VerifyMe, Inc. — Form 10-Q for the quarter ended September 30, 2016
Issuer identification: The filing names VerifyMe, Inc. as the registrant; this differs from the “Openworld, Inc.” company in the request metadata. VerifyMe develops anti-counterfeiting and identity-authentication technologies. The filing covers the third quarter and nine months ended September 30, 2016; financial statements are unaudited.
Financial results and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $0 | $142,642 | $11,705 | $217,267 |
| Gross profit | $0 | $113,953 | $5,795 | $152,499 |
| Operating expenses | $451,234 | $1,229,230 | $2,669,859 | $4,071,347 |
| Net income (loss) | $(1,772,901) | $216,337 | $(1,695,849) | $(1,003,625) |
| Operating cash used | Not separately stated | Not separately stated | $1,215,113 | $1,221,500 |
- Nine-month gross margin was approximately 49.5%; there was no Q3 revenue from which to calculate a margin.
- At September 30, cash was $6,539, current assets $65,918, current liabilities $2,540,448, and total liabilities $2,540,448. Total assets were $310,198, and stockholders’ deficit was $2,230,250.
- Current liabilities included $731,662 in accounts payable and accrued expenses, a $50,000 note payable, $683,000 in embedded derivative liability, and $1,070,161 in warrant liability.
- Nine-month financing provided $1,217,500 net, principally from the Series C preferred-stock offering. Cash rose by only $2,387 over the period, to $6,539. Management reported approximately $16,000 cash on hand as of November 21, 2016.
- The filing reports no off-balance-sheet arrangements and no non-cancelable operating lease obligations at September 30.
Material changes versus prior periods
- Revenue fell to zero in Q3 from $142,642; nine-month revenue declined to $11,705 from $217,267.
- Q3 shifted from net income of $216,337 to a net loss of $1,772,901. Nine-month loss widened from $1,003,625 to $1,695,849.
- Operating expenses declined year over year for both the quarter and nine-month period. Nine-month research and development fell substantially, while payroll and sales and marketing increased.
- Reported earnings were significantly affected by noncash fair-value changes: Q3 included an $820,667 warrant-related loss and a $500,000 embedded-derivative loss; nine-month results included a $2,499,790 warrant fair-value gain and a $239,000 embedded-derivative gain, as well as a $1,767,575 charge for the fair value of Series C warrants exceeding consideration received.
Outlook, risks, and notable items
- Management states that existing cash is not sufficient to fund operations for the next 12 months. The filing identifies substantial doubt about the company’s ability to continue as a going concern.
- The company says it needs additional revenue or financing, and may need to reduce expenses. Further financing is not assured; issuing equity could dilute existing shareholders. No quantified revenue or earnings guidance is provided.
- Management’s outlook depends on commercializing its technology and achieving sales sufficient to support operations. Risks cited include financing availability, product development and market acceptance, competition, technological change, security breaches, and ability to attract and retain personnel.
- A May 2016 memorandum of understanding with HP Indigo contemplated marketing and selling security ElectroInk, readers, and authentication tools to HP Indigo customers. The filing does not report resulting revenue.
- After quarter-end, the company issued Series D preferred stock for $103,774 gross proceeds and warrants to purchase 1,037,740 common shares. Series D is convertible into common stock and includes adjustment provisions. The company also reported subsequent preferred-stock conversions into common shares.
- CEO and COO departures occurred in 2016. The filing says disclosure controls were effective as of September 30, 2016, with no material change in internal control during the quarter; it reports no legal proceedings.
Investor verification priorities
- Confirm the issuer identity and ticker: the filing is for VerifyMe, Inc. (VRME), not the company named in the request metadata.
- Assess near-term liquidity, cash needs, and the company’s ability to raise capital or generate revenue, given minimal cash and the going-concern uncertainty.
- Track actual commercialization and sales following the HP Indigo agreement; reported revenue remained very low and was zero in Q3.
- Review the terms and potential dilution from Series C and Series D preferred stock, associated warrants, conversion adjustments, and subsequent conversions.
- Separate operating performance from noncash derivative and warrant remeasurement effects when evaluating reported losses and gains.