VerifyMe(VRME) - 2022 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION This section presents the company's financial statements and management's analysis of its financial condition and operational results Financial Statements The financial statements for Q3 2022 reflect the transformative PeriShip acquisition, showing asset shifts, increased liabilities, and a significant net loss due to an equity investment write-off Consolidated Balance Sheets The balance sheet highlights the impact of the PeriShip acquisition, including changes in assets, liabilities, and equity Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2022 (Unaudited) | Dec 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $3,694 | $9,422 | | Goodwill | $4,092 | $0 | | Intangible Assets, Net | $6,421 | $509 | | Equity Investment | $0 | $10,964 | | Total Assets | $17,422 | $21,688 | | Liabilities & Equity | | | | Total Current Liabilities | $2,322 | $450 | | Total Long-Term Liabilities | $1,887 | $71 | | Total Liabilities | $4,209 | $521 | | Total Stockholders' Equity | $13,213 | $21,167 | - The balance sheet reflects the acquisition of PeriShip, with the appearance of $4.1 million in Goodwill and a significant increase in Intangible Assets to $6.4 million. This was accompanied by a decrease in cash and the complete write-down of the $11.0 million equity investment[10] - Total liabilities increased significantly from $0.5 million to $4.2 million, primarily due to the incurrence of $2.0 million in debt to finance the PeriShip acquisition[10] Consolidated Statements of Operations The statement of operations shows substantial revenue growth from the PeriShip acquisition, offset by a significant loss on an equity investment Statement of Operations Summary (in thousands, except per share data) | Metric | Q3 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Revenue | $5,215 | $300 | $9,873 | $612 | | Gross Profit | $1,855 | $186 | $3,663 | $429 | | Total Operating Expenses | $2,730 | $1,212 | $7,510 | $4,098 | | Loss on equity investment | ($1) | - | ($10,959) | - | | Unrealized gain on equity investments | - | $8,214 | - | $8,214 | | Net (Loss) Income | ($557) | $7,189 | ($14,506) | $4,616 | | Diluted (Loss) EPS | ($0.06) | $0.95 | ($1.76) | $0.63 | - Revenue for the first nine months of 2022 grew over 16-fold year-over-year, driven by the PeriShip acquisition. However, a $10.96 million loss on an equity investment (SPAC) led to a significant net loss of $14.5 million, compared to a net income of $4.6 million in the prior-year period which included an $8.2 million unrealized gain on the same investment[15] Consolidated Statements of Cash Flows Cash flow analysis reveals significant cash usage for the PeriShip acquisition and details financing activities Cash Flow Summary for Nine Months Ended Sep 30 (in thousands) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | ($2,668) | ($2,368) | | Net cash used in investing activities | ($7,747) | ($2,790) | | Net cash provided by financing activities | $4,687 | $7,849 | | Net (Decrease) Increase in Cash | ($5,728) | $2,691 | | Cash at End of Period | $3,694 | $10,630 | - Investing activities were dominated by the $7.5 million cash payment for the acquisition of PeriShip. In 2021, the primary use of investing cash was a $2.6 million purchase of an equity investment[18] - Financing activities in 2022 provided $4.7 million, primarily from a $4.5 million public offering and $2.0 million in new debt, offset by a $1.7 million debt settlement. This is compared to $7.8 million provided in 2021, largely from an $8.4 million public offering[18] Notes to Consolidated Financial Statements Key notes detail the company's new segment structure, the PeriShip acquisition, the SPAC investment loss, and new debt facilities - The company's operations are now split into two reportable segments: PeriShip Global Solutions (logistics management for time/temperature sensitive parcels) and VerifyMe Solutions (brand protection and consumer engagement)[27][30] - On April 22, 2022, the company acquired PeriShip, LLC for a total purchase price of $10.5 million, consisting of $7.5 million in cash, a $2.0 million promissory note, and $1.0 million in stock. This acquisition is the primary driver of the company's revenue growth[61] - The investment in the G3 VRM Acquisition Corp. (SPAC) was dissolved in July 2022 after failing to complete a business combination. The company recognized a total loss of $10.96 million on this investment for the nine months ended September 30, 2022[54][55] - In September 2022, the company entered into a new debt facility with PNC Bank, including a $1 million revolving line of credit and a $2 million four-year term note, to refinance the seller's note from the PeriShip acquisition[122] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the PeriShip acquisition's impact on revenue and segments, the SPAC investment loss, and the company's liquidity outlook through 2025 amid economic uncertainties Overview This overview details the company's new segment structure, potential synergies, and acknowledges current economic challenges - The company now operates under two segments: PeriShip Global Solutions, a software-driven logistics provider for time and temperature-sensitive