VerifyMe, Inc.

Good morning, and welcome to the Verify Me Year-End 2022 Financial Results Conference Call. All participants will be in a listen-only mode, and should you need any assistance during the call, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. And to withdraw a question, please press star, then two. Please note that this event is being recorded today. I would now like to turn the conference over to Nancy Myers, Vice President and Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us today for our earnings call presentation. On the call today, we have Scott Greenberg, Interim CEO and Executive Chairman, Keith Goldstein, President and Chief Operating Officer, Margaret Gazurlis, CFO, and Kurt Cole, Executive Vice President Sales and Global Strategy, to give an update on our fourth quarter 2022 results. Following our management presentation, we will have a Q&A session. I would like to bring your attention to the note on forward-looking statements on slide three. Today's presentation and the answers to question include forward-looking statements. It should be understood that actual results could differ materially from those projected due to a number of factors, including those described under the forward-looking statements caption and on the risk factors of the company's annual report on Form 10-K and quarterly reports on Form 10-Q. I will now turn the call over to Scott Greenberg for some opening remarks.

Thank you, Nancy. Thanks for participating on the fourth quarter of 2022 earnings call. We believe the company is developing a unique platform both organically and through the acquisitions completed. In 2023, our goal is to further integrate our acquisitions to enhance the company's platform. The fourth quarter of 2022 results and the opportunities being pursued leads us to a positive future outlook. I believe the presentations today will demonstrate that the company is at an inflection point, and for 2023, the company forecasts a positive adjusted EBITDA and increased revenue for the year with a strong balance sheet. We believe that the Verify Me, Parachip, and Trust Code brands are important, both individually and the combined strategy for future growth. In addition, I'd like to thank Patrick White for his contributions in the past of being the company's CEO. That being said, I believe we have put together an experienced management team and board of directors that's poised for success. Next slide, please. Just a little bit about the financial and equity snapshot. Our stock price today is roughly about $1.60, and our shares outstanding is $9.4 million, which gives us a market cap that's closing in on $15 million. Our cash balance as of December 31st, 2022, was $3.4 million, and that's socially consistent with our June balance. So our cash has been holding up and roughly staying equal in the six months. Our debt is $1.9 million as of December 31, 2022. And on a positive note, our debt is normal bank debt with PNC Bank. Our revenues for fiscal 2022 is $19.6 million. And as you see our projection later on, we should grow revenue both organically and through acquisitions by over 40% in 2023. and our inside beneficial ownership is approximately 17%. With that being said, I'd now like to turn over the call to Keith Goldstein.

