VerifyMe (VRME) 10-Q 2023 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 001-39332  

VERIFYME, INC.

(Exact Name of Registrant as Specified in Its Charter)

Nevada	23-3023677
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
801 International Parkway, Fifth Floor Lake Mary, FL	32746
(Address of Principal Executive Offices)	(Zip Code)
(585) 736-9400
(Registrant’s Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal year, if Changed Since Last Report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which Registered
Common Stock, par value $0.001 per share	VRME	The Nasdaq Capital Market
Warrants to Purchase Common Stock	VRMEW	The Nasdaq Capital Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes x     No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T  § 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes x    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or, an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company,” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	x	Smaller reporting company	x
Emerging growth company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o     No x 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 9,991,806 shares of common stock outstanding at November 6, 2023.

2

PART I - FINANCIAL INFORMATION
ITEM 1.	Financial Statements	4
Consolidated Balance Sheets (Unaudited)		4
Consolidated Statements of Operations (Unaudited)		6
Consolidated Comprehensive Loss (Unaudited)		7
Consolidated Statements of Cash Flows (Unaudited)		8
Consolidated Statements of Stockholders' Equity (Unaudited)		10
Notes to Consolidated Financial Statements (Unaudited)		12
ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	32
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	42
ITEM 4.	Controls and Procedures	42
PART II - OTHER INFORMATION
ITEM 1.	Legal Proceedings	44
ITEM 1A.	Risk Factors	44
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
ITEM 3.	Defaults Upon Senior Securities	45
ITEM 4.	Mine Safety Disclosures	45
ITEM 5.	Other Information	45
ITEM 6.	Exhibits	45
SIGNATURES		46

3

PART I - FINANCIAL STATEMENTS

ITEM 1. 

VerifyMe, Inc.

Consolidated Balance Sheets

(In thousands, except share data)

	As of
	September 30, 2023		December 31, 2022
	(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents including restricted cash	$	3,007	$	3,411
Accounts receivable, net of allowance for credit loss reserve, $76 and $37 as of September 30, 2023 and December 31, 2022, respectively		1,379		4,448
Unbilled revenue		885		1,185
Prepaid expenses and other current assets		302		333
Inventory		42		81
TOTAL CURRENT ASSETS		5,615		9,458
PROPERTY AND EQUIPMENT, NET	$	265	$	292
RIGHT OF USE ASSET		506		469
INTANGIBLE ASSETS, NET		7,107		6,545
GOODWILL		5,313		3,988
TOTAL ASSETS	$	18,806	$	20,752
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Debt, short-term	$	1,000	$	500
Accounts payable		1,497		3,912
Other accrued expense		815		902
Lease liability- current		160		115
Contingent liability-short term		162		-
TOTAL CURRENT LIABILITIES		3,634		5,429
LONG-TERM LIABILITIES
Contingent liability-long term	$	827	$	-
Long-term lease liability		346		359
Long-term derivative liability		-		3
Term note		1,000		1,375
Convertible Note – related party		425		-
Convertible Note		675		-
TOTAL LIABILITIES	$	6,907	$	7,166
STOCKHOLDERS' EQUITY
Series A Convertible Preferred Stock, $.001 par value, 37,564,767 shares authorized; 0 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively		-		-
Series B Convertible Preferred Stock, $.001 par value; 85 shares authorized; 0.85 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively		-		-

4

Common stock,  $0.001 par value; 675,000,000 authorized; 10,270,400 and 9,341,002 issued, 9,935,534 and 8,951,035 shares outstanding as of September 30, 2023 and December 31, 2022, respectively		10			10
Additional paid in capital		94,563			92,987
Treasury stock as cost; 334,866 and 389,967 shares at September 30, 2023 and December 31, 2022, respectively		(748	)		(949	)
Accumulated deficit		(81,851	)		(78,459	)
Accumulated other comprehensive loss		(75	)		(3	)
STOCKHOLDERS' EQUITY		11,899			13,586
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	18,806		$	20,752

The accompanying notes are an integral part of these unaudited consolidated financial statements.

5

VerifyMe, Inc.

Consolidated Statements of Operations

(Unaudited)

(In thousands, except share data)

	Three months ended						Nine months ended
	September 30, 2023			September 30, 2022			September 30, 2023			September 30, 2022
NET REVENUE	$	5,604		$	5,215		$	16,600		$	9,873
COST OF REVENUE		3,312			3,360			10,734			6,210
GROSS PROFIT		2,292			1,855			5,866			3,663
OPERATING EXPENSES
General and administrative (a)		2,754			2,213			7,852			6,213
Research and development		5			39			23			73
Sales and marketing (a)		388			478			1,388			1,224
Total Operating expenses		3,147			2,730			9,263			7,510
LOSS BEFORE OTHER (EXPENSE) INCOME		(855	)		(875	)		(3,397	)		(3,847	)
OTHER (EXPENSE) INCOME
Interest expenses, net		(39	)		(32	)		(127	)		(54	)
Loss on equity investment		-			-			-			(10,964	)
Unrealized (loss) gain on equity investment		-			(1	)		(2	)		5
Change in fair value of contingent consideration		(36	)		-			136			-
Other income (expense), net		-			25			(2	)		28
Gain on extinguishment of debt		-			326			-			326
TOTAL OTHER (EXPENSE) INCOME, NET		(75	)		318			5			(10,659	)
NET LOSS	$	(930	)	$	(557	)	$	(3,392	)	$	(14,506	)
LOSS PER SHARE:
BASIC		(0.09	)		(0.06	)		(0.35	)		(1.76	)
DILUTED		(0.09	)		(0.06	)		(0.35	)		(1.76	)
WEIGHTED AVERAGE COMMON SHARE OUTSTANDING
BASIC		9,879,202			8,943,613			9,732,619			8,219,154
DILUTED		9,879,202			8,943,613			9,732,619			8,219,154

(a) Includes share-based compensation of $498 thousand and $1,099 thousand for the three and nine months ended September 30, 2023, respectively, and $354 thousand $1,095 thousand for the three and nine months ended September 30, 2022.  

The accompanying notes are an integral part of these unaudited consolidated financial statements.

6

Consolidated Statements of Other Comprehensive Loss

(Unaudited)

(In thousands)

	Three months ended						Nine months ended
	September 30, 2023			September 30, 2022			September 30, 2023			September 30, 2022
NET LOSS	$	(930	)	$	(557	)	$	(3,392	)	$	(14,506	)
Change in fair value of interest rate, Swap		3			-			4			-
Foreign currency translation adjustments		(28	)		-			(76	)		-
Total Comprehensive Loss	$	(955	)	$	(557	)	$	(3,464	)	$	(14,506	)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

7

VerifyMe, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

	Nine months ended
	September 30, 2023			September 30, 2022
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(3,392	)	$	(14,506	)
Adjustments to reconcile net loss to net cash used in operating activities:
Allowance for bad debt		49			13
Stock based compensation		46			123
Unrealized loss (gain) on equity investment		2			(5	)
Change in fair value of contingent consideration		(136	)		-
Fair value of restricted stock awards and restricted stock units issued in exchange for services		1,053			972
Loss on disposal of equipment		2			-
Intangible asset impairment		34			-
Loss on equity investment		-			10,964
Gain on extinguishment of debt		-			(326	)
Amortization and depreciation		835			504
Unrealized loss on foreign currency transactions		16			-
Changes in operating assets and liabilities:
Accounts receivable		3,015			(69	)
Unbilled revenue		300			(695	)
Inventory		38			(89	)
Prepaid expenses and other current assets		51			(33	)
Accounts payable, other accrued expenses and net change in operating leases		(2,512	)		479
Net cash used in operating activities		(599	)		(2,668	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of patents	$	(51	)	$	(33	)
Leasehold improvements		(8	)		-
Purchase of office equipment		(24	)		-
Cash paid in business combination		(363	)		(7,500	)
Deferred implementation costs		(58	)		(87	)
Capitalized software costs		(576	)		(127	)
Net cash used in investing activities		(1,080	)		(7,747	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from public offering of securities	$	-		$	4,528
Proceeds from line of credit		800			-
Proceeds from convertible debt		1,100			-
Proceeds from issuance of note payable		-			2,000
Proceeds from SPP Plan		80			102
Tax withholding payments for employee stock-based compensation in exchange for shares surrendered		(18	)		(34	)
Increase in treasury shares (share repurchase program)		(10	)		(185	)
Repayment of debt and line of credit		(675	)		-
Settlement of debt and redemption of shares from PeriShip seller		-			(1,724	)
Net cash provided by financing activities		1,277			4,687
Effect of exchange rate changes on cash		(2	)		-
NET DECREASE CASH AND CASH EQUIVALENTS		(404	)		(5,728	)
CASH AND CASH EQUIVALENTS INCLUDING RESTRICTED CASH- BEGINNING OF PERIOD		3,411			9,422
CASH AND CASH EQUIVALENTS INCLUDING RESTRICTED CASH- END OF PERIOD	$	3,007		$	3,694

8

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest	$	129	$	-
Income taxes	$	-	$	-
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Initial recognition of right-of-use asset and lease liability during the period	$	-	$	552
Change in fair value of interest rate, swap	$	4	$	-
Exercise of pre-funded warrants	$	-	$	1

The accompanying notes are an integral part of these unaudited consolidated financial statements.

9

VerifyMe, Inc.

Consolidated Statements of Stockholders' Equity

(Unaudited)

(In thousands, except share data)

	Series A				Series B
	Convertible				Convertible
	Preferred				Preferred				Common								Treasury
	Stock				Stock				Stock								Stock
														Additional
	Number of				Number of				Number of					Paid-In			Number of							Accumulated
	Shares		Amount		Shares		Amount		Shares			Amount		Capital			Shares			Amount				Deficit			Total
Balance at June 30, 2022		-		-		0.85		-		8,467,046			9		92,347			198,956			(756	)	-		(78,010	)		13,590
Restricted stock awards, net of shares withheld for employee tax		-		-		-		-		-			-		33			-			-				-			33
Restricted Stock Units		-		-		-		-		-			-		289			-			-				-			289
Stock Purchase Plan		-		-		-		-		-			-		31			-			-				-			31
Common stock issued in relation to Stock Purchase Plan		-		-		-		-		28,895			-		(63	)		(28,895	)		98				-			35
Common stock issued in relation to private placement		-		-		-		-		-			-		(24	)		-			-				-			(24	)
Repurchase of Common Stock		-		-		-		-		(135,530	)		-		-			135,530			(185	)			-			(185	)
Exercise of Pre-funded Warrants		-		-		-		-		675,000			1		-			-			-				-			1
Net loss		-		-		-		-		-			-		-			-			-		-		(557	)		(557	)
Balance at September 30, 2022		-		-		0.85		-		9,035,411			10		92,613			305,591			(843	)	-		(78,567	)		13,213

	Convertible				Convertible
	Preferred				Preferred				Common							Treasury
	Stock				Stock				Stock							Stock
													Additional									Accumulated Other
	Number of				Number of				Number of				Paid-In			Number of						Comprehensive			Accumulated
	Shares		Amount		Shares		Amount		Shares		Amount		Capital			Shares			Amount			Loss			Deficit			Total
Balance at June 30, 2023		-		-		0.85		-		9,842,765		10		94,111			347,668			(792	)		(50	)		(80,921	)		12,358
Restricted stock awards, net of shares withheld for employee tax		-		-		-		-		14,000		-		170			-			-			-			-			170
Restricted Stock Units, net of shares withheld for employee tax		-		-		-		-		65,967		-		308			-			-			-			-			308
Common stock issued in relation to Stock Purchase Plan		-		-		-		-		12,802		-		(26	)		(12,802	)		44			-			-			18
Accumulated other comprehensive income		-		-		-		-		-		-		-			-			-			(25	)		-			(25	)
Net loss		-		-		-		-		-		-		-			-			-			-			(930	)		(930	)
Balance at September 30, 2023		-		-		0.85		-		9,935,534		10		94,563			334,866			(748	)		(75	)		(81,851	)		11,899

The accompanying notes are an integral part of these unaudited consolidated financial statements.

