VERIFYME, INC. The information in this Management's Discussion and Analysis should be read in conjunction with the accompanying unaudited financial statements and notes.
Cautionary Note Regarding Forward-Looking Statements
This report includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the Private Securities Litigation Reform Act of 1995. The words "believe," "may," "estimate," "continue," "anticipate," "intend," "should," "plan," "could," "target," "potential," "is likely," "will," "expect" and similar expressions are intended to identify forward-looking statements. All statements other than statements of historical facts contained in this report, including among others, our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements.
Our actual results and financial condition may differ materially from those express or implied in such forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:
· the ongoing coronavirus ("COVID-19") pandemic;
· our relatively new business model and lack of significant revenues;
· our ability to prosecute, maintain or enforce our intellectual property rights;
· disputes or other developments relating to proprietary rights and claims of
infringement;
· the accuracy of our estimates regarding expenses, future revenues and capital
requirements;
· the implementation of our business model and strategic plans for our business
and technology;
· the successful development of our sales and marketing capabilities;
· the potential markets for our products and our ability to serve those markets;
· the rate and degree of market acceptance of our products and any future
products;
· our ability to retain key management personnel;
· regulatory developments and our compliance with applicable laws; and
· our liquidity.
For a further list and description of various risks, relevant factors and
uncertainties that could cause future results or events to differ materially
from those expressed or implied in our forward-looking statements, see the "Risk
Factors" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" sections in this report, our Annual Report on Form 10-K
for the fiscal year ended
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Our brand protection technologies involve the utilization of invisible and visible images, which are special composition inks comprised of a rare earth material that are compatible and printed with modern digital and standard printing presses. The visible inks may be used with certain printing systems such as digital, offset, flexographic, silkscreen, gravure, inkjet and toner-based laser printers. The inks can be used to print both static and variable images utilizing digital printing presses and third-party digital inkjet systems that can be attached to traditional printing presses and finishing equipment. Our invisible ink can be used to print fixed images, variable images, serialized codes, static and dynamic bar codes and QR codes. We have developed and patented a product that attaches to a smartphone that brand inspectors can use to read our invisible ink codes into sophisticated cloud-based track and trace software that contain our patented verification technology along with algorithms which analyze the label, package or product's authenticity and diversion activity. We also have a product that informs users that our invisible ink is present for authentication.
· VerifyMe Engage™ for consumer engagement
· VerifyMe Authenticate™ for product authentication
· VerifyMe Track & Trace™ for product supply chain control
· VerifyMe Online™ for on-line (web) brand monitoring
VerifyMe Engage™services provide the ability for the brand owner to gather business intelligence and engage with the consumer using our authentication test as the initial contact with the consumer. For example, consumers can simply use their smart phone camera to scan our visible unique codes and/or RFID/NFC chips printed on products, labels and packages. Once the consumer scans the code, an instant authenticity check is made using algorithms stored in the cloud to determine the products authenticity on multiple factors. This allows brands to understand where their products are being scanned, whether they are legitimate, and form an immediate bridge for communication with the consumer. After this test is completed, the brand owner can then engage with the consumer and can offer a gift or future discounts to the consumer in exchange for their personal information as well as providing marketing materials, videos, discount coupons, product specifications, contest entries or cross sell other products through the consumer engagement software. This service allows to the brand owner to gather real-time information on their customer base,. To date, we have derived limited revenue from VerifyMe Engage customers in the cannabis industry.
VerifyMe Authenticate™ services provide an assortment of tools through our
patented products allowing the brand owner to instantly authenticate a product,
label or package as genuine and / or determine if a product has been
fraudulently diverted and where such diversion occurred in the supply chain.
Brand owners can use our cloud-based web portal to easily order many types of
serialization codes for their products, labels and packages. Once the codes are
applied to their products, brand owners can then monitor, control and protect
their products during the products complete life cycle through the supply chain.
Our customers use our patented invisible ink, VerifyInkTM which is combined with
a proprietary reader to easily identify counterfeit products. Product
investigators may then use our patented VerifyAuthenticatorTMtechnology, a
device used with a smartphone and the
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VerifyMe Track & Trace™ supply chain serialization, track and trace technology utilizes overt dynamic codes (QR codes or other barcode symbology), such as our VerifyCode™, which is tied to our cloud-based authentication and track and trace system. This technology provides brand owners business intelligence on counterfeiting and diversion through the use of distribution channel scans through the supply chain coupled with consumer scan data all tied to a back end system that allows brands to customize rules and parameters and sophisticated alert systems allowing brands to be proactive, rather than reactive, in thwarting illicit activity. Invisible codes can be added using VerifyInkTMto increase brand protection security and provide inspectors a means to authenticate counterfeit or diverted product if the visible codes have been defaced or removed. Using information from a smartphone screen, our VerifyCodeTM technology, can provide authentication and data submission information. A customer or end-user can scan codes printed on labels and packaging and send it to the cloud where our software can verify authenticity of the product, as well as track and trace the product from production through delivery. To date, we have derived limited revenues from the use of this technology in the personal protective equipment industry and in the cannabis industry. While we consider revenues limited to date, we expect recurring orders from our current customer base as well as an expansion into other industries.
