Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
x
No
o
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
o
No
x
Indicate the number of shares outstanding
of each of the issuer’s classes of common stock, as of the latest practicable date: 102,203,166 shares of common stock
outstanding at November 2, 2018.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
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 can deliver security solutions for identification and authentication
of people, products and packaging in a variety of applications in the security field for physical transactions and hold patents
with the application to digital 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 are on target to complete development of our digital patents by the end of the
year. Our goal is to enable 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 currency, passports, ID cards, pharmaceuticals, apparel, cosmetics, accessories,
music, software, food, wine, 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 2.5%
of global trade or $461 billion and creates global health, safety and economic consequences for 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, luxury goods, tobacco, fragrances and cosmetics, 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 color changing inks, which are compatible with today’s printing presses. 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.
We believe that our physical technologies
will play a role in the supply chain management process. Our invisible ink can be used as a unique identifier in a digital
serialization application.
Serialization or Unique identification
helps brand owners identify who manufactured the product, which wholesaler has sold the product to retailers or hospitals
and other pertinent information concerning the products supply chain. The implementation of serialization and track and trace
provides the ability to track and trace the lifecycle of products in the system end-to-end. Our invisible ink is applied
during the printing process of product labels and packaging and can be used as a unique invisible serialization identifying number
or code on labels and packaging. The invisibleness of our ink acts as an additional layer of security since the ink
needs to be revealed with special equipment.
A track and trace system improves security
by:
|
1.
|
Knowing the life cycle of a product or prescription drug, from where it is manufactured, who is
repackaging it, who is distributing, when it is prescribed and when it is sold
|
|
2.
|
Meeting accurate regulatory and compliance requirement questions such as “What, Where, When
and Who”
|
|
3.
|
Locating prescription drug batches and precisely where they are distributed
|
|
4.
|
Enabling the option to recall a particular batch or entire batches which are reported as having
a product/batch failure or having not met standards
|
|
5.
|
Identify if the prescribed drug is counterfeit, stolen, contaminated etc.
|
|
6.
|
Know about the multi-container packaging item level details
|
Track and trace works in the following
ways:
|
1.
|
Generate and apply unique serialization number for manufactured drugs.
|
|
2.
|
Capture unique serialization number and store in centralized database (distributed or non-distributed).
|
|
3.
|
Update serialization data in EPCIS centralized database.
|
|
4.
|
Wholesalers, Repackagers and Pharmacies can have the ability to validate the serialization when
they perform transactions.
|
Each time a transaction for serialized
drugs is carried out, the transaction drug history is updated in the e-pedigree system.
Our physical and digital technologies include
the following products:
RainbowSecure™ Print Technology – Invisible
ink technology that only our special VeriPAS Mobile phone Authenticator device can see and read variable codes into the cloud.
This technology is made and supported by HP Indigo for use by brand owners and printers with 6000 series HP Indigo digital printing
presses. It is ideal for producing labels and packaging requiring counterfeit prevention, authentication, serialization and traceability.
RainbowSecure works with our new Smart Phone reading device as well as the “VeriPAS” global product authentication
software.
VeriPAS Mobile Phone Authenticator – This is our
Smart Phone Authenticator Device designed to read RainbowSecure invisible codes into a powerful cloud based Global Product authentication,
track and trace system called, “VeriPAS”. Investigators will be able to use their personal smart phones with this device
to authenticate and track products.
VeriPAS Track and Trace Software: VeriPAS
is a serialization, track and trace system for both consumers and brand owners to verify a product’s authenticity. In addition,
brand owners can access powerful data intelligence, GPS hot spots of counterfeited product awareness, and track a product’s
complete “life cycle.”
VeriPAS Quick-Check –This product
is a hand-held device which instantly verifies the actual products authenticity. This technology can verify the authenticity of
products made of metal, plastic, ceramic or even fabric. This is a quick press of a button notification for product investigators
to validate the actual products authenticity rather than just a product’s packaging and or labels.
