Attached files
| file | filename |
|---|---|
| EX-31.1 - EXHIBIT 31.1 - VerifyMe, Inc. | ex31_1.htm |
| EX-32.1 - EXHIBIT 32.1 - VerifyMe, Inc. | ex32_1.htm |
| EX-32.2 - EXHIBIT 32.2 - VerifyMe, Inc. | ex32_2.htm |
| EX-3.2 - EXHIBIT 3.2 - VerifyMe, Inc. | ex3_2.htm |
| EX-31.2 - EXHIBIT 31.2 - VerifyMe, Inc. | ex31_2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2016
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¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
Commission file number 000-31927
VERIFYME, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Nevada
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23-3023677
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(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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12 West 21st Street, New York, NY
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10010
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(Address of Principal Executive Offices)
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(Zip Code)
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(212) 994-7002
(Registrant’s Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 7,312,211 shares of common stock outstanding at May 18, 2016.
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PART II - OTHER INFORMATION
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This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts included or incorporated by reference in this Quarterly Report on Form 10-Q, including without limitation, statements regarding our future financial position, business strategy, budgets, projected revenues, projected costs and plans and objectives of management for future operations, are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expects,” “intends,” “plans,” “projects,” “estimates,” “anticipates,” “believes,” “contemplates,” “targets,” “could,” “would” or “should” or the negative thereof or any variation thereon or similar terminology or expressions. Management cautions readers not to place undue reliance on any of the Company’s forward-looking statements, which speak only as of the date made.
We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are not guarantees and are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to: our ability to raise additional capital, the absence of any operating history or revenue, our ability to attract and retain qualified personnel, our ability to develop and introduce a new service and products to the market in a timely manner, market acceptance of our services and products, our limited experience in the industry, the ability to successfully develop licensing programs and generate business, rapid technological change in relevant markets, unexpected network interruptions or security breaches, changes in demand for current and future intellectual property rights, legislative, regulatory and competitive developments, intense competition with larger companies, general economic conditions, and other risks discussed in this filing, the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the Securities and Exchange Commission (the “SEC”), the Company’s Form S-1 registration statement declared effective on April 29, 2016, the Company’s final prospectus filed pursuant to Securities Act Rule 424 on May 2, 2016, and the Company’s other subsequent filings with the SEC.
All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the foregoing. The Company has no obligation to and does not undertake to update, revise, or correct any of these forward-looking statements after the date of this report.
References such as “we”, “us”, “our” and the “Company” used in this Quarterly Report on Form 10-Q mean VerifyMe, Inc., a Nevada corporation.
VerifyMe, Inc.
CONTENTS
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PAGE
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5
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6
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7
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8
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9-16
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March 31, 2016
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December 31, 2015
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(Unaudited)
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(Audited)
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ASSETS
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CURRENT ASSETS
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Cash and cash equivalents
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$ | 608,891 | $ | 4,152 | ||||
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Inventory
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48,807 | 28,687 | ||||||
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Employee advances
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36,083 | - | ||||||
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TOTAL CURRENT ASSETS
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693,781 | 32,839 | ||||||
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PROPERTY AND EQUIPMENT
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Capital equipment, net of accumulated depreciation of $231,430 and $230,621 as of March 31, 2016 and December 31, 2015
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7,029 | 7,838 | ||||||
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OTHER ASSETS
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Deposits
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- | 37,197 | ||||||
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Patents and Trademark, net of accumulated amortization of $173,729 and $166,894 as of March 31, 2016 and December 31, 2015
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252,459 | 259,294 | ||||||
| 252,459 | 296,491 | |||||||
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TOTAL ASSETS
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$ | 953,269 | $ | 337,168 | ||||
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LIABILITIES AND STOCKHOLDERS' DEFICIT
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CURRENT LIABILITIES
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Accounts payable and accrued expenses
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$ | 514,471 | $ | 652,973 | ||||
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Note payable
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50,000 | 50,000 | ||||||
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Embedded derivative liability
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1,698,000 | - | ||||||
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Warrant liability
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1,839,018 | 1,802,375 | ||||||
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TOTAL CURRENT LIABILITIES
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4,101,489 | 2,505,348 | ||||||
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CONTINGENCIES
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STOCKHOLDERS' DEFICIT
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Series A Convertible Preferred Stock, $ .001 par value; 37,564,767 shares authorized; 427,218 shares issued and outstanding
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as of March 31, 2016 and 75,000,000 shares authorized; 441,938 issued and outstanding as of December 31, 2015
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427 | 442 | ||||||
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Series B Convertible Preferred Stock, $.001 par value; 85 shares authorized; 0.97 shares issued and outstanding
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as of March 31, 2016 and 1 share issued and outstanding as of December 31, 2015
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- | - | ||||||
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Series C Convertible Preferred Stock, $.001 par value; 7,500,000 shares authorized; 3,087,500 shares issued and outstanding
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as of March 31, 2016 and 0 shares issued and outstanding as of December 31, 2015
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3,088 | - | ||||||
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Common stock, $ .001 par value; 675,000,000 shares authorized; 6,937,250 and 6,327,570 shares issued, 6,586,710 and 5,977,030
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shares outstanding at March 31, 2016 and December 31, 2015
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6,586 | 5,977 | ||||||
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Additional paid in capital
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40,027,210 | 39,779,414 | ||||||
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Treasury stock, at cost (350,540 shares at March 31, 2016 and December 31, 2015)
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(113,389 | ) | (113,389 | ) | ||||
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Deferred compensation
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(1,557,518 | ) | (1,842,334 | ) | ||||
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Accumulated deficit
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(41,514,624 | ) | (39,998,290 | ) | ||||
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STOCKHOLDERS' DEFICIT
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(3,148,220 | ) | (2,168,180 | ) | ||||
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TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
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$ | 953,269 | $ | 337,168 | ||||
See the accompanying notes to the condensed financial statements.
VerifyMe, Inc.
For the Three Months Ended March 31, 2016 and 2015
(Unaudited)
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Three Months
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Three Months
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Ended
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Ended
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March 31,
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March 31,
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2016
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2015
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NET REVENUES
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Sales
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- | $ | - | |||||
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Royalties
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- | 6,250 | ||||||
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TOTAL NET REVENUE
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- | 6,250 | ||||||
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COST OF SALES
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- | - | ||||||
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GROSS PROFIT
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- | 6,250 | ||||||
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OPERATING EXPENSES
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General and administrative
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117,758 | 83,901 | ||||||
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Legal and accounting
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115,345 | 11,113 | ||||||
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Payroll expenses (a)
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627,923 | 170,904 | ||||||
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Research and development
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89,335 | 120,386 | ||||||
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Sales and marketing (b)
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65,331 | 22,808 | ||||||
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Total operating expenses
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1,015,692 | 409,112 | ||||||
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LOSS BEFORE OTHER INCOME
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(1,015,692 | ) | (402,862 | ) | ||||
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OTHER INCOME (EXPENSE)
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Interest expense
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(1,000 | ) | (30,250 | ) | ||||
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Change in fair value of warrants
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1,730,933 | 169,476 | ||||||
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Change in fair value of embedded derivative liability
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(463,000 | ) | - | |||||
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Fair value of warrants in excess of consideration for convertible preferred stock
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(1,767,575 | ) | - | |||||
| (500,642 | ) | 139,226 | ||||||
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NET LOSS
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$ | (1,516,334 | ) | $ | (263,636 | ) | ||
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LOSS PER SHARE
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BASIC
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$ | (0.25 | ) | $ | (0.07 | ) | ||
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DILUTED
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$ | (0.25 | ) | $ | (0.07 | ) | ||
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WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
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BASIC
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6,139,460 | 3,618,566 | ||||||
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DILUTED
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6,139,460 | 3,618,566 | ||||||
(a) - includes share-based compensation of $495,763 and $(54,834) for the three months ended March 31, 2016 and 2015
(b) - includes share-based compensation of $21,688 and $0 for the three months ended March 31, 2016 and 2015
See the accompanying notes to the condensed financial statements.
