UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM
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| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number
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| (Exact Name of Registrant as Specified in Its Charter) |
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(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) | |
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| (Address of Principal Executive Offices) | (Zip Code) | |
| (Registrant’s Telephone Number, Including Area Code) | ||
(Former Name, Former Address and Former Fiscal year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) |
Name of each exchange on which Registered |
| The Capital Market | ||
| The |
Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T §
232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or, an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company,” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | o | Accelerated filer | o | |
| x | Smaller reporting company | |||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: shares of common stock outstanding at May 6, 2022.
| 2 |
| PART I - FINANCIAL INFORMATION | ||
| ITEM 1. | Financial Statements | 4 |
| Balance Sheets (Unaudited) | 4 | |
| Statements of Operations (Unaudited) | 5 | |
| Statements of Cash Flows (Unaudited) | 6 | |
| Statements of Stockholders' Equity (Unaudited) | 7 | |
| Notes to Financial Statements (Unaudited) | 8 | |
| ITEM 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 19 |
| ITEM 3. | Quantitative and Qualitative Disclosures about Market Risk | 24 |
| ITEM 4. | Controls and Procedures | 24 |
| PART II - OTHER INFORMATION | ||
| ITEM 1. | Legal Proceedings | 25 |
| ITEM 1A. | Risk Factors | 25 |
| ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 26 |
| ITEM 3. | Defaults Upon Senior Securities | 26 |
| ITEM 4. | Mine Safety Disclosures | 26 |
| ITEM 5. | Other Information | 26 |
| ITEM 6. | Exhibits | 27 |
| SIGNATURES | 28 | |
| 3 |
FINANCIAL STATEMENTS
ITEM 1.
VerifyMe, Inc.
Balance Sheets
(In thousands, except share data)
| As of | ||||||||
| March 31, 2022 | December 31, 2021 | |||||||
| ASSETS | (Unaudited) | |||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts Receivable | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Short Term Investment | ||||||||
| Inventory | ||||||||
| TOTAL CURRENT ASSETS | ||||||||
| INVESTMENTS | ||||||||
| Equity Investment | ||||||||
| PROPERTY AND EQUIPMENT | ||||||||
| Equipment for lease, net of accumulated
amortization of $ |
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| Office Equipment, net of accumulated
amortization of $ |
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| INTANGIBLE ASSETS | ||||||||
| Patents and Trademarks, net of accumulated
amortization of $ |
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| Capitalized
Software Costs, net of accumulated amortization of $ |
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| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable and other accrued expenses | $ | $ | ||||||
| TOTAL CURRENT LIABILITIES | ||||||||
| LONG-TERM LIABILITIES | ||||||||
| Long Term Derivative Liability | $ | $ | ||||||
| TOTAL LIABILITIES | $ | $ | ||||||
| STOCKHOLDERS' EQUITY | ||||||||
| Series A Convertible Preferred Stock, $par value, shares | ||||||||
| authorized; shares issued and outstanding as of March 31, 2022 and | ||||||||
| shares issued and outstanding as of December 31, 2021 | ||||||||
| Series B Convertible Preferred Stock, $par value; shares | ||||||||
| authorized; shares issued and outstanding as of March 31, 2022 and | ||||||||
| December 31, 2021, respectively | ||||||||
| Common stock, $par value; authorized; and issued, and shares outstanding as of March 31, 2022 and December 31, 2021, respectively |
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| Additional paid in capital | ||||||||
| Treasury stock
as cost; and
shares
at March 31, 2022 and December 31, 2021, respectively | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| STOCKHOLDERS' EQUITY | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited financial statements.
| 4 |
VerifyMe, Inc.
Statements of Operations
(Unaudited)
(In thousands, except per share data)
| Three Months Ended | ||||||||
| March 31, 2022 | March 31, 2021 | |||||||
| NET REVENUE | ||||||||
| Sales | $ | $ | ||||||
| COST OF SALES | ||||||||
| GROSS PROFIT | ||||||||
| OPERATING EXPENSES | ||||||||
| General and administrative (a) | ||||||||
| Research and development | ||||||||
| Sales and marketing (a) | ||||||||
| Total Operating expenses | ||||||||
| LOSS BEFORE OTHER INCOME | ( | ) | ( | ) | ||||
| OTHER INCOME, NET | ||||||||
| Interest income, net | ||||||||
| Fair value gain on equity investments | ||||||||
| Other Income | ||||||||
| TOTAL OTHER INCOME, NET | ||||||||
| NET LOSS | $ | ( | ) | $ | ( | ) | ||
| LOSS PER SHARE | ||||||||
| BASIC | $ | ( | ) | $ | ( | ) | ||
| DILUTED | $ | ( | ) | $ | ( | ) | ||
| WEIGHTED AVERAGE COMMON SHARE OUTSTANDING | ||||||||
| BASIC | ||||||||
| DILUTED | ||||||||
| (a) |
The accompanying notes are an integral part of these unaudited financial statements.
| 5 |
VerifyMe, Inc.
Statements of Cash Flows
(Unaudited)
(In thousands)
| Three Months Ended | ||||||||
| March 31, 2022 | March 31, 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: |
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| Stock based compensation | ||||||||
| Fair value of options in exchange for services | ||||||||
| Fair value of restricted stock awards issued in exchange for services | ||||||||
| Fair value of restricted stock units issued in exchange for services | ||||||||
| Fair value gain on equity investments | ( | ) | ||||||
| Amortization and depreciation | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts Receivable | ( | ) | ||||||
| Deferred Offering Costs | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Accounts payable and accrued expenses | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchase of Patents | ( | ) | ( | ) | ||||
| Purchase of Equipment for lease | ( | ) | ||||||
| Capitalized Software Costs | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from public offering of securities | ||||||||
| Proceeds from Stock Purchase Plan | ||||||||
| Tax withholding payments for employee stock-based compensation in exchange for shares surrendered | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
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| CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD | ||||||||
| CASH AND CASH EQUIVALENTS - END OF PERIOD | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited financial statements.
| 6 |
VerifyMe, Inc.
Statement of Stockholders' Equity
(Unaudited)
(In thousands, except share data)
| Series A | Series B | |||||||||||||||||||||||||||||||||||||||||||
| Convertible | Convertible | |||||||||||||||||||||||||||||||||||||||||||
| Preferred | Preferred | Common | Treasury | |||||||||||||||||||||||||||||||||||||||||
| Stock | Stock | Stock | Additional | Stock | ||||||||||||||||||||||||||||||||||||||||
| Number of | Number of | Number of | Paid-In | Number of | Accumulated | |||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Shares | Amount | Deficit | Total | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Fair value of stock options | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||
| Restricted stock awards | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Restricted Stock Units | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||
| Common stock issued for services | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Common stock issued for services related to Public Offering | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Series A | Series B | |||||||||||||||||||||||||||||||||||||||||||
| Convertible | Convertible | |||||||||||||||||||||||||||||||||||||||||||
| Preferred | Preferred | Common | Treasury | |||||||||||||||||||||||||||||||||||||||||
| Stock | Stock | Stock | Additional | Stock | ||||||||||||||||||||||||||||||||||||||||
| Number of | Number of | Number of | Paid-In | Number of | Accumulated | |||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Shares | Amount | Deficit | Total | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Restricted stock awards, net of shares withheld for employee tax | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Restricted Stock Units | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Stock Purchase Plan | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited financial statements.
| 7 |
VerifyMe, Inc.
Notes to the Financial Statements (unaudited)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of the Business
VerifyMe, Inc. (“VerifyMe,” the “Company,” “we,” “us,” or “our”) was incorporated in the State of Nevada on November 10, 1999. The Company is based in Rochester, New York and its common stock, par value $ per share, and warrants to purchase common stock are traded on The Nasdaq Capital Market (“Nasdaq”) under the trading symbols “VRME” and “VRMEW,” respectively.
