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 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
and diversion 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 delayed
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 Services – clients use our shipping monitoring,
predictive analytics, or exception management services. Shippers use their own transportation rates, provided and charged directly by
their carrier, with our added services charged (i) directly by the carrier, under a “white label”
arrangement, which we refer to as our Premium service, or (ii) by us, which we refer to as our Direct Premium service. These services
include customer web portal access, weather monitoring, temperature control, full-service center support, and last mile resolution.
As discussed in the section “Partnerships”
below, w e ceased providing ProActive services to our prior carrier partner in September 2025. In February
2026, we ceased providing Premium services to our prior carrier partner. While we no longer provide ProActive and Premium services to
our prior carrier partner we can and continue to provide Direct Premium services to our customers who use our prior carrier partner for
their shipping needs.
Beginning in September 2025, we began providing
ProActive services to our new Strategic Partner. We are currently establishing the ability to offer our Premium
services to our Strategic Partner. We expect to begin broadly offering Premium and Direct Premium services to customers of our new Strategic
Partner in the second quarter of 2026.
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. We are not actively pursuing business in the Authentication segment but continue
to service existing customers.
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Recent Developments
Merger Agreement
On January 2, 2026, we entered into the LOI with
Open World Ltd. regarding a proposed merger transaction. On February 11, 2026, we entered into an Agreement and Plan of Merger (the “Merger
Agreement”) with VRME Subsidiary Corp., a Nevada corporation, and our wholly owned subsidiary (the “Merger Sub”) and
Open World. Upon the terms and subject to the satisfaction of the conditions described in the Merger Agreement, Merger Sub will merge
with and into Open World, Merger Sub will cease to exist and Open World will become our wholly-owned subsidiary (the “Merger”).
At the effective time of the Merger (the “Effective Time”), (i) each holder of ordinary shares of Open World outstanding immediately
prior to the Effective Time (excluding holders of Excluding Shares and Dissenting Shares, as defined in the Merger Agreement) will be
entitled to receive the number of shares of our common stock, based on the Exchange Ratio as defined in the Merger Agreement (the “Exchange
Ratio”), (ii) each investor in Open World Simple Agreements for Future Equity (“Open World SAFEs”) outstanding immediately
prior to the Effective Time will be entitled to receive a right to a number of shares of our common stock based on the Exchange Ratio
and (iii) any outstanding option to purchase shares of Open World shall be converted into an option to purchase the number of shares of
our common stock based on the Exchange Ratio.
Immediately following the closing of the Merger
(the “Closing”), our pre-Closing stockholders are expected to collectively retain approximately 10% of the post-Closing aggregate
number of shares of our common stock and holders of Open World ordinary shares and Open World SAFEs will receive as merger consideration
newly issued shares of our common stock representing approximately 90% of the post-Closing aggregate number of shares of our common stock.
The Merger Agreement contains customary representations,
warranties and covenants, including, among others, (i) covenants requiring each of us and Open World to conduct its business in the ordinary
course during the period between the execution of the Merger Agreement and the Closing or earlier termination of the Merger Agreement,
subject to certain exceptions, (ii) covenants prohibiting us and Open World from engaging in certain kinds of transactions during such
period (without the prior written consent of the other), and (iii) a covenant restricting us and Open World from activities relating to
the soliciting, initiating, encouraging, inducing or facilitating the communication, making, submission or announcement of any alternative
acquisition proposals or inquiries.
The Merger Agreement also requires us, in cooperation
with the Open World, to prepare and file with the SEC a registration statement on Form S-4 that will contain a proxy statement relating
to a Company stockholder meeting to be held in connection with the Merger (the “Registration Statement”) and pursuant to which
our shares of common stock will be registered under the Securities Act of 1933, as amended (the “Securities Act”), to be issued
by virtue of the Merger and the contemplated transactions thereunder. We shall use its reasonable best efforts to (i) cause the Registration
Statement to comply with applicable rules and regulations promulgated by the SEC, (ii) cause the Registration Statement to become effective
as promptly as practicable, and (iii) keep the Registration Statement effective as long as is necessary to consummate the Merger and the
contemplated transactions thereunder. In addition, under the Merger Agreement, the parties agreed to other customary provisions including
(i) obtaining requisite stockholder approval to consummate the Merger and the contemplated transactions thereunder, (ii) obtaining regulatory
approvals from relevant governmental authorities, (iii) indemnifying our directors and officers for a period of six years following the
Closing, (iv) completing certain disclosure obligations required by the SEC and listing requirements promulgated by the Nasdaq Capital
Market (“Nasdaq”), (v) electing or appointing to the positions of officers and directors of Company and the surviving corporation
certain persons designated by Open World, and (vi) executing employment agreements between us and Adam Stedham and Jennifer Cola.
