, VerifyMe has introduced a consumer engagement feature to its platform which is illustrated in the graphic below.

VRME consumer engagement

(Source: Investor Day Presentation)

The consumer engagement platform enables clients to access valuable data from consumers including purchases and target market penetration by region. The graphic below illustrates the number and location of scans for a startup business based in California, which indicates early recorded scans by region.

VRME simple 3 level approach leve 2

(Source: Investor Day Presentation)

With approximately six billion global smart phone users and growing, the opportunity to connect with consumers is unlimited. Consumers are increasingly using smart phones to scan QR codes for information. The ability to authenticate products gives consumers a powerful tool to enhance their purchase experiences.

As stated during the Investor Day presentation, the company is not aware of another provider of all the combined features available from VerifyMe as a complete package that can be adopted quickly. To attain a full grasp of how the complete platform works, a demo is provided in a replay of the Investor Day presentation. The presentation provides a complete overview and history of the business, including a presentation from the board chairman and key management.

Competition

Currently the brand protection industry is highly fragmented. Concerning VerifyMe, management cited two examples of competitors specifically related to its business, Opsec Security and SICPA, both privately held companies. In addition, as quoted in the most recent Form 10K, "Amazon has become a competitor with their new "Project Zero" brand protection system utilizing their "Transparency" serialization product. Amazon's product serialization service provides a unique code for every unit that is manufactured, and the brand puts these codes on its products as part of its manufacturing process, which Amazon scans and verifies. This differs from our covert luminescent pigment which is incorporated in the labeling process and our invisible covert serialization and authentication solution." The solution from Amazon may be sufficient for some manufacturers, however, increasingly manufactures want to own their own data. And the Amazon offering does not provide a complete, dedicated platform including consumer engagement available from VerifyMe.

Revenue Opportunity

The total addressable market for the VerifyMe product offering is a massive $105 billion. In addition, the revenue stream is diversified in four major product categories in authentication, serialization, consumer engagement, and label printing. It is not hard to see that if VerifyMe attains even a small share of the total addressable market, the company will experience explosive growth. With a differentiated product line and qualified management and sales team, rapid traction should be achievable. Just as impressive is the CAGR for each of the product categories ranging between 8.7% and 19%

Global market size of VerifyMe products

(Source: Investor Day Presentation)

VerifyMe added its first sales team within the last two years with the addition of three dedicated sales professionals. In addition, management participates in the sales effort and works with clients to tailor the VerifyMe platform to specific customer requirements. As stated during the Investor Day presentation, the company booked its first 7-digit customer in August 2021 that has since placed a reorder to add functionality. The addition provided an example of the ability to cross-sell functionality. The new client, a small business, provides a comparison of potential revenue that will be generated from large businesses. Further, the consumer engagement platform adds to the potential for expenditures funded by marketing budgets of clients instead of security or general procurement which may not be budgeted.

Spac Equity Investment

During 2021, VerifyMe participated in a Spac deal that added $10.8 million in current valuation to the balance sheet. Some of the details of the equity investment are quoted from the most recent VerifyMe Form 10Q:

"On February 26, 2021, the Company formed VMEA Holdings Inc. (the "Sponsor Entity"), a Delaware corporation and wholly owned subsidiary of the Company, that owns G3 VRM Acquisition Corp. (NASDAQ:GGGVU) (the "SPAC"), a Delaware corporation and special purpose acquisition company being co-sponsored by the Company. The SPAC was formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. While it may pursue an initial business combination target in any business, industry or geographical location, it intends to focus its search on target businesses with enterprise values of approximately $250 million to $500 million within the technology and business services industry."

VerifyMe CFO Margaret Gezerlis stated on the Investor Day presentation that they have "full faith" in the potential of the Spac and expect cash injections from the equity investment.

Financials and key data

Illustrated below are some key data points on VerifyMe stock and financials. Even though the company has been in business for years, the data appears to be representative of a startup business, which in many respects it is. For years the company offered security marking products with no digital capability. From 2017-2020 the company focused on developing a digital platform that ultimately resulted in a total of 12 issued U.S. and European patents with nine U.S. and foreign patents pending (source: Form 10K).

Further analysis of the numbers below reveals significant positives not found in most startup businesses. While revenue for the TTM was only $686,000, growth is accelerating as management is targeting $4 million in sales for 2022. During the Q A session on the Investor Day presentation, the CFO stated that expenses (not including stock-based compensation) are running about $1 million per quarter. With a cash balance of $10.6 million as of September 30, management estimates an approximate 4-year run rate with current cash burn. Further, management indicated in the Q A session that they believe the current sales force will be sufficient to drive sales for the foreseeable future. At the current expense run rate and gross margins of 60%, the company's core business should achieve breakeven status at about $7 million in annual revenue, which should be attainable at current growth rates. In addition, the Spac could add to profitability if successful.

Another positive for the company is the low share count with 11.3 million fully diluted shares. As the company becomes profitable, EPS could build quickly and propel the shares higher. In addition, the company has a share repurchase program with approximate $1 million remaining under the plan. With no debt, cash flow could also build quickly.

VRME financial and Equity snapshot (Source: Investor Day Presentation)

Risks

As with any small microcap company with limited history of successful operations, there is a great deal of risk inherent in the possibility that business may not develop as expected. It is essential that investors understand the risks associated committing a long position. Accordingly, the risk factors for VerifyMe are detailed in the current Form 10K beginning on page 12.

Overall, due to its relative financial strength, it appears that the major risk for VerifyMe is in the ability to meet revenue expectations. The Spac investment carries risk in that it may not develop as expected to justify the equity investment on the balance sheet which could result in future charges against income. However, failure of the Spac should not significantly affect the core business of the company.

Conclusion

Due to the explosion of counterfeiting and product diversion, it appears that VerifyMe is well positioned to benefit in solving problems that so far have not been adequately addressed. With a complete digital platform that can be quickly deployed globally to facilitate both authentication and consumer engagement, it appears the company is on track to deliver. The small, startup size of the company could present an opportunity that could explode shares to the upside. Significant catalysts could materialize as new clients are added and sales are accrued to a very small base. Lastly, the Spac, if successful, could add a durable stream of profitability and cash flow.

This article was written by

Arthur Frentzel profile picture

I have been investing in common stocks for over 40 years.  With all the information that is available today...

Long Only, Long-Term Horizon, Special Situations

Contributor Since 2012

I have been investing in common stocks for over 40 years.  With all the information that is available today, it is more exciting than ever.  However, due to extreme current valuations of many stocks, increasingly it is a stock pickers game to find names that have not yet been recognized in the market.  The foregoing entails a much greater degree of risk, but also the potential for outsized returns once the risk/reward profile is ascertained in advance of committing funds, which is the goal of my research and writing.  Your comments and input on my articles are greatly appreciated which should enhance learning for everyone.  

Disclosure: I/we have a beneficial long position in the shares of VRME either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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