10

VerifyMe, Inc.

Consolidated Statements of Stockholders' Equity

(Unaudited)

(In thousands, except share data)

	Series A				Series B
	Convertible				Convertible
	Preferred				Preferred				Common								Treasury
	Stock				Stock				Stock								Stock
														Additional
	Number of				Number of				Number of					Paid-In			Number of							Accumulated
	Shares		Amount		Shares		Amount		Shares			Amount		Capital			Shares			Amount				Deficit			Total
Balance at December 31, 2021		-		-		0.85		-		7,196,677			7		86,059			223,956			(838	)	-		(64,061	)		21,167
Restricted stock awards, net of shares withheld for employee tax		-		-		-		-		29,688			-		172			-			-				-			172
Restricted Stock Units		-		-		-		-		-			-		766			-			-				-			766
Stock Purchase Plan		-		-		-		-		-			-		98			-			-				-			98
Common stock issued in relation to Stock Purchase Plan		-		-		-		-		53,895			-		(78	)		(53,895	)		180				-			102
Common stock issued in relation to private placement		-		-		-		-		880,208			2		4,526			-			-				-			4,528
Common stock issued for services		-		-		-		-		30,000			-		96			-			-				-			96
Common stock issued in relation to Acquisition		-		-		-		-		305,473			-		974			-			-				-			974
Repurchase of Common Stock		-		-		-		-		(135,530	)		-		-			135,530			(185	)			-			(185	)
Exercise of Pre-funded Warrants		-		-		-		-		675,000			1		-			-			-				-			1
Net loss				-		-		-		-			-		-			-			-		-		(14,506	)		(14,506	)
Balance at September 30, 2022		-		-		0.85		-		9,035,411			10		92,613			305,591			(843	)	-		(78,567	)		13,213

	Convertible				Convertible
	Preferred				Preferred				Common								Treasury
	Stock				Stock				Stock								Stock
														Additional									Accumulated Other
	Number of				Number of				Number of					Paid-In			Number of						Comprehensive			Accumulated
	Shares		Amount		Shares		Amount		Shares			Amount		Capital			Shares			Amount			Loss			Deficit			Total
Balance at December 31, 2022		-		-		0.85		-		8,951,035			10		92,987			389,967			(949	)		(3	)		(78,459	)		13,586
Restricted stock awards, net of shares withheld for employee tax		-		-		-		-		499,444			-		317			-			-			-			-			317
Restricted stock units, net of shares withheld for employee tax		-		-		-		-		67,717			-		718			-			-			-			-			718
Common stock issued in relation to Stock Purchase Plan		-		-		-		-		70,047			-		(84	)		(61,302	)		211			-			-			127
Common stock issued in relation to Acquisition		-		-		-		-		353,492			-		625			-			-			-			-			625
Repurchase of common stock		-		-		-		-		(6,201	)		-		-			6,201			(10	)		-			-			(10	)
Accumulated other comprehensive loss		-		-		-		-		-			-		-			-			-			(72	)					(72	)
Net loss				-		-		-		-			-		-			-			-			-			(3,392	)		(3,392	)
Balance at September 30, 2023		-		-		0.85		-		9,935,534			10		94,563			334,866			(748	)		(75	)		(81,851	)		11,899

The accompanying notes are an integral part of these unaudited consolidated financial statements.

11

VerifyMe, Inc.

Notes to the Consolidated Financial Statements (unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of the Business

VerifyMe, Inc. (“VerifyMe”) was incorporated in the State of Nevada on November 10, 1999. VerifyMe, together with its subsidiaries, including PeriShip Global LLC (“PeriShip Global”) and Trust Codes Global Limited (“Trust Codes Global”), (together the “Company,” “we,” “us,” or “our”) is based in Lake Mary, Florida and its common stock, par value $0.001 per share, and warrants to purchase common stock are traded on The Nasdaq Capital Market (“Nasdaq”) under the trading symbols “VRME” and “VRMEW,” respectively.

VerifyMe, through PeriShip Global, is a software driven predictive analytics logistics provider of high-touch, end-to-end logistics management, which represents most of our current revenue stream. In addition, VerifyMe technologies provide product traceability and brand solutions. Our operations are split into two segments: Precision Logistics and Authentication. Through our Precision Logistics segment, we provide a value-added service for time and temperature sensitive parcel management driven by a proprietary software platform that provides predictive analytics from key metrics such as flight-tracking, weather, and traffic, all delivered to customers via a secure portal. The portal provides real-time visibility into shipment transit and last-mile events, with dynamic dashboards. All aspects of the shipping journey are managed by a dedicated service center. Using our proprietary logistics solution, we provide real-time information and analysis to mitigate supply chain flow interruption, delivering last-mile resolution for key markets, including the perishable healthcare and food industries. Through our Authentication segment, our technologies provide unit level traceability and brand solutions allowing brand owners to gather business intelligence, cross-sell products, monitor product diversion through the supply chain and build brand loyalty through interaction utilizing our unique dynamic codes which are read by consumers with their smart phones. The Company’s activities are subject to significant risks and uncertainties. See the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections in this report.

Reclassifications

Certain amounts presented for the three and nine months ended September 30, 2022, reflect reclassifications made to conform to the presentation in our current reporting period. These reclassifications had no effect on the previously reported net loss.

Basis of Presentation

The accompanying unaudited interim consolidated financial statements (the “Interim Statements”) include the accounts of VerifyMe and its wholly owned subsidiaries PeriShip Global and Trust Codes Global. All significant intercompany balances and transactions have been eliminated upon consolidation. The consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and disclosures required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements are not included herein. The Interim Statements should be read in conjunction with the financial statements and notes thereto included in the Company’s latest Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange Commission (the “SEC”) on March 28, 2023.  The accompanying Interim Statements are unaudited; however, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The interim results for the three and nine months ended September 30, 2023, are not necessarily indicative of the results to be expected for the year ending December 31, 2023, or for any future interim periods.

Restricted Cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts in the consolidated statements of cash flows (dollars in thousands):

Schedule of cash, cash equivalents and restricted cash
	As of
	September 30, 2023		December 31,2022
Cash and cash equivalents	$	2,944	$	3,348
Restricted cash		63		63
Total cash and cash equivalents including restricted cash	$	3,007	$	3,411

The Company classifies cash and cash equivalents that are restricted from operating use for the next twelve months as restricted cash. As of September 30, 2023, and December 31, 2022, the Company held $63 thousand subject to restrictions.

12

Segment Reporting

Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision maker, or decision-making group, in deciding the method by which to allocate resources and assess performance. The Company has two reportable segments, namely, (i) Precision Logistics (formerly PeriShip Global) and (ii) Authentication (formerly VerifyMe Solutions). See Note 12 Segment Reporting, for further discussion of the Company’s segment reporting structure. 

Foreign Currency Translation

The functional currency of our New Zealand operations is the local currency, New Zealand dollar (NZD). The translation of the foreign currency into U. S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using the weighted average exchange rates prevailing during the year. The unrealized gains and losses resulting from such translation are included as a component of comprehensive income. Translation gains and losses arising from currency exchange rate fluctuations on transactions denominated in a currency other than the local functional currency are included in “General and administrative” on our Consolidated Statements of Operations. The foreign currency transaction losses for the three and nine months ended September 30, 2023, were $16 thousand and $30 thousand, respectively.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Recent Accounting Pronouncements

In October 2021, the FASB issued Accounting Standards Update No. 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”). ASU 2021-08 amends ASC 805 to require acquiring entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The Company adopted the new standard beginning January 1, 2023, and did not have an effect on its financial position, results of operations or cash flows.

Fair Value of Financial Instruments

The Company’s financial instruments consist of accounts receivable, unbilled revenue, accounts payable, notes payable and accrued expenses, equity investment, contingent consideration and long-term derivative liabilities. The carrying value of accounts receivable, accounts payable and accrued expenses approximate their fair value because of their short maturities.  The Company believes the carrying amount of its notes payable approximates fair value based on rates and other terms currently available to the Company for similar debt instruments.

The Company follows FASB ASC 820, “Fair Value Measurements and Disclosures,” and applies it to all assets and liabilities that are being measured and reported on a fair value basis. The statement requires that assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data

Level 3: Unobservable inputs that are not corroborated by market data

The level in the fair value within which a fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

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The following table presents the Company’s financial instruments that are measured and recorded at fair value on the Company’s balance sheets on a recurring basis, and their level within the fair value hierarchy as of September 30, 2023 and December 31, 2022.

Amounts in Thousands ('000)

Schedule of fair value assets measured on recurring basis
	Short Term Investment			Derivative Asset (Liability)			Contingent Consideration
	(Level 1)			(Level 2)			(Level 3)
Balance as of December 31, 2022	$	100			(3	)		-
Unrealized loss on fair value recognized in other income (expense)		(2	)		-			-
Contingent Consideration at issuance		-			-			(1,125	)
Change in fair value of Contingent Consideration		-			-			136
Change in fair value to interest rate, SWAP, recognized in other comprehensive loss		-			4			-
Balance at September 30, 2023	$	98		$	1		$	(989	)

Equity Investments

When the Company does not have a controlling financial interest in an entity but can exert influence over the entity’s operations and financial policies, the investment is accounted for either (i) under the equity method of accounting or (ii) at fair value by electing the fair value option available under applicable generally accepted accounting policies. The Company has elected the fair value option for its equity security under prepaid expenses and other current assets on the Consolidated Balance Sheets, as it has determined the fair value best reflects the economic performance of the equity investment. Changes in unrecognized gain or loss of the fair value of the equity investments are included in Other income (expense) on the accompanying Consolidated Statements of Operations.

Revenue Recognition

The Company accounts for revenues according to Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” which establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. 

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The Company applies the following five steps, separated by reportable segments, in order to determine the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements. For more detailed information about reportable segments, see Note 12 – Segment reporting.

· identify the contract with a customer;

· identify the performance obligations in the contract;

· determine the transaction price;

· allocate the transaction price to performance obligations in the contract; and

· recognize revenue as the performance obligation is satisfied.

The Company generally considers completion of an agreement, or Statement of Work (“SOW”) and/or purchase order as a customer contract, provided collection is considered probable.

Precision Logistics

Our Precision Logistics segment consists of two service lines, Proactive and Premium. Under our Proactive service line, clients pay us directly for carrier service coupled with our proactive logistics service. Terms typically range 7 days and no longer than 30 days. The Company has determined it is the principal and recognizes shipment fees in gross revenue. Under our Premium service line, we provide complete white-glove shipping monitoring and predictive analytics services. This service includes customer web portal access, weather monitoring, temperature control, full service center support and last mile resolution. Payment terms are typically 30 days.

Under both service lines in our Precision Logistics segment, our performance obligation is met, and revenue is recognized, when the packages are delivered. The transaction fees consist of fixed consideration made up of amounts contractually billed to the customer. There are no variable considerations in the transaction fee, in either service line.

