What changed in this filing

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Item 9A. Controls and Procedures

2021-03-25 compared with 2020-03-09 · 1016 added, 1694 removed, 489 unchanged (85% of the section changed)

9 unchanged sentences

in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management conducted an evaluation

of the effectiveness of our internal control over financial reporting as of December 31, 2019 using criteria established

in Internal Control —

Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway

Our management has concluded that our internal control over financial reporting was not effective as of December 31,

2019 based on a finding of a material weakness related to a lack of segregation of duties, resulting from staffing in accordance

with cost containment measures.

If we are able to obtain additional funding in the future, we intend to hire sufficient full-time

staff to enable an appropriate level of segregation of duties and to provide appropriate controls surrounding the financial reporting

This Report does not include an attestation

report of our registered public accounting firm regarding internal control over financial reporting.

Management’s report

was not subject to attestation by our registered public accounting firm pursuant to applicable rules, which permit us to

provide only management’s report in this Report.

Disclosure Controls and Procedures

As of December 31, 2019, our management

carried out the evaluation of the effectiveness of our disclosure controls and procedures required by Rule 13a-15(e) under the

Exchange Act with the participation of our Chief Executive Officer and Chief Financial Officer.

Based upon that evaluation,

our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2019, our disclosure controls and

procedures were not effective since the Company did not have adequate segregation of duties within account processes due to limited

personnel 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.

Our management, including our principal

executive and principal financial officers, conducted an evaluation of the effectiveness of our internal control over financial

reporting as of December 31, 2020 using criteria established in Internal Control —

Integrated Framework (2013) issued

by the Committee of Sponsoring Organizations of the Treadway Commission.

Our management has concluded that our internal control

over financial reporting was not effective as of December 31, 2020 based on a finding of a material weakness related to a

lack of segregation of duties, resulting from staffing in accordance with cost containment measures.

Remediation Plan to Address the Material

Weakness in Internal Control over Financial Reporting.

A material weakness is a deficiency, or

a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a

material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

As a result of the material weaknesses

identified above, our internal control over financial reporting was not effective as of December 31, 2020.

The Company plans to initiate a program

to address the above weakness.

As of the December 31, 2020 we have outsourced our day-to-day bookkeeping function and are in the

process of hiring a corporate financial controller.

We have started to identify key internal controls over financial reporting

as required by Section 404 of the Sarbanes-Oxley Act and we are currently in the process of documenting our internal control policies

and procedures.

We plan to implement the written policies and procedures commencing in 2021.

The Company has an internal policy

that all major expenditures must be approved by a majority of the Board of Directors.

We have established controls related to corporate

The Board of Directors has adopted our audit committee charter, compensation committee charter and nominating and corporate

governance committee charter, which can be found on our website at www.verifyme.com under “Investors–Corporate Governance.”

Furthermore, the Board has adopted a Code of Business

Conduct and Ethics (the “Code of Ethics”) that applies to all of our employees, including our Chief Executive Officer and

Chief Financial Officer.

Although not required, the Code of Ethics also applies to our directors.

The Code of Ethics provides written

standards that we believe are reasonably designed to deter wrongdoing and promote honest and ethical conduct, including the ethical handling

of actual or apparent conflicts of interest between personal and professional relationships, full, fair, accurate, timely and understandable

disclosure and compliance with laws, rules and regulations and the prompt reporting of illegal or unethical behavior, and accountability

for adherence to the Code of Ethics.

The Code of Ethics is available on our website at www.verifyme.com under “Investors-Corporate

Governance.”

To address the material weaknesses identified,

management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present,

in all material respects, our financial position, results of operations and cash flows for the periods presented.

we believe that the financial statements included in this report fairly present, in all material respects, our financial condition,

results of operations and cash flows for the periods presented.

Auditor’s Report on Internal Control Over Financial

This Report does not include an attestation report of our independent

registered public accounting firm regarding internal control over financial reporting.

Management’s report was not subject

to attestation by our independent registered public accounting firm pursuant to the rules of the SEC that permit us to provide

only management’s report in this Report.

Changes in Internal Control Over Financial

There were no changes in our internal control

over financial reporting identified in connection with this evaluation that occurred during the period covered by this Report, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

over financial reporting identified in connection with this evaluation that occurred during the period covered by this Report,

that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

OTHER INFORMATION.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE

DIRECTORS AND EXECUTIVE OFFICERS

Norman Gardner

Christopher Gardner

Marshall Geller

Howard Goldberg

Scott Greenberg

Arthur Laffer

Patrick White

Director and Chief Executive Officer

Director Biographies

Norman Gardner –

Gardner, the Company’s founder, was appointed as Chairman of the Board on January 28, 2017.

