VerifyMe(VRME) - 2022 Q4 - Annual Report

PART I Item 1. Business VerifyMe operates through two segments: PeriShip Global Solutions, providing predictive analytics and logistics for time and temperature-sensitive parcels, and VerifyMe Solutions, offering brand protection, traceability, and consumer engagement technologies - The company's operations are divided into two main segments: PeriShip Global Solutions (high-touch logistics management) and VerifyMe Solutions (product traceability and brand protection), with the PeriShip segment currently generating the majority of the company's revenue[17] - In April 2022, the company acquired PeriShip, LLC for $10.5 million, consisting of cash, a promissory note, and stock, forming the basis of the PeriShip Global Solutions segment[48] - In March 2023, the company acquired the assets of Trust Codes Limited for approximately $1.0 million in cash and stock, enhancing the VerifyMe Solutions segment with expertise in the food and agriculture industry[18][47] - A significant portion of the company's business relies on strategic partnerships, including a major global carrier for PeriShip and HP Indigo and INX International for VerifyMe's ink technologies[36][37] - The company's investment in G3 VRM Acquisition Corp, a SPAC, resulted in a total impairment loss of $10.9 million in 2022 after the SPAC failed to complete a business combination and was liquidated[50][51] Item 1A. Risk Factors The company identifies significant risks, including its heavy dependence on a single strategic partner for shipping services and a substantial portion of revenue, along with integration challenges from recent acquisitions - The company is highly dependent on its relationship with one major global carrier for all of its customers' shipping needs and for a significant portion of its revenue through a "white label" arrangement, which accounted for approximately 13% of PeriShip Global Solutions revenue in 2022[78][80] - The company's key strategic partner has announced the development of an in-house logistics service that may ultimately compete with the company's offerings, potentially increasing costs or reducing customer referrals[81] - The business is subject to risks from economic downturns, as many clients ship luxury or discretionary products, with a major carrier partner already noting weakening demand, signaling a potential global recession[88][90] - The company has significant goodwill and intangible assets from the PeriShip acquisition, which are subject to impairment risk if negative economic trends or increased competition arise[87] - The company's ability to use its Net Operating Losses (NOLs) is limited due to an "ownership change" under IRC Section 382, resulting in $23.1 million in Federal NOLs expiring unutilized in 2022[96] - Approximately 5% of revenues are derived from clients in the cannabis industry, exposing the company to risks associated with federal illegality, banking regulations, and potential changes in state laws[128][129][131] Item 1B. Unresolved Staff Comments The company reports that it has no unresolved staff comments Item 2. Properties The company does not own significant real property, with its primary leased office space in Connecticut for the PeriShip Solutions segment expiring in 2027 - The company's primary property is a leased 5,000 sq. ft. office in Connecticut for its PeriShip segment, under a lease agreement that expires in 2027[150] Item 3. Legal Proceedings As of the report date, the company is not aware of any pending or threatened legal proceedings that would have a material effect on its business or financial position Item 4. Mine Safety Disclosures This item is not applicable to the company PART II Item 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities The company's common stock and warrants are traded on The Nasdaq Capital Market, and a new $1.5 million share repurchase program was approved in July 2022 - The company's common stock and warrants trade on The Nasdaq Capital Market under the symbols "VRME" and "VRMEW," respectively[155] - A new share repurchase program of up to $1.5 million was approved, effective July 1, 2022, to run for 12 months[160][195] Share Repurchase Activity (Q4 2022) | Period | Total Shares Purchased | Average Price Paid | Value Remaining | | :--- | :--- | :--- | :--- | | Oct 2022 | - | - | $1.39M | | Nov 2022 | 28,201 | $1.36 | $1.35M | | Dec 2022 | 56,175 | $1.21 | $1.29M | | Total Q4 | 84,376 | $1.26 | $1.29M | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations For the year ended December 31, 2022, revenue surged to $19.6 million, a 2,158% increase from 2021, driven by the PeriShip acquisition, but the company reported a net loss of $14.4 million primarily due to a $10.9 million impairment loss on its SPAC investment Revenue by Segment (FY 2022 vs FY 2021) | Segment | 2022 Revenue (in thousands) | 2021 Revenue (in thousands) | Change | | :--- | :--- | :--- | :--- | | PeriShip Global Solutions | $18,190 | $- | N/A | | VerifyMe Solutions | $1,386 | $867 | +60% | | Total Revenue | $19,576 | $867 | +2,158% | Profitability Analysis (FY 2022 vs FY 2021) | Metric | 2022 (in thousands) | 2021 (in thousands) | Key Driver of Change | | :--- | :--- | :--- | :--- | | Gross Profit | $6,488 | $599 | PeriShip acquisition | | Gross Margin | 33% | 69% | Mix shift to lower-margin logistics | | G&A Expenses | $8,428 | $4,216 | PeriShip acquisition costs | | Net (Loss)/Income | $(14,398) | $3,612 | $10.9M SPAC impairment loss | | Diluted (LPS)/EPS | $(1.70) | $0.49 | Net loss driven by SPAC impairment | - The significant decrease in net income was primarily due to a $10.9 million impairment loss on the SPAC investment in 2022, contrasting with an $8.4 million unrealized gain on the same investment in 2021[184] - 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 four-year term note, to improve liquidity[190] - Cash used in investing activities was $7.9 million, primarily for the $7.5 million cash portion of the PeriShip