DMRC - VerifyMe: Anti-Counterfeiting Ready For Primetime In 2023?

Summary

• Order booking is accelerating.
• Recent developments are encouraging.
• The competitive position of the company will be discussed.
• Low valuation could provide an attractive entry point.

I last posted an article on VerifyMe ( VRME ) in December 2021, forecasting triple-digit revenue growth in 2022, which actually proved to be way too conservative. YTD revenue growth exceeded 1500% through the end of Q3, which should increase in Q4. On the other hand, it must be noted that since the article posted near the end of 2021, VRME stock price has lost approximately 62% of its value. For comparison, Cathie Wood's ARK Innovation Fund ( ARKK ) lost approximately 65% of its value in the same period. Needless to say, speculative stocks losing money did extremely poor in the period.

While the revenue comparison is from a very low base of $612K (2021) to $9.873 million (2022) which included an acquisition, it is nonetheless impressive. Revenue growth was mostly due to the acquisition in early 2022 of PeriShip Global LLC, a logistics supplier for perishable goods. As stated on the acquisition conference call, the combined annual revenue run rate for both VerifyMe and PeriShip is forecasted at about $25 million near term.

The purchase price for PeriShip Global was $10.5 million, including $7.5 million in cash. Although the PeriShip business was not profitable at the time of the acquisition, management is projecting positive adjusted EBITA for Q4 2022 and 2023 for the combined businesses.

Beyond the foregoing, there are multiple reasons to support an investment thesis for VerifyMe, which are covered below.

The business

Global counterfeit goods are a growing problem for brand owners and consumers, which are estimated to exceed $1 trillion annually, with about $200 billion just in pharmaceuticals . Beyond pharmaceuticals, counterfeit goods represent a growing health and safety concern according to the Department of Homeland Security. In addition, counterfeits have a huge economic impact to companies and employment.

In view of the foregoing, the market for packaging to address counterfeits is expected to grow at a CAGR of 12.9% to $188 billion annually by 2025. While VerifyMe primarily supplies the technology to counteract counterfeits, the robust CAGR should underpin the industry for the foreseeable future.

In addition to the above, the Drug Supply Chain and Security Act becomes effective November 27, 2023 which requires manufacturers of certain drugs to provide authentication and tracing of their products in the supply chain. The much-needed DSCSA should provide a tailwind for the security/tracking sector leading up to the effective date and beyond.

VerifyMe has made steady progress in launching its platform to address counterfeit goods and with the recent addition of online/website verification monitoring. The company also recently announced the addition of a multi-billion-dollar, luxury apparel client with initial orders recently received as well as other new business added that will impact Q4 results.

Further, the company signed a new five-year contract with Federal Express for logistics services provided by PeriShip Global. In addition, an extension agreement was also signed with HP Indigo, which expands royalties and commissions for selling the VerifyMe platform, which is expected to drive revenue beginning in this year.

Competition

As with any high-growth business, there is no shortage of competition in brand protection. While the anti-counterfeit business continues to be highly fragmented, there are some notable players that compete with VerifyMe. While the list of competitors in the graphic below is by no means exhaustive, it may provide a useful comparison to assess the position of VerifyMe in the market for anti-counterfeiting technology. However, it must be noted that there are shortcomings to a comparison made without financials and disclosures from the private companies.

Alitheon is a startup company that claims to be able to authenticate products from a photo of the physical product, as opposed to labeling and/or packaging verification. While this is a great step forward that will likely be used in some applications, there are questions on the viability of the platform for widespread use.

Most consumer goods are contained in packaging and consumers would likely want to verify the product before purchasing it. The packaging could be photographed, but changes in packing (which occur relatively often) would negate the effectiveness of the technology. Also, without embedded codes, there would be no media to enable logistics tracking and consumer engagement.

Authentix focuses primarily on the finance/government sector and its core business appears to be tax stamp verification. With 199 employees and years in business, the company appears to be well planted in its core business but a relatively new entrant into consumer goods verification and tracking.

