UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM
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(Mark one)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
| 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
| (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 November 8, 2022.
| 2 |
| PART I - FINANCIAL INFORMATION | ||
| ITEM 1. | Financial Statements | 4 |
| Consolidated Balance Sheets (Unaudited) | 4 | |
| Consolidated Statements of Operations (Unaudited) | 6 | |
| Consolidated Statements of Cash Flows (Unaudited) | 7 | |
| Consolidated Statements of Stockholders' Equity (Unaudited) | 8 | |
| Notes to Consolidated Financial Statements (Unaudited) | 10 | |
| ITEM 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 26 |
| ITEM 3. | Quantitative and Qualitative Disclosures about Market Risk | 34 |
| ITEM 4. | Controls and Procedures | 34 |
| PART II - OTHER INFORMATION | ||
| ITEM 1. | Legal Proceedings | 35 |
| ITEM 1A. | Risk Factors | 35 |
| ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 36 |
| ITEM 3. | Defaults Upon Senior Securities | 37 |
| ITEM 4. | Mine Safety Disclosures | 37 |
| ITEM 5. | Other Information | 37 |
| ITEM 6. | Exhibits | 37 |
| SIGNATURES | 38 | |
| 3 |
FINANCIAL STATEMENTS
ITEM 1.
VerifyMe, Inc.
Consolidated
Balance Sheets
(In thousands, except share data)
| As of | ||||||||
| September 30, 2022 | December 31, 2021 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts Receivable, net of allowance for credit loss reserve, $ and $ | ||||||||
| Unbilled revenue | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Short term investments | ||||||||
| Inventory | ||||||||
| TOTAL CURRENT ASSETS | ||||||||
| INVESTMENTS | ||||||||
| Equity Investment | $ | $ | ||||||
| PROPERTY AND EQUIPMENT, NET | ||||||||
| RIGHT OF USE ASSET | ||||||||
| INTANGIBLE ASSETS, NET | ||||||||
| GOODWILL | ||||||||
| DEFERRED IMPLEMENTATION COSTS | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Current portion of debt | $ | $ | ||||||
| Accounts payable | ||||||||
| Other accrued expense | ||||||||
| Lease liability- current | ||||||||
| TOTAL CURRENT LIABILITIES | ||||||||
| LONG-TERM LIABILITIES | ||||||||
| Long-term portion of debt | $ | $ | ||||||
| Long-term lease liability | ||||||||
| Long-term derivative liability | ||||||||
| TOTAL LIABILITIES | $ | $ | ||||||
| 4 |
| STOCKHOLDERS' EQUITY | ||||||||
| Series A Convertible Preferred Stock, $ par value, shares authorized, shares issued and outstanding as of September 30, 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 September 30, 2022 and December 31, 2021, respectively | ||||||||
| Common stock, $ par value; authorized; and issued, and shares outstanding as of September 30, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid in capital | ||||||||
| Treasury stock as cost; and shares at September 30, 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 consolidated financial statements.
| 5 |
VerifyMe, Inc.
Consolidated
Statements of Operations
(Unaudited)
(In thousands, except share data)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||
| NET REVENUE | $ | $ | $ | $ | ||||||||||||
| COST OF REVENUE | ||||||||||||||||
| GROSS PROFIT | ||||||||||||||||
| OPERATING EXPENSES | ||||||||||||||||
| General and administrative (a) | ||||||||||||||||
| Research and development | ||||||||||||||||
| Sales and marketing (a) | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| LOSS BEFORE OTHER INCOME (EXPENSE) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||
| Interest (expense) income, net | ( | ) | ( | ) | ||||||||||||
| Loss on equity investment | ( | ) | ( | ) | ||||||||||||
| Unrealized gain on equity investments | ||||||||||||||||
| Other income | ||||||||||||||||
| Gain on extinguishment of debt | ||||||||||||||||
| Payroll Protection Program debt forgiveness | ||||||||||||||||
| TOTAL OTHER INCOME (EXPENSE), NET | ( | ) | ||||||||||||||
| NET (LOSS) INCOME | $ | ( | ) | $ | ( | ) | $ | |||||||||
| LOSS PER SHARE | ||||||||||||||||
| BASIC | ( | ) | ( | ) | ||||||||||||
| DILUTED | ( | ) | ( | ) | ||||||||||||
| WEIGHTED AVERAGE COMMON SHARE OUTSTANDING | ||||||||||||||||
| BASIC | ||||||||||||||||
| DILUTED | ||||||||||||||||
| (a) |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 6 |
VerifyMe, Inc.
Consolidated
Statements of Cash Flows
(Unaudited)
(In thousands)
| Nine Months Ended | ||||||||
| September 30, 2022 | September 30, 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net (Loss) Income | $ | ( | ) | $ | ||||
| Adjustments to reconcile net (loss) income to net cash used in | ||||||||
| operating activities: | ||||||||
| Allowance for bad debt | ||||||||
| 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 | ||||||||
| Payroll Protection Program Debt Forgiveness | ( | ) | ||||||
| Loss (Gain) on equity investment | ( | ) | ||||||
| Gain on extinguishment of debt | ( | ) | ||||||
| Amortization and depreciation | ||||||||
| Changes in operating assets and liabilities | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Unbilled revenue | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ||||||
Accounts payable, other accrued expenses and net change in operating leases | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchase of patents | $ | ( | ) | $ | ( | ) | ||
| Purchase of equipment for lease | ( | ) | ||||||
| Purchase of equity investment | ( | ) | ||||||
| Purchase of office equipment | ( | ) | ||||||
| Acquisition of PeriShip | ( | ) | ||||||
| Deferred implementation costs | ( | ) | ||||||
| Capitalized software costs | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from public offering of securities | $ | $ | ||||||
| Proceeds from issuance of notes payable | ||||||||
| Settlement of debt and redemption of shares from PeriShip seller | ( | ) | ( | ) | ||||
| Proceeds from Stock Purchase Plan | ||||||||
Tax withholding payments for employee stock-based compensation in exchange for shares surrendered | ( | ) | ( | ) | ||||
| Increase in treasury shares (share repurchase program) | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | ( | ) | ||||||
| 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 | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES | ||||||||
| Initial recognition of right-of-use asset and lease liability during the period | $ | $ | ||||||
| Exercise of pre-funded warrants | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 7 |
VerifyMe, Inc.
Consolidated Statements 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 June 30, 2021 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Restricted stock awards, net of shares withheld for employee tax | - | - | ( | ) | - | |||||||||||||||||||||||||||||||||||||||
| Restricted Stock Units | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Common stock issued for services | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Repurchase of Common Stock | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Net Income | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 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 June 30, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Restricted stock awards, net of shares withheld for employee tax | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Restricted Stock Units | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Stock Purchase Plan | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Common stock issued in relation to SPP | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Common stock issued in relation to private placement | - | - | ( | ) | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Repurchase of Common Stock | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Exercise of Pre-funded Warrants | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 8 |
VerifyMe, Inc.
Consolidated Statements 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, net of shares withheld for employee tax | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Restricted Stock Units | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Common stock issued for services | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Common stock issued in relation to public offering of securities | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Repurchase of Common Stock | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Net Income | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 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 | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Common stock issued in relation to Stock Purchase Plan | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Common stock issued in relation to private placement | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Common stock issued for services | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Common stock issued in relation to Acquisition | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Repurchase of Common Stock | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Exercise of Pre-funded Warrants | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 9 |
VerifyMe, Inc.
Notes to the Consolidated Financial Statements (unaudited)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of the Business
VerifyMe, Inc. (“VerifyMe”) was incorporated
in the State of
VerifyMe, through PeriShip Global, is a software driven logistics provider of high-touch, end-to-end logistics management representing most of our current revenue stream. In addition, VerifyMe technologies provide brand protection and supply chain functions. Our operations are split into two segments: PeriShip Global Solutions and VerifyMe Solutions. Through our PeriShip Global Solutions segment we provide a value-added service for time and temperature sensitive parcel management through logistics management from a sophisticated IT platform with proprietary databases, package and flight-tracking software, weather, traffic, and flight status monitoring systems, as well as dynamic dashboards with real-time visibility into shipment transit and last-mile events that are managed by a call center. Using our proprietary IT platform, we provide real-time information and analysis to mitigate supply chain flow interruption, delivering last-mile resolution for key markets, including the perishable healthcare and food industries. Through our VerifyMe Solutions segment our technologies provide brand protection and consumer engagement solutions allowing brand owners to gather business intelligence. The Company’s activities are subject to significant risks and uncertainties. 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”).
Reclassifications
Certain amounts presented for the three and nine months ended September 30, 2022, and 2021, respectively, reflect reclassifications made to conform to the presentation in our current reporting period.
