VerifyMe, Inc. - Quarter Report: 2016 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

Commission file number 000-31927 

 

 

 

VERIFYME, INC.

(Exact Name of Registrant as Specified in Its Charter)

               (212) 994-7002

(Registrant’s Telephone Number, Including Area Code)

 

 

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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  ☒    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.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 8,515,207 shares of common stock outstanding at November 21, 2016.

 

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VerifyMe, Inc.

 

CONTENTS

 

 

 

VerifyMe, Inc.

Condensed Balance Sheets

September 30, 2016 and December 31, 2015

 

 

See the accompanying notes to the condensed financial statements.

 

 

VerifyMe, Inc.

Condensed Statements of Operations

For the Three and Nine Months Ended September 30, 2016 and 2015

(Unaudited)

 

 

See the accompanying notes to the condensed financial statements.

 

 

VerifyMe, Inc.

Condensed Statement of Changes in Stockholders’ Deficit

For the Nine Months Ended September 30, 2016
 

 

See the accompanying notes to the condensed financial statements.

 

 

VerifyMe, Inc.

Condensed Statements of Cash Flows

For the Three and Nine Months Ended September 30, 2016 and 2015

(Unaudited)
 

See the accompanying notes to the condensed financial statements.

 

 

  NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

 

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.

 

 

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 and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

 

 Basic and Diluted Net Income per Share of Common Stock

 

The Company follows FASB ASC 260, “Earnings Per Share,” when reporting Earnings Per Share resulting in the presentation of basic and diluted earnings per share. Basic net income per common share is based on the weighted average number of shares outstanding during the periods presented. Diluted net income per common share is computed using the weighted average number of common shares plus dilutive common share equivalents outstanding during the period. Potential common shares that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive, i.e., the exercise prices of the outstanding stock options were greater than the market price of the Common Stock. Anti-dilutive Common Stock equivalents, which were excluded from the calculation of number of dilutive common stock equivalents, amounted to 19,237,648 shares for the three months ended September 30, 2015.

 

 

Effective January 1, 2016, the Company adopted 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”, which did not have a material impact on the financial statements.

 

 

 

As of September 30, 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 condensed 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.

 

On November 15, 2016, the Company issued 259,435 shares of 0% Series D Convertible Preferred Stock, par value $0.001 per share (“Series D Preferred Stock”) at a purchase price of $0.40 per share with gross proceeds to the Company of $103,774. In connection with the sale of the Series D Preferred Stock, the Company issued to the purchasers warrants to purchase in the aggregate 1,037,740 shares of the Company’s common stock at an exercise price of $0.40 per share. Each share of Series D Preferred Stock is convertible into one share of common stock. The Series D Preferred Stock 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 D Preferred Stock.

 

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 and nine months ended September 30, 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 2016 related to unrecognized tax benefits. There has been no change in unrecognized tax benefits during the three and nine months ended September 30, 2016, and there was no accrual for uncertain tax positions as of September 30, 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 and nine months ended September 30, 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 FASB ASC Topic 815, “Derivatives and Hedging” and ASU 2014-16, and was valued in accordance with FASB ASC 470, “Debt”, 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.  Series C shareholders converted 1,050,000 shares into 1,050,000 common shares during the second quarter of 2016.  As a result, the embedded derivative liability associated with those shares was adjusted to the fair value ($313,000) and the associated liability was eliminated against additional paid in capital.  As of September 30, 2016, the fair value of the embedded derivative liability was $683,000.  For the three and nine months ended September 30, 2016, the Company realized income (expense) of $(500,000) and $239,000 relative to the embedded derivative liability.
 

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 (collectively, the “VFM Agreements”) 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”). The Agreements contemplate 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 September 30, 2016 and December 2015, the fair value of the warrant liability was $70,746 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 September 30, 2016 and December 31, 2015, the fair value of the warrants was $58,986 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 the VFM 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 VFM Patent and Technology 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 September 30, 2016, and December 31, 2015, the fair value of the warrant liability was $15,779 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 September 30, 2016 and December 31, 2015, the fair value of those warrants was $892 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 815 and 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 September 30, 2016, the fair value of the warrant liability was $923,758.

 

 

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 post 85-for-1 reverse stock split and a warrant to purchase 392,157 shares of Common Stock post 85-for-1 reverse stock split 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.

 

On June 1, 2016, 14,720 shares of Series A Convertible Preferred Stock were converted into 294,400 shares of the Company’s Common Stock.

