Openworld, Inc. quarterly report, Q3 FY2022

VerifyMe, Inc. — Form 10-Q Summary

Reporting period: Quarter ended September 30, 2022; filed November 10, 2022. The filing identifies the registrant as VerifyMe, Inc. (Nasdaq: VRME, VRMEW), not Openworld, Inc. Figures below are in thousands of dollars except per-share data.

Business context

VerifyMe operates two segments: PeriShip Global Solutions, providing logistics management for time- and temperature-sensitive shipments, and VerifyMe Solutions, providing brand protection, authentication and consumer engagement technologies. The PeriShip business, acquired April 22, 2022, now accounts for most revenue.

Financial performance

Metric	Three months ended September 30	Nine months ended September 30
Revenue, 2022	$5,215	$9,873
Revenue, 2021	$300	$612
Gross profit, 2022	$1,855	$3,663
Gross margin, 2022 / 2021	36% / 62%	37% / 70%
Operating expenses, 2022	$2,730	$7,510
Net income (loss), 2022	$(557)	$(14,506)
Net income (loss), 2021	$7,189	$4,616
Basic and diluted earnings (loss) per share, 2022	$(0.06)	$(1.76)

PeriShip contributed $5,036 of third-quarter revenue and $9,267 for the nine-month period. VerifyMe Solutions revenue was $179 for the quarter and $606 year to date, compared with $300 and $612, respectively, in 2021. The lower consolidated margins reflect PeriShip’s lower-margin business mix; management attributed higher third-quarter VerifyMe Solutions margin to greater use of its patented secure-ink technology.

Third-quarter 2021 net income included an $8,214 unrealized gain on the SPAC investment. For the first nine months of 2022, the company recorded a $10,964 loss on that investment after the SPAC failed to complete a business combination and was liquidated. The 2022 third-quarter results also included a $326 gain on extinguishment of debt.

Cash flow, liquidity and debt

• Cash and cash equivalents were $3,694 at September 30, 2022, down from $9,422 at December 31, 2021. Current assets were $6,001 and current liabilities were $2,322.
• For the first nine months, operating cash outflow was $2,668, investing cash outflow was $7,747, and financing cash inflow was $4,687. Investing outflow included $7,500 paid for the PeriShip acquisition.
• Debt outstanding at quarter-end was $2,000 under the PNC term note: $500 current and $1,500 long term. The $1,000 revolving credit line was undrawn. The facilities are secured by company and PeriShip assets and guaranteed by VerifyMe.
• The PNC term note bears interest at Daily SOFR plus 3.1% and matures in September 2026; the revolving line bears Daily SOFR plus 2.85% and expires in September 2023. A fixed-charge coverage covenant applies; the company reported compliance at quarter-end.
• Management stated existing cash and proceeds from the 2022 offering and debt issuance were expected to fund operations through 2025, while also expecting continued negative cash flows in 2022 and potentially using additional debt or equity financing.

Material changes, outlook and risks

• The April 2022 PeriShip acquisition was valued at approximately $10.5 million, comprising $7.5 million cash, a $2.0 million seller note and approximately $1.0 million of stock. VerifyMe settled the seller note in September, repurchased 61,000 shares from the seller and recorded a $326 gain on extinguishment.
• The acquisition added $4,092 of goodwill and substantial identifiable intangible assets. Goodwill and acquired intangible-asset valuations involve estimates and are subject to impairment review or measurement-period adjustments.
• The co-sponsored SPAC was liquidated in July 2022; its founder shares and private-placement securities became worthless. The company said it might have to contribute to liquidation costs or could receive a distribution, depending on the final costs; no additional amount was recorded.
• Management cited softening demand for some high-end perishable and cannabis-related services amid reduced discretionary spending and warned that a recession could adversely affect demand. It also described potential growth opportunities serving the carrier partner’s small and medium-sized business customers.
• Revenue and operating results are subject to customer concentration: one customer represented 16% of third-quarter 2022 revenue, and one customer accounted for 23% of receivables at quarter-end. One vendor represented 99% of PeriShip transportation costs in both the quarter and nine-month period.
• A vendor asserted approximately $143 in fees; the company disputes the amount but considered a loss reasonably possible and recorded no expense. The SPAC liquidation-cost exposure is also unresolved.
• Disclosure controls and procedures were reported ineffective at September 30, 2022, due to a material weakness associated with insufficient segregation of duties and limited accounting staff. Management was taking remediation steps but said the weakness would not be considered remediated until controls operated effectively for a sufficient period and were tested. PeriShip was excluded from the internal-control assessment under the SEC’s recently acquired business guidance.
• Subsequent to quarter-end, the company entered into an interest-rate swap effective October 17, 2022, with a $1,958 notional amount that fixed the rate on outstanding debt at 7.602%. The filing provides no financial guidance ranges.

Important facts for investors to verify

• Confirm the registrant identity: the supplied filing is for VerifyMe, Inc., despite the request metadata naming Openworld, Inc.
• Review PeriShip’s contribution, integration and margins, and whether acquisition-related goodwill and intangible values remain supportable.
• Assess cash burn, the stated funding runway through 2025, debt-service capacity, floating-rate exposure and compliance with debt covenants.
• Monitor customer and transportation-vendor concentration, demand sensitivity to economic conditions, and the status of the disputed vendor fees and SPAC liquidation costs.
• Check whether management remediated the reported material weakness and whether PeriShip was subsequently included in the internal-control assessment.