Gardner was previously a

director and Vice-Chairman of the Company from the Company’s inception in November 1999 until January 1, 2013.

Gardner served as Chief Executive Officer of the Company from November 1999 until January 1, 2013, and from January 28, 2017 until

August 9, 2017.

Gardner has been a consultant to the Company since June 2017 and was previously a consultant to the Company

from January 2013 until January 2017.

The Board believes that Mr.

Gardner is qualified to serve on the Board because, as the Company’s

Chairman and founder, he brings to the Board extensive knowledge of the Company’s products, structure, history, major shareholders

Christopher Gardner –

Christopher Gardner has served as a director of the Company since May 8, 2019.

Gardner has been a Senior Advisor to Wisdom

Tree Investments, Inc.

(NASDAQ:WETF), an exchange-traded fund, since June 12, 2018.

From October 2010 until April 2016, he was

the Ambassador of Happyness for AARP, a nonprofit organization dedicated to empowering Americans age 50 and older.

is an international best-selling author and award-winning film producer.

Gardner established the institutional brokerage firm

of Gardner Rich and Company in 1989 that closed in December 2012.

The Board believes Mr.

Gardner is qualified to serve on the Board

because of his entrepreneurial experience and network of relationships, which the Board believes are valuable assets to the Company

and its growth.

Christopher Gardner is not related to Norman Gardner.

Scott Greenberg –

Greenberg was elected to the Board in November 2019.

Greenberg has served as Chief Executive Officer of GP Strategies Corporation

(“GP Strategies”) since April 2005.

He was President of GP Strategies from 2001 to 2006, Chief Financial Officer from

1989 until 2005, Executive Vice President from 1998 to 2001, Vice President from 1985 to 1998, and held various other positions

with GP Strategies since 1981.

Greenberg was also a director of Wright Investors’

Service Holdings, Inc., formerly National

Patent Development Corporation (OTCPINK:

WISH), from 2004 to 2015.

The Board believes Mr.

Greenberg is qualified to serve on the

Board because of his significant experience and expertise in management, acquisitions and strategic planning, as well as many years

of finance and related transactional experience.

Arthur Laffer –

Laffer has served as a director of the Company since March 2019.

Laffer is the founder and chairman of Laffer Associates,

an institutional economic research and consulting firm, as well as Laffer Investments, an institutional investment management

firm utilizing diverse investment strategies.

Laffer has served as a director of EVO Transportation & Energy Services,

EVOA) since August 2018, GEE Group, Inc.

(NYSE American:

JOB) since January 2015, and NexPoint Residential Trust

NXRT) since May 2015.

Laffer’s economic acumen and influence in triggering a world-wide tax-cutting movement

in the 1980s have earned him the distinction in many publications as “The Father of Supply-Side Economics.”

was a member of President Reagan’s Economic Policy Advisory Board for both of his two terms (1981-1989).

advised Prime Minister Margaret Thatcher on fiscal policy in the UK during the 1980s.

In the early 1970s, Dr.

the first to hold the title of Chief Economist at the Office of Management and Budget under Mr.

George Shultz.

Additionally,

Laffer served as Charles B.

Thornton Professor of Business Economics at the University of Southern California and as

Associate Professor of Business Economics at the University of Chicago.

In June 2019, Dr.

Laffer received the Presidential Medal

The Board believes Dr.

Laffer is qualified to serve on the Board because of his expertise in economics and his

experience as a director of multiple companies.

Marshall Geller –

Geller has served as a director of the Company since July 2017.

Geller has been a director and a member of the audit committee

of GP Strategies Corporation (NYSE:GPX) since 2002.

Geller was a director of Wright Investors’

Service Holdings Inc.,

formerly National Patent Development Corporation (OTCPINK:WISH) since January 2015.

Geller was a founder of St.

Cloud Capital,

a Los Angeles based private equity fund, and Senior Investment Advisor from December 2001 until September 2017.

more than 50 years in corporate finance and investment banking, including 21 years as a Senior Managing Partner of Bear, Stearns

& Co., with oversight of all operations in Los Angeles, San Francisco, Chicago, Hong Kong and the Far East.

is currently on the Board of Directors of UCLA Health System and is on the Board of Governors of Cedars Sinai Medical Center, Los

Geller also served on the Dean’s Advisory Council for the College of Business & Economics at California

State University, Los Angeles.

