Openworld, Inc. annual report, FY2019

Business context and reporting period

The filing is VerifyMe, Inc.’s Form 10-K for the fiscal year ended December 31, 2019; it is not a report solely for 2019 Q4. The request metadata names Openworld, Inc., which does not match the registrant named in the filing and should be verified. VerifyMe develops anti-counterfeiting inks, serialization and track-and-trace products, authentication devices, and digital identity software. Commercialization was still early-stage: revenue remained small, and the company reported minimal or no revenue from several key products.

Financial results and liquidity

Metric20192018
Revenue$244,748$74,884
Gross profit / margin$199,689 / 81.6%$46,082 / 61.5%
Operating loss$(2,432,573)$(2,595,801)
Net loss$(2,507,799)$(2,932,462)
Net loss per share$(0.02)$(0.03)
Cash used in operating activities$(1,579,412)$(2,376,714)

Revenue increased 227%, principally from security printing and authentication serialization for two global brand owners. Gross margin improved, which management attributed to more efficient use of RainbowSecure ink. Operating expenses were $2.63 million, approximately level with 2018: lower R&D, legal and administrative costs were offset in part by higher sales and marketing and payroll costs. The smaller net loss primarily reflects the absence of the $779,000 shareholder settlement expense recorded in 2018.

Cash and cash equivalents were $252,766 at year-end 2019, down from $1,673,201. Current assets were $447,332 versus current liabilities of $1,010,834, a working-capital deficit of approximately $563,502. Total assets were $943,154 and stockholders’ deficit was $67,680. At December 31, 2019, convertible debt had $600,000 principal and a $297,997 net carrying value; a related derivative liability was $171,499.

Material changes and financing

  • Cash used in operations declined year over year, partly because 2018 included a $500,000 cash settlement payment. Investing cash outflow increased to $302,330, including equipment for lease, patents and software. Financing provided $461,307 in 2019, versus $3,465,650 in 2018, when the company raised equity and warrant-exercise proceeds.
  • After year-end, on March 6, 2020, the company completed a $1,992,000 gross senior secured convertible-debenture financing, receiving $1,814,040 net. It used approximately $750,000 to redeem the prior debentures, including a $150,000 early-redemption fee. The new debentures carry 10% annual interest payable in shares, mature 18 months after issuance, and are secured by a first lien on company assets, including intellectual property.
  • The new financing included 24.9 million warrants and potential conversion at $0.08 per share, subject to the stated terms. The filing estimates that conversion and warrant exercise could result in substantial share issuance and dilution; actual dilution depends on conversion, exercise and applicable adjustments.

Outlook, risks and unusual items

No quantified revenue, earnings or cash-flow guidance is provided. Management’s plans depend on increasing sales and raising additional capital. The company said it did not have sufficient cash for its working-capital needs over the next 12 months and expected to need additional financing around December 1, 2020 absent a material increase in operating cash generation. The auditor’s report highlights substantial doubt about the company’s ability to continue as a going concern.

  • Commercial execution remains uncertain: the company reported limited revenue, no sales to date for its multi-factor authentication product, and no revenue yet from tested pre-printed VeriPAS labels. INX inkjet testing was ongoing. Reliance on HP Indigo qualification and distribution partners may constrain market access.
  • Revenue and receivables were highly concentrated: two customers represented 97% of 2019 sales and 97% of year-end accounts receivable. One vendor supplied all pigment and one vendor supplied all canisters in both 2019 and 2018.
  • Management concluded internal control over financial reporting and disclosure controls were ineffective at year-end because of a material weakness in segregation of duties associated with limited staffing. The weakness had not been remediated.
  • Other disclosed risks include competition from substantially larger companies, the need for further financing, possible dilution, dependence on a small team, intellectual-property and cybersecurity risks, and privacy regulation. The company reported no material pending or threatened legal proceedings known to it.
  • In 2018, the company recorded a $779,000 expense related to terminating a revenue-sharing arrangement, partly offset by gains from debt and payable forgiveness. These items affect comparison with 2019.

Most important facts for investors to verify

  1. Confirm the issuer identity: the request says Openworld, Inc., while the filing identifies VerifyMe, Inc. (OTCQB: VRME).
  2. Review the March 2020 debenture and warrant terms, collateral, repayment timetable, conversion mechanics, and potential dilution; verify remaining proceeds and subsequent financing needs.
  3. Assess whether operating cash runway, the approximately $150,000 deferred CEO salary due August 15, 2020, and the going-concern uncertainty were addressed through subsequent funding or sales.
  4. Track customer concentration, actual recurring sales and collections, and progress in qualifying additional HP Indigo presses and completing INX inkjet development.
  5. Check whether management remediated the disclosed material weakness in internal controls and whether customer and supplier concentrations have changed.