VerifyMe, Inc.
For the Three Months Ended March 31, 2016
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Series A
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Series B
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Series C
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Convertible
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Convertible
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Convertible
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Preferred
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Preferred
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Preferred
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Common
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Stock
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Stock
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Stock
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Stock
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Additional
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Number of
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Number of
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Number of
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Number of
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Paid-In
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Treasury
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Deferred
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Accumulated
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Shares
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Amount
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Shares
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Amount
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Shares
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Amount
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Shares
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Amount
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Capital
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Stock
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Compensation
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Deficit
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Total
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Balance at December 31, 2015
(Audited) |
441,938 | $ | 442 | 1.00 | $ | - | 5,977,030 | $ | 5,977 | $ | 39,779,414 | $ | (113,389 | ) | $ | (1,842,334 | ) | $ | (39,998,290 | ) | $ | (2,168,180 | ) | |||||||||||||||||||||||||||||
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Conversion of Series A Convertible Preferred Stock
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(14,720 | ) | (15 | ) | - | - | - | - | 294,400 | 294 | (279 | ) | - | - | - | - | ||||||||||||||||||||||||||||||||||||
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Conversion of Series B Convertible Preferred Stock
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- | - | (0.03 | ) | - | - | - | 291,780 | 292 | (292 | ) | - | - | - | - | |||||||||||||||||||||||||||||||||||||
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Sale of Series C Convertible Preferred Stock
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- | - | - | - | 3,087,500 | 3,088 | - | - | 1,231,912 | - | - | - | 1,235,000 | |||||||||||||||||||||||||||||||||||||||
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Stock issuance costs
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- | - | - | - | - | - | - | - | (17,500 | ) | - | - | - | (17,500 | ) | |||||||||||||||||||||||||||||||||||||
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Deemed dividend distribution
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- | - | - | - | - | - | (1,235,000 | ) | - | - | - | (1,235,000 | ) | |||||||||||||||||||||||||||||||||||||||
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Issuance of stock for services
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- | - | - | - | - | - | 23,500 | 23 | 15,252 | - | - | - | 15,275 | |||||||||||||||||||||||||||||||||||||||
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Fair value of stock options
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- | - | - | - | - | - | - | - | 335,828 | - | - | - | 335,828 | |||||||||||||||||||||||||||||||||||||||
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Decrease in fair value of restricted stock units
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- | - | - | - | - | - | - | - | (82,125 | ) | - | 82,125 | - | - | ||||||||||||||||||||||||||||||||||||||
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Amortization of deferred compensation
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- | - | - | - | - | - | - | - | - | 202,691 | - | 202,691 | ||||||||||||||||||||||||||||||||||||||||
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Net loss
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- | - | - | - | - | - | - | - | - | - | (1,516,334 | ) | (1,516,334 | ) | ||||||||||||||||||||||||||||||||||||||
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Balance at March 31, 2016 (Unaudited)
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427,218 | $ | 427 | 0.97 | $ | - | 3,087,500 | $ | 3,088 | 6,586,710 | $ | 6,586 | $ | 40,027,210 | $ | (113,389 | ) | $ | (1,557,518 | ) | $ | (41,514,624 | ) | $ | (3,148,220 | ) | ||||||||||||||||||||||||||
See the accompanying notes to the condensed financial statements.
VerifyMe, Inc.
For the Three Months Ended March 31, 2016 and 2015
(Unaudited)
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Three Months
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Three Months
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Ended
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Ended
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March 31,
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March 31,
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2016
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2015
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CASH FLOWS FROM OPERATING ACTIVITIES
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Net loss
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$ | (1,516,334 | ) | $ | (263,636 | ) | ||
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Adjustments to reconcile net loss to net cash used in
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operating activities
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Fair value of options issued in exchange for services
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335,828 | (54,834 | ) | |||||
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Common stock issued for services
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15,275 | - | ||||||
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Accretion of discount on notes payable
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- | 10,447 | ||||||
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Change in fair value of warrant liability
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36,643 | (169,476 | ) | |||||
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Change in fair value of embedded derivative liability
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463,000 | - | ||||||
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Amortization and depreciation
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7,644 | 21,426 | ||||||
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Amortization of deferred compensation
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202,691 | - | ||||||
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(Increase) decrease in assets
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Inventory
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(20,120 | ) | (12,000 | ) | ||||
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Prepaid expenses
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- | 2,632 | ||||||
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Increase (decrease) in liabilities
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Accounts payable and accrued expenses
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(101,305 | ) | 346,205 | |||||
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Deferred revenue
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- | (6,250 | ) | |||||
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Net cash used in operating activities
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(576,678 | ) | (125,486 | ) | ||||
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CASH FLOWS FROM INVESTING ACTIVITIES
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Employee advances
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(36,083 | ) | - | |||||
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Net cash used in investing activities
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(36,083 | ) | - | |||||
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CASH FLOWS FROM FINANCING ACTIVITIES
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Proceeds from issuance of notes payable
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- | 136,102 | ||||||
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Proceeds from sale of Series C Convertible Preferred Stock
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1,235,000 | - | ||||||
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Stock issuance costs
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(17,500 | ) | - | |||||
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Net cash provided by financing activities
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1,217,500 | 136,102 | ||||||
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NET INCREASE IN CASH AND
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CASH EQUIVALENTS
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604,739 | 10,616 | ||||||
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CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD
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4,152 | 63,956 | ||||||
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CASH AND CASH EQUIVALENTS - END OF PERIOD
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$ | 608,891 | $ | 74,572 | ||||
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
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Cash paid during the year for:
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Interest
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$ | - | $ | - | ||||
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Income taxes
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$ | - | $ | - | ||||
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SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
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Series A Convertible Preferred Stock converted to common stock
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$ | 294 | $ | - | ||||
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Series B Convertible Preferred Stock converted to common stock
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$ | 292 | $ | - | ||||
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Security deposit offset against accounts payable
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$ | 37,197 | $ | - | ||||
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Accretion of discount on preferred stock as deemed dividend distribution
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$ | 1,235,000 | $ | - | ||||
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Revaluation of restricted stock units between additional paid in capital and deferred
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compensation
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$ | 82,125 | $ | - | ||||
See the accompanying notes to the condensed financial statements.