 

On August 23, 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 May 26, 2015, the Company amended its Amended and Restated Articles of Incorporation dated December 19, 2003 to establish the Series B Convertible Preferred Stock and authorized 1 share (85 shares pre-reverse stock split). The par value of the Series B Convertible Preferred Stock is $0.001 and they are convertible currently at 8,496,732:1. These shares were issued to settle the $6.5 million of licensing fees due and the associated warrants as part of the Company’s recapitalization transaction in July 2015.

 

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 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.

 

On May 2, 2016, 572,000 shares of Series C were converted into 572,000 shares of the Company’s Common Stock.

 

On May 3, 2016, 125,000 shares of Series C were converted into 125,000 shares of the Company’s Common Stock.

 

On May 5, 2016, 353,000 shares of Series C were converted into 353,000 shares of the Company’s Common Stock.

 

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:

 

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 nine months ended September 30, 2016.

 

 

As of September 30, 2016, the beneficial conversion feature of Series C was 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 was 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:

 

As of September 30, 2016, the Company’s outstanding warrants were treated as derivative liabilities and changes in the fair value were recognized in earnings. These warrants did not trade in an active securities market, and as such, the Company estimated the fair value of these warrants using the Black-Scholes option pricing model and the following assumptions:

 

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

 

A restricted stock unit (“RSU”) is an award of common shares that is subject to certain restrictions during a specified period. RSU awards are independent of option grants and are generally subject to forfeiture if employment terminates prior to the release of the restrictions. The grantee cannot transfer the shares before the restricted shares vest. Shares of nonvested restricted stock have the same voting rights as common stock, are entitled to receive dividends and other distributions thereon and are considered to be currently issued and outstanding. The Company’s restricted stock awards vest over a period of one year. The Company expenses the cost of the RSUs, which is determined to be the fair market value of the shares at the date of grant, straight-line over the period, during which the restrictions lapse. For these purposes, the fair market value of the restricted stock is determined based on the closing price of the Company’s common stock on the grant date.  RSU’s issued to consultants are revalued every quarter until the end of the term of the agreement.

 

On June 11, 2015, the Company issued 525,000 RSUs (44,625,000 units pre-reverse stock split) to two officers of the Company. The RSUs were valued at the closing stock price of $0.01 on June 11, 2015, at $446,250, fair value. These RSUs are being expensed over the vesting terms.  The former Chief Executive Officer (“CEO”) resigned on April 27, 2016 and holds 300,000 of the issued 525,000 RSUs above.  As part of his severance package the RSUs will continue to vest and will not expire, therefore since there is no further obligation on the part of the former CEO, the Company expensed immediately the remaining unamortized portion of the RSUs in the amount of $187,708.

 

 

On July 9, 2015, the Company hired a Chief Operating Officer (“COO”). The COO received 225,000 RSUs (19,125,000 units pre-reverse stock split), vesting over a three-year period, with one-third vesting the first year and one-twelfth vesting ratably on a quarterly basis thereafter. The RSUs were valued at fair value of $918,000 based on the closing stock price of $4.08 on July 9, 2015.  The COO resigned on May 31, 2016 and as a result the Company reversed the expense related to the RSUs during the six months ended June 30, 2016 in the amount of $280,500.  In addition, the value of the RSUs included in deferred compensation in the amount of $637,500 was reclassified to additional paid in capital.

 

On August 10, 2015, the Company agreed to issue the Chief Financial Officer (“CFO”) 20,000 RSUs vesting over six months and 100,000 RSUs vesting annually over three years. The RSUs were valued at a fair value of $692,400 based on the closing stock price of $5.77 per share on August 10, 2015.

 

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 issued the remaining 40,000 shares in April 2016 and expensed $0 and $124,750 for the three and nine months ended September 30, 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 agreement was terminated on April 29, 2016.  The Company expensed $0 and $18,563 for the three and nine months ended September 30, 2016 relative to these RSUs. Further the individual was to receive a 2% to 5% commission on company sales while this agreement is in effect; however no commissions were earned during April 2016 or the three months ended March 31, 2016.  In addition, the remaining value of the RSUs included in deferred compensation in the amount of $2,750 was reclassified to additional paid in capital as a result of the termination of the agreement.

 

For the three and nine months ended September 30, 2016 the Company expensed $64,021 and $563,942 and for the three and nine months ended September 30, 2015, the Company expensed $196,710 and $202,908 related to the RSUs.

 

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 of the Company’s stock price on February 8, 2016 of $0.65 per share.  The value of the shares was expensed immediately.

 

On May 24, 2016, the Company issued 9,483 shares of Common Stock to a consultant as a finder’s fee for an employee.  The shares were value at $5,500 based on the closing stock price of the Company’s common stock on March 11, 2016 per the agreement.  The value of the shares was expensed immediately.