The Board believes Mr.

Geller is qualified to serve on the Board because of his experience

as a managing partner of a private equity fund, his many years of experience and expertise as an investor in and adviser to

companies in various sectors and his experience with serving on the board of directors of other companies.

Howard Goldberg –

Goldberg has served as a director of the Company since July 2017.

Goldberg served as a director of Winthrop Realty Trust from 2003 until August 2016, when it was converted to Winthrop Realty Liquidating

Since August 2016, Mr.

Goldberg has served as a trustee of the Winthrop Realty Liquidating Trust.

Goldberg was a director

of New York REIT, Inc.

from March 2017 until October 2018, when it converted to a limited liability company called New York REIT

Since October 2018, Mr.

Goldberg has been a manager of New York REIT LLC.

He has been retired since 1994 after a long career

He provided consulting services to the Company through December 31, 2017.

The Board believes Mr.

Goldberg is qualified

to serve on the Board because of his experience with being a director of other public companies and his legal expertise.

Patrick White –

White has served as a director of the Company since July 12, 2017.

He was a consultant to the Company from June 1, 2017 through

August 14, 2017, when he was appointed Chief Executive Officer and President.

White founded Document Security Systems, Inc.

(NYSE:DSS), a technology company, and served as its Chief Executive Officer and director from August 2002 until December 2012 and

as its business consultant from 2012 to March 2015.

He has been a director of Box Score Brands, Inc.

(formerly, U-Vend, Inc.) since

White was a Financial Adviser for the Monroe County Government from April 2016 until May 2017.

as an independent consultant from March 2015 until March 2016.

The Board believes Mr.

White is qualifies to serve on the Board

because of his experience previously serving as the chief executive officer of a public company.

Executive Officers

Patrick White

Chief Executive Officer and President

Sandy Fliderman

Chief Technology Officer

Margaret Gezerlis

Chief Financial Officer

Keith Goldstein

Chief Operating Officer

Patrick White –

Patrick White’s biography.

Sandy Fliderman –

has been the Company’s Chief Technology Officer since 2015.

Prior to his current role with the Company, Mr.

Fliderman was

the Chief Information Officer at VEEDIMS, LLC, an Internet of Things technology company specializing in data collection and distribution

in the aerospace and marine industries.

In addition IT/IS, R&D and Operations, Mr.

Fliderman lead the charge for VEEDIMS, LLC to attain the

AS9100 and ISO9001:2008 certifications needed to do business in the aerospace markets.

Fliderman was co-inventor on a number

of patents and created the technology behind VerifyMe.

Margaret Gezerlis –

Gezerlis has been the Company’s Chief Financial Officer since May 2018.

In November 2018, Ms.

Gezerlis became an

employee of the Company.

Gezerlis was previously an employee of the CFO Squad LLC from February 2018 until November

2018 where she worked as an independent contractor for the Company.

Previously, Ms.

Gezerlis was a Financial Reporting

Manager at Bankrate.com from March 2017 until February 2018.

Prior to her position at Bankrate.com, Ms.

Gezerlis was a

financial reporting manager at Westport Fuel Systems Inc.

WPRT) from March 2014 to November 2016.

Gezerlis holds

an international accounting qualification from the Association of Chartered Certified Accountants.

Keith Goldstein –

Goldstein has served as the Chief Operating Officer of the Company since September 2017.

Goldstein served as the Chief Executive

Officer of Infinacom LLC, a provider of biometric based security solutions, from April 2018 until March 2019.

He was previously

Chief Executive Officer of ABCorp., North America, a supplier of secure payment, retail and identification cards, vital record

and transaction documents, systems and services to governments and financial institutions, from 2011 until April 2017, and has

provided professional sales and advisory services to ABCorp.

since April 2017.

Family Relationships

There are no family relationships among

the Company’s directors and/or executive officers.

Board Responsibilities

The Board oversees, counsels, and directs

management in regard to the long-term interests of the Company and its shareholders.

The Board’s responsibilities include

establishing broad corporate policies and reviewing the overall performance of the Company.

The Board is not involved in the operating

details on a day-to-day basis.

Board Committees

The Board and its committees meet throughout

the year and act by written consent from time to time as appropriate.

