VerifyMe, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. The filing identifies the registrant as VerifyMe, Inc. (Nasdaq: VRME; warrants: VRMEW); the financial statements are unaudited. The company provides anti-counterfeiting, authentication, serialization, and track-and-trace technologies. It reports limited revenue from RainbowSecure-related printing and no revenue to date from its VeriPAS software system.
Financial results and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $75,256 (2019: $40,479) | $167,102 (2019: $86,933) |
| Gross profit / margin | $62,084 / 82% (2019: $33,394 / 82%) | $137,128 / 82% (2019: $65,081 / 75%) |
| Operating expenses | $803,756 (2019: $700,082) | $1,547,794 (2019: $1,246,703) |
| Operating loss | $741,672 (2019: $666,688) | $1,410,666 (2019: $1,181,622) |
| Net loss | $2,653,057 (2019: $665,656) | $3,745,220 (2019: $1,178,962) |
| Operating cash flow | Six-month cash used: $699,450 (2019: $1,013,238) |
Six-month gross margin improved, which management attributed to more efficient use of RainbowSecure ink. Revenue grew year over year, but operating loss widened as expenses rose, particularly stock-based compensation. Net loss increased substantially, primarily due to debt-discount amortization related to convertible debentures; the six-month statements report $2.054 million of net interest expense and a $280,504 loss on extinguishment of debt.
Cash and cash equivalents were $9.60 million at June 30, 2020, versus $252,766 at December 31, 2019. Current assets were $9.72 million and current liabilities $384,742. Total liabilities were $457,142, including a $72,400 long-term PPP loan; the 2020 convertible debentures had converted by quarter-end. Six-month investing cash use was $50,832 and financing cash provided was $10.09 million. Financing included $9.02 million net public-offering proceeds and $1.75 million net proceeds from the 2020 debentures, partly offset by $750,000 to redeem the 2019 debentures.
Material changes and notable transactions
- In June, the company completed an underwritten offering of units, raising approximately $10.0 million gross and $9.02 million net, including the partial exercise of the over-allotment option. Each unit included common stock and a warrant; the offering and related issuances materially increased potential share dilution.
- The 2020 debentures automatically converted in June following the public offering and Nasdaq listing. The company issued 637,513 common shares in connection with conversion and interest, and additional shares and warrants related to warrant cancellations. The filing also reports 2,499,900 offering warrants and 173,913 representative warrants, among other outstanding warrants.
- The 2019 secured debentures were redeemed in February for $600,000 principal plus a $150,000 early-redemption fee. A 50-for-1 reverse stock split took effect June 18, 2020; share and per-share data are adjusted retroactively in the statements.
- At June 30, 5,343,380 common shares were outstanding; the cover reports 5,575,554 outstanding at August 13, 2020.
Outlook, risks, and controls
- No quantified revenue or earnings guidance is provided. Management says the first-half 2020 financing addressed the liquidity conditions that had raised substantial doubt about going concern, and states that available resources met estimated liquidity needs for the 12 months following issuance of the statements. Continued operating losses and the need to commercialize products remain relevant risks.
- Management says COVID-19 had not materially adversely affected reported first-half results, but warns that it could reduce customer demand, delay or cancel programs, restrict in-person sales, and impair access to capital. The company also cites its limited revenue base, need for financing, intellectual-property risks, and Nasdaq listing requirements.
- Customer concentration is high: one customer represented 99% of Q2 revenue, two customers 97% of six-month revenue, and one customer 99% of receivables at June 30.
- Disclosure controls and procedures were deemed ineffective at June 30 due to a material weakness in segregation of duties associated with limited staffing. The remediation plan is to hire additional personnel as resources allow. No material change in internal control over financial reporting during the quarter was reported.
- The $72,400 PPP loan bears 1% interest, matures in 2022, and may be forgiven subject to program requirements. No legal proceedings or off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Reconcile reported loss per share: the financial statements show Q2 basic and diluted loss per share of $1.04 and six-month loss per share of $1.56, while MD&A cites $1.05 and $1.58, respectively.
- Review the terms, remaining balances, and potential dilution from warrants, options, and post-quarter equity awards; the filing reports 3,779,243 warrants outstanding at June 30 and subsequent director awards.
- Assess dependence on a small number of customers, the conversion of limited commercial traction into recurring revenue, and the status of VeriPAS commercialization.
- Monitor cash burn, future financing requirements, PPP loan forgiveness, Nasdaq continued-listing compliance, and remediation of the disclosed control weakness.