The Company is a technology solutions provider specializing in products to connect brands with consumers. VerifyMe technologies give brand owners the ability to gather business intelligence while engaging directly with their consumers. VerifyMe technologies also provide brand protection and supply chain functions such as counterfeit prevention, authentication, serialization, and track and trace features for labels, packaging and products. We began to commercialize our covert luminescent pigment VerifyInkTM in 2018. Prior to 2021 we completed the initial development stage of our other current technologies and in 2021 we began to commercialize as a Brand Protection Solutions provider. The Company’s activities are subject to significant risks and uncertainties, including its ability to successfully commercialize its technologies and the need to further develop the Company’s intellectual property.
Reclassifications
Certain amounts presented for the three months ended March 31, 2021, reflect reclassifications made to conform to the presentation in our current reporting period.
Basis of Presentation
The accompanying unaudited interim financial statements (the “Interim Statements”) have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and disclosures required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements are not included herein. The Interim Statements should be read in conjunction with the financial statements and notes thereto included in the Company’s latest Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the Securities and Exchange Commission (the “SEC”) on March 14, 2022. The accompanying Interim Statements are unaudited; however, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The interim results for the three months ended March 31, 2022, are not necessarily indicative of the results to be expected for the year ending December 31, 2022, or for any future interim periods.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Fair Value of Financial Instruments
The Company’s financial instruments consist of accounts receivable, accounts payable, notes payable and accrued expenses, equity investments, and long-term derivative liabilities. The carrying value of accounts receivable, accounts payable and accrued expenses approximate their fair value because of their short maturities. The Company believes the carrying amount of its notes payable approximate fair value based on rates and other terms currently available to the Company for similar debt instruments.
The Company follows FASB ASC 820, “Fair Value Measurements and Disclosures,” and applies it to all assets and liabilities that are being measured and reported on a fair value basis. The statement requires that assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data
Level 3: Unobservable inputs that are not corroborated by market data
The level in the fair value within which a fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
| 8 |
VerifyMe, Inc.
Notes to the Financial Statements (unaudited)
The following table presents the Company’s financial instruments that are measured and recorded at fair value on the Company’s balance sheets on a recurring basis, and their level within the fair value hierarchy as of December, 31 2021 and March 31, 2022
| Amounts in Thousands ('000) | ||||||||||||||||
| December 31, 2021: | ||||||||||||||||
| Amount ($) | Level 1 ($) | Level 2 ($) | Level 3 ($) | |||||||||||||
| Short Term Investment | - | - | ||||||||||||||
| Equity Investment | - | - | ||||||||||||||
| Derivative Liability | ( | ) | - | - | ( | ) | ||||||||||
| March 31, 2022: | ||||||||||||||||
| Amount ($) | Level 1 ($) | Level 2 ($) | Level 3 ($) | |||||||||||||
| Short Term Investment | - | - | ||||||||||||||
| Equity Investment | - | - | ||||||||||||||
| Derivative Liability | ( | ) | - | - | ( | ) | ||||||||||
Variable Interest Entity
The Company has determined that G3 VRM Acquisition Corp. (NASDAQ: GGGVU) (the “SPAC”, see FN 2 – Equity Investments), a Delaware corporation and special purpose acquisition company, is a variable interest entity (“VIE”) in which the Company has a variable interest but is not the primary beneficiary. Making the determination as to whether a VIE should be consolidated requires judgement in assessing if the Company is the primary beneficiary. To make this determination, the Company evaluated its power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the SPAC. The Company concluded that it is not the primary beneficiary of the VIE and as such, does not consolidate the SPAC. The Company reassess its evaluation of whether an entity is a VIE and if it continues to be a VIE, whether the Company is the primary beneficiary of the VIE, on an ongoing basis based on the current facts and circumstances surrounding the entity.
Equity Investments
When the Company does not have a controlling financial interest in an entity but can exert influence over the entity’s operations and financial policies, the investment is accounted for either (i) under the equity method of accounting or (ii) at fair value by electing the fair value option available under applicable generally accepted accounting policies. The Company has elected the fair value option for its equity investment in the SPAC (see FN2 – Equity Investments) and its equity security under short term investment on the balance sheets, as it has determined the fair value best reflects the economic performance of the equity investment. Changes in unrecognized gains or losses of the fair value of the equity investments are included in Other Income, Net on the accompanying Statements of Operations.
Revenue Recognition
The Company accounts for revenues according to Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” which establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers.
The Company applies the following five steps in order to determine the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements:
| · | identify the contract with a customer; |
| · | identify the performance obligations in the contract; |
| · | determine the transaction price; |
| · | allocate the transaction price to performance obligations in the contract; and |
| · | recognize revenue as the performance obligation is satisfied. |
During the three months ended March 31, 2022, the Company’s revenues primarily consisted of revenue generated from printing labels and through our product authentication technology, as well as our customer engagement technology.
The Company follows Financial Accounting Standards Board (“FASB”) ASC 260, “Earnings Per Share,” when reporting earnings per share resulting in the presentation of basic and diluted earnings per share. Because the Company reported a net loss for each of the periods presented, common stock equivalents, including preferred stock, stock options and warrants were anti-dilutive; therefore, the amounts reported for basic and diluted loss per share were the same.
| 9 |
VerifyMe, Inc.
Notes to the Financial Statements (unaudited)
For each of the three months ended March 31, 2022, and 2021, there were shares potentially issuable, that could dilute basic earnings per share in the future that were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive to the Company’s losses during the periods presented. For the three months ended March 31, 2022, there were approximately anti-dilutive shares consisting ofunvested restricted stock awards and units and stock purchase plan, shares issuable upon exercise of options, shares issuable upon exercise of warrants, and shares issuable upon conversion of preferred stock. For the three months ended March 31, 2021, there were approximately anti-dilutive shares consisting of shares issuable upon exercise of options, shares issuable upon exercise of warrants, shares issuable upon conversion of preferred stock.
We account for stock-based compensation under the provisions of FASB ASC 718, “Compensation—Stock Compensation”, which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date. We estimate the fair value of stock-based awards on the date of grant using the Black-Scholes model. The assumptions used in the Black-Scholes option pricing model include risk-free interest rates, expected volatility and expected life of the stock options. Changes in these assumptions can materially affect estimates of fair value stock-based compensation, and the compensation expense recorded in future periods. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods using the straight-line method. For performance restricted stock units with stock price appreciation targets (see FN 6 – Stock Options, Restricted Stock and Warrants), we applied a lattice approach that incorporated a Monte Carlo simulation, which involved random iterations that took different future price paths over the RSU’s contractual life based on the appropriate probability distributions (which are based on commonly applied Black Scholes inputs). The fair value was determined by taking the average of the grant date fair values under each Monte Carlo simulation trial. We recognize compensation expense on a straight-line basis over the performance period and there is no ongoing adjustment or reversal based on actual achievement during the period.
We account for stock-based compensation awards to non-employees in accordance with ASU No. 2018-07, Compensation – Stock Based Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which aligns accounting for share-based payments issued to nonemployees to that of employees under the existing guidance of Topic 718, with certain exceptions. This update supersedes previous guidance for equity-based payments to nonemployees under Subtopic 505-50, Equity – Equity-Based Payments to Non-Employees.
All issuances of stock options or other equity instruments to non-employees as consideration for goods or services received by the Company are accounted for based on the fair value of the equity instruments issued. Non-employee equity-based payments are recorded as an expense over the service period, as if we had paid cash for the services. At the end of each financial reporting period, prior to vesting or prior to the completion of the services, the fair value of the equity-based payments will be re-measured, and the non-cash expense recognized during the period will be adjusted accordingly. Since the fair value of equity-based payments granted to non-employees is subject to change in the future, the amount of the future expense will include fair value re-measurements until the equity-based payments are fully vested or the service completed.