Great. Thank you, Scott. For those of you who don't know me, I've been the Chief Operating Officer of VerifyMe for approximately four and a half years, and the President and Chief Operating Officer for just over a year. It's a pleasure today, rather, it's a pleasure to speak with you today about VerifyMe. As Scott mentioned, we had a record fourth quarter with revenue coming in at $9.7 million. The fourth quarter is historically the strongest quarter for Perryship due to holiday shipments. In addition, our sales opportunity pipeline for the brand protection business continues to be robust. And with the acquisition of Perryship last April, we now have a strong sales opportunity pipeline in our information logistics business as well. Last month, we acquired the assets of Trust Codes, a New Zealand-based software-as-a-service company. Trust Codes is in the brand protection space, connecting a brand to the consumer with storytelling, data transparency, and visibility of the journey for each and every item in the supply chain. we view the acquisition of Trust Codes as strategic for the company. Combining Trust Codes unit level traceability solutions with Pariship's information logistics platform, we now have a unified software offering that allows us to provide end-to-end security and trust in the supply chain from the point of a product's manufacturer all the way through to the proof of delivery. I'll share more about the benefits from the Trust Codes acquisition when we move to the next slide. We entered into a five-year extension on our agreement with our strategic partner, HP Indigo. For anyone that may be new to Verify.me, HP Indigo manufactures and sells offset quality digital printing presses. We provide our covert pigment to HP Indigo. They convert it into an ink for the Indigo presses, which we market and sell as Verify Ink. The five-year extension with HP Indigo also offers new financial incentives for them to promote all of our brand protection solutions. We've added Perryship services to our social media marketing campaign as a first for the company, and it's starting to gain traction. With the addition of trust codes, we'll begin promoting unified messaging around our ability to provide supply chain security and trust. We've also developed a mobile PowerShip app that we'll be rolling out to customers in Q2. Kurt Cole, Executive Vice President of the company, will provide more details on our sales and marketing initiatives in a few minutes. Lastly, the company has demonstrated effective internal controls. This is a great achievement for a company our size. It puts us in a very strong position to build off of as we continue to grow the company organically and inorganically. Next slide, please. So now I'm going to speak about the benefits from the Trust Codes acquisition. And as I mentioned earlier, the Trust Codes acquisition is strategic for the company. And I'm going to spend a few minutes sharing the key benefits that we see resulting from it. Until the acquisition, the cloud-based brand protection solution that we sold was a white-labeled solution from a third party. It allowed us to build the Verify Me brand and go to market with a covert authentication solution with minimal investment. We reached a point in our growth cycle where it made sense to have greater control and flexibility in the software development cycle. The Trust Code solution is our own. With our own software developers, we can continually enhance it as a best-in-class offering and modify it for specific customer requirements. It also reduces our product costs, increases our margins, and allows us to be more competitive when needed. We consider it to be a proven highly scalable platform, having over 700 million products marked in the field for more than 500 companies with product scans in 141 countries. Most of TrustCode's current customers are in the food and nutrition space, which is a natural tie-in to Perryship's customer base and core competencies. The software platform uses the same programming language and development tools as the Perryship solutions, allowing for system interoperability and product development resource sharing. Lastly, the acquisition gives us a foothold into Australasia and a peek into China. So to reiterate, the combination of VerifyMe's covert solutions, TrustCode's unit-level product traceability, and Pariship's last-mile information logistics solution allows us to provide end-to-end supply chain security and trust from the point of manufacturing all the way to the proof of delivery, creating a truly unique software logistics offering. I'll now turn it over to Kurt Cole to discuss our initiatives to drive new business and revenue by market sector.

This is Kurt Cole and thank you, Keith. I'm going to spend a few minutes talking about some of the initiatives that we've embarked on post acquisition. Some of the things we're going to do in the future that we believe is going to drive new business. We are so enthusiastic about the recent acquisition that we've embarked on a total rebranding, including logo, website, messaging that encompasses all the blended services. We believe that the acquisition builds out the brand in a way that we have not previously. and we are looking at selling propositions to all aspects of the enterprise, inclusive of Pariship, VerifyMe, as well as Trustcodes. We've embarked on a full-scale digital marketing campaign to include social media, paid search, email marketing, content, and content development. In addition to our sales efforts, that we have embarked on originally. We believe that this is going to enhance our opportunity to inform the market and going to position us in a way that is unique to the space. As Scott and Keith mentioned, we are in the info logistics business. We handle no product. We manage the information associated with that. And we believe that that value increases on a daily basis, given that it's about data, about data and about data. We're fortunate enough to be aligned with folks in our organization who understand that, who understand the value of it and how to translate that into a new opportunity and new revenues. We also engage a third party lead generation organization to cast a wider net Given the addition of our new organization, we believe we're positioned in a unique way, and we want to make sure that we're touching all of the folks out there that could have some need for our services. the unique nature of what we deliver from a logistics perspective. Keith mentioned the mobile app. One of the most recent developments is putting our tools in the customer's hand. We've always had a very robust customer portal. We believe we're going to translate that into a handheld device. so that they can understand the nature of their shipments, the status of all of their shipments in transit without having to open their computer or to reach out to us directly. The upselling opportunities that are presented as a result of the Trust Code's Verify Me, Pariship collaboration have opened up areas for us that we have heretofore not been able to address. They come to the table with a great tech skill set. We look forward to working with them. We've had the opportunity to engage with them already. They're in the States this week, and uniquely, we are meeting with a single customer that currently does business with Pariship and VerifyMe because of their vast interest in the serialization aspects that TrustCodes brings to the table. We're enthusiastic, we're excited, and we look forward to the next year ahead. Next slide, please. This is a segment of our business, a segment that shows not much change from previously. We believe that the largest portion of that pie will continue to grow. We also believe that the health and personal care, health and beauty, however you choose to term it, presents huge opportunities with regard to trust codes in the technology that they deliver. We expect that we are able to grow the apparel business as a result of this acquisition, which is a small segment of our business. And we look forward to pursuing that opportunity this week, as I mentioned in the meetings that we have scheduled. And with that, I will pass the baton. And I appreciate your time and your interest.