Pursuant to Merger Agreement, we have also agreed
to enter into a Registration Rights Agreement and an Exchange Agent Agreement in forms reasonably acceptable to us and Open World at Closing.
Closing of the Merger is subject to various customary
closing conditions. Each party’s obligations to effect the Merger and otherwise consummate the contemplated transactions thereunder
are conditioned upon (i) the effectiveness of the Registration Statement on Form S-4, (ii) expiration or termination of applicable regulatory
waiting periods, (iii) no restraints from any governmental authority preventing the consummation of the contemplated transactions under
the Merger Agreement, (iv) us and Open World obtaining the respective requisite stockholder votes to consummate the transactions contemplated
by the Merger Agreement, (v) us causing our PeriShip subsidiary to terminate its current credit facility, (vi) us effectuating a reverse
stock split upon the request of Open World, (vii) Nasdaq’s approval of our Nasdaq listing application for the post-Merger entity,
(viii) receipt of written approval of the Merger by the Cayman Islands Trade and Business Licensing Board, and (ix) execution of the Registration
Rights Agreement. Our and Merger Sub’s obligations to effect the Merger and otherwise consummate the contemplated transactions thereunder
are further conditioned upon customary closing conditions. Open World’s obligations to effect the Merger and otherwise consummate
the contemplated transactions thereunder are further conditioned upon customary closing conditions as well as (i) us having Closing Net
Cash, as defined in the Merger Agreement, of no less than $1 million, and (ii) our common stock having not been delisted from Nasdaq.
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In connection with and subject to the Closing
of the Merger, outstanding time-based and performance-based restricted stock awards and restricted stock units held by certain of our
employees and directors at Closing will accelerate and vest, regardless of any performance conditions, at the Effective Time.
At the Closing of the Merger, pursuant to the
Merger Agreement, each of David Edmonds, Marshall Geller, Howard Goldberg, and Adam Stedham are expected to resign as directors of our
Board of Directors.
The foregoing description of the Merger Agreement
does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the full text of the Merger Agreement.
Stockholder Support Agreements
In connection with the Merger Agreement, certain
of our stockholders representing approximately 14% or more of the voting power in the aggregate of our common stock, including our directors
and officers (the “Supporting Stockholders”), executed Stockholder Support Agreements (the “Support Agreements”),
pursuant to which they agreed to vote their shares of our common stock, including any shares of our capital stock or other equity securities
that they purchase or with respect to which they otherwise acquire sole or shared voting power (including any proxy) (the “Support
Agreement Shares”) after the execution of Support Agreement and prior to its expiration pursuant to its terms, in favor of the issuance
of our common stock in accordance with Nasdaq Listing Rule 5635 (the “Issuance Proposal”), (ii) any matter that could reasonably
be expected to facilitate the Issuance Proposal, (iii) against any other proposed action, agreement, transaction or other matter that
is intended to, or would reasonably be expected to, impede, interfere with, delay, postpone, discourage or adversely affect the approval
or consummation of the Issuance Proposal or the consummation of any or all of the other transactions contemplated by the Merger Agreement;
and (iv) to approve any proposal to adjourn or postpone the meeting to a later date, if there are not sufficient votes for the approval
of the Issuance Proposal on the date on which such meeting is held.
The Support Agreements also contain restrictions
on transfer of Support Agreement Shares held by the Supporting Stockholders. The Support Agreements will terminate upon the earliest to
occur of the following events: (a) the effective time of the approval of the Issuance Proposal, (b) the termination of the Merger Agreement
in accordance with its terms or (c) upon mutual written agreement of the parties to the Support Agreements. The foregoing description
of the Support Agreement does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the full
text of the form of Support Agreement.
Amended and Restated Employment Agreement
with Adam Stedham
In connection with the Merger Agreement, on February
11, 2026, we entered into an Amended and Restated Employment Agreement with Adam Stedham, effective as of the Effective Time of the Merger.
As of the Effective Time, and subject to the Closing of the Merger, Mr. Stedham is expected to resign as a director, Chief Executive Officer
and President to become the President of Precision Logistics (the “Stedham Employment Agreement”). Mr. Stedham’s expected
resignation as our director, Chief Executive Officer and President is not the result of any disagreement with us on any matter relating
to our operations, policies or practices.
