VerifyMe, Inc. — Form 10-Q summary
Issuer identity: The filing names VerifyMe, Inc., not Openworld, Inc.; confirm that this is the intended filing. Reporting period: quarter ended March 31, 2016. Financial statements are unaudited.
Business context and financial results
VerifyMe develops anti-counterfeiting and identity-authentication technologies for physical products and digital transactions. It reports that it has not generated significant revenue since inception.
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $0 | $6,250, entirely royalties |
| Operating expenses | $1,015,692 | $409,112 |
| Operating loss | $1,015,692 | $402,862 |
| Net loss | $1,516,334 | $263,636 |
| Basic and diluted loss per share | $0.25 | $0.07 |
| Net cash used in operating activities | $576,678 | $125,486 |
No meaningful gross margin is reported for Q1 2016 because revenue and cost of sales were both zero. The net loss included substantial non-cash and fair-value items, including a $1,730,933 gain on warrant fair value, a $463,000 expense for the embedded derivative revaluation, and a $1,767,575 expense for the fair value of warrants issued with Series C preferred stock exceeding the consideration received.
Financial position, liquidity, and material changes
- At March 31, 2016, cash was $608,891, current assets were $693,781, and current liabilities were $4,101,489. The resulting working capital deficit was approximately $3.41 million.
- Current liabilities included a $50,000 note payable, a $1,698,000 embedded derivative liability, and a $1,839,018 warrant liability. Stockholders’ deficit was $3,148,220.
- Cash increased from $4,152 at December 31, 2015, mainly following $1,217,500 of net financing proceeds from the Series C offering. The company reported approximately $376,000 cash on hand as of May 18, 2016.
- The Series C offering raised $1,235,000 gross in February. The company issued 3,087,500 preferred shares and warrants to purchase 3,087,500 common shares at $0.40 per share. The preferred shares are convertible into common shares, subject to adjustment.
- Compared with Q1 2015, revenue fell to zero, operating expenses rose by about $607,000, net loss increased by about $1.25 million, and operating cash use increased by about $451,000. Payroll expense rose substantially, primarily due to option expense; legal and accounting expense increased largely due to the S-1 registration filing. Research and development expense declined, which management attributed to cost containment.
Outlook, risks, and notable events
- Management said existing cash resources were not expected to sustain operations for the next 12 months. The filing raises substantial doubt about the company’s ability to continue as a going concern. Management may need to reduce expenses or obtain additional debt or equity financing; neither financing nor adequate revenue is assured, and equity issuance could dilute shareholders.
- Management stated that, based solely on internal projections, effectively marketing its products could produce revenue sufficient to fund planned operations, but gave no quantified revenue guidance and provided no assurance that this would occur.
- Risks identified include the need for additional capital, lack of significant operating revenue, product development and market acceptance, competition, technological change, and potential network interruptions or security breaches.
- After quarter-end, CEO and President Paul Donfried resigned on April 29, 2016. The company appointed Tom Nicolette on May 1 under a consulting arrangement through December 31, 2017, providing a $12,500 monthly fee and warrants to purchase 100,000 shares at $0.01. Donfried’s separation terms included $50,000 severance and $16,667 accrued time off.
- From May 1 through May 18, 965,500 Series C shares were converted into common shares. The S-1 covering resale of common shares underlying Series C and its warrants became effective April 29, 2016.
- The company reported no legal proceedings, no defaults on senior securities, and no off-balance-sheet arrangements. Management concluded disclosure controls were effective as of March 31, 2016 and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the issuer identity, given the request metadata names Openworld, Inc. while the filing is for VerifyMe, Inc.
- Assess the company’s cash runway and financing needs, including the reported decline from $608,891 cash at quarter-end to approximately $376,000 on May 18.
- Review the Series C conversion and warrant adjustment terms, potential dilution, and the valuation assumptions behind the $3,537,018 combined derivative and warrant liabilities.
- Track revenue generation and commercialization progress against management’s unquantified internal projections.
- Review the CEO transition, consulting compensation, and subsequent preferred-stock conversions for their financial and governance implications.