The information in this Management’s Discussion and Analysis should be read in
conjunction with the accompanying unaudited condensed financial statements and
notes.
Cautionary Note Regarding Forward-Looking Statements
This report includes forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and
the Private Securities Litigation Reform Act of 1995. The words “believe,”
“may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,”
“could,” “target,” “potential,” “is likely,” “will,” “expect” and similar
expressions are intended to identify forward-looking statements. All statements
other than statements of historical facts contained in this report, including
among others, statements regarding our ability to continue as a going concern,
our strategy, future operations, future financial position, future revenue,
projected costs, prospects, plans, objectives of management and expected market
growth are forward-looking statements.
Our actual results and financial condition may differ materially from those
express or implied in such forward-looking statements. Therefore, you should not
rely on any of these forward-looking statements. Important factors that could
cause our actual results and financial condition to differ materially from those
indicated in the forward-looking statements include, among others, the
following:
· our ability to continue as a going concern and our history of losses;
· our ability to obtain additional financing;
· the ongoing coronavirus (“COVID-19”) pandemic;
· our relatively new business model and lack of significant revenues;
· our ability to prosecute, maintain or enforce our intellectual property rights;
· disputes or other developments relating to proprietary rights and claims of
infringement;
· the accuracy of our estimates regarding expenses, future revenues and capital
requirements;
· the implementation of our business model and strategic plans for our business
and technology;
· the successful development of our sales and marketing capabilities;
· the potential markets for our products and our ability to serve those markets;
· the rate and degree of market acceptance of our products and any future
products;
· our ability to retain key management personnel;
· regulatory developments and our compliance with applicable laws; and
· our liquidity.
For a further list and description of various risks, relevant factors and
uncertainties that could cause future results or events to differ materially
from those expressed or implied in our forward-looking statements, see the “Risk
Factors” and “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” sections in this report, our Annual Report on Form 10-K
for the fiscal year ended
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.
Notwithstanding the above, Section 21E of the Exchange Act expressly states that
the safe harbor for forward looking statements does not apply to companies that
issue penny stocks. Accordingly, the safe harbor for forward looking statements
under Section 21E of the Exchange Act is not currently available to us because
we may be considered to be an issuer of penny stock.
18 Table of Contents Overview
solutions provider specializing in brand protection functions such as
counterfeit prevention, authentication, serialization, track and trace features
for labels, packaging and products. The Company was formed in
10, 1999
of our technologies. We began to commercialize our covert luminescent pigment,
RainbowSecure®, in 2018, and we also developed the patented VeriPAS™ software
system in 2018 which covertly and overtly serializes products to remotely track
a product’s “life cycle” for brand owners. We believe VeriPAS™ is the only
invisible covert serialization and authentication solution deployed through
variable digital printing on HP Indigo (a division of HP, Inc.) printing systems
with a smartphone tracking and authentication system. VeriPAS™ is capable of
fluorescing, decoding, and verifying invisible RainbowSecure® codes in the field
– designed to allow investigators to quickly and efficiently authenticate
product throughout the distribution chain, including warehouses, ports of entry,
retail locations, and product purchased over the Internet for inspection and
investigative actions. This technology is coupled with a secure cloud based
track and trace software engine which allows brands and investigators to see
where products originate and where they are deployed with geo location mapping
and intelligent programable alerts. Brand owners access the VeriPAS™ software
over the Internet. Brand owners can then set rules of engagement, establish
marketing programs for customer engagement and control, and monitor and protect
their products’ “life cycle.” We have not yet derived revenue from our VeriPAS™
software system and have derived limited revenue from the sale of our
RainbowSecure® technology.
We believe the brand protection technologies we own, once fully developed, can
be used to enable businesses to reconstruct their overall approaches to
security-from brand protection, product diversion and counterfeit identification
to employee or customer monitoring. We are currently testing a pre-printed
labeling system containing VeriPAS™ for third party on-line retailers to affix
to their products that allows the third party retailer to engage with their
customer through marketing and data gathering. In addition these pre-printed
labels containing VeriPAS™ labels will allow the receiving customer to
authenticate the product with their personal smartphone. We are also developing
a thread made of fabric containing covert RainbowSecure® ink that will be sewn
into clothing and apparel for authentication. A VeriPAS™ readable code for
apparel labels is also being developed with a third party apparel manufacturer.