Basis of Presentation
The accompanying unaudited interim consolidated financial statements (the “Interim Statements”) include the accounts of VerifyMe and its wholly owned subsidiary PeriShip Global. All significant intercompany balances and transactions have been eliminated upon consolidation. The consolidated financial 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 and nine months ended September 30, 2022, are not necessarily indicative of the results to be expected for the year ending December 31, 2022, or for any future interim periods.
Segment Reporting
Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision maker, or decision-making group, in deciding the method by which to allocate resources and assess performance. The Company has two reportable segments, namely, (i) PeriShip Global Solutions and (ii) VerifyMe Solutions. See Note 14 Segment Reporting, for further discussion of the Company’s segment reporting structure.
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.
| 10 |
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments, (“CECL”), which changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. This guidance was to be effective for reporting periods beginning after December 15, 2022, with early adoption permitted. The Company has elected to early adopt ASU 2016-13, as of January 1, 2022, and the impact has been disclosed on the face of the Consolidated Balance Sheets. The Company’s accounts receivable is currently the only financial instrument subject to the new CECL model. The Company has considered relevant internal and/or external information about past events, e.g., historical loss experience with similar assets, current conditions, and reasonable and supportable forecasts that affect the expected collectability of the reported amount of financial assets in determining the credit loss.
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 approximates 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.
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 September 30, 2022 and December 31, 2021.
| Amounts in Thousands ('000) | ||||||||||||
| Short Term Investment | Equity Investment | Derivative Liability | ||||||||||
| (Level 1) | (Level 3) | (Level 3) | ||||||||||
| Balance as of December 31, 2021 | $ | ( | ) | |||||||||
| Realized loss on fair value recognized in other (expense)/income | - | ( | ) | - | ||||||||
| Unrealized gain on fair value recognized in other (expense)/income | - | - | ||||||||||
| Realized gain on fair value recognized in share-based compensation | - | - | ||||||||||
| Balance at September 30, 2022 | $ | $ | - | $ | - | |||||||
Variable Interest Entity
The Company determined that G3 VRM Acquisition Corp. (NASDAQ: GGGVU) (the “SPAC”, see Note 2 – Equity Investments), a Delaware corporation and special purpose acquisition company, was a variable interest entity (“VIE”) in which the Company had a variable interest but was 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 impacted 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 was not the primary beneficiary of the VIE and as such, did not consolidate the SPAC. The Company reassessed 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. The SPAC was unable to complete its initial business combination within 12 months from the closing of the IPO, and the Company made the decision not to fund the extension and did not deposit additional funds into the trust account. As a result, the SPAC was dissolved, and liquidated according to its charter. The SPAC redeemed 100% of the public shares for cash, the rights have expired worthless, and the founder shares and the private placement securities have become worthless.
| 11 |
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 Note 2 – 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 Loss on equity investments on the accompanying Consolidated 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 and nine months ended September 30, 2022, the Company’s revenues primarily consisted of revenue related to our shipping logistics services generated by our subsidiary PeriShip Global.
Goodwill
Goodwill represents the excess of purchase price over the fair value of net assets acquired in business combinations. Pursuant to ASC 350, the Company tests goodwill for impairment on an annual basis in the fourth quarter, or between annual tests, in certain circumstances. Under authoritative guidance, the Company first assessed qualitative factors to determine whether it was necessary to perform the quantitative goodwill impairment test. The assessment considers factors such as, but not limited to, macroeconomic conditions, data showing other companies in the industry and our share price. An entity is not required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. Events or changes in circumstances which could trigger an impairment review include macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, other entity specific events and sustained decrease in share price.
Business Combinations
The Company applies the provisions of Accounting Standard Codification (“ASC”) Topic 805, Business Combinations, in the accounting for business acquisitions. ASC 805 requires the Company to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the identifiable assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions to accurately apply preliminary value to assets acquired and liabilities assumed at the acquisition date, where applicable, these estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments in the current period, rather than a revision to a prior period. Upon the conclusion of the measurement period or final determination of the values of the assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded in the Consolidated Statements of Operations. Accounting for business combinations requires management to make significant estimates and assumptions, especially at the acquisition date, including estimates for intangible assets where applicable. Although the Company believes the assumptions and estimates made have been reasonable and appropriate, they are based in part on information obtained from management of the acquired companies and are inherently uncertain. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates, or actual results.
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.
| 12 |
For each of the three and nine months ended September 30, 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 and nine months ended September 30, 2022, there were approximately anti-dilutive shares consisting of unvested performance restricted stock units, restricted stock units, restricted stock awards and options under the stock purchase plan, shares issuable upon exercise of stock options, shares issuable upon exercise of warrants (excludes warrants not yet exercisable), and shares issuable upon conversion of preferred stock. For the three and nine months ended September 30, 2021, there were approximately anti-dilutive shares excluded from the calculation of diluted earnings per share consisting of shares issuable upon exercise of stock options, shares issuable upon exercise of warrants, and unvested restricted stock units.
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 an expense over the requisite service periods using the straight-line method. For performance restricted stock units with stock price appreciation targets (see Note 7 – 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 was the founder of G3 VRM Acquisition Corp. (the “SPAC”) that was 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.
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.
| 13 |
The SPAC was unable to complete its initial business combination within 12 months from the closing of the IPO and the Sponsor Entity decided not to fund the extension and did not deposit additional funds into the trust account. As a result, the SPAC was dissolved and liquidated in accordance with its charter. The SPAC redeemed 100% of the public shares for cash on July 19, 2022, the rights expired worthless, and the founder shares and private placement securities became worthless. The SPAC was dissolved on July 29, 2022 and no distributions were made to the Sponsors. The SPAC’s management team has informed the Company that it is still evaluating the liquidation costs of the SPAC and depending on the ultimate costs incurred that the Company may be required to contribute towards these costs. If the costs to dissolve the SPAC are ultimately less than the remaining assets of the SPAC then the SPAC may make a distribution to the Company. No additional amounts have been included in the accompanying Consolidated Statements of Operations.
The fair value of the equity investment was $
In December 2021, the Company acquired
NOTE 3 – REVENUE
Revenue by Category
The following series of tables present our revenue disaggregated by various categories (dollars in thousands).
| VerifyMe | PeriShip Global | Consolidated | ||||||||||||||||||||||
| Revenue | Three Months Ended September 30, | Three Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Proactive services | $ | $ | $ | $ | ||||||||||||||||||||
| Premium services | ||||||||||||||||||||||||
| Brand protection services | ||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| VerifyMe | PeriShip Global | Consolidated | ||||||||||||||||||||||
| Revenue | Nine Months Ended September 30, | Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Proactive services | $ | $ | $ | $ | ||||||||||||||||||||
| Premium services | ||||||||||||||||||||||||
| Brand protection services | ||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||
Contract Balances
The timing of revenue recognition, billings and cash collections results in unbilled revenue (contract assets) and deferred revenue (contract liabilities) on the consolidated balance sheets. Amounts charged to our clients become billable according to the contract terms, which usually consider the delivery completion. Unbilled amounts will generally be billed and collected within 30 days but typically no longer than 60 days. When we advance bill clients prior to the work being performed, generally, such amounts will be earned and recognized in revenue within the 30 days. These assets and liabilities are reported on the consolidated balance sheet on a contract-by-contract basis at the end of each reporting period. Changes in the contract asset and liability balances during the nine-month period ended September 30, 2022, were not materially impacted by any other factors.
| 14 |
Applying the practical expedient in ASC Topic 606, we recognize the incremental costs of obtaining contracts (i.e. sales commissions) as an expense when incurred if the amortization period of the assets that we otherwise would have recognized is one year or less. As of September 30, 2022, we did not have any capitalized sales commissions.
NOTE 4 – BUSINESS COMBINATION
PeriShip LLC
On April 22, 2022, we acquired, through PeriShip
Global, the business and certain assets of PeriShip, LLC (“PeriShip”), a value-added service provider for time and temperature
sensitive parcel management. PeriShip Global provides shipping logistics services utilizing proprietary predictive analytics software
and supporting call center services. Using our proprietary IT platform, we provide real-time information and analysis to mitigate
supply chain flow interruption, delivering last-mile resolution for key markets, including the perishable healthcare and food industries.