NOTE 2 – EQUITY INVESTMENTS
On February 26, 2021, the Company formed VMEA Holdings Inc. (the “Sponsor Entity”), a Delaware corporation that is the founder of the “SPAC” 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.
On April 12, 2021, the Sponsor Entity converted
to a Delaware limited liability company, changed its name to “G3 VRM Holdings LLC” and a co-sponsor was added as a member
of the Sponsor Entity resulting in an equity interest of
As a result of ceasing
to have a controlling financial interest in the Sponsor Entity on April 12, 2021, the Company accounted for the Sponsor Entity as an equity
investment and has elected the fair value option resulting in a fair value gain of $
| 10 |
VerifyMe, Inc.
Notes to the Financial Statements (unaudited)
If the SPAC is unable to complete its initial business combination within 12 months from the closing of the IPO (or 15 or 18 months from the closing of the IPO, should the Company and the co-sponsor extend the period of time to consummate a business combination by depositing additional funds into the trust account as described in more detail in IPO prospectus), the SPAC will redeem 100% of the public shares for cash, the rights will expire worthless, and the founder shares and the private placement securities will be worthless. Even if the SPAC is able to complete a business combination within the allotted time, if the combined company is unable to maintain adequate results from operations, then our investment in the SPAC could lose value and may ultimately become worthless. There can be no assurance that the SPAC will complete a business combination within the allotted time or that any such business combination will be successful.
The following table presents summary financial information of the Sponsor Entity. Such summary information has been provided herein based upon the individual significance of the equity investment to the financial information of the Company.
| Amounts in Thousands ('000) | ||||||||
March 31, 2022 | December 31, 2021 | |||||||
| Total Assets | $ | $ | ||||||
| Total Liabilities | ||||||||
| Mezzanine Equity and Stockholders' Deficit | ||||||||
| Amounts in Thousands ('000) | ||||||||
| Three Months
Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Operating Loss | | - | ||||||
| Net Loss | - | |||||||
In December 2021, the Company acquired 8,841 10% cumulative convertible Series D preferred stock at a price of $10.00 as payment for a customer’s outstanding AR balance of $88,410. This instrument is considered an equity security within the scope of Topic 321 since the issuing entity has the option but no contractual obligation to redeem the preferred stock, and the Company can convert the preferred shares to common stock. For the three months ended March 31, 2022 a fair value gain of $54 thousand was recognized and included in fair value gain on equity investments, in the accompanying Statements of Operations. The fair value of the equity investment was $143 thousand as of March 31, 2022 and $88 thousand as of December 31, 2021. The fair value of the equity investment is classified as Level 1 in the fair value hierarchy as the calculation is dependent upon the quoted market price of the entity.
NOTE 3 – PROPERTY AND EQUIPMENT
Equipment for Lease
During the three months
ended March 31, 2022, and 2021, the Company capitalized $
Office Equipment
During the three months
ended March 31, 2022, and 2021, the Company capitalized $
| 11 |
VerifyMe, Inc.
Notes to the Financial Statements (unaudited)
NOTE 4 – INTANGIBLE ASSETS
Patents and Trademarks
As of March 31, 2022, the current patent and trademark
portfolios consist of twelve granted U.S. patents and one granted European patent validated in four countries (France, Germany,
United Kingdom, and Italy), six pending U.S. and foreign patent applications, six registered U.S. trademarks, two EU trademark registrations,
one Colombian trademark registration, one Australian trademark registration, one Japanese trademark registration, one Mexican trademark
registration, one Singaporean trademark registration, two UK trademark registrations, and twenty-two pending US and foreign trademark
applications. Our
Capitalized Software
Costs incurred in connection with the
development of software related to our proprietary digital products are accounted for in accordance with FASB ASC
985 “Costs of Software to Be Sold, Leased or Marketed.” Costs incurred prior to the establishment of technological
feasibility are charged to research and development expense. Software development costs are capitalized after a product is
determined to be technologically feasible and is in the process of being developed for market. Amortization of capitalized software
costs begins once the product is available to the market. Capitalized software costs are amortized over the estimated life of the
related product, generally five years, using the
NOTE 5 – STOCKHOLDERS’ EQUITY
The Company expensed $ and $thousand related to restricted stock awards for the three months ended March 31, 2022, and 2021, respectively.
The Company expensed $ thousand and $ thousand related to restricted stock units for the three months ended March 31, 2022, and 2021, respectively.
Effective
January 1, 2022, the Company approved restricted stock units or restricted stock awards, for each non-employee director, with a grant
date fair value equal to $thousand. If the non-employee director serves as a Board committee chair or Lead Independent director, he
also received an additional award of restricted stock units or restricted stock award with a grant date fair value equal to $
Effective April 15, 2021, Norman Gardner, our
former Chairman of the board of directors retired from the board of directors. Mr. Gardner was awarded shares of restricted stock
awards for a fair value of $
| 12 |
VerifyMe, Inc.
Notes to the Financial Statements (unaudited)
On March 29, 2022, the Company retired shares of common stock in order to satisfy U.S. payroll tax withholding obligations on restricted stock awards held by our Chief Executive Officer.
No stock options were granted during the three months ended March 31, 2022.
Effective
January 1, 2021, the Company approved restricted stock units or restricted stock awards, for each non-employee director, with a grant
date fair value equal to $
Effective March 1, 2021,
the Company amended and restated the Consulting Agreement it has with its Chief Operating Officer.
On February 9, 2021,
the Company entered into an underwriting agreement with Maxim Group LLC (“Maxim”), as the representative of several underwriters
pursuant to which the Company agreed to issue and sell to the underwriters in an underwritten public offering an aggregate of shares of common stock of the Company at a public offering price of $5.30 per share, less underwriting discounts and commissions. The
public offering closed on February 12, 2021, resulting in gross proceeds of $
Non-Qualified Stock Purchase Plan
On June 10, 2021, the stockholders of the Company approved a non-qualified stock purchase plan (the “2021 Plan”). The 2021 Plan provides eligible participants, including employees, directors and consultants of the Company, the opportunity to purchase shares of the Company’s common stock thereby increasing their interest in the Company’s continued success. The maximum numbers of common stock reserved and available for issuance under the 2021 Plan is 500,000 shares. The purchase price of shares of common stock acquired pursuant to the exercise of an option will be the lesser of 85% of the fair market value of a share (a) on the enrollment date, and (b) on the exercise date. The 2021 Plan is not intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended (the “Code”). The Company applied FASB ASC 718, “Compensation-Stock Compensation” and estimated the fair value using the Black-Scholes model, as the plan is considered compensatory. During the three months ended March 31, 2022, $32 thousand has been expensed in relation to the non-qualified stock purchase plan.
Shares Held in Treasury
As of March 31, 2022, and December 31, 2021, the
Company had and shares, respectively, held in treasury with a value of approximately $
On February 28, 2022, five participants exercised their option under the Company’s non-qualified stock purchase plan, and as a result, 25,000 shares were issued from treasury with an exercise price of $2.69.
In November 2020, the Company’s Board of Directors approved a share repurchase program for up to $1.5 million of the Company’s common stock until August 16, 2021. On August 12, 2021, the Company’s Board of Directors extended the share repurchase program to expire on August 16, 2022. All other terms and conditions remained the same. During the three months ended March 31, 2022, the Company did not repurchase any shares of common stock under this plan.
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VerifyMe, Inc.
Notes to the Financial Statements (unaudited)
During 2013, the Company adopted the 2013 Omnibus Equity Compensation Plan (the “2013 Plan”). Under the 2013 Plan, the Company is authorized to grant awards of stock options, restricted stock, restricted stock units and other stock-based awards up to an aggregate of shares of common stock. The 2013 Plan is intended to permit certain stock options granted to employees under the 2013 Plan to qualify as incentive stock options. All options granted under the 2013 Plan, which are not intended to qualify as incentive stock options are deemed to be non-qualified stock options.
