Business context and reporting period
This is the unaudited Form 10-Q for the quarter and six months ended June 30, 2015. The filing is by LaserLock Technologies, Inc.; it reports that the company changed its name to VerifyMe, Inc. effective July 23, 2015. The request identifies Openworld, Inc., which does not match the registrant named in the filing.
The company develops authentication and anti-counterfeiting technologies, including security pigments and digital identity solutions. It reported limited revenue and said it had not generated significant revenue since inception.
Financial performance and position
- Revenue: Q2 revenue was $68,375, up from $65,148 a year earlier; first-half revenue was $74,625, versus $65,148. First-half 2015 included $12,500 in royalties; the rest was sales.
- Gross profit and margin: Q2 gross profit was $32,296, a 47.2% margin, versus $10,708 and 16.4% in Q2 2014. First-half gross profit was $38,546, a 51.7% margin, versus $10,708 and 16.4%.
- Net result: Q2 net loss was $956,326, compared with net income of $3,651,844 in Q2 2014. First-half net loss was $1,219,962, versus net income of $222,136. Results were materially affected by noncash warrant fair-value gains and debt restructuring items.
- Operating expenses: Q2 operating expenses were $2,433,005, including $2,016,000 of R&D; first-half expenses were $2,842,117, including $2,136,386 of R&D. Management attributed the R&D increase mainly to licensing fees arising from the June restructuring.
- Cash flow: First-half operating cash use was $541,345, compared with $1,428,203 in 2014. Financing provided $1,488,043, primarily reflecting the recapitalization. Cash was $1,010,554 at June 30; management reported approximately $635,000 on hand at August 14.
- Liquidity and liabilities: June 30 current assets were $1,325,939 and current liabilities $740,189, implying working capital of about $585,750. Total liabilities were $3,922,693, including a $3,182,504 warrant liability. The balance sheet showed a stockholders’ deficit of $2,419,993. Notes payable and related-party accrued interest shown at year-end were eliminated by conversions during the period.
- Per-share data: Q2 and first-half basic and diluted loss per share were $(0.24) and $(0.32), respectively. Share counts and per-share amounts reflect the filing’s retroactive presentation of the July 1-for-85 reverse split.
Material changes and unusual items
- On June 12, 2015, the company completed a recapitalization: it raised $1.45 million from an investor through Series A preferred stock and $50,000 from a private investor through common stock; converted substantial notes and warrants into equity; and settled $6.5 million of past-due licensing and exclusivity fees owed to VerifyMe with Series B preferred stock. The related warrant liability was partly reclassified to equity.
- Q2 results included a $1,117,369 gain from changes in warrant fair value and a $351,918 gain on debt extinguishment. These non-operating items materially offset the operating loss; the prior-year quarter also included large warrant and embedded-derivative gains.
- Management reduced payroll, general and administrative, and sales and marketing spending. Legal and accounting expense rose in Q2, primarily due to the recapitalization.
- After quarter-end, the company completed a 1-for-85 reverse stock split and changed its name to VerifyMe, Inc. It also disclosed substantial equity awards to new executives in July and August.
Outlook, risks and contingencies
Management stated that existing cash was not expected to sustain operations for the next 12 months and that substantial doubt existed about the company’s ability to continue as a going concern. The company said it would need revenue growth, expense reductions, or additional debt or equity financing; there is no assurance it can obtain financing on acceptable terms or generate sufficient sales. Additional equity financing could dilute existing shareholders.
Management’s stated 12–24 month priority was to market products and generate revenue sufficient to cover operating expenses and support growth. This was a plan, not quantified guidance. Risks identified include limited operating history and revenue, financing needs, market acceptance, reliance on third parties, competition, technology and security risks, and regulatory or economic changes. The filing reported no legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the intended issuer: the supplied company name Openworld, Inc. conflicts with the filing’s registrant, LaserLock Technologies, Inc./VerifyMe, Inc.
- Review the recapitalization terms, preferred-stock conversion and voting rights, warrant accounting, and resulting potential dilution.
- Assess actual cash use and financing after August 14, 2015, given management’s stated 12-month funding shortfall and going-concern warning.
- Separate recurring operating performance from noncash warrant remeasurements, debt-extinguishment gains, and the $2 million Q2 R&D charge associated with licensing.
- Check the filing’s disclosure-controls evaluation date: it says controls were evaluated as of March 31, 2015, although this is the June 30 quarterly report.