VerifyMe® Online™ includes, through our collaboration with a strategic partner, a brand clearance and protection leader, technologies and services that better enable customers to effectively tackle counterfeit websites, domains and e-commerce platforms, and social media sites offering or promoting counterfeit products. To date, we have not derived revenue from this technology.
We believe that our brand protection security technologies, coupled with our contract with HP Indigo, can be used to enable brand owners to securely prevent counterfeiting, prevent product diversion and authenticate labels, packaging and products and alleviate the brand owner's liability from counterfeit products that physically harm consumers. Our covert technologies give brand owners the ability to control, monitor and protect their products life cycle. In cases where the brand owner may be subject to liability brought forth by counterfeit products, our tools allow the brand owner to prove whether the product causing an issue is authentic or counterfeit. Combined with our customer engagement product lines, we offer a unique and comprehensive brand protection and promotion solution that can be tailored to any brand's specifications.
At present, our strategic partner, HP Indigo has the ability, with their Indigo
6000 series, to print our technology on a variable basis. HP Indigo has produced
flexible packaging pouch samples, shrink sleeves samples, and tax stamp samples
with our covert VerifyInkTM. In
To optimize our security for our customers, we are seeking to migrate our brand protection platform from a current centralized cloud-based data architecture to a blockchain (fractured data) architecture. We are exploring opportunities to gain the skillsets needed either through mergers and acquisitions or through strategic partnerships with blockchain specialists that will help us create this product.
COVID-19
The COVID-19 pandemic disrupted businesses and affected production and sales
across a range of industries, as well as caused volatility in the financial
markets, which negatively impacted our results of operations for the first nine
months of 2021. The full extent of the impact of the COVID-19 pandemic on our
customer demand, sales and financial performance will depend on certain
developments, including, among other things, the continued duration and spread
of the outbreak, the effectiveness of vaccines against new variants, the
availability of vaccines and vaccination rates, and the impact on our customers
and employees, all of which are uncertain and cannot be predicted. Please see
Item 1A, "Risk Factors- Risks Relating to the COVID-19 Pandemic" in our Annual
Report on Form 10-K for the fiscal year ended
The COVID-19 pandemic has caused an increase in demand for safety products such as masks and gloves, COVID-19 test kits, medications and vaccines to treat the virus, which we believe has further caused an increase in counterfeit products. Our suite of technology solutions for global manufacturers, distributors and sellers are designed to allow consumers to prove authenticity and we have proactively reached out to global manufacturers who are seeking to provide their customers authenticity in their products. We believe we have a dynamic management and sales team in place with the ability to seamlessly work remotely to minimize any operational disruption.
After an approximately one-year COVD-19 related hiatus we have recently begun
attending sales conferences and other in-person sales initiatives. Although we
have been attending in-person sales events, such events are not at full capacity
due to the ongoing pandemic. Since we have recently begun face to face sales
presentations and trade shows we are experiencing a small increase in travel
related costs versus the previous 12 months. We expect these travel related
costs to grow which should be offset by increased sales activity.
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Further, we anticipate that as a result of the continued COVID-19 pandemic, our customers may still require that their programs be cancelled, delayed or reduced. We will continue to work in partnership with our customers to continually assess any potential impacts and opportunities to mitigate risk.
SPAC Investment
On
If the SPAC is unable to complete its initial business combination within 12 months from the closing of the IPO (or 15 or 18 months from the closing of the IPO, should we and the co-sponsor extend the period of time to consummate a business combination by depositing additional funds into the trust account as described in more detail in IPO prospectus), our founder shares and private placement securities will be worthless. Even if the SPAC is able to complete a business combination within the allotted time, if the combined company is unable to maintain adequate results from operations, then our investment in the SPAC could lose value and may ultimately become worthless. There can be no assurance that the SPAC will complete a business combination within the allotted time or that any such business combination will be successful.
As of
We believe our sponsorship of the SPAC will allow us to pursue an equity interest in larger companies and add value without diluting the equity interests of our shareholders.
