What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2021-03-25 compared with 2020-03-09 · 397 added, 296 removed, 72 unchanged (91% of the section changed)

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Our common stock,

is quoted on the OTCQB under the trading symbol “VRME”.

Quotations on the OTCQB reflect inter-dealer prices, without

retail mark-up, mark-down commission, and may not represent actual transactions.

par value $0.001 per share, and warrants to purchase common stock are traded on The Nasdaq Capital Market under the trading symbols

“VRME”

and “VRMEW,”

respectively.

Common Shareholders

As of February 20, 2020, we had approximately 1,458 shareholders

As of March 19, 2021, we had approximately 1,450 shareholders

of record of our common stock.

Because many of our shares of common stock are held by brokers and other institutions on behalf

of shareholders, this number is not indicative of the total number of shareholders represented by these shareholders of record.

We have never

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Nevada law permits a corporation to pay dividends out of earnings or surplus.

Accordingly, we can

not pay dividends as a matter of law.

Accordingly, we cannot pay dividends as a matter of law.

of Unregistered Securities

We have previously

disclosed all sales of securities without registration under the Securities Act of 1933 (the “Securities Act”) except

for the following:

In November 2019,

the Company issued 33,333 shares of restricted common stock for investor relation services.

In October, the Company issued 1,087 shares of restricted common

stock in relation to investor relation services.

October 12, 2020, pursuant to the 2020 Plan, the Company granted to each of the Company’s Chief Financial Officer, acting

Chief Operating Officer, and Chief Technology Officer 5,000 restricted stock units that vested immediately and converted into shares

of the Company’s common stock.

In November 2020,

the Company issued 280,000 shares of restricted common stock for consulting services.

In October 2019,

the Company issued 33,333 shares of restricted common stock for investor relation services.

In August 2019,

the Company granted 400,000 shares of restricted common stock for consulting services.

These transactions were exempt from registration

under Section 4(a)(2) of the Securities Act of 1933.

SELECTED FINANCIAL

Not applicable for smaller reporting companies.

the Company issued 1,087 shares of restricted common stock in relation to investor relation services.

In December 2020, the Company issued 2,174 shares

of restricted common stock in relation to investor relation services.

These securities described

above were issued in reliance upon the exemption from the registration requirements of the Securities Act of 1933, as amended (the

“Securities Act”), as set forth in Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D promulgated

thereunder relative to transactions by an issuer not involving any public offering, to the extent an exemption from registration

was required.

The recipients of the securities described in the transactions above acquired the securities for their own account

for investment purposes only and not with a view to, or for sale in connection with, any distribution thereof.

Use of Proceeds

On June 17, 2020, our Registration Statement on

Form S-1 (File No.

333-234155), as amended (the “Registration Statement”) relating to an underwritten public offering of an

aggregate of 2,173,913 units consisting of one share of the Company’s common stock and a warrant to purchase one share of common

stock at an exercise price equal to $4.60 per share of common stock was declared effective by the SEC.

The cash proceeds from the offering

were $9,023 thousand, net of underwriting discounts and commissions of approximately $800 thousand and fees and expenses of approximately

$450 thousand.

There has been no material change in the expected use of the net proceeds from the offering, as described in our final

prospectus filed with the SEC on June 19, 2020 pursuant to Rule 424(b)(4).

As of December 31, 2020, this offering has terminated.

MANAGEMENT’S

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The following should be read in conjunction with our annual financial statements contained elsewhere in this Report.

Our Revenue Model

Our goal is to generate revenue through

licenses and royalties of our technology and through direct sales of products based on our technology.

We had revenue of $244,748

for the year ended December 31, 2019.

We believe that our contract with HP Indigo will create demand for our RainbowSecure®

and VeriPAS TM products.

Working with HP Indigo and S-One, we are creating co-marketing programs to effectively reach

all 6000 series HP Indigo owners.

We also will reach out to brand owners and make them aware of our brand protection security solutions

which can provide brand owners counterfeit prevention protection.

We intend to generate revenues primarily by collecting license

fees based on usage fees generated from HP Indigo 6000 series users as well as non-digital press technology usage.

The HP Indigo

7800 sheet-fed press has been successfully piloted and we intend to work with HP Indigo to formally qualify the 7800 press opening

up the ability to market to new folded carton and plastic card customers.

Our revenue is derived utilizing a royalty rate based

on the volume of a particular label or package printed with our RainbowSecure®

technology (e.g.

a royalty on each impression).

We believe we will also generate revenue by leasing authentication devices to manufacturers who incorporate our technologies into

their manufacturing processes and user authentication protocols, as well as through the sale of pigments to be incorporated in

inks and dyes and the sale of authentication tools.