Results of Operations
Comparison of the Three Months Ended September 30, 2018 and
2017
The following discussion analyzes our results
of operations for the three months ended September 30, 2018 and 2017. The following information should be considered together with
our financial statements for such period and the accompanying notes thereto.
Revenue
We generated revenue of $28,273 for the three months ended September
30, 2018. This compares to $392 revenue in 2017. We were engaged for an order for the printing of labels with VerifyMe’s
authentication serialization technology for a large global brand owner. The $28,273 primarily represents a portion of this order
of labels printed with our technology.
General and Administrative Expenses
General and administrative expenses increased
by $115,264 to $357,665 for the three months ended September 30, 2018 from $242,401 for the three months ended September 30, 2017. The
increase resulted primarily to an increase in non-cash charges related to restricted stock awards.
Legal and Accounting
Legal and accounting fees increased by
$12,971 to $64,897 for the three months ended September 30, 2018 from $51,926 for the three months ended September 30, 2017.
Payroll Expenses
Payroll expenses were $77,664 for the three
months ended September 30, 2018, an increase of $5,766 from $71,898 for the three months ended September 30, 2017.
Research and Development
Research and development expenses were
$73,843 and $15,933 for the three months ended September 30, 2018 and 2017, respectively.
Gain on derecognition of note payable
and accrued interest
Gain on derecognition of note payable and
accrued interest was $86,667 and $0 for the three months ended September 30, 2018 and 2017, respectively. The release related to
a note payable that had matured in 2011. We were not able to contact the holder, nor had the holder reached out us. As a result,
we derecognized the amounts payable once the applicable statute of limitations expired.
Net Loss
Our net loss increased to $479,476 for
the three months ended September 30, 2018 from $384,983 for the three months ended September 30, 2017.
Comparison of the Nine months Ended September 30, 2018 and
2017
The following discussion analyzes our results
of operations for the nine months ended September 30, 2018 and 2017. The following information should be considered together with
our financial statements for such period and the accompanying notes thereto.
Revenue
We generated revenue of $35,072 for the nine months ended September
30, 2018 and $392 for the nine months ended September 30, 2017. We were engaged for an order for the printing of labels
with VerifyMe’s authentication serialization technology for a large global brand owner. The $35,072 primarily represents
a portion of this order of labels printed with our technology.
General and Administrative Expenses
General and administrative expenses increased
by $506,232 to $1,378,999 for the nine months ended September 30, 2018 from $872,767 for the nine months ended September 30, 2017. The
increase resulted primarily to an increase in non-cash charges related to restricted stock awards and options to consultants and
our directors for $200,000. The remaining increases related to increase in consulting charges and expenses related to activities
that will expand our operations.
Legal and Accounting
Legal and accounting fees increased by
$219,239 to $362,371 for the nine months ended September 30, 2018 from $143,132 for the nine months ended September 30, 2017.
In the quarter ended March 31, 2017 we had released our then attorneys and hired our current attorneys in the second quarter
of 2017.
Payroll Expenses
Payroll expenses were $269,518 for the
nine months ended September 30, 2018, an increase of $154,558 from $114,960 for the nine months ended September 30, 2017.
The increase relates to compensation for our Chief Executive Officer.
Research and Development
Research and development expenses were
$102,272 and $33,243 for the nine months ended September 30, 2018 and 2017, respectively. The increase relates to the expenditure
for our developed technologies.
Interest Expense, net
During the nine months ended September
30, 2018, the Company incurred interest income, net of $1,367 as compared to interest expense, net of $217,316 for the nine months
ended September 30, 2017. The decrease in interest expense is related to the settlement of notes payable in the second quarter
of 2017.
Change in Fair Value of Warrants
During the nine months ended September
30, 2018, the Company did not have any unrealized gain or loss for the change in Fair Value of Warrants as compared to a gain of
$103,527 for the nine months ended September 30, 2017. As of September 30, 2017, warrants with derivative liabilities were
exchanged for common stock.