Authentication

Our Authentication segment primarily consists of our brand protection service line which consists of a custom suite of products that offer clients traceability and brand solutions. Terms typically range between 30 and 90 days. Our performance obligation is met, and revenue is recognized, when our products are shipped or delivered depending on the specific agreement with the customer. The transaction fee is made up of fixed consideration based on the related purchase order or agreement. Warranties and other variable considerations are analyzed by the Company, in terms of historical warranties, current economic trends, and changes in customer demand, and have been determined to be insignificant in the nine months ended September 30, 2023.

Goodwill

Goodwill represents the excess of purchase price over the fair value of net assets acquired in business combinations. Pursuant to ASC 350, the Company tests goodwill for impairment on an annual basis in the fourth quarter, or between annual tests, in certain circumstances. Under authoritative guidance, the Company first assesses 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.

Business Combinations

The Company applies the provisions of Accounting Standard Codification (“ASC”) Topic 805, Business Combinations, in the accounting for business acquisitions. ASC 805 requires the Company to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the identifiable assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions to accurately apply preliminary value to assets acquired and liabilities assumed at the acquisition date, where applicable, these estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments in the current period, rather than a revision to a prior period. Upon the conclusion of the measurement period or final determination of the values of the assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded in the Consolidated Statements of Operations. Accounting for business combinations requires management to make significant estimates and assumptions, especially at the acquisition date, including estimates for intangible assets where applicable. Although the Company believes the assumptions and estimates made have been reasonable and appropriate, they are based in part on information obtained from management of the acquired companies and are inherently uncertain. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates, or actual results.

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Basic and Diluted Net Loss per Share of Common Stock

The Company follows Financial Accounting Standards Board (“FASB”) ASC 260, “Earnings Per Share,” when reporting earnings per share resulting in the presentation of basic and diluted earnings per share.  Because the Company reported a net loss for each of the periods presented, common stock equivalents, including preferred stock, stock options and warrants were anti-dilutive; therefore, the amounts reported for basic and diluted loss per share were the same. 

For the nine months ended September 30, 2023, and 2022, there were shares potentially issuable, that could dilute basic earnings per share in the future that were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive to the Company’s losses during the periods presented. For the three and nine months ended September 30, 2023, there were approximately 8,385,000 anti-dilutive shares consisting of 2,348,000 unvested performance restricted stock units, restricted stock units, restricted stock awards and options under the stock purchase plan, 307,000 shares issuable upon exercise of stock options, 4,629,000 shares issuable upon exercise of warrants, 957,000 shares issuable upon conversion of convertible debt, and 144,000 shares issuable upon conversion of preferred stock. For the three and nine months ended September 30, 2022, there were approximately 4,852,000 anti-dilutive shares consisting of 757,000 unvested restricted stock units and options under the stock purchase plan, 337,000 shares issuable upon exercise of stock options, 3,614,000 shares issuable upon exercise of warrants, (excludes 1,545,000 warrants not exercisable as of September 30, 2022) and 144,000 shares issuable upon conversion of preferred stock. 

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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 options 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 performance restricted stock units with stock price appreciation targets (see Note 7 – Stock Options, Restricted Stock and Warrants), 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.  

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. 

NOTE 2 – EQUITY INVESTMENTS

In December 2021, the Company acquired 8,841 shares of 10% Cumulative Convertible Series D Preferred Stock at a price of $10.00 per share as payment for a customer’s outstanding AR balance of $88,410. This instrument is considered an equity security within the scope of Topic 321 since the issuing entity has the option but no contractual obligation to redeem the preferred stock, and the Company can convert the preferred shares to common stock. For the three months ended September 30, 2023, there was no change in the fair value. For the nine months ended September 30, 2023, there was an unrealized fair value loss of $2 thousand recognized and included in Unrealized (loss) gain on equity investment, in the accompanying Consolidated Statements of Operations. The fair value of the equity investment was $98 thousand as of September 30, 2023, and $100 thousand as of December 31, 2022, and included in Prepaid expenses and other current assets on the accompanying Consolidated Balance Sheets. The fair value of the equity investment is classified as Level 1 in the fair value hierarchy as the calculation is dependent upon the quoted market price of the entity.

NOTE 3 – REVENUE

Revenue by Category

The following series of tables present our revenue disaggregated by various categories (dollars in thousands).

Schedule of disaggregation of revenue
	Authentication				Precision Logistics				Consolidated
Revenue	Three Months Ended September 30,				Three Months Ended September 30,				Three Months Ended September 30,
	2023		2022		2023		2022		2023		2022
Proactive services	$	-	$	-	$	4,038	$	4,026	$	4,038	$	4,026
Premium services		-		-		1,419		1,010		1,419		1,010
Brand protection services		147		179		-		-		147		179
	$	147	$	179	$	5,457	$	5,036	$	5,604	$	5,215

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	Authentication				Precision Logistics				Consolidated
Revenue	Nine Months Ended September 30,				Nine Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022		2023		2022
Proactive services	$	-	$	-	$	12,742	$	7,341	$	12,742	$	7,341
Premium services		-		-		3,343		1,926		3,343		1,926
Brand protection services		515		606		-		-		515		606
	$	515	$	606	$	16,085	$	9,267	$	16,600	$	9,873

Contract Balances 

The timing of revenue recognition, billings and cash collections results in unbilled revenue (contract assets) and deferred revenue (contract liabilities) on the consolidated balance sheets. Amounts charged to our clients become billable according to the contract terms, which usually consider the delivery completion. Unbilled amounts will generally be billed and collected within 30 days but typically no longer than 60 days. When we advance bill clients prior to the work being performed, generally, such amounts will be earned and recognized in revenue within twelve months. These assets and liabilities are reported on the consolidated balance sheets on a contract-by-contract basis at the end of each reporting period. Changes in the contract asset and liability balances during the nine-month period ended September 30, 2023, were not materially impacted by any other factors.

Applying the practical expedient in ASC Topic 606, we recognize the incremental costs of obtaining contracts (i.e. sales commissions) as an expense when incurred if the amortization period of the assets that we otherwise would have recognized is one year or less. As of September 30, 2023, we did not have any capitalized sales commissions.

For all periods presented, contract liabilities were not significant. 

The following table provides information about contract assets from contracts with customers: 

Schedule of contract assets from contracts with customers
	Contract Asset
	September 30,
In Thousands	2023			2022
Beginning balance, January 1	$	1,185		$	-
Contract asset additions		2,316			1,317
Reclassification to accounts receivable, billed to customers		(2,616	)		(622	)
Ending balance (1)	$	885		$	695

______________

(1) Included within "Unbilled revenue" on the accompanying Consolidated Balance sheets.

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NOTE 4 – BUSINESS COMBINATIONS

Trust Codes Global Limited

On March 1, 2023, we acquired, through Trust Codes Global, the business and certain assets of Trust Codes Limited (“Trust Codes”), specializing in brand protection, anti-counterfeiting, and consumer engagement technology with an expertise in the food and agriculture industry. Trust Codes Global uses unique QR codes or IoT, coupled with GS1 standards to deliver cloud-based brand protection based on a unique per-item digital identity to protect brand and product authenticity, increase data visualization of a product through the end to end supply chain, and creates a data-drive engine to inform and educate consumers of the product. The Company accounted for the transaction as an acquisition of a business under ASC 805 – Business Combination. The purchase price was approximately $1.0 million which consisted of $0.36 million in cash paid at closing and 353,492 shares of common stock of the Company, representing $0.65 million in stock consideration. In addition, the purchase agreement requires consideration contingent upon the achievement of earnings targets during a five-year period subsequent to the closing of the acquisition. The earn-out consideration is estimated at $1.1 million at the acquisition date, however the maximum amount of the payment is unlimited. The preliminary purchase price allocation is subject to change and is expected to be finalized in the fourth quarter of 2023. The goodwill recognized is due to the expected synergies from combining the operations of the acquiree with the Company. All of the goodwill recorded for financial statement purposes is deductible for tax purposes. The Company incurred $278 thousand in relation to acquisition related costs which have been included in General and administrative, in the accompanying Consolidated Statements of Operations. Trust Codes Global is included in the Authentication segment and the results of its operations have been included in the consolidated financial statements beginning March 1, 2023. Trust Codes has generated $219 thousand in revenues since the acquisition date through September 30, 2023, included in the Consolidated Statements of Operations. The pro-forma financial information for Trust Codes is not required.

The following table summarizes the purchase price allocation for the acquisition (dollars in thousands).

Schedule of business acquisitions
Cash	$	363
Fair value of contingent consideration		1,125
Stock (issuance of 353,492 shares of common stock) (a)		625
Total purchase price	$	2,113
				Amortization
				Period
Purchase price allocation:
Prepaid expenses	$	25
Property and Equipment, net		18
ROU Asset		171
Developed Technology		485		8 years
Trade Names/Trademarks		148		18 years
Customer Relationships		68		10 years
Goodwill		1,383
Accounts payable and other accrued expenses		(14	)
Current lease liability		(63	)
Long term lease liability		(108	)
	$	2,113

^(a) Stock issued was calculated based on the 15 day volume-weighted average price (“VWAP”) through February 28, 2023 calculated at $1.8388.

Contingent Consideration

ASC Topic 805 requires that contingent consideration to be recognized at fair value on the acquisition date and be re-measured each reporting period with subsequent adjustments recognized in the consolidated statement of operations. We estimate the fair value of contingent consideration liabilities using an appropriate valuation methodology, typically either an income-based approach or a simulation model, such as the Monte Carlo model, depending on the structure of the contingent consideration arrangement. Contingent consideration is valued using significant inputs that are not observable in the market which are defined as Level 3 inputs pursuant to fair value measurement accounting. We believe our estimates and assumptions are reasonable; however, there is significant judgment involved. At each reporting date, the contingent consideration obligation is revalued to estimated fair value, and changes in fair value subsequent to the acquisitions are reflected in income or expense in the consolidated statements of operations, and could cause a material impact to, and volatility in, our results. Changes in the fair value of contingent consideration obligations may result from changes in discount periods and rates and changes in the timing and amount of revenue and/or earnings projections.

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As of September 30, 2023, contingent consideration presented as current liability totaled $162 thousand. As of September 30, 2023, we also had accrued long term contingent consideration totaling $827 thousand related to the acquisition of Trust Codes on the consolidated balance sheets and represents the portion of contingent consideration estimated to be payable greater than twelve months from the balance sheet date.

NOTE 5 – INTANGIBLE ASSETS AND GOODWILL

Goodwill

Goodwill represents costs in excess of values assigned to the underlying net assets of acquired businesses. Intangible assets acquired are recorded at estimated fair value. Goodwill is deemed to have an indefinite life and is not amortized but is tested for impairment annually, and at any time when events suggest an impairment more likely than not has occurred. We test goodwill at the reporting unit level.

ASC Topic 350, Intangibles - Goodwill and Other (ASC Topic 350), permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative goodwill impairment test.  Under ASC Topic 350, an entity is not required to perform a quantitative goodwill impairment test for a reporting unit if it is more likely than not that its fair value is greater than its carrying amount. A reporting unit is an operating segment, or one level below an operating segment, as defined by U.S. GAAP.

Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and determination of appropriate market comparables. We base our fair value estimates on assumptions we believe to be reasonable but are unpredictable and inherently uncertain. Actual future results may differ from those estimates. The timing and frequency of our goodwill impairment tests are based on an ongoing assessment of events and circumstances that would indicate a possible impairment. We will continue to monitor our goodwill and intangible assets for impairment and conduct formal tests when impairment indicators are present.