Our VeriPAS TM technology product

is an identifier, track and trace system which generates revenue from a contracted usage fee per impression rate based on the number

of codes which are purchased for application on labels and packages printed with the technology.

Our VerifyMe digital authentication technology

is a software system.

The revenue to be generated from this product is expected to be in the form of a contracted per transaction

fee and or a monthly service fee.

VerifyMe, Inc.

is a technology

solutions provider specializing in brand protection functions such as counterfeit prevention, authentication, serialization,

track and trace features for labels, packaging and products.

This broad market encompasses identifying and preventing

counterfeiting of physical and material goods and products, prevent product diversion, enable brand owners to monitor,

control and protect their products life cycle, as well as authenticating people in digital transactions.

We have the ability

to deliver security solutions for identification and authentication of people and products in a variety of applications in

the security fields of authentication, counterfeit prevention and product diversion.

Our products can be used to print,

secure and covertly serialize labels and packaging for brand owners, manage and issue secure credentials including national

identifications, passports, driver licenses and access control credentials, as well as comprehensive authentication security

software to securely process digital financial transactions, provide secure physical and logical access to facilities,

computer networks, internet sites and mobile applications.

Brand owners, government agencies, professional

associations, and others all share in the challenge of responding to counterfeit goods and product protection issues.

goods span across multiple industries including 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, “counterfeiting”

has been labeled as the crime of the twenty-first century.

According to the "Global

Brand Counterfeiting Report, 2018"

written by “Research and Markets”

the amount of total counterfeiting globally

has reached to $1.2 Trillion.

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, cosmetics, pharmaceuticals, event and transportation tickets, driver’s

licenses, insurance cards, passports, computer software, and credit cards.

We generate sales through re-seller agreements 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, that we may attempt to commercialize in the future.

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

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 are continuing to develop and market this technology but it has not yet been commercialized.

(“VerifyMe,”

the “Company,”

“we”

or “us”) is a technology solutions provider specializing in brand protection

and supply chain functions such as counterfeit prevention, authentication, serialization, consumer engagement, track and trace

features for labels, packaging and products.

The Company was formed in Nevada on November 10, 1999.

Until 2018, we were primarily

engaged in the research and development of our technologies.

We began to commercialize our covert luminescent pigment, RainbowSecure®,

in 2018, and we also developed the patented VeriPAS™

software system in 2018 which covertly and overtly serializes products

to remotely track a product’s “life cycle”

for brand owners.

We believe VeriPAS™

is the only invisible

covert serialization and authentication solution deployed through variable digital printing on HP Indigo (a division of HP, Inc.)

printing systems with a smartphone tracking and authentication system.

VeriPAS™

is capable of fluorescing, decoding, and

verifying invisible RainbowSecure®

codes in the field –

designed to allow investigators to quickly and efficiently authenticate

product throughout the distribution chain, including warehouses, ports of entry, retail locations, and product purchased over the

Internet for inspection and investigative actions.

This technology is coupled with a secure cloud-based track and trace software

engine which allows brands and investigators to monitor the complete supply chain from product origination to the end user utilizing

geolocation mapping and intelligent programable alerts.

Brand owners access the VeriPAS™

software through a web portal over

the Internet.

Brand owners can then set rules of engagement, gather rich business intelligence, establish marketing programs for

customer engagement and control, monitor and protect their products’

“life cycle.”

We have derived minimal

revenue from our VeriPAS™

software system and have derived limited revenue from the sale of our RainbowSecure®

Our brand protection technologies involve

the utilization of invisible and/or color changing inks, which are compatible and printed with modern digital and standard printing

The inks may be used with certain printing systems such as digital, offset, flexographic, silkscreen, gravure, inkjet

and toner-based laser printers.

The inks can be used to print both static and variable images utilizing digital printing presses

and third-party digital inkjet systems which are attached to traditional printing presses.

Our invisible ink can be used in fixed

images, variable images or serialized codes, bar codes or QR codes.

We have developed a product which attaches to a smartphone

that reads our invisible ink codes into sophisticated cloud-based track and trace software.

We also have a product that informs

users that our invisible ink is present for authentication.

Based upon our experience, we believe that the ink technologies may

be incorporated into most existing manufacturing processes.

In the areas of authentication and serialization

of physical goods, we offer clients the following brand protection security and anti-counterfeit technologies:

RainbowSecure®

VeriPAS™

supply chain serialization, track and trace technology

VeriPAS™

Smartphone Authenticator

VerifyMe Beeper

VerifyMe®

RainbowSecure®

technology was

our first technology to be patented.