Nature of the Business
On July 14, 2015, LaserLock Technologies, Inc. changed its name to VerifyMe, Inc., effective July 23, 2015.
The Company was incorporated in the State of Nevada on November 10, 1999. The Company is based in New York, New York and its common stock, par value $0.001 per share (the “Common Stock”), is traded on the over-the-counter market and quoted on the OTCQB, organized by the OTC Markets Group, Inc., and the OTC Bulletin Board under the ticker symbol “VRME.”
The Company is a technology pioneer in the anti-counterfeiting industry. This broad market encompasses counterfeiting of physical and material goods and products, as well as counterfeiting of identity in digital transactions. The Company delivers security solutions for identification and authentication of people, products and packaging in a variety of applications in the security field for both digital and physical transactions. The products can be used to manage and issue secure credentials, including national IDs, passports, driver licenses and access control credentials, as well as comprehensive authentication security software to secure physical and logical access to facilities, computer networks, internet sites and mobile applications.
The Company’s activities are subject to significant risks and uncertainties, including the need to secure additional funding to operationalize the Company’s current technology.
Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions for Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The accompanying unaudited financial statements should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on form 10-K for the year ended December 31, 2015 as filed with the SEC. Operating results for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.
Recently Adopted Accounting Pronouncements
Effective January 1, 2016, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2014-16, Derivatives and Hedging (Topic 815) Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or to Equity.
Recently Issued Accounting Pronouncements Not Yet Adopted
As of March 31, 2016, there are no recently issued accounting standards not yet adopted which would have a material effect on the Company’s financial statements through 2017.
NOTE 2 – MANAGEMENT PLANS
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred significant losses and experienced negative cash flow from operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The Company does not believe that its existing cash resources will be sufficient to sustain operations during the next twelve months. The Company currently needs to generate revenue in order to sustain its operations. In the event that the Company cannot generate sufficient revenue to sustain its operations, the Company will need to reduce expenses or obtain financing through the sale of debt and/or equity securities. The issuance of additional equity would result in dilution to existing stockholders. If the Company is unable to obtain additional funds when they are needed or if such funds cannot be obtained on terms acceptable to the Company, the Company may be unable to execute upon the business plan or pay costs and expenses as they are incurred, which could have a material adverse effect on the business, financial condition and results of operations.
If sufficient revenues are not generated to sustain operations or additional funding cannot be obtained in the short term, the Company will need to reduce monthly expenditures to a level that will enable the Company to continue until such funds can be obtained.
Successful completion of the Company’s development program, and the attainment of profitable operations are dependent upon future events, including obtaining adequate financing to fulfill its development activities and achieving a level of sales adequate to support the Company’s cost structure. However, there can be no assurances that the Company will be able to secure additional equity investment or achieve an adequate sales level.
NOTE 3 – INCOME TAXES
Income tax expense was $0 for the three months ended March 31, 2016 and 2015.
As of January 1, 2016, the Company had no unrecognized tax benefits, and accordingly, the Company did not recognize interest or penalties during 2015 related to unrecognized tax benefits. There has been no change in unrecognized tax benefits during the three months ended March 31, 2016, and there was no accrual for uncertain tax positions as of March 31, 2016. Tax years from 2012 through 2015 remain subject to examination by major tax jurisdictions.
There is no income tax benefit for the losses for the three months ended March 31, 2016 and 2015, since management has determined that the realization of the net tax deferred asset is not assured and has created a valuation allowance for the entire amount of such benefits.
NOTE 4 – EMBEDDED DERIVATIVE LIABILITY
The conversion feature of the 0% Series C Convertible Preferred Stock (“Series C”) is an embedded derivative, which due to anti-dilution adjustments is classified as a liability in accordance with Financial Accounting Standards Board FASB Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging and ASU 2014-16, and was valued in accordance with ASC 470 as a beneficial conversion feature at a combined fair market value of $1,235,000 as of February 2016. This was classified as an embedded derivative liability and a discount to Series C. Because the Series C can be converted at any time, the full amount was accreted and classified as a reduction to the discount on Series C and a deemed distribution in the full amount of $1,235,000.
In addition, the embedded derivative liability must be valued every reporting period and adjusted to market with the increase or decrease being adjusted through earnings. As of March 31, 2016, the fair value of the embedded derivative liability was $1,698,000.
NOTE 5 – WARRANT LIABILITY
On December 31, 2012, the Company entered into an Investment Agreement, a Technology and Service Agreement, a Patent and Technology License Agreement and an Asset Purchase Agreement with VerifyMe, Inc. – Texas (“VFM”) on the same date entered into a Technology and Service Agreement with Zaah Technologies, Inc. (collectively with the VFM agreements, the “Agreements”). Contemplated by those Agreements were warrant issuances by the Company for the purchase of common stock.
Warrants exercisable for 627,451 shares of common stock associated with these Agreements are subject to anti-dilution adjustments outlined in the Agreements. In accordance with FASB ASC 815, the warrants were classified as a liability in the total amount of $2.4 million at December 31, 2012. In addition, the warrants must be valued every reporting period and adjusted to market with the increase or decrease being adjusted through earnings. As of March 31, 2016 and December 2015, the fair value of the warrant liability was $177,750 and $1,020,632, respectively.
The 392,157 warrants associated with the Company’s Series A Convertible Preferred Stock were also classified as a liability since they were subject to anti-dilutive adjustments outlined in the warrant agreement and valued at a fair market value of $2,995,791 at January 31, 2013. In addition, the warrants must be valued every reporting period and adjusted to market with the increase or decrease being adjusted through earnings. As of March 31, 2016 and December 31, 2015, the fair value of the warrants was $107,686 and $626,317.
On January 1, 2014, the Company issued warrants to purchase 74,697 shares of common stock as consideration for technology received from VFM under to the Patent and Technology License Agreement dated December 31, 2012. The warrants are exercisable at $0.10 per share. The warrants are subject to anti-dilution adjustments outlined in the Agreement. In accordance with FASB ASC 815, the warrants were classified as a liability with an initial fair value of $444,000, which was immediately expensed as research and development costs. In addition, the warrants must be valued every reporting period and adjusted to market with the increase or decrease being adjusted through earnings. As of March 31, 2016 and December 31, 2015, the fair value of the warrant liability was $25,830 and $147,524, respectively.
Warrants to purchase 3,529 shares of common stock associated with the notes payable incurred on August 5, 2014, were revalued and at March 31, 2016 and December 31, 2015, the fair value of those warrants was $1,539 and $7,902.