The purchase price was $
On September 22, 2022 the Company entered into
an agreement with the owner of PeriShip, LLC to resolve certain disputes among the parties, reduce the principal and interest on the promissory
note, repay the amended promissory note in full, and repurchased shares of the Company’s common stock (see Note 8). The Company
accounted for the agreement in accordance with Topic 250, through earnings, with the full amount included as a Gain on extinguishment
of debt on the accompanying Consolidated Statements of Operations, for a total of $
The following table summarizes the purchase price allocation for the acquisition (dollars in thousands).
| Cash | |||||||
| Promissory note | |||||||
| Stock (issuance of 305,473 shares of common stock) (a) | |||||||
| Total purchase price |
| Amortization | |||||||
| Period | |||||||
| Purchase price allocation: | |||||||
| Accounts receivable, net | |||||||
| Prepaid expenses | |||||||
| Developed Technology | |||||||
| Trade Names/Trademarks | |||||||
| Customer Relationships | |||||||
| Non-Compete Agreement | |||||||
| Property and Equipment, net | |||||||
| Goodwill | |||||||
| Accounts payable and other accrued expenses | ( | ) | |||||
Unaudited Pro forma Financial Information
The following unaudited proforma financial information presents the combined results of operations of the Company and gives effect to the acquisition discussed above for the three and nine months ended September 30, 2022, as if the acquisition had occurred as of the beginning of the first period presented instead of on April 22, 2022.
The pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations that would have been realized if the acquisition had been completed on January 1, 2021, nor does it purport to project the results of operations of the combined company in future periods. The pro forma financial information does not give effect to any anticipated integration costs related to the acquired company during the periods presented.
| 15 |
The below table summarizes proforma financial information for the Company, and the acquired PeriShip business, assuming the acquisition date of Periship occurred on January 1, 2021 (dollars in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| Description | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Net loss | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
NOTE 5 – INTANGIBLE ASSETS AND GOODWILL
Goodwill
Goodwill represents costs in excess of values assigned to the underlying net assets of acquired businesses. Intangible assets acquired are recorded at estimated fair value. Goodwill is deemed to have an indefinite life and is not amortized but is tested for impairment annually, and at any time when events suggest an impairment more likely than not has occurred. We test goodwill at the reporting unit level.
ASC Topic 350, Intangibles - Goodwill and Other (ASC Topic 350), permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative goodwill impairment test. Under ASC Topic 350, an entity is not required to perform a quantitative goodwill impairment test for a reporting unit if it is more likely than not that its fair value is greater than its carrying amount. A reporting unit is an operating segment, or one level below an operating segment, as defined by U.S. GAAP.
Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and determination of appropriate market comparables. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates. The timing and frequency of our goodwill impairment tests are based on an ongoing assessment of events and circumstances that would indicate a possible impairment. We will continue to monitor our goodwill and intangible assets for impairment and conduct formal tests when impairment indicators are present.
Each of our two reportable segments represents an operating segment under ASC Topic 280, Segment Reporting. We test our goodwill at the reporting unit level, or one level below an operating segment, under ASC Topic 350, Intangibles - Goodwill and Other. We determined that we have two reporting units for purposes of goodwill impairment testing, which represent our two reportable business segments, as discussed below.
Changes in the carrying amount of goodwill by reportable business segment for the nine months ended September 30, 2022, were as follows (in thousands):
| VerifyMe | PeriShip Global | Total | ||||||||||
| Net book value at | ||||||||||||
| January 1, 2022 | $ | $ | $ | |||||||||
| 2022 Activity | ||||||||||||
| Acquisition | ||||||||||||
| Net book value at | ||||||||||||
| September 30, 2022 | $ | $ | $ | |||||||||
| 16 |
Intangible Assets Subject to Amortization
Our intangible assets include amounts recognized in connection with patents and trademarks, capitalized software and acquisitions, including customer relationships, tradenames, developed technology and non-compete agreements. Intangible assets are initially valued at fair market value using generally accepted valuation methods appropriate for the type of intangible asset. Amortization is recognized on a straight-line basis over the estimated useful life of the intangible assets. Intangible assets with definite lives are reviewed for impairment if indicators of impairment arise. Except for goodwill, we do not have any intangible assets with indefinite useful lives.
Intangible assets with finite lives are subject to amortization over their estimated useful lives. The primary assets included in this category
and their respective balances were as follows (in thousands):
| September 30, 2022 | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||
| Patents and Trademarks | $ | $ | ( | ) | $ | |||||||
| Capitalized Software | ( | ) | ||||||||||
| Customer Relationships | ( | ) | ||||||||||
| Developed Technology | ( | ) | ||||||||||
| Internally Used Software | ||||||||||||
| Non-Compete Agreement | ( | ) | ||||||||||
| $ | $ | ( | ) | $ | ||||||||
| December 31, 2021 | ||||||||||||
| Patents and Trademarks | $ | $ | ( | ) | $ | |||||||
| Capitalized Software | ( | ) | ||||||||||
| Customer Relationships | ||||||||||||
| Developed Technology | ||||||||||||
| Non-Compete Agreement | ||||||||||||
| $ | $ | ( | ) | $ | ||||||||
Amortization expense for intangible assets was
$
Patents and Trademarks
As of September 30, 2022, the current patent and trademark portfolios consist of eleven 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, fifteen registered U.S. trademarks (of which seven trademarks were acquired through our wholly owned subsidiary, PeriShip Global), 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.
The Company expects to record amortization expense of intangible assets over the next 5 years and thereafter as follows (in thousands):
| Fiscal Year ending December 31, | |||||
| 2022 (three months remaining) | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Thereafter | |||||
| Total | $ | ||||
NOTE 6 – STOCKHOLDERS’ EQUITY
The Company expensed $
The Company expensed $
During the nine months ended September 30, 2022, and 2021, the Company issued and shares of common stock in relation to services with a stock-based compensation expense of $ thousand and $ thousand, respectively.
| 17 |
On August 11, 2022, we received an exercise
notice to exercise
On April 22, 2022, shares of common stock were issued in relation to the acquisition of the PeriShip business, see Note 4 – Business Combinations, for details.
On April 22, 2022, the Company, as part of the
acquisition of the PeriShip business, entered into employment agreements with three executives effective as of April 22, 2022. In accordance
with the employment agreements, the Compensation Committee of the Board approved grants of performance restricted stock units (“Performance
RSUs”) to each of the executives with a grant date value as of April 22, 2022, equal to their respective base salary for a total
of
The Performance RSUs vest as follows: 50% of the RSUs (“Tranche 1”) will vest on the two-year anniversary of the Date of Grant if the Participant has remained in continuous employment with the Company through such date and the closing price of the Common Stock during such two-year period was at or above $5.00 for 20 consecutive trading days. If Tranche 1 does not vest on the two-year anniversary of the Date of Grant because closing price of the Common Stock was not at or above $5.00 during such two year period, then Tranche 1 will vest on the three-year anniversary of the Date of Grant if the Participant has remained in continuous employment with the Company through such date and the closing price of the Common Stock during such three-year period was at or above $5.00 for 20 consecutive trading days. In the event of termination of the Participant’s employment due to the death or Disability of the Participant at any time on or before the two-year anniversary of the Date of Grant, if Tranche 1 has not vested prior to the date of termination, then Tranche 1 will vest on the date of the Participant’s termination if the closing price of the Common Stock was at or above $5.00 for 20 consecutive trading days during the period from Date of Grant through the date of the Participant’s employment. 50% of the RSUs (“Tranche 2”) will vest on the two-year anniversary of the Date of Grant if the Participant has remained in continuous employment with the Company through such date and the closing price of the Common Stock during such two-year period was at or above $7.00 for 20 consecutive trading days. If Tranche 2 does not vest on the two-year anniversary of the Date of Grant because closing price of the Common Stock was not at or above $7.00 during such two year period, then Tranche 2 will vest on the three-year anniversary of the Date of Grant if the Participant has remained in continuous employment with the Company through such date and the closing price of the Common Stock during such three-year period was at or above $7.00 for 20 consecutive trading days. In the event of termination of the Participant’s employment due to the death or Disability of the Participant at any time on or before the two-year anniversary of the Date of Grant, if Tranche 2 has not vested prior to the date of termination, then Tranche 2 will vest on the date of the Participant’s termination if the closing price of the Common Stock was at or above $7.00 for 20 consecutive trading days during the period from Date of Grant through the date of the Participant’s employment.
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 $
On April 15, 2022, the Company withheld and retired 750 shares of common stock in order to satisfy U.S. payroll tax withholding obligations on restricted stock awards held by our Chief Financial Officer.
On April 12, 2022, we entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with the selling stockholder and certain directors, providing for the issuance and sale to purchasers therein of an aggregate of 880,208 shares of our common stock, pre-funded warrants to purchase up to 675,000 shares of our common stock, and warrants to purchase up to 1,555,208 shares of our common stock, for gross proceeds to us of approximately $5.0 million and net proceeds of $4.6 million. The pre-funded warrant is exercisable immediately and shall terminate when fully exercised and has an exercise price of $0.001 per share. The pre-funded warrant was exercised in full on August 11, 2022. The warrants will be exercisable for a period of five years commencing six months from the date of issuance and have an exercise price of $3.215 per share. Both the pre-funded warrants and warrants contain price adjustment provisions which may, under certain circumstances, reduce the applicable exercise price. The transaction closed on April 14, 2022.