Potential applications of our technologies are available in different types of
products and industries-e.g., banking, gaming, apparel, tobacco, cosmetics,
food, beverages, plastics, metal, event and transportation tickets, manufactured
goods, tax stamps, fabrics, parts, driver’s licenses, insurance cards,
passports, computer software, on-line retail and credit cards. We have had
revenue generating sales through re-seller agreements of our technology and
through direct sales of our technology to global brand owners, and label and
packaging printers.
Our brand protection technologies involve the utilization of invisible and/or
color changing inks, which are compatible and printed with modern digital and
standard printing presses. The inks may be used with certain printing systems
such as digital, offset, flexographic, silkscreen, gravure, inkjet and toner
based laser printers. The inks can be used to print both static and variable
images utilizing digital printing presses and third party digital inkjet systems
which are attached to traditional printing presses. Our invisible ink can be
used in fixed images, variable images or serialized codes, bar codes or QR
codes. We have developed a product which attaches to a smart-phone that reads
our invisible ink codes into sophisticated cloud based track and trace software.
We also have a product that informs users that our invisible ink is present for
authentication. Based upon our experience, we believe that the ink technologies
may be incorporated into most existing manufacturing processes.
In the areas of authentication and serialization of physical goods, we offer
clients the following products as anti-counterfeit systems:
• RainbowSecure®
• VeriPASTM Global Product Identifier, Track and Trace System
• SecureLight® • SecureLight+®
• VeriPAS™ Smartphone Authenticator
• VerifyMe Beeper
• VerifyMe As Authentic Labels
19 Table of Contents
RainbowSecure® technology was our first technology to be patented. It combines
an invisible ink with a proprietary tuned laser to enable counterfeit products
to be exposed. In 2017, we signed a five-year contract with HP Indigo to print
this technology on packages and labels on their 6000 series presses. Our
technology has been tested and approved by HP Indigo 6000 series presses and
more recently we have successfully run pilot production on the 7800 press which
runs on HP Indigo’s newer series 4 platform, and will open up sheet-feed
products like folded cartons and plastic cards. In
contract with Micro Focus to use RainbowSecure® in their Global Product
Authentication, Track and Trace system (software). The technology also features
a unique double layer of security which remains entirely covert at all times and
provides licensees with additional protection. RainbowSecure® is particularly
well-suited to closed and controlled environments, such as casinos that want to
verify transactions within a specific area, as well as labels, packaging,
textiles, plastics and metal products which need authentication. In
entered into a strategic partnership with
third largest producer of inks in
used for inkjet printing in combination with high speed, high volume label and
packaging printing presses. The specially formulated inks will enable these
printing presses to print our RainbowSecure® invisible ink technology, which
includes our variable VeriPAS™ serialization, track and trace technology. We
have not yet derived any revenue from our VeriPAS™ software system and have
derived limited revenue from the sale of our RainbowSecure® technology.
VeriPAS™ technology combines the covert identifier of RainbowSecure® with the
Micro Focus Track and Trace software which provides brand owners geographical
business intelligence on counterfeiting as well as the ability to authenticate
labels, packaging and products. Based on our discussions with other
serialization, track and trace software providers we expect to add alternatives
to clients beyond the Micro Focus GPAS system. This technology is currently
being co-marketed with RainbowSecure® and our VeriPAS™ Smartphone Authenticator
product. Several clients are in the testing stage with this product. To date, we
have not derived revenue from this technology.
SecureLight® technology was developed as a result of our investment in new
proprietary color changing inks that could penetrate broader markets. During the
past decade, we have refined our technology and its applications, and now have
what we believe to be the easiest, most cost effective and efficient
authentication technology available in the world today. Our technology, known as
SecureLight®, takes advantage of the new ubiquitous energy efficient fluorescent
lighting to change the color of ink, resulting in hundreds of new applications
ranging from credit cards to driver’s licenses, passports, stock certificates,
clothing labels, currency, ID cards, and tax stamps. The technology can also be
used to protect apparel, pharmaceuticals, and virtually any other physical
product, such as fabrics, plastics, ceramics and metal. In 2018, we received
notice that patents involving this technology were approved in various European
nations. We are attempting to commercialize this product.
