VerifyMe, Inc. — Form 10-Q for the quarter ended September 30, 2017
Entity note: The supplied filing is for VerifyMe, Inc., not Openworld, Inc. Verify the issuer and ticker (OTCQB: VRME) before relying on this summary. The filing reports unaudited results for the three and nine months ended September 30, 2017.
Business context
VerifyMe develops physical-product authentication and digital identity technologies, including security inks, product tracking, software and biometric authentication. It has a five-year global agreement with HP Indigo to incorporate its pigments into security ink; management expected the agreement to affect revenue beginning in 2018, but gave no assurance that revenue would result. The company said it had not generated significant revenue since inception.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $392 | $0 | $392 | $11,705 |
| Gross profit | $392 | $0 | $392 | $5,795 |
| Operating expenses | $382,158 | $451,234 | $1,164,102 | $2,669,859 |
| Net loss | $384,983 | $1,772,901 | $1,198,079 | $1,695,849 |
| Operating cash used | Not separately stated | Not separately stated | $626,743 | $1,215,113 |
- Margins: Gross margin was effectively 100% in Q3 on $392 of revenue; nine-month gross profit was $392 on $392 revenue. These very small revenue amounts make margin comparisons uninformative.
- Balance sheet at September 30: Cash and equivalents were $759,698; current assets $813,468; current liabilities $1,001,161; total assets $1,032,822; and stockholders’ equity $31,661. Management reported a working-capital deficiency of approximately $188,000.
- Debt and obligations: The balance sheet showed $50,000 of notes payable, a 2009 note that was past due, and $892,057 of accounts payable and accrued expenses. Accrued interest on notes was $32,667. Warrant liabilities were $59,104; the embedded derivative liability had been eliminated through conversions.
- Cash funding: Nine-month financing activities provided $1,363,797, including $1,100,250 from common-stock-and-warrant sales and $281,000 in notes that were later converted into stock and warrants. Cash increased by $737,054 from year-end 2016. Management reported approximately $732,000 cash as of November 6, 2017.
Changes versus comparable periods
- Revenue remained negligible and fell to $392 for the first nine months, from $11,705 a year earlier.
- Nine-month net loss narrowed by about $498,000, while Q3 net loss narrowed by about $1.39 million. The comparisons were significantly affected by noncash fair-value gains and losses on warrants and embedded derivatives, as well as the 2016 warrant expense associated with Series C preferred stock.
- Nine-month operating expenses declined, principally because payroll, research and development, and sales and marketing spending were lower. General and administrative expense increased, primarily due to consulting costs.
- Operating cash use decreased by approximately $588,000 year over year. The company also reported substantially higher cash at quarter-end, supported by equity and debt financing.
- In June 2017, Series C and D preferred shares and related instruments, along with bridge notes, were converted into common stock and warrants. Common shares outstanding rose substantially; the filing reports 47,867,957 at September 30 and 49,648,497 at October 24.
Outlook, risks and unusual items
- Going concern: Management said losses and negative operating cash flow raise substantial doubt about the company’s ability to continue as a going concern. It said existing cash was not expected to sustain operations for the next 12 months and additional financing was needed. If financing or sufficient revenue is unavailable, the company may have to cut expenses and may be unable to execute its plans or pay obligations as incurred.
- Commercial outlook: The HP Indigo agreement could support royalties, with management anticipating potential revenue beginning in 2018; timing and revenue generation were uncertain. Management also expected payroll expense to increase.
- Dilution: The company issued 15,733,575 common shares and matching warrants for $1,100,250 during the nine months. It reported approximately 72 million potentially issuable shares excluded from diluted EPS as anti-dilutive; 35,264,498 warrants were outstanding at September 30. In October, it sold another 1,430,000 shares and matching warrants for $100,000. A 2017 equity incentive plan covering 13 million shares was adopted in November.
- Controls: Management concluded disclosure controls and procedures were ineffective as of September 30. It reported no material change in internal control over financial reporting during the quarter.
- The filing reported no legal proceedings and no off-balance-sheet arrangements. It provided no specific forward revenue or earnings guidance.
Important facts for investors to verify
- Confirm the filing belongs to VerifyMe, Inc., rather than the requested Openworld, Inc.
- Assess near-term cash needs, financing availability, and the implications of the going-concern warning and past-due $50,000 note.
- Review the terms, exercise prices, and potential dilution from the large outstanding warrant and equity-award overhang.
- Verify whether the HP Indigo relationship has generated commercial orders or royalties since management’s stated 2018 revenue expectation.
- Check reported expense figures against the statements: the MD&A gives nine-month research and development expense as $33,423, while the income statement reports $33,243. The MD&A also contains apparent period-label and comparative-figure inconsistencies.
- Monitor remediation of ineffective disclosure controls and confirm subsequent cash, share-count, and financing disclosures.