Four of our directors, participated in the offering as purchasers and acquired an aggregate of 93,312 shares of our common stock and warrants to purchase an aggregate of 93,312 shares of our common stock.
Effective April 7, 2022, the Company approved
restricted stock units or restricted stock awards, for a non-employee director, with a grant date fair value equal to $
On April 7, 2022, the Compensation Committee of
the Board approved grants of Performance RSUs each to two of the board members with a grant date fair value amount of $
| 18 |
On March 29, 2022, the Company withheld and retired 8,870 shares of common stock in order to satisfy U.S. payroll tax withholding obligations on restricted stock awards held by our Chief Executive Officer.
On February 16, 2022, the Company, as part of
the development and implementation of the Company’s strategic initiatives, entered into employment agreements with its Chief Executive
Officer, President & Chief Operating Officer, Executive Vice President & Chief Financial Officer, Chief Technology Officer and
Senior VP of Finance and Investor Relations, each with effect as of February 15, 2022. In accordance with the employment agreements, the
Compensation Committee of the Board approved grants of Performance RSUs to each of the executives, for a total of restricted stock
units with a grant date fair value of $
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 $
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 and nine months ended September 30, 2022, $31 thousand and $98 thousand, respectively, have been expensed in relation to the non-qualified stock purchase plan.
Shares Held in Treasury
As of September 30, 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,
On August 31, 2022, four participants exercised
their option under the Company’s non-qualified stock purchase plan, and as a result,
On September 22, 2022, the Company paid $1.8 million of the $2.0 million principal amount promissory note issued to the seller in connection with the PeriShip acquisition, inclusive of the Company redeeming 61,000 shares of its common stock from the seller, pursuant to an agreement with the seller, see Note 8.
Shares Repurchase Program
In November 2020, the Company’s Board of Directors approved a share repurchase program for up to $ 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. Effective July 1, 2022, the Company’s Board of Directors terminated the existing share repurchase program and approved a new share repurchase program to replace the existing program due to expire on August 16, 2022, to allow the Company to spend up to $1.5 million to repurchase shares of its common stock, so long as the price does not exceed $5.00 until July 1, 2023. During the three and nine months ended September 30, 2022, the Company repurchased 74,530 shares of common stock under the Company’s current program.
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.
| 19 |
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 6 – 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 September 30, 2022 | $ | |||||||||||||||
| Exercisable as of September 30, 2022 | $ | $ | ||||||||||||||
| (1) |
| 20 |
As of September 30, 2022, the Company had no unvested stock options.
During the three months ended September 30, 2022,
and 2021, the Company expensed $
As of September 30, 2022, there was $
Restricted Stock Awards and Restricted Stock Units
The following table summarizes the unvested restricted stock awards as of September 30, 2022:
| Unvested Restricted Stock Awards | ||||||||
| Weighted - | ||||||||
| Average | ||||||||
| Number of | Grant | |||||||
| Award Shares | Date Fair Value | |||||||
| Unvested at December 31, 2021 | ||||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Balance September 30, 2022 | $ | |||||||
As of September 30, 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 September 30, 2022:
| Unvested Restricted Stock Units | ||||||||
| Weighted - | ||||||||
| Average | ||||||||
| Number of | Grant | |||||||
| Unit Shares | Date Fair Value | |||||||
| Unvested at December 31, 2021 | ||||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Balance September 30, 2022 | $ | $ | ||||||
As of September 30, 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 each grant 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 derived service period and there is no ongoing adjustment or reversal based on actual achievement during the period.
| 21 |
The following table summarizes the unvested performance restricted stock units as of September 30, 2022:
| Unvested Performance Restricted Stock Units | ||||||||
| Weighted - | ||||||||
| Average | ||||||||
| Number of | Grant | |||||||
| Unit Shares | Date Fair Value | |||||||
| Unvested at December 31, 2021 | ||||||||
| Granted | ||||||||
| Vested | ||||||||
| Balance September 30, 2022 | $ | $ | ||||||
As of September 30, 2022, total unrecognized share-based
compensation cost related to unvested restricted stock units was $
Warrants
The following table summarizes the activities for the Company’s warrants for the nine months ended September 30, 2022:
| Warrants Outstanding (Excluding Pre-Funded Warrants) | ||||||||||||||||
| Number of Warrant 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 | ||||||||||||||||
| Expired | ( | ) | ||||||||||||||
| Balance as of September 30, 2022 | $ | |||||||||||||||
| Exercisable as of September 30, 2022 | $ | $ | ||||||||||||||
| (1) |
For the nine months ended September 30, 2022, the Company granted 39,942 warrants to warrant holders pursuant to anti-dilution provisions, 1,555,208 warrants in conjunction with the Securities Purchase Agreement (see Note 6 – Stockholders’ Equity). As the fair value of the warrants granted would have had a net zero impact to equity (increasing additional paid in capital and offering costs for the same amount), the Company did not break out or complete a separate valuation of the warrants granted in association with either capital raise.
Pre-funded Warrants
On April 14, 2022, in connection with our Securities
Purchase Agreement (see Note 6 – Stockholders’ Equity), the Company issued 675,000 pre-funded warrants to purchase
up to an aggregate of shares of common stock at a purchase price of $3.214 per pre-funded warrant, which represented
the per share public offering price for the common stock less the $
NOTE 8—DEBT
On April 22, 2022, the Company issued a $
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The Company accounted for the early extinguishment
of debt in accordance with ASC 405-20 - Extinguishment of Liabilities, and recognized a gain included in Gain on extinguishment
of debt on the accompanying Consolidated Statements of Operations of $
Contemporaneously, the Company entered into a new debt facility with PNC Bank, National Association (the “PNC Facility”). The PNC Facility includes a $1 million revolving line of credit (the “RLOC”) with a term of one-year, expiring in September 2023. The RLOC has no scheduled payments of principal until maturity, and bears interest per annum at a rate equal to the sum of Daily SOFR plus 2.85% with monthly interest payments. The PNC Facility also includes a four-year term note (the “Term Note”) for $2 million which matures in September of 2026 and requires equal quarterly payments of principal and interest. The Term Note incurs interest per annum at a rate equal to the sum of Daily SOFR plus 3.1%. The RLOC and Term Note are guaranteed by the Company and secured by the assets of PeriShip and the Company.
The PNC Facility includes a number of affirmative and restrictive covenants applicable to PeriShip, including, among others, a financial covenant to maintain a fixed charge coverage ratio of at least 1.10 to 1.00 at the end of each fiscal year, affirmative covenants regarding delivery of financial statements, payment of taxes, and establishing primary depository accounts with PNC Bank, and restrictive covenants regarding dispositions of property, acquisitions, incurrence of additional indebtedness or liens, investments and transactions with affiliates. PeriShip is also restricted from paying dividends or making other distributions or payments on its capital stock if an event of default (as defined in the PNC Facility) has occurred or would occur upon such declaration of dividend. PeriShip was in compliance with all affirmative and restrictive covenants under the PNC Facility at September 30, 2022.
As of September 30, 2022, our short-term debt
outstanding under the Term Note was $
No amounts were drawn on the RLOC as of September 30, 2022.
NOTE 9 – LOSS CONTINGENCY
One of the Company’s vendors has made an assessment of fees owed by the Company in the amount of approximately $143 thousand. The Company believes that these fees are not valid based on precedent established in the business relationship. The Company has determined that a loss contingency is reasonably possible and has not accounted for the amount in the accompanying Consolidated Statements of Operations for the nine months ended September 30, 2022.
NOTE 10—INCOME TAXES
There are no taxes payable as of September 30, 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
Utilization of the net operating loss (NOL) carryforwards may be subject to a substantial annual limitation due to ownership changes 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 September 30, 2022.
The Company acquired certain assets and the business
of PeriShip LLC on April 22, 2022. Intangible assets have been established in the amount of $
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NOTE 11—LONG TERM DERIVATIVE LIABILITY
On April 7, 2022, the Company granted two directors 11,250 restricted stock units each (“SPAC RSUs”) with respect to the common stock, $ par value per share, of G3 VRM Acquisition Corp. The SPAC RSUs were to 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 represented the right to receive the value of one share of stock in G3 VRM Acquisition Corp., which would have been paid to the director as soon as practicable after the fifteen-month anniversary of the vesting date.
