Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This Management’s Discussion and Analysis
of Financial Condition and Results of Operation and other parts of this Report contain forward-looking statements that involve risks and
uncertainties. All forward-looking statements included in this Report are based on information available to us on the date hereof,
and except as required by law, we assume no obligation to update any such forward-looking statements. Our actual results may differ
materially from those anticipated in these forward-looking statements as a result of various factors. The following should be read in
conjunction with our annual financial statements contained elsewhere in this Report.
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VerifyMe, Inc. (“VerifyMe,” the
“Company,” “we,” “us,” or “our”), is a specialized logistics company that specializes
in time and temperature sensitive products, as well as providing brand protection and enhancement solutions. We operate a Precision Logistics
segment which includes the operations of our subsidiary PeriShip Global and accounts for nearly all VerifyMe revenue, and an Authentication
segment. Through our Precision Logistics segment, we provide a value-added service for sensitive parcel management driven by a proprietary
software platform that provides predictive analytics from key metrics such as pre-shipment weather analysis, flight-tracking, sort volumes,
and traffic, delivered to customers via a secure portal. The portal provides real-time visibility into shipment transit and last-mile
events which is supported by a service center. Through our Authentication segment our technologies enable brand owners to deter counterfeit
activities.
Further information regarding our business segments
is discussed below:
Precision Logistics:
The Precision Logistics segment specializes in predictive analytics for optimizing delivery of time and temperature sensitive perishable
products. We manage complex industry-specific shipping logistic processes that require critical time, temperature control and handling
to prevent spoilage and extreme delivery times and brand impairment. Utilizing predictive analytics from multiple data sources including
flight-tracking, weather, traffic, major carrier feeds, and time of day data, we provide our clients an end-to-end vertical approach for
their most critical service delivery needs. Using our proprietary IT platform, we provide real-time information and analysis to mitigate
supply chain flow interruption, as well as delivering last-mile resolution for key markets, including the perishable healthcare and food
industries.
Through our proprietary PeriTrack ® customer
dashboard, we provide an integrated tool that gives our customers an in-depth look at their shipping activities and allows them access
to critical information in support of the specific needs of the supply chain stakeholders. We offer post-delivery services such as customized
reporting for trend analysis, system performance reports, power outage maps, and other tailored reports.
Precision Logistics generates revenue from two
business service models.
· ProActive Service – clients pay us directly for carrier service coupled with our proactive
logistics assistance.
· Premium Service – clients pay us directly or through our carrier partner for our complete
white-glove shipping monitoring and predictive analytics service. This service includes customer web portal access, weather monitoring,
temperature control, full-service center support and last mile resolution.
Products: The Precision Logistics segment
includes the following bundled services as part of our service offerings to our customers:
· PeriTrack ® : Our proprietary PeriTrack® customer dashboard was developed utilizing our
extensive logistics operational knowledge. This integrated web portal tool gives our customers an in-depth look at their shipping activities
based on real-time data. The PeriTrack® dashboard was designed to provide critical information in support of the specific needs of
supply chain stakeholders and gives our customer resolution specialists a 360° view of shipping activity. PeriTrack® features
tools tailored for shippers of perishable goods, which includes the In-Transit Shipment Tracker. This tool provides details on the unique
shipper’s in-transit shipments, with the ability to select and analyze data on individual shipments.
· Service Center : We have assembled a team of customer resolution specialists based in the U.S. This
service team resolves shipping problems on behalf of our customers. The service center acts as a help desk and monitors shipping to delivery
for our customers.
· Pre-Transit Service : We help clients prepare their products for shipments by advising clients on
packaging requirements for various types of perishable products. Each product type requires its own particular packaging to protect it
during shipment, and we utilize our extensive knowledge and research to provide our customers with packaging recommendations to meet their
unique needs.
· Post-Delivery : We provide customized reporting for trend analysis, system performance reports,
power outage maps, and many other reports to help our customers improve their processes and customer service outcomes.
· Weather/Traffic Service : We have full-time meteorologists on staff to monitor weather. A package
may experience a variety of weather conditions between the origin and destination, and our team actively monitors these conditions to
maximize the number of timely and safely transmitted shipments. Similarly, traffic and construction also create unpredictable delays which
our team works diligently to mitigate. If delays or other issues occur, we inform clients and work with them to proactively resolve such
shipment issues.