SecureLight+® technology combines the covert characteristics of RainbowSecure®
and the overt characteristics of SecureLight®. This provides a solution which
can be authenticated in two different ways – by proprietary tuned laser devices,
and also by anyone with fluorescent lighting, including end consumers. In 2018,
we received notice that patents involving this technology were approved in
various European nations. SecureLight+® has been successfully deployed in one
country’s drivers’ licenses and another country’s voter registration card
program. We have begun to commercialize this product.
VeriPAS™ Smartphone Authenticator technology is a piece of hardware with a
built-in lighting system and software that scans invisible RainbowSecure® codes.
Product investigators attach their smartphone to this device which then reveals
the hidden RainbowSecure® images on the smartphone screen which are then sent to
the VeriPASTM software in the cloud for authentication and data submission.
These devices have been commercialized and are being leased to customers. Leases
are typically one year in length.
VerifyMe Beeper technology is an authentication tool which we are marketing to
customers in conjunction with our RainbowSecure® ink pigment. Authentication is
provided in the form of an LED indicator, a camera device which reveals the
hidden serialization numbers and codes on a viewing screen and an audible
beeping device when placed on a label, product or package containing the
RainbowSecure® technology. The handheld beeping device is tuned to authenticate
the unique frequency of our RainbowSecure® invisible ink and will broadcast a
beeping sound to confirm the authenticity when placed on products, labels and
packaging containing our RainbowSecure® ink technology. The VerifyMe Beeper is
designed for use by customers who desire instant authentication on items, such
as event tickets at an entry gate. Our customized beeper will only positively
identify a product bearing our unique anti-counterfeit solution. This technology
is being commercialized and leased to customers.
VerifyMe® as Authentic™ technology is a dual-purpose pre-printed label with a
visible serialized QR code for consumer scanning purposes, and an invisible
serialized IR code for inspector scanning, authentication, and tracking
purposes. This label was developed to provide covert brand protection for
on-line retailers, while enabling consumer product authentication, promotion,
engagement and education through the visible serialized QR code. This technology
is being commercialized to prospective customers.
20 Table of Contents COVID-19 Pandemic
In
constituted a “Public Health Emergency of International Concern” and declared a
pandemic. The
COVID-19 pandemic is disrupting businesses and affecting production and sales
across a range of industries, as well as causing volatility in the financial
markets. The extent of the impact of the COVID-19 pandemic on our customer
demand, sales and financial performance will depend on certain developments,
including, among other things, the duration and spread of the outbreak and the
impact on our customers and employees, all of which are uncertain and cannot be
predicted. Please see Item 1A. Risk Factors in this report for additional
information regarding certain risks associated with the pandemic.
The COVID-19 pandemic has caused a major spike in demand for safety products
such as masks and gloves, COVID-19 test kits, medications and vaccines to treat
the virus, which we believe has further caused an increase in counterfeit
products. Our suite of technology solutions for global manufacturers,
distributors and sellers are designed to allow consumers to prove authenticity
and we have proactively reached out to global manufacturers who are seeking to
provide their customers authenticity in their products. We believe we have a
dynamic management and sales team in place with the ability to seamlessly work
remotely to minimize any operational disruption.
In connection with the COVID-19 pandemic, sales conferences and other in-person
sales events have been curtailed. While this has resulted in a reduction of our
sales-related transportation costs, it has limited our sales efforts. We
continue to work with our sales representatives to look for alternative ways to
communicate effectively and promote sales both with our customers and potential
customers.
Further, we anticipate that as a result of the COVID-19 pandemic, our customers
may require that their programs be cancelled or reduced. We will continue to
work in partnership with our customers to continually assess any potential
impacts and opportunities to mitigate risk.