 

On May 1, 2016, the Company issued warrants to purchase 100,000 shares of common stock at an exercise price of $0.01 per share, with a term of five years, to the Chief Executive Officer, which vest immediately. The fair value of warrants issued was $49,885. These warrants 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 204.0%, risk-free interest rate of 1.28% and expected life of five years. The options were expensed immediately.

 

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.”  There were no outstanding equity-based payments to non-employees as of September 30, 2016.

 

 

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 the Board was authorized to grant options to purchase up to 1.5 million shares of Common Stock (the “2000 Plan”). 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 September 30, 2016, options to purchase 282,353 shares of Common Stock have been issued and are unexercised, and 4,083,808 shares are available for grants under the 2003 Plan.  

 

During 2013, the Board adopted a new omnibus incentive compensation plan that was ratified by the shareholders at the 2013 annual meeting, (the “2013 Plan”) which serves 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 September 30, 2016, under the 2013 Plan grants of restricted stock and options to purchase 760,000 shares of Common Stock have been issued and are unvested or unexercised, and 19,240,000 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 June 11, 2015, the Company issued options to purchase an aggregate of 1,225,000 shares of the Company’s Common Stock (104,125,000 shares of Common Stock pre-reverse split stock) at an exercise price of $0.85 per share, with a term of five years, to three employees and two members of the Board. The fair value of options issued was $993,083. 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 176.6%, risk-free interest rate of 1.74% to 1.75% and expected option life of five years. The options are being expensed over the vesting terms for the employees and over the board members’ remaining service terms as that is shorter than the vesting terms.  On April 27, 2016, the former CEO resigned.  As part of his severance package the options will continue to vest and will not expire prior to the original expiration date, therefore since there is no further obligation on the part of the former CEO, the Company expensed immediately the remaining unamortized portion of the options in the amount of $298,377.

 

 

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. 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 Chairman’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 and nine months ended September 30, 2016 the Company expensed $131,127 and $894,177 and for the three and nine months ended September 30, 2015, the Company expensed $314,960 and $349,055 with respect to the options.

 

The following table summarizes the activities for our stock options for the nine months ended September 30, 2016:
 

 

 

(1)

– the aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing stock price of $0.34 for our common stock on September 30, 2016.

 

As of September 30, 2016 there was $907,494 of unrecognized compensation cost related to outstanding stock options. This amount is expected to be recognized over a weighted-average period of 1.8 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 September 30, 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 nine months ended September 30, 2016:
 

(1)

– the aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing stock price of $0.34 for our common stock on September 30, 2016.

 

All warrants were vested on the date of grant.

 

For the three and nine months ended September 30, 2016, the Company expensed $49,885 relative to the warrants in addition to previous income or expense related to the warrant liability and for the three and nine months ended September 30, 2015, the Company expensed $0 relative to the warrants in addition to previous income or expense related to the warrant liability.

 

NOTE 10 – OPERATING LEASES

 

For the three and nine months ended September 30, 2016, total rent expense under leases amounted to $0 and $11,835.  For the three and nine months ended September 30, 2015, total rent expense under leases amounted to $23,463 and $55,474. As of September 30, 2016, the Company was not obligated under any non-cancelable operating lease arrangements.

NOTE 11 – RELATED PARTIES

 

As of September 30, 2016, the Company owed the current CEO $6,250 for services rendered, the CFO $19,400 for services rendered and the former CEO $56,667 under his severance package.  All of these amounts are included in accounts payable.

 

 

NOTE 12 – SUBSEQUENT EVENTS

 

On October 6, 2016, 0.0451 shares of Preferred Series B were converted into 383,203 shares of the Company’s common stock.

 

On October 14, 2016, 125,000 shares of Preferred Series C were converted into 125,000 shares of the Company’s common stock.

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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 new services 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.

 

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.

 

 

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.

 

 

On May 26, 2016, the Company signed a Memorandum of Understanding with Hewlett Packard Indigo (“HP Indigo”) to launch security ElectroInk for authentication and counterfeit prevention.  This security ElectroInk will be marketed and sold globally by the Company to HP Indigo customers, along with the Company’s readers and authentication tools that can be used in conjunction with security ElectroInk. Both companies will provide support to HP Indigo customers that use security ElectroInk on HP Indigo’s digital printing presses.

 

The Company’s patented anti-counterfeiting pigment technology can be seamlessly integrated into the digital printing process to produce visible and invisible marks, which enables two levels of authentication. First, consumers are able to see the patented ink without any specialized equipment. Second, manufacturers can use customized devices to view characteristics of non-visible pigments to support their supply and distribution chain security.