Thanks, Kurt. Just to quickly provide the 2023 outlook, we are projecting revenue to be at $28 million or better for 2023, which is slightly better than the guidance that we've previously provided. We expect the gross margin to be consistent with 2022 or better, which was at 33%. And as Scott had mentioned, we are projecting a positive adjusted EBITDA. And with that, I'll turn the presentation over to our CFO, Margaret Gazerlis, to touch upon the financials in greater detail.

Thanks, Keith. Good morning, everyone. Thank you for joining. As you've heard from Scott and Keith, we continue showing record results and have a positive outlook for the upcoming fiscal year. Our Q4 revenue was $9.7 million, an increase of 86% over the third quarter revenue. Gross profit margin was $2.8 million, or 29% over the quarter. Lower gross margin was in line with our seasonal shift in product mix between proactive and premium revenue streams. We had a net income of $0.1 million in Q4 2022 compared to a net loss of $0.5 in the third quarter of 2022, loss of $1 million in the fourth quarter of 2021. Next slide, please. In this slide, you can see the improvement of our financial results quarter over quarter. Our adjusted EBITDA is a positive $0.7 million in the fourth quarter, an increase of $0.9 million, or approximately 500% when compared to the third quarter adjusted EBITDA loss of $0.2 million. Our business is seasonal, with the fourth quarter showing the strongest performance. Our first quarter is lower performing in comparison. However, we do expect a positive outlook for fiscal year 2023, as mentioned previously. Next slide, please. The next slide illustrates the dramatic increase in revenue and gross profit in 2022, which includes the acquisition of the Perryship business starting on April 22nd, 2022. We expect to maintain or improve our gross profit margin for the fiscal year 2023. Next slide, please. Our cash as of December 31st, 2022 is 3.4 million, a decrease of 6 million from 9.4 million on December 31st, 2021. Since the acquisition of the Parachute business in April 2022, we required an initial cash outlay of 7.5 million and a repayment of debt in Q3 of 1.9 million. Other than this, our cash has remained steady. If you look at comparison, to September, as Scott previously mentioned. As for the year end, we have a working capital of $4 million, $10.4 million of intangible assets and goodwill related to the acquisition of Pariship, and a four-year term loan with PNC of $1.9 million. We also have a $1 million revolving line of credit with PNC, of which no amount has been withdrawn as of December 31, 2022. We continue to believe that we have sufficient cash to cover our operations for the foreseeable future as our business starts to generate cash. We believe the acquisitions of the Trust Codes assets in Q1 2023 allows us to provide a comprehensive solution to our customers that will improve our results. We continue to grow the business organically, but are always looking for opportunities to increase our shareholders' value. With that, I'd like to thank you for your participation and open the floor to any questions you might have.

We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause just momentarily to assemble our roster. And our first question here will come from Jack Vanderaard with Maxim Group. Please go ahead.

Okay, great. Good morning, guys. I appreciate the update. Thank you for taking my questions. Scott, you know, good to see the strong finish to 2022 with, you know, strong fourth quarter revenue. Obviously, the bulk of that was Paraship. And I think in the preliminary announcement, I saw that the core verify me business seemed to be up 60%, which was ahead of your 50% year-over-year growth guide.

Yes.

How do you, you know, you gave new guidance for 2023 of $28 million for revenue. How does that factor in? How do we factor in the core Verify Me business? Is it still at that 50% clip in your mind? And any comments would be helpful.