Each of our two reportable segments represents an operating segment under ASC Topic 280, Segment Reporting. We test our goodwill at the reporting unit level, or one level below an operating segment, under ASC Topic 350, Intangibles - Goodwill and Other. We determined that we have two reporting units for purposes of goodwill impairment testing, which represent our two reportable business segments, as discussed below.

Changes in the carrying amount of goodwill by reportable business segment for the nine months ended September 30, 2023, were as follows (in thousands):

Schedule of goodwill by reportable business segment
	Authentication			Precision Logistics		Total
Net book value at
January 1, 2023	$	-		$	3,988	$	3,988
2023 Activity
Acquisition of Trust Codes Global		1,383			-		1,383
Foreign currency translation		(58	)		-		(58	)
Net book value at
September 30, 2023	$	1,325		$	3,988	$	5,313

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Intangible Assets Subject to Amortization

Our intangible assets include amounts recognized in connection with patents and trademarks, capitalized software and acquisitions, including customer relationships, tradenames, developed technology and non-compete agreements. Intangible assets are initially valued at fair market value using generally accepted valuation methods appropriate for the type of intangible asset. Amortization is recognized on a straight-line basis over the estimated useful life of the intangible assets. Intangible assets with definite lives are reviewed for impairment if indicators of impairment arise. Except for goodwill, we do not have any intangible assets with indefinite useful lives.

Intangible assets with finite lives are subject to amortization over their estimated useful lives. The primary assets included in this category and their respective balances were as follows (in thousands):

Schedule of intangible assets subject to amortization
September 30, 2023	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted Average Remaining Useful Life (Years)
Patents and Trademarks	$	2,045	$	(538	)	$	1,507		13
Capitalized Software		161		(101	)		60		2
Customer Relationships		1,904		(269	)		1,635		9
Developed Technology		3,607		(789	)		2,818		5
Internally Used Software		812		(40	)		772		5
Non-Compete Agreement		191		(55	)		136		4
Deferred Implementation		198		(19	)		179		9
Total Intangible Assets	$	8,918	$	(1,811	)	$	7,107
December 31, 2022
Patents and Trademarks	$	1,858	$	(445	)	$	1,413		13
Capitalized Software		206		(91	)		115		3
Customer Relationships		1,839		(133	)		1,706		9
Developed Technology		3,143		(360	)		2,783		5
Internally Used Software		236		(4	)		232		6
Non-Compete Agreement		191		(28	)		163		4
Deferred Implementation		140		(7	)		133		10
Total Intangible Assets	$	7,613	$	(1,068	)	$	6,545

Amortization expense for intangible assets was $266 thousand and $248 thousand for the three months ended September 30, 2023, and 2022, respectively, and $761 thousand and $446 thousand for the nine months ended September 30, 2023, and 2022, respectively. During the nine months ended September 30, 2023, the Company impaired certain assets related to its Developed Technology and Patents by $28 thousand and $6 thousand, respectively, to bring the gross carrying amount related to these assets to zero, as these technologies are no longer in use.

Patents and Trademarks

As of September 30, 2023, our current patent and trademark portfolios consist of nine granted U.S. patents and one granted European patent validated in four countries (France, Germany, United Kingdom, and Italy), five pending U.S. and foreign patent applications, twenty-six registered U.S. trademarks (of which seven trademarks were acquired through our wholly owned subsidiary, PeriShip Global), two EU trademark registrations, one Colombian trademark registration, one Australian trademark registration, one Japanese trademark registration, one Mexican trademark registration, one Singaporean trademark registration, two UK trademark registrations, six NZ trademark registration (in the name of Trust Codes Limited and/or Trust Codes Global Limited), one OAPI (African Intellectual Property Organization) trademark registration (in the name of Trust Codes Global Limited), and seven pending US and foreign trademark applications (of which one European trademark application is in the name of Trust Codes Limited). The Company abandoned three patents during the nine months ended September 30, 2023.

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The Company expects to record amortization expense of intangible assets over the next 5 years and thereafter as follows (in thousands):

Schedule of future amortization expense
Fiscal Year ending December 31,
2023 (three months remaining)	$	291
2024		1,137
2025		1,112
2026		1,108
2027		1,073
Thereafter		2,386
Total	$	7,107

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NOTE 6 – STOCKHOLDERS’ EQUITY

The Company expensed $177 thousand and $325 thousand related to restricted stock awards for the three and nine months ended September 30, 2023, respectively. The Company expensed $33 thousand and $206 thousand related to restricted stock awards for the three and nine months ended September 30, 2022, respectively.

The Company expensed $316 thousand and $728 thousand related to restricted stock units for the three and nine months ended September 30, 2023, and $289 thousand and $766 thousand related to restricted stock units for the three and nine months ended September 30, 2022.

On February 28, 2023, 353,492 shares of common stock were issued in relation to the acquisition of Trust Codes Global, see Note 4 – Business Combinations, for details. 

Non-Qualified Stock Purchase Plan

On June 10, 2021, the stockholders of the Company approved a non-qualified stock purchase plan (the “2021 Plan”). The 2021 Plan provides eligible participants, including employees, directors and consultants of the Company, the opportunity to purchase shares of the Company’s common stock thereby increasing their interest in the Company’s continued success. The maximum number of common stock reserved and available for issuance under the 2021 Plan is 500,000 shares. The purchase price of shares of common stock acquired pursuant to the exercise of an option will be the lesser of 85% of the fair market value of a share (a) on the enrollment date, and (b) on the exercise date. The 2021 Plan is not intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended (the “Code”). The Company applied FASB ASC 718, “Compensation-Stock Compensation” and estimated the fair value using the Black-Scholes model, as the 2021 Plan is considered compensatory. In relation to the 2021 Plan the Company expensed $5 thousand and $46 thousand for the three and nine months ended September 30, 2023, respectively, and $31 thousand and $98 thousand, respectively during the three and nine months ended September 30, 2022. During the nine months ended September 30, 2023 and 2022, the Company received $80 thousand and $102 thousand, respectively, in proceeds related to the 2021 Plan.

Shares Held in Treasury

As of September 30, 2023, and December 31, 2022, the Company had 334,866 and 389,967 shares, respectively, held in treasury with a value of approximately $748 thousand and $949 thousand, respectively.  

On August 31, 2023, 6 participants exercised their option under the Company’s non-qualified stock purchase plan, and as a result, 12,802 shares were issued from treasury, with an exercise price of $0.96 per share.

On February 28, 2023, fourteen participants exercised their option under the Company’s non-qualified stock purchase plan, and as a result, 57,245 shares were issued, of which 48,500 were issued from treasury, with an exercise price of $1.19 per share.

On August 31, 2022, four participants exercised their option under the Company’s non-qualified stock purchase plan, and as a result, 28,895 shares were issued from treasury with an exercise price of $1.20 per share.

On February 28, 2022, five participants exercised their option under the Company’s non-qualified stock purchase plan, and as a result, 25,000 shares were issued from treasury with an exercise price of $2.69 per share.

Shares Repurchase Program

Effective July 1, 2022, the Company’s Board of Directors approved a share repurchase program to allow the Company to spend up to $1.5 million to repurchase shares of its common stock, so long as the price does not exceed $5.00. This plan ended on July 1, 2023. During the nine months ended September 30, 2023, the Company repurchased 6,201 shares of common stock for $10 thousand under the Company’s repurchase program.

NOTE 7 – STOCK OPTIONS, RESTRICTED STOCK AND WARRANTS

During 2013, the Company adopted the 2013 Omnibus Equity Compensation Plan (the “2013 Plan”). Under the 2013 Plan, the Company is authorized to grant awards of stock options, restricted stock, restricted stock units and other stock-based awards up to an aggregate of 400,000 shares of common stock.  The 2013 Plan is intended to permit certain stock options granted to employees under the 2013 Plan to qualify as incentive stock options.  All options granted under the 2013 Plan, which are not intended to qualify as incentive stock options are deemed to be non-qualified stock options.  

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On November 14, 2017, the Executive Committee of the Company’s Board of Directors adopted the 2017 Equity Incentive Plan (the “2017 Plan”) which covered the potential issuance of 260,000 shares of common stock. The 2017 Plan provided that directors, officers, employees, and consultants of the Company were eligible to receive equity incentives under the 2017 Plan at the discretion of the Board or the Board’s Compensation Committee.

On August 10, 2020, the Company’s Board of Directors adopted the 2020 Equity Incentive Plan (the “2020 Plan”), subject to stockholder approval, which authorizes the potential issuance of up to 1,069,110 shares of common stock. On September 30, 2020, the Company’s stockholders approved the 2020 Plan, and upon such approval the 2020 Plan became effective and the 2017 Plan was terminated. Shares of common stock underlying existing awards under the 2017 Plan may become available for issuance pursuant to the terms of the 2020 Plan under certain circumstances. Employees and non-employee directors of the Company or its affiliates, and other individuals who perform services for the Company or any of its affiliates, are eligible to receive awards under the 2020 Plan at the discretion of the Board of Directors or the Board’s Compensation Committee.

On March 28, 2022, the Company’s Board of Directors adopted the First Amendment to the 2020 Plan, subject to stockholder approval, which increased the shares authorized for potential issuance under the 2020 Plan to 2,069,100 shares of common stock and extended the term of the 2020 Plan to June 9, 2023. On June 9, 2022, the Company’s stockholders approved the First Amendment to the 2020 Plan. On April 17, 2023, the Company’s Board of Directors adopted the Second Amendment to the 2020 Plan, subject to stockholder approval, which increased the shares authorized for potential issuance under the 2020 Plan to 3,069,100 shares of common stock and extended the term of the 2020 Plan to June 6, 2033. On June 6, 2023, the Company’s stockholders approved the Second Amendment to the 2020 Plan.

The 2020 Plan, as amended, is administered by the Compensation Committee which determines the persons to whom awards will be granted, the number of awards to be granted and the specific terms of each grant, including the vesting thereof, subject to the provisions of the plan.

In connection with incentive stock options, the exercise price of each option may not be less than 100% of the fair market value of the common stock on the date of the grant (or 110% of the fair market value in the case of a grantee holding more than 10% of the outstanding stock of the Company). The aggregate fair market value (determined at the time of the grant) of stock with respect to which incentive stock options are exercisable for the first time by any individual during any calendar year (under all plans of the Company and its affiliates) shall not exceed $100 thousand, and the options in excess of $100 thousand shall be deemed to be non-qualified stock options, including prices, duration, transferability and limitations on exercise. The maximum number of shares of common stock that may be issued under the 2020 Plan pursuant to incentive stock options may not exceed, in the aggregate, 1,000,000.

The Company has issued non-qualified stock options pursuant to contractual agreements with non-employees. Options granted under the agreements are expensed when the related service or product is provided. Determining the appropriate fair value of stock-based awards requires the input of subjective assumptions. The Company uses the Black-Scholes option pricing model to value its stock option awards. The assumptions used in calculating the fair value represent management’s best estimates and involve inherent uncertainties and judgements.

Stock Options

The following table summarizes the activities for the Company’s stock options as of September 30, 2023:

Schedule of stock options
	Options Outstanding
						Weighted -
						Average
						Remaining		Aggregate
				Weighted-		Contractual		Intrinsic
	Number of			Average		Term		Value
	Shares			Exercise Price		(in years)		(in thousands)(1)
Balance as of December 31, 2022		337,471		$	4.63
Granted		-			-
Forfeited/Cancelled/Expired		(30,000	)	$	4.67
Balance as of September 30, 2023		307,471		$	4.62
Exercisable as of September 30, 2023		307,471		$	4.62		1.4	$	-

(1) The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock for options that were in-the-money at each respective period. 

