VerifyMe, Inc. — FY2021 Form 10-K
Entity and period: The supplied filing is for VerifyMe, Inc. (Nasdaq: VRME; warrants: VRMEW), not Openworld, Inc. It covers the fiscal year ended December 31, 2021; comparisons are to FY2020. The filing is an annual report, not a standalone fourth-quarter report.
Business context
VerifyMe is an early-commercialization technology company offering covert security inks, tamper-evident labels, authentication and serialization, supply-chain tracking, consumer engagement, and online brand monitoring. The company says it began commercializing its broader brand-protection solutions in 2021. Revenue remained concentrated among a small number of customers.
Financial performance and position
| Metric | FY2021 / Dec. 31, 2021 | FY2020 / Dec. 31, 2020 |
|---|---|---|
| Revenue | $867,000 | $343,000 |
| Gross profit / margin | $599,000 / 69.1% | $281,000 / 81.9% |
| Operating loss | $4.831 million | $3.568 million |
| Net income (loss) | $3.612 million | $(5.902) million |
| Diluted earnings (loss) per share | $0.49 | $(1.48) |
| Cash used in operating activities | $3.254 million | $2.281 million |
| Cash and cash equivalents | $9.422 million | $7.939 million |
| Current assets / current liabilities | $10.011 million / $450,000 | $8.201 million / $383,000 |
| Total liabilities | $521,000 | $455,000 |
Amounts are shown in U.S. dollars; financial statement amounts reported in thousands have been converted where applicable. The company reported no outstanding convertible debt at year-end; its $72,000 PPP note was forgiven in part and the remaining $3,000 was repaid. A $71,000 long-term derivative liability related to SPAC-linked director awards remained outstanding.
Changes versus FY2020
- Revenue rose 153%, primarily from increased security printing and authentication/serialization work for two global brand owners, PPE-related orders, and cannabis-industry customers.
- Gross margin fell to 69.1% from 81.9%, which management attributed to product mix, including more track-and-trace serialization and customer-engagement products.
- Operating expenses increased to $5.430 million from $3.849 million. Management cited higher stock-based compensation, staffing and executive compensation, sales and marketing, and strategic-partnership/M&A exploration costs.
- Reported net income swung from a loss to a profit chiefly because of an $8.371 million fair-value gain on the SPAC investment. The gain was non-operating; the company still recorded an operating loss and used cash in operations.
Liquidity, outlook, and notable items
- Financing activities provided $7.588 million in 2021, including $8.447 million of net proceeds from a February public offering; investing activities used $2.851 million, including $2.593 million invested in the SPAC. Cash increased by $1.483 million during the year.
- Management said existing cash and cash equivalents would fund operations through 2025, absent acquisitions. It also expected continued negative cash flows as it expanded the business and anticipated funding operations with current resources, future revenue, and potentially debt or equity. No specific revenue or earnings guidance was provided.
- The SPAC investment was carried at $10.964 million at year-end, compared with a $2.593 million cash investment reported in investing activities. Its fair value measurement used significant Level 3 inputs. The investment could lose substantial value or become worthless if the SPAC fails to complete a business combination or the resulting business performs poorly.
- COVID-19 disrupted sales activity, production, and customer negotiations; management warned that customers could delay, reduce, or cancel programs. It resumed limited in-person sales activity in September 2021 and expected travel costs to rise.
- Customer concentration remained high: five customers accounted for 95% of 2021 sales, and three accounted for 91% of year-end receivables. One vendor supplied all pigment and one vendor supplied all canisters in both years.
- Management concluded that disclosure controls and internal control over financial reporting were ineffective at year-end due to a material weakness in segregation of duties. The company had hired finance personnel and expected remediation before the end of FY2022, subject to successful testing over time. The auditor did not provide an internal-control attestation.
- Other disclosed risks include early-stage commercialization and ongoing losses, reliance on HP Indigo and strategic partners, competition, cannabis-industry legal and banking uncertainty, supply-chain constraints, cybersecurity and privacy exposure, potential shareholder dilution, and Nasdaq listing requirements. The filing reported no known pending or threatened legal proceedings expected to have a material effect.
Key facts for investors to verify
- Whether revenue growth converts into recurring, less-concentrated sales and whether gross margins stabilize as product mix changes.
- Whether the $8.371 million SPAC fair-value gain and $10.964 million year-end investment valuation remain supportable, and the SPAC’s business-combination timetable and outcome.
- Cash burn, the basis for management’s stated runway through 2025, and the potential need for additional financing or acquisitions.
- Progress in remediating the material weakness in segregation of duties and whether controls operate effectively for a sufficient period.
- Customer and supplier concentration, including exposure to the single pigment and canister suppliers and to cannabis-industry customers.
- Potential dilution from outstanding warrants, options, preferred stock, and restricted awards; the filing lists 3,779,243 warrants and 144,444 common shares issuable upon conversion of Series B preferred stock at year-end.