On November 14, 2017, the Executive Committee of the Company’s Board of Directors adopted the 2017 Equity Incentive Plan (the “2017 Plan”) which covered the potential issuance of shares of common stock. The 2017 Plan provided that directors, officers, employees, and consultants of the Company were eligible to receive equity incentives under the 2017 Plan at the discretion of the Board or the Board’s Compensation Committee.
On August 10, 2020, the Company’s Board of Directors adopted the 2020 Equity Incentive Plan (the “2020 Plan”), subject to stockholder approval, which authorizes the potential issuance of up to shares of common stock. On September 30, 2020, the Company’s stockholders approved the 2020 Plan, and upon such approval the 2020 Plan became effective and the 2017 Plan was terminated. Shares of common stock underlying existing awards under the 2017 Plan may become available for issuance pursuant to the terms of the 2020 Plan under certain circumstances. Employees and non-employee directors of the Company or its affiliates, and other individuals who perform services for the Company or any of its affiliates, are eligible to receive awards under the 2020 Plan at the discretion of the Board of Directors or the Board’s Compensation Committee.
The 2020 Plan is administered by the Compensation Committee which determines the persons to whom awards will be granted, the number of awards to be granted and the specific terms of each grant, including the vesting thereof, subject to the provisions of the plan.
). The aggregate fair market value (determined at the time of the grant) of stock with respect to which incentive stock options are exercisable for the first time by any individual during any calendar year (under all plans of the Company and its affiliates) shall not exceed $100 thousand, and the options in excess of $100 thousand shall be deemed to be non-qualified stock options, including prices, duration, transferability and limitations on exercise. The maximum number of shares of common stock that may be issued under the 2020 Plan pursuant to incentive stock options may not exceed, in the aggregate, .
The Company has issued non-qualified stock options pursuant to contractual agreements with non-employees. Options granted under the agreements are expensed when the related service or product is provided.
Determining the appropriate fair value of stock-based awards requires the input of subjective assumptions. The Company uses the Black-Scholes option pricing model to value its stock option awards. The assumptions used in calculating the fair value represent management’s best estimates and involve inherent uncertainties and judgements.
Details for all stock issuances are discussed in Note 5 – Stockholders’ Equity.
Stock Options
| Options Outstanding | ||||||||||||||||
| Weighted - | ||||||||||||||||
| Average | ||||||||||||||||
| Remaining | Aggregate | |||||||||||||||
| Weighted- | Contractual | Intrinsic | ||||||||||||||
| Number of | Average | Term | Value | |||||||||||||
| Shares | Exercise Price | (in years) | (in thousands)(1) | |||||||||||||
| Balance as of December 31, 2021 | $ | |||||||||||||||
| Granted | ||||||||||||||||
| Forfeited/Cancelled/Expired | ( | ) | ||||||||||||||
| Balance as of March 31, 2022 | $ | |||||||||||||||
| Exercisable as of March 31, 2022 | $ | $ | | |||||||||||||
| (1) |
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VerifyMe, Inc.
Notes to the Financial Statements (unaudited)
As of March 31, 2022, the Company had no unvested stock options.
During the three months ended March 31, 2022,
and 2021, the Company expensed $
As of March 31, 2022,
there was $
Restricted Stock Awards and Restricted Stock Units
The following table summarizes the unvested restricted stock awards as of March 31, 2022:
| Unvested Restricted Stock Awards | ||||||||
| Weighted - | ||||||||
| Average | ||||||||
| Number of | Grant | |||||||
| Shares | Date Fair Value | |||||||
| Unvested at December 31, 2021 | ||||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Balance March 31, 2022 | $ | |||||||
As of March 31, 2022, total unrecognized share-based
compensation cost related to unvested restricted stock awards was $
The following table summarizes the unvested restricted stock units as of March 31, 2022:
| Unvested Restricted Stock Units | ||||||||
| Weighted - | ||||||||
| Average | ||||||||
| Number of | Grant | |||||||
| Shares | Date Fair Value | |||||||
| Unvested at December 31, 2021 | ||||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Balance March 31, 2022 | $ | $ | ||||||
As of March 31, 2022, total unrecognized share-based
compensation cost related to unvested restricted stock units was $
For RSUs with stock price appreciation targets, we applied a lattice approach that incorporated a Monte Carlo simulation, which involved random iterations that took different future price paths over the RSU’s contractual life based on the appropriate probability distributions (which are based on commonly applied Black Scholes inputs). The fair value of $ thousand was determined by taking the average of the grant date fair values under each Monte Carlo simulation trial. We recognize compensation expense on a straight-line basis over the performance period and there is no ongoing adjustment or reversal based on actual achievement during the period.
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VerifyMe, Inc.
Notes to the Financial Statements (unaudited)
The following table summarizes the unvested performance restricted stock units as of March 31, 2022:
| Unvested Performance Restricted Stock Units | ||||||||
| Weighted - | ||||||||
| Average | ||||||||
| Number of | Grant | |||||||
| Shares | Date Fair Value | |||||||
| Unvested at December 31, 2021 | ||||||||
| Granted | ||||||||
| Vested | ||||||||
| Balance March 31, 2022 | $ | $ | ||||||
As of March 31, 2022, total unrecognized share-based
compensation cost related to unvested performance restricted stock units was $
Warrants
The following table summarizes the activities for the Company’s warrants for the three months ended March 31, 2022:
| Warrants Outstanding | ||||||||||||||||
| Number of Shares | Weighted- Average Exercise Price | Weighted - Average Remaining Contractual Term in years) | Aggregate Intrinsic Value (in thousands)(1) | |||||||||||||
| Balance as of December 31, 2021 | $ | |||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ||||||||||||||||
| Balance as of March 31, 2022 | $ | |||||||||||||||
| Exercisable as of March 31, 2022 | $ | $ | - | |||||||||||||
| (1) |
NOTE 7—INCOME TAXES
There are no taxes payable as of March 31, 2022, or December 31, 2021.
Some of the federal tax carry forwards will expire at various dates through 2037. Generally, these can be carried forward and applied against future taxable income at the tax rate applicable at that time. We are currently using an effective income tax rate of 21% for our projected available net operating loss carry-forward. No tax benefit has been reported in the three months March 31, 2022, due to the uncertainty surrounding the realizability of the benefit.
Utilization of the net operating losses (NOL) carryforwards may be subject to a substantial annual limitation due to ownership change limitations that could occur in the future, as required by Section 382 of the IRC, as well as similar state provisions. These ownership changes may limit the amount of NOL carryforwards that can be utilized annually to offset future taxable income. In general, an “ownership change” as defined by Section 382 of the IRC results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders.
In accordance with FASB ASC 740 “Income Taxes”, valuation allowances are provided against deferred tax assets, if based on the weight of available evidence, some or all of the deferred tax assets may or will not be realized. The Company did not utilize any NOL deductions for the three months ended March 31, 2022.
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VerifyMe, Inc.
Notes to the Financial Statements (unaudited)
NOTE 8—LONG TERM DERIVATIVE LIABILITY
On September 17, 2021, the Company granted two
directors restricted stock units (“SPAC RSUs”) with respect to the common stock, $0.0001
par value per share, of G3 VRM Acquisition Corp. The SPAC RSUs vest upon the initial business combination of the SPAC (see Note
2 – Equity Investments) subject to continuous service to the Company through the vesting date. Each vested SPAC RSU represents the
right to receive the value of one share of stock in G3 VRM Acquisition Corp., which will be paid to the director as soon as practicable
after the fifteen-month anniversary of the vesting date. The grant date fair value of the SPAC RSUs for each director was $
NOTE 9– CONCENTRATIONS
Revenue
For the three months ended March 31, 2022, and
2021, two customers represented
Accounts Receivable
As of March 31, 2022 and 2021, two customers represented
NOTE 10 – SUBSEQUENT EVENTS
On April
7, 2022, the board of directors (the “Board”) of the Company appointed Mr. Scott Greenberg to serve as Executive Chairman
of the Board, and Mr. Marshall Geller to serve as non-Executive Vice Chairman of the Board, effective immediately. On April 7, 2022, in
connection with their appointments, Messrs. Greenberg and Geller each received an award of restricted stock units, each such unit
representing the contingent right to receive one share of the Company’s common stock, par value $ per share, subject to the
terms of the Company’s 2020 Plan. These restricted stock units, except as otherwise provided in the award agreement, vest on April
7, 2024, in two equal tranches.