 

On May 31, 2016, Ben Burrell resigned as Chief Operating Officer.
 

Results of Operations

 

Comparison of the Three Months Ended September 30, 2016 and 2015

 

The following discussion analyzes our results of operations for the three months ended September 30, 2016 and 2015. The following information should be considered together with our condensed financial statements for such period and the accompanying notes thereto.

 

 

We have not generated significant revenue since our inception. For the three months ended September 30, 2016 and 2015, we generated revenues of $0 and $142,642.  For the three months ended September 30, 2016 and 2015, we had a net income (loss) of $(1,772,901) and $216,337. 

 

 

General and administrative expenses decreased $108,447 to $107,340 for the three months ended September 30, 2016 from $215,787 for the three months ended September 30, 2015. The decrease resulted from approximate decreases in bad debt expenses of $62,000, depreciation of $17,000, employee related expenses of $14,000, rent expense $23,000, SEC filing fees of $54,000, website expenses of $24,000 and other expenses of $11,000, offset by an approximate increase in consulting expense of $74,000, and insurance expense of $23,000.

 

 

Legal and accounting fees decreased $99,501 to $71,005 for the three months ended September 30, 2016 from $170,506 for the three months ended September 30, 2015. The decrease in legal and accounting fees between the periods was primarily a result of the costs associated costs associated with the beginning a Registration Statement on Form S-1 in the third quarter of 2015.

 

 

 

Payroll expenses were $257,712 for the three months ended September 30, 2016, a decrease of $489,621 from $747,333 for the three months ended September 30, 2015. The decrease is primarily the result of option expenses and restricted stock related to officers that were issued between June and August of 2015.

 

 

Research and development expenses were $0 and $58,415 for the three months ended September 30, 2016 and 2015, a decrease of $58,415.  The decrease is a result of cost containment procedures and research and development programs being suspended.

 

 

Sales and marketing expenses for the three months ended September 30, 2016 were $15,177 as compared to $37,189 for the three months ended September 30, 2015, a decrease of $22,012. The decrease relates to decreases in option issuances, commissions and travel expenses.

 

 

During the three months ended September 30, 2016, the Company incurred interest expense of $1,000 as compared to $4,284 for the three months ended September 30, 2015, a decrease of $3,284. The decrease in interest expense was a result of the conversion of debt to stock pursuant to the Company’s restructuring transaction in June 2015.

 

 

During the three months ended September 30, 2016 and 2015, the Company incurred a loss of $0 and $19,395. The loss related to conversion of notes payable and accrued interest.

 

 

During the three months ended September 30, 2016, the Company reported an unrealized loss on the market value of warrants of $820,667 as compared to a gain of 1,355,293 for the three months ended September 30, 2015, a decrease in the gain of $2,175,960. The change primarily resulted from the valuation of warrants associated with the Investment Agreement entered into on December 31, 2012 with VerifyMe, Inc. – Texas (“VFM”) and the Subscription Agreement entered into on January 31, 2013 with VFM. The value of these warrants has decreased during the three months ended September 30, 2016 as a result of the value of the Company’s common stock decreasing relative to the 2012 and 2013 issuances, but offset by the issuance of the February 2016 issuances.

 

 

During the three months ended September 30, 2016, the Company reported an unrealized loss of $500,000 for the change in the fair value of the embedded derivative liability as compared to a gain of $0 for the three months ended September 30, 2015.  This change is related to a decrease in the value of the beneficial conversion option related to the 0% Series C Convertible Preferred Stock, par value $0.001 per share (the “Series C”), issued in February 2016 and the Series A Preferred Stock issued in conjunction with the Subscription Agreement entered into on January 31, 2013 with VFM.  The increase in the embedded derivative liability is due to the increase in the trading price of the Company’s Common Stock.

 

 

Comparison of the Nine Months Ended September 30, 2016 and 2015

 

The following discussion analyzes our results of operations for the nine months ended September 30, 2016 and 2015. The following information should be considered together with our condensed financial statements for such period and the accompanying notes thereto.

 

 

We have not generated significant revenue since our inception. For the nine months ended September 30, 2016 and 2015, we generated revenues of $11,705 and $200,600.  For the nine months ended September 30, 2016 and 2015, we had a net loss of $1,695,849 and $1,003,625. 

 

 

General and administrative expenses decreased $22,094 to $357,723 for the nine months endedSeptember 30, 2016 from $379,817 for the nine months ended September 30, 2015. The decrease resulted primarily from approximate decreases in bad debt expense of $62,000, depreciation and amortization of $42,000, SEC filing fees of $49,000, rent expense of $44,000, and website expense of $40,000, offset by increases in consulting related expenses of $155,000, insurance of $23,000, recruitment fees of $17,000, transfer agent fees of 12,000 and other expenses of $8,000.