It combines an invisible ink with a proprietary tuned laser to enable counterfeit products to be

In 2017, we signed a five-year contract with Indigo Division of HP Inc.

(“HP Indigo”) to print this technology on

packages and labels on their 6000 series presses.

Our technology has been tested and approved by HP Indigo 6000 series presses and

more recently was qualified on HP Indigo’s 6900 series presses.

In addition, we successfully trialed production on their 7900 press

series used for sheet-fed products like folded cartons and plastic cards.

HP Indigo informed us that other press models will be qualified

once clients formally request in writing the need for qualification for current unqualified models.

In addition, HP Indigo is producing

sample secure government products such as tax stamp samples for governments with our RainbowSecure®

invisible ink technology.

has showcased these samples at various global government and print service providers trade shows.

Customers can use a handheld beeping

device, our VerifyMe Beepers, tuned to authenticate the unique frequency of our RainbowSecure®

invisible ink, to broadcast a beeping

sound to confirm the authenticity when placed on products, labels and packaging containing our RainbowSecure®

VerifyMe Beepers

are being commercialized and leased to customers, typically for one year.

In December 2017, we signed a contract with Micro Focus to use

RainbowSecure®

in their Global Product Authentication Service (GPAS).

The technology also features a unique double layer of security

which remains entirely covert at all times and provides licensees with additional protection.

Under the contract with Micro Focus, we

have a re-seller agreement where we sell the combined Micro Focus GPAS with our RainbowSecure®

identifier under our own trademarked

name, VeriPAS™.

In May 2019, we entered into a strategic partnership with INX, the third largest producer of inks in North America,

to co-develop inkjet inks to be used for inkjet printing in combination with high speed, high volume label and packaging printing presses.

In 2020, INX, in conjunction with Print Craft Inc., successfully-tested an appeal garment containing our RainbowSecure®

secured garment survived the 50 wash and dry cycle test.

Sales and marketing efforts for this new VerifyMe secure apparel technology are

commencing in 2021 in conjunction with INX and Print Craft Inc.

In February 2021, INX completed the development of a version of our RainbowSecure®

security ink for metal objects and INX is now co-marketing the new security ink to its global clients.

The specially formulated inks will

enable these printing presses to print our RainbowSecure®

invisible ink technology, which includes our variable VeriPAS™

serialization,

track and trace technology.

We believe RainbowSecure®

is particularly well-suited to closed and controlled environments that want

to verify transactions within a specific area, as well as labels, packaging, textiles, plastics and metal products which need authentication.

We have derived limited revenue from the sale of our RainbowSecure®

VeriPAS™

serialization, track and trace technology combines the covert identifier of RainbowSecure®

with the Micro Focus GPAS which

provides brand owners geographical business intelligence on counterfeiting as well as the ability to authenticate labels, packaging

and products.

Using information from a smartphone screen, our VeriPAS TM technology, can provide authentication

and data submission information.

A customer or end-user can scan information from a product label or QR code and send it to the

cloud where our VeriPAS TM software can verify authenticity of the product, as well as track and trace the product

from production through delivery.

Certain clients are in the testing stage with this product.

Revenue for this product was received

for the first time in 2020 and a reorder was received in the first quarter of 2021.

To date, we have recognized minimal revenue

from this technology.

VeriPAS ™

Authenticator technology is a piece of hardware with a built-in lighting system and software that scans invisible RainbowSecure®

Product investigators attach their smartphone to this device which then reveals the hidden RainbowSecure®

the smartphone screen which are then sent to the VeriPAS TM software in the cloud for authentication and data submission.

These devices have been commercialized and are being leased to customers.

Leases are typically one year in length and are auto-renewable.

A Forbes Top 50 Company added additional leases in 2020 for its international brand inspector team.

Revenue from this product is

at an initial stage and minimal at this time.

VerifyMe Beeper technology

is an authentication tool which we are marketing to customers in conjunction with our RainbowSecure®

Beeper is a handheld beeping device is tuned to authenticate the unique frequency of our RainbowSecure®

invisible ink and will

broadcast a beeping sound to confirm the authenticity when placed on products, labels and packaging containing our RainbowSecure®

The VerifyMe Beeper is designed for use by customers who desire instant authentication on items, such as event tickets at

an entry gate.

Our customized beeper will only positively identify a product bearing our unique anti-counterfeit solution.

technology is being commercialized and leased to customers, typically for one year auto-renewable terms.

We are in the process

of upgrading the functionality of this device so that it connects to a mobile phone via Bluetooth allowing authentication attempts

to be recorded in the cloud by geo-location with time and date stamp.

