VerifyMe, Inc. - Quarter Report: 2017 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

 

Commission file number 000-31927 

 

 

 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  ☒    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   ☒    No  ☐

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth 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: 9,765,697 shares of common stock outstanding at May 15, 2017.

 

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PART I - FINANCIAL INFORMATION

ITEM 1.	Financial Statements	4
Condensed Balance Sheets (Unaudited)		4
Condensed Statements of Operations (Unaudited)		5
Condensed Statement of Changes in Stockholders' Deficit (Unaudited)		6
Condensed Statements of Cash Flows (Unaudited)		7
Notes to Condensed Financial Statements (Unaudited)		8
ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	18
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	22
ITEM 4.	Controls and Procedures	22
PART II - OTHER INFORMATION
ITEM 1.	Legal Proceedings	23
ITEM 1A.	Risk Factors	23
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
TIEM 3.	Defaults Upon Senior Securities	25
ITEM 4.	Mine Safety Disclosures	25
ITEM 5.	Other Information	25
ITEM 6.	Exhibits	26
SIGNATURES		27

 

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VerifyMe, Inc.

Condensed Balance Sheets

March 31, 2017 and December 31, 2016

See the accompanying notes to the condensed financial statements.

 

VerifyMe, Inc.

Condensed Statements of Operations

For the Three Months Ended March 31, 2017 and 2016

(Unaudited)

See the accompanying notes to the condensed financial statements.

 

 

VerifyMe, Inc.

Condensed Statement of Changes in Stockholders’ Deficit

For the Three Months Ended March 31, 2017 

See the accompanying notes to the condensed financial statements.

 

 

VerifyMe, Inc.

Condensed Statements of Cash Flows

 (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 Downingtown, Pennsylvania 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 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. In addition, the Company has begun developing comprehensive authentication security software to secure physical and logical access to facilities, computer networks, internet sites and mobile applications. When the Company has sufficient working capital, management intends to devote resources resolving certain functionality issues which presently affect this technology.

 

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, 2016 as filed with the SEC. Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.
 

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As of March 31, 2017, 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.

 

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, 2017 and 2016.

 

As of January 1, 2017, the Company had no unrecognized tax benefits, and accordingly, the Company did not recognize interest or penalties during 2017 related to unrecognized tax benefits. There has been no change in unrecognized tax benefits during the three months ended March 31, 2017, and there was no accrual for uncertain tax positions as of March 31, 2017.  Tax years from 2013 through 2016 remain subject to examination by major tax jurisdictions.

 

There is no income tax benefit for the losses for the three months ended March 31, 2017 and 2016, 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 – NOTES PAYABLE

 

Notes payable consist of the following as of March 31, 2017 and December 31, 2016:
 

As of March 31, 2017 and December 31, 2016, accrued interest on notes payable was $31,983 and $29,668. Interest expense including accretion of debt discount for the three months ended March 31, 2017 and 2016 was $66,544 and $1,000.

 

 

NOTE 5 – 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 dividend.

 

The conversion feature of the 0% Series D Convertible Preferred Stock (“Series D”) 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 $181,942 as of October 24, 2016.  This was classified as an embedded derivative liability and a discount to Series D.  Because the Series D can be converted at any time, the full amount was accreted and classified as a reduction to the discount on Series D and a deemed dividend.

 

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, 2017 and December 31, 2016, the fair value of the embedded derivative liability was $250,000 and $228,718.  For the three March 31, 2017 and 2016, the Company realized expense $21,282 and $463,000 relative to the embedded derivative liability.

 

NOTE 6 – 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 March 31, 2017 and December 31, 2016, the fair value of the warrant liability was $21,345 and $22,063.

 

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, 2017 and December 31, 2016 the fair value of the warrants was $14,722 and $18,107.

 

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 March 31, 2017 and December 31, 2016, the fair value of the warrant liability was $5,504 and $4,885.

 

 

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, 2017 and December 31, 2016, the fair value of those warrants was $297 and $262.

 

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 March 31, 2017 and December 31, 2016, the fair value of the warrant liability was $310,757 and $285,290.

 

In conjunction with the issuance of Series D, the Company issued warrants to purchase 667,000 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 $181,942, 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, 2017 and December 31, 2016, the fair value of the warrant liability was $70,375 and $64,137.

 

NOTE 7 – CONVERTIBLE PREFERRED STOCK

 

Subscription Agreement

 

The Company entered into a Subscription Agreement with VerifyMe, Inc., a Texas corporation (“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 January 6, 2017, 13,000 shares of Series A Convertible Preferred Stock were converted into 260,000 shares of the Company’s Common Stock.