Pursuant to the Stedham Employment Agreement,
should it become effective, Mr. Stedham will receive an annual base salary of $300,000 and be eligible for an annual bonus for each calendar
year, with a potential up to 50% of his base salary based on performance goals set by the Board of Directors each year. Mr. Stedham shall
be eligible to receive equity-based compensation award(s), as determined by the Board of Directors (or a subcommittee thereof), from time
to time.
The Stedham Employment Agreement is for an initial
term of one year and will thereafter be “at-will”, and may be terminated by either party during the initial term. If terminated
by Mr. Stedham for good reason, or by us without cause prior to the 6-month anniversary of the Effective Time, then Mr. Stedham shall
be entitled to an amount equal to his Base Salary that would have otherwise been paid until the conclusion of the initial term. If the
qualifying termination occurs after the 6-month anniversary of the Effective Time, then Mr. Stedham shall be entitled to an amount equal
to six (6) months of his Base Salary.
Employment Agreement with Jennifer Cola
In connection with the Merger Agreement, on February
11, 2026, we entered into an Employment Agreement with Jennifer Cola, effective as of the Effective Time. As of the Effective Time, and
subject to the Closing of the Merger, Ms. Cola is expected to continue in her position as our Chief Financial Officer (the “Cola
Employment Agreement”).
Pursuant to the Cola Employment Agreement, should
it become effective, Ms. Cola will receive an annual base salary of $180,000 and be eligible for an annual bonus for each calendar year
ending during the employment period, with a potential up to 50% of her base salary based on performance goals set by the Board of Directors
each year. Ms. Cola shall be eligible to receive equity-based compensation award(s), as determined by the Board of Directors (or a subcommittee
thereof), from time to time. In addition, in connection with and subject to entering into the Cola Employment Agreement, the Compensation
Committee of the Board of Directors approved the grant on the Effective Time of 130,000 restricted stock awards under our 2020 equity
incentive plan, which shall vest on the Effective Time.
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The Cola Employment Agreement is for an initial
term of one year and will thereafter be “at-will”, and may be terminated by either party during the initial term. If terminated
by Ms. Cola for good reason, or by us without cause prior to the 6-month anniversary of the Effective Time, then Ms. Cola shall be entitled
to an amount equal to her Base Salary that would have otherwise been paid until the conclusion of the initial term. If the qualifying
termination occurs after the 6-month anniversary of the Effective Time, then Ms. Cola shall be entitled to an amount equal to six (6)
months of her Base Salary.
Jennifer Cola Severance Period
In connection with the Merger, on February 11,
2026, the Board of Directors approved the grant of a severance period for Ms. Cola effective immediately and which will expire upon the
Effective Time of the Merger (the “Severance Period”), whereby Ms. Cola will receive a continuation of her base salary and
benefits for a period of six months if she is terminated without cause during the Severance Period.
Termination of ATM Sales Agreement
As previously disclosed, on March 6, 2025, we
entered into an At-The-Market Sales Agreement (the “Sales Agreement”) with Roth Capital Partners, LLC (the “Sales Agent”),
pursuant to which we could issue and sell, from time to time, shares of our common stock up to an aggregate offering price of $15.8 million
(the “ATM Program”).
On February 11, 2026, we provided the Sales Agent
written notice of its decision to terminate the ATM Program and pursuant to Section 12(b) of the Sales Agreement, the ATM Program and
Sales Agreement terminated on February 16, 2026.
During the year ended December 31, 2025, and through
the termination of the ATM Program, we sold 628,432 shares of common stock through the ATM Program for net proceeds of $483 thousand,
after deducting $15 thousand in offering costs.
ZenCredit Agreement
On August 8, 2025, we entered into a Master Loan Agreement and Promissory
Note (the “Loan Agreement”) with ZenCredit Ventures, LLC (“ZenCredit”). Pursuant to the Loan Agreement, we agreed
to loan ZenCredit up to $2 million. Pursuant to the terms of the Loan Agreement, ZenCredit will pay us regular quarterly interest payments
at an annual interest rate of 16%. The term of the initial promissory note is nine months at which time all accrued principal and interest
is due to us subject to the terms of the Loan Agreement. On August 11, 2025, we loaned ZenCredit $2 million in exchange for a promissory
note issued pursuant to the Loan Agreement that matures on May 11, 2026.
