VerifyMe, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The filing identifies the issuer as VerifyMe, Inc. (OTCQB: VRME), a brand-protection technology company; this differs from the company name in the request metadata. The company sells authentication and serialization technologies, including RainbowSecure, and is commercializing related products. It reported no revenue from its VeriPAS software system.
Financial performance and position
- Revenue: $91,846, up 98% from $46,454 in Q1 2019. Revenue primarily came from security printing for two global brand owners.
- Gross profit and margin: $75,044 and 81.7%, versus $31,687 and 68.2% a year earlier. Management attributed the margin increase to more efficient use of RainbowSecure ink.
- Operating expenses and loss: Operating expenses were $744,038, versus $546,621. Operating loss was $668,994, compared with $514,934; net loss was $1,092,163, compared with $513,306. Loss per share was $0.01 in both periods.
- Cash flow: Operating cash use was $335,233, compared with $593,181. Investing cash use was $29,114. Financing provided $997,203, primarily reflecting proceeds from new debentures after transaction costs and repayment of earlier debt.
- Liquidity: Cash was $885,622 at quarter-end, up from $252,766 at December 31, 2019. Current assets were $1,039,789 and current liabilities $559,335. Management estimated existing cash would fund operations until November 2020, but stated additional capital would be needed.
- Debt: The company repaid its $600,000 2019 debentures for $750,000, including an early-redemption fee, and recorded a $280,504 extinguishment loss. It issued $1,992,000 of 2020 senior secured convertible debentures, receiving $1,747,203 net; these are secured by a lien on company assets and mature 18 months after issuance. Quarter-end debt carrying value was $123,817 after substantial unamortized discounts.
- Equity and potential dilution: The 2020 debentures generally convert at $0.08 per share, subject to terms. The company also issued warrants for 24.9 million shares at $0.15, in addition to outstanding options and warrants. Approximately 101.9 million potential shares were excluded from diluted EPS as anti-dilutive.
Material changes and notable items
- Revenue nearly doubled year over year, and gross margin improved; however, operating and net losses widened, driven in part by higher non-cash stock compensation and financing-related expenses.
- General and administrative expense rose to $570,582 from $232,682, primarily due to increased non-cash stock-based compensation. Total reported stock-based compensation in the income statement was $322,629, versus $89,085.
- Revenue was highly concentrated: two customers generated 97% of Q1 revenue, and two customers represented 95% of accounts receivable at March 31.
- After quarter-end, the company approved changes to executive compensation, including restricted shares in lieu of $150,000 of deferred CEO salary, and additional option-related actions. See the filing’s subsequent-events note for details.
Outlook, risks, and controls
- Going concern: Recurring operating losses and negative operating cash flows raise substantial doubt about the company’s ability to continue as a going concern. Management plans to pursue product sales, exercises of options and warrants, and additional debt or equity financing, but cannot assure success.
- COVID-19: Management said the pandemic had not materially affected reported Q1 results but could affect customer demand, sales activity, operations, and access to capital. Remote sales and canceled in-person events could hinder business development; customer programs could be reduced or canceled.
- Business execution: Commercialization and customer adoption remain uncertain; the company had limited product revenue and no VeriPAS software revenue. Intellectual-property protection, market acceptance, and the ability to fund development are key risks.
- Internal controls: Management concluded disclosure controls and procedures were ineffective at March 31, 2020, citing a material weakness from insufficient staffing to segregate duties. Remediation depends on hiring additional personnel as resources allow.
- Guidance: The filing provides no specific revenue or earnings guidance. Management’s cash runway estimate is not an assurance of future financing or operating results.
Investor verification priorities
- Verify whether the company obtained additional financing after the stated cash runway estimate, and review the terms and security interests of any new funding.
- Assess the conversion, maturity, registration, and potential dilution terms of the 2020 debentures and warrants, including related-party participation.
- Track revenue growth, customer concentration, and progress toward recurring VeriPAS or other product revenue.
- Review cash burn and the company’s ability to fund operations while addressing the disclosed going-concern uncertainty.
- Monitor remediation of ineffective disclosure controls and the potential operational and commercial effects of COVID-19.