Business context and reporting period
VerifyMe, Inc. (Nasdaq: VRME; warrants: VRMEW) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2021. The company provides brand-protection and supply-chain technologies, including product authentication, serialization, and track-and-trace solutions. Management reported limited revenue from these offerings. The filing describes a rebranding campaign launched in April 2021, including renaming RainbowSecure to VerifyInk.
Financial performance and position
Amounts below are in thousands of dollars, except per-share data, percentages, and share counts.
| Metric | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 |
|---|---|---|---|---|
| Revenue | $124 | $75 | $312 | $167 |
| Gross profit / margin | $98 / 79% | $62 / 83% | $243 / 78% | $137 / 82% |
| Operating expenses | $1,526 | $804 | $2,886 | $1,548 |
| Operating loss | $(1,428) | $(742) | $(2,643) | $(1,411) |
| Net loss | $(1,358) | $(2,653) | $(2,573) | $(3,745) |
| Loss per share, basic and diluted | $(0.18) | $(1.04) | $(0.37) | $(1.56) |
Revenue increased 65% for the quarter and 87% for the six-month period. Management attributed growth primarily to security printing and authentication/serialization technology, including a new personal protective equipment application. Gross margins declined year over year, which management attributed to product mix, including greater use of track-and-trace serialization.
Operating losses widened as the company increased sales and marketing, staffing, public-company costs, and stock-based compensation. Six-month stock-based compensation was approximately $1,007, compared with $688 in 2020. Net losses narrowed versus 2020 largely because the prior-year periods included substantial noncash debt-discount amortization and other debt-related charges; 2021 also included $70 of PPP loan forgiveness income.
For the six months, operating cash used was $1,668 (2020: $699); investing cash used was $3,125 (2020: $51), including a $2,713 SPAC-related deposit and $208 of reimbursable SPAC expenses; financing cash provided was $8,216 (2020: $10,092), including $8,447 net proceeds from the February 2021 stock offering. Cash and cash equivalents were $11,362 at June 30, 2021, versus $7,939 at December 31, 2020.
At June 30, 2021, total assets were $15,338, current assets $14,631, current liabilities $423, total liabilities $423, and stockholders’ equity $14,915. The $72 PPP term note outstanding at year-end was forgiven in part and the remaining $3 was repaid by June 30; no term note remained. Current assets included $2,952 due from related parties, principally SPAC-related funds and expenses.
Material changes and notable items
- Operating expenses increased substantially year over year, notably general and administrative and sales and marketing costs; six-month sales and marketing expense rose to $544 from $122.
- The February public offering generated $8,447 in net proceeds. The company repurchased 67,516 shares for $228 during the first half, with $1,273 remaining under the $1.5 million authorization at June 30. The program was subsequently extended through August 16, 2022.
- VerifyMe co-sponsored G3 VRM Acquisition Corp. The SPAC completed its IPO on July 6, 2021, after quarter-end. VerifyMe reported an indirect beneficial interest of approximately 9.42%; the investment is subject to forfeiture and transfer restrictions, and could become worthless if the SPAC fails to complete a successful business combination.
- Three customers represented 97% of second-quarter revenue and 84% of first-half revenue; two customers represented 94% of accounts receivable at June 30.
Outlook, risks, and controls
No formal revenue or earnings guidance was provided. Management expects revenue to increase but also expects continued negative cash flows as it expands the business. Management stated that cash and offering proceeds were expected to fund operations through 2025; this is an estimate, not a guarantee. The company expects to rely on existing resources, future revenue, and potentially debt or equity financing.
Management cited COVID-19 uncertainty, limited operating history and revenue, commercialization and market-acceptance challenges, intellectual-property risks, sales-capability and key-personnel risks, regulatory matters, and liquidity as factors that could affect results. Customers may cancel, delay, or reduce programs. The company also expected increased travel costs as in-person sales activity resumed.
Disclosure controls and procedures were deemed ineffective as of June 30, 2021 because of an inherent material weakness related to insufficient segregation of duties and limited accounting staff. The company hired a Corporate Financial Controller in May as part of remediation; management reported additional review procedures but had not stated that the weakness was fully remediated. No legal proceedings were reported.
Important facts for investors to verify
- Whether revenue growth translates into larger, recurring customer programs, given low revenue and substantial customer concentration.
- Whether spending growth and continued cash use remain consistent with management’s estimated funding runway through 2025.
- The terms, funding exposure, ownership, and potential forfeiture or valuation outcomes of the SPAC sponsorship investment.
- Progress in remediating the material weakness in internal controls and restoring effective disclosure controls.
- How share-based compensation, future equity issuance, and the extended repurchase program affect dilution and cash resources.