parcels, and VerifyMe Solutions, which provides brand protection and consumer engagement technologies[156] - Management highlights the synergistic potential between the two segments, such as adding VerifyMe's authentication and serialization technology to protect pharmaceutical shipments managed by PeriShip Global[168] - The company acknowledges a potential global recession and has observed softening demand for services related to high-end perishable items and cannabis products due to reduced discretionary spending[171][172] Results of Operations This section analyzes the drivers of revenue and gross profit changes, along with the primary causes of the consolidated net loss Revenue by Segment (in thousands) | Segment | Q3 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :--- | :--- | :--- | :--- | :--- | | PeriShip Global Solutions | $5,036 | $- | $9,267 | $- | | VerifyMe Solutions | $179 | $300 | $606 | $612 | | Total Revenue | $5,215 | $300 | $9,873 | $612 | Gross Profit by Segment (in thousands) | Segment | Q3 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :--- | :--- | :--- | :--- | :--- | | PeriShip Global Solutions | $1,722 | $- | $3,231 | $- | | VerifyMe Solutions | $133 | $186 | $432 | $429 | | Total Gross Profit | $1,855 | $186 | $3,663 | $429 | - The acquisition of PeriShip is the primary driver for the substantial increase in revenue and gross profit. However, the lower-margin profile of the PeriShip business caused the consolidated gross margin to decrease from 70% to 37% for the nine-month period[181][189] - General and administrative expenses for the nine months increased by nearly $3.0 million to $6.2 million, primarily due to salaries and related expenses for approximately 35 employees from the acquired PeriShip business[190] - The consolidated net loss of $14.5 million for the nine months of 2022 was primarily driven by the $11.0 million impairment of the SPAC investment[193] Liquidity and Capital Resources This section details cash flow activities, recent financing efforts, and management's outlook on funding future operations - Cash used in investing activities for the nine months was $7.7 million, almost entirely for the $7.5 million cash portion of the PeriShip acquisition[195] - In April 2022, the company raised net proceeds of $4.6 million through a securities purchase agreement, issuing common stock, pre-funded warrants, and warrants[197] - In September 2022, the company secured a new debt facility with PNC Bank, including a $1 million revolving line of credit and a $2 million term note, to refinance acquisition-related debt[198] - Management believes that current cash and cash equivalents, along with proceeds from recent financing, will be sufficient to fund operations through 2025[201] Quantitative and Qualitative Disclosures about Market Risk The company has indicated that this section is not applicable - Not Applicable[218] Controls and Procedures Management concluded that disclosure controls were ineffective as of September 30, 2022, due to a material weakness in segregation of duties, with remediation efforts underway - The CEO and CFO concluded that disclosure controls and procedures were ineffective as of September 30, 2022[219] - A material weakness exists due to a lack of segregation of duties from limited accounting staff. Remediation efforts are underway and expected to be complete by the end of fiscal year 2022[220] - The assessment of internal control over financial reporting as of September 30, 2022, excludes the recently acquired PeriShip Global, in accordance with SEC guidance[223] PART II - OTHER INFORMATION This section covers legal proceedings, updated risk factors, and details regarding unregistered sales of equity securities and share repurchases Legal Proceedings The company reported no legal proceedings during the period - None[226] Risk Factors Key risk factors include potential impacts from reduced consumer spending due to recession and the financial implications of new debt facilities and their covenants - A potential global recession and reduction in discretionary consumer spending could negatively impact demand for the company's services, especially for high-end perishable goods and cannabis products[227][228] - The company's new debt facilities (Term Note and PNC Facility) contain restrictive covenants. A breach of these covenants could lead to default, acceleration of debt repayment, and potential foreclosure on substantially all company assets[229][233] - Debt service obligations could strain cash flows and reduce funds available for business growth[232] Unregistered Sales of Equity Securities and Use of Proceeds The company details its new $1.5 million share repurchase program, including shares repurchased and remaining authorization in Q3 2022 Issuer Purchases of Equity Securities (Q3 2022) | Period | Total Shares Purchased | Average Price Paid per Share | Approx. Dollar Value Remaining (in thousands) | | :--- | :--- | :--- | :--- | | Jul 2022 | - | - | $1,500 | | Aug 2022 | 60,000 | $1.50 | $1,410 | | Sep 2022 | 14,530 | $1.33 | $1,390 | | Total | 74,530 | $1.46 | $1,390 | - Effective July 1, 2022, the Board of Directors approved a new share repurchase program for up to $1.5 million of common stock, expiring July 1, 2023[235]