On September 17, 2021, the Company granted two
directors SPAC RSUs with respect to the common stock, $0.0001 par value per share, of G3 VRM Acquisition Corp. The SPAC RSUs were to 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 represented the right to receive the value of one share of stock in G3 VRM Acquisition
Corp., which was to 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 $
In June 2022, the Sponsor Entity decided not to
fund the extension for the time that the SPAC had to complete its initial business combination. As a result, the SPAC was dissolved and
liquidated in accordance with its charter and under ASC 815, and the derivative instrument was terminated. As a result, the SPAC RSUs
were forfeited. For the nine months ended September 30, 2022, the Company has recorded the effect of termination to reduce the fair value
and recorded a credit to share-based compensation expense of $(126) thousand in relation to these awards. The fair value of the derivative
liability was $
NOTE 12– LEASES
The Company accounts for its leases under Accounting Standard Codification (“ASC”) Topic 842, Leases. The Company determines at its inception whether an arrangement that provides us control over the use of an asset is a lease. We recognize at lease commencement a right-of-use (ROU) asset and lease liability based on the present value of the future lease payments over the lease term. We have elected not to recognize a ROU asset and lease liability for leases with terms of 12 months or less. Our current long-term lease includes an option to extend the term of the lease prior to the end of the initial term. It is not reasonably certain that we will exercise the option and have not included the impact of the option in the lease term for purposes of determining total future lease payments. As our lease agreement does not explicitly state the discount rate implicit in the lease, we use our promissory note borrowing rate to calculate the present value of future payments.
In addition to the base rent, real estate leases typically contain provisions for common-area maintenance and other similar services, which are considered non-lease components for accounting purposes. For our real estate leases, we apply a practical expedient to include these non-lease components in calculating the ROU asset and lease liability. For all other types of leases, non-lease components are excluded from our ROU assets and lease liabilities and expensed as incurred.
We have operating leases for office facilities. We do not have any finance leases.
Lease expense is included in General & Administrative Expenses on the accompanying Consolidated Statements of Operations. The components of lease expense were as follows (in thousands):
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Operating lease cost | $ | $ | $ | $ | ||||||||||||
| Short-term lease cost | ||||||||||||||||
| Total lease costs | $ | $ | ||||||||||||||
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Supplemental information related to leases was as follows (dollars in thousands):
| September 30, 2022 | December 31, 2021 | |||||||
| Operating Lease right-of-use asset | $ | $ | ||||||
| Current portion of operating lease liabilities | $ | $ | ||||||
| Non-current portion of operating lease liabilities | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
| Cash paid for amounts included in the measurement of operating lease liabilities | $ | $ | ||||||
| Right-of-use assets obtained in exchange for operating lease liabilities | $ | $ | ||||||
| Weighted-average remaining lease term for operating leases (years) | ||||||||
| Weighted average discount rate for operating leases | % | |||||||
The following is a reconciliation of future undiscounted cash flows to the operating lease liabilities on our consolidated balance sheets as of September 30, 2022 (in thousands):
| Year ended December 31, | ||||
| 2022 (Excluding nine months ended September 2022) | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total future lease payments | ||||
| Less: imputed interest | ( |
) | ||
| Present value of future lease payments | ||||
| Less: current portion of lease liabilities | ( |
) | ||
| Long-term lease liabilities | $ | |||
NOTE 13– CONCENTRATIONS
For the three months ended September 30, 2022,
one customer represented
As of September 30, 2022, one customer made up
During each of the three and nine months ended September 30, 2022,
one vendor accounted for
NOTE 14 – SEGMENT REPORTING
As of September 30, 2022, we operated through two reportable business segments: (i) PeriShip Global Solutions and (ii) VerifyMe Solutions.
PeriShip Global Solutions: This segment offers a value-added service provider for time and temperature sensitive parcel management. Through logistics management from a sophisticated IT platform with proprietary databases, package and flight-tracking software, weather, traffic, and flight status monitoring systems, as well as dynamic dashboards with real-time visibility into shipment transit and last-mile events that are managed by a call center Using our proprietary IT platform, we provide real-time information and analysis to mitigate supply chain flow interruption, delivering last-mile resolution for key markets, including the perishable healthcare and food industries.
VerifyMe Solutions. This segment specializes in solutions that connect brands with consumers through their products. Consumers can authenticate products with their smart phone prior to usage, and brand owners have the ability to gather business intelligence while engaging directly with their consumers. Our VerifyMe Solutions also provide brand protection and supply chain functions such as counterfeit prevention.
We do not allocate the following items to the segments: general & administrative expenses, sales & marketing expenses, restructuring charges, other expense, interest expense, gain on equity investments and income tax expense.
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The following table sets forth the revenue and operating results attributable to each reportable segment and includes a reconciliation of segment revenue to consolidated revenue and operating results to consolidated loss before income tax expense (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue | ||||||||||||||||
| PeriShip Global Solutions | $ | $ | $ | $ | ||||||||||||
| VerifyMe Solutions | ||||||||||||||||
| Total Revenue | $ | $ | $ | $ | ||||||||||||
| Gross Profit | ||||||||||||||||
| PeriShip Global Solutions | $ | $ | $ | $ | ||||||||||||
| VerifyMe Solutions | ||||||||||||||||
| Total Gross Profit | ||||||||||||||||
| General and administrative (a) | ||||||||||||||||
| Research and development | ||||||||||||||||
| Sales and marketing (a) | ||||||||||||||||
| LOSS BEFORE OTHER INCOME (EXPENSE) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER INCOME (EXPENSE) | ( | ) | ||||||||||||||
| NET (LOSS) INCOME | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
NOTE 15 – SUBSEQUENT EVENTS
Effective October 17, 2022, the Company entered
into an interest rate SWAP agreement, with a notional amount of $
On November 2, 2022, the Company issued restricted stock units to executive employees under the 2020 Equity Incentive Plan, vesting one-third on each anniversary of the grant date.
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 consolidated 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.
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Overview
VerifyMe, Inc. (“VerifyMe”) through its wholly owned subsidiary, PeriShip Global, LLC (“PeriShip Global”), (together the “Company,” “we,” “us,” or “our”), is a software driven logistics provider of high-touch end-to-end logistics management representing most of our current revenue stream. In addition, VerifyMe technologies provide brand protection and supply chain functions. Our operations are split into two segments: PeriShip Global Solutions and VerifyMe Solutions. Through our PeriShip Global Solutions segment we provide a value-added service for time and temperature sensitive parcel management through logistics management from a sophisticated IT platform with proprietary databases, package and flight-tracking software, weather, traffic, and flight status monitoring systems, as well as dynamic dashboards with real-time visibility into shipment transit and last-mile events that are managed by a call center. Using our proprietary IT platform, we provide real-time information and analysis to mitigate supply chain flow interruption, delivering last-mile resolution for key markets, including the perishable healthcare and food industries. Through our VerifyMe Solutions segment our technologies provide brand protection and consumer engagement solutions allowing brand owners to gather business intelligence. Further information regarding our business segments is discussed below:
PeriShip Global Solutions: The PeriShip Global Solutions segment specializes in predictive analytics for optimizing delivery of time and temperature sensitive perishable products. We manage complex industry-specific shipping logistic processes that require critical time, temperature control and handling to prevent spoilage and extreme delivery times. Utilizing predictive analytics from multiple data sources including weather, traffic, major carrier feeds, and time of day data, we provide our clients an end-to-end vertical approach for their most critical service delivery needs. Using its proprietary IT platform, we provide real-time information and analysis to mitigate supply chain flow interruption, delivering last-mile resolution for key markets, including the perishable healthcare and food industries.
Through our proprietary PeriTrack ® customer dashboard, we provide an integrated tool that gives our customers an in-depth look at their shipping activities and allows them access to critical information in support of the specific needs of the supply chain stakeholders. We offer post-delivery services such as customized reporting for trend analysis, system performance reports, power outage maps, and other tailored reports.
PeriShip Global generates revenue from three business service models.
| · | Pro-Active Service – PeriShip Global clients pay us directly for carrier service coupled with our pro-active logistics assistance. |
| · | Direct Premium Service –PeriShip Global clients pay us directly for carrier service coupled with our complete white-glove shipping monitoring and predictive analytics service. This service includes the customer web portal access, weather monitoring, temperature control, full call center support and last mile resolution. |
| · | Indirect Premium Service – Our carrier partner also offers a “white label” version of our Premium Service to its customers and pays us a fixed contractual fee. |
PeriShip Service Products: The PeriShip Global Solutions segment provides the following service offerings to our customers:
PeriTrack ®: Our proprietary PeriTrack® customer dashboard was developed utilizing our extensive logistics operational knowledge. This integrated web portal tool gives our customers an in-depth look at their shipping activities based on real-time data. The PeriTrack® dashboard was designed to provide critical information in support of the specific needs of supply chain stakeholders and gives our customer resolution specialists a 360° view of shipping activity. PeriTrack® features tools tailored for shippers of perishable goods, which includes the In-Transit Shipment Tracker. This tool provides details on the unique shipper’s in-transit shipments, with the ability to select and analyze data on individual shipments.