In conjunction with the issuance of Series C, the Company issued warrants to purchase 3,087,500 shares of the Company’s common stock. The warrants are subject to anti-dilution adjustments outlined in the warrant agreement. In accordance with FASB ASC 815and ASU 2014-16, the warrants were classified as a liability with an initial fair value of $1,767,576, which was immediately expensed. In addition, the warrants must be valued every reporting period and adjusted to market with the increase or decrease being adjusted through earnings. As of March 31, 2016 the fair value of the warrant liability was $1,526,213.
NOTE 6 – CONVERTIBLE PREFERRED STOCK
Subscription Agreement
The Company entered into a Subscription Agreement with VFM on January 31, 2013 (the “Subscription Agreement”). Under the terms of the Subscription Agreement, VFM subscribed to purchase 392,157 shares of Series A Convertible Preferred Stock pre 85-for-1 reverse stock split and a warrant to purchase 392,157 shares of pre 85-for-1 reverse stock split Common Stock at an exercise price of $10.20 per share, for $1 million.
Series A Convertible Preferred Stock
On March 10, 2016, 14,720 shares of Series A Convertible Preferred Stock were converted into 294,400 shares of the Company’s common stock.
Series B Convertible Preferred Stock
On March 17, 2016, 0.03 shares of Series B Convertible Preferred Stock were converted into 291,780 shares of the Company’s common stock.
Series C Convertible Preferred Stock
On February 9, 2016, the Company issued 2,587,500 shares of Series C, par value $0.001 per share, at a purchase price of $0.40 per share with gross proceeds to the Company of $1,035,000. In connection with the sale of the Series C, the Company issued to the purchasers warrants to purchase in the aggregate 2,587,500 shares of the Company’s common stock at an exercise price of $0.40 per share. Further, as a part of the same offering, on February 29, 2016, the Company issued 500,000 shares of Series C, at a purchase price of $0.40 per share with gross proceeds to the Company of $200,000. In connection with the sale of the Series C, the Company issued to the purchasers warrants to purchase in the aggregate 500,000 shares of the Company’s common stock at an exercise price of $0.40 per share. Each share of Series C is convertible into one share of common stock. The Series C provides for certain adjustments that may be made to the exercise price and the number of shares issuable upon exercise due to future corporate events or otherwise, including, for a proscribed period of time, upon the issuance of securities at a price that is less than the exercise price of the Series C.
In addition, the Company incurred stock issuance costs of $17,500 related to the issuance of Series C.
The Company entered into a Registration Rights Agreement with each of the purchasers of the Series C (the “Registration Rights Agreement”), pursuant to which the Company agreed to file a registration statement with the SEC covering the resale of the common stock underlying the Series C, as well as the shares of common stock that are issuable upon exercise of the warrants. The registration statement was filed in April 2016 and declared effective on April 29, 2016.
NOTE 7 – FAIR VALUE OF FINANCIAL INSTRUMENTS
Derivative Liabilities
For purposes of determining whether certain instruments are derivatives for accounting treatment, the Company follows the accounting standard that provides guidance for determining whether an equity-linked financial instrument, or embedded feature, is indexed to an entity’s own stock. The standard applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative, and to any freestanding financial instruments that are potentially settled in an entity’s own common stock.
Liabilities measured at fair value on a recurring basis are summarized as follows:
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
|
Embedded derivative liability related to beneficial conversion option
|
$ | - | $ | - | $ | 1,698,000 | $ | 1,698,000 | ||||||||
|
Derivative liability related to fair value of warrants
|
- | - | 1,839,018 | 1,839,018 | ||||||||||||
|
Total
|
$ | - | $ | - | $ | 3,537,018 | $ | 3,537,018 | ||||||||
The following table details the approximate fair value measurements within the fair value hierarchy of the Company’s derivative liabilities using Level 3 inputs:
|
Total
|
||||
|
Balance at January 1, 2016
|
$ | 1,802,375 | ||
|
Series C embedded derivative fair value, February, 2016
|
1,235,000 | |||
|
Series C warrant liability fair value, February, 2016
|
1,767,576 | |||
|
Change in fair value of derivative liabilities
|
(1,267,933 | ) | ||
|
Balance at March, 31, 2016
|
$ | 3,537,018 | ||
The Company has no assets that are measured at fair value on a recurring basis. There were no assets or liabilities measured at fair value on a non-recurring basis during the three months ended March 31, 2016.
As of March 31, 2016, the beneficial conversion feature of Series C is treated as an embedded derivative liability and changes in the fair value were recognized in earnings. Because the fair value of the warrants issued in conjunction with Series C, were in excess of the proceeds of Series C, the effective conversion price of the Series C is $0. The Series C shares are convertible into shares of the Company’s common stock, which did trade in an active securities market, therefore the embedded derivative liability was valued using the following market based inputs:
|
Closing trade price of common stock
|
$ | 0.55 | ||
|
Effective Series A Preferred Stock Conversion price
|
- | |||
|
Intrinsic value of conversion option per share
|
$ | 0.55 |
As of March 31, 2016, the Company’s outstanding warrants were treated as derivative liabilities and changes in the fair value were recognized in earnings. These Common Stock purchase warrants did not trade in an active securities market, and as such, the Company estimated the fair value of these warrants using Black-Scholes and the following assumptions:
|
March 31, 2016
|
||||
|
Annual Dividend Yield
|
0.0 | % | ||
|
Expected Life (Years)
|
2.0 - 3.0 | |||
|
Risk-Free Interest Rate
|
0.73% - 0.87 | % | ||
|
Expected Volatility
|
183.4% - 208.4 | % | ||
Expected volatility was based primarily on historical volatility. Historical volatility was computed using daily pricing observations for recent periods. The Company believes this method produced an estimate that was representative of the Company’s expectations of future volatility over the expected term of these warrants. The Company had no reason to believe future volatility over the expected remaining life of these warrants was likely to differ materially from historical volatility. The expected life was based on the remaining contractual term of the warrants. The risk-free rate was based on the U.S. Treasury rate that corresponded to the expected term of the warrants.
NOTE 8 – STOCKHOLDERS’ EQUITY
On February 8, 2016, the Company issued 23,500 shares of common stock to a consultant for assistance in raising capital. The shares were valued at 15,275 based on the closing stock price on February 8, 2016 of $0.65 per share.
On October 1, 2015, the Company agreed to issue 100,000 RSUs to a consultant for services. Of the 100,000 RSUs, 60,000 were issued upon execution of the agreement, 20,000 shares were to be issued on January 1, 2016 and 20,000 shares were to be issued on April 1, 2016. The RSUs were originally valued at $195,000. The Company expensed $34,750 for the three months ended March 31, 2016 relative to these RSUs.
On October 7, 2015, the Company agreed to pay $15,000 to a consultant/stockholder as well as an additional $35,000 based on certain milestones being met. Additionally, as of August 1, 2015 the Company agreed to issue the individual 30,000 RSUs originally valued at $165,000 in quarterly installments on November 1, 2015, February 1, 2016, May 1, 2016 and August 1, 2016, which began vesting on August 1, 2015. The Company expensed $(13,063) for the three months ended March 31, 2016 relative to these RSUs. Further the individual will receive a 2% to 5% commission on company sales while this agreement is in effect; however no commissions were earned during the three months ended March 31, 2016.