Opportunities
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
agents give 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 agents work to address the issue saving the perishable product from spoiling,
while 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-sized health care, 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 and
discovering other industries that need a “high touch”, “white glove” exception management team.
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.
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Partnerships:
On August 26, 2025, our prior carrier partner,
notified providers, including PeriShip Global, that it would be providing preferred shipping services through its own internal platform
and that the providers would no longer be approved as preferred shippers effective September 24, 2025. As such, PeriShip Global is no
longer a preferred shipper for our prior carrier partner and our Precision Logistics segment ceased providing ProActive services to our
prior carrier partner’s customers in September 2025. We continued to provide Premium
services to our prior carrier partner until we ceased providing Premium services in February 2026. While we no longer provide ProActive
and Premium services to our prior carrier partner we can and continue to provide Direct Premium services to our customers who use our
prior carrier partner for their shipping needs.
On September
24, 2025, we began offering ProActive services to the customers of an alternative Preferred Shipping Partner. W e
are currently establishing the ability to offer our Premium services to our Strategic Partner. We expect to begin broadly offering Premium
and Direct Premium services to customers of our new Strategic Partner in the second quarter of 2026.
Seasonality
We experience seasonal fluctuations
in our net revenues from sales in our Precision Logistics segment. Revenues from sales are generally higher in the fourth quarter than
in other quarters due to increased holiday shipments. While the fourth quarter is historically our highest revenue quarter, revenues from
ProActive services declined in the quarter ended December 31, 2025 as compared to the quarter ended December 31, 2024 due to the previously
disclosed loss of our prior carrier partner as a shipping supplier integrating our service offerings, and larger shippers not wanting
to change shipping suppliers during the peak season. The seasonality of our business may cause fluctuations in our quarterly operating
results.
Results of Operations
Comparison of the Years Ended December 31,
2025, and 2024
The following discussion analyzes our results
of operations for the years ended December 31, 2025, and 2024. The following information should be considered together with our financial
statements for such periods and the accompanying notes thereto.
Revenue
Years Ended
December 31,
2025
2024
(In thousands)
(In thousands)
Precision Logistics
$ 16,242
$ 23,766
Authentication
156
441
Total Revenue
$ 16,398
$ 24,207
Consolidated revenue for the year ended December 31,
2025, was $16,398 thousand, a 32% decrease compared to $24,207 thousand, for the year ended December 31, 2024. The
decrease in our Precision Logistics segment primarily relates to the termination of our agreement with our prior carrier partner to offer
our ProActive services effective September 24, 2025. During the fourth quarter of 2025 we began offering our ProActive services under
our new Program Agreement with our Strategic Partner. We anticipate our ProActive services revenue to take several quarters to recover
while our Premium services revenue increased by 5% in the fourth quarter 2025 compared to the fourth quarter 2024. The Authentication
segment did not grow during 2025, primarily due to the shift to servicing existing customers and the Company not actively pursuing
business in the Authentication segment .
Gross Profit
Years Ended
December 31,
2025
2024
(In thousands)
% of Revenue
(In thousands)
% of Revenue
Precision Logistics
6,220
37.9 %
8,268
34.2 %
Authentication
101
0.6 %
394
1.6 %
Total Gross Profit
$ 6,321
38.5 %
$ 8,662
35.8 %
Consolidated gross profit for the years ended
December 31, 2025, and 2024, was $6,321 thousand and $8,662 thousand, respectively. The resulting gross margin was 38.5% for the year
ended December 31, 2025, compared to 35.8% for the year ended December 31, 2024. The gross profit percentage increase relates to process
improvements implemented to increase ProActive services margins in the Precision Logistics segment.
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Segment Management and Technology
Segment management and technology expenses decreased
by $2,316 thousand to $3,138 thousand for the year ended December 31, 2025, compared to $5,454 thousand for the year ended December 31,
2024. The decrease relates primarily to the divestiture of Trust Codes Global in December 2024 and gain on derecognized liability
in our Authentication segment and a decrease in management wages and severance expense in our Precision Logistics segment.
General and Administrative Expenses
General and administrative expenses decreased
by $436 thousand to $3,416 thousand for the year ended December 31, 2025, compared to $3,852 thousand for the year ended December 31,
2024. The decrease relates primarily to a decrease in stock-based compensation from $1,386 thousand for the year ended December 31, 2024
to $545 thousand for the year ended December 31, 2025, partially offset by an increase in legal fees.
