Business context and reporting period
The supplied filing is VerifyMe, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2018—not a filing identifying Openworld, Inc. VerifyMe develops anti-counterfeiting, product-authentication and digital identity technologies. It reported its first revenue from a customer order involving authentication technology for 10 million labels.
Financial results and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $6,799 | $0 | $6,799 | $0 |
| Gross profit | $4,799 | $0 | $4,799 | $0 |
| Gross margin | 70.6% | Not applicable | 70.6% | Not applicable |
| Operating expenses | $805,591 | $593,439 | $1,547,158 | $781,944 |
| Net loss | $(795,195) | $(508,509) | $(1,918,828) | $(813,096) |
| Net loss attributable to common stockholders | $(795,195) | $(652,728) | $(1,918,828) | $(957,315) |
| Cash used in operating activities | Not presented quarterly | $(1,623,303) | $(281,449) |
- Cash and cash equivalents were $2.316 million at June 30, 2018, versus $693,001 at December 31, 2017. Current assets were $2.352 million and current liabilities $490,556, implying working capital of approximately $1.862 million.
- Financing provided $3.247 million in the first half: $2.093 million from warrant exercises and $1.154 million from common-stock sales. Investing cash use was $825.
- Current liabilities include $50,000 of unsecured notes, past due since October 2011 and bearing 8% interest; accrued interest was $35,667. The holder had not demanded payment.
- Common shares outstanding were 100.815 million at June 30, compared with 53.523 million at December 31, 2017; 101.673 million were outstanding at July 31.
Material changes versus prior periods
- Revenue began in 2018 but remained minimal. The company said the $6,799 was primarily for canisters enabling the customer to print labels; revenue for technology use was expected as labels were printed.
- First-half operating expenses rose to $1.547 million from $781,944, including higher general and administrative, legal and accounting, and payroll costs. Management attributed much of the increase to stock-based awards, consulting and CEO compensation.
- First-half net loss increased to $1.919 million from $813,096. The period included a $779,000 shareholder settlement expense ($500,000 cash and $279,000 in shares) and a $402,248 gain from forgiveness of accounts payable.
- Operating cash use increased substantially, while cash rose through equity and warrant financing.
Outlook, management commentary and risks
- Management expected technology-usage revenue from the 10-million-label order in the third and fourth quarters of 2018, but provided no revenue amount or broader formal guidance.
- Management estimated that developing its digital patents would require $150,000 and stated a goal of spending that amount in 2018. It said cash of $2.371 million as of July 31 was expected to cover liquidity and working-capital needs for more than 12 months.
- The company cautioned that it must generate revenue and positive operating cash flow; otherwise it may need additional, potentially dilutive capital or may have to cease current operations. Management identified closing sales, marketing products and generating meaningful revenue as key uncertainties.
- The filing reports that disclosure controls and procedures were ineffective as of June 30, 2018. No material change in internal control over financial reporting was reported during the quarter. No legal proceedings or off-balance-sheet arrangements were reported.
- The company disclosed 12 granted U.S. patents and two pending applications, and said it had received notice that a core printing-technology patent was granted in the EU.
Important facts for investors to verify
- Confirm the registrant’s identity: the filing names VerifyMe, Inc., while the request metadata names Openworld, Inc.
- Track whether the anticipated label-technology revenue was recognized, its amount, and whether customer demand expanded beyond the disclosed order.
- Assess cash burn against management’s stated runway, and whether additional financing is needed.
- Review the dilution and terms associated with warrant exercises, private placements, equity awards and the sharp increase in shares outstanding.
- Verify the status and repayment terms of the long-past-due $50,000 note and related accrued interest.
- Monitor remediation of the ineffective disclosure controls and procedures.