Authentication : The Authentication segment
specializes in anti-counterfeit and brand protection. This is critical in the current landscape of increased counterfeit activity and
customer expectations. VerifyMe has patented technologies that address the needs of brands.
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Opportunities
Precision Logistics: Traditionally, most
shipping businesses utilize the carrier’s data platform for tracking which generally informs the shipping enterprise, and their
customers, when a package is in transit, when a package has been delivered, and some level of detail of the path which a package traveled.
We believe taking the data feeds from a carrier and adding real-time visibility with predictive analytics and the human intervention factor
of our service center gives us a competitive advantage against other third-party platforms that solely rely on the carrier’s data
feeds. We utilize a variety of input sources beyond the carrier’s data feed. Our proprietary “Predictive Analytics”
technology is fed real-time meteorology data, traffic and road construction data, and power grid information to help predict issues before
they happen. If an alert is created the shipper and our service center will work to address the issue and save the perishable product
from spoiling, saving the shipper significant costs and reducing the need to replace products that are no longer viable. We have meteorologists
on staff that track world-wide weather patterns to address predicted issues before they happen. We believe the company has two significant
areas of opportunity. First, our services are specifically designed to address the needs of small and medium size agriculture, food and
beverage companies. Second, the pharmaceutical and healthcare industries represent significant opportunities due to the enhanced tracking
and customer service associated with distribution of these products. We are focusing our sales emphasis on those industries.
Building logistics infrastructure is a capital-intensive
process as the investment is locked in for a considerably long period. Due to the current economic environment, and our cost competitive
offering, we believe companies may opt to outsource their precision logistics services to reduce their operational costs. The outsourcing
of supply chain related and other logistics operations to service providers such as ours allows companies to improve the efficiency of
their businesses by focusing their resources on core competencies. We believe outsourcing this function to our Precision Logistics segment
provides the ideal solution for all parties involved.
Authentication: We believe the products
in our Authentication segment have applications in many areas. Currently, we are marketing opportunities in the areas of preventing counterfeit
and protecting customer brands.
Results of Operations
Comparison of the Years Ended December 31,
2024, and 2023
The following discussion analyzes our results
of operations for the years ended December 31, 2024, and 2023. The following information should be considered together with our financial
statements for such periods and the accompanying notes thereto.
Revenue
Years Ended
December 31,
2024
2023
(In thousands)
(In thousands)
Precision Logistics
$ 23,766
24,652
Authentication
441
661
Total Revenue
$ 24,207
$ 25,313
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Consolidated revenue for the year ended December 31,
2024, was $24,207 thousand, a 4% decrease compared to $25,313 thousand, for the year ended December 31, 2023. The
decrease in our Precision Logistics segment primarily relates to a discontinued contract with one customer in our Premium services. In
addition, with Thanksgiving arriving later than usual in 2024, there were fewer days from Black Friday to December 31, making this the
shortest peak season since 2019. The Authentication segment did not grow during 2024 and we divested Trust Codes Global on December
8, 2024.
Gross Profit
Years Ended
December 31,
2024
2023
(In thousands)
% of Revenue
(In thousands)
% of Revenue
Precision Logistics
8,268
35
%
7,504
30
%
Authentication
394
89
%
522
79
%
Total Gross Profit
$
8,662
36
%
$
8,026
32
%
Consolidated gross profit for the years ended
December 31, 2024, and 2023, was $8,662 thousand and 8,026 thousand, respectively. The resulting gross margin was 36% for the year ended
December 31, 2024, compared to 32% for the year ended December 31, 2023. The gross profit increase relates to the process improvements
to increase Proactive services margins in the Precision Logistics segment.
Segment Management and Technology
Segment management and technology expenses increased
by $357 thousand to $5,454 thousand for the year ended December 31, 2024, compared to $5,097 thousand for the year ended December 31,
2023. The increase relates primarily to the acquisition of Trust Codes Global in March 2023, lower capitalized labor costs and severance
expense of $163 thousand in 2024. Amortization and depreciation expense was $1,212 thousand for the year ended December 31, 2024, compared
to $1,134 thousand for the year ended December 31, 2023.
