VerifyMe, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2017. The filing identifies the registrant as VerifyMe, Inc. (OTCQB: VRME), not Openworld, Inc.; verify that this is the intended filing.
Business context and financial position
VerifyMe develops physical and digital anti-counterfeiting, identification and authentication technologies. The company reported limited commercialization and said it needs working capital to address functionality issues in its digital technology and support operations.
- At June 30, 2017, cash was $538,317, total current assets were $579,439, and current liabilities were $1,072,070, implying negative working capital of approximately $493,000.
- Total assets were $805,060; stockholders’ deficit was $267,010. Accounts payable and accrued expenses were $961,183.
- Reported current note payable was $50,000, relating to a 2009 note described as past due. The filing also describes a $30,000 secured note due October 2017; its presentation is not clear from the balance sheet. Warrant liability was approximately $60,887; embedded derivative liability was zero.
- Cash was approximately $600,000 as of August 14, 2017, according to management.
Results and cash flow
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $0 in 2017; $11,705 in 2016 | $0 in 2017; $11,705 in 2016 |
| Operating expenses | $593,439; $1,202,933 in 2016 | $781,944; $2,218,625 in 2016 |
| Net income (loss) | $(508,509); $1,593,386 in 2016 | $(813,096); $77,052 in 2016 |
| Net loss attributable to common stockholders | $(652,728); $1,593,386 in 2016 | $(957,315); $(1,157,948) in 2016 |
| Net cash used in operating activities | Not provided separately | $(281,449); $(1,005,142) in 2016 |
| Net cash provided by financing activities | Not provided separately | $797,122; $1,217,500 in 2016 |
Gross profit and margins were zero in 2017 because the company had no revenue. Six-month cash increased by $515,673, from $22,644 to $538,317. Interest expense rose to $212,316 for the first half, from $2,000 in 2016. Gains from changes in fair value of warrants and embedded derivatives were $101,744 and $79,420, respectively, in the first half of 2017; these noncash gains were substantially smaller than in 2016 and affected period-to-period earnings.
Material changes, outlook and risks
- Operating expenses fell sharply year over year, principally as payroll, research and development, and sales and marketing were reduced. General and administrative expense increased, primarily due to consulting costs.
- The company raised $531,250 from a June common-stock-and-warrant sale and received $281,000 in note proceeds during the first half. On June 30, $360,000 of notes, described as converting at $390,000 plus accrued interest, converted into common shares and warrants. Series C and D preferred shares and associated warrants were also converted or exchanged, alongside substantial new share and warrant issuances.
- Management stated existing cash was not expected to sustain operations for the next 12 months. The filing reports substantial doubt about the company’s ability to continue as a going concern; additional revenue, expense reductions or financing are needed, and financing may dilute existing shareholders. Management warned the company could cease operations if it cannot raise funds.
- In July and August, the company reported additional common-stock-and-warrant sales totaling $220,000. Patrick White was appointed CEO effective August 15, 2017; the prior CEO remained chairman. The company also granted restricted shares to directors.
- Disclosure controls and procedures were deemed ineffective as of June 30, 2017. The filing reported no legal proceedings and no off-balance-sheet arrangements.
Key facts for investors to verify
- Whether this VerifyMe filing is the intended document given the request metadata naming Openworld, Inc.
- The status, terms and balance-sheet treatment of the $30,000 secured note and other debt; the filing’s debt disclosures are not fully consistent.
- Current cash runway, near-term funding requirements, and whether subsequent financing is sufficient to support operations.
- The share, warrant and option totals following the large June conversions and issuances, and their potential dilution.
- The causes of ineffective disclosure controls and management’s remediation plans.