VerifyMe, Inc. — FY 2018 Form 10-K
Entity and period: The filing is for VerifyMe, Inc., not Openworld, Inc. It covers the fiscal year ended December 31, 2018; it is an annual report, not a standalone fourth-quarter report.
Business context
VerifyMe develops anti-counterfeiting and product-authentication technologies, including security inks, serialized labels, track-and-trace software, and digital multi-factor authentication. 2018 was described as a product-development and early-revenue year. The company reported new reseller and strategic-partner arrangements, including with HP Indigo, Micro Focus, S-One, and print service providers.
Financial results and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $74,844 in MD&A; $74,884 in the financial statements | $0 |
| Gross profit | $46,082 | $0 |
| Operating expenses | $2,641,883 | $2,835,504 |
| Net loss | $2,932,462 | $3,385,340 |
| Net cash used in operating activities | $2,376,714 | $935,918 |
| Cash at year-end | $1,673,201 | $693,001 |
Gross margin was approximately 61% based on the financial-statement revenue and gross-profit figures. The net loss narrowed by $452,878, while operating cash use increased by $1,440,796. The filing attributes the cash-flow increase in part to a $500,000 shareholder settlement and operating changes. Financing provided $3,465,650 in 2018, mainly from stock sales and warrant exercises. Investing cash use was $108,736, including patent purchases and capitalized software development.
At December 31, 2018, current assets were $1,771,337 and current liabilities were $480,252. The balance sheet reported no notes payable at year-end; liabilities consisted primarily of accounts payable/accruals and accrued payroll. Stockholders’ equity was $1,570,365, compared with a deficit of $192,504 a year earlier. No dividend or formal margin guidance is provided.
Material changes and unusual items
- Revenue began in 2018 after no sales in 2017, but remained nominal; four customers accounted for all 2018 sales.
- Net loss included a $779,000 shareholder-settlement expense, consisting of $500,000 cash and $279,000 in stock-related consideration. The settlement ended certain revenue-sharing arrangements.
- Other income included a $352,008 gain from accounts-payable forgiveness and an $83,667 gain from derecognizing an old note and accrued interest after the limitations period expired.
- Operating expenses included $828,203 of share-based compensation, down from $1,800,181 in 2017. Legal and accounting costs rose, while payroll costs declined; research and development and sales and marketing spending increased.
- Common shares outstanding increased substantially through financings and warrant exercises. At year-end, the company reported 22.2 million warrants and 18.6 million options outstanding, in addition to preferred-stock-related potential shares.
Outlook, risks, and controls
Management expected revenue to ramp in 2019, citing planned delivery of smartphone authentication readers in April, reseller and marketing support, and customer demonstrations at HP Experience Centers. These are expectations, not quantified guidance; the filing states the company had not generated material revenue and cannot assure commercial adoption. The digital authentication product had no 2018 sales.
The auditor’s report and management’s disclosure identify substantial doubt about the company’s ability to continue as a going concern. Management said additional capital would be needed and that financing could be dilutive; the filing also states that, as of March 31, 2019, cash was approximately $1.055 million and was not sufficient for the next twelve months without a material revenue increase. Elsewhere, management described existing resources as sufficient for roughly six months.
Key risks include dependence on future financing and a small customer base; reliance on strategic partners and single suppliers for pigment and canisters; competition from substantially larger companies; technology and commercialization uncertainty; potential share dilution; and limited staffing. Management concluded internal control over financial reporting and disclosure controls were ineffective at year-end because of a material weakness in segregation of duties. The weakness had not been remediated. The filing reports no material pending legal proceeding known to the company.
Investor verification priorities
- Confirm the issuer identity: the supplied metadata says Openworld, Inc., while the filing identifies VerifyMe, Inc. (OTCQB: VRME).
- Reconcile 2018 revenue, stated as $74,844 in MD&A and $74,884 in the audited statements.
- Clarify the cash runway: the filing gives both approximately six months of available resources and insufficient resources for twelve months absent material revenue growth.
- Verify current share counts and potential dilution. The cover reports 103,963,166 common shares outstanding as of March 29, 2019, while the beneficial-ownership table uses an adjusted 122,001,195-share denominator.
- Track whether expected reader deliveries, partner-led deployments, and projected 2019 revenue growth occurred, and whether additional financing was obtained.