Change in Fair Value of Embedded
Derivative Liability
During the nine months ended September
30, 2018, the Company did not have any unrealized gain or loss for the change in the fair value of the embedded derivative liability
as compared to a gain of $79,420 for the nine months ended September 30, 2017.
Settlement agreement with shareholders
In the first half of 2018 we made a strategic
decision to end a future revenue sharing program resulting in settlement expenses of $779,000.
Gain on derecognition of note payable
and accrued interest
Gain on derecognition of note payable
and accrued interest was $86,667 and $0 for the nine months ended September 30, 2018 and 2017, respectively. The release related
to a note payable that had a matured in 2011. We were not able to contact the holder, nor had the holder reached out us. As a
result, we derecognized the amounts payable once the applicable statute of limitations expired.
Net Loss
Our net loss increased to $2,398,304 from
$1,198,079 for the nine months ended September 30, 2018 and 2017, respectively.
Non-GAAP – Financial Measures
The following discussion and analysis includes
both financial measures in accordance with GAAP, as well as non-GAAP financial measures. Generally, a non-GAAP financial measure
is a numerical measure of a company’s performance, financial position or cash flows that either excludes or includes amounts
that are not normally included or excluded in the most directly comparable measure calculated and presented in accordance with
GAAP. Non-GAAP financial measures should be viewed as supplemental to, and should not be considered as alternatives to net income,
operating income, and cash flow from operating activities, liquidity or any other financial measures. They may not be indicative
of the historical operating results of AGI nor are they intended to be predictive of potential future results. Investors should
not consider non-GAAP financial measures in isolation or as substitutes for performance measures calculated in accordance with
GAAP.
Our management uses and relies on EBITDA
and Adjusted EBITDA, which are non-GAAP financial measures. We believe that both management and shareholders benefit from referring
to the following non-GAAP financial measures in planning, forecasting and analyzing future periods. Our management uses these non-GAAP
financial measures in evaluating its financial and operational decision making and as a means to evaluate period-to-period comparison.
Our management recognizes that the non-GAAP financial measures have inherent limitations because of the described excluded items.
The Company defines Adjusted EBITDA as
earnings (or loss) from operations before the items in the table below including non-recurring charges. Adjusted EBITDA is an important
measure of our operating performance because it allows management, investors and analysts to evaluate and assess our core operating
results from period-to-period after removing the impact of items of a non-operational nature that affect comparability.
We have included a reconciliation of our
non-GAAP financial measures to the most comparable financial measure calculated in accordance with GAAP. We believe that providing
the non-GAAP financial measures, together with the reconciliation to GAAP, helps investors make comparisons between us and
other companies. In making any comparisons to other companies, investors need to be aware that companies use different non-GAAP
measures to evaluate their financial performance. Investors should pay close attention to the specific definition being used and
to the reconciliation between such measure and the corresponding GAAP measure provided by each company under applicable SEC rules.