Digimarc ( DMRC ) has been in business over 25 years, originally developing a digital watermark used in Adobe. While the company currently has a market cap near $347 million, the stock trades at 12 times sales with negative earnings. Peak revenue for the company was booked in 2012 at $44.4 million and current revenue for the TTM is $30.1 million. The company was last profitable in 2012 with net income of $8.3 million and has remained unprofitable to the current timeframe ( source: TIKR.com ).

OpSec Security appears to be the most viable competitor to VerifyMe, offering a full suite of security products and services and an employee count near 800. Due to the fact that OpSec Security is a privately held company, it is difficult to ascertain the full scope of the business and financials. Located in Oregon, the company has been in business about 20 years. Based on information on the company's website, Opsec appears to be a well-recognized leader in both product and online security.

SICPA

SICPA is a Swiss-based company that was founded in 1927 that was originally focused on currency, tax, and document security that has branched out into product authentication and tracking. The company has a long history of trust and has brand recognition globally in its core business.

TrackTraceRx

The company name TrackTraceRx describes the business that focuses on tracking and tracing prescription drugs. The company is likely a major beneficiary of the DSCSA law going into effect this year and beyond. However, it does not appear that TrackTraceRx has an engagement platform, which may not affect tracking prescription drugs but is very relevant to most consumer goods.

VerifyMe position

Based on the number of employees and (available) market cap, it is obvious that VerifyMe is one of the smallest players in the comparison group. Starting with the financials, the following discussion will cover some aspects of the VRME business.

As seen above, VerifyMe maintains solid financials for its small size. In the aftermath of purchasing PeriShip, long-term debt remains low at 11.4% of equity with $3.6 million in cash and a current ratio of 2.6. Gross margin slipped to 35.6% in Q2 with the integration of the PeriShip business, however, with projected gross margins near 60-70% for the VerifyMe (technology) business, margins should grow long term as the technology segment attains a greater share of revenue.

In the last five years, Digimarc spent $82.4 million on R & D and reported cash burn of $133.5 million, yet the company reported almost no growth. Revenue through the end of Q3 2022 was $11.9 million compared to $11.5 million through Q3 2021, with net losses of $26.5 million and $47.4 million respectively ( source: Form 10Q ). The foregoing brings into question management's ability to execute.

While financials are unknown for OpSec Security , it appears that the company may be one of the most advanced in addressing counterfeits among the comparison group, with 800 employees focused on consumer goods and online security. While the company apparently began with holograms, their technology has advanced to offer a wide array of product offerings, providing overt and covert security options.

Authentix, SIPCA , and TrackTraceRx have established core businesses focused on specific segments outside the primary focus of VerifyMe, however, it is unclear what their competitive position is in the consumer goods space. While Alitheon is launching a new technology, significant adoption with consumer goods remains to be proved.

Based on a comparison of number of employees, and years-in-business, VerifyMe could be considered a startup company competing with companies that have proven business models and a history of operations, especially Authentix , OpSec Security , and SICPA .

So how is VerifyMe positioned in the market considering the foregoing comparison? There are several factors that differentiate the company in the comparison, which are discussed below.

1. Low-cost provider VerifyMe is focused only on consumer goods authentication, tracking, tracing, and engagement while some of its competitors have core businesses focused in multiple areas of the market. Specializing in one market segment often provides opportunities to deploy limited resources to highly-specific targeted markets, saving costs associated with a wider field of operations and addon services.

Supporting the foregoing, VerifyMe board chairman Scott Greenberg stated during the Q & A session on its Q3 earnings conference call that VerifyMe is "an outsourcing company", meaning that the company has lower fixed costs. Lower fixed costs enable the company to operate at lower overall costs compared to companies with higher head-counts, brick and mortar, and other fixed costs. Further, as suggested by Chairman Scott Greenberg noted above, the company has less vulnerability to market downturns.