On April
7, 2022, the Company appointed Mr. Adam H. Stedham to the Board, effective immediately. Mr. Stedham will serve as the chair of the Board’s
Audit Committee and as a member of the Board’s Compensation Committee. In connection with his appointment, Mr. Stedham received
restricted stock unit awards under the 2020 Plan with a grant date fair value equal
to $
On April 7, 2022, the Company granted each of two its directors an award of SPAC RSUs in connection with their continued service to the Company in relation to the SPAC.
On April 12, 2022, the
Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) providing for the issuance and
sale of an aggregate of shares of the Company’s common stock, a pre-funded warrant to purchase up to shares of our
common stock, exercisable immediately with an exercise price of $ and warrants to purchase up to shares of common stock
exercisable for a period of five years commencing October 14, 2022, with an exercise price of $, for gross proceeds to the Company
of approximately $
On April 22, 2022, the Company entered into an Asset Purchase Agreement (the “APA”) whereby it purchased substantially all of the assets and certain specified liabilities of PeriShip, LLC, a value-added logistics partner for time and temperature controlled shipping, via its wholly owned subsidiary, PeriShip Global, LLC.
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VerifyMe, Inc.
Notes to the Financial Statements (unaudited)
On April 22, 2022, in connection with the APA, the Company entered into employment agreements with certain key executive officers of PeriShip, LLC. In accordance with the employment agreements, the Compensation Committee of the Board approved grants of restricted stock units to each of the executives.
The total
consideration paid to PeriShip, LLC in connection with the APA was $
Also on April 22, 2022, in connection with the execution of the APA, PeriShip Global LLC entered into a lease agreement (the “Lease”), guaranteed by the Company (the “Lease Guarantee”), with Mordo, LLC, a Connecticut limited liability company controlled by the founder and seller of PeriShip, LLC, whereby PeriShip Global, LLC will rent the office space for a term of five years with two options to renew the lease for additional five-year terms. Base rent under the lease is $120 thousand per year, payable in equal monthly installments, with annual escalations of 3% for each year following the initial lease year. Rent during any renewal period will be equal to the greater of the base rent as escalated or fair market rental value as provided in the Lease.
On April 25, 2022 the Company issued shares of common stock to an entity for its services in relation to the APA.
In April 2022, upon vesting of the restricted stock awards held by our Chief Financial Officer, the Company withheld and retired shares of common stock in order to satisfy her U.S. payroll tax withholding obligations.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The information in this Management’s Discussion and Analysis should be read in conjunction with the accompanying unaudited financial statements and notes.
Cautionary Note Regarding Forward-Looking Statements
This report includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “could,” “target,” “potential,” “is likely,” “will,” “expect” and similar expressions are intended to identify forward-looking statements. All statements other than statements of historical facts contained in this report, including among others, our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements.
Our actual results and financial condition may differ materially from those express or implied in such forward-looking statements. Therefore, you should not rely on any of these forward-looking statements.
For a further list and description of various risks, relevant factors and uncertainties that could cause future results or events to differ materially from those expressed or implied in our forward-looking statements, see the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections in this report, our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, and our other filings with the Securities and Exchange Commission (the “SEC”). All forward-looking statements in this report are made only as of the date hereof or as indicated and represent our views as of the date of this report. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise, except as required by law.
Overview
VerifyMe, Inc. (“VerifyMe,” the “Company,” “we” “us” or “our”) is a technology solutions provider specializing in products to connect brands with consumers. VerifyMe technologies give brand owners the ability to gather business intelligence while engaging directly with their consumers. VerifyMe technologies also provide brand protection and supply chain functions such as counterfeit prevention, authentication, serialization, and track and trace features for labels, packaging and products. We are a Nevada corporation formed in 1999. We began to commercialize our covert luminescent pigment VerifyInkTM in 2018. Prior to 2021 we completed the initial development stage of our other current technologies and in 2021 we began to commercialize as a Brand Protection Solutions provider.
Our brand protection technologies include consumer engagement capabilities, the custom printing of tamper proof secure labels, and utilization of invisible and visible images printed with our proprietary special composition inks comprised of a rare earth mineral. These inks are compatible and printed with modern digital and standard printing systems such as digital, offset, flexographic, silkscreen, gravure, inkjet and toner-based laser printers. The inks can be used to print both static labels on standard printing systems and variable labels utilizing digital printing systems that include variable images, serialized codes, dynamic bar codes and dynamic QR codes that allow brand owners to engage directly with customers. We have developed and patented a dual-code technology that we believe can connect digital NFTs to physical products. We have developed and patented a device that attaches to a smartphone that brand inspectors or law enforcement can use to read our invisible ink codes into our cloud-based track and trace software that contains our patented verification technology along with algorithms that analyze the label, package or product’s authenticity and diversion activity. We also have a device that informs users that our proprietary invisible ink is present, which can be used for authentication without the need for internet connectivity.
Our Solutions
VerifyMe has a custom suite of products that offer clients the brand protection security, anti-counterfeiting, protection from product diversion, consumer engagement and a robust serialization, track and trace system. These products are combined with “software as a service” or “SAAS” which is stored in the cloud and accessed through the internet.
| · | VerifyMe Engage™ for consumer engagement |
| · | VerifyMe Authenticate™ for product authentication |
| · | VerifyMe Track & Trace™ for product supply chain control |
| · | VerifyMe Online™ for on-line (web) brand monitoring |
VerifyMe Engage™ services provide the ability for the brand owner to gather business intelligence and engage with the consumer using our authentication test as the initial contact with the consumer. For example, consumers can simply use their smart phone camera to scan our visible unique codes and/or RFID/NFC chips included on products, labels and packages. Once the consumer scans the code, an instant authenticity check is made using algorithms stored in the cloud to determine the products authenticity on multiple factors. This allows brands to understand where their products are being scanned, whether they are legitimate, and form an immediate bridge for communication with the consumer. After a product is authenticated, the brand owner can then engage with the consumer by, for example offering a gift or future discounts providing marketing materials, videos, product information and specifications, contest entries or cross selling other products through the consumer engagement software. This service allows to the brand owner to gather real-time actionable information on their customer base. To date, we have derived limited revenue from VerifyMe Engage customers in the cannabis industry.
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VerifyMe Authenticate™ services provide an assortment of tools through our patented products allowing brand owners to instantly authenticate a product, label or package as genuine and or determine if a product has been fraudulently diverted and where such diversion occurred in the supply chain. Brand owners can use our cloud-based web portal to easily order many types of serialization codes for their products, labels and packages. Once the codes are applied to their products, brand owners can then monitor, control and protect their products during the product’s complete life cycle through the supply chain. Our customers use our patented invisible ink, VerifyInkTM which is combined with a proprietary reader to easily identify counterfeit products. Product investigators may then use our patented VerifyAuthenticatorTM technology, a device used with a smartphone and the VerifyMe app, to authenticate and decode VerifyInkTM codes. The user attaches this device to their smartphone, which reveals the hidden VerifyInkTM images that are then sent to our web portal in the cloud for authentication and data submission. We also have another device that does not require use the of a smartphone, our VerifyChecker™ which is a handheld device that is tuned to authenticate the unique frequency of our VerifyInkTM invisible ink. The VerifyChecker™ is designed for use by customers who desire instant authentication on items without the need for an internet connection. It is perfect for field investigators, CBP officials, or as validation in practice such as scanning event tickets at an entry gate. The device functionality was upgraded in September 2021 by adding wireless connectivity to a mobile phone enabling authentication attempts to be recorded in the cloud with geo-location, inspector’s names, and time and date stamp. To date, we have derived limited recurring revenues from two global brand owners who use VerifyMe Authenticate.