Yes. I mean, on the positive, on the Verify Me business, it's twofold. One is the incremental gross profit. is typically over 60%. So as we improve VerifyMe, it has a high margin business. We do expect the VerifyMe business again to grow in excess of 50%. And that was taken into consideration for our ability to raise the guidance from an excess of 25 million to an excess of $28 million. So the answer to your question is good news. The answer is yes, and why we feel positive is you could see all the additions we've made to the technology and the features of the technology and the mobile apps to generate additional revenue. This is the things that the company never had before, and we're starting to make a significant progress in those areas. So we are optimistic for both Verify Me technology, Parachip technology, and Trust Codes all having organic revenue growth in 2023. Okay, great.

And then, you know, since the Parachip acquisition did close in April, and just circling back to your new guidance for 2023, $28 million at least, I guess just, I'm trying to get a better sense of what you expect for a true or a net revenue growth going forward. And I know you're not providing 2024 guidance by any means, but, you know, is there sort of a normalized growth rate you think beyond 2023 once the dust kind of settles, the integrations happen?

Yeah, that's why I call it an inflection year. We expect a growth this year, but in order to get and to continue on significant growth, which we believe we will, we have to succeed on what we're doing. We have to execute. I believe we'll execute and the growth rate will continue. But this is going to be the inflection year, Mike, in that respect. But we feel comfortable that we will have continued revenue growth, organic growth, significant growth and beyond 2023. Okay, great.

And then maybe just one more for me and I'll hop back in the queue. But You know, Scott, you obviously took over as interim CEO after Patrick White. I thought Patrick White did a great job helping us get to this point, so kudos to him for that. Just maybe an update on your CEO, new CEO search process or what you're kind of expecting or looking for.

Well, right now what we wanted to have the team focus on is executing, right? and we believe we have all the key people in place to execute. We did not want any distractions from achieving our goals in 2023. So since I was already executive chairman, we all believed that the best approach currently would be for me to continue on as interim CEO. So I don't believe there's any rush in making changes, but, you know, we will evaluate that. But the number one goal is to not disrupt the company, and I believe the way we reorganize the management team, everybody has a clear focus and agenda, and the board thought it was the best way to approach it.

Understood. Okay, that's it for me. Congrats on the increased outlook and strong results. I'll hop back in the queue.

All right, thank you.

Our next question will come from Mike Petusky with Barrington Research. Please go ahead.

Hey, good morning. Thanks for the question. So I guess one question I have, and I haven't seen this enough. I missed it. Can you give – and I understand that Paraship wasn't part of the business, obviously – you know, in the previous Q4, but did Paraship actually grow in Q4 versus the previous Q4, or did it shrink? Thanks.

Margaret?

So Paraship, generally for the full year, Paraship came in lower than it was in the prior year, and that related to some business that was lost primarily in Alaska. So the Q4 actually remained steady because we had a record Q4, and it was a higher percentage of the total revenue. So last year, Q4 came to roughly 33%. We were expecting the same kind of a percentage this year, but it landed at 37%. So it was a very strong Q4.

What happened is, so looking at it, Q4 was relatively flat compared to Q4 last year.

Was it 9.7? Can you just give me the number so I can assess that?

Yeah, Margaret, do you have the number for Q4 in the prior year?

Yes. So the number was around 9.5 million. Okay. And then in this quarter it was 8.9 million.

So basically looking at it, you know, we've added a lot of accounts. And even though it was down slightly the same from last year, The prospects look good, so we expect to have organic growth again. A lot of counts were added. You saw all the new things we put into place. So we're optimistic that Parachip will start having organic growth back under our domain. Sorry, I may have misheard.

Was it 9.9 or 9.5 for the year ago, Q4? 9.5. Sorry, I'm still getting garbled. 99, Scott? I think she said 9.5.

Okay, so it did grow.

Or I'm sorry, it didn't grow because it was 8.9. 8.9 is the comp. 8.9 is the comp.

Okay, got it. Our overall revenue grew, but the perish because of VerifyMe business. So we did have organic revenue growth in the fourth quarter, but it was primarily attributable to the huge growth of the VerifyMe technology.