 

 

Legal and accounting fees decreased $95,009 to $303,932 for the nine months ended September 30, 2016 from $398,941 for the nine months ended June 30, 2015. The legal and accounting fees were reduced as a result of the Company beginning the preparation of a registration statement in the third quarter of 2015 that did not occur in the third quarter of 2016.

 

 

Payroll expenses were $1,569,372 for the nine months ended September 30, 2016, an increase of $531,900 from $1,037,472 for the nine months ended September 30, 2015. The increase is the result of option expenses and restricted stock units related to officers that were issued between June and August of 2015, as well as the hiring of the Chief Operating Officer and Chief Technology Officer in June 2015.

 

 

Research and development expenses were $211,881 and $2,194,801 for the nine months endedSeptember 30, 2016 and 2015, a decrease of $1,982,920.  The decrease is a result of the additional licensing fees as part of the restructuring transaction in June 2015 that was not replicated in the second quarter of 2016.

 

 

Sales and marketing expenses for the nine months ended September 30, 2016 were $226,951 as compared to $60,316 for the nine months ended September 30, 2015, an increase of $166,635. The Company hired a salesperson in the second quarter of 2016, issued options to the salesperson and had increased travel expenditures relative to the new collaboration with HP Indigo.

 

 

 

During the nine months ended September 30, 2016, the Company incurred interest expense of $3,000 as compared to $59,438 for the nine months ended September 30, 2015, a decrease of $56,438. The decrease in interest expense was a result of the conversion of debt to stock pursuant to the Company’s restructuring transaction in June 2015.

 

 

 

 

During the nine months ended September 30, 2016, the Company reported an unrealized gain on the market value of warrants of $2,499,790 as compared to $2,642,138 for the nine months ended September 30, 2015, a decrease of $142,348. The change primarily resulted from the valuation of warrants associated with an Investment Agreement entered into on December 31, 2012 with VFM and a Subscription Agreement entered into on January 31, 2013 with VFM. The values of these warrants have decreased during the nine months ended September 30, 2016 because the trading price of our Common Stock has decreased from the price at the beginning of the year. This decrease was offset by an increase in the value of the warrants issued in February 2016 pursuant to the Series C issuance.

 

 

During the nine months ended September 30, 2016, the Company reported an unrealized gain of $239,000 for the change in the fair value of the embedded derivative liability as compared to a gain of $0 for the nine months ended September 30, 2015.  This change is related to a decrease 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 and the Series A Preferred Stock issued in conjunction with the Subscription Agreement entered into on January 31, 2013.  The decrease in the embedded derivative liability is due to the loss created by the conversion of Series C preferred stock offset by the increase in the trading price of the Company’s Common Stock.

 

 

In February 2016, upon the issuance of the Series C, the associated warrants were valued and that value exceeded the amount that was received by Company for the Series C in the amount of $1,767,575, fair value.  This value exceeded the amount of proceeds allocated to the Series C by $1,767,575 and was expensed immediately.

 

Liquidity and Capital Resources

 

As of November 21, 2016, we had cash on hand of approximately $16,000.

 

Net cash used in operating activities decreased $6,387 to $1,215,113 for the nine months ended September 30, 2016 as compared to $1,221,500 for the nine months ended September 30, 2015.  The increase resulted primarily from a increases in net loss from operations, amortization of deferred compensation and fair value of options offset by changes in the warrant and embedded derivative liability values and reversal of expenses from restricted stock forfeitures.

 

Net cash used in investing activities was $0 for the nine months ended September 30, 2016, compared to $2,532 for the nine months ended September 30, 2015.  

 

 

Net cash provided by financing activities decreased by $220,543 to $1,217,500 for the nine months ended September 30, 2016 from $1,438,043 for the nine months ended September 30, 2015.  Cash provided by financing activities during the nine months ended June 30, 2016, consisted of our Series C offering which raised $1,217,500 net of stock issuance costs of $17,500, in February 2016 as opposed to the restructuring transaction in 2015 that raised $1,438,043.

 

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 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, 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 September 30, 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.

 

 

 

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 option pricing 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, “Revenue Recognition”, 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.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not Applicable.

 

 

ITEM 4. CONTROLS AND PROCEDURES.

 

(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 September 30, 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.

 

 

 

 

ITEM 1. LEGAL PROCEEDINGS.

 

None.

 

ITEM 1A. RISK FACTORS.

 

None.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

None.

 

 

 

 

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.