VerifyMe Track & Trace™ supply chain serialization, track and trace technology utilize overt dynamic codes (QR codes or other barcode symbology), such as our VerifyCode™, which are tied to our cloud-based authentication and track and trace system. This technology provides brand owners business intelligence on counterfeiting and diversion using distribution channel scans throughout the supply chain coupled with consumer scan data. All this data is consolidated on a system that allows brands to customize rules and parameters and establish sophisticated alert systems allowing brands to be proactive, rather than reactive, in thwarting illicit activity. Invisible codes can be added using VerifyInkTM to increase brand protection security and provide inspectors a means to authenticate counterfeit or diverted product if the visible codes have been defaced or removed. Using information from a smartphone, our VerifyCodeTM technology, can provide authentication and data submission information. A customer or end-user can scan codes printed on labels and packaging and send it to the cloud where our software can verify authenticity of the product, as well as track and trace the product from production through delivery. To date, we have derived limited revenues from the use of this technology in the personal protective equipment industry and in the cannabis industry.
VerifyMe® Online™ includes, through our collaboration with a strategic partner, a brand clearance and protection leader, technologies and services that better enable customers to effectively tackle counterfeit websites, domains and e-commerce platforms, and social media sites offering or promoting counterfeit products. To date, we have not derived revenue from this technology.
To optimize our security for our customers, we are seeking to add a blockchain architecture version to our brand protection platform which currently uses a centralized cloud-based data architecture. Our plan is to develop the ability to connect physical products to NFTs in the blockchain. VerifyMe has a patented dual-code technology that we believe will facilitate this process for clients requesting this service. We are exploring opportunities to gain the skillsets needed either through mergers and acquisitions or through strategic partnerships with blockchain specialists that will help us create this product.
Partnerships
We believe that our brand protection security technologies, coupled with our contract with HP Indigo, can be used to enable brand owners to securely prevent counterfeiting, prevent product diversion and authenticate labels, packaging and products and alleviate the brand owner’s liability from counterfeit products that physically harm consumers. Our covert technologies give brand owners the ability to control, monitor and protect their products life cycle. In cases where the brand owner may be subject to liability brought forth by counterfeit products, our tools allow the brand owner to prove whether the product causing an issue is authentic or counterfeit. Combined with our customer engagement product lines, we offer a unique and comprehensive brand protection and promotion solution that can be tailored to any brand’s specifications.
At present, our strategic partner, HP Indigo has the ability, with their Indigo 6000 series, to print our technology on a variable basis. HP Indigo has produced flexible packaging pouch samples, shrink sleeves samples, and tax stamp samples with our covert VerifyInkTM. In May 2019, we entered into a strategic partnership with INX, the third largest producer of inks in North America allowing us to successfully print our covert VerifyInk™ on garments, metal and plastic objects, and INX is now co-marketing the new security ink to its global clients. We are continuing to work with our partners and INX international to develop inkjet ink for various print head, drop on demand and continuous inkjet, that can be used independently or mounted to printing presses and finishing equipment. We have successfully developed VerifyInk™ for drop on demand inkjet printing and are carrying on with the development of a continuous inkjet solution. The specially formulated inks will enable these printing presses to print our VerifyInkTM invisible ink technology, which includes our variable VerifyCode™ serialization, track and trace technology. We believe VerifyInkTM is particularly well-suited to closed and controlled environments that want to verify transactions within a specific area, as well as labels, packaging, textiles, plastics and metal products that need authentication.
In addition to packaging and labels, our brand protection security printing technologies can be applied to authenticate important credentials such as tax stamps, driver’s licenses, plastics, metal, apparel, election ballots, birth certificates, immigration documents, gaming, apparel, currency, event and transportation tickets, passports, computer software, and credit cards. We can track and trace from production to ultimate consumption when coupled with our proprietary brand protection software.
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Commercialization Strategy
Our commercialization and sales efforts are focused on six key areas of growth: Cosmetics, Food and Beverages, Nutraceuticals, Cannabis, Apparel and Pharmaceuticals. We believe these areas present particularly attractive markets of our products and services. For example, the U.S. Drug Supply Chain Security Act, requires that by November 2023 the FDA implement a comprehensive system designed to combat counterfeit, diluted or falsely labelled pharmaceuticals, referred to as serialization or electronic pedigree (e-Pedigree). We believe this presents a significant opportunity for VerifyMe because our brand protection, serialization and track and trace technologies can provide a layered security foundation for a customer solution in this market and believe our products will provide attractive alternatives to pharmaceutical companies seeking to comply with this legislation and the e-Pedigree requirements.
COVID-19
The COVID-19 pandemic disrupted businesses and affected production and sales across a range of industries, as well as caused volatility in the financial markets, which combined with some timing delays in customer sales ramp-up, negatively impacted our results of operations for the first three months of 2022. The full extent of the impact of the COVID-19 pandemic on our customer demand, sales and financial performance will depend on certain developments, including, among other things, the continued duration and spread of the outbreak, the effectiveness of vaccines against new variants, the availability of vaccines and vaccination rates, and the impact on our customers and employees, all of which are uncertain and cannot be predicted. Please see Item 1A, “Risk Factors- Risks Relating to the COVID-19 Pandemic” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, and our other filings with the SEC for additional information regarding certain risks associated with the pandemic.
We are attending sales conferences and in person meetings, however there is no guarantee we will be able to continue due to fluctuations in COVID-19 cases and the development of new variants. We continue to work with our sales representatives to look for alternative ways to communicate effectively and promote sales both with our customers and potential customers. Further, we anticipate that as a result of the continued COVID-19 pandemic, our customers may still require that their programs be cancelled, delayed or reduced. We will continue to work in partnership with our customers to continually assess any potential impacts and opportunities to mitigate risk.
SPAC Investment
On July 6, 2021, we co-sponsored the initial public offering of G3 VRM Acquisition Corp, a special purpose acquisition company, or “SPAC,” through a contribution into G3 VRM Holdings LLC, or the “Sponsor Entity.” The closing of the IPO of 10,626,000 Units, including 626,000 Units pursuant to the partial exercise of the underwriter’s over-allotment, generated gross proceeds of $106,260,000. G3 VRM commenced trading on NASDAQ under the symbol “GGGVU” and is targeting businesses with enterprise values of approximately $250 million to $500 million within the technology and business services industry. VerifyMe, indirectly through the Sponsor Entity beneficially owns approximately 9.42% of the common stock of the SPAC.
If the SPAC is unable to complete its initial business combination within 12 months from the closing of the IPO (or 15 or 18 months from the closing of the IPO, should we and the co-sponsor extend the period of time to consummate a business combination by depositing additional funds into the trust account as described in more detail in IPO prospectus), our founder shares and private placement securities will be worthless. Even if the SPAC is able to complete a business combination within the allotted time, if the combined company is unable to maintain adequate results from operations, then our investment in the SPAC could lose value and may ultimately become worthless. There can be no assurance that the SPAC will complete a business combination within the allotted time or that any such business combination will be successful.
As of March 31, 2022, we have accounted for the Sponsor Entity as an equity investment and have elected the fair value option resulting in a fair value gain of $198 thousand included in Other Income, Net in the accompanying Statements of Operations.
We believe our sponsorship of the SPAC will allow us to pursue an equity interest in larger companies and add value without diluting the equity interests of our shareholders.
Results of Operations
Comparison of the three months ended March 31, 2022, and 2021
The following discussion analyzes our results of operations for the three months ended March 31, 2022, and 2021.