In accordance with FASB ASC 505-50, “Equity – Equity-Based Payments to Non-Employees,” restricted stock with performance conditions should be revalued based on the modification accounting methodology described in FASB ASC 718-20, “Compensation—Stock Compensation—Awards Classified as Equity.” As such the Company has revalued certain restricted stock with consultants and determined that there was an aggregate decrease in fair value of $82,125.
NOTE 9 – STOCK OPTIONS
During 1999, the Board of Directors (“Board”) of the Company adopted, with the approval of the stockholders, a stock option plan. In 2000, the Board superseded that plan and created a new stock option plan, pursuant to which it is authorized to grant options to purchase up to 1.5 million shares of common stock. On December 17, 2003, the Board, with approval of the stockholders, superseded the 2000 plan and created the 2003 Stock Option Plan (the “2003 Plan”). Under the 2003 Plan the Company is authorized to grant options to purchase up to 18,000,000 shares of common stock to the Company’s employees, officers, directors, consultants, and other agents and advisors. The Plan is intended to permit stock options granted to employees under the Plan to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended (“Incentive Stock Options”). All options granted under the 2003 Plan, which are not intended to qualify as Incentive Stock Options, are deemed to be non-qualified options (“Non-Statutory Stock Options”). As of March 31, 2016, options to purchase 298,530 shares of common stock have been issued and are unexercised, and 4,067,631 shares are available for grants under the 2008 Plan.
During 2013, our Board adopted a new omnibus incentive compensation plan that was ratified by the shareholders at the 2013 annual meeting, (the “2013 Plan”) which will serve as the successor incentive compensation plan to the 2003 Plan. Under the 2013 Plan, the Company is authorized to grant awards of stock options, restricted stock, restricted stock units and other stock-based awards of up to an aggregate of 20,000,000 shares of common stock. The 2013 Plan is intended to permit stock options granted to employees under the 2013 Plan to qualify as incentive stock options. All options granted under the 2013 Plan, which are not intended to qualify as incentive stock options, are deemed to be Non-Statutory Stock Options. As of March 31, 2016, under the 2013 Plan grants of restricted stock and options to purchase 700,000 shares of common stock have been issued and are unvested or unexercised, and 19,300,000 shares of common stock remain available for grants under the 2013 Plan.
The 2013 Plan is administered by a committee of the Board (“Compensation Committee”) which determines the persons to whom awards will be granted, the number of awards to be granted and the specific terms of each grant, including the vesting thereof, subject to the provisions of the plan.
In connection with Incentive Stock Options, the exercise price of each option may not be less than 100% of the fair market value of the common stock on the date of the grant (or 110% of the fair market value in the case of a grantee holding more than 10% of the outstanding stock of the Company). The aggregate fair market value (determined at the time of the grant) of stock for which an employee may exercise Incentive Stock Options under all plans of the company shall not exceed $1,000,000 per calendar year. If any employee shall have the right to exercise any options in excess of $100,000 during any calendar year, the options in excess of $100,000 shall be deemed to be Non-Statutory Stock Options, including prices, duration, transferability and limitations on exercise.
The Company issued Non-Statutory Stock Options pursuant to contractual agreements with non-employees. Options granted under the agreements are expensed when the related service or product is provided.
Determining the appropriate fair value of stock-based awards requires the input of subjective assumptions. The Company uses the Black-Scholes option pricing model to value its stock option awards. The assumptions used in calculating the fair value represent management’s best estimates and involve inherent uncertainties and judgments.
On February 29, 2016, the Company issued options to purchase an aggregate of 100,000 shares of the Company’s common stock at an exercise price of $0.57 per share, with a term of five years, to the Chairman of the Board of Directors. The fair value of options issued was $53,731. These options were valued using the Black-Scholes option pricing model to calculate the grant-date fair value of the options, with the following assumptions: no dividend yield, expected volatility of 202.9%, risk-free interest rate of 1.22% and expected option life of five years. The options are being expensed over the Board member’s remaining service terms as that is shorter than the vesting terms.
On March 10, 2016, the Company issued options to purchase 150,000 shares of the Company’s common stock at an exercise price of $0.56 per share, with a term of five years, to an employee. The fair value of options issued was $82,113. These options were valued using the Black-Scholes option pricing model to calculate the grant-date fair value of the options, with the following assumptions: no dividend yield, expected volatility of 202.9%, risk-free interest rate of 1.45% and expected option life of five years. The options are being expensed over the vesting terms for the employee.
On March 24, 2016, the Company issued options to purchase 50,000 shares of common stock at an exercise price of $0.43 per share, with a term of five years, to a consultant, which vest immediately. The fair value of options issued was $21,068. These options were valued using the Black-Scholes option pricing model to calculate the grant-date fair value of the options, with the following assumptions: no dividend yield, expected volatility of 203.1%, risk-free interest rate of 1.39% and expected option life of five years. The options were expensed immediately.
For the three months ended March 31, 2016 and 2015, the Company expensed $335,827 and ($54,834) with respect to the options.
The following table summarizes the activities for our stock options for the three months ended March 31, 2016:
|
Options Outstanding
|
||||||||||||||||
|
Weighted -
|
||||||||||||||||
|
Average
|
||||||||||||||||
|
Remaining
|
Aggregate
|
|||||||||||||||
|
Weighted-
|
Contractual
|
Intrinsic
|
||||||||||||||
|
Number of
|
Average
|
Term
|
Value
|
|||||||||||||
|
Shares
|
Exercise Price
|
in years)
|
(in 000's) (1)
|
|||||||||||||
|
Balance December 31, 2015
|
2,157,353 | $ | 1.80 | 5.0 | ||||||||||||
|
Granted
|
300,000 | $ | 0.55 | 5.0 | ||||||||||||
|
Balance March 31, 2016
|
2,457,353 | $ | 1.64 | 4.8 | $ | 6 | ||||||||||
|
Exercisable at March 31, 2016
|
867,770 | $ | 2.14 | 5.5 | $ | 6 | ||||||||||
|
Exercisable at March 31, 2016 and expected to
|
||||||||||||||||
|
vest thereafter
|
2,457,353 | $ | 1.64 | 4.8 | $ | 6 | ||||||||||
|
(1)
|
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing stock price of $0.55 for our common stock on March 31, 2016.
|
During the three months ended March 31, 2016 and 2015, the weighted average fair value of stock options granted during the period was $62,478 and $0. The fair value of stock options is expensed over the vesting term in accordance with the terms of the related stock option agreements.
For the three months ended March 31, 2016 and 2015, the Company expensed $52,453 and $0, relative to the fair value of stock options granted.
As of March 31, 2016 there was $2,674,621 of unrecognized compensation cost related to outstanding stock options. This amount is expected to be recognized over a weighted-average period of 2.4 years. To the extent the actual forfeiture rate is different from what the Company has estimated, stock-based compensation related to these awards will be different from the Company’s expectations. The difference between the stock options exercisable at March 31, 2016 and the stock options exercisable and expected to vest relates to management’s estimate of options expected to vest in the future.