Research and Development
Research and development expenses were $20 thousand
for the year ended December 31, 2025, compared to $70 thousand for the year ended December 31, 2024, primarily due to fewer projects in
the Authentication segment in 2025.
Sales and Marketing
Sales and marketing expenses decreased by $394
thousand to $967 thousand for the year ended December 31, 2025, compared to $1,361 thousand for the year ended December 31, 2024. The
decrease primarily relates to a reduction in employees and consultants in the Authentication segment.
Goodwill and Intangible Asset Impairment
As a result of a long-lived asset and goodwill
asset impairment assessment performed in September 2025, an intangible asset impairment charge of $2,788 thousand and a goodwill impairment
charge of $1,062 thousand was recorded for the year ended December 31, 2025 relating to the Precision Logistics segment. An intangible
asset impairment charge of $964 thousand and a goodwill impairment charge of $1,351 thousand was recorded for the year ended December
31, 2024 relating to Authentication segment.
Interest Income (Expense), net
Interest income, net was $214 thousand for the
year ended December 31, 2025, compared to interest expense, net $130 thousand for the year ended December 31, 2024. This increase in interest
income primarily relates to the repayment of the Term Note in the first quarter of 2025 reducing interest expense as well as the increase
in interest income from the Company’s investment of the proceeds from the warrants exercise in January 2025, and interest income
earned on the Promissory Note with ZenCredit entered on August 8, 2025
that matures on May 11, 2026.
Net Loss
Consolidated net loss for the year ended December
31, 2025, and 2024 was $4,905 thousand and $3,824 thousand, respectively. The increased loss was primarily related to the decline in revenue
resulting from the decline in ProActive services previously described, and the goodwill and intangible asset impairment noted above and
the gain on change in fair value of the contingent consideration related to the acquisition of Trust Codes Global of $844 thousand for
the year ended December 31, 2024 that did not recur for the year ended December 31, 2025. The resulting consolidated loss per share for
the year ended December 31, 2025, and year ended December 31, 2024, was $0.39 and $0.37 per diluted share, respectively.
Liquidity and Capital Resources
Our operations provided $603 thousand of cash
during the year ended December 31, 2025, compared to $871 thousand cash during the year end December 31, 2024.
Net cash used in investing activities was $2,733
thousand for the year ended December 31, 2025, compared to $575 thousand for the year ended December 31, 2024. The increase in spending
in investing activities relates primarily to a Promissory Note of $2 million with ZenCredit entered into on August 8, 2025 and increased
capitalized software costs.
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Net cash provided by financing activities for
the year ended December 31, 2025, was $3,660 thousand compared to cash used in financing activities of $616 thousand for the year ended
December 31, 2024. The increased cash primarily relates to proceeds from the exercise of warrants and proceeds from the ATM, partially
offset by the repurchase of shares under the repurchase program and repayment of the Term Note during the year ended December 31, 2025.
On August 8, 2025, we entered into the Loan Agreement
with ZenCredit. Pursuant to the Loan Agreement, we agreed to loan ZenCredit up to $2 million and on August 11, 2025 we loaned ZenCredit
$2 million in exchange for a promissory note issued pursuant to the Loan Agreement that matures on May 11, 2026. Pursuant to the terms
of the Loan Agreement, ZenCredit will pay us regular quarterly interest payments at an annual interest rate of 16%. The term of the initial
promissory note is nine months at which time all accrued principal and interest is due to us subject to the terms of the Loan Agreement.
As of December 31, 2025, we reserved $12 thousand allowance for expected credit loss on the Note.
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.
The Company recognized the fair value of the new
warrants, calculated using the Black-Scholes option pricing model, as $3,971 thousand. The transaction was treated as an equity issuance,
and the fair value of the new warrants was recorded in additional paid-in capital. Direct transaction costs totaling approximately $352
thousand, including legal fees and placement agent commissions, were also recorded as a reduction to additional paid-in capital.
On March 6, 2025, the Company entered into an
At-The-Market Sales Agreement (“ATM”) with Roth Capital Partners, LLC (“Roth”), pursuant to which the Company
may issue and sell, from time to time, shares of its common stock up to an aggregate offering price of $15.8 million. Roth acts as the
sales agent and is entitled to a 3.0% commission on gross proceeds from sales under the program.
On February 11, 2026, we provided the Sales Agent
written notice of our decision to terminate the ATM Program and pursuant to Section 12(b) of the Sales Agreement, the ATM Program and
Sales Agreement terminated on February 16, 2026.
