VerifyMe, Inc. — Q1 2019 Form 10-Q
Filing identity: The supplied filing is for VerifyMe, Inc., not Openworld, Inc. It covers the unaudited quarter ended March 31, 2019; the comparable period is the quarter ended March 31, 2018.
Business context
VerifyMe develops anti-counterfeiting, product-authentication and identity-security technologies. Q1 2019 revenue came from printing labels with its authentication and serialization technology for a large global brand owner. The company reported that one customer generated all quarterly revenue.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $46,454 | $0 |
| Gross profit | $31,687 | $0 |
| Gross margin | 68.2% | Not applicable |
| Operating expenses | $546,621 | $741,567 |
| Net loss | $513,306 | $1,123,633 |
| Net cash used in operating activities | $593,181 | $982,041 |
| Cash used in investing activities | $24,435 | $825 |
| Cash provided by financing activities | $0 | $2,631,266 |
At March 31, 2019, cash and cash equivalents were $1.06 million, current assets were $1.31 million, and current liabilities were $459,156. Working capital was approximately $848,000. Total assets were $1.61 million and stockholders’ equity was $1.15 million. The balance sheet lists no debt; it reports accounts payable, accrued expenses and accrued payroll as current liabilities.
Cash declined by $617,616 during the quarter. The company reported approximately $926,000 of cash as of May 10, 2019 and estimated that existing resources would support operations only until October 2019. It said additional funding would be needed to remain operational and that cash was insufficient for the next 12 months absent materially higher revenue and collections.
Changes, outlook and risks
- Revenue began from zero in the prior-year quarter, but remained small and wholly dependent on one customer; two customers represented all accounts receivable at quarter-end.
- Net loss narrowed year over year. Management attributed the comparison largely to prior-year unusual items: a $779,000 shareholder-settlement loss and a $397,725 gain from accounts-payable forgiveness. Operating expenses fell by $194,946, mainly as non-cash stock-award and option charges declined; sales and marketing costs rose to $143,143 from $8,042.
- Operating cash use improved year over year, but there were no financing proceeds in Q1 2019, compared with $2.63 million raised in Q1 2018 through stock sales and warrant exercises.
- The filing states that recurring losses and negative operating cash flows raise substantial doubt about the company’s ability to continue as a going concern. Management plans to pursue product sales and additional capital through equity, warrant or option exercises, debt financing and/or a public offering, but gave no assurance of success. No quantified revenue guidance was provided.
- Management described product development and commercialization opportunities, including authentication labels and track-and-trace applications, but cautioned that closing sales, generating material revenue and obtaining financing are uncertain.
- Disclosure controls and procedures were concluded to be ineffective as of March 31, 2019. Management reported no material change in internal control over financial reporting during the quarter.
- Q1 included $24,435 of patent-related investment. The company reported 10 granted U.S. patents and one granted European patent, alongside pending patent and trademark applications. Capitalized software of $70,231 was not yet available for use.
- After quarter-end, 20,000 Series A preferred shares converted into 400,000 common shares, and a warrant exercise generated $15,067. The company also appointed a director in May and granted an equity award subject to vesting.
Important facts for investors to verify
- Confirm the registrant’s identity: the filing is for VerifyMe, Inc., despite the request metadata naming Openworld, Inc.
- Review the going-concern disclosure, October 2019 estimated cash runway, and the status and terms of any subsequent financing.
- Assess whether the initial label-printing order can develop into recurring, material revenue and whether customer concentration can be reduced.
- Reconcile cash use and the May 10 cash balance, including the reported spending on manufacturing and deployment of authenticators and beepers.
- Evaluate potential dilution: approximately 54.4 million anti-dilutive potential shares were excluded from diluted loss per share for Q1 2019, in addition to common shares issued or issuable through conversions, options and warrants.
- Review remediation plans for ineffective disclosure controls and the potential effect of the large year-over-year decline in unusual charges on comparisons of reported losses.