 

On March 29, 2017, 20,000 shares of Series A Convertible Preferred Stock were converted into 400,000 shares of the Company’s Common Stock.

 

Series B Convertible Preferred Stock

 

There were no conversions of Series B Convertible Preferred Stock during the three months ended March 31, 2017.

 

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 prescribed 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.

 

 

NOTE 8 – 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 three months ended March 31, 2017.

 

As of March 31, 2017, the beneficial conversion feature of Series C and Series D were 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 and Series D was in excess of the proceeds of Series C and Series D, the effective conversion price of the Series C and Series D is $0.   The Series C and Series D 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 March 31, 2017, 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 9 – STOCK OPTIONS

 

The Company has options to purchase 11,765 shares of Common Stock outstanding under the 2003 Stock Option 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 March 31, 2017, under the 2013 Plan grants of restricted stock and options to purchase 3,512,500 shares of Common Stock have been issued and are unvested or unexercised, and 16,487,500 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 January 31, 2017, the Company issued options to purchase 225,000 shares of Common Stock at an exercise price of $0.09 per share, with a term of five years, to a consultant, which vest over three months. The fair value of options issued was $19,727. 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 197.7%, risk-free interest rate of 1.90% and expected option life of five years. The options were revalued on February 28, 2017 and March 31, 2017 and it was determined that there was an increase in the value of the options of $2,307, which will be expensed over the remaining term of the options.

 

On February 6, 2017, the Company issued options to purchase 250,000 shares of Common Stock at an exercise price of $0.068 per share and options to purchase 250,000 shares of Common Stock at an exercise price of $0.25, with a term of five years, to a consultant, which vest immediately. The fair value of options issued was $32,508. 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 198.0%, risk-free interest rate of 1.86% and expected option life of five years. The options were expensed immediately.

 

For the three months ended March 31, 2017 and March 31, 2016 the Company expensed $51,597 and $335,828 with respect to the options.

 

The following table summarizes the activities for our stock options for the three months ended March 31, 2017:

 

(1)

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and the closing stock price of $0.12 for the Company’s common stock on March 31, 2017.

 

 

The following table summarizes the activities for the Company’s unvested stock options for the three months ended March 31, 2017:

 

 

As of March 31, 2017 there was $2,944 of unrecognized compensation cost related to outstanding stock options. This amount is expected to be recognized over a weighted-average period of 1 month. 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, 2017 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, 2017:

(1)

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and the closing stock price of $0.12 for the Company’s common stock on March 31, 2017.

 

 

All warrants were vested on the date of grant.

 

For the three months ended March 31, 2017 and 2016, 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 months ended March 31, 2017 and 2016, total rent expense under leases amounted to $3,000 and $10,335.  As of March 31, 2017, the Company was not obligated under any non-cancelable operating lease arrangements.

 

NOTE 11 – RELATED PARTIES

 

As of March 31, 2017, the Company owed the current CEO $10,749 for services rendered, and the CFO $32,099 for services rendered.  All of these amounts are included in accounts payable.

 

NOTE 12 – SUBSEQUENT EVENTS

 

On April 26, 2017, the Company issued a secured promissory note (the “Note”) in the principal amount of $30,000 in exchange for a loan bearing 10% annual interest maturing October 31, 2017. The Note is secured by a first lien on all assets of the Company in accordance with a security agreement entered into in connection with the Note. In the event the Company completes a financing of at least $750,000 prior to maturity of the Note, the principal of the Note will automatically convert into a number of shares of common stock of the Company equivalent to an investment of $60,000 under the terms of such financing. In the event of such a conversion or a voluntary prepayment by the Company, the Company will also pay six months of interest payments on the $30,000 principal of the Note.

 

 

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

 

Overview

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Results of Operations

 

Comparison of the Three Months Ended March 31, 2017 and 2016

 

The following discussion analyzes our results of operations for the three months ended March 31, 2017 and 2016. 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 March 31, 2017 and 2016, we generated revenues of $0.  For the three months ended March 31, 2017 and 2016, we had a net loss of $304,587 and $1,516,334. 

 

 

General and administrative expenses increased $24,303 to $142,061 for the three months ended March 31, 2017 from $117,758 for the three months ended March 31, 2016. The increase resulted primarily from an increase in consulting expenses.

 

 

Legal and accounting fees decreased $106,301 to $9,044 for the three months ended March 31, 2017 from $115,345 for the three months ended March 31, 2016. The decrease in legal and accounting fees between the periods was primarily a result of the costs associated costs associated with the Registration Statement on Form S-1 in the first quarter of 2016, which were not incurred during the 2017 period.