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As of September 30, 2023, the Company had no unvested stock options.

During the three and nine months ended September 30, 2023, and 2022, the Company expensed $0 thousand, respectively, with respect to options.

As of September 30, 2023, there was $0 unrecognized compensation cost related to outstanding stock options.

Restricted Stock Awards and Restricted Stock Units

The following table summarizes the unvested restricted stock awards as of September 30, 2023:

Schedule of unvested restricted stock awards
				Weighted -
				Average
	Number of			Grant
	Award Shares			Date Fair Value
Unvested at December 31, 2022		41,808			3.24
Granted		506,194			1.45
Vested		(131,333	)		2.06
Balance September 30, 2023		416,669		$	1.44

As of September 30, 2023, total unrecognized share-based compensation cost related to unvested restricted stock awards is $411 thousand, which is expected to be recognized over a weighted-average period of less than one year.

The following table summarizes the unvested restricted stock units as of September 30, 2023:

Schedule of unvested restricted stock units
				Weighted -
				Average
	Number of			Grant
	Unit Shares			Date Fair Value
Unvested at December 31, 2022		413,626			2.14
Granted		272,941			1.35
Vested		(221,933	)		2.93
Balance September 30, 2023		464,634		$	1.30

As of September 30, 2023, total unrecognized share-based compensation cost related to unvested restricted stock units was $401 thousand, which is expected to be recognized over a weighted-average period of 1.4 years.

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 of each grant 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 derived service period and there is no ongoing adjustment or reversal based on actual achievement during the period.

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The following table summarizes the unvested performance restricted stock units as of September 30, 2023:

Schedule of unvested performance restricted stock units
				Weighted -
				Average
	Number of			Number of
	Unit Shares			Unit Shares
Unvested at December 31, 2022		432,326			2.95
Granted		1,156,591			1.16
Forfeited/Cancelled		(150,157	)		2.95
Balance September 30, 2023		1,438,760		$	1.51

As of September 30, 2023, total unrecognized share-based compensation cost related to unvested performance restricted stock units was $1,373 thousand, which is expected to be recognized over a weighted-average period of 1.9 years.

Warrants

The following table summarizes the activities for the Company’s warrants for the nine months ended September 30, 2023:

Schedule of warrants outstanding
	Number of Warrant Shares			Weighted- Average Exercise Price		Weighted - Average Remaining Contractual Term in years)		Aggregate Intrinsic Value (in thousands)(1)
Balance as of December 31, 2022		5,103,455		$	4.34
Granted		-			-
Expired		(474,869	)		6.34
Balance as of September 30, 2023		4,628,586		$	4.13		2.5
Exercisable as of September 30, 2023		4,628,586		$	4.13		2.5	$	-

(1) The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying warrants and the closing stock price of $1.17 for our common stock on September 30, 2023.

NOTE 8—DEBT

PeriShip Global is a party to a debt facility with PNC Bank, National Association (the “PNC Facility”). The PNC Facility includes a $1 million revolving line of credit (the “RLOC”) with a term of one-year which was extended to December 14, 2023. 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 PNC Facility also includes a four-year term note (the “Term Note”) for $2 million which matures in September of 2026 and requires equal quarterly payments of principal and interest. The Term Note incurs interest per annum at a rate equal to the sum of Daily SOFR plus 3.1%.  The RLOC and Term Note are guaranteed by VerifyMe and secured by the assets of PeriShip Global and VerifyMe.

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. PeriShip Global was in compliance with all affirmative and restrictive covenants under the PNC Facility at September 30, 2023.

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As of September 30, 2023, our short-term debt outstanding under the Term Note was $0.5 million and total long-term debt outstanding under the Term Note was $1.0 million. During the nine months ended September 30, 2023, the Company made a repayment of $375 thousand towards the principal of the outstanding Term Note.

During the nine months ended September 30, 2023, $800 thousand was drawn on the RLOC, of which $300 thousand was repaid. As of September 30, 2023, $500 thousand was outstanding on the RLOC and is included in short-term debt outstanding.

Effective October 17, 2022, the Company entered into an interest rate swap agreement, with a notional amount of $1,958 thousand, effectively fixing the interest rate on the Company’s outstanding debt at 7.602%. The Company has designated the intertest rate swap, expiring September 2026, as a cash flow hedge and have applied hedge accounting. The fair value of the derivative asset and liability associated with the interest rate swap are not significant as of September 30, 2023, and as of December 31, 2022, respectively.

Convertible Debt

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 $425 thousand was purchased by related parties including certain members of management and the Board of Directors. 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 three and nine months ended September 30, 2023 interest expense related to the convertible debt was $9 thousand and $9 thousand, respectively. As of September 30, 2023 the amount outstanding on the convertible debt was $1,100 thousand and included in Convertible debt on the accompanying Consolidated Balance Sheets.

NOTE 9—INCOME TAXES

There are no taxes payable as of September 30, 2023, or December 31, 2022.

Some of the federal tax carry forwards will expire at various dates through 2037. Generally, these can be carried forward and applied against future taxable income at the tax rate applicable at that time. We are currently using an effective income tax rate of 21% for our projected available net operating loss carry-forward. No tax benefit has been recognized in the nine months ending September 30, 2023, due to the uncertainty surrounding the realizability of the benefit.

Utilization of the net operating losses (NOL) carryforwards may be subject to a substantial annual limitation as required by Section 382 of the IRC, due to ownership changes of the company that could occur in the future, as well as similar state provisions. In general, an “ownership change” as defined by Section 382 results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders. These ownership changes may limit the amount of NOL carryforwards that can be utilized annually to offset future taxable income.

In accordance with FASB ASC 740 “Income Taxes”, valuation allowances are provided against deferred tax assets, if based on the weight of available evidence, some or all, of the deferred tax assets may or will not be realized. The Company did not utilize any NOL deductions for the nine months ended September 30, 2023.

The Company acquired certain assets and the business of Trust Codes Limited on March 1, 2023. Intangible assets have been established in the amount of $701 thousand for trademarks, customer relationships and developed technology. These assets will be amortized over 15 years for tax purposes, while for book purposes they will be amortized over varying useful lives ranging from 8 to 18 years. In addition, goodwill of $1,383 thousand was established. Goodwill is not amortizable for book purposes but is amortizable for tax over a period of 15 years. These timing differences will result in the creation of deferred tax assets in future quarters. As of September 30, 2023, the differences are not material. See Note 5. Intangible Assets and Goodwill.

NOTE 10– LEASES

The Company accounts for its leases under Accounting Standard Codification (“ASC”) Topic 842, Leases. The Company determines at its inception whether an arrangement that provides us control over the use of an asset is a lease. We recognize at lease commencement a right-of-use (ROU) asset and lease liability based on the present value of the future lease payments over the lease term. We have elected not to recognize a ROU asset and lease liability for leases with terms of 12 months or less. Our current long-term leases include an option to extend the term of the lease prior to the end of the initial term. It is not reasonably certain that we will exercise the option and have not included the impact of the option in the lease term for purposes of determining total future lease payments. As our lease agreement does not explicitly state the discount rate implicit in the lease, we use our promissory note borrowing rate to calculate the present value of future payments.

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In addition to the base rent, real estate leases typically contain provisions for common-area maintenance and other similar services, which are considered non-lease components for accounting purposes. For our real estate leases, we apply a practical expedient to include these non-lease components in calculating the ROU asset and lease liability. For all other types of leases, non-lease components are excluded from our ROU assets and lease liabilities and expensed as incurred.

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We have operating leases for office facilities. We do not have any finance leases.

Lease expenses are included in General & administrative expenses on the accompanying Consolidated Statements of Operations. The components of lease expense were as follows (in thousands):

Schedule of components of lease expense
	Three months ended September 30,				Nine months ended September 30,
	2023		2022		2023		2022
Operating lease cost	$	47	$	32	$	132	$	53
Short-term lease cost		5		4		23		11
Total lease costs	$	52	$	36	$	155	$	64

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Supplemental information related to leases was as follows (dollars in thousands):

Schedule of supplemental information related to leases
	September 30, 2023			December 31, 2022
Operating Lease right-of-use asset	$	506		$	469
Current portion of operating lease liabilities	$	160		$	115
Non-current portion of operating lease liabilities		346			359
Total operating lease liabilities	$	506		$	474
Cash paid for amounts included in the measurement of operating lease liabilities	$	138		$	80
Right-of-use assets obtained in exchange for operating lease liabilities	$	-		$	552
Weighted-average remaining lease term for operating leases (years)		3.3
Weighted average discount rate for operating leases		6.4	%

The following is a reconciliation of future undiscounted cash flows to the operating lease liabilities on our consolidated balance sheets as of September 30, 2023 (in thousands):

Schedule of operating lease liabilities maturities
Year ended December 31,
2023 (Excluding nine months ended September 2023)	$	36
2024		188
2025		193
2026		139
2027		45
Thereafter
Total future lease payments		601
Less: imputed interest		(95	)
Present value of future lease payments		506
Less: current portion of lease liabilities		(160	)
Long-term lease liabilities	$	346

NOTE 11– CONCENTRATIONS

For the three months ended September 30, 2023 and 2022, one customer represented 23% and 16% of revenues, respectively. For the nine months ended September 30, 2023 and 2022, one customer represented 18% of revenues and 17% of revenues, respectively.

As of September 30, 2023, one customer made up 34% of accounts receivable.

During the three and nine months ended September 30, 2023, one vendor accounted for 99% of transportation cost, in our Precision Logistics segment. 

NOTE 12 – SEGMENT REPORTING

As of September 30, 2023, we operated through two reportable business segments: (i) Precision Logistics (formerly PeriShip Global Solutions) and (ii) Authentication (formerly VerifyMe Solutions).

Precision Logistics: This segment offers a value-added service provider for time and temperature sensitive parcel management. Through logistics management from a sophisticated IT platform with proprietary databases, package and flight-tracking software, weather, traffic, as well as dynamic dashboards with real-time visibility into shipment transit and last-mile events that are managed by a service center 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, delivering last-mile resolution for key markets, including the perishable healthcare and food industries.

Authentication: This segment specializes in solutions that connect brands with consumers through their products. Consumers can authenticate products with their smart phone prior to usage, and brand owners have the ability to gather business intelligence while engaging directly with their consumers. Our Authentication segment also provides brand protection and supply chain functions such as counterfeit prevention.

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We do not allocate the following items to the segments: general & administrative expenses, sales & marketing expenses, research and development and other income (expense).

The following table sets forth the revenue and operating results attributable to each reportable segment and includes a reconciliation of segment revenue to consolidated revenue and operating results to consolidated loss before income tax expense (in thousands):

Schedule of segment reporting information
	Three months ended September 30,						Nine months ended September 30,
	2023			2022			2023			2022
Revenue:
Precision Logistics	$	5,457		$	5,036		$	16,085		$	9,267
Authentication		147			179			515			606
Total Revenue	$	5,604		$	5,215		$	16,600		$	9,873
Gross Profit:
Precision Logistics	$	2,155		$	1,722		$	5,460		$	3,231
Authentication		137			133			406			432
Total Gross Profit		2,292			1,855			5,866			3,663
General and administrative		2,754			2,213			7,852			6,213
Research and development		5			39			23			73
Sales and marketing		388			478			1,388			1,224
LOSS BEFORE OTHER (EXPENSE) INCOME		(855	)		(875	)		(3,397	)		(3,847	)
OTHER (EXPENSE) INCOME		(75	)		318			5			(10,659	)
NET LOSS	$	(930	)	$	(557	)	$	(3,392	)	$	(14,506	)

Additional information relating to our business segments is as follows (in thousands):

Identifiable assets:

Schedule of Identifiable assets
	As of
	September 30, 2023		December 31,2022
Precision Logistics	$	13,656	$	17,302
Authentication		5,150		3,450
Total Assets	$	18,806	$	20,752

NOTE 13 – SUBSEQUENT EVENTS

On November 2, 2023 the Company issued 56,272 shares of common stock upon vesting of 72,329 restricted stock units, net of 16,057 withheld for taxes.