Results of Operations
Comparison of the three months ended
The following discussion analyzes our results of operations for the three months
ended
Revenue
Revenue for the three months ended
Gross Profit
Gross profit for the three months ended
General and Administrative Expenses
General and administrative expenses increased by
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Legal and accounting fees decreased by
Corporate Payroll Expenses
Corporate payroll expenses were
Research and Development
Research and development expenses were
Sales and Marketing
Sales and marketing expenses were
Operating Loss
Operating loss for the three months ended
Net Income
Our net income increased by
Comparison of the Nine Months Ended
The following discussion analyzes our results of operations for the nine months
ended
Revenue
We generated revenue of
Gross Profit
Gross profit for the nine months ended
General and Administrative Expenses
General and administrative expenses increased by
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Legal and accounting fees increased by
Corporate Payroll Expenses
Corporate payroll expenses were
Research and Development
Research and development expenses were
Sales and Marketing
Sales and marketing expenses were
Operating Loss
Operating loss for the nine months ended
Net Income
Our net income for the nine months ended
Liquidity and Capital Resources
Our operations used
Cash used in investing activities was
Cash provided by financing activities during the nine months ended
In
While we expect revenues to increase, we expect continued negative cash flows as we incur increased costs associated with expanding our business. We expect to grow our business organically and through key acquisitions that will help accelerate the growth of our business. We expect to continue to fund our operations primarily through utilization of our current financial resources, future revenue, and through the issuance of debt or equity.
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Off-Balance Sheet Arrangements
None.
Critical Accounting Policies and Estimates
Our financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. We have identified below the accounting policies that are of particular importance in the presentation of our financial position, results of operations and cash flows and which require the application of significant judgment by management. We believe estimates and assumptions related to these critical accounting policies are appropriate under the circumstances; however, should future events or occurrences result in unanticipated consequences, there could be a material impact on our future financial position, results of operations or cash flows.
Variable Interest Entities
We determined that we have a variable interest in a VIE through our indirect ownership of the SPAC. As such, we used judgment to determine whether we are the primary beneficiary of the VIE and would need to consolidate as a result. To make this determination, we evaluated our power to direct the activities that most significantly impact the VIE's economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the SPAC. We concluded that we are not the primary beneficiary, and as such account for it as an equity investment. The facts and circumstances surrounding our determination of whether the SPAC is a VIE and the entity that is the primary beneficiary are analyzed on an ongoing basis based on the current facts and circumstances surrounding the entity, including at every reporting period.
Equity Method Investment
We have accounted for our beneficial ownership in the SPAC as an equity investment as we have determined that we exert a significant influence in the entity's operations and accounting policies. Furthermore, we have elected the fair value option under applicable US GAAP as we believe the fair value best reflects the economic performance of the equity investment.
Revenue Recognition
Our revenue transactions include sales of our ink canisters, software, licensing, pre-printed labels, integrated solutions and leasing of our equipment. We recognize revenue based on the principals established in ASC Topic 606, "Revenue from Contracts with Customers." Revenue recognition is made when our performance obligation is satisfied. Our terms vary based on the solutions we offer and are examined on a case-by-case basis. For licensing of our VerifyInkTM technology we depend on the integrity of our clients' reporting.
Stock-based Compensation
We account for stock-based compensation under the provisions of FASB ASC 718, "Compensation-Stock Compensation", which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date. We estimate the fair value of stock-based awards on the date of grant using the Black-Scholes model. The assumptions used in the Black-Scholes option pricing model include risk-free interest rates, expected volatility and expected life of the stock options. Changes in these assumptions can materially affect estimates of fair value stock-based compensation, and the compensation expense recorded in future periods. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods using the straight-line method.
We account for stock-based compensation awards to non-employees in accordance with ASU No. 2018-07, Compensation - Stock Based Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting ("ASU 2018-07"), which aligns accounting for share-based payments issued to nonemployees to that of employees under the existing guidance of Topic 718, with certain exceptions. This update supersedes previous guidance for equity-based payments to nonemployees under Subtopic 505-50, Equity - Equity-Based Payments to Non-Employees.
All issuances of stock options or other equity instruments to non-employees as consideration for goods or services received by the Company are accounted for based on the fair value of the equity instruments issued. Non-employee equity-based payments are recorded as an expense over the service period, as if we had paid cash for the services. At the end of each financial reporting period, prior to vesting or prior to the completion of the services, the fair value of the equity-based payments will be re-measured and the non-cash expense recognized during the period will be adjusted accordingly. Since the fair value of equity-based payments granted to non-employees is subject to change in the future, the amount of the future expense will include fair value re-measurements until the equity-based payments are fully vested or the service completed.
Recently Adopted Accounting Pronouncements
Recently adopted accounting pronouncements are discussed in Note 1 - Summary of Significant Accounting Policies in the notes accompanying the financial statements.
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