Call Center Service: PeriShip Global has assembled a team of customer resolution specialists based in the U.S. This service team resolves shipping problems on behalf of our customers. The call center acts as a help desk and monitors shipping to delivery for our customers.
Pre-Transit Service: PeriShip Global helps clients prepare their products for shipments by advising clients on packaging requirements for various types of perishable products. Each product type requires its own particular packaging to protect it during the shipment, and we utilize our extensive knowledge and research to provide our customers with packaging recommendations to meet their unique needs.
Post-Delivery: PeriShip Global provides customized reporting for trend analysis, system performance reports, power outage maps, and many other reports to help our customers improve their processes and customer service outcomes.
Weather/Traffic Service: PeriShip Global has full-time meteorologists on staff to monitor weather. A package may experience a variety of weather conditions between the origin and destination, and our team actively monitors these conditions to maximize the changes of timely and safe transit of shipments. Similarly, traffic and construction also creates unpredictable delays which our team works diligently to mitigate. If delays or other issues occur the PeriShip team informs clients and works with them to pro-actively resolve such shipment issues.
VerifyMe Solutions: The VerifyMe Solutions segment specializes in technology solutions to connect brands with consumers through their product. Consumers can authenticate products with their smart phone prior to usage, and brand owners have the ability to gather business intelligence while engaging directly with their consumers. Our VerifyMe solutions also provide brand protection and supply chain functions such as counterfeit prevention.
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Our commercialization and sales efforts for VerifyMe 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.
VerifyMe Products: 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 allowing the brand owner to gather business intelligence and engage with customers |
| · | VerifyMe Authenticate™ for product authentication |
| · | VerifyMe Track & Trace™ for product supply chain control |
| · | VerifyMe Online™ for on-line (web) brand monitoring |
VerifyMe/PeriShip Global Synergies:
We believe that VerifyMe and PeriShip Global have synergistic product centric technology platforms and combined have a compelling technology offering for brand owners. For example, currently PeriShip Global ships vaccines for major pharmaceutical companies. With the addition of VerifyMe technology, PeriShip Global can add product authentication and serialization to protect clients’ vaccines from product diversion and sub-standard counterfeits. In addition, VerifyMe’s consumer engagement solutions could give PeriShip Global food and beverage clients the ability to gather rich business intelligence and build customer loyalty with engagement functions like video’s, discounts, contests, etc.
Partnerships
PeriShip Global has a direct partnership with a major global carrier company. This partnership includes the ability for both companies to white label each partner’s services. In addition, PeriShip Global has data feeds directly from the carrier into our proprietary logistics optimization software which provides shippers much more detailed information and predictive analytics on their shipment versus just a standard shipping code look up which is provided by the carrier.
VerifyMe has a contract with HP Indigo, and a strategic partnership with INX, the third largest producer of inks in North America. We believe these partnerships can be used to enable brand owners to securely prevent counterfeiting, prevent product diversion and authenticate labels, packaging and products alleviating liability from counterfeit products that harm consumers.
Current Economic Environment
In early September, 2022, the major global carrier company that PeriShip partners with disclosed that a global recession could be coming based on various indicators in its business including the demand for packages weakening considerably in the final weeks of August 2022, a negative impact on its express delivery business due to the weakening global economy, particularly in Asia and Europe, and a decline in the volume of freight it handles in every region around the world. The major global carrier stated that it expects business conditions to further weaken during its current quarter and is responding by reducing flights, temporarily parking aircraft, trimming hours for its staff, delaying some hiring plans and closing ninety office locations as well as five corporate offices. It also stated it is cutting $500 million from its capital expenditure budget for its fiscal year, which runs through May of 2023.
We have seen a softening in demand for some services related to high-end perishable items and cannabis products which seem to be impacted by reduced discretionary spending by U.S. consumers. While a recession, whether global or more localized to the U.S., may decrease the demand for our services that are more discretionary in nature, we believe that the internal cost cutting measures, if implemented by the major global carrier may benefit out-sourced service providers, including PeriShip Global. Additionally, PeriShip Global is working with this major global carrier to address their small and medium sized business clients, which we believe is an underserved segment and presents considerable growth opportunities for PeriShip Global. However, we can provide no assurances that a decline in discretionary consumer spending will not have a negative impact on our revenues and results of operations.
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Business Combination
On April 22, 2022, we acquired, through PeriShip Global, the business and certain assets of PeriShip, LLC, value-added service provider for time and temperature sensitive parcel management. PeriShip Global provides shipping logistics services utilizing proprietary predictive analytics software and supporting call center services. Using our proprietary IT platform, we provide real-time information and analysis to mitigate supply chain flow interruption, delivering last-mile resolution for key markets, including the perishable healthcare and food industries. The purchase price was $10.5 million which consisted of $7.5 million in cash paid at closing, a promissory note of $2.0 million with a fixed interest rate of 6% per annum on the unpaid principal balance, to be paid in three installments on the sixth, fifteenth, and eighteenth month anniversaries of the closing, and 305,473 shares of restricted common stock of the Company, representing $1.0 million in stock consideration. The goodwill recognized is due to the expected synergies from combining the operations of the acquiree with the Company. We expect that all of the goodwill recorded for financial statement purposes is deductible for tax purposes. The acquired PeriShip business is included in the PeriShip Global Solutions segment and the results of its operations have been included in the consolidated financial statements beginning April 22, 2022.
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 was 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 owned approximately 9.42% of the common stock of the SPAC.
The SPAC was unable to complete its initial business combination within 12 months from the closing of the IPO and the Sponsor Entity decided not to fund the extension and did not deposit additional funds into the trust account. As a result, the SPAC was dissolved and liquidated in accordance with its charter. The SPAC redeemed 100% of the public shares for cash, the rights expired worthless, and the founder shares and the private placement securities have become worthless.
The fair value of the equity investment was $0 million as of September 30, 2022, and $11.0 million as of December 31, 2021.
As of September 30, 2022, we have recognized the impairment loss of $10,964 thousand included in Loss on equity investments in the accompanying Consolidated Statements of Operations.
Results of Operations
Comparison of the three months ended September 30, 2022, and 2021
The following discussion analyzes our results of operations for the three months ended September 30, 2022, and 2021.
| Revenue | Three Months Ended September 30, | |||||||
| 2022 | 2021 | |||||||
| PeriShip Global Solutions | $ | 5,036 | $ | - | ||||
| VerifyMe Solutions | 179 | 300 | ||||||
| Total Revenue | $ | 5,215 | $ | 300 | ||||
Consolidated revenue for the three months ended September 30, 2022, was $5,215 thousand compared to $300 thousand for the three months ended September 30, 2021. The increase in revenue primarily relates to the acquisition of the PeriShip business on April 22, 2022, which contributed $5,036 thousand for the three months ended September 30, 2022. VerifyMe Solutions Segment revenue decreased by $121 thousand to $179 thousand from $300 thousand, primarily due to fluctuating timing of orders.
| Gross Profit | Three Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | |||||||||||||||
| % of Revenue | % of Revenue | |||||||||||||||
| PeriShip Global Solutions | 1,722 | 34 | % | - | - | |||||||||||
| VerifyMe Solutions | 133 | 74 | % | 186 | 62 | % | ||||||||||
| Total Gross Profit | $ | 1,855 | 36 | % | $ | 186 | 62 | % | ||||||||
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Gross profit for the three months ended September 30, 2022, was $1,855 thousand, compared to $186 thousand for the three months ended September 30, 2021. The resulting gross margin was 36% for the three months ended September 30, 2022, compared to 62% for the three months ended September 30, 2021. The gross profit increase relates to the acquisition of the PeriShip business. The decrease in our gross margin is due to the acquisition of the PeriShip business which has significantly lower margins than the VerifyMe Solutions Segment. The increase in the VerifyMe Solutions gross margin was due to an increase in the use of our patented secure ink technology, which has higher margins.
General and Administrative Expenses
General and administrative expenses increased by $1,308 thousand to $2,213 thousand for the three months ended September 30, 2022. The increase related to the acquisition of the PeriShip business, and primarily made up of salaries and related expenses for approximately 35 employees in the IT and operations department.
Research and Development
Research and development expenses were $39 thousand and $8 thousand for the three months ended September 30, 2022, and 2021, respectively.