The Board delegates various responsibilities and authority

to its Board committees.

On September 5, 2017, the Board established three committees:

the Audit Committee, the Compensation

Committee, and the Governance and Nominating Committee.

In June 2018 the Company established the Finance and Uplisting Committee.

The following table identifies the

current committee members:

and Uplisting

Christopher Gardner

Marshall Geller

Howard Goldberg

Scott Greenberg

Arthur Laffer

Director Independence

With the exception

Patrick White and Mr.

Norman Gardner, our Board determined that all of our present directors are independent in accordance

with standards under the Nasdaq Listing Rules.

Our Board determined that as a result of being a consultant to the Company, Mr.

Gardner is not an independent director and, as a result of being an employee of the Company, Mr.

White is not an independent director

under the Nasdaq Listing Rules.

Our Board has

determined that Marshall Geller, Howard Goldberg and Scott Greenberg are independent under the Nasdaq Listing Rules’

standards for Audit Committee members.

Our Board has also determined that Christopher Gardner, Marshall Geller, Howard Goldberg

and Scott Greenberg are independent under the Nasdaq Listing Rules independence standards for Compensation Committee members.

Board has also determined that Christopher Gardner, Marshall Geller and Howard Goldberg are independent under the Nasdaq Listing

Rules independence standards for Governance and Nominating committee members.

Our Board has also determined that Marshall Geller,

Howard Goldberg and Arthur Laffer are independent under the Nasdaq Listing Rules independence standards for Finance and Uplisting

committee members.

Audit Committee

The responsibilities of the Audit Committee

include monitoring the integrity of the financial statements of the Company, monitoring the independent registered public accounting

firm’s (the “Auditors”) qualifications and independence, monitoring the performance of the Company’s internal

audit function and the Auditors, and evaluating the Company’s compliance with legal and regulatory requirements.

meets with our Auditors to review the results of their audit and review of our annual and interim consolidated financial statements.

The Audit Committee operates under a written charter which is available on the Company’s website:

https://www.verifyme.com/investor#sec.

The Audit Committee held six meetings in 2019.

Audit Committee Financial Expert

Our Board has determined that Mr.

Greenberg is qualified as an Audit Committee Financial Expert, as that term is defined by the rules of the SEC, in compliance with

the Sarbanes-Oxley Act of 2002.

Compensation Committee

The responsibilities of the Compensation

Committee include reviewing the compensation of our executive officers and making recommendations to the Company regarding compensation.

The Compensation Committee has the power to set performance targets for determining periodic bonuses payable to executive officers

and may review and make recommendations with respect to shareholder proposals related to compensation matters.

Additionally, the

Compensation Committee is responsible for administering the VerifyMe, Inc.

2017 Equity Incentive Plan (the “2017 Plan”).

The Compensation Committee operates under a written charter which is available on the Company’s website:

https://www.verifyme.com/investor#sec.

The Compensation Committee held two meetings in 2019 and acted by written consent on three occasions.

Nominating and Corporate Governance

The responsibilities of the Nominating

and Corporate Governance Committee include identifying, recommending and recruiting individuals qualified to become Board members,

establishing a policy for shareholder nominations, recommending removal of directors, evaluating the Board and management, establishing

corporate governance guidelines, and evaluating its own performance and charter.

The Nominating and Corporate Governance Committee

operates under a written charter which is available on the Company’s website:

https://www.verifyme.com/investor#sec.

Nominating and Corporate Governance Committee held one meeting in 2019.

Number of Meetings of the Board in 2019

In 2019, the Board had nine meetings and

took action by written consent on 21 occasions.

There were no directors (who were incumbent at the time) who attended fewer than

75 percent of the aggregate total number of Board meetings and meetings of the Board committees of which the director was a member

The Company does not have a policy regarding director attendance of annual shareholders’

Patrick White

and Norman Gardner attended the 2019 annual shareholders’

Board Diversity

While we do not have a formal policy on

diversity, the Board considers diversity to include the skill set, background, reputation, type and length of business experience

of the Board members as well as a particular director’s contributions to that mix.

The Board believes that diversity brings

a variety of ideas, judgments and considerations that benefit the Company and its shareholders.

Although there are many other factors

the Board considers, the Board seeks individuals with experience on operating and growing businesses.

Board Leadership Structure

Norman Gardner serves as the Chairman

of the Board and actively interfaces with management, the Board and counsel regularly.