The following table summarizes the activities for our warrants for the three months ended March 31, 2016:
|
Warrants Outstanding
|
||||||||||||||||
|
Weighted -
|
||||||||||||||||
|
Average
|
||||||||||||||||
|
Remaining
|
Aggregate
|
|||||||||||||||
|
Weighted-
|
Contractual
|
Intrinsic
|
||||||||||||||
|
Number of
|
Average
|
Term
|
Value
|
|||||||||||||
|
Shares
|
Exercise Price
|
in years)
|
(in 000's) (1)
|
|||||||||||||
|
Balance December 31, 2015
|
1,414,893 | $ | 9.67 | 4.8 | ||||||||||||
|
Expired
|
(2,941 | ) | $ | 0.85 | ||||||||||||
|
Granted
|
3,087,500 | $ | 0.40 | 3.0 | ||||||||||||
|
Balance March 31, 2016
|
4,499,452 | $ | 3.31 | 3.4 | $ | 463 | ||||||||||
|
Exercisable at March 31, 2016
|
4,499,452 | $ | 3.31 | 3.4 | $ | 463 | ||||||||||
|
Exercisable at March 31, 2016 and expected to
|
||||||||||||||||
|
vest thereafter
|
4,499,452 | $ | 3.31 | 3.4 | $ | 463 | ||||||||||
|
(1)
|
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying warrants and the closing stock price of $0.55 for our common stock on March 31, 2016.
|
All warrants were vested on the date of grant.
NOTE 10 – OPERATING LEASES
For the three months ended March 31, 2016 and 2015, total rent expense under leases amounted to $10,335 and $19,369. As of March 31, 2016, the Company was not obligated under any non-cancelable operating lease arrangements.
NOTE 11 – SUBSEQUENT EVENTS
On April 14, 2016, the Company filed a Form S-1 registration statement with the SEC which registered 6,175,000 shares of the Company’s common stock underlying shares of the Series C and the warrants associated with Series C. This filing, which was declared effective on April 29, 2016, satisfied the timely filing requirements of the Registration Rights Agreement entered into as part of the Series C transaction.
On April 29, 2016, Paul Donfried resigned as Chief Executive Officer and President of the Company as well as his position as a director on the Board of Directors of the Company. In connection with his resignation the Company entered in a Separation Agreement with Mr. Donfried whereby he will receive $50,000 as a severance payment and $16,667 as accrued but unpaid time off. In addition, the Company amended Mr. Donfried’s Stock Option Agreement and Restricted Stock Unit Agreement to maintain the previous vesting and exercisability schedules.
On May 1, 2016, the Company appointed a new Chief Executive Officer (“CEO”) and President and in connection therewith entered into a consulting arrangement with the CEO beginning May 1, 2016 and ending December 31, 2017. In consideration for this arrangement, the CEO will receive a monthly fee of $12,500 per month and warrants to purchase 100,000 shares of the Company’s Common Stock at $0.01 per share. The warrants expire in five years.
From May 1, 2016 through May 18, 2016, 965,500 shares of Series C into 965,500 shares of the Company’s Common Stock.
Overview
VerifyMe is a technology pioneer in the anti-counterfeiting industry. This broad market encompasses counterfeiting of physical and material goods and products, as well as counterfeiting of identity in digital transactions. We deliver security solutions for identification and authentication of people, products and packaging in a variety of applications in the security field for both digital and physical transactions. Our products can be used to manage and issue secure credentials, including national identifications, passports, driver licenses and access control credentials, as well as comprehensive authentication security software to secure physical and logical access to facilities, computer networks, internet sites and mobile applications.
The challenges associated with digital access control and identity theft are problems that are highly relevant in the world today. Consumers, citizens, employees, governments and employers demand comprehensive solutions that are reliable but not intrusive. The current widespread use of passwords or PINs for authentication has been proven insecure and inadequate. Individuals increasingly expect anywhere-anytime experiences—whether they are making purchases, crossing borders, accessing services or logging into online accounts or corporate resources. They expect those experiences to ensure the protection of their privacy and to provide uncompromising confidentiality.
We believe that the digital technologies we own will enable businesses and consumers to reconstruct their overall approaches to security—from identity and authentication to the management of legacy passwords and PINs. We empower our customers to take advantage of the full capabilities of smart mobile devices and provide solutions that are both simple to use and deliver the highest level of security. These solutions can be applied to corporate networks, financial services, e-gov services, digital wallets, mobile payments, entertainment, subscription services, and social media.
Brand owners, government agencies, professional associations, and others all share in the challenge of responding to counterfeit goods and product protection issues. Counterfeit goods span across multiple industries including from currency, passports, ID cards, pharmaceuticals, apparel, accessories, music, software, food, beverages, tobacco, automobile and airplane parts, consumer goods, toys and electronics. Described by the U.S. Federal Bureau of Investigation as the crime of the twenty-first century, product counterfeiting accounts for an estimated 5% of global trade and wreaks dire global health, safety and economic consequences on individuals, corporations, government and society.
We believe that the physical technologies we own will enable businesses and consumers to reconstruct their overall approaches to security—from counterfeit identification to employee or customer monitoring. Potential applications of our technologies are available in different types of products and industries—e.g., gaming, apparel, tobacco, fragrances, pharmaceuticals, event and transportation tickets, driver’s licenses, insurance cards, passports, computer software, and credit cards. We generate sales through licenses of our technology or through direct sales of our technology.
Our physical technologies involve the utilization of invisible and/or color shifting/changing inks, which are compatible with today’s printing machines. The inks may be used with certain printing systems such as offset, flexographic, silkscreen, gravure, and laser. Based upon our experience, we believe that the ink technologies may be incorporated into existing manufacturing processes. We believe that some of our patents may have non-security applications, and we are attempting to commercialize these opportunities.
Our digital technologies involve the utilization of multiple authentication mechanisms, some of which we own and some of which we license. These mechanisms include biometric factors, knowledge factors, possession factors and location factors. Biometric factors include facial recognition with liveness detection, finger print and voice recognition. Knowledge factors include a personal gesture swipe and a safe and panic color choice. Possession factor includes devices that the user has in their possession such as a smartphone, smart watch, and other wearable computing devices. The location factor geo-locates the user during a secure login. We surround these authentication mechanisms with proprietary systems that improve the usability and the security of the solutions. Our solutions allow the assessment and quantification of risk using a sophisticated heuristic scoring mechanism. We have specialized systems that perform ‘liveness’ detection to insure the subject of authentication is in fact a live human being. We have systems that introduce learning capabilities into our solutions to improve the ease of use and flexibility.
Recent Events
On April 29, 2016, Paul Donfried resigned as Chief Executive Officer and President of the Company as well as his position as a director on the Board of Directors of the Company. On May 1, 2016, the Company appointed Tom Nicolette as Chief Executive Officer and President pursuant to a consulting agreement that began May 1, 2016 and ends December 31, 2017.
