VerifyMe, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2016. The filing identifies the registrant as VerifyMe, Inc. (OTCQB: VRME), a Nevada company developing authentication and anti-counterfeiting technologies for physical products and digital transactions.
Financial performance and position
| Metric | Q2 2016 | Six months 2016 |
|---|---|---|
| Revenue | $11,705 | $11,705 |
| Gross profit / margin | $5,795 / 49.5% | $5,795 / 49.5% |
| Operating expenses | $1,202,933 | $2,218,625 |
| Loss before other income | $(1,197,138) | $(2,212,830) |
| Net income (loss) | $1,593,386 | $77,052 |
| Cash used in operations | Not separately stated for quarter | $(1,005,142) |
- Compared with Q2 2015, revenue fell from $68,375; six-month revenue fell from $74,625. Gross margin was approximately 49.5% in both 2016 periods, versus 47.2% for Q2 2015 and 51.7% for the first half of 2015.
- Reported net income was driven by noncash fair-value gains on warrants and embedded derivatives: $2.792 million in Q2 and $4.059 million for the first half. First-half results also included a $1.768 million expense because Series C warrants’ fair value exceeded the offering proceeds. The filing reports an operating loss before other income in both 2016 periods.
- At June 30, cash was $216,510, current assets $270,616, and current liabilities $1,174,997, implying negative working capital of approximately $904,000. The balance sheet included a $50,000 note payable, $692,503 of accounts payable and accrued expenses, and $432,494 in derivative liabilities. Stockholders’ deficit was $652,497.
- Cash increased by $212,358 during the first half, supported by $1,217,500 net financing proceeds from the Series C offering. Management reported approximately $40,000 cash on hand as of August 22, 2016.
Material changes and management commentary
- Payroll expense rose to $683,737 in Q2 and $1,311,660 for the first half, largely reflecting stock-option and restricted-stock compensation. Research and development expense declined substantially year over year because prior-period costs included licensing fees from a 2015 restructuring. Sales and marketing expense increased as the company hired a salesperson and incurred travel costs related to HP Indigo.
- In May 2016, VerifyMe signed a memorandum of understanding with HP Indigo to launch and market security ElectroInk, readers, and authentication tools to HP Indigo customers. The filing provides no quantified revenue outlook or assurance of commercial sales from the arrangement.
- The company raised gross proceeds of $1.235 million in February through Series C preferred stock issued with warrants. The preferred stock is convertible into common stock, subject to adjustments; 1.05 million Series C shares had converted by June 30. Common shares outstanding were 7,712,604 at June 30 and August 22.
- The CEO resigned in April and a new CEO began under a consulting agreement in May; the COO resigned in May. The filing describes significant stock-based compensation and related severance accounting.
Outlook, risks, and controls
- Management states that existing cash is not sufficient to sustain operations for the next 12 months. The filing identifies substantial doubt about the company’s ability to continue as a going concern and says additional financing, revenue growth, or expense reductions will be needed. There is no assurance that financing or sufficient sales can be secured; additional equity could dilute shareholders.
- Management’s expectation that effectively marketed products could generate enough revenue to fund planned operations is based on internal projections and is expressly uncertain. No specific financial guidance is provided.
- Key disclosed risks include limited revenue, need for capital, product development and market acceptance, competition, retaining qualified personnel, rapid technological change, and security breaches or network interruptions. No legal proceedings or off-balance-sheet arrangements were reported. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Investor verification priorities
- Verify cash runway and subsequent financing, particularly given August 22 cash of approximately $40,000 and management’s going-concern warning.
- Assess the HP Indigo arrangement’s binding terms, launch progress, customer demand, and potential revenue; the filing reports an MOU rather than quantified commercial results.
- Review the conversion and anti-dilution provisions, outstanding warrants and preferred stock, and resulting dilution exposure.
- Separate operating performance and cash burn from noncash derivative revaluations when assessing the reported net income.
- Confirm whether sales can grow enough to support ongoing expenses; first-half revenue was only $11,705.