On November 3, 2023, PeriShip Global entered into a waiver and amendment to loan documents and received a waiver for certain events of default and entered into an amended and restated loan agreement with PNC effective October 31, 2023, which provided amendments to a number of affirmative and restrictive covenants applicable to PeriShip Global and extended the RLOC to September 30, 2024.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 

The information in this Management’s Discussion and Analysis should be read in conjunction with the accompanying unaudited consolidated 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,” “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 expressed 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 December 31, 2022, and our other filings with the Securities and Exchange Commission (the “SEC”). All forward-looking statements in this report are made only as of the date hereof or as indicated and represent our views as of the date of this report. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise, except as required by law.

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Overview

VerifyMe, Inc. (“VerifyMe”) together with its subsidiaries, including PeriShip Global, LLC (“PeriShip Global”) and Trust Codes Global Limited (“Trust Codes Global”), (together the “Company,” “we,” “us,” or “our”), is a software driven predictive analytics logistics provider of high-touch end-to-end logistics management which represents most of our current revenue stream. In addition, VerifyMe technologies provide product traceability and brand solutions. Our operations are split into two segments: Precision Logistics and Authentication. Through our Precision Logistics segment, we provide a value-added service for time and temperature sensitive parcel management driven by a proprietary software platform that provides predictive analytics from key metrics such as flight-tracking, weather, and traffic, all 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. Using our proprietary logistics solution, we provide real-time information and analysis to mitigate supply chain flow interruption, delivering last-mile resolution for key markets, including the perishable healthcare and food industries. Through our Authentication segment our technologies provide unit level traceability and brand solutions allowing brand owners to gather business intelligence, cross-sell products, monitor product diversion through the supply chain and build brand loyalty through interaction utilizing our unique dynamic codes which are read by consumers with their smart phones. Further information regarding our business segments is discussed below:

Precision Logistics: The Precision Logistics (formerly PeriShip Global Solutions) 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, 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.

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· 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 (formerly VerifyMe Solutions) segment specializes in traceability to connect brands with consumers through their product. This is critical in the current landscape of increased regulations, as well as increased counterfeit activity and product diversion. The ability to predict fraud or abnormal behavior while tracing an item’s journey from production through to the consumer’s hands provides consumers and brands the assurance they require. VerifyMe has custom software, patented technologies, and a cloud environment that combines machine learning and data science to meet the needs of consumers and brands. In addition, the personalized consumer experience with the brand creates a connection that increases brand perception and loyalty.

Products: We have a custom suite of products that offer clients traceability and brand solutions. These products are combined with “software as a service” or “SAAS” which is stored in the cloud and accessed through the internet.

· VerifyMe Engage™ for brand enhancement allowing the brand owner to gather business intelligence and engage with customers

· VerifyMe Authenticate™ using rare earth-based ink taggants for instant authentication of labels, packaging and products

· VerifyMe Track & Trace™ for unit level traceability and supply chain control

Opportunities

Precision Logistics: Currently 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 major 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 two 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. In addition, we feel that combining our authentication solutions into the product offering for Precision Logistics clientele, gives our Precision Logistics segment a competitive advantage to generate revenue by enhancing clients’ ability to grow revenue, gain business intelligence and build brand loyalty.

The current global logistics industry worldwide is facing an economic slowdown. We believe this represents an opportunity since major global carriers are cutting internal staff and are reducing research and development investments. To maintain their credibility in the market, these carriers will need to ensure they meet their customers’ demands for time and temperature sensitive shipments, while maintaining their overheads. We believe outsourcing this function to our Precision Logistics segment provides the ideal solution for all parties involved.

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 will 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.

Authentication: We believe the products in our Authentication segment have applications in many areas. Currently, we are aggressively marketing opportunities in the following areas:

· Agriculture, Food and Beverage – Food safety is becoming more common as supply chains become more global and as imaging and manufacturing technology become more accessible. Food traceability, sustainability and carbon neutral production is becoming a significant consideration for brand and governments. We believe our unit level traceability and authentication solutions can help brands tell their story about sustainability and battle against tainted or substandard foods and beverages.

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· Pharmaceuticals/nutraceuticals – We believe counterfeit prescription pharmaceuticals and nutraceuticals are a growing problem, widely recognized as a public health risk and a serious concern to public health officials, private companies, and consumers. Counterfeiting can apply to both branded and generic products and counterfeit pharmaceuticals may include products with the correct ingredients but fake packaging, with the wrong ingredients, without active ingredients or with insufficient active ingredients. The United States enacted legislation requiring the implementation of a comprehensive system designed to combat counterfeit, diluted or falsely labelled pharmaceuticals, referred to as serialization or electronic pedigree (e-Pedigree). Our consumer facing visible codes and unique pigments embedded in the ink of a unique serialized barcode can provide a layered security foundation for a customer solution in this market. We are seeking to expand our business in this market and believe that as additional pharmaceutical companies seek to comply with the legislation, our products will provide attractive alternatives to address the need for product identifiers.

· Consumer Products – We believe our technology solutions are particularly suited for the cosmetics, health and beauty and apparel industries. We give the consumer the ability to test a product’s authenticity instantly with a smartphone. We can protect brand owners from liability litigation, product diversion and lost financial sales with our consumer facing visible codes and unique ink pigments which can be incorporated in dyes and used by manufacturers in these industries to combat counterfeiting and piracy of actual physical goods. Our pigments expressed as inks can also be used on packaging, as well as to track products that have been lost in transit, whether misplaced or stolen.

In addition, in each of these markets, our SaaS software allows brand owners and consumers to track the products and will alert the consumer or brand owner of product diversion with 24/7 monitoring. As each product has a unique code, this allows consumers and brand owners to authenticate the product in real time and link directly to the brand owner’s website for additional product information, discounts, and more.

Synergies: We believe that Precision Logistics and Authentication segments have synergistic product centric technology platforms and combined have a compelling technology offering for brand owners. For example, currently our Precision Logistics segment ships vaccines for major pharmaceutical companies. With the addition of our Authentication technology, we can add unit level traceability and authentication to protect clients’ vaccines from product diversion and sub-standard counterfeits. In addition, our Authentication segment brand enhancement solutions could give the Precision Logistics food and beverage clients the ability to gather rich business intelligence and build customer loyalty with engagement functions like videos, discounts, contests, recipes, etc.

Partnerships:

Precision Logistics has a direct partnership with a major global carrier company. This partnership includes the ability for both companies to white label each partner’s services. In addition, Precision Logistics has data feeds directly from the carrier into our proprietary logistics optimization software which provides shippers much more detailed information and predictive analytics on their shipment versus a standard shipping code look up which is provided by the carrier.

Our Authentication segment has a contract with HP Indigo, and a strategic partnership with INX, the third largest producer of inks in North America. We believe these partnerships can be used to enable brand owners to securely prevent counterfeiting, prevent product diversion and authenticate labels, packaging and products alleviating liability from counterfeit products that harm consumers.

Current Economic Environment

In early September 2022, the major global carrier company that PeriShip partners with disclosed that a global recession could be coming based on various indicators in its business including the demand for packages weakening considerably in the final weeks of August 2022, a negative impact on its express delivery business due to the weakening global economy, particularly in Asia and Europe, and a decline in the volume of freight it handles in every region around the world. The major global carrier stated that it expected business conditions to further weaken and responded by reducing flights, temporarily parking aircraft, trimming hours for its staff, delaying some hiring plans and closing ninety office locations as well as five corporate offices. It also stated it was cutting $500 million from its capital expenditure budget for its fiscal year, which runs through May 2023. In April 2023, this major carrier laid out steps it was taking to slash $4 billion in permanent costs by the end of its 2025 fiscal year in response to market conditions and lower demand. In June 2023, the major carrier stated that due to ongoing demand its plans to ground 29 more aircraft in its fiscal year that started in June 2024.

We have seen a softening in demand for some services related to high-end perishable items and cannabis products which seem to be impacted by reduced discretionary spending by U.S. consumers. While a recession, whether global or more localized to the U.S., may decrease the demand for our services that are more discretionary in nature, we believe that the internal cost cutting measures, if implemented by the major global carrier may benefit out-sourced service providers. We are working with this major global carrier to address their small and medium-sized business clients, which we believe is an underserved market and presents considerable growth opportunities for our Precision Logistics segment. However, we can provide no assurances that a decline in discretionary consumer spending will not have a negative impact on our revenues and results of operations.

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Business Combinations

On March 1, 2023, we acquired, through Trust Codes Global, the business and certain assets of Trust Codes, a company specializing in brand protection, anti-counterfeiting and consumer engagement technology with an expertise in the food and agriculture industry. Trust Codes Global uses unique QR codes or IoT, coupled with GS1 standards to deliver cloud-based brand protection based on a unique per-item digital identity to protect brand and product authenticity, increase data visualization of a product through the end-to-end supply chain and creates a data driven engine to inform and educate consumers of the product. The purchase price was approximately $1.0 million which consisted of approximately $0.36 million in cash paid at closing, and 353,492 shares of restricted common stock of the Company, representing $0.65 million in stock consideration. In addition, the purchase agreement requires consideration contingent upon the achievement of earnings targets during a five-year period subsequent to the closing of the acquisition. The earn-out consideration estimated at $1.1 million at the acquisition date, however the maximum amount of the payment is unlimited. Trust Codes Global is included in the Authentication segment and the results of its operations are included in the consolidated financial statement beginning March 1, 2023.

On April 22, 2022, we acquired, through PeriShip Global, the business and certain assets of PeriShip, LLC, a value-added service provider for time and temperature sensitive parcel management.  PeriShip Global provides shipping logistics services utilizing proprietary predictive analytics software and supporting service center services.  Using our proprietary IT platform, we provide real-time information and analysis to mitigate supply chain flow interruption, delivering last-mile resolution for key markets, including the perishable healthcare and food industries. The purchase price was $10.5 million which consisted of $7.5 million in cash paid at closing, a promissory note of $2.0 million with a fixed interest rate of 6% per annum on the unpaid principal balance, to be paid in three installments on the sixth, fifteenth, and eighteenth month anniversaries of the closing, and 305,473 shares of restricted common stock of the Company, representing $1.0 million in stock consideration. We expect that all of the goodwill recorded for financial statement purposes is deductible for tax purposes. The acquired PeriShip Global business is included in the Precision Logistics segment and the results of its operations have been included in the consolidated financial statements beginning April 22, 2022.

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. The seasonality of our business may cause fluctuations in our quarterly operating results.

Changes in Executive Management Team

On May 24, 2023, the Company’s Board of Directors appointed Mr. Adam Stedham to serve as Chief Executive Officer of the Company, effective June 19, 2023. Mr. Stedham ceased to be an independent director and stepped down as chair of the Audit Committee and as a member of the Compensation Committee on June 19, 2023. In connection with Mr. Stedham’s appointment as Chief Executive Officer, Scott Greenberg ceased to serve as the Company’s Interim Chief Executive Officer and Executive Chairman of the Board and continued to serve as Chairman of the Board.

