Business context and reporting period
The supplied filing is VerifyMe, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2018—not a filing identified as Openworld, Inc. VerifyMe develops anti-counterfeiting, product-authentication and digital identity technologies. Its reported 2018 sales primarily came from printing labels using its authentication and serialization technology for a large global brand owner.
Financial performance and position
| Metric | Three months ended September 30, 2018 | Nine months ended September 30, 2018 | Prior comparable period |
|---|---|---|---|
| Revenue | $28,273 | $35,072 | $392 in each 2017 period |
| Gross profit | $15,992 | $20,791 | $392 in each 2017 period |
| Operating expenses | $583,219 | $2,130,377 | $382,158 and $1,164,102 |
| Net loss | $479,476 | $2,398,304 | $384,983 and $1,198,079 |
| Adjusted EBITDA, non-GAAP | Loss of $271,297 | Loss of $894,803 | Loss of $258,520 and $698,163 |
For the nine months, operating cash use was $1,987,465, compared with $626,743 in 2017. Investing cash use was $46,913, mainly for software and patent costs. Financing provided $3,465,649, including $1,154,211 from common-stock sales and $2,311,438 from warrant exercises. Cash increased to $2,124,272 at September 30 from $693,001 at December 31, 2017. Management reported approximately $1,957,000 cash at October 31 and expected it to cover liquidity and working-capital needs for more than 12 months.
At September 30, current assets were $2,206,504 and current liabilities were $442,737. The balance sheet reported no notes payable and stockholders’ equity of $1,986,259, versus a deficit of $192,504 at year-end 2017. The company remained loss-making; operating margins and profit margins were negative. No dividends or cash interest payments were reported.
Material changes versus the prior period
- Revenue rose from a very low base, reflecting a label-printing order; revenue remained limited relative to operating costs.
- Nine-month net loss approximately doubled. General and administrative, legal and accounting, payroll, and research and development expenses all increased.
- Operating cash use increased substantially, including a $500,000 cash payment under a shareholder settlement.
- Equity financing and warrant exercises drove a significant rise in cash and common shares outstanding. Common shares outstanding increased from 53,523,332 at December 31, 2017 to 102,196,168 at September 30, 2018.
Outlook, risks and unusual items
- Management said development of its digital patents was on target for completion by year-end 2018. This is a stated target, not quantified revenue or earnings guidance.
- Management said the company must generate technology revenue and positive operating cash flow; otherwise, it may need additional capital, which could be highly dilutive, or may cease operating its current business.
- The March 2018 settlement ended certain future revenue-sharing agreements and an obligation to issue 3.7 million warrants. It involved $500,000 cash and 1 million common shares valued at $279,000; the nine-month statements recorded a $779,000 settlement expense.
- The company recorded a $402,248 gain from vendor accounts-payable forgiveness and an $86,667 gain after derecognizing a past-due note and accrued interest following expiration of the statute of limitations.
- Two customers each represented more than 10% of revenue, and two customers each represented more than 10% of accounts receivable. The filing does not provide a clear percentage breakdown.
- Management concluded disclosure controls and procedures were ineffective as of September 30, 2018. No material change in internal control over financial reporting was reported during the quarter.
- The filing reported no legal proceedings and no off-balance-sheet arrangements. It identified the need for additional funding to develop patents as a significant risk.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing is for VerifyMe, Inc., not Openworld, Inc.
- Check subsequent revenue, customer orders and conversion of product-development targets into commercial sales.
- Assess cash burn against management’s stated runway, including financing needs and potential dilution.
- Review the settlement’s future revenue-sharing savings and the effect of the vendor debt forgiveness and note derecognition on reported results.
- Track outstanding shares, options and warrants, including the impact of equity awards and related-party financing or exercises.
- Follow remediation of the ineffective disclosure controls and procedures.