General and Administrative Expenses
General and administrative expenses decreased
by $564 thousand to $3,852 thousand for the year ended December 31, 2024, compared to $4,416 thousand for the year ended December 31,
2023. The decrease relates primarily to the deal costs related to the acquisition of the Trust Codes Global business of $278 thousand,
and higher severance expense in 2023.
Research and Development
Research and development expenses were $70 thousand
for the year ended December 31, 2024, compared to $107 thousand for the year ended December 31, 2023, primarily due to fewer projects
in the Authentication segment in 2024.
Sales and Marketing
Sales and marketing expenses decreased by $283
thousand to $1,361 thousand for the year ended December 31, 2024, compared to $1,644 thousand for the year ended December 31, 2023. The
decrease is primarily related to a reduction in employees and consultants in the Authentication segment, a reduction in stock compensation
in Precision Logistics, partially offset by an increase in employees in Precision Logistics.
Goodwill and Intangible Asset Impairment
As a result of a long-lived asset and goodwill
asset impairment assessment performed in 2024, intangible asset impairment charges of $964 thousand and a goodwill impairment charge of
$1,351 thousand was recorded for the year ended December 31, 2024, which primarily represents the amount by which the net carrying value
in the Authentication segment exceeded the fair value of the segment, primary due to changes to the forecasted cashflows of the segment.
On December 8, 2024, we divested our Trust Codes business in the Authentication segment.
Interest Expense, net
Interest expense, net was $130 thousand for the
year ended December 31, 2024, compared to $161 thousand for the year ended December 31, 2023.
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Net Loss
Consolidated net loss for the year ended December
31, 2024, and 2023 was $3,824 thousand and $3,390 thousand, respectively. The increased loss was primarily related to the goodwill and
intangible asset impairment noted above partially offset by a gain in contingent consideration of $844 thousand and improvement in gross
profit. The resulting consolidated loss per share for the year ended December 31, 2024, and year ended December 31, 2023, was $0.37 and
$0.35 per diluted share, respectively.
Liquidity and Capital Resources
Our operations provided $871 thousand of cash
during the year ended December 31, 2024, compared to $244 thousand cash during the year end December 31, 2023. The increase in cash from
operations is primarily due to the non-cash addbacks to net loss.
Net cash used in investing activities was $575
thousand for the year ended December 31, 2024, compared to $1,195 thousand for the year ended December 31, 2023. The decrease in
spending in investing activities related to a decrease in capitalized software costs and the acquisition of the Trust Codes Global business
in March 2023.
Net cash used in financing activities for the
year ended December 31, 2024, was $616 thousand primarily related to repayments toward the PNC Facility, compared to cash provided by
financing activities of $634 thousand for the year ended December 31, 2023, primarily related to proceeds from the PNC Facility and issuance
of convertible debt in 2023 offset by repayments towards the PNC Facility.
On January 13, 2025, we entered into an
Inducement Letter Agreement with an institutional investor and holder of existing warrants to purchase up to 1,461,896 shares of our
common stock, for $4.7 million in gross proceeds. The existing warrants were originally issued on April 14, 2022, with an exercise price of
$3.215 per share, and became exercisable six months following issuance. Pursuant to
the Inducement Letter Agreement, the holder agreed to exercise the existing warrants for cash at the exercise price of $3.215 per
share in consideration for our agreement to issue a new unregistered warrant to purchase up to an aggregate of 1,461,896 shares of
common stock at an exercise price of $4.00 per share. The new warrant was immediately exercisable upon issuance and has a term of
five and one-half years from the issuance date.
On November 26, 2024, we announced an extension
of the $0.5 million share repurchase program to repurchase shares of the Company’s common stock through December 31, 2025. The share
repurchase program may be modified, suspended or discontinued at the discretion of the Board at any time. During the year ended
December 31, 2024, the Company repurchased 21,100 shares of common stock for $18 thousand under the program.