On July 10, 2023, the Company and Keith Goldstein agreed that Mr. Goldstein would resign as President and Chief Operating Officer effective, July 31, 2023. Also on July 10, 2023, the Company and Margaret Gezerlis agreed that Ms. Gezerlis would step down as Executive Vice President and Chief Financial Officer and continue in a strategic consulting role with the Company, effective July 31, 2023. Effective July 20, 2023, the Company granted Margaret Gezerlis a restricted stock award of 20,000 which vested on July 31, 2023 subject to Ms. Gezerlis not revoking her entry in the separation agreement. Mr. Goldstein’s and Ms. Gezerlis’ separations were not a result of any disagreement with the Company on any matter relating to its operations, policies, or practices, or to any issues regarding its accounting policies or practices.

On July 13, 2023, in connection with Mr. Goldstein’s and Ms. Gezerlis’ separations, the Company appointed Adam Stedham as President of the Company in addition to his position as Chief Executive Officer, and Nancy Meyers Executive Vice President and Chief Financial Officer, Treasurer and Corporate Secretary of the Company, each effective August 1, 2023. 

On July 14, 2023, the Company designated Paul Ryan as the Executive Vice President, Authentication Segment. Mr. Ryan co-founded the Trust Codes Global platform and developed it into the powerful product cloud that today provides brand protection, brand enhancement, GS1 digital link and traceability. Additionally, Curt Kole will be the Executive Vice President, Precision Logistics Segment. Mr. Kole has 25 years of experience in many aspects of the logistics industry with extensive knowledge in the needs of customers whose products have specific time, temperature, or other criticality requirements. Mr. Kole has served as the Executive Vice President, Global Sales and Strategy at PeriShip Global.

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Adam Stedham Employment Agreement

In connection with his appointment as Chief Executive Officer, the Company and Mr. Stedham entered into an employment agreement (“Employment Agreement”), effective June 19, 2023. Pursuant to the Employment Agreement Mr. Stedham will receive an annual base salary of $300,000 and be eligible for an annual bonus with a potential up to 50% of his base salary based on an Adjusted EBITDA performance goal to be set annually by the Compensation Committee of the Board. In accordance with the Employment Agreement, the Compensation Committee of the Board approved, in each case within five business days of the Effective Date, the grant of (i) a restricted stock award (“RSA”) of 34,014 shares of the Company’s common stock, subject to the terms of the Company’s 2020 Equity Incentive Plan (the “2020 Plan”), which vest upon the grant date to compensate Mr. Stedham for his service as an independent director during 2023; (ii) 204,082 time-based restricted stock units (“RSUs”), each such unit representing the contingent right to receive one share of the Company’s common stock, subject to the terms of the 2020 Plan, which vest, except as otherwise provided in the award agreement, in three equal annual installments with the first installment vesting on the first anniversary of the grant date; and (iii) an award of 550,000 performance-based restricted stock units (“PSUs”), each such unit representing the contingent right to receive one share of the Company’s common stock, subject to the terms of the 2020 Plan. The PSUs, except as otherwise provided in the award agreement, vest in three tranches subject to continued employment and upon the satisfaction of the applicable performance criteria within four years of the grant date. Tranche 1 will vest 150,000 shares of common stock on or after the first anniversary of the grant date if the price of the Company’s common stock is $2.21 per share and trades at or above that price for 20 consecutive days. Tranche 2 will vest 200,000 shares of common stock on or after the second anniversary of the grant date if the Company’s common stock trades at or above $2.94 per share for 20 consecutive trading days. Tranche 3 will vest 200,000 shares of common stock on the fourth anniversary of the grant date if the Company’s common stock trades at or above $3.68 per share for 20 consecutive trading days.

The Employment Agreement is for an initial term of two years 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 the Company without cause, Mr. Stedham will be entitled, in addition to accrued base salary and unpaid expenses, to his annual bonus payout, if applicable, severance in the amount of base salary that would have otherwise been paid through June 19, 2025 or six months, whichever is greater, and the accelerated vesting of his time-based restricted stock units and retention of his performance-based restricted stock units for the remainder of the awards’ applicable performance period.

Keith Goldstein Separation Agreement

On July 17, 2023, the Company and Mr. Goldstein entered into a Separation Agreement and Release of all Claims (the “Goldstein Agreement”) whereby Mr. Goldstein voluntarily elected to resign as President and Chief Operating Officer and from any position held with the Company’s subsidiaries, including PeriShip Global and Trust Codes Global, effective July 31, 2023 (the “Separation Date”). Pursuant to the Goldstein Agreement, the Company agreed to pay Mr. Goldstein his salary through the Separation Date and to continue to pay his base salary for six months from the Separation Date, which is through January 31, 2024. The Company also agreed to continue to provide health care benefits to Mr. Goldstein through January 31, 2024. In addition, the Company agreed to award Mr. Goldstein 80,796 RSUs on July 31, 2023, each such unit representing the contingent right to receive one share of the Company’s common stock, subject to the terms of the 2020 Plan. These RSUs, except as otherwise provided in the award agreement, will vest within three years in equal tranches provided the Company’s stock price exceeds $2.75 and $3.75 per share for twenty consecutive trading days. In connection with the grant of the RSUs Mr. Goldstein will forfeit his outstanding award of RSUs granted pursuant to a Restricted Stock Unit Award Agreement dated February 16, 2022.

Mr. Goldstein had seven days but did not elect his right to revoke his entry into the Goldstein Agreement. Pursuant to the Goldstein Agreement, Mr. Goldstein’s employment agreement entered into as of February 15, 2022, will terminate on July 31, 2023, with certain covenants in the employment agreement relating to the ownership of intellectual property, confidential information, non-solicitation and non-competition surviving its termination. The Goldstein Agreement also includes customary representations, warranties for agreements of its type.

Margaret Gezerlis Separation Agreement

On July 17, 2023, the Company and Ms. Gezerlis entered into a Separation Agreement and Release of all Claims (the “Gezerlis Agreement”) whereby Ms. Gezerlis voluntarily elected to step down as Executive Vice President and Chief Financial Officer and from any position held with the Company’s subsidiaries, including PeriShip Global, and Trust Codes, effective July 31, 2023. Pursuant to the Gezerlis Agreement, the Company Agreed to pay Ms. Gezerlis her salary through the Separation Date and to continue to pay her base salary for six months from the Separation Date, which is through January 31, 2024. In addition, the Company agreed to award Ms. Gezerlis 42,612 RSUs on July 31, 2023, each such unit representing the contingent right to receive one share of the Company’s common stock, subject to the terms of the 2020 Plan. These RSUs, except as otherwise provided in the award agreement, will vest within three years in equal tranches provided the Company’s stock price exceeds $2.75 and $3.75 per share for twenty consecutive trading days. In connection with the grant of the RSUs Ms. Gezerlis will forfeit her outstanding award of RSUs granted pursuant to a Restricted Stock Unit Award Agreement dated February 16, 2022.

Ms. Gezerlis had seven days but did not elect her right to revoke her entry into the Gezerlis Agreement. Pursuant to the Gezerlis Agreement, Ms. Gezerlis’ employment agreement entered into as of February 15, 2022, will terminate on July 31, 2023, with certain covenants in the employment agreement relating to the ownership of intellectual property, confidential information, non-solicitation and non-competition surviving its termination. The Gezerlis Agreement also includes customary representations, warranties for agreements of its type.

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Results of Operations

Comparison of the three months ended September 30, 2023, and 2022

The following discussion analyzes our results of operations for the three months ended September 30, 2023 and 2022.

Revenue	Three Months Ended September 30,
	2023		2022
Precision Logistics	$	5,457	$	5,036
Authentication		147		179
Total Revenue	$	5,604	$	5,215

Consolidated revenue increased $389 thousand or 7% during the third quarter of 2023 compared to the third quarter of 2022. The increase is primarily due to organic growth in our premium services in the Precision Logistics segment.

Gross Profit	Three Months Ended September 30,
	2023					2022
			% of Revenue					% of Revenue
Precision Logistics	$	2,155		39	%	$	1,722		34	%
Authentication		137		93	%		133		74	%
Total Gross Profit	$	2,292		41	%	$	1,855		36	%

Gross profit for the three months ended September 30, 2023, was $2,292 thousand, compared to $1,855 thousand for the three months ended September 30, 2022. The resulting gross margin was 41% for the three months ended September 30, 2023, compared to 36% for the three months ended September 30, 2022. The gross profit increase relates to the increased premium services revenue in the Precision Logistics segment, which has higher margins. With the acquisition of Trust Codes in March 2023, providing custom software, our margins in the Authentication segment also increased.

General and Administrative Expenses

General and administrative expenses increased by $541 thousand to $2,754 thousand for the three months ended September 30, 2023, compared to $2,213 thousand for the three months ended September 30, 2022. The increase relates primarily to the acquisition of Trust Codes Global in March 2023, severance expense of $247 thousand and additional stock compensation of $115 thousand (excluding shares issued relating to severance).

Research and Development

Research and development expenses were $5 thousand and $39 thousand for the three months ended September 30, 2023, and 2022, respectively.

Sales and Marketing

Sales and marketing expenses decreased by $90 thousand to $388 thousand for the three months ended September 30, 2023, compared to $478 thousand for the three months ended September 30, 2022. The decrease is primarily related to a reduction in employees and consultants partially offset by additional travel expenses in the Authentication segment during the third quarter of 2023.

Interest Expense, net

Interest expense, net was $39 thousand for the three months ended September 30, 2023, compared to $32 thousand for the three months ended September 30, 2022. The increase is primarily due to the increased borrowings on the RLOC.

Net Loss

Consolidated net loss for the three months ended September 30, 2023, and 2022 was $930 thousand and $557 thousand, respectively. The increased loss was primarily related to an increase in operating expenses and the gain on extinguishment of debt in 2022 that did not recur in 2023, partially offset by an increase in gross profit. The resulting consolidated loss per share for the three months ended September 30, 2023, and three months ended September 30, 2022, was $0.09 and $0.06 per diluted share, respectively.

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Comparison of the nine months ended September 30, 2023, and 2022

The following discussion analyzes our results of operations for the nine months ended September 30, 2023, and 2022.

Revenue	Nine Months Ended September 30,
	2023		2022
Precision Logistics	$	16,085	$	9,267
Authentication		515		606
Total Revenue	$	16,600	$	9,873

Consolidated revenue increased $6,727 thousand for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. The increase is primarily due to the acquisition of our PeriShip Global business on April 22, 2022, partially offset by a $91 thousand decrease in our Authentication segment.

Gross Profit	Nine Months Ended September 30,
	2023					2022
			% of Revenue					% of Revenue
Precision Logistics	$	5,460		34	%	$	3,231		35	%
Authentication		406		79	%		432		71	%
Total Gross Profit	$	5,866		35	%	$	3,663		37	%

Gross profit for the nine months ended September 30, 2023, was $5,866 thousand, compared to $3,663 thousand for the nine months ended September 30, 2022. The resulting gross margin was 35% for the nine months ended September 30, 2023, compared to 37% for the nine months ended September 30, 2022. The gross profit increase relates to the acquisition of the PeriShip Global business on April 22, 2022, which is included for the full nine months of 2023.