We expect to be able to commercialize this update by the

end of the Q1 2021.

VerifyMe®

as Authentic®

are dual-purpose pre-printed labels with a visible serialized QR code for consumer scanning purposes, and an invisible serialized

IR code for inspector scanning, authentication and tracking purposes.

This label can be either a standard label or designed

with tamper evident features.

It was developed to provide covert brand protection for e-commerce retailers to enable consumer product

authentication, promotion, engagement and education through the visible serialized QR code.

This technology has been successfully

launched with tamper evident features and is being used in the cannabis sector, without the covert IR component.

VerifyMe®

Web TM includes,

through our collaboration with Corsearch, a brand clearance and protection leader, technologies and services that better enable

customers to effectively tackle counterfeit websites, domains and e-commerce platforms offering counterfeit products.

we have not derived revenue from this technology.

We believe that our brand protection security

technologies, coupled with our contract with HP Indigo, can be used to enable brand owners to securely prevent counterfeiting,

prevent product diversion and authenticate labels, packaging and products and alleviate the brand owner’s liability from

counterfeit products which physically harm consumers.

Our covert technologies give brand owners the ability to control, monitor

and protect their products life cycle.

Also, our technologies allow brand owners to prove whether the product causing an issue

is authentic or counterfeit.

Our digital technologies are contained in a web

portal known as VeriPAS™.

VeriPAS™

is built on the Micro Focus centralized cloud- based GPAS platform.

Utilizing Micro Focus’s

software team, we have embedded our patented invisible code system into the GPAS platform that allows inspectors to utilize our smartphone

attachment to read unique invisible, serial codes, barcodes, NFC, RFID and QR codes for every label, package and or product into the VeriPAS™

cloud-based software portal.

GPS locations of the scans of inspectors and end users are captured for the brand owner to monitor.

this software is integrated with “iot”, NFC, RFID, SAP enterprise systems.

In addition, we have the ability to broadcast

Bluetooth signals from our handheld light sensor device when our RainbowSecure®

Ink is found on a product or label.

This signal then

triggers a GPS location to be recorded in the cloud-based VeriPAS™

software application.

Together, the handheld light sensor device

and the smartphone attachment authenticator provide the brand owner the ability to monitor their inspector team activities thru the VeriPAS™

Another feature of our digital technologies is

the ability for the brand owner to gather rich business intelligence and engage with the consumer using our authentication test as the

initial contact with the consumer.

For example, consumers can simply scan a visible unique code generated by the VeriPAS™

that is printed on labels and packages using their smartphone camera.

Once the consumer scans the code, an instant authenticity check

is made using algorithms stored in the cloud to determine the products authenticity on a multiple of factors.

Once this test is completed,

the brand owner can then engage with the consumer by providing marketing materials, videos, discount coupons, product specifications,

or cross sell other products with this consumer engagement software we provide to the brand owner in the cloud-based VeriPAS™

COVID-19 Pandemic

The COVID-19 pandemic disrupted businesses and

affected production and sales across a range of industries, as well as caused volatility in the financial markets, which negatively impacted

our results of operations for 2020, and could further negatively impact our sales and results of operations.

The full extent of the impact

of the COVID-19 pandemic on our customer demand, sales and financial performance will depend on certain developments, including, among

other things, the duration and spread of the outbreak, the effectiveness of vaccines, and the impact on our customers and employees, all

of which are uncertain and cannot be predicted.

Please see Item 1A, “Risk Factors- Risks Relating to the COVID-19 Pandemic”

in this Report for additional information regarding certain risks associated with the pandemic.

The COVID-19 pandemic has caused a major

spike in demand for safety products such as masks and gloves, COVID-19 test kits, medications and vaccines to treat the virus,

which we believe has further caused an increase in counterfeit products.

Our suite of technology solutions for global manufacturers,

distributors and sellers are designed to allow consumers to prove authenticity and we have proactively reached out to global manufacturers

who are seeking to provide their customers authenticity in their products.

We believe we have a dynamic management and sales team

in place with the ability to seamlessly work remotely to minimize any operational disruption.

In connection with the COVID-19 pandemic,

sales conferences and other in-person sales events have been curtailed.

This has resulted in a reduction of our sales-related transportation

costs and limited our in-person sales efforts.

However, during these challenging times, we have expanded our sales and marketing

team and made changes to our social media branding strategy.

We continue to work with our sales representatives to look for alternative

ways to communicate effectively and promote sales both with our customers and potential customers.

Further, we anticipate that as a result

of the COVID-19 pandemic, our customers may require that their programs be cancelled, delayed or reduced.