Sales and Marketing
Sales and marketing expenses increased $179 thousand to $478 thousand for the three months ended September 30, 2022. The increase is related to the acquisition of the PeriShip business, primarily consisting of salaries and related expenses for four employees.
Net Loss
Consolidated net loss for the three months ended September 30, 2022 was $557 thousand compared to a consolidated net income of $7,189 thousand for the nine months ended September 30, 2022. The decrease was primarily due to the unrealized gain on equity investment of $8,214 thousand in 2021, partially offset by a gain on extinguishment of debt of $326 thousand and the decreases discussed above. The resulting consolidated loss per diluted share for the three months ended September 30, 2022, was $0.06 compared to a consolidated earnings per diluted share of $0.95 for the three months ended September 30, 2021.
Comparison of the nine months ended September 30, 2022, and 2021
The following discussion analyzes our results of operations for the nine months ended September 30, 2022, and 2021.
| Revenue | Nine Months Ended September 30, |
|||||||
| 2022 | 2021 | |||||||
| PeriShip Global Solutions | $ | 9,267 | - | |||||
| VerifyMe Solutions | 606 | 612 | ||||||
| Total Revenue | $ | 9,873 | $ | 612 | ||||
Consolidated revenue for the nine months ended September 30, 2022, was $9,873 thousand compared to $612 thousand for the nine months ended September 30, 2021. The increase in revenue relates to the acquisition of the PeriShip business on April 22, 2022, which contributed $9,267 thousand for the nine months ended September 30, 2022. VerifyMe Solutions Segment decreased by $6 thousand from $612 thousand.
| Gross Profit | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | |||||||||||||||
| % of Revenue | % of Revenue | |||||||||||||||
| PeriShip Global Solutions | 3,231 | 35 | % | - | - | |||||||||||
| VerifyMe Solutions | 432 | 71 | % | 429 | 70 | % | ||||||||||
| Total Gross Profit | $ | 3,663 | 37 | % | $ | 429 | 70 | % | ||||||||
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Consolidated gross profit for the nine months ended September 30, 2022, was $3,663 thousand, compared to $429 thousand for the nine months ended September 30, 2021. The resulting gross margin was 37% for the nine months ended September 30, 2022, compared to 70% for the nine months ended September 30, 2021. The decrease in our gross margin is due to the acquisition of the PeriShip business which has significantly lower margins than the VerifyMe Solutions Segment.
General and Administrative Expenses
General and administrative expenses increased by $2,983 thousand to $6,213 thousand for the nine months ended September 30, 2022. The increase related to the acquisition of the PeriShip business, and primarily made up of salaries and related expenses for approximately 35 employees in the IT and operations department.
Research and Development
Research and development expenses were $73 thousand and $25 thousand for the nine months ended September 30, 2022, and 2021, respectively.
Sales and Marketing
Sales and marketing expenses increased $381 thousand to $1,224 thousand for the nine months ended September 30, 2022. The increase is related to the acquisition of the PeriShip business, primarily consisting of salaries and related expenses to four employees.
Net Loss/Income
Consolidated net loss for the nine months ended September 30, 2022 was $14,506 thousand compared to a consolidated net income of $4,616 thousand for the nine months ended September 30, 2022. The decrease was primarily due to the impairment of the SPAC of $10,964 thousand during 2022. The resulting consolidated loss per diluted share for the nine months ended September 30, 2022 was $1.76 compared to a consolidated gain per diluted share of $0.63 for the nine months ended September 30, 2021.
Liquidity and Capital Resources
Our operations used $2,668 thousand of cash during the nine months ended September 30, 2022, compared to $2,368 thousand during the comparable period in 2021. The increase in cash used from operations is due to a net decrease in working capital balances due to our significant acquisition that occurred during the nine months ended September 30, 2022.
Cash used in investing activities was $7,747 thousand during the nine months ended September 30, 2022, compared to $2,790 thousand during the nine months ended September 30, 2021. During the nine months ended September 30, 2022, $7,500 thousand was used for the acquisition of the PeriShip business. The use of cash in 2021 relates primarily to the acquisition of sponsor units in the SPAC of $2,593 thousand.
Cash provided by financing activities during the nine months ended September 30, 2022, was $4,687 thousand compared to $7,849 thousand during the nine months ended September 30, 2021 related to proceeds from debt and offerings of our common stock in 2022 and 2021.
On April 12, 2022, we entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with the selling stockholder and certain directors, providing for the issuance and sale to purchasers therein of an aggregate of 880,208 shares of our common stock, pre-funded warrants to purchase up to 675,000 shares of our common stock, and warrants to purchase up to 1,555,208 shares of our common stock, for gross proceeds to us of approximately $5.0 million and net proceeds of $4.6 million. The pre-funded warrant was exercisable immediately and terminated when fully exercised and had an exercise price of $0.001 per share. The pre-funded warrant was fully exercised in August 2022, with an exercise price of $0.001, and as a resulted, 675,000 shares of our common stock were issued. The warrants are exercisable for a period of five years commencing six months from the date of issuance and have an exercise price of $3.215 per share. The warrants contain price adjustment provisions which may, under certain circumstances, reduce the applicable exercise price. The transaction closed on April 14, 2022.
On September 22, 2022 we entered into the PNC Facility with PNC Bank, National Association. The PNC Facility includes a $1 million RLOC with a term of one-year, expiring in September 2023. The RLOC has no scheduled payments of principal until maturity, and bears interest per annum at a rate equal to the sum of Daily SOFR plus 2.85% with monthly interest payments. The PNC Facility also includes a four-year Term Note for $2 million which matures in September of 2026 and requires equal quarterly payments of principal and interest. The Term Note incurs interest per annum at a rate equal to the sum of Daily SOFR plus 3.1%. The RLOC and Term Note are guaranteed by the Company and secured by the assets of PeriShip and the Company.
Of the proceeds of $2.0 million, we used $1.8 million to settle debt outstanding issued in connection with the PeriShip acquisition, including the redemption of 61,000 shares of our common stock. As of September 30, 2022, our short-term debt outstanding under the Term Note was $0.5 million and total long-term debt outstanding under the Term Note was $1.5 million.
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We believe that our cash and cash equivalents, together with the net proceeds from the April 12, 2022 offering and proceeds from debt issued, will fund our operations through 2025.
In June 2022, we announced a new $1.5 million share repurchase program to repurchase shares of the Company’s common stock commencing July 1, 2022, for a period of 12 months. This new repurchase program replaces our existing share repurchase program that was due to expire in August 2022 and is now terminated. During the three months ended September 30, 2022, the Company repurchased 74,530 shares of common stock under the Company’s current program for a total of $109 thousand
and a remaining $1,390 thousand may be purchased under the program.
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 and may issue additional debt or equity.
Off-Balance Sheet Arrangements
None.
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.
Revenue Recognition
Our revenue transactions include sales of our ink canisters, software, licensing, pre-printed labels, integrated solutions, leasing of our equipment and logistics management for time and temperature sensitive packages. 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.
Business Combinations
Accounting for business combinations requires management to make significant estimates and assumptions to determine the fair values of assets acquired and liabilities assumed at the acquisition date. Although we believe the assumptions and estimates we have made in relation to the acquisition of the PeriShip business are appropriate, they are based, in part, on historical experience and information obtained from management of the acquired companies and are inherently uncertain. Critical estimates in valuing certain acquired intangible assets include, but are not limited to, future expected cash flows including revenue growth rate assumptions from product sales, customer contracts and acquired technologies, estimated royalty rates used in valuing technology related intangible assets, and discount rates. The discount rates used to discount expected future cash flows to present value are typically derived from a weighted-average cost of capital (“WACC”) analysis and adjusted to reflect inherent risks. Unanticipated events and circumstances may occur that could affect either the accuracy or validity of such assumptions, estimates or actual results.
We allocate the fair value of the purchase price of our acquisitions to the tangible assets acquired, liabilities assumed, and intangible assets acquired, based on their estimated fair values at acquisition date. The excess of the fair value of the purchase price over the fair values of these net tangible and intangible assets acquired is recorded as goodwill. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but our estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the measurement period, which will not exceed one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. After the conclusion of the measurement period or final determination of the fair value of the purchase price of our acquisitions, whichever comes first, any subsequent adjustments are recorded to our Consolidated Statements of Operations.
Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.
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Goodwill
We have recorded goodwill as part of our acquisition of the PeriShip business, which represents the excess of purchase price over the fair value of net assets acquired in the business combinations. Pursuant to ASC 350, the Company will test goodwill for impairment on an annual basis in the fourth quarter, or between annual tests, in certain circumstances. Under authoritative guidance, the Company first assessed qualitative factors to determine whether it was necessary to perform the quantitative goodwill impairment test. The assessment considers factors such as, but not limited to, macroeconomic conditions, data showing other companies in the industry and our share price. An entity is not required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. Events or changes in circumstances which could trigger an impairment review include macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, other entity specific events and sustained decrease in share price.