acquisition, while net cash from financing was $4.4 million from debt and stock offerings[186][188] Item 7A. Quantitative and Qualitative Disclosures About Market Risk This item is not applicable as the company is a smaller reporting company Item 8. Financial Statements and Supplementary Data This section incorporates by reference the company's audited consolidated financial statements, which begin on page F-1 of the report Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure Item 9A. Controls and Procedures Management concluded that the company's disclosure controls and procedures, as well as its internal control over financial reporting, were effective as of December 31, 2022, with a previously identified material weakness remediated - Management concluded that both disclosure controls and internal controls over financial reporting were effective as of December 31, 2022[212][214] - A material weakness from 2021 regarding a lack of segregation of duties was successfully remediated in 2022 through hiring a VP of Finance, Financial Controller, and HR Manager[215] - The scope of the internal control assessment for 2022 does not include the PeriShip Global business, which was acquired on April 22, 2022, as permitted by SEC guidance for recently acquired businesses[216] Item 9B. Other Information The company reports no other information PART III Item 10. Directors, Executive Officers and Corporate Governance The information required for this item is incorporated by reference from the company's definitive proxy statement for its 2023 annual meeting of stockholders Item 11. Executive Compensation The information required for this item is incorporated by reference from the company's definitive proxy statement for its 2023 annual meeting of stockholders Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section provides information on securities authorized for issuance under equity compensation plans as of December 31, 2022, with other required information incorporated by reference from the 2023 proxy statement Equity Compensation Plan Information as of December 31, 2022 | Plan Category | Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Securities Remaining for Future Issuance | | :--- | :--- | :--- | :--- | | Approved by security holders | 157,000 | $5.68 | 1,292,225 | | Not approved by security holders | 180,471 | $4.19 | - | | Total | 337,471 | $4.63 | 1,292,225 | Item 13. Certain Relationships and Related Transactions, and Director Independence The information required for this item is incorporated by reference from the company's definitive proxy statement for its 2023 annual meeting of stockholders Item 14. Principal Accountant Fees and Services The information required for this item is incorporated by reference from the company's definitive proxy statement for its 2023 annual meeting of stockholders PART IV Item 15. Exhibits and Financial Statement Schedules This section lists all exhibits filed with the Form 10-K, including corporate governance documents, material contracts, employment agreements, equity incentive plans, and certifications Item 16. Form 10-K Summary This item is not applicable Financial Statements and Supplementary Data Consolidated Financial Statements The consolidated financial statements for the year ended December 31, 2022, reflect a significant transformation following the PeriShip acquisition, with total assets at $20.8 million and a net loss of $14.4 million primarily driven by a SPAC investment impairment Consolidated Balance Sheet Highlights (As of Dec 31) | Account (in thousands) | 2022 | 2021 | Change Driver | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $3,411 | $9,422 | PeriShip acquisition, operations | | Equity Investment | $0 | $10,964 | SPAC liquidation/impairment | | Goodwill | $3,988 | $0 | PeriShip acquisition | | Intangible Assets, net | $6,412 | $509 | PeriShip acquisition | | Total Assets | $20,752 | $21,688 | - | | Total Liabilities | $7,166 | $521 | Acquisition debt & payables | | Stockholders' Equity | $13,586 | $21,167 | Net loss, share issuance | Consolidated Statement of Operations (Year Ended Dec 31) | Account (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Net Revenue | $19,576 | $867 | | Gross Profit | $6,488 | $599 | | Loss Before Other Income | $(3,747) | $(4,831) | | Loss on equity investment | $(10,932) | $0 | | Unrealized gain on equity investment | $12 | $8,371 | | Net (Loss)/Income | $(14,398) | $3,612 | Consolidated Statement of Cash Flows (Year Ended Dec 31) | Activity (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(2,551) | $(3,254) | | Net cash used in investing activities | $(7,884) | $(2,851) | | Net cash provided by financing activities | $4,424 | $7,588 | | Net (Decrease)/Increase in Cash | $(6,011) | $1,483 | Notes to Consolidated Financial Statements The notes provide detailed explanations of the company's accounting policies and financial results, including business combinations, segment reporting, customer concentration, and subsequent events - The acquisition of PeriShip on April 22, 2022, had a total purchase price of $10.5 million, allocated to various assets including $3.1 million in developed technology, $1.8 million in customer relationships, and $4.0 million in goodwill[324][327] - The company has significant customer and vendor concentration, with one customer representing 13% of total revenues in 2022 and one vendor accounting for 99% of transportation costs in the PeriShip Global Solutions segment[418][419] Segment Results (FY 2022) | Segment (in thousands) | Revenue | Gross Profit | | :--- | :--- | :--- | | PeriShip Global Solutions | $18,190 | $5,505 | | VerifyMe Solutions | $1,386 | $983 | | Total | $19,576 | $6,488 | - Subsequent to year-end, on March 1, 2023, the company acquired the assets of Trust Codes Limited for approximately $1 million in cash and stock, plus potential earnouts[428][429] - On March 15, 2023, CEO Patrick White resigned and was replaced by Executive Chairman Scott Greenberg as Interim CEO[435]