Comparison of the Three Months Ended March 31, 2016 and 2015
The following discussion analyzes our results of operations for the three months ended March 31, 2016 and 2015. The following information should be considered together with our condensed financial statements for such period and the accompanying notes thereto.
Net Revenue/Net Loss
We have not generated significant revenue since our inception. For the three months ended March 31, 2016 and 2015, we generated sales of $0 and $6,250. For the three months ended March 31, 2016 and 2015, we had a net loss of $1,516,334 and $263,636.
General and Administrative Expenses
General and administrative expenses increased $33,857 to $117,758 for the three months ended March 31, 2016 from $83,901 for the three months ended March 31, 2015. The increase resulted from options issued to consultants.
Legal and Accounting
Legal and accounting fees increased $104,232 to $115,345 for the three months ended March 31, 2016 from $11,113 for the three months ended March 31, 2015. The increase in legal and accounting fees between the periods was primarily a result of the costs associated with filing the S-1 registration statement.
Payroll Expenses
Payroll expenses were $627,923 for the three months ended March 31, 2016, an increase of $457,019 from $170,904 for the three months ended March 31, 2015. The increase is the result of option expenses related to officers that were issued between June and August of 2015.
Research and Development
Research and development expenses were $89,335 and $120,386 for the three months ended March 31, 2016 and 2015, a decrease of $31,051. The decrease is related to cost containment initiatives relative to our products, while improving the quality of the products.
Sales and Marketing
Sales and marketing expenses for the three months ended March 31, 2016 were $65,331 as compared to $22,808 for the three months ended March 31, 2015, an increase of $42,523. The Company increased travel expenditures in an attempt to generate more revenue, as well as incurred expense from deferred compensation from the issuance restricted stock units issued in October 2015.
Interest Expense
During the three months ended March 31, 2016, the Company incurred interest expense of $1,000 as compared to $30,250 for the three months ended March 31, 2015, a decrease of $29,250. The decrease in interest expense was a result of the conversion of debt to stock pursuant to the company’s 1-for-85 reverse stock split effectuated in July 2015.
During the three months ended March 31, 2016, the Company incurred an unrealized gain on the market value of warrants of $1,730,933 as compared to $169,476 for the three months ended March 31, 2015, an increase of $1,561,457. The change primarily resulted from the valuation of warrants associated with the Investment Agreement entered into on December 31, 2012 and the Subscription Agreement entered into on January 31, 2013. The values of these warrants have decreased during the three months ended March 31, 2016 because the trading price of the Common Stock has decreased.
Change in Fair Value of Embedded Derivative Liability
During the three months ended March 31, 2016, the Company incurred an expense of $463,000 for the change in the fair value of the embedded derivative liability as compared to a loss of $0 for the three months ended March 31, 2016. This change is related to an increase in the value of the beneficial conversion option related to the 0% Series C Convertible Preferred Stock (the “Series C Preferred”) issued in February 2016. The increase in the embedded derivative liability results from the price of the common stock exceeding the conversion price for the Series C Preferred.
Fair value of warrants in excess of consideration for convertible preferred stock
In February 2016, upon the issuance of the Series C Preferred, the associated warrants were valued and that value exceeded the amount that was received by Company for the Series C Preferred in the amount of $1,767,575, fair value. This value exceeded the amount of proceeds allocated to the Series C Preferred by $1,767,575 and was expensed.
Liquidity and Capital Resources
As of May 18, 2016, we had cash on hand of approximately $376,000.
Net cash used in operating activities increased $451,192 to $576,678 for the three months ended March 31, 2016 as compared to $125,486 for the three months ended March 31, 2015. The increase resulted primarily from an increase in net loss from operations as explained previously.
Net cash used in investing activities was $36,083 for the three months ended March 31, 2016, compared to $0 for the three months ended March 31, 2015. This was a result of employee advances that will be included in payroll for the second quarter of 2016 with the associated reductions of the employees’ net pay for taxes.
Net cash provided by financing activities increased by $1,081,398 to $1,217,500 for the three months ended March 31, 2016 from $136,102 for the three months ended March 31, 2015. Cash provided by financing activities during the three months ended March 31, 2016, consisted of our Series C Preferred offering which raised $1,217,500, net in February 2016.
Since our inception, we have focused on developing and implementing our business plan. Our business plans are dependent on our ability to raise capital through private placements of our common stock and/or preferred stock, through the possible exercise of outstanding options and warrants, through debt financing and/or through future public offering of our securities. On February 9, 2016, the Company issued 2,587,500 shares of Series C Preferred, par value $0.001 per share, at a purchase price of $0.40 per share with gross proceeds to the Company of $1,035,000. In connection with the sale of the Series C Preferred, the Company issued to the purchasers warrants to purchase in the aggregate 2,587,500 shares of the Company’s common stock at an exercise price of $0.40 per share. Further, as a part of the same offering, on February 29, 2016, the Company issued 500,000 shares of Series C Preferred, at a purchase price of $0.40 per share with gross proceeds to the Company of $200,000. In connection with the sale of the Series C Preferred, the Company issued to the purchasers warrants to purchase in the aggregate 500,000 shares of the Company’s common stock at an exercise price of $0.40 per share. Each share of Series C Preferred is convertible into one share of common stock, subject to adjustment.
Even with this infusion of capital, we do not believe that our existing cash resources will be sufficient to sustain our operations during the next twelve months, and we may need to raise additional funds in the future. We intend to raise such financing through private placements and/or the sale of debt and equity securities, of which there is no assurance. The issuance of additional equity would result in dilution to our existing shareholders. If we are unable to obtain additional funds when they are needed or if such funds cannot be obtained on terms favorable to us, we may be unable to execute upon our business plan or pay our costs and expenses as they are incurred, which could have a material, adverse effect on our business, financial condition and results of operations.
Even if we are successful in raising sufficient capital, in order to continue in business as a viable going concern our revenues need to reach a level that sustains our business operations. While it is impossible to predict the amount of revenues, if any, that we may receive from our products, we presently believe, based solely on our internal projections, that we will generate revenues sufficient to fund our planned business operations if the products are marketed effectively in accordance with our plans. There can be no assurance that we will raise sufficient proceeds, or any proceeds, for us to implement fully our proposed business plan. Moreover there can be no assurance that, even if our products are marketed effectively, we will generate revenues sufficient to fund our operations. In either situation, we may not be able to continue our operations and our business might fail.
As we have not realized significant revenues since our inception, we have financed our operations through public and private offerings of debt and equity securities. We do not currently maintain a line of credit or term loan with any commercial bank or other financial institution.
Off-Balance Sheet Arrangements
As of March 31, 2016, we do not have any off-balance sheet arrangements.
Critical Accounting Policies
Our financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. We have identified below the accounting policies that are of particular importance in the presentation of our financial position, results of operations and cash flows and which require the application of significant judgment by management.