 

 

Payroll expenses were $22,810 for the three months ended March 31, 2017, a decrease of $605,113 from $627,923 for the three months ended March 31, 2016.  The decrease is the result of the three officers leaving the Company in 2016, subsequent to the first quarter.

 

 

Research and development expenses were $8,669 and $89,335 for the three months ended March 31, 2017 and 2016, a decrease of $80,666.  The decrease is a result of cost containment procedures and research and development programs being reduced to a minimum.

 

 

 

Sales and marketing expenses for the three months ended March 31, 2017 were $5,921 as compared to $65,331 for the three months ended March 31, 2016, a decrease of $59,410. The decrease relates to cost containment procedures associated with travel and minimal marketing activities. 

 

 

During the three months ended March 31, 2017, the Company incurred interest expense of $66,544 as compared to $1,000 for the three months ended March 31, 2016, an increase of $65,544. The increase in interest expense was a result of the Company resorting to debt to fund its operations during the fourth quarter of 2016 and the first quarter of 2017.

 

 

During the three months ended March 31, 2017, the Company reported an unrealized loss on the market value of warrants of $28,256 as compared to a gain of 1,730,933 for the three months ended March 31, 2016, a decrease in the gain of $1,759,189. 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 increased during the three months ended March 31, 2017 as a result of the value of the Company’s common stock increasing at March 31, 2017 compared to December 31, 2016.

 

 

During the three months ended March 31, 2017, the Company reported an unrealized loss of $21,282 for the change in the fair value of the embedded derivative liability as compared to a loss of $463,000 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, 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.

 

Liquidity and Capital Resources

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Cautionary Note Regarding Forward-Looking Statements

 

This report includes forward-looking statements including statements regarding our liquidity.

 

The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “could,” “target,” “potential,” “is likely,” “will,” “expect” and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. 

 

The results anticipated by any or all of these forward-looking statements might not occur. Important factors, uncertainties and risks that may cause actual results to differ materially from these forward-looking statements include our ability to raise capital to support our operations and begin meaningful marketing of our products, our ability to reach an accommodation with investors on our  February 2017 preferred stock offering so we can raise equity without significant dilution to additional shareholders and our ability to attract a new Chief Executive officer on acceptable terms. Further information on our risk factors is contained in our filings with the SEC, including the Form 10-K for the year ended December 31, 2016. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise.

Off-Balance Sheet Arrangements

 

As of three months ended March 31, 2017, 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 three months ended March 31, 2017, 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, as of March 31, 2017, our disclosure controls and procedures were ineffective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is: (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

(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

 

ITEM 1. LEGAL PROCEEDINGS.

 

None.

 

ITEM 1A. RISK FACTORS.

 

Not applicable.

 

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On January 6, 2017, an investor converted 13,000 shares of Series A Convertible Preferred Stock into 260,000 shares of the Company’s Common Stock.

 

On February 6, 2017, the Company issued options to purchase in the aggregate of 500,000 shares of the Company’s common stock to a consultant at an exercise price of $0.068 for 250,000 options and $0.25 for the remaining 250,000 options, all with a term of 5 years and vesting immediately.

 

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 ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

None.

 

 

 

 

ITEM 6. EXHIBITS

 

				Incorporated by Reference						Filed or Furnished
Exhibit #		Exhibit Description		Form		Date		Number		Herewith
10.1		Form of Note dated January 31, 2017								Filed
10.2		Form of Warrant dated January 24, 2017								Filed
10.3		Form of Option Agreement dated January 31, 2017								Filed
10.4		Form of Option Agreement dated February 6, 2017, exercise price $0.068								Filed
10.5		Form of Option Agreement dated February 6, 2017, exercise price $0.25								Filed
10.6		Form of Note dated February 13, 2017								Filed
10.7		Form of Warrant dated February 13, 2017								Filed
10.8		Form of Note dated March 28, 2017								Filed
10.9		Form of Warrant dated March 28, 2017								Filed
10.10		Form of Note dated April 26, 2017		8-K		5/1/17		10.1
10.11		Form of Security Agreement dated April 26, 2017		8-K		5/1/17		10.2
31.1		Certification of Principal Executive Officer (302)								Filed
31.2		Certification of Principal Financial Officer (302)								Filed
32.1		Certification of Principal Executive Officer (906)								Furnished**
32.2		Certification of Principal Financial Officer (906)								Furnished**
101.INS		XBRL Instance Document								Filed
101.SCH		XBRL Taxonomy Extension Schema Document								Filed
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document								Filed
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document								Filed
101.LAB		XBRL Taxonomy Extension Label Linkbase Document								Filed
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document								Filed

 

SIGNATURES

 

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.