We will continue to work

in partnership with our customers to continually assess any potential impacts and opportunities to mitigate risk.

Results of Operations

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of operations for the years ended December 31, 2020 and 2019.

The following information should be considered together with

our financial statements for such periods and the accompanying notes thereto.

Revenue for the

year ended December 31, 2019 was $244,748, a 227% increase as compared to $74,884, for the year ended December 31, 2018.

revenue primarily related to security printing with our authentication serialization technology for two large global brand owners.

Gross profit for the years ended

December 31, 2019 and 2018, was $199,689 and $46,082, respectively.

The resulting gross margin was 81.6% for the year ended

December 31, 2019, compared to 61.5% for the year ended December 31, 2018.

This was a result of more efficient usage of our

RainbowSecure®

The following information should be considered together with our

financial statements for such periods and the accompanying notes thereto.

Revenue for the year ended December 31, 2020

was $343 thousand, a 40% increase compared to $245 thousand, for the year ended December 31, 2019.

increase in revenue primarily related to an increase in security printing with our authentication serialization technology for two large

global brand owners.

Gross profit for the years ended December

31, 2020 and 2019, was $281 thousand and $200 thousand, respectively.

The resulting gross margin was 81.9% for the year ended December

31, 2020, compared to 81.6% for the year ended December 31, 2019.

This was a result of more efficient usage of our RainbowSecure®

invisible ink.

We believe our high gross profit margins demonstrate our business model’s ability to

generate profitable growth.

We believe our high gross profit margins demonstrate our business model’s ability to generate profitable growth.

General and Administrative Expenses

General and administrative expenses were

$1,358,748 for the year ended December 31, 2019 compared to $1,585,329 for the year ended December 31, 2018, a decrease

The decrease is attributable primarily due to efficiencies within the Company.

$2,151 thousand for the year ended December 31, 2020 compared to $1,359 thousand for the year ended December 31, 2019,

an increase of $792 thousand.

The increase related primary to non-cash stock-based compensation expense, public company related

costs, including investor relations and filing fees associated with our Nasdaq listing, and an increase in amortization and depreciation.

Legal and Accounting

Legal and accounting fees decreased $170,517

to $246,255 for the year ended December 31, 2019 from $416,772 for the year ended December 31, 2018.

related primarily to a decrease in legal fees and a decrease in accounting fees as we replaced our accounting firm and hired our

Chief Financial Officer on a part-time basis.

Legal and accounting fees increased to

$324 thousand for the year ended December 31, 2020 from $246 thousand for the year ended December 31, 2019.

increase related primarily to an increase in legal fees due to our securities offerings, more contract related work and other projects.

Payroll Expenses

Payroll expenses increased to $469,031

for the year ended December 31, 2019 from $316,837 for the year ended December 31, 2018, an increase of $152,194.

majority of the increase was the result of lower non-cash charges related to stock-based compensation and the transition of

our Chief Financial Officer and Chief Technology Officer from consultants to part-time employees.

Payroll expenses increased to $704 thousand

for the year ended December 31, 2020 from $469 thousand for the year ended December 31, 2019, an increase of $235 thousand.

increase was primarily the result of higher non-cash charges related to stock-based compensation of approximately $131 thousand

and an increase in the salaries of our Chief Executive Officer and Chief Financial Officer.

Research and Development

Research and development expenses decreased

by $182,536 to $5,119 for the year ended December 31, 2019 from $187,655 for the year ended December 31, 2018.

decrease is primarily due to investments in developing our VeriPAS TM Smartphone Authenticator technology in 2018,

while in the year ended December 31, 2019, our products were nearly completely developed.

Research and development expenses increased by

$14 thousand to $19 thousand for the year ended December 31, 2020 from $5 thousand for the year ended December 31, 2019.

plan to increase research and development in future periods, particularly in the switch from a cloud-based centralized network for VeriPAS™

to an Ethereum decentralized block-chain platform for our supply chain monitoring, and authentication platform.

Sales and Marketing

Sales and marketing expenses for the year

ended December 31, 2019 were $553,109 as compared to $135,290 for the year ended December 31, 2018, an increase of $417,819.

increase was related to the hiring of our VP of Sales, and expenses for travel and costs related to various trade shows and other

sales and marketing activities.

Sales and marketing expenses for the year ended

December 31, 2020 were $651 thousand compared to $553 thousand for the year ended December 31, 2019, an increase of $98 thousand.

increase is related to an expansion of our sales and marketing team which increased costs by approximately $150 thousand, charges related

to our social media and branding of approximately $150 thousand, offset by lower share-based compensation costs of $135 thousand and lower

costs due to a decrease in trade shows primarily as a result of the COVID-19 pandemic.