The Board has determined that separating

the roles of Chairman and Chief Executive Officer is in the best interests of the Company and its shareholders at this time, as

it allows the Chief Executive Officer to focus on generating sales, overseeing sales and marketing, and managing the Company while

leveraging the experience and perspectives of the Chairman, who is our founder, and offers an additional channel of communication

for other directors, investors and employees.

Board Risk Oversight

The Company’s risk management function

is overseen by the Board.

The Company’s management keeps the Board apprised of material risks and provides its directors

access to all information necessary for them to understand and evaluate how these risks interrelate, how they affect us, and how

management addresses those risks.

Norman Gardner, Chairman of the Board, works closely together with the other members of the

Board when material risks are identified on how to best address such risks.

If the identified risk poses an actual or potential

conflict with management, the Company’s independent directors may conduct the assessment.

Presently, the primary risks affecting

us are our liquidity and the lack of material revenue.

Code of Ethics

The Board has

adopted a Code of Business Conduct and Ethics (the “Code of Ethics”) that applies to all of the Company’s employees,

including the Company’s Chief Executive Officer and Chief Financial Officer.

Although not required, the Code of Ethics also

applies to the Company’s directors.

The Code of Ethics provides written standards that we believe are reasonably designed

to deter wrongdoing and promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of

interest between personal and professional relationships, full, fair, accurate, timely and understandable disclosure and compliance

with laws, rules and regulations and the prompt reporting of illegal or unethical behavior, and accountability for adherence to

the Code of Ethics.

The Code of Ethics is available on the Company’s website

at https://www.verifyme.com/code-of-conduct.

Communication with the Company’s Board

Although the Company does not have a formal

policy regarding communications with the Board, shareholders may communicate with the Board by writing to us at VerifyMe, Inc.,

Clinton Square, 75 S.

Clinton Ave, Suite 510 Rochester, NY 14604 Attention:

Corporate Secretary.

Shareholders who would like their

submission directed to a member of the Board may so specify, and the communication will be forwarded, as appropriate.

EXECUTIVE COMPENSATION.

The following information is related to

the compensation paid, distributed or accrued by us for the fiscal years ended December 31, 2019 and 2018 for our Chief Executive

Officer (principal executive officer) serving during the last fiscal year and the two other most highly compensated executive officers

serving at the end of the last fiscal year whose compensation exceeded $100,000 (the “Named Executive Officers”).

Compensation Table

Patrick White

Keith Goldstein (5)

Margaret Gezerlis (6)

(1) Represents the grant date fair value

of the option award, calculated in accordance with FASB Accounting Standard Codification 718, “Compensation –

Compensation,”

The assumptions used in calculating the grant date fair value of the option awards are set forth

in Note 1 to our audited financial statements included herein.

(2) The amounts shown in this column reflect

amounts paid by us to or on behalf of each named executive officer for medical insurance reimbursement.

(3) Pursuant to Mr.

White’s Employment

Agreement, $50,000 of his annual salary was deferred for each year of the two-year term beginning August 15, 2017, for a total

deferred salary of $100,000.

This amount was subsequently deferred for another year and will become due on August 15, 2020.

“Employment and Consulting Agreements with Named Executive Officers”

(4) Represents the aggregate grant date

fair value of the restricted stock awards granted to Mr.

White for his service as a director, calculated in accordance with ASC

The assumptions used in calculating the grant date fair value of the restricted stock awards are set forth in Note 1 to our

audited financial statements included herein.

(5) The amounts represent consulting fees

paid to POC Advisory Group, LLC (“POC”), of which Mr.

Goldstein is the managing member.

Gezerlis was appointed Chief Financial

Officer on May 17, 2018.

On November 15, 2018, Ms.

Gezerlis became a part-time employee of the Company.

For 2018, the amounts

Gezerlis also include consulting fees.

Employment and Consulting Agreements

with Named Executive Officers

The Company entered into an Employment

Agreement, dated as of August 15, 2017, with Patrick White, the Chief Executive Officer of the Company, with an annual salary of

White agreed to defer $50,000 each year until August 15, 2019 in order to improve the Company’s liquidity.

On August 13, 2019, Mr.

White entered into an amendment to his Employment Agreement, extending it for one year at the same base

annual salary of $200,000 and deferring the $100,000 he was owed and $50,000 of his current salary until August 15, 2020.