On August
25, 2023, the Company entered into a Convertible Note Purchase Agreement with certain investors for the sale of convertible promissory
notes for the aggregate principal amount of $1,100 thousand of which $475 thousand was purchased
by relating parties including certain members of management and the Board of Directors. As of December 31, 2024, $450 thousand was held
by related parties after one member of management left the Company. The notes are subordinated unsecured obligations of the Company and
accrue interest at a rate of 8% per year payable semiannually in arrears on February 25 and August 25 of each year, beginning on February
25, 2024. The notes will mature on August 25, 2026, unless earlier converted or repurchased at a conversion price of $1.15 per share of
common stock. The Company may not redeem the notes prior to the maturity date. As of December 31, 2024, the amount outstanding on the
convertible debt was $1,100 thousand and included in Convertible Note, and Convertible Note – related party on the accompanying
Consolidated Balance Sheets. The Company has accrued interest expense of $31 thousand related to the convertible note as of December 31,
2024. As of January 21, 2025, $350 thousand was converted to common stock.
On September 22, 2022, we entered into the PNC
Facility with PNC Bank, National Association. The PNC Facility includes a $1 million RLOC. The RLOC has no scheduled payments of principal
until maturity, and bears interest per annum at a rate equal to the sum of Daily SOFR plus 2.85% with monthly interest payments. The RLOC
is guaranteed by the Company and secured by the assets of PeriShip Global and the Company. As of December 31, 2024, $0 was outstanding
on the RLOC.
The PNC Facility also included a four-year Term
Note for $2 million which had a maturity date of September 2026 and required equal quarterly payments of principal and interest. The Term
Note incurred interest per annum at a rate equal to the sum of Daily SOFR plus 3.1%. As of December 31, 2024, our short-term debt
outstanding under the Term Note was $500 thousand and total long-term debt outstanding under the Term Note was $375 thousand. During the
year ended December 31, 2024, the Company made a repayment of $500 thousand towards the principal of the outstanding Term Note. As of
January 21, 2025, the Term Note was paid in full and no future principal payments are due.
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The PNC Facility includes a number of affirmative
and restrictive covenants applicable to PeriShip Global, including, among others, a financial covenant to maintain a fixed charge coverage
ratio of at least 1.10 to 1.00 at the end of each fiscal year, affirmative covenants regarding delivery of financial statements, payment
of taxes, and establishing primary depository accounts with PNC Bank, and restrictive covenants regarding dispositions of property, acquisitions,
incurrence of additional indebtedness or liens, investments and transactions with affiliates. PeriShip Global is also restricted from
paying dividends or making other distributions or payments on its capital stock if an event of default (as defined in the PNC Facility)
has occurred or would occur upon such declaration of dividend. We entered into a waiver and amendment on August 14, 2024 which provided
a waiver for a certain event of default and extended the RLOC to September 30, 2025.
We were not in compliance with all affirmative
and restrictive covenants under the PNC Facility at December 31, 2024. On February 28, 2025, we received a waiver as of December 31, 2024,
for certain events of default.
Effective October 17, 2022, we entered into an
interest rate swap agreement, with a notional amount of $1,958 thousand, effectively fixing the interest rate on our outstanding debt
at 7.602%. As of January 21, 2025, we terminated our interest rate swap agreement.
We believe that our cash and cash equivalents,
together with the proceeds from the convertible notes, warrant inducement, share repurchase program, and the amount available on the RLOC,
will fund our operations for the next 12 months including expected capital expenditures.
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 and may issue additional debt or equity.
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 have identified that the estimates used in the valuation of the assets of the
Trust Codes acquisition in March 2023, are critical and require significant judgment. We believe estimates and assumptions related to
these 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.
Revenue Recognition
We recognize revenue based on the principals established
in the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 606, Revenue
from Contracts with Customers. Revenue recognition is made when our performance obligation is satisfied at a point in time of delivery
of the service. Over 95% of our revenue is derived from logistics management for time and temperature sensitive packages with the remaining
from our brand protection solutions. Our terms vary based on the solutions we offer and are examined on a case-by-case basis. For licensing
our VerifyInk TM technology we depend on the integrity of our clients’ reporting. Determining whether products and services
in agreements with non-standard terms are distinct performance obligations that should be accounted for separately or combined to one
unit of accounting may require significant judgement.
