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.
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
Overview
Our brand protection technologies include consumer engagement capabilities, the custom printing of tamper proof secure labels, and utilization of invisible and visible images printed with our proprietary special composition inks comprised of a rare earth mineral. These inks are compatible and printed with modern digital and standard printing systems such as digital, offset, flexographic, silkscreen, gravure, inkjet and toner-based laser printers. The inks can be used to print both static labels on standard printing systems and variable labels utilizing digital printing systems that include variable images, serialized codes, dynamic bar codes and dynamic QR codes that allow brand owners to engage directly with customers. We have developed and patented a dual-code technology that we believe can connect digital NFTs to physical products. We have developed and patented a device that attaches to a smartphone that brand inspectors or law enforcement can use to read our invisible ink codes into our cloud-based track and trace software that contains our patented verification technology along with algorithms that analyze the label, package or product's authenticity and diversion activity. We also have a device that informs users that our proprietary invisible ink is present, which can be used for authentication without the need for internet connectivity.
Our Solutions
· 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 included 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 a product is authenticated, the brand owner can then engage with the consumer by, for example offering a gift or future discounts providing marketing materials, videos, product information and specifications, contest entries or cross selling other products through the consumer engagement software. This service allows to the brand owner to gather real-time actionable information on their customer base. To date, we have derived limited revenue from VerifyMe Engage customers in the cannabis industry.
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VerifyMe Authenticate™ services provide an assortment of tools through our
patented products allowing brand owners 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 product's 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
VerifyMe Track & Trace™ supply chain serialization, track and trace technology utilize overt dynamic codes (QR codes or other barcode symbology), such as our VerifyCode™, which are tied to our cloud-based authentication and track and trace system. This technology provides brand owners business intelligence on counterfeiting and diversion using distribution channel scans throughout the supply chain coupled with consumer scan data. All this data is consolidated on a system that allows brands to customize rules and parameters and establish sophisticated alert systems allowing brands to be proactive, rather than reactive, in thwarting illicit activity. Invisible codes can be added using VerifyInkTM to 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, 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.
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.
To optimize our security for our customers, we are seeking to add a blockchain
architecture version to our brand protection platform which currently uses a
centralized cloud-based data architecture. Our plan is to develop the ability to
connect physical products to NFTs in the blockchain.
Partnerships
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
In addition to packaging and labels, our brand protection security printing technologies can be applied to authenticate important credentials such as tax stamps, driver's licenses, plastics, metal, apparel, election ballots, birth certificates, immigration documents, gaming, apparel, currency, event and transportation tickets, passports, computer software, and credit cards. We can track and trace from production to ultimate consumption when coupled with our proprietary brand protection software.
20 Table of Contents Commercialization Strategy
Our commercialization and sales efforts are focused on six key areas of growth:
Cosmetics, Food and Beverages,
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 combined with some timing delays in customer sales ramp-up,
negatively impacted our results of operations for the first three months of
2022. 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
We are attending sales conferences and in person meetings, however there is no guarantee we will be able to continue due to fluctuations in COVID-19 cases and the development of new variants. We continue to work with our sales representatives to look for alternative ways to communicate effectively and promote sales both with our customers and potential customers. 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
21 Table of Contents Gross Profit
Gross profit for the three months ended
General and Administrative Expenses
General and administrative expenses increased by
Research and Development
Research and development expenses were
Sales and Marketing
Sales and marketing expenses increased
Net Loss
Our net loss increased by
Liquidity and Capital Resources
Our operations used
Cash used in investing activities was
Cash provided by financing activities during the three months ended
In
On
While we expect revenues to increase, we expect continued negative cash flows in 2022, 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 and future revenue, however as we continue to look at potential acquisitions, we may issue debt or additional equity.
Off-Balance Sheet Arrangements
None. 22 Table of Contents
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 Investments
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. We perform a qualitative assessment at each reporting date to determine if there was a change in fair value. The assessment considers factors such as, but not limited to, discussions with management, data showing other companies in the industry, plus adjustment to reflect company circumstances.
Derivative Liability
We have accounted for our two directors restricted stock units in the SPAC RSUs as a long-term derivative liability as the underlying awards are not the Company's stock but an unrelated, publicly traded entity's shares. We perform an assessment at each reporting date to determine if there was a change in fair value using a Monte Carlo Simulation. The assessment considers factors such as, but not limited to, discussions with management, data showing other companies in the industry, plus adjustment to reflect company circumstances.
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.
For RSUs with stock price appreciation targets, we applied a lattice approach that incorporated a Monte Carlo simulation, which involved random iterations that took different future price paths over the RSU's contractual life based on the appropriate probability distributions (which are based on commonly applied Black Scholes inputs). The fair value was determined by taking the average of the grant date fair values under each Monte Carlo simulation trial. We recognize compensation expense on a straight-line basis over the performance period and there is no ongoing adjustment or reversal based on actual achievement during the period.
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.
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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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