Revenue
Revenue for the three months ended March 31, 2022, was $161 thousand, a 14% decrease as compared to $188 thousand for the three months ended March 31, 2021. The decrease in revenue primarily related to $100 thousand project in the personal protective equipment space that did not recur in 2022 due to supply chain issues impacting our customer and changing US demand for the product, partially offset by revenue from new customers using our authentication serialization technology.
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Gross Profit
Gross profit for the three months ended March 31, 2022, was $123 thousand, compared to $145 thousand for the three months ended March 31, 2021. The resulting gross margin was 76% for the three months ended March 31, 2022, compared to 77% for the three months ended March 31, 2021. We believe our high gross profit margins demonstrate our business model’s ability to generate profitable growth.
General and Administrative Expenses
General and administrative expenses increased by $375 thousand to $1,465 thousand for the three months ended March 31, 2022, from $1,108 thousand for the three months ended March 31, 2021. The increase is primarily related to an increase of approximately $133 thousand in salaries and number of employees, $125 thousand of professional expenses for the acquisition of PeriShip, LLC and $88 thousand incurred for costs related to our pursuit of other strategic partnerships, mergers and acquisitions.
Research and Development
Research and development expenses were $9 thousand and $5 thousand for the three months ended March 31, 2022, and 2021, respectively.
Sales and Marketing
Sales and marketing expenses increased $52 thousand to $299 thousand for the three months ended March 31, 2022, from $247 thousand for the three months ended March 31, 2021. The increase is associated with an increase in branding and advertising expense as well as an increase in expenses related to trade shows.
Net Loss
Our net loss increased by $179 thousand to $1,394 thousand for the three months ended March 31, 2022, from a net loss of $1,215 thousand for the three months ended March 31, 2021. The increase was primarily due to an increase in the number of employees and higher salaries and costs incurred for targeted acquisitions offset by the fair value gain of $252 thousand on our equity investments. The resulting loss per share for the three months ended March 31, 2022, and March 31, 2021, was $0.19 per diluted share.
Liquidity and Capital Resources
Our operations used $1,001 thousand of cash during the three months ended March 31, 2022, compared to $904 thousand during the comparable period in 2021, relating primarily to an increase in employee headcount.
Cash used in investing activities was $24 thousand during the three months ended March 31, 2022, compared to $131 thousand during the three months ended March 31, 2021. The decrease relates to a decrease in the purchase of intangible assets.
Cash provided by financing activities during the three months ended March 31, 2022, was $36 thousand compared to $8,447 thousand during the three months ended March 31, 2021. On February 12, 2021, as part of our public offering of an aggregate 1,750,000 shares of common stock, we generated aggregate gross proceeds of $9.3 million and net proceeds of $8.4 million, less underwriting discounts and commissions and other offering expenses, including the partial exercise of the over-allotment option resulting in gross proceeds of $530 thousand.
In November 2020, we announced a share repurchase program to spend up to $1.5 million to repurchase shares of our common stock until August 16, 2021. On August 12, 2021, this program was extended to expire on August 16, 2022. All other terms and conditions remained the same. To date, 216,945 shares have been purchased for a total of $725 thousand and a remaining $775 thousand may be purchased under the program.
On April 14, 2022, as part of our Securities Purchase Agreement, we issued 880,208 shares of common stock, a pre-funded warrant to purchase up to 675,000 shares of our common stock, with an exercise price of $0.001 and warrants to purchase up to 1,555,208 shares of common stock, with an exercise price of $3.215, and generated aggregate gross proceeds of approximately $5.0 million and net proceeds of approximately $4.6 million, less placement agent commissions and expenses.
While we expect revenues to increase, we expect continued negative cash flows in 2022, as we incur increased costs associated with expanding our business. We expect to grow our business organically and through key acquisitions that will help accelerate the growth of our business. We expect to continue to fund our operations primarily through utilization of our current financial resources and future revenue, however as we continue to look at potential acquisitions, we may issue debt or additional equity.
Off-Balance Sheet Arrangements
None.
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Critical Accounting Policies and Estimates
Our financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. We have identified below the accounting policies that are of particular importance in the presentation of our financial position, results of operations and cash flows and which require the application of significant judgment by management. We believe estimates and assumptions related to these critical accounting policies are appropriate under the circumstances; however, should future events or occurrences result in unanticipated consequences, there could be a material impact on our future financial position, results of operations or cash flows.
Variable Interest Entities
We determined that we have a variable interest in a VIE through our indirect ownership of the SPAC. As such, we used judgment to determine whether we are the primary beneficiary of the VIE and would need to consolidate as a result. To make this determination, we evaluated our power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the SPAC. We concluded that we are not the primary beneficiary, and as such account for it as an equity investment. The facts and circumstances surrounding our determination of whether the SPAC is a VIE and the entity that is the primary beneficiary are analyzed on an ongoing basis based on the current facts and circumstances surrounding the entity, including at every reporting period.
Equity Investments
We have accounted for our beneficial ownership in the SPAC as an equity investment as we have determined that we exert a significant influence in the entity’s operations and accounting policies. Furthermore, we have elected the fair value option under applicable US GAAP as we believe the fair value best reflects the economic performance of the equity investment. We perform a qualitative assessment at each reporting date to determine if there was a change in fair value. The assessment considers factors such as, but not limited to, discussions with management, data showing other companies in the industry, plus adjustment to reflect company circumstances.
Derivative Liability
We have accounted for our two directors restricted stock units in the SPAC RSUs as a long-term derivative liability as the underlying awards are not the Company’s stock but an unrelated, publicly traded entity’s shares. We perform an assessment at each reporting date to determine if there was a change in fair value using a Monte Carlo Simulation. The assessment considers factors such as, but not limited to, discussions with management, data showing other companies in the industry, plus adjustment to reflect company circumstances.
Revenue Recognition
Our revenue transactions include sales of our ink canisters, software, licensing, pre-printed labels, integrated solutions and leasing of our equipment. We recognize revenue based on the principals established in ASC Topic 606, “Revenue from Contracts with Customers.” Revenue recognition is made when our performance obligation is satisfied. Our terms vary based on the solutions we offer and are examined on a case-by-case basis. For licensing of our VerifyInkTM technology we depend on the integrity of our clients’ reporting.
Stock-based Compensation
We account for stock-based compensation under the provisions of FASB ASC 718, “Compensation—Stock Compensation”, which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date. We estimate the fair value of stock-based awards on the date of grant using the Black-Scholes model. The assumptions used in the Black-Scholes option pricing model include risk-free interest rates, expected volatility and expected life of the stock options. Changes in these assumptions can materially affect estimates of fair value stock-based compensation, and the compensation expense recorded in future periods. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods using the straight-line method.
For RSUs with stock price appreciation targets, we applied a lattice approach that incorporated a Monte Carlo simulation, which involved random iterations that took different future price paths over the RSU’s contractual life based on the appropriate probability distributions (which are based on commonly applied Black Scholes inputs). The fair value was determined by taking the average of the grant date fair values under each Monte Carlo simulation trial. We recognize compensation expense on a straight-line basis over the performance period and there is no ongoing adjustment or reversal based on actual achievement during the period.
We account for stock-based compensation awards to non-employees in accordance with ASU No. 2018-07, Compensation – Stock Based Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which aligns accounting for share-based payments issued to nonemployees to that of employees under the existing guidance of Topic 718, with certain exceptions. This update supersedes previous guidance for equity-based payments to nonemployees under Subtopic 505-50, Equity – Equity-Based Payments to Non-Employees.
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All issuances of stock options or other equity instruments to non-employees as consideration for goods or services received by the Company are accounted for based on the fair value of the equity instruments issued. Non-employee equity-based payments are recorded as an expense over the service period, as if we had paid cash for the services. At the end of each financial reporting period, prior to vesting or prior to the completion of the services, the fair value of the equity-based payments will be re-measured, and the non-cash expense recognized during the period will be adjusted accordingly. Since the fair value of equity-based payments granted to non-employees is subject to change in the future, the amount of the future expense will include fair value re-measurements until the equity-based payments are fully vested or the service completed.