General and Administrative Expenses

General and administrative expenses increased by $1,639 thousand to $7,852 thousand for the nine months ended September 30, 2023, compared to $6,213 thousand for the nine months ended September 30, 2022. The increase relates primarily to the acquisition of the PeriShip business, included for the full nine months of 2023, the deal costs related to the acquisition of the Trust Codes Global business of $278 thousand, operations related to Trust Codes, as well as severance expense of approximately $579 thousand which is expected to be paid in full by the end of January 2024, partially offset by costs related to the acquisition of the PeriShip Global business of $661 thousand in 2022 that did not recur in 2023. Stock-based compensation was $977 thousand, including $121 thousand relating to severance for the nine months ended September 30, 2023, compared to $1,039 thousand for the nine months ended September 30, 2022. Amortization and depreciation expense was $835 thousand and $504 thousand for the nine months ended September 30, 2023, and 2022, respectively.

Research and Development

Research and development expenses were $23 thousand and $73 thousand for the nine months ended September 30, 2023, and 2022, respectively.

Sales and Marketing

Sales and marketing expenses increased by $164 thousand to $1,388 thousand for the nine months ended September 30, 2023, compared to $1,224 thousand for the nine months ended September 30, 2022. The increase is primarily related to the salaries and related expenses for employees for the full nine months of 2023 in the Precision Logistics segment, partially offset by a reduction in employees and consultants in the Authentication segment during the third quarter of 2023.

Interest Expense, net

Interest expense, net was $127 thousand for the nine months ended September 30, 2023, compared to interest expense of $54 thousand for the nine months ended September 30, 2022. The higher expense relates to the drawdown on the RLOC, interest on the outstanding convertible note, offset by a lower amount outstanding for the note payable.

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Net Loss

Consolidated net loss for the nine months ended September 30, 2023, was $3,392 thousand compared to $14,506 thousand, for the nine months ended September 30, 2022. The decreased loss was primarily related to a loss on equity investment of $11 million in 2022 that did not recur in 2023, an increase in gross profit, a gain relating to the change in the fair value of the contingent consideration related to the acquisition of Trust Codes Global partially offset by increased operating expenses discussed above. The resulting consolidated loss per share for the nine months ended September 30, 2023, and nine months ended September 30, 2022, was $0.35 and $1.76 per diluted share, respectively.

Liquidity and Capital Resources

Our operations used $599 thousand of cash during the nine months ended September 30, 2023, compared to $2,668 thousand during the comparable period in 2022. The decrease in cash used from operations is due to favorable changes in working capital accounts during 2023 compared to 2022 from our acquisition of PeriShip Global in April of 2022.

Cash used in investing activities was $1,080 thousand during the nine months ended September 30, 2023, compared to $7,747 thousand during the nine months ended September 30, 2022. During the nine months ended September 30, 2023, $363 thousand was used for the acquisition of the Trust Codes Global business. During the nine months ended September 30, 2022, $7,500 thousand was used for the acquisition of the PeriShip Global business.

Cash provided by financing activities during the nine months ended September 30, 2023, was $1,277 thousand compared to $4,687 thousand during the nine months ended September 30, 2022. The decrease relates mainly to the proceeds from the public offering in 2022 which did not recur in 2023.

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 $425 thousand was purchased by relating parties including certain members of management and the Board of Directors. 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 September 30, 2023 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 $9 thousand as of September 30, 2023.

On September 22, 2022, PeriShip Global became a party to the PNC Facility with PNC Bank, National Association. The PNC Facility includes a $1 million RLOC with a term of one-year, which was extended to December 14, 2023. 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. As of September 30, 2023, we had drawn down $500 thousand under the RLOC.

The PNC Facility also includes a four-year Term Note for $2 million which matures in September of 2026 and requires equal quarterly payments of principal and interest. The Term Note incurs interest per annum at a rate equal to the sum of Daily SOFR plus 3.1%. The RLOC and Term Note are guaranteed by VerifyMe and secured by the assets of PeriShip Global and VerifyMe.

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.

On November 3, 2023, we entered into a waiver and amendment to loan documents and received a waiver for certain events of default, as a result of which, as of the date hereof, we are in compliance with all affirmative and restrictive covenants under the PNC Facility. We also entered into an amended and restated loan agreement with PNC effective October 31, 2023, which provided amendments to a number of affirmative and restrictive covenants applicable to PeriShip Global and extended the RLOC to September 30, 2024.

Of the proceeds of $2.0 million from the Term note, we used $1.8 million to settle debt outstanding issued in connection with the PeriShip Global acquisition, including the redemption of 61,000 shares of our common stock. As of September 30, 2023, our short-term debt outstanding under the Term note was $0.5 million and total long-term debt outstanding under the Term note was $1.0 million.

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%.

In June 2022, we announced a $1.5 million share repurchase program to repurchase shares of our common stock commencing July 1, 2022, for a period of 12 months. Before the program expired on July 1, 2023, 165,107 shares were purchased for a total of $226 thousand and $1,275 thousand was not used.

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We believe that our cash and cash equivalents will fund our operations for the next 12 months. We may issue additional debt or equity as we grow our business which we expect to grow organically, and if the opportunity arises, through key acquisitions that will help accelerate the growth of our business.

Off-Balance Sheet Arrangements

None.

Critical Accounting Policies and Estimates

Our financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. We have identified below the accounting policies that are of particular importance in the presentation of our financial position, results of operations and cash flows and which require the application of significant judgment by management. We believe estimates and assumptions related to these critical accounting policies are appropriate under the circumstances; however, should future events or occurrences result in unanticipated consequences, there could be a material impact on our future financial position, results of operations or cash flows.

Revenue Recognition

Our revenue transactions include logistics management for time and temperature sensitive packages, 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 our VerifyInk^TM technology we depend on the integrity of our clients’ reporting.

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 acquisitions 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.

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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 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.

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 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 (“ASU 2018-07”), which aligns accounting for share-based payments issued to nonemployees to that of employees under the existing guidance of Topic 718, with certain exceptions. This update supersedes previous guidance for equity-based payments to nonemployees under Subtopic 505-50, Equity – Equity-Based Payments to Non-Employees.

All issuances of stock options or other equity instruments to non-employees as consideration for goods or services received by the Company are accounted for based on the fair value of the equity instruments issued. Non-employee equity-based payments are recorded as an expense over the service period, as if we had paid cash for the services. At the end of each financial reporting period, prior to vesting or prior to the completion of the services, the fair value of the equity-based payments will be re-measured, and the non-cash expense recognized during the period will be adjusted accordingly. Since the fair value of equity-based payments granted to non-employees is subject to change in the future, the amount of the future expense will include fair value re-measurements until the equity-based payments are fully vested or the service completed. 

Recently Adopted Accounting Pronouncements 

Recently adopted accounting pronouncements are discussed in Note 1 – Summary of Significant Accounting Policies in the notes accompanying the financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable.

ITEM 4. CONTROLS AND PROCEDURES.

(a) Evaluation of Disclosure Controls and Procedures

Our disclosure controls and procedures are designed to ensure information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. The Company’s Chief Executive Officer, our principal executive officer, and Chief Financial Officer, our principal financial officer, have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2023, the end of the fiscal quarter covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2023, our disclosure controls and procedures were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is: (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

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(b) Changes in Internal Control over Financial Reporting

There have been no changes in our internal controls over financial reporting (as defined in Rules 13a-15(d) and 15d-15(d) under the Exchange Act) during the three months ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

(c) Trust Codes Global Acquisition

On March 1, 2023, we acquired, through Trust Codes Global, the business and certain assets of Trust Codes Limited, a company specializing in brand protection, anti-counterfeiting and brand enhancement technology with an expertise in the food and agriculture industry. For additional information regarding the acquisition, refer to Note 4 to the Unaudited Consolidated Financial Statements included in Item 1 in this Quarterly Report on Form 10-Q and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 2 in this Quarterly Report on Form 10-Q. Based on the recent completion of this acquisition and, pursuant to the Securities and Exchange Commission’s guidance that an assessment of a recently acquired business may be omitted from the scope of an assessment for a period not to exceed one year from the date of acquisition, the scope of our assessment of the effectiveness of internal control over financial reporting as of September 30, 2023 does not include Trust Codes Global. We plan to include Trust Codes Global in our assessment of the effectiveness of internal control over financial reporting within the timeframe set forth by the SEC’s guidance. 

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

None. 

ITEM 1A. RISK FACTORS.

For a discussion of the Company’s potential risks or uncertainties, please see “Part I—Item 1A—Risk Factors” and “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC, and “Part I—Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein. There have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, and subsequent Quarterly Reports on Form 10-Q, except as noted herein.

Foreign Currency Exchange Rate Risk

We operate in the US and New Zealand, which exposes us to market risk associated with foreign currency exchange rate fluctuations. Our foreign currency exposure primarily relates to intercompany receivables and payables and third party receivables and payables that are denominated in currencies other than the functional currency of our legal entities. Our largest foreign currency exposure is unsettled intercompany payables and receivables which are reviewed on a regular basis. Gains and losses from foreign currency transactions are included in “General and administrative” on our Consolidated Statements of Operations.

Our foreign subsidiary operates in a currency other than the United States dollar; therefore, increases or decreases in the value of the U.S. dollar against other major currencies will affect our operating results and the value of our balance sheet items denominated in foreign currencies. Our most significant exposures to translation risk relates to functional currency assets and liabilities that are denominated in the New Zealand dollar. The changes in the net investment of our foreign subsidiary are reflected in "Foreign currency translation adjustments” on our Consolidated Statements of Comprehensive Loss. We have not used any exchange rate hedging programs to mitigate the effect of exchange rate fluctuations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

On November 3, 2023, PeriShip Global entered into a waiver and amendment to loan documents and received a waiver for certain events of default and entered into an amended and restated loan agreement with PNC effective October 31, 2023, which provided amendments to a number of affirmative and restrictive covenants applicable to PeriShip Global and extended the RLOC to September 30, 2024.

During the three months ended September 30, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

ITEM 6. EXHIBITS

Exhibit No.	Description
10.1*	Amended and Restated Loan Agreement between PeriShip Global LLC and PNC Bank, National Association, effective October 31, 2023.
10.2*	Waiver and Amendment to Loan Documents between PeriShip Global LLC and PNC Bank, National Association, effective October 31, 2023.
10.3#*	Employment Agreement with Paul Ryan, effective March 1 2023.
10.4#	Separation Agreement and Release of all Claims between the Company and Keith Goldstein dated July 17, 2023 (incorporated herein by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 21, 2023).
10.5#	Separation Agreement and Release of all Claims between the Company and Margaret Gezerlis dated July 17, 2023 (incorporated herein by reference from Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on July 21, 2023).
10.6#	Restricted Stock Unit Award Agreement between the Company and Keith Goldstein dated July 31, 2023 (incorporated herein by reference from Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on July 21, 2023).
10.7#	Restricted Stock Unit Award Agreement between the Company and Margaret Gezerlis dated July 31, 2023 (incorporated herein by reference from Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on July 21, 2023).
10.8	Form of Convertible Note Purchase Agreement (incorporated herein by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 28, 2023).
10.9	Form of Convertible Subordinated Promissory Note (incorporated herein by reference from Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on August 28, 2023).
31.1*	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**	Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*	XBRL Instance Document. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH*	Inline XBRL Taxonomy Extension Schema Document.
101.CAL*	Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB*	Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*	Inline XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF*	Inline XBRL Taxonomy Extension Definition Linkbase Document.
104*	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

*Filed herewith

**Furnished herewith

# Denotes management compensation plan or contract

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SIGNATURES 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	VERIFYME, INC.
Date: November 8, 2023	By: /s/ Adam Stedham
	Adam Stedham
	Chief Executive Officer and President (Principal Executive Officer)
Date: November 8, 2023	By: /s/ Nancy Meyers
	Nancy Meyers Executive Vice President and
	Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

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