We expect that travel related expenses will increase

in 2021 and beyond, to the extent the COVID-19 pandemic subsides and in-person sales and marketing events resume.

Operating Loss

Operating loss for the year ended December 31,

31, 2019 was $2,432,573, a decrease of $163,228, compared to $2,595,801 for the year ended December 31, 2018 and was primarily

related to efficiencies within the Company, decreases in research and development offset by the increase related to the hiring

of our VP of Global business Development and increased participation in trade shows.

Interest Expense

During the year ended December 31,

2019, we incurred interest expense of $96,891 as compared to a net interest income of $6,664, for the year ended December 31,

2018, a variance of $103,555.

The variance is related primarily to amortization of our debt discount related to the issuance

of our secured convertible debentures issued in 2019 (the “Debentures”).

See “Note 5 –

Convertible Debt”

in the notes accompanying the financial statements included herein.

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 (the

“Settlement Agreement”).

Our net loss decreased

by $424,663 to $2,507,799 for the year ended December 31, 2019, from $2,932,462 for the year ended December 31, 2018.

related primarily to the Settlement Agreement which occurred in the first quarter of 2018 resulting in a total expense of $779,000.

The resulting loss per share for the year ended December 31, 2019 was $0.02 per share, compared to $0.03 per share

for the year ended December 31, 2018.

2020 was $3,568 thousand, an increase of $1,136 thousand, compared to $2,432 thousand for the year ended December 31, 2019.

primarily related to an increase in public company related costs, including costs associated with our Nasdaq listing, an expansion of

our sales and marketing department, and an increase in non-cash stock-based compensation that was partially offset by increases in revenue.

Our net loss increased

$3,395 thousand to $5,902 thousand for the year ended December 31, 2020, from $2,507 thousand for the year ended December 31, 2019.

The increase was primarily due to amortization of debt discount related to our 2020 senior secured convertible debentures (the

“2020 Debentures”) included in interest expense, and loss on extinguishment of debt related to our 2019 senior secured

convertible debentures (the “2019 Debentures”).

The resulting loss per share for the year ended December 31,

2020 was $1.48 per share, compared to $1.17 per share for the year ended December 31, 2019.

Liquidity and Capital Resources

Net cash used in operating activities decreased

by $797,302 to $1,579,412 for the year ended December 31, 2019 as compared to $2,376,714 for the year ended December 31, 2018.

decrease resulted primarily from a $500,000 payment made related to the Settlement Agreement during the year ended December 31,

Net cash used in operating activities increased

by $702 thousand to $2,281 thousand for the year ended December 31, 2020 compared to $1,579 thousand for the year ended December 31, 2019.

increase resulted primarily in increases due to salaries, increased legal fees, increased public related costs, an expansion of our sales

and marketing team, and the initiation of our social branding and marketing campaign.

Net cash used in investing activities was

$302,330 for the year ended December 31, 2019, compared to $108,736 for the year ended December 31, 2018.

The increase in

investing activities related to the purchase of patents which is vital for our business, and for software costs related to the

development of our products.

$125 thousand for the year ended December 31, 2020, compared to $302 thousand for the year ended December 31, 2019.

in investing activities related to lower capitalized software costs and equipment held for lease, offset by an increase in expenses

related to patents.

Net cash provided by financing activities

decreased by $3,004,343 to $461,307 for the year ended December 31, 2019 from $3,465,650 for the year ended December 31, 2018.

the year ended December 31, 2019 we issued convertible debt to two investors for gross proceeds, net of costs of $461,307.

the year ended December 31, 2018, we sold common stock for gross proceeds of $1,153,645.

Additionally, we raised $2,312,005

from the exercise of warrants during the year ended December 31, 2018.

On March 6, 2020 we completed the closing

of our 2020 Debentures and raised $1,992,000 in gross proceeds from the sale of the 2020 Debentures and warrants to purchase shares

of our common stock.

From this sale, we received $1,814,040 after the payment of commissions and fees.

We used approximately $750,000

of the net proceeds to repay our existing convertible debentures.

On February 28, 2020, the holder of a $75,000

promissory note which was to become due in March 2020 purchased $80,000 of the 2020 Debentures and warrants, which he paid by exchanging

his note and paying an additional $5,000.

This is included in the $1,992,000 gross proceeds raised.

After the 2020 Debenture financing, the

Company’s only outstanding debt on its balance sheet are 2020 Debentures.

The 2020 Debentures are due 18 months from the

applicable closing date of each respective sale and pay 10% per annum in interest, which will be payable in common stock at the

rate of $0.08 per share.

