Business context and reporting period
This filing is a Form 10-Q for the quarter ended June 30, 2019, filed by VerifyMe, Inc. The request metadata names Openworld, Inc.; the filing itself identifies VerifyMe, so the issuer identity should be verified. VerifyMe describes itself as a development-stage brand-protection technology company. It reported no revenue from VeriPAS software and only minimal revenue from RainbowSecure technology.
Financial results and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $40,479 in 2019; $6,799 in 2018 | $86,933 in 2019; $6,799 in 2018 |
| Gross profit | $33,394; prior year $4,799 | $65,081; prior year $4,799 |
| Net loss | $665,656; prior year $795,195 | $1,178,962; prior year $1,918,828 |
| Loss per share, basic and diluted | $0.01; prior year $0.01 | $0.01; prior year $0.02 |
| Cash used in operations | Not presented for the quarter | $1,013,238; prior year $1,623,303 |
Gross margin was approximately 82% in the second quarter and 75% for the first half of 2019, compared with approximately 71% in each 2018 comparable period. These percentages are calculated from reported revenue and cost of sales. Operating expenses were $700,082 for the quarter and $1,246,703 for the half year.
At June 30, 2019, cash was $585,193, total current assets $843,554, current liabilities $445,558, total assets $1,185,969, and stockholders’ equity $740,411. The balance sheet reports current liabilities and no long-term debt balance. Cash fell from $1,673,201 at December 31, 2018. First-half investing cash outflow was $74,770, including capitalized software costs; financing cash flow was zero. At August 9, the company reported approximately $450,000 of cash.
Material changes versus the prior comparable period
- Revenue increased substantially from a very small base, primarily from security printing using the company’s authentication and serialization technology for a large global brand owner. Three customers accounted for all first-half revenue; two customers accounted for all accounts receivable at June 30.
- First-half net loss narrowed by $739,866, largely because the 2018 period included a $779,000 shareholder settlement expense. The 2018 settlement also involved a $500,000 cash payment and 1,000,000 shares.
- Operating cash use declined year over year, partly reflecting the prior-year settlement payment. No financing proceeds were raised in the first half of 2019, compared with $3,247,428 in the 2018 period.
- Common shares outstanding increased to 109,321,833 at June 30 from 102,203,166 at year-end, including conversion of Series A preferred shares. The filing also reports substantial options and warrants outstanding.
Outlook, risks, contingencies and unusual items
- Going concern and funding: Management states that recurring losses and negative operating cash flows raise substantial doubt about the company’s ability to continue as a going concern. Cash was expected to support operations only through the third quarter of 2019; management said additional funds would be needed to remain operational beyond that point and that existing resources were insufficient for the next 12 months without materially higher revenue and collections. No investor commitments were reported. Potential financing, including convertible debt or equity, could be dilutive or have unfavorable terms.
- Commercial execution: Several VeriPAS clients were testing the product, but the company had not generated revenue from VeriPAS. Management cited risks in converting sales leads, marketing products, generating material revenue, and closing bridge financing. No quantified revenue or earnings guidance was provided.
- Concentration and dilution: All first-half revenue came from three customers. Approximately 48.9 million potentially issuable shares from options, warrants and preferred stock were excluded from diluted loss per share as anti-dilutive.
- Subsequent events: In August 2019, the CEO agreed to defer a $100,000 salary amount until August 2020 and to continue deferring 25% of base salary for one year. The company granted him 500,000 fully vested five-year options exercisable at $0.14 per share. The filing also reports grants of restricted shares after quarter-end.
- Disclosure controls: Management concluded disclosure controls and procedures were ineffective as of June 30, 2019. The filing reports no material change in internal control over financial reporting during the quarter.
- The company reported no legal proceedings and no off-balance-sheet arrangements. Interim results are unaudited and are not necessarily indicative of full-year results.
Important facts for investors to verify
- Confirm the issuer: this filing is for VerifyMe, Inc., not Openworld, Inc.
- Verify the company’s near-term cash needs, ability to raise capital, and actual liquidity after the reported August 9 cash balance.
- Assess whether revenue growth is repeatable given customer concentration and the absence of VeriPAS revenue to date.
- Review potential dilution from outstanding options, warrants, preferred securities, and subsequent equity awards.
- Follow remediation of ineffective disclosure controls and the company’s progress on its going-concern risks.