VerifyMe, Inc. — Form 10-Q Summary
Entity note: The supplied filing is for VerifyMe, Inc. (OTCQB: VRME), not Openworld, Inc. It covers the quarter ended March 31, 2017; the interim financial statements are unaudited.
Business context
VerifyMe develops anti-counterfeiting and authentication technologies for physical products, identity, and digital access. The company reported no revenue in the quarter and said further development of its digital technology depends on sufficient working capital.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 or comparison |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $188,505 | $1,015,692 |
| Net loss | $304,587 | $1,516,334 |
| Basic and diluted loss per share | $0.04 | $0.25 |
| Cash used in operating activities | $144,422 | $576,678 |
| Cash provided by financing activities | $145,000 | $1,217,500 |
Gross profit and gross margin were zero because revenue and cost of sales were both zero. The lower net loss reflected lower operating expenses and less expense from fair-value changes than in the prior-year quarter, partly offset by increased interest expense and a different warrant valuation impact.
At March 31, 2017, cash was $23,222; current assets were $47,905 and current liabilities were $1,699,327, implying a working-capital deficit of $1,651,422. Total assets were $282,069, and stockholders’ deficit was $1,417,258. The company reported $164,012 of current notes payable net of discounts; the notes’ stated principal included a $50,000 note past due since 2011 and notes due June 30, 2017. Accounts payable and accrued expenses were $862,315. Warrant and embedded derivative liabilities totaled $673,000.
Changes, outlook, and risks
- Operating expenses fell substantially year over year: payroll decreased to $22,810 from $627,923, research and development to $8,669 from $89,335, and sales and marketing to $5,921 from $65,331. Management attributed reductions to officers leaving after Q1 2016 and cost containment; it said R&D programs were reduced to a minimum.
- Interest expense rose to $66,544 from $1,000 as the company used debt to fund operations. Q1 financing consisted of $145,000 in bridge loans, compared with Series C preferred-stock financing in the prior-year period.
- Management stated that cash was insufficient for the next 12 months and disclosed substantial doubt about the company’s ability to continue as a going concern. As of May 15, cash resources were approximately $1,000.
- The company was seeking to borrow up to $1.1 million and discussing an equity offering of as much as $2.1 million, including repayment of potential borrowings. The offering depended on investor consents and conversion of outstanding notes; management said it was uncertain whether required Series C investors would agree. It warned that failure to borrow $500,000 or secure the stated concessions and financing would result in cessation of operations.
- Subsequent to quarter-end, VerifyMe issued a $30,000 secured note on April 26, bearing 10% interest and maturing October 31, 2017. It is secured by a first lien on company assets and has a conditional conversion feature tied to a qualifying financing.
- Common shares outstanding were 8,990,696 at March 31 and 9,765,697 as of May 15. Preferred-stock conversions and substantial warrant and option issuances create potential dilution.
- Management concluded disclosure controls and procedures were ineffective as of March 31. It reported no material change in internal control over financial reporting during the quarter. No legal proceedings were reported; the filing’s Risk Factors item states “Not applicable,” while the MD&A identifies significant funding and execution risks.
Important facts for investors to verify
- Whether the company obtained the financing and investor consents it said were necessary to continue operations, and its subsequent cash position.
- The status, repayment, conversion, or refinancing of notes due June 30, 2017, including the past-due $50,000 note.
- Whether VerifyMe generated revenue after the quarter and whether reduced spending left the business adequately funded to develop and commercialize its products.
- The potential dilution and terms associated with preferred stock, warrants, options, and proposed financing.
- The causes and remediation of ineffective disclosure controls, and the valuation assumptions behind the Level 3 warrant and embedded derivative liabilities.