The 2020 Debentures are secured by a first lien on all of the Company’s assets, including intellectual

We do not have sufficient cash to meet our working capital needs for the next 12 months.

Accordingly, we will have to

obtain additional financing on or about December 1, 2020 unless we experience a material increase in cash generated from operations.

Because of the secured nature of the 2020 Debentures, it may be more difficult to raise capital.

We cannot assure you we will

have sufficient cash resources to meet working capital needs or repay the 2020 Debentures if they are not converted.

Certain insiders of the Company also invested

in 2020 Debentures, as is more particularly described in and the Related Party Transaction on page 48 of this Report.

information on the 2020 Debentures and warrants, see the Risk Factor at page 20 of this Report.

As of March 4, 2020, we owe Mr.

White, our Chief Executive Officer, $125,000 in accrued salary reflecting $50,000 of his annual salary which Mr.

White has deferred

each year from 2017 to 2019.

The total $150,000 of his deferred salary will become due on August 15, 2020.

Going Concern

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 offerings of our securities.

However, management cannot provide any assurances

that we will be successful in accomplishing any of our plans.

On March 6, 2020, the Company completed the closing of the 2020 Debentures

and raised $1,992,000 of senior secured convertible debentures for net proceeds of $1,814,040.

The Company used the net proceeds

to repay existing convertible debentures and will use any additional proceeds for working capital.

We also may raise capital in

other private offerings of our securities during 2020.

We cannot assure you that we will be successful in completing any

public offering or private offerings of our securities to raise the additional capital we need.

The purchasers of our 2020

Debentures have a security interest that may make it harder to raise the needed capital through a private placement of our securities.

If we are unable to raise the necessary capital, we will not be able to operate our business.

increased by $9,631 thousand to $10,092 thousand for the year ended December 31, 2020 from $461 thousand for the year ended December

During the year ended December 31, 2020, we redeemed the convertible debt issued to two investors in September

2019 for a total of $750 thousand.

In the first quarter of 2020, we raised $1,992 thousand in gross proceeds from the 2020 Debentures

for net proceeds of $1,747 thousand.

In the second quarter of 2020, as part of our public offering, we raised approximately $10,000,000

in gross proceeds and received net proceeds of $9,023 thousand, including the exercise of the over-allotment option resulting in

gross proceeds of approximately $232 thousand.

On May 17, 2020, we entered into a paycheck

protection program term note for $72 thousand (the “SBA Loan”) with PNC Bank, N.A.

under the recently enacted Coronavirus

Aid, Relief, and Economic Security Act (the “CARES Act”) pursuant to the Paycheck Protection Program (the “PPP”),

which is administered by the U.S.

Small Business Administration.

The SBA Loan is scheduled to mature on May 17, 2022, bears interest

at a rate of 1.00% per annum and is subject to the terms and conditions applicable to loans administered by the U.S.

Small Business

Administration under the CARES Act.

Pursuant to the CARES Act and the PPP, all or a portion of the principal amount of the SBA

Loan is subject to forgiveness so long as, over the eight-week period following the receipt by the Company of the proceeds of the

SBA Loan, the Company uses those proceeds for payroll costs, payment on rent obligations, utility costs, and costs of certain employee

benefits as per Section 1106 of the CARES Act.

As of December 31, 2020, the amount outstanding on the SBA Loan was $72 thousand

classified as Long-Term Liabilities and included in the accompanying Balance Sheets.

In November 2020,

we announced a share repurchase program to spend up to $1.5 million to repurchase shares of our common stock over the next nine

To date, no shares have been purchased but the Company reserves the right to make purchases at any time under the terms

set out in this program.

The accompanying financial statements and

notes have been prepared assuming we will continue as a going concern.

During the year ended December 31, 2019 we suffered from

recurring losses from operations and negative cash flows from operations, resulting in substantial doubt about our ability to continue

as a going concern and a need for, among other things, capital resources.

As of December 31, 2019, we had cash of $253 thousand

and disclosed that our ability to continue as a going concern was predicated on our ability to raise capital and to sustain adequate

working capital to finance our operations.

During the year ended December 31, 2020, we raised working capital to finance our operations

sufficient to mitigate any substantial doubt about our ability to continue as a going concern which is more fully described in

Note 1 –

Summary of Significant Accounting Policies in the notes accompanying the financial statements.

On February 12, 2021, as part of our public offering

of an aggregate 1,750,000 shares of common stock, we generated aggregate gross proceeds of $9.2 million and net proceeds of $8.5 million,

less underwriting discounts and commissions and other offering expenses, including the partial exercise of the over-allotment option resulting

in gross proceeds of $530 thousand.