Recently Adopted Accounting Pronouncements
Recently adopted accounting pronouncements are discussed in Note 1 – Summary of Significant Accounting Policies in the notes accompanying the financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures are designed to ensure information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. The Company’s Chief Executive Officer, our principal executive officer, and Chief Financial Officer, our principal financial officer, have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the three months ended March 31, 2022, the end of the fiscal quarter covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2022, our disclosure controls and procedures were ineffective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is: (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
We have an inherit material weakness in controls due to a lack of segregation of duties, resulting from limited staffing in our accounting department. Management has been implementing measures designed to ensure that control deficiencies contributing to the material weakness are remediated, such that these controls are designed, implemented, and operating effectively and has hired additional personnel to address its staffing needs. Management believes that it has taken action that will remediate the material weakness identified above. We are committed to continuing to improve our internal control processes and will continue to review, optimize and enhance our financial reporting controls and procedures. The material weakness will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. The Company expects that the remediation of this material weakness will be completed prior to the end of fiscal year 2022.
(b) Changes in internal control over financial reporting
Other than the remediation efforts underway, as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, there were no changes in our internal control over financial reporting during the quarter ended March 31, 2022, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
To address the material weaknesses identified, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 1A. RISK FACTORS.
For a discussion of the Company’s potential risks or uncertainties, please see “Part I—Item 1A—Risk Factors” and “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC, and “Part I—Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein. There have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, except as noted herein.
We have engaged, and may engage in future, acquisitions or strategic partnerships that increase our capital requirements, dilute our stockholders, cause us to incur debt or assume contingent liabilities, and subject us to other risks.
We may evaluate various acquisitions and strategic partnerships, including licensing or acquiring complementary products, intellectual property rights, technologies or businesses. For example, in April 2022, we acquired the assets of PeriShip, LLC (“PeriShip”) through our wholly owned subsidiary PeriShip Global, LLC. To realize the anticipated benefits of the PeriShip acquisition, we must successfully integrate PeriShip’s business with ours. The integration of PeriShip’s business and any potential acquisition or strategic partnership entails numerous risks, including:
| · | increased operating expenses and cash requirements; |
| · | the assumption of indebtedness or contingent liabilities; |
| · | dilution of our stockholders due to the issuance of additional equity securities to the executive officers of PeriShip; |
| · | assimilation of operations, intellectual property and products of an acquired company, including difficulties associated with integrating new personnel; |
| · | the diversion of our management’s attention from our existing product programs and initiatives in pursuing such a strategic merger or acquisition; |
| · | retention of key employees, the loss of key personnel, and uncertainties in our ability to maintain key business relationships; and |
| · | our inability to generate revenue from acquired technology and/or products sufficient to meet our objectives in undertaking the acquisition or even to offset the associated acquisition and maintenance costs. |
In addition, if we undertake acquisitions, we may issue dilutive securities, assume or incur debt obligations, incur large one-time expenses and acquire intangible assets that could result in significant future amortization expense. Moreover, we may not be able to locate suitable acquisition opportunities and this inability could impair our ability to grow or obtain access to technology or products that may be important to the development of our business.
Our investment in G3 VRM Acquisition Corp. (the “SPAC”) could be lost if the SPAC is unable to consummate a business combination or if its business combination proves unsuccessful.
On July 6, 2021, we acted as the sponsor for the initial public offering of G3 VRM Acquisition Corp, a special purpose acquisition company, or SPAC, through a contribution into the SPAC’s sponsor, G3 VRM Holdings LLC, or the Sponsor Entity. The Sponsor Entity holds founder shares equal to 20% of the shares underlying the Units issued in the SPAC IPO (less 210,000 founder shares issued to the officers and certain directors of the SPAC), plus 516,280 shares underlying private placement units purchase by the Sponsor Entity in connection with the SPAC’s IPO. Our investment in the SPAC through the Sponsor Entity equaled approximately $2,593 thousand, and our ownership in the Sponsor Entity is 44.4%. The Sponsor Entity and all holders of founder shares and private placement securities have agreed to waive any right to distributions under the trust established for the benefit of the SPAC’s public shareholders. Accordingly, if the SPAC is unable to complete its initial business combination within 12 months from the closing of the IPO (or 15 or 18 months from the closing of the IPO, if we and the co-sponsor extend the period of time to consummate a business combination by depositing additional funds into the trust account as described in more detail in IPO prospectus), the SPAC will redeem 100% of the public shares for cash, the rights will expire worthless, and the founder shares and the private placement securities will be worthless.
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At the time the SPAC enters into an agreement for its initial business combination, it will not know how many shareholders may exercise their redemption rights and, therefore, it will need to structure the transaction based on its expectations as to the number of shares that will be submitted for redemption. If the initial business combination agreement requires it to use a portion of the cash in the trust account to pay the purchase price, or requires it to have a minimum amount of cash at closing, it will need to reserve a portion of the cash in the trust account to meet such requirements, or arrange for third-party financing. Changing market conditions, including increased volatility, may cause SPAC shareholders to exercise their redemption rights at higher rates than they have historically. In addition, if a larger number of shares is submitted for redemption than initially expected, the SPAC may need to restructure the transaction to reserve a greater portion of the cash in the trust account or arrange for third-party financing. Raising additional third-party financing may involve dilutive equity issuances or the incurrence of indebtedness at higher than desirable levels, and may not be available on favorable terms, or at all. The above considerations may limit the SPAC’s ability to complete a business combination on favorable terms, or at all.
Even if the SPAC is able to complete a business combination within the allotted time, if the combined company is unable to maintain adequate results from operations, then our investment in the SPAC could lose value and may ultimately become worthless. There can be no assurance that the SPAC will complete a business combination within the allotted time or that any such business combination will be successful.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Share Repurchase Plan
ISSUER PURCHASES OF EQUITY SECURITIES
| Period | Total Number of Shares (or Units) Purchased | Average Price Paid per Share (or Units) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) | Approximate Dollar Value
of Shares that May Yet Be Purchased Under the Plans or Programs(1) (In thousands) |
|||||
| 01/01/2022-01/31/2022 | - | - | - | $775 | |||||
| 02/01/2022-02/28/2022 | - | - | - | $775 | |||||
| 03/01/2022-03/31/2022 | - | - | - | $775 | |||||
| Total | - | - | - | $775 |
| (1) | Purchases made pursuant to the Company’s share repurchase program announced on November 17, 2020, pursuant to which the Company is authorized to purchase up to $1.5 million worth of shares of its common stock. Under the repurchase program, shares of the Company’s common stock may be repurchased from time to time in open market transactions, in privately negotiated transactions or otherwise. The timing and the actual number of shares repurchased depend on a variety of factors, including legal requirements, price and economic and market conditions. The repurchase program may be suspended or discontinued at any time until it expires on August 16, 2021. On August 12, 2021, the Company’s Board of Directors extended the share repurchase program to expire on August 16, 2022. All other terms and conditions remained the same. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
The information included under the heading Share Repurchase Plan of Part II–Item 2–Unregistered Sales of Equity Securities and Use of Proceeds of this form 10-Q, is incorporated by reference herein.
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ITEM 6: EXHIBITS
*Filed or furnished herewith, as applicable
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| VERIFYME, INC. | |
| Date: May 11, 2022 | By: /s/ Patrick White |
| Patrick White | |
|
Chief Executive Officer (Principal Executive Officer) | |
| Date: May 11, 2022 | By: /s/ Margaret Gezerlis |
| Margaret Gezerlis | |
|
Chief Financial Officer (Principal Financial Officer and Principal Accounting |
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