VerifyMe, Inc. (formerly LaserLock Technologies, Inc.) — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. The filing identifies the registrant as VerifyMe, Inc.; it does not identify Openworld, Inc.
Business context and period
VerifyMe develops physical-product authentication and anti-counterfeiting technologies, as well as digital identity and access-authentication solutions. It reported limited revenue and stated that it needs additional financing and/or materially higher sales to sustain operations.
Financial results and liquidity
| Metric | Three months ended Sept. 30 | Nine months ended Sept. 30 |
|---|---|---|
| Revenue | $142,642 (2014: $53,260) | $217,267 (2014: $118,408) |
| Gross profit | $113,953 (2014: $3,100); gross margin about 79.9% | $152,499 (2014: $13,808); gross margin about 70.2% |
| Operating expenses | $1,229,230 (2014: $609,069) | $4,071,347 (2014: $3,728,186) |
| Loss before other income | $(1,115,277) (2014: $(605,969)) | $(3,918,848) (2014: $(3,714,378)) |
| Net income (loss) | $216,337 (2014: $(1,713,915)) | $(1,003,625) (2014: $(1,491,780)) |
| Operating cash flow | Not separately presented for the quarter | $(1,221,500) (2014: $(1,932,368)) |
- Q3 net income was driven mainly by a $1,355,293 noncash gain from the change in fair value of warrants, despite a substantial operating loss.
- At September 30, cash was $277,967; current assets were $616,838 and current liabilities $559,485. The company also reported a $1,829,757 long-term warrant liability and total stockholders’ deficit of $1,614,898.
- Cash declined to approximately $187,000 by November 11, 2015, according to management. Nine-month financing cash flow was $1,438,043, principally reflecting the recapitalization and related securities issuance.
- Notes payable were $50,000 at September 30. Most prior debt was converted, repaid, or otherwise restructured during the period.
Material changes and unusual items
- In June, the company completed a recapitalization: it converted substantial debt and warrants into common stock, exchanged $6.5 million of claimed license and exclusivity fees for Series B preferred stock, and issued Series A preferred stock in connection with an investment. It also acquired certain patent rights from VerifyMe Inc., a Texas corporation, and terminated related agreements.
- The company completed a 1-for-85 reverse stock split on July 23, 2015. Common shares outstanding were 5,909,187 at September 30 and 5,976,687 at November 11.
- Nine-month research and development expense rose to $2,194,801 from $1,055,290, including $2 million of share-based compensation related to licensing agreements. Q3 payroll expense included $550,837 of share-based compensation; new executive hires also increased payroll.
- Warrant fair-value accounting materially affected reported earnings: the nine-month gain was $2,642,138, while the warrant liability fell from $6,370,709 at year-end 2014 to $1,829,757 at September 30, 2015.
Outlook, risks, and contingencies
- No quantified revenue or earnings guidance was provided. Management’s stated objective for the next 12–24 months was to market products and generate revenue sufficient to cover operating expenses and support growth.
- Management said existing cash would not sustain operations for the next 12 months and identified substantial doubt about the company’s ability to continue as a going concern. It may need additional debt or equity financing, expense reductions, or sufficient revenue; financing may be unavailable or dilutive.
- Risks cited include limited operating history and revenue, dependence on capital raising, customer acceptance and timely product development, competition, rapid technological change, personnel retention, and potential network interruptions or security breaches.
- The filing reports no legal proceedings and no off-balance-sheet arrangements. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the company obtained financing or reduced expenditures after the reported cash balance and how long available funds could support operations.
- Whether sales and royalties grew enough to offset operating costs, and whether recurring operating performance improved apart from noncash warrant revaluations.
- The terms, conversion rights, voting and liquidation preferences, and potential dilution from preferred stock, warrants, options, and restricted stock awards.
- The accounting and settlement details of the recapitalization, including the license-related obligations exchanged for Series B preferred stock and the patent rights acquired.
- The cash balance and share count reported after September 30; the filing gives approximately $187,000 of cash and 5,976,687 shares outstanding as of November 11, 2015.