The following table presents a reconciliation
of EBITDA and Adjusted EBITDA to net income (loss) allocable to common shareholders, a GAAP financial measure:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADJUSTED EBITDA
(Non-GAAP)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(479,476
|
)
|
|
$
|
(384,983
|
)
|
|
$
|
(2,398,304
|
)
|
|
$
|
(1,198,079
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expenses (income), net
|
|
|
(1,084
|
)
|
|
|
5,000
|
|
|
|
(1,367
|
)
|
|
|
217,316
|
|
Amortization and
depreciation
|
|
|
5,034
|
|
|
|
6,267
|
|
|
|
15,928
|
|
|
|
12,598
|
|
Total EBITDA (Non-
GAAP)
|
|
|
(475,526
|
)
|
|
|
(373,716
|
)
|
|
|
(2,383,743
|
)
|
|
|
(968,165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based
compensation
|
|
|
1
|
|
|
|
12,285
|
|
|
|
44,120
|
|
|
|
12,285
|
|
Fair value of options and
warrants issued in exchange
for services
|
|
|
44,151
|
|
|
|
104,694
|
|
|
|
270,339
|
|
|
|
440,664
|
|
Fair value of restricted stock
and restricted stock units
issued in exchange for
services
|
|
|
160,077
|
|
|
|
-
|
|
|
|
395,481
|
|
|
|
-
|
|
Change in fair value of
warrants
|
|
|
|
|
|
|
(1,783
|
)
|
|
|
|
|
|
|
(103,527
|
)
|
Change in fair value of
embedded derivative
liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(79,420
|
)
|
Share-based payment for
settlement agreement with
shareholders
|
|
|
-
|
|
|
|
-
|
|
|
|
279,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payment for settlement
agreement with
shareholders
|
|
|
-
|
|
|
|
-
|
|
|
|
500,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Adjusted EBITDA
(Non-GAAP)
|
|
$
|
(271,297
|
)
|
|
$
|
(258,520
|
)
|
|
$
|
(894,803
|
)
|
|
$
|
(698,163
|
)
|
Liquidity and Capital Resources
Our operations used $1,987,465 of cash
during the nine months ended September 30, 2018 compared to $626,743 during the comparable period in 2017 due to a $500,000 payment
made related to the Settlement Agreement and due to changes in operations occurring in the first half of 2017.
In March 2018, we made a financial strategic
decision to end a future revenue sharing program, so that we could benefit entirely from future revenues. To do this, we
paid out cash in relation to the Settlement Agreement mentioned in Note 6 to the financial statements, of $500,000. Management
believes that the potential future savings that will be incurred by this transaction significantly outweigh the costs.
Cash used in investing activities was $46,913 during the nine
months ended September 30, 2018 compared to nil during the nine months ended September 30, 2017. Cash used in investing activities
primarily related to capitalized software costs.
Cash provided by financing activities during
the nine months ended September 30, 2018, was $3,465,649 compared to $1,363,797 during the nine months ended September 30, 2017.
During the nine months ended September 30, 2018, the Company sold common stock for gross proceeds of $1,154,211. Additionally,
the Company raised $2,311,438 from the exercise of warrants.
As of October 31, 2018, we had approximately
$1,957,000 of cash which we expect will meet our liquidity and working capital needs for more than the next 12 months. Ultimately,
we must not only generate revenue from our technologies but we must generate positive cash flow from operations. If we do not,
we will be required to raise more capital, which will likely be very dilutive or cease operating our current business.
Cautionary Note Regarding Forward-Looking
Statements
This report includes forward-looking statements
including statements regarding our product development and capabilities, and generation of revenue.
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.
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 complete development of our digital patents, to close sales
leads, begin meaningful marketing of our products, and begin generating revenue from our products. Further information on our risk
factors is contained in our filings with the SEC, including our annual report on Form 10-K for the year ended December 31, 2017.
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
None.
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.
Revenue Recognition
We account for revenues according to ASC
Topic
606, “
Revenue from Contracts with Customers”
which establishes
principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the
entity's contracts to provide goods or services to customers.
We apply the following five steps in order
to determine the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements:
|
·
|
identify the contract with a customer;
|
|
·
|
identify the performance obligations in the contract;
|
|
·
|
determine the transaction price;
|
|
·
|
allocate the transaction price to performance obligations in the contract; and
|
|
·
|
recognize revenue as the performance obligation is satisfied.
|
Stock-based Compensation
We account for stock-based compensation
under the provisions of FASB ASC 718, “Compensation—Stock Compensation,” which requires the measurement
and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values
on the grant date. We estimate the fair value of stock-based awards on the date of grant using the Black-Scholes 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.
Recently Issued Accounting Pronouncements
Recently issued accounting pronouncements
are discussed in Note 1 of the notes to financial statements contained in this report.