The timing of revenue recognition, billings and
cash collections results in billed accounts receivable, and unbilled revenue when billings occur after the end of the month (contract
assets) on the consolidated balance sheets. Amounts charged to our clients become billable when the performance obligation has been met
at a point in time. Unbilled amounts will generally be billed and collected within 30 days but typically no longer than 60 days. These
assets are reported on the consolidated balance sheets on a contract-by-contract basis at the end of each reporting period. Changes in
the contract assets have not significantly changed as of December 31, 2024. No other factors materially impacted the balances.
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Business Combinations
Accounting for business combinations requires
management to make significant estimates and assumptions to determine the fair values of assets acquired and liabilities assumed at the
acquisition date. Although we believe the assumptions and estimates we have made in relation to the acquisitions are appropriate, they
are based, in part, on historical experience and information obtained from management of the acquired companies and are inherently uncertain.
Critical estimates in valuing certain acquired intangible assets include, but are not limited to, future expected cash flows including
revenue growth rate assumptions from product sales, customer contracts and acquired technologies, estimated royalty rates used in valuing
technology related intangible assets, and discount rates. The discount rates used to discount expected future cash flows to present value
are typically derived from a weighted-average cost of capital (“WACC”) analysis and adjusted to reflect inherent risks. Unanticipated
events and circumstances may occur that could affect either the accuracy or validity of such assumptions, estimates or actual results.
We allocate the fair value of the purchase price
of our Trust Codes acquisition, to the tangible assets acquired, liabilities assumed, and intangible assets acquired, based on their estimated
fair values at acquisition date. The excess of the fair value of the purchase price over the fair values of these net tangible and intangible
assets acquired is recorded as goodwill. Management’s estimates of fair value are based upon assumptions believed to be reasonable,
but our estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the measurement period, which
will not exceed one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the
corresponding offset to goodwill. After the conclusion of the measurement period or final determination of the fair value of the purchase
price of our acquisitions, whichever comes first, any subsequent adjustments are recorded to our Consolidated Statements of Operations.
Acquisition-related expenses are recognized separately
from the business combination and are expensed as incurred.
Goodwill
We have recorded goodwill as part of our acquisitions,
which represents the excess of purchase price over the fair value of net assets acquired in the business combinations. Pursuant to ASC
Topic 350, Intangibles—Goodwill and Other, the Company will test goodwill for impairment on an annual basis in the fourth quarter,
or between annual tests, in certain circumstances. Under authoritative guidance, the Company first assessed qualitative factors to determine
whether it was necessary to perform the quantitative goodwill impairment test. The assessment considers factors such as, but
not limited to, macroeconomic conditions, data showing other companies in the industry and our share price. An entity is not required
to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely
than not that its fair value is less than its carrying amount. Events or changes in circumstances which could trigger an impairment review
include macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, other entity specific events
and sustained decrease in share price.
On September 24, 2024, Paul Ryan, former Executive
Vice President, Authentication Segment, notified us of his resignation. During the third quarter of fiscal year ended December 31, 2024,
we identified concerns relating to the commercial viability of the Authentication segment. As a result, the Company made revisions to
our internal forecasts and concluded that in accordance with ASC Topic 350 a triggering event occurred indicating that potential impairment
exists, which required the Company to conduct an interim test of the fair value of the goodwill for the Authentication segment. We performed
a quantitative goodwill impairment test and determined the fair value of our reporting units using a combination of an income approach,
employing a discounted cashflow model, and a market approach, employing a guideline public company approach. The results of our goodwill
impairment test indicated that the carrying value of the Authentication reporting unit exceeded its estimated fair value. As a result,
the Company recorded a goodwill impairment charge of $1,351 thousand during the year ended December 31, 2024, within goodwill and intangible
asset impairment on the consolidated statement of operations. On December 8, 2024 we divested the Trust Codes business in the Authentication
segment.
Stock-based Compensation
We account for stock-based compensation under
the provisions of ASC Topic 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 an 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.
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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, 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
Not applicable for smaller reporting companies.