We believe that our cash and cash equivalents, together with the net proceeds from this offering,

will fund our operations through 2025.

While we expect revenues to increase, we

expect continued negative cash flows as we incur increased costs associated with expanding our business.

We expect to continue

to fund our operations primarily through utilization of our current financial resources, future revenue, and through the issuance

of debt or equity.

Critical Accounting Policies and Estimates

In response to financial reporting release

FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, from the SEC, we have selected our more subjective

accounting estimation processes for purposes of explaining the methodology used in calculating the estimate, in addition to the

inherent uncertainties pertaining to the estimate and the possible effects on our financial condition.

There were no material changes

to our principal accounting estimates during the period covered by this report.

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 believe estimates and assumptions related

to these critical accounting policies are appropriate under the circumstances;

however, should future events or occurrences result

in unanticipated consequences, there could be a material impact on our future financial position, results of operations or cash

Revenue Recognition

Our revenue transactions include sales of our canisters, software,

licensing, pre-printed labels, integrated solutions and leasing of our equipment.

We recognize revenue based on the principals

established in ASC Topic 606, “Revenue from Contracts with Customers.”

Revenue recognition is made when our performance

obligation is satisfied.

Our terms vary based on the solutions we offer and are examined on a case by case basis.

For licensing

of our RainbowSecure®

technology we depend on the integrity of our clients’

Stock-based Compensation

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We estimate the fair value of stock-based awards on the date of grant using the Black-Scholes model.

The value of the portion

of the award that is ultimately expected to vest is recognized as expense over the requisite service periods using the straight-line

The assumptions used

in the Black-Scholes option pricing model include risk-free interest rates, expected volatility and expected life of the stock

Changes in these assumptions can materially affect estimates of fair value stock-based compensation, and the compensation

expense recorded in future periods.

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

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vested or the service completed.

Off Balance Sheet Arrangements

We do not engage in any activities involving

variable interest entities or off-balance sheet arrangements.

New Accounting Pronouncements

See Note 1 –

Summary of Significant

Accounting Policies in the notes accompanying the financial statements included herein for discussion of recent accounting pronouncements.

Cautionary Note Regarding Forward Looking

This Report includes forward-looking statements

within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding the expected applications

of our technologies and the future effect of our technologies on our customers’

approach to security and on successful prevention

of counterfeiting and product diversion, the ability of our ink technologies to be incorporated in existing manufacturing processes,

our expectations regarding access to certain markets, including East Asia, the anticipated useful life of our technologies, the

future success of our internal sales efforts and strategic partnerships, the expected changes in the pharmaceutical industry and

their effect on acceptance of our technology, our beliefs with respect to the ability of our digital verification technology to

meet user expectations, the projected growth of the biometrics systems market and the development of anti-counterfeiting technologies,

the expected improvements of our APPs, our plans with respect to certain of our patent applications, our expected primary sources

of revenue, our marketing strategy, including our focus on strategic partnerships, and the anticipated effects of such partnerships,

the expected effect of our contract with HP Indigo on future demand for our products, our future growth, our expectations regarding

our liquidity and our future capital-raising activities.

All statements other than statements of historical fact contained in this

Report are forward-looking statements.

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 trends that we believe may affect our financial condition,

results of operations, business strategy and financial needs.

Our actual results and financial condition may differ materially

from those indicated in the forward-looking statements.

Therefore, you should not rely on any of these forward-looking statements.

Important factors that could cause our actual results and financial condition to differ materially from those indicated in the

forward-looking statements include, among others, the following:

our ability to continue as a going concern;

our ability to raise additional capital;

our ability to achieve market acceptance of our technologies or product offerings;

the ability of our technologies to work as anticipated;

our reliance on HP Indigo and other strategic partners;

our ability to compete successfully;

such other factors as discussed in the “Risk Factors”

section of this Report.

Any forward-looking statement made by

us in this Report is based only on information currently available to us and speaks only as of the date on which it is made.

undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time

to time, whether as a result of new information, future developments or otherwise, except as required by law.

Recently Adopted Accounting Pronouncements

Recently adopted accounting pronouncements

are discussed in Note 1 –

Summary of Significant Accounting Policies in the notes accompanying the financial statements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES

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FINANCIAL STATEMENTS AND SUPPLEMENTARY

The financial statements required to be filed pursuant to this

Item 8 are appended to this Report beginning on page F-1 located immediately after the signature page.

The financial statements required to be filed pursuant to this Item 8

are appended to this Report beginning on page F-1 located immediately after the signature page and incorporated by reference in this Item

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity