VerifyMe, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019; filed November 14, 2019. The supplied filing is for VerifyMe, Inc., although the request metadata names Openworld, Inc. VerifyMe describes itself as a development-stage brand-protection and authentication technology company; its common stock traded on OTCQB.
Business context and financial results
VerifyMe develops covert inks, product authentication and serialization technology, and related tracking software. It reported no revenue from its VeriPAS software and only minimal revenue from RainbowSecure technology. Current sales primarily came from security printing for a large global brand owner.
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue, 2019 | $56,225 | $143,158 |
| Revenue, 2018 | $28,273 | $35,072 |
| Gross profit, 2019 | $47,754 | $112,835 |
| Gross margin, 2019 | 84.9% | 78.8% |
| Net loss, 2019 | $706,548 | $1,885,510 |
| Net loss, 2018 | $479,476 | $2,398,304 |
Quarterly revenue rose 99% year over year; nine-month revenue increased by $108,086. Gross margins improved versus 2018, which management attributed to more efficient use of RainbowSecure ink. Quarterly operating expenses increased to $709,855 from $583,219, with higher payroll and sales and marketing costs offset partly by lower research and development and legal costs. Nine-month operating expenses declined to $1,956,558 from $2,130,377. The nine-month net loss narrowed mainly because the 2018 period included a $779,000 shareholder settlement expense; quarterly net loss widened year over year.
Cash, debt and liquidity
- Cash and cash equivalents were $671,011 at September 30, 2019, down from $1,673,201 at December 31, 2018. Current assets were $953,459 and current liabilities $897,216, leaving approximately $56,243 of working capital.
- For the first nine months of 2019, operating cash use was $1,355,119, investing cash use was $108,378, and financing provided $461,307. The financing was net proceeds from the first tranche of convertible debt.
- In September, VerifyMe issued $600,000 principal amount of senior secured convertible debentures for $540,000 gross proceeds after original issue discount; reported net proceeds were $461,307. The debentures mature September 18, 2020, are secured by company assets, and have a $228,478 net carrying value after discount. A related embedded derivative liability was $207,534.
- The financing agreement contemplated a second $600,000 tranche after November 17, 2019, subject to the parties’ discretion. The filing also describes variable conversion-price, redemption-premium, and potential dilution provisions. Overdue amounts bear 18% interest.
- Management stated that substantial doubt existed about the company’s ability to continue as a going concern. At September 30, it expected cash to sustain operations only through December 2019; as of November 9, it reported about $470,000 cash and expected funding only through January 2020. It said resources were insufficient for the next 12 months even if it raised an additional $540,000 gross from debentures.
Changes, outlook and risks
- Three customers represented 99% of revenue in both the quarter and nine-month period; one customer accounted for 90% and 93%, respectively. Two customers made up 96% of accounts receivable at quarter-end.
- Management anticipated a possible public securities offering in the first quarter of 2020, conditional on a stock-price recovery and meeting Nasdaq listing requirements. It warned that there was no assurance of completing the offering or other financing and that inability to raise capital could prevent continued operations. It also cited possible stock sales by a former affiliate and associates as a factor affecting the share price.
- The company said the VeriPAS software was expected to be available for use in the fourth quarter of 2019; it had capitalized $141,656 of software costs and had not begun amortizing them because the software was not yet available for use. Several clients were testing VeriPAS.
- Management reported ineffective disclosure controls and procedures as of September 30, 2019. It reported no material change in internal control over financial reporting during the quarter.
- Other notable risks include recurring operating losses, dependence on additional financing, early-stage commercialization, customer concentration, and potential dilution from convertible debt, options and warrants. Approximately 56.7 million potentially issuable shares were excluded from diluted loss per share as anti-dilutive. The filing reported no legal proceedings and no off-balance-sheet arrangements.
- No quantitative revenue or earnings guidance was provided. Management’s outlook depended on financing, customer adoption, product commercialization and capital-market conditions.
Important facts for investors to verify
- Confirm the issuer’s identity: this supplied 10-Q is for VerifyMe, Inc., not Openworld, Inc.
- Check whether the second debenture tranche or other financing was completed, and review the conversion, security and redemption terms and resulting dilution.
- Verify the company’s subsequent cash position, actual operating runway and ability to fund operations beyond the stated January 2020 estimate.
- Assess revenue durability and collection risk given extreme customer and receivables concentration, and confirm whether VeriPAS generated revenue or entered commercial use.
- Review remediation of ineffective disclosure controls and any subsequent filings or updates to the company’s going-concern assessment.