VerifyMe, Inc. — Form 10-K Summary
Filing identity and period: The supplied filing is VerifyMe, Inc.’s annual report for the fiscal year ended December 31, 2016, filed April 12, 2017. This differs from the request metadata identifying Openworld, Inc.; the filing does not describe a 2016 Q4-only report.
Business context
VerifyMe develops anti-counterfeiting technologies, including security pigments and inks, and digital identity-authentication software. The company reported that its digital Authenticator product was not functioning as intended and could not be fully developed without additional working capital. All 2016 revenue came from one customer, identified in the filing as AB Corp.
Financial results and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $37,055 | $217,268 |
| Gross profit | $12,692 | $151,545 |
| Gross margin | About 34% | About 70% |
| Operating expenses | $3,747,030 | $5,394,035 |
| Net loss | $1,646,255 | $2,301,885 |
| Net loss per share, basic and diluted | $0.24 | $0.47 |
| Cash used in operations | $1,344,708 | $1,495,315 |
Revenue fell about 83% year over year. The net loss narrowed, but results included substantial non-cash fair-value gains on warrants and an embedded derivative; the filing says warrant values declined as the share price fell. Operating expenses also decreased, principally because the $2.0 million 2015 technology-license fee did not recur and costs were reduced. General and administrative expense increased to $1.01 million from $449,483, including higher consulting and non-cash option and warrant expense.
At December 31, 2016, cash was $22,644, current assets were $49,162, and current liabilities were $1,558,967, implying a working-capital deficit of about $1.51 million. Total assets were $281,114 and stockholders’ deficit was $1,277,853. Current liabilities included $867,436 of accounts payable and accrued expenses, $68,069 of notes payable net of discount, and $623,462 of derivative liabilities. Notes included $50,000 past due and $79,000 due June 30, 2017. The company reported no cash interest paid in 2016.
Material changes, outlook, and risks
- Financing activities provided $1,363,200 in 2016, mainly from Series C and Series D preferred-stock offerings and bridge loans. The company said it needed additional financing and sufficient sales to continue operating.
- Management reported approximately $11,000 in cash resources as of April 12, 2017, and expected scaled operations to be sustainable only until April 30, 2017. It sought to raise $600,000 to $1.75 million, subject to investor concessions and conversion of notes; failure to secure funding could require cessation of operations. Management warned additional financing could be highly dilutive.
- The auditor issued an unqualified opinion on the financial statements but highlighted substantial doubt about the company’s ability to continue as a going concern. The statements include no adjustments for the outcome of that uncertainty.
- Customer concentration was total: one customer accounted for 100% of 2016 sales, versus three customers accounting for 100% in 2015. One vendor supplied 100% of pigment in both years.
- As of March 31, 2017, the company reported one full-time employee. Management said working-capital constraints had curtailed operations and prevented the research and development needed to address the Authenticator’s functionality issues.
- Management concluded internal control over financial reporting and disclosure controls were ineffective, citing lack of segregation of duties after staff reductions. The company had no non-cancelable operating lease obligations at year-end and disclosed no legal proceedings.
- Other key risks include competition from better-resourced companies, patent and technology commercialization uncertainty, anti-dilution provisions in preferred stock and warrants, potential future share dilution, and the illiquidity risks associated with penny-stock trading.
The filing provides no formal revenue or earnings guidance. Management anticipated continuing losses absent adequate financing and sales. Subsequent to year-end, the company disclosed additional note proceeds, including $100,000 in February 2017; despite those proceeds, it stated that existing resources were insufficient for the next twelve months.
Investor facts to verify
- Whether the company obtained the proposed financing, secured required investor concessions, and converted outstanding notes—and the resulting dilution and capitalization.
- Current cash, accounts payable, debt maturities, and actual operating runway after the reported subsequent financing.
- Whether revenue diversified beyond the single 2016 customer and whether alternative pigment suppliers were established.
- Whether the Authenticator became functional and whether physical-security products generated material new orders or recurring revenue.
- Whether internal-control deficiencies were remediated and whether the going-concern uncertainty persists.
- Reconcile the filing’s financial statements and subsequent-event disclosures with later SEC filings; the company’s cash-resource and financing disclosures should be assessed as of the relevant date.