Okay, sure. So if you look at – you guys have a slide, which I appreciate, sort of the revenue by market sector for the quarter. When you sort of think about what that's going to look like over the next one year, over the next three years, how will that shift? I'm assuming maybe a bigger percentage is healthcare, but I was just wondering if you could sort of talk about that.

I think the percentages will switch slightly, but it'll be on an increasing revenue base, which means that unit's growing. So I would say overall that Trust Codes brings us in to a lot of things like baby formulas and those type of products. We're also looking the way to expand off pharmaceuticals. So I would say while we have other industries, the food and beverage and the health care should go up as percentages, but they're such a big percentage now that they'll be slightly bigger on a much larger, hopefully much larger revenue scheme.

Okay. And just shifting to the actual Q4 result, was there any unusual – items, either positive or negative, that would have impacted pairship margins or revenue in the court? Like, was there anything unusual as I think about how to model next year's?

Well, the one thing that does happen is in the high revenue quarter, we have what's called premium and proactive. And the premium business does not have pass-throughs. The proactive does. And basically in the fourth quarter, a lot of the revenue is shipped for Christmas, and a higher percentage is proactive. So it's just due to the mix of product line in Q4, not due to any change in our gross margin of our deliverables.

Okay, but that will repeat at least in next year's Q4. Okay.

That would probably repeat, but all I'm saying is that's the only thing that changed the margin. There was nothing unusual in it other than the mix of business offset by, obviously, the high margin business that was in the verify in Q4 as well, which raised the overall margin. But there's nothing unusual or no one-time adjustments or adjustments that impacted the business in Q4 other than normal product mix. Okay.

And last question, I promise. Is there likely to be a positive adjusted EBITDA quarter beyond next year's fourth quarter? Are you guys likely to find a quarter in there to show positive?

Well, the answer is if you look at Q3 and Q2 and Q3 and Q2 and you adjust it for growth, they were close to being positive as well, right? I mean, they were negative 300,000, I believe, one quarter. So to go from negative 300,000 to a positive quarter is obviously not out of the question. It's actually probably not out of the question at all.

Okay. All right. Thank you so much. I appreciate it.

All right. Thank you.

Again, if you have a question, you may press star then one to join the queue. At this time, we will pause momentarily to assemble our roster. Our next question will come from Daniel Orla, a private investor. Please go ahead.

Yes, Daniel. Just so you know, we're limiting to two questions, so try to get your two best questions, but go ahead.

Okay, so what are you guiding to on operating margin?

We didn't guide operating margin. What we did is we guided overall adjusted EBITDA for the year, and basically as a positive, We did say that we expected our gross margin to be the same or better than the prior year, so we expect our overall gross margin to increase. We expect our operating profit to obviously be adjusted even to a positive, but as a dollar to value for operating margin, we did not give guidance on that.

Okay. What cost reductions can you see effectuating given the brand, the new branding that you're proposing? You're obviously changing the business model, changing the business mix. Is the current sales force at VerifyMe, which I recall being not particularly candidly, not having produced much in the last several years, is that a source of rededicating capital so that we can look for higher expected growth given the new brand proposition in the marketing?

Well, if you look at it, a few things happen. One is we now have the management team on trust codes in the mix, and they have a sales and marketing person. The thing to realize, and I tried saying this before, that We believe each brand is still important. That being said, then we have the overall strategy of the three brands. What we are doing is we're, because we're now on a higher revenue base, we're using some of that incremental profit to do things as Kurt and Keith discussed, improving the product. So a lot of what we've done is improving the product. And as far as sales and marketing, we're spending a lot more time at trade shows, reintroducing the product. We were just at a seafood show as well. And we're relying on our distributors across the world. One of our three salespeople are also helping out with Trust Code at the Verify Me division, helping out with Trust Code. So we reallocated time to get them involved with other But overall, we're not reducing the sales expense going into 2023. We think sales and marketing on our increased revenue base is an important aspect of being successful next year.

