VerifyMe, Inc. — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2021. The filing identifies the issuer as VerifyMe, Inc. (Nasdaq: VRME; warrants: VRMEW), not Openworld, Inc. Financial statement amounts below are in thousands of dollars except per-share data.
Business context and financial performance
VerifyMe provides brand protection, product authentication, serialization and track-and-trace, and consumer engagement technologies. Its revenues primarily come from printing labels and authentication and customer engagement technology.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $300 | $101 | $612 | $268 |
| Gross profit / margin | $186 / 62% | $82 / 81% | $429 / 70% | $219 / 81% |
| Operating expenses | $1,211 | $1,065 | $4,097 | $2,613 |
| Operating loss | $(1,025) | $(983) | $(3,668) | $(2,394) |
| Net income (loss) | $7,189 | $(983) | $4,616 | $(4,728) |
| Diluted earnings (loss) per share | $0.95 | $(0.18) | $0.63 | $(1.38) |
Revenue increased 197% in Q3 and 128% for the nine-month period. Management attributed growth to recurring security-printing and authentication customers, as well as new orders, including from a cannabis customer. Gross margins declined as the product mix shifted toward track-and-trace serialization and customer engagement products. Operating losses widened as the company increased compensation, sales and marketing, stock-based compensation, and public-company and strategic-partnership costs.
Reported net income includes an $8,214 noncash fair-value gain on the company’s SPAC-related equity investment. Excluding that gain, the filing reports an operating loss of $1,025 in Q3 and $3,668 for the nine months; it does not present a separate adjusted net income measure.
Cash, liquidity, debt and capital
- Cash and cash equivalents were $10,630 at September 30, 2021, up from $7,939 at December 31, 2020. Current assets were $11,108 and current liabilities $434.
- Operating cash use was $2,368 for the first nine months, versus $1,294 in the prior-year period. Investing cash use was $2,790, including $2,593 invested in the SPAC-related sponsor entity. Financing provided $7,849, principally from the February 2021 public offering.
- Total liabilities were $443, including $434 current liabilities and $9 of other long-term liabilities. The $72 PPP loan outstanding at year-end 2020 was largely forgiven; the remaining $3 was repaid in June 2021. No term note remained at quarter-end.
- Stockholders’ equity was $22,157. The company repurchased 137,352 shares for $464 during the nine months and extended its $1.5 million repurchase program through August 16, 2022.
- Management said cash and offering proceeds were expected to fund operations through 2025, while also anticipating continued negative cash flows as the business expands. This is management’s estimate, not a guarantee.
Material changes, outlook and risks
- The SPAC-related investment was carried at fair value of $10,806 at September 30, 2021. VerifyMe owns a 44.4% interest in the sponsor entity and reported an $8,214 fair-value gain. The investment is Level 3 and depends on valuation adjustments; founder shares and private-placement securities could become worthless if the SPAC fails to complete a business combination within its allotted period or the resulting business performs poorly.
- There is no specific revenue or earnings forecast in the provided filing text. Management expects revenue to increase, continued negative cash flows during expansion, and to fund operations through existing resources, future revenue, or potential debt or equity issuance. It also plans organic growth and acquisitions.
- Key risks include limited revenue and commercialization history, customer and market adoption, intellectual-property protection, liquidity, COVID-19 effects, and global supply-chain disruptions. The company also identified risks related to cannabis-industry customers, including federal law, banking access, changing state rules, licensing and insurance.
- Customer concentration is high: four customers represented 97% of Q3 revenue and five represented 95% of nine-month revenue; four customers represented 90% of accounts receivable at quarter-end.
- Disclosure controls and procedures were deemed ineffective as of September 30, 2021 because of an inherent material weakness from limited accounting staff and lack of segregation of duties. The company said it hired a Vice President of Finance and Corporate Financial Controller and was undertaking remediation.
- The company reported no legal proceedings. It noted that COVID-19 may continue to delay or reduce customer programs and described increased sales activity, an expanded sales team, a new website, and initial social-media advertising.
Important facts for investors to verify
- Confirm the issuer identity: this filing is for VerifyMe, Inc., notwithstanding the request metadata naming Openworld, Inc.
- Assess recurring revenue, customer retention and concentration, and whether revenue growth can offset rising operating expenses and cash use.
- Review the SPAC investment’s valuation assumptions, forfeiture conditions, business-combination deadline and potential need for extensions.
- Track cash burn, actual progress toward management’s stated funding horizon, and any need for additional financing.
- Monitor remediation of the disclosed material weakness and whether disclosure controls become effective.
- Evaluate potential dilution from equity awards, the stock purchase plan, and 3,779,243 outstanding warrants reported at September 30, 2021.