Results of Operations
Comparison of the three months ended
The following discussion analyzes our results of operations for the three months
ended
Revenue
Revenue for the three months ended
compared to
primarily related to security printing with our authentication serialization
technology for two large global brand owners.
Gross Profit
Gross profit for the three months ended
was 81.7% for the three months ended
three months ended
efficient usage of our RainbowSecure® invisible ink allowing more output per
canister. We believe our high gross profit margins demonstrate our business
model’s ability to generate profitable growth.
General and Administrative Expenses
General and administrative expenses increased by
three months ended
31, 2019
compensation which increased by
Legal and Accounting
Legal and accounting fees decreased by
ended
decrease related primarily to a decrease in legal fees.
21 Table of Contents Payroll Expenses
Payroll expenses were
decrease of
The decrease related primarily to a decrease in stock based compensation offset
by the transition of the Chief Financial Officer from a consultant to a
part-time employee.
Research and Development
Research and development expenses were
shift from research and development to commercialization of our products.
Sales and Marketing
Sales and marketing expenses were
ended
decrease in non-cash stock-based compensation
Operating Loss
Operating loss for the three months ended
increase of
2019
compensation offset by increases in revenue. Operating loss for the three months
ended
adjustments compared to
three months ended
Net Loss
Our net loss increased by
increase primarily related to an increase in non-cash stock-based compensation,
loss on extinguishment of debt, amortization of debt discount and interest
expense related to our convertible debentures offset by increases in revenue.
The resulting loss per share for the three months ended
per diluted share, compared to
ended
Liquidity and Capital Resources
Our operations used
2020
an increase in revenues and greater efficiencies within the Company.
Cash used in investing activities was
which was attributed primarily to costs related to our equipment held for lease
during the three months ended
Cash provided by financing activities during the three months ended
2020
During the three months ended
issued to two investors in
we raised
of
Going Concern
We have suffered recurring losses from operations and negative cash flows from
operations. These conditions raise substantial doubt about our ability to
continue as a going concern. In order to continue as a going concern, develop a
reliable source of revenues, and achieve a profitable level of operations, we
will need, among other things, additional capital resources. Since our
inception, we have focused on developing and implementing our business plan. Our
business plans and our ability to continue as a going concern are dependent on
our ability to raise capital through increased sales of product and the possible
exercise of outstanding options and warrants, through debt financing and/or
through future public and/or private offerings of our securities. However,
management cannot provide any assurances that we will be successful in
accomplishing any of our plans. On
the 2020 Debentures and raised
used the net proceeds to repay existing convertible debentures and will use any
additional proceeds for working capital. We also may raise capital in other
private offerings of our securities during 2020. We believe the Company’s
existing cash resources are sufficient to sustain the Company’s operations until
public offering or private offerings of our securities to raise the additional
capital we need. Further, any plans to raise capital may be disrupted by the
volatility in the capital markets raised by the COVID-19 pandemic. The
purchasers of our 2020 Debentures have a security interest that may make it
harder to raise the needed capital through an offering of our securities. If we
are unable to raise the necessary capital, we will not be able to operate our
business.
Off-Balance Sheet Arrangements
None. 22 Table of Contents
Critical Accounting Policies
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.
Revenue Recognition
We account for revenues according to ASC Topic 606, “Revenue from Contracts with
Customers” which established 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.
We apply the following five steps in order to determine the appropriate amount
of revenue to be recognized as we fulfill our obligations under each of our
agreements:
· 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 obligations are satisfied.
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, directors and non-employees 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 option pricing model. The value of the portion of
the award that is ultimately expected to vest is recognized as expense over the
requisite service periods using the straight-line method.
We account for stock-based compensation awards to non-employees in accordance
with ASU No. 2018-07, Compensation – Stock Based Compensation (Topic 718):
Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”),
which aligns accounting for share-based payments issued to nonemployees to that
of employees under the existing guidance of Topic 718, with certain exceptions.
This update supersedes previous guidance for equity-based payments to
nonemployees under Subtopic 505-50, Equity – Equity-Based Payments to
Non-Employees.
Recently Adopted Accounting Pronouncements
Recently adopted accounting pronouncements are discussed in Note 1 of the notes
to the financial statements contained in this report.
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