Stock-based Compensation
We account for stock-based compensation under the provisions of FASB ASC 718, “Compensation—Stock Compensation,” which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date. We estimate the fair value of stock-based awards on the date of grant using the Black-Scholes model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods using the straight-line method.
We account for stock-based compensation awards to non-employees in accordance with FASB ASC 505-50, “Equity-Based Payments to Non-Employees”. Under FASB ASC 505-50, we determine the fair value of the warrants or stock-based compensation awards granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.
All issuances of stock options or other equity instruments to non-employees as consideration for goods or services received by the Company are accounted for based on the fair value of the equity instruments issued. Any stock options issued to non-employees are recorded as an expense and additional paid in capital in stockholders’ equity over the applicable service periods using variable accounting through the vesting dates based on the fair value of the options at the end of each period.
In accordance with FASB ASC 605, we recognize revenue when (i) persuasive evidence of a customer or distributor arrangement exists, (ii) a retailer, distributor or wholesaler receives the goods and acceptance occurs, (iii) the price is fixed or determinable, and (iv) collectability of the sales revenues is reasonably assured. Subject to these criteria, the Company recognizes revenue from product sales, consisting mainly of pigments and penlights, upon shipment to the customer. Royalty revenue is recognized upon receipt of notification from a customer that the Company’s product has been used in the customer’s production process.
License fee revenue is recognized on a straight-line basis over the term of the license agreement.
Recently Issued Accounting Pronouncements
Recently issued accounting pronouncements are discussed in Note 1 of the notes to condensed financial statements contained in this report.
Not Applicable.
(a) Evaluation of Disclosure Controls and Procedures. Our disclosure controls and procedures are designed to ensure information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of March 31, 2016, the end of the fiscal quarter covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective.
(b) Changes in Internal Controls. There has been no change in our internal control over financial reporting that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
None.
Not applicable.
On February 8, 2016, the Company issued 23,500 shares of common stock to a consultant for assistance in raising capital. These shares of common stock were not registered under the Securities Act in reliance upon the exemption from registration under Section 4(a)(2) of the Securities Act as such transactions did not involve a public offering of securities.
On February 9, 2016 in a private placement of securities, the Company issued 2,587,500 shares of its Series C Preferred at a purchase price of $0.40 per share with gross proceeds to the Company of $1,035,000. In connection with the February 9, 2016 sale, the Company issued to the purchasers warrants to purchase in the aggregate 2,587,500 shares of the Company’s common stock at an exercise price of $0.40 per share. Further, as a part of the same offering, on February 29, 2016, the Company issued 500,000 shares of Series C Preferred at a purchase price of $0.40 per share with gross proceed s to the Company of $200,000. In connection with the February 29, 2016 sale, the Company issued to the purchasers warrants to purchase in the aggregate 500,000 shares of the Company’s common stock at an exercise price of $0.40 per share. The offer and sale of these private placement shares was not registered under the Securities Act in reliance upon the exemption from registration under Section 4(a)(2) of the Securities Act as such transactions did not involve a public offering of securities.
On February 26, 2016, the Company issued options to purchase 100,000 shares of the Company’s common stock at an exercise price of $0.57 per share to the Chairman of the Board of Directors under our 2013 Plan. The option becomes exercisable in two equal installments. The first installment became exercisable on February 26, 2016, and the second installment will become exercisable on February 26, 2017. These options were not registered under the Securities Act in reliance upon the exemption from registration under Section 4(a)(2) of the Securities Act as such transactions did not involve a public offering of securities.
On March 10, 2016, the Company issued options to purchase 150,000 shares of the Company’s common stock at an exercise price of $0.56 per share to an employee under our 2013 Plan. The option becomes exercisable in 12 quarterly installments. The first installment became exercisable on June 10, 2016, and the remaining installments will become exercisable on the 10th of the successive third month through March 10, 2018. These options were not registered under the Securities Act in reliance upon the exemption from registration under Section 4(a)(2) of the Securities Act as such transaction did not involve a public offering of securities.
On March 24, 2016, the Company issued options to purchase 50,000 shares of the Company’s common stock at an exercise price of $0.43 per share to a consultant, which vest immediately. These options were not registered under the Securities Act in reliance upon the exemption from registration under Section 4(a)(2) of the Securities Act as such transaction did not involve a public offering of securities.
None.
Not applicable.
None.
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Exhibit
No.
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Description
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3.1
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Amended and Restated Articles of Incorporation of LaserLock Technologies, Inc., as amended (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on August 19, 2015).
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3.2†
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Amended and Restated Bylaws of LaserLock Technologies, Inc., as amended.
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3.3
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Certificate of Designation for 0% Series C Convertible Preferred Stock, filed with the Nevada Secretary of State on January 27, 2016 (filed as an Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 10, 2016 and incorporated herein by reference).
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4.1
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Form of Warrant for Purchase of Common Stock (filed as an Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 10, 2016 and incorporated herein by reference).
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4.2
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Form of Share Certificate for 0% Series C Convertible Preferred Stock (filed as an Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 10, 2016 and incorporated herein by reference).
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4.3
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Certificate of Designation for 0% Series C Convertible Preferred Stock, filed with the Nevada Secretary of State on January 27, 2016(filed as an Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 10, 2016 and incorporated herein by reference).
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10.1
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Form of Securities Purchase Agreement (incorporated herein by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed with the SEC on February 10, 2016).
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10.2
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Form of Registration of Rights Agreement by and between the Registrant and each of the Investors (filed as an Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 10, 2016 and incorporated herein by reference).
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10.3@
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Separation Agreement and General Release dated as of April 27, 2016 by and between the Registrant and Paul Donfried(filed as an Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on April 29, 2016 and incorporated herein by reference).
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10.4@
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Amendment No. 1 to Stock Option Agreement dated as of April 29, 2016 by and between the Registrant and Paul Donfried(filed as an Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on April 29, 2016 and incorporated herein by reference).
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10.5@
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Amendment No. 1 to Restricted Stock Unit Agreement dated as of April 29, 2016 by and between the Registrant and Paul Donfried(filed as an Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed with the SEC on April 29, 2016 and incorporated herein by reference).
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10.6@
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Consulting Services Agreement dated as of May 1, 2016 by and between the Registrant and Nicolette Consulting Group Limited (filed as an Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on May 2, 2016 and incorporated herein by reference).
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31.1†
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Certification of Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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31.2†
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Certification of Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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32.1††
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Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002.
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32.2††
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Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002.
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101
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Interactive Data Files.*
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*
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The documents formatted in XBRL (Extensible Business Reporting Language) and attached as Exhibit 101 to this report are deemed not filed as part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act, are deemed not filed for purposes of Section 18 of the Exchange Act, and otherwise are not subject to liability under these sections.
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†
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filed herewith
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††
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furnished herewith
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@
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Denotes Management compensation plan on contract
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In accordance with the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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VERIFYME, INC.
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By:
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/s/ Scott McPherson
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Scott McPherson
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| On behalf of the registrant and as
Chief Financial Officer
(Principal Financial Officer)
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Date: May 18, 2016
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-24-