During the year ended December 31, 2025, and through
the termination of the ATM Program on February 16, 2026, we have sold 628,432 shares of common stock through the ATM Program for net proceeds
of $483 thousand, after deducting $15 thousand in offering costs.
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 related parties including certain members of management and the Board of Directors.
As of December 31, 2025, $400 thousand was held by related parties. 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. For the year ended December 31, 2025, interest expense
related to the convertible debt was $61 thousand. As of January 21, 2025, $350 thousand was converted to common stock, none of which was
related parties. As of December 31, 2025 the amount outstanding on the convertible debt was $750 thousand and included in Convertible
note and Convertible note related party on the accompanying Consolidated Balance Sheets.
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, 2025, $0 was outstanding
on the RLOC. On August 8, 2025, the Company extended the line of credit to September 30, 2026.
The PNC Facility included a four-year Term Note
for $2 million which matured in September of 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%. The PNC Facility is guaranteed by VerifyMe and secured by
the assets of PeriShip Global and VerifyMe. As of January 21, 2025, the Term Note was paid in full and no future principal payments are
due.
We were not in compliance with
all affirmative and restrictive covenants under the PNC Facility at December 31, 2025. On March 26, 2026, we received a waiver as of December
31, 2025, for certain events of default.
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In connection with the Merger Agreement we have agreed that PeriShip
Global will not utilize the PNC Facility or RLOC from the execution of the Merger Agreement. Additionally, we have agreed that at least
three business days prior to closing of the merger to cause PeriShip Global to use its reasonable best efforts to obtain and deliver to
Open World, a customary payoff letter with respect to the PNC Facility. As such, we do not expect to be able to utilize the PNC Facility
or RLOC unless the merger is not completed pursuant to the terms of the merger agreement.
We believe that our cash and cash equivalents,
together with the proceeds from the warrant inducement and loan agreement, 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 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.
The critical accounting estimates of impairment
assessment of intangible assets and goodwill are estimates made in accordance with generally accepted accounting principles that involve
a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition
or results of operations.
Revenue Recognition
We recognize revenue based on the principals established
in the Financial Accounting Standards Board 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, 2025. No other factors materially impacted the balances.
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, 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 August 26, 2025, our prior carrier partner
notified providers, including PeriShip Global, that it would be providing preferred shipping services internally and that the providers
would no longer be approved FedEx preferred shippers effective September 24, 2025. 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 us to conduct an interim test of the fair value of the goodwill for the Precision Logistics segment. We performed a quantitative
goodwill impairment test and determined the fair value of our reporting units using a combination of an income approach, and a market
approach, employing a guideline public company approach. The results of our goodwill impairment test indicated that the carrying value
of the Precision Logistics reporting unit exceeded its estimated fair value. As a result, we recorded a goodwill impairment charge of
$1,062 thousand during the year ended December 31, 2025, within goodwill and intangible asset impairment on the consolidated statement
of operations.
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Intangibles
We review long-lived assets for impairment when
performance expectations, events, or changes in circumstances indicate that the asset’s carrying value may not be recoverable. The
evaluation is performed at the lowest level of identifiable cashflows by comparing the carrying value of the asset to the undiscounted
cashflow. If the evaluation indicates that the carrying amount of the assets may not be recoverable, any potential impairment is measured
based upon the fair value of the related asset or asset group as determined by an appropriate market appraisal or other valuation technique.
On August 26, 2025, our prior carrier partner
notified providers, including PeriShip Global, that it would be providing preferred shipping services internally and that the providers
would no longer be approved FedEx preferred shippers effective September 24, 2025. As a result of the revised internal forecasts, the
Company concluded in accordance with Topic ASC 360 that this change was an interim triggering event for the three months ended September
30, 2025, indicating the carrying value of our long-lived assets including internally used software, deferred implementation, trademarks,
customer relationships, non-compete and developed technology may not be recoverable. Accordingly, the Company performed an interim impairment
test and assessed the recoverability of the related intangible assets by using level 3 inputs and comparing the carrying value to the
net undiscounted cashflow expected to be generated. The analysis indicated that certain intangible assets were impaired. We recorded an
intangible impairment charge of $2,788 thousand during the year ended December 31, 2025, within goodwill and intangible asset impairment
on the consolidated statement of operations.
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.
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 is 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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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
Not applicable for smaller reporting companies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements required to be filed pursuant to this Item 8
are appended to this Report beginning on page F-1 located immediately after the signature page and incorporated by reference in this Item
8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.