Slow adoption of anti-counterfeiting technology has been due in part to the reluctance of consumer goods managements to add incremental costs to each product moving through the supply chain. Accordingly, low-cost operators maintain price-competitive advantages compared to higher cost alternatives.

The corporate/technology segment of VerifyMe operates with 8 employees (exclusive of PeriShip) and directors are compensated with VRME stock. Said another way, it is much easier to be price competitive in the market with 8 full-time employees compared to 800.

2. Recently VerifyMe signed a new 5-Year agreement with HP Indigo Ltd to provide VerifyInk ^TM security ink taggants for HP Indigo 6000 series printers as “HP Security Electroink”. In addition to selling VerifyInk, HP Indigo will also participate in marketing additional VerifyMe technologies including consumer engagement codes, and new brand protection technologies. The agreement also provides opportunities to add other HP Indigo press models supporting the Security Electroink on an as needed basis.

The above agreement provides global sales opportunities by a world-leader in print technologies--at little cost to VerfiyMe.

3. In June of 2022, VerfiyMe reached a development milestone that will enable proprietary VerifyInk ^TM to run on continuous inkjet printers. As stated by CEO Patrick White, the development “...will allow VerifyMe to scale our business into the massive global product labeling and packaging industry that previously was unable to print our technologies.... Our new inkjet technology will allow brands to easily deploy a low-cost high-impact brand protection and consumer engagement capability using large volume flexo and web printing presses and infrastructure that often already exists in their supply chain.”

As stated on the Q3 earnings conference call, continuous inkjet printers represent 95% of the label and packaging market, as compared digital printing that remains in earlier adoption.

On December 15, 2022 the company provided a corporate update that included an announcement that the company had received orders totalling $800,000 to date in Q4 for the technology segment. For comparison, revenue for all of 2021 totaled $867,000, so revenue appears to be accelerating. Management stated that they intend to provide guidance for expected revenue increases in 2023 after full-year 2022 results are reported.

4. PeriShip Global Beyond revenue growth, the acquisition of the PeriShip business should enable VerifyMe to cross-sell technology and, in addition, gain traction in the perishables supply chain. Accordingly, management stated during the corporate update linked above that several PeriShip customers have expressed an interest in the VerifyMe engagement platform.

In addition, PeriShip is positioned to gain technology revenue in the pharma segment due to the DSCSA law going into effect later this year.

PeriShip appears to provide an ideal path to add new clients for the VerifyMe technology platform and expand its footprint in the logistics supply chain. Perishable shipping is projected to grow at a CAGR of 7.2% through 2026. Further, the growth estimate may be too low due to forecasted rapid growth of cell-based therapies that require cryogenic shipping, which is already a multi-billion-dollar business.

Valuation

With a current market cap near $11.6 million and a revenue run rate near $25 million, VRME trades at a price-to-sales ratio of .46, compared to Digimarc with a current price-to-sales ratio near 12.8, an extreme valuation difference. Add to that the fact that Digimarc has high cash burn with no profits in sight (source:TIKR.com), contrasted with VerifyMe that is approaching positive EBITA and cash flow.

While VerifyMe has a lot to prove in building a continued revenue stream, the company operates in an industry with a projected 12.9 CAGR tailwind in the anti-counterfeiting business. With all the positives and an extremely low valuation discussed above, it appears the company may be ready for primetime.

Risks

As with any small microcap company with limited history of successful operations, there is a high level of risk inherent in the possibility that the VerifyMe business may not develop as expected. Accordingly, prospective investors should understand the high risks associated with investing in low priced, speculative issues, that could result in the stock price going to zero.

Beyond business risks, VerifyMe stock encompasses market risk associated with low trading volume, with a current average daily trading volume near 27,000. In addition, low-price, low-capitalization stocks run the risk of being delisted from national markets, which almost always results in lower stock prices.

Lastly, stated risk factors for VerifyMe should be considered as detailed in the current Form 10K beginning on page 11.

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