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 an 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.
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.
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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 nine months ended September 30, 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 September 30, 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 inherent 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 September 30, 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.
(c) PeriShip Acquisition
On April 22, 2022, we acquired, through PeriShip Global, the business and certain assets of PeriShip, LLC, a value-added service provider for time and temperature sensitive parcel management. For additional information regarding the acquisition, refer to Note 4 to the Unaudited Consolidated Financial Statements included in Item 1 in this Quarterly Report on Form 10-Q and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 2 in this Quarterly Report on Form 10-Q. Based on the recent completion of this acquisition and, pursuant to the Securities and Exchange Commission’s guidance that an assessment of a recently acquired business may be omitted from the scope of an assessment for a period not to exceed one year from the date of acquisition, the scope of our assessment of the effectiveness of internal control over financial reporting as of September 30, 2022 does not include PeriShip Global. We plan to include PeriShip Global within the timeframe set forth by the SEC’s guidance.
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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, and subsequent Quarterly Reports on Form 10-Q, except as noted herein.
Reductions in discretionary consumer spending could have an adverse effect on our business, financial condition, and results of operations.
The services and products we provide are sensitive to reductions from time to time in discretionary consumer spending. For example, demand for high-end perishable items and cannabis products, and subsequently the demand for shipping, brand protection, and other services related to such, can be affected by changes in the economy and consumer tastes, both of which are difficult to predict and beyond our control. Unfavorable changes in general economic conditions, including recessions, economic slowdowns, sustained high levels of unemployment, and rising prices or the perception by consumers of weak or weakening economic conditions, may reduce consumer’s disposable income or result in a decrease in demand for our services and products. As a result, we cannot ensure that demand for our services and products will materialize or remain constant. In early September, 2022, the major global carrier company that PeriShip partners with disclosed that a global recession could be coming based on various indicators in its business including the demand for packages weakening considerably in the final weeks of August 2022, a negative impact on its express delivery business due to the weakening global economy, particularly in Asia and Europe, and a decline in the volume of freight it handles in every region around the world. The major global carrier stated that it expects business conditions to further weaken during its current quarter and is responding by reducing flights, temporarily parking aircraft, trimming hours for its staff, delaying some hiring plans and closing ninety office locations as well as five corporate offices. It also stated it is cutting $500 million from its capital expenditure budget for its fiscal year, which runs through May of 2023.
We have seen a softening in demand for some services related to high-end perishable items and cannabis products which seem to be impacted by reduced discretionary spending by U.S. consumers. While a recession, whether global or more localized to the U.S., may decrease the demand for our services that are more discretionary in nature, we believe that the internal cost cutting measures, if implemented by the major global carrier may benefit out-sourced service providers, including PeriShip Global. Additionally, PeriShip Global is working with this major global carrier to address their small and medium sized business clients, which we believe is an underserved segment and presents considerable growth opportunities for PeriShip Global. However, we can provide no assurances that a decline in discretionary consumer spending will not have a negative impact on our revenues and results of operations. Adverse developments affecting economies throughout the world, including a general tightening of availability of credit, decreased liquidity in certain financial markets, increased interest rates, foreign exchange fluctuations, increased energy costs, acts of war or terrorism, transportation disruptions, natural disasters, declining consumer confidence, sustained high levels of unemployment or significant declines in stock markets, as well as concerns regarding pandemics, epidemics and the spread of contagious diseases, could lead to a further reduction in consumer discretionary spending and have an adverse effect on our business, financial condition, and results or operations.
Risks Related to our Debt
If we do not timely pay amounts due and comply with the covenants under our debt facilities, our business, financial condition and results of operations may be adversely impacted.
Our consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Term Note, among other things, requires high interest payments, and both the Term Note and the PNC Facility place encumbrances on our assets, and subject us to restrictive covenants that limit our operating flexibility. Additionally, under the terms of the Term Note, the Company is required to make monthly loan principal payments of $41,667 per month plus interest, through September 15, 2026.
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The terms of the Term Note and the PNC Facility have been structured in such a way that, if we default under one, we will also default under the other. In the event of a continuing default, our senior secured lenders would have the right to accelerate the then-outstanding amounts under each such facility and to exercise their respective rights and remedies to collect such amounts, which would include foreclosing on collateral constituting substantially all of our assets and the assets of our PeriShip Global subsidiary. Any continuing default on the Term Note or the PNC Facility could result in the outstanding principal balance under each such facility becoming immediately due and payable, which could harm our business, financial condition and results of operations and may have a material adverse impact on our business.
Our cash flows and operating results could be adversely affected by required payments of debt or related interest and other risks of our debt financing.
We are generally subject to risks associated with debt financing. These risks include: (1) our cash flow may not be sufficient to satisfy required payments of principal and interest; (2) we may not be able to refinance existing indebtedness or the terms of any refinancing may be less favorable to us than the terms of existing debt; (3) debt service obligations could reduce funds available for other uses such as growing our business; (4) any default on our indebtedness could result in acceleration of those obligations and possible loss of assets or capital; and (5) the risk that necessary capital expenditures cannot be financed on favorable terms. Any of these risks could place strains on our cash flows, reduce our ability to grow, and adversely affect our results of operations.
Covenants in our debt agreements may restrict our operating activities and adversely affect our financial condition.
Our existing debt agreements contain, and future debt agreements may contain, financial and/or operating covenants including, among other things, certain coverage ratios, as well as limitations on the ability to incur additional secured and unsecured debt, and/or otherwise affect our distribution and operating policies. These covenants may limit our operational flexibility and acquisition and disposition activities. Moreover, if any of the covenants in these debt agreements are breached and not cured within the applicable cure period, we could be required to repay the debt immediately, even in the absence of a payment default. A default under one of our debt agreements could result in a cross-default under other debt agreements, and our lenders could elect to declare outstanding amounts due and payable, terminate their commitments, require the posting of additional collateral, and enforce their respective interests against existing collateral. The terms of the Term Note and the PNC Facility have been structured in such a way that, if we default under one, we will also default under the other. In the event of a continuing default, our senior secured lenders would have the right to accelerate the then-outstanding amounts under each such facility and to exercise their respective rights and remedies to collect such amounts, which would include foreclosing on collateral constituting substantially all of our assets and the assets of our PeriShip Global subsidiary As a result, a default under applicable debt covenants could have an adverse effect on our financial condition or results of operations. These covenants may restrict our ability to engage in transactions that we believe would otherwise be in the best interests of our stockholders.
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)(2)(3) |
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(1)(2)(3) (In thousands) |
| 07/01/2022-07/31/2022 | - | - | - | $1,500 |
| 08/01/2022-08/31/2022 | 60,000 | $1.50 | 60,000 | $1,410 |
| 09/01/2022-09/30/2022 | 15,530 | $1.33 | 14,530 | $1,390 |
| Total | 74,530 | $1.46 | 74,530 | $1,390 |
| (1) | 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. Effective July 1, 2022, the Company’s Board of Directors terminated the existing share repurchase program and approved a new share repurchase program to replace the existing program due to expire in August 2022 to allow the Company to spend up to $1.5 million to repurchase shares of its common stock, so long as the price does not exceed $5.00 until July 1, 2023. During the three months ended September 30, 2022, the Company repurchased 74,530 shares of common stock under the Company’s current program. |
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| (2) | Excludes shares surrendered by employees to satisfy minimum tax withholding obligations on restricted stock awards which Vested in the second quarter of 2022. |
| (3) | Excludes 61,000 shares redeemed from the seller of the PeriShip acquisition as part of the settlement of outstanding debt outstanding in connection with the acquisition. |
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.
ITEM 6: EXHIBITS
*Filed or furnished herewith, as applicable
^ Certain portions of this exhibit have been omitted (indicated by asterisks) pursuant to Item 601(b) of Regulation S-K of the Securities Act of 1933, as amended, because such omitted information is (i) not material and (ii) would be competitively harmful if publicly disclosed.
# Denotes management compensation plan or contract
+ The schedule to this agreement has been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule will be furnished to the SEC upon request
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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: November 10, 2022 | By: /s/ Patrick White |
| Patrick White | |
|
Chief Executive Officer (Principal Executive Officer) | |
| Date: November 10, 2022 | By: /s/ Margaret Gezerlis |
| Margaret Gezerlis | |
|
Chief Financial Officer (Principal Financial Officer and Principal Accounting |
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