Business context and reporting period
This is VerifyMe, Inc.’s Form 10-K for the fiscal year ended December 31, 2015, filed March 30, 2016. The request metadata names Openworld, Inc.; that does not match the registrant identified in the filing. Although the request refers to 2015 Q4, the filing reports full-year results, not a standalone fourth quarter.
VerifyMe develops physical anti-counterfeiting technologies, including security pigments and inks, and digital identity and authentication software. The company says it has not generated significant revenue and intends to commercialize its products through licensing, pigment sales, and authentication tools.
Financial results and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $217,268 | $124,598 |
| Cost of sales | $65,723 | $113,024 |
| Gross profit (margin) | $151,545 (69.8%) | $11,574 (9.3%) |
| Operating expenses | $5,394,035 | $13,576,909 |
| Loss before other income | $(5,242,490) | $(13,565,335) |
| Net loss | $(2,301,885) | $(7,918,495) |
| Net cash used in operations | $(1,495,315) | $(2,020,017) |
Revenue increased about 74% year over year, but remained small relative to expenses. Gross margin improved substantially as cost of sales declined. The lower net loss primarily reflected reduced research and development expense and other cost savings, alongside noncash fair-value effects; it should not be read as evidence that the business had reached operating profitability.
At December 31, 2015, cash was $4,152, current assets were $32,839 and current liabilities were $702,973. Total liabilities were $2,505,348, including $1,802,375 of warrant liability; stockholders’ deficit was $2,168,180. The company reported $50,000 of notes payable at year-end. Cash provided by financing in 2015 was $1,438,043, including $1,278,501 from a Series A preferred stock offering. The filing reports that February 2016 Series C offerings raised $1,235,000 gross ($1,217,500 net); approximately $670,000 remained as of March 30, 2016.
Material changes versus the prior year
- Operating expenses fell by approximately $8.18 million, largely because 2014 included $10.24 million of share-based compensation associated with a technology license, versus $2.0 million in 2015.
- General and administrative expense decreased $362,433 after office closure, staffing reductions, and cost controls. Legal and accounting expense rose $113,898, mainly related to the June 2015 recapitalization and settling old payables.
- Payroll expense increased $264,112; management attributed much of the increase to higher option compensation. Interest expense declined $137,926 after debt conversion.
- The June 2015 recapitalization converted debt and warrants, restructured preferred stock, terminated prior technology and services agreements, and transferred certain patents to the company. It also settled $6.5 million of past-due license and exclusivity payments with Series B preferred stock.
- A 1-for-85 reverse stock split was completed in July 2015. The company changed its name from LaserLock Technologies, Inc. to VerifyMe, Inc. in July 2015.
Outlook, risks, contingencies, and unusual items
- Going concern: The independent auditor’s report and the financial-statement notes state that significant losses and negative operating cash flow raise substantial doubt about the company’s ability to continue as a going concern. Management said year-end resources and subsequent financing were not sufficient to sustain operations for the next twelve months, and further financing or expense reductions may be necessary. Additional financing was not assured and could dilute shareholders.
- Commercial execution: Management’s expectation that revenues could support planned operations is based on internal projections; the filing gives no firm revenue or earnings guidance and cautions that adequate sales may not materialize.
- Concentration: Three customers accounted for 100% of revenue in both 2015 and 2014; the company also sourced 100% of its pigment from one vendor.
- Accounting volatility: The 2015 results included a $2.67 million gain from changes in warrant fair value and a $332,523 gain on extinguishment of debt. Warrant valuation relies on Level 3 inputs and can make reported earnings volatile.
- Other risks: The company cited dependence on additional capital, limited revenues, competition from better-resourced firms, technology and market uncertainty, and challenges attracting and retaining qualified personnel. It had five full-time employees at year-end.
- Subsequent financing and dilution: February 2016 Series C preferred shares were convertible into common stock and were accompanied by warrants to purchase an equal number of common shares, both at $0.40 per share, subject to adjustment. The filing also describes registration deadlines and potential liquidated damages for failures to meet them.
- The filing reports no legal proceedings and no off-balance-sheet arrangements. Management concluded internal control over financial reporting was effective; the auditor did not attest to that assessment.
Most important facts for investors to verify
- Confirm the registrant identity: the supplied metadata says Openworld, Inc., while the filing is for VerifyMe, Inc.
- Review the full audited statements and going-concern disclosures, including cash runway, obligations, and the terms and remaining proceeds of the 2016 financing.
- Assess whether revenue can grow beyond the very small base and reduce dependence on three customers and one pigment supplier.
- Examine the recapitalization, preferred-stock conversion and liquidation rights, warrant liabilities, and potential share dilution, including Series C adjustment provisions.
- Separate recurring operating performance from noncash share-based compensation, debt-extinguishment gains, and warrant fair-value changes.