VerifyMe, Inc. — Form 10-K Summary
Filing identity: The filing is for VerifyMe, Inc., not Openworld, Inc. It reports the fiscal year ended December 31, 2017; “2017 Q4” is not a separate quarterly filing period.
Business context and reporting period
VerifyMe develops physical anti-counterfeiting products, including security inks and authentication tools, and digital identity-authentication software. The company was seeking to commercialize its products through sales, licensing and partnerships. Its common stock trades on the OTCQB under VRME.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $0 | $37,055 |
| Gross profit | $0 | $12,692 |
| Operating expenses | $2,835,504 | $3,747,030 |
| Net loss | $3,385,340 | $1,646,255 |
| Net cash used in operations | $935,918 | $1,344,708 |
| Cash at year-end | $693,001 | $22,644 |
| Current assets | $711,669 | $49,162 |
| Current liabilities | $1,095,680 | $1,558,967 |
Margins are not meaningful for 2017 because the company reported no revenue. Management said net loss excluding non-cash charges was $1,005,635 in 2017, versus $1,598,538 in 2016, attributing the improvement to cost reductions. Stock-based compensation was a significant non-cash expense. The reported GAAP loss increased, partly reflecting $218,316 of interest expense and a $331,912 non-cash loss on settlement of related-party notes. The 2016 comparison included substantial warrant and derivative fair-value gains that were not recorded in 2017 after an accounting change.
At December 31, 2017, stockholders’ deficit was $192,504. Current liabilities included $923,202 of accounts payable and accrued expenses, $50,000 of notes payable, and $122,478 of common stock payable to a related party. The $50,000 note was past due; its holder had not demanded payment. The company used $2,650 in investing activities and received $1,608,925 from financing activities in 2017.
Material changes and developments
- Revenue fell from $37,055 in 2016 to zero in 2017. Payroll, research and development, and sales and marketing expenses declined, while general and administrative expenses rose.
- In September 2017, VerifyMe announced a five-year agreement with HP Indigo to market RainbowSecure for use on certain HP Indigo 6000-series presses.
- After year-end, the company signed a cross-reselling arrangement with Micro Focus for track-and-trace services and a strategic sales and marketing partnership with S-One. These arrangements were commercial opportunities, not evidence of material realized revenue in 2017.
- The company raised capital through common-stock-and-warrant offerings and converted Series C and Series D preferred securities in 2017. Common shares outstanding rose from 8.3 million at the end of 2016 to 53.5 million at the end of 2017; 84.9 million shares were outstanding as of April 12, 2018.
Outlook, risks and unusual items
Management stated that cash resources of approximately $2.376 million as of March 31, 2018 were sufficient for operations for the next 12 months, while noting that additional funding might be needed to expand the business. No quantified revenue, earnings or margin guidance is provided.
- Commercialization remained unproven: the company had no 2017 revenue and disclosed that VerifyMe Authenticator did not function as intended and required further development funding.
- Management reported one full-time employee and three outside contractors as of March 31, 2018. The filing identifies reliance on partners, a small sales team and a single pigment supplier as risks; one to three customers accounted for all sales in 2016, and there were no sales in 2017.
- Management found a material weakness in internal control over financial reporting related to insufficient segregation of duties and concluded disclosure controls were ineffective as of year-end. Management cited outsourcing accounting functions and forming an Audit Committee as remediation steps; the weakness had not been fully remediated. The auditor did not express an opinion on internal controls.
- Subsequent to year-end, the company reported a settlement involving $500,000 cash and 1 million common shares, cancellation of revenue-sharing agreements, and termination of an obligation to issue warrants for 3.7 million shares. These are post-period events, not 2017 operating results.
- The company early adopted ASU 2017-11, changing the accounting for certain warrants and embedded features. The filing reports a $623,462 cumulative-effect adjustment and explains that 2016 amounts were not restated.
- The independent auditor issued an unqualified opinion on the 2017 financial statements. The filing also reports that the prior auditor was dismissed in November 2017, with no disagreements or reportable events disclosed.
Important facts for investors to verify
- Whether the HP Indigo, Micro Focus and S-One relationships have generated recurring sales, royalties or customer commitments since the filing.
- Current cash, cash burn, overdue obligations and the basis for management’s 12-month liquidity assessment.
- The amount and terms of post-year-end financing, warrant exercises and other potential dilution; the filing presents multiple financing totals across sections.
- Progress in remediating the internal-control weakness and improving disclosure controls.
- Whether VerifyMe Authenticator has become functional and what additional development funding is required.
- Exposure to supplier concentration, customer concentration, and the post-year-end settlement’s full financial and ownership effects.