Business context and reporting period
VerifyMe, Inc. (Nasdaq: VRME; warrants: VRMEW) filed this unaudited Form 10-Q for the quarter ended March 31, 2022. The request metadata names Openworld, Inc., but the filing identifies VerifyMe, Inc. as the registrant. VerifyMe provides brand-protection, product-authentication, serialization, track-and-trace and consumer-engagement technologies.
Financial performance and position
Amounts below are in thousands of dollars, except per-share data and percentages.
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Revenue | $161 | $188; down 14% |
| Gross profit and margin | $123; 76% | $145; 77% |
| Operating expenses | $1,773 | $1,360 |
| Net loss | $(1,394); $(0.19) per share | $(1,215); $(0.19) per share |
| Cash used in operating activities | $(1,001) | $(904) |
| Cash and cash equivalents at period end | $8,433 | $15,351 at March 31, 2021 |
| Current assets / current liabilities | $9,054 / $609 | $10,011 / $450 at December 31, 2021 |
At March 31, 2022, total assets were $20,918, total liabilities were $735, and stockholders’ equity was $20,183. Liabilities included $609 of accounts payable and accrued expenses and a $126 long-term derivative liability; the balance sheet reports no conventional debt. Equity investments totaled $11,162, including the SPAC-related investment. The company reported a $252 fair-value gain on equity investments, comprising $198 related to the SPAC investment and $54 related to preferred stock.
Material changes versus the prior comparable period
- Revenue declined by $27, primarily because a $100 PPE-sector project did not recur, amid customer supply-chain issues and changing U.S. demand. New authentication and serialization customers partly offset the decline.
- Gross margin edged down one percentage point to 76%.
- Operating expenses rose $413. General and administrative expense increased $357, including higher salary and employee costs, PeriShip acquisition-related professional fees, and costs pursuing other strategic transactions. Sales and marketing expense increased $52.
- Net loss widened by $179 despite the $252 investment fair-value gain. Operating cash use increased $97.
- Financing cash flow was $36, compared with $8,447 in Q1 2021, when the company received proceeds from a public offering.
Outlook, commentary, risks and unusual items
- Management expects revenue to increase but also expects negative cash flows during 2022 as it expands. It anticipates funding operations primarily with existing resources and future revenue, while noting possible debt or additional equity to support acquisitions. No quantified revenue, earnings or cash-flow guidance is provided.
- On April 12, 2022, the company agreed to an equity and warrant financing expected to generate approximately $5.0 million gross and $4.6 million net. The securities include common shares, pre-funded warrants and warrants, creating potential dilution.
- On April 22, 2022, the company acquired substantially all assets and certain liabilities of PeriShip for $10.5 million: $7.5 million cash, a $2.0 million note bearing 6% interest, and $1.0 million in stock. The deal also includes a five-year office lease, with renewal options and annual rent increases. These are subsequent events, not reflected in the March 31 balance sheet.
- Customer concentration is high: two customers generated 94% of Q1 2022 revenue, and two customers accounted for 95% of accounts receivable at March 31. The filing does not identify those customers in the provided text.
- The SPAC-related investment is valued using Level 3 inputs and could lose value or become worthless if the SPAC fails to complete a business combination or the resulting business performs poorly.
- Management cited COVID-19-related disruption and customer sales-ramp timing delays as factors negatively affecting Q1 results; future effects remain uncertain. Other risks include commercialization, acquisition integration and funding needs.
- Disclosure controls and procedures were deemed ineffective due to a material weakness arising from insufficient segregation of duties in a limited-staffing accounting function. Management reported remediation efforts underway, including hiring, and expected remediation before year-end 2022; the weakness was not yet considered remediated.
- Two customers also represented 97% of Q1 2021 revenue. Share-based compensation included $429 of expense in Q1 2022, versus $438 in Q1 2021.
Important facts for investors to verify
- Reconcile the filing’s company identity with the Openworld, Inc. request metadata.
- Assess cash runway against continued operating cash burn, the PeriShip cash payment and debt installments, and post-quarter financing proceeds.
- Review PeriShip’s integration, performance, lease obligations and the acquisition’s effect on liquidity and dilution.
- Track customer concentration, recurring revenue growth and whether the lost PPE project is offset by new business.
- Examine the valuation assumptions and business-combination timeline for the SPAC investment.
- Monitor remediation and testing of the disclosed material weakness in financial-reporting controls.
- Reconcile share counts and potential dilution from the April financing, outstanding warrants, equity awards and subsequent stock issuances.