So just as a half question and as a corollary to that, is HP a self-sufficient sales force? And would that relationship develop, do you think, more aggressively over the course of the year? I mean, how do you see HP unfolding on legacy sales? as a legacy opportunity.

Hey, Keith, you want to take that one?

Sure. So, you know, with the new agreement with HP, there are now incentives that did not exist before for their solution architects and their sales teams to more proactively promote the verify me solution. So that's going to be happening. Also, you know, not to overplay the impacts of COVID. It, you know, with that said, it still had a significant impact on the business. And now that everything is completely opened up, you know, we are starting to go to global trade shows with HP Indigo around the world. So, you know, those two things, I think, will help to grow and spur additional sales through the HP Indigo global sales team and solution architects.

Thank you, Keith. Thanks, Daniel. Moderator, why don't we switch to the next caller at this point so everyone could participate.

Our next question will come from Russ Barnes with EPS. Please go ahead.

Hello, folks. Good morning. Thank you for taking my call. So what can I do as an individual investor? I know that there is, you know, LinkedIn, and I talk up the company, particularly VerifyMe. I don't know about these other companies. But what can I do as an individual to help, you know, make this thing grow? I mean, it's fantastic. When I first learned about it from Norman, fantastic product. I'm just surprised that this thing hasn't been scooped up. by every country in the world. I think it's great. But like I said, I'm one individual. I own a heating and air conditioning company here in the Washington DC marketplace. And can this thing squeeze onto a dollar bill? Can we go after the government in terms of putting your mark on a $100 bill? What can I do to help out increase sales?

Well, Russ, thanks for the question. I think the first thing is we have to help ourselves and we have to execute ourselves. And I understand it's been a long history and a long road. But if you looked at where we are today, the product is much more enhanced with much more features than it was two or three years ago. Three years ago, while there was a lot of hope and prospects, the company needed these features in order to be successful. It needed all the things we've put together now, and that's why you're seeing the revenue growth. I know it's not up to the level that was promised many years ago, but I think now you have a nice developing company with solid with a solid foundation. When you say help, you know, any introductions to customers at the highest levels, relationships our shareholders have, relationships anybody has, that we could have the ability to get a meeting set up to demonstrate what we have would be greatly appreciated.

Okay. Thank you very much. Have a good day.

Thank you. Thank you.

moderator next question our next question will come from Jeff Porter with Porter Capital please go ahead hey guys could you give us a sense of employee compensation structure sort of what percentage of compensation is in options or restricted stock units and how those vest over time just like to get a sense of you know Are we all pulling together from the same team here and are the employees motivated to help get the stock price up?

Thank you, Jeff. One of the things that we've put in place in the last year or two was a similar approach that we had in my former company, GP Strategies, which is basically to align the stockholders with the executive team and employees of the company. So the board of directors have historically taken all their compensation and restricted stock of the company and have not pulled out any type of significant cash or working capital. So the board is aligned with the investors. A second plan that we put in place for the executive team, including myself, is that people get restricted stock grants, but the stock is not vesting over time. The stock invests when the price hits certain levels for a period of time. This is what we used at my former company. And basically, in order to earn your shares, the company has to approve. So the shareholders and the employees are aligned. Last year, the executive team got between 50 and 70%, roughly, a percent of their base salary in these type of shares, but they only earned the shares of this significant increase in the price. And it can't be one day. It has to be over, let's say, a 20-day period. And I think that that's a way to align the investors, the shareholders, and the executive team.

Makes sense to me. Thanks.

Moderator, do we have any other questions at this point?

There are no remaining questions at this time. And at this time, we will conclude the question and answer session. I'd like to turn the conference back over to Scott Greenberg for any closing remarks.

Thank you, Moderator. Thanks for participating. As you can see, you have a company today which is finally starting to achieve revenue with the margin associated with it. You have a company that has a, you heard from our management today, we believe a strong management team. You have a company that saw Bain's Oxley compliance so you could feel confident in that. And for a small company, that's an accomplishment. You have a company that has a strong balance sheet. compared to where it was. And we look forward to the future down the road with our investors. So thank you for participating.

The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.