VerifyMe, Inc. — FY2022 Form 10-K
Entity and period: The supplied filing is for VerifyMe, Inc. (Nasdaq: VRME; warrants: VRMEW), not Openworld, Inc. It reports the fiscal year ended December 31, 2022; the filing does not provide standalone fourth-quarter results. Financial amounts below are in U.S. dollars and, unless stated otherwise, millions.
Business context
VerifyMe operates two segments: PeriShip Global Solutions, providing predictive, high-touch logistics management for time- and temperature-sensitive shipments, and VerifyMe Solutions, providing product authentication, traceability, brand protection and consumer engagement technologies. PeriShip was acquired on April 22, 2022, so its results are included from that date. More than 90% of 2022 revenue came from logistics management.
Financial performance and position
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $19.576 | $0.867 |
| Gross profit / margin | $6.488 / 33% | $0.599 / 69% |
| Operating expenses | $10.235 | $5.430 |
| Loss before other income (expense) | $(3.747) | $(4.831) |
| Net income (loss) | $(14.398) | $3.612 |
| Diluted earnings (loss) per share | $(1.70) | $0.49 |
| Cash used in operating activities | $(2.551) | $(3.254) |
| Cash used in investing activities | $(7.884) | $(2.851) |
| Cash provided by financing activities | $4.424 | $7.588 |
- Revenue rose 2,158%, principally because PeriShip contributed $18.190 million. VerifyMe Solutions revenue increased 60% to $1.386 million, which the company attributed mainly to agriculture-related growth.
- PeriShip generated $5.505 million gross profit at a 30% margin; VerifyMe Solutions generated $0.983 million at a 71% margin. The acquired logistics business lowered consolidated gross margin.
- Net loss included a $10.932 million loss on the SPAC investment, which was liquidated after failing to complete a business combination. FY2021 included an $8.371 million unrealized gain on that investment. FY2022 also included a $0.326 million gain on extinguishment of debt.
- At year-end, cash and cash equivalents, including $0.063 million restricted, were $3.411 million, versus $9.422 million a year earlier. Current assets were $9.458 million and current liabilities $5.429 million. Total assets were $20.752 million; total liabilities were $7.166 million.
- Debt included $0.500 million current and $1.375 million long-term under the PNC term note; no amount was drawn on the $1.0 million revolving line of credit. The term note and line are secured by company and PeriShip assets and guaranteed by VerifyMe. A swap effectively fixed the rate on outstanding debt at 7.602%. The company reported covenant compliance at year-end.
Changes, outlook and management commentary
- The April 2022 PeriShip acquisition had a purchase price of approximately $10.5 million: $7.5 million cash, a $2.0 million seller note and approximately $1.0 million in stock. The seller note was repaid under a September agreement; the company recorded a $0.326 million extinguishment gain.
- Management said cash, offering proceeds and debt proceeds were expected to fund operations for the next 12 months. It expects to pursue organic growth and acquisitions, funded primarily through existing resources and future revenue, with possible additional debt or equity. No specific revenue or earnings guidance was provided.
- Management reported weaker demand for some higher-end perishable shipping services amid reduced discretionary spending. It saw potential opportunity if carriers outsource logistics functions, while cautioning that weaker consumer demand could hurt revenue and results.
- On March 1, 2023, after the reporting period, the company acquired substantially all assets of Trust Codes Limited for approximately $1.0 million, comprising $0.350 million cash and $0.650 million in restricted shares, plus contingent earnouts. Its results are expected to be included from March 1, 2023.
- The filing identifies substantial dependence on one carrier partner: that partner accounted for 99% of PeriShip transportation costs in 2022, and its white-label service represented approximately 13% of PeriShip segment revenue. The partner is developing a potentially competing logistics solution.
- Other material risks include continuing operating losses and cash use, debt-service and covenant/default exposure, customer concentration, seasonality, economic and shipping disruptions, competition, technology and cybersecurity dependence, acquisition integration and impairment risk, and potential share dilution. The company also disclosed that a Section 382 ownership change limits use of tax attributes; $23.1 million of federal NOLs were expected to expire unused, leaving $24.4 million federal and $13.1 million state NOL carryforwards subject to applicable limits.
- The financial statement auditor issued an unqualified opinion and reported no critical audit matters. Management concluded disclosure controls and internal control over financial reporting were effective at December 31, 2022; the assessment excluded the recently acquired PeriShip business, and the auditor did not attest to internal control effectiveness.
Most important facts for investors to verify
- Whether PeriShip’s revenue, gross margin and cash generation persist, particularly as the acquisition was included for only part of 2022.
- Current cash, debt maturities, interest costs, revolving-credit availability and compliance with the PNC fixed-charge coverage covenant; the filing’s liquidity statement was management’s expectation, not a guarantee.
- Continuity and terms of the carrier relationship, exposure to its potential competing product, and whether alternative shipping providers can be established.
- Integration costs and performance of the Trust Codes acquisition, including cash and share earnouts and any further equity issuance.
- The extent of potential dilution: at year-end, 5.103 million warrants, 337,471 options, 144,444 common shares issuable on preferred stock conversion and 846,000 restricted stock units were disclosed in the filing, subject to their respective terms.
- Whether the $10.932 million SPAC impairment, acquisition accounting estimates, goodwill and acquired intangible assets result in further material charges.