In connection

with the amendment, the Board granted Mr.

White immediately vesting incentive stock options under the 2017 Plan for 500,000 shares

of common stock that expires five-years from the date of grant with an exercise price of $0.14 per share.

In the event of Mr.

White’s

termination without cause, Mr.

White is entitled to receive any unpaid salary and expenses, a payment equal to 12 months of his

salary, and a continuation of benefits for six months.

In connection with his 2017 Employment Agreement and a Consulting Agreement

as of June 2, 2017, he received option grants for 5,000,000 shares of common stock that expire five years from the date of grant

with an exercise price of $0.07 per share, and on April 17, 2018, he received options for 2,000,000 shares of common stock which

expire five years from the date of grant and have an exercise price of $0.07 per share.

White’s stock options are

In the event Mr.

White is terminated or his title as Chief Executive Officer changes within 12 months following a change

in control, Mr.

White will be entitled to receive any unpaid salary and expenses, a payment equal to 18 months of his salary at

the rate in effect on the date of such termination, and a continuation of benefits for a period of 18 months.

On September 1, 2017, the Company entered

into a six-month Consulting Agreement with POC pursuant to which Mr.

Keith Goldstein served as our Chief Operating Officer and

received a monthly fee of $10,000 per month plus 4% of any sales made by Mr.

Goldstein on behalf of the Company.

and equity grants to Mr.

Goldstein as described herein, are made to POC on Mr.

Goldstein’s behalf.

Goldstein was granted

five-year non-plan stock options to purchase 2,000,000 shares of our common stock exercisable at $0.04 per share which options

are vested and expire five-years from the date of grant.

On March 1, 2018, the Company amended the Consulting Agreement

Goldstein, extending it for a one-year term which expired on February 28, 2019.

Under the first amendment to the Consulting

Agreement Mr.

Goldstein received a monthly fee of $12,500 per month.

The amendment also terminated Mr.

Goldstein’s right

to the 4% sales commission.

On March 1, 2018, Mr.

Goldstein received a grant of five-year options to purchase 1,000,000 shares

of our common stock with an exercise price of $0.21 per share that expire on March 1, 2023 and vested on February 28, 2019.

In February 2019, the Company agreed to

Goldstein’s Consulting Agreement on a month-to-month basis on the terms of the amendment, pending Board approval

of a new agreement.

On April 9, 2019, the Company entered into a Second Amendment to the Consulting Agreement pursuant to which

Goldstein is paid a fee of $14,500 per month or $174,000 per year over a two-year term.

Goldstein received a new grant

of stock options under the 2017 Plan to purchase 1,000,000 shares of common stock that vest annually in equal increments over a

two-year term subject to Mr.

Goldstein performing services for the Company as of each applicable vesting date.

Any unvested options

will vest immediately upon a change of control.

The Consulting Agreement, as amended, may be terminated at any time by the Company

If terminated without cause, Mr.

Goldstein is entitled to any unpaid fees and any unpaid and accrued expenses.

On May 17, 2018, the Company appointed

Margaret Gezerlis as the Company’s Chief Financial Officer (the “CFO”) and entered into a CFO Consulting

Agreement with Ms.

Gezerlis under which the Company agreed to pay Ms.

Gezerlis a $1,000 signing bonus and a monthly consulting

fee of $1,500 per month.

Prior to her appointment, Ms.

Gezerlis had been an employee of the CFO Squad LLC since February 2018

and had provided services to the Company through her employment at CFO Squad LLC.

On November 15, 2018, the Company entered

into an Employment Agreement with Ms.

The Employment Agreement was for an initial term of one year, which automatically

renews for additional one year terms until either party gives 30 day notice of non-renewal or otherwise terminates the agreement

according to its terms.

Under her Employment Agreement.

Gezerlis is entitled to an annual base salary of $84,000 per year as

well as a monthly stipend of $1,000 in lieu of benefits.

Additionally, pursuant to the Employment Agreement on March 11, 2019,

Gezerlis was granted options to purchase 100,000 shares of common stock at an exercise price of $0.321 per share.

vest quarterly in equal installments over one year, subject to continued employment.

The Employment Agreement can be terminated

by the Company for cause or by Ms.

Gezerlis for good reason.

Additionally, by its terms the Employment Agreement terminates automatically

upon a change of control.

If terminated by the Company without cause or by Ms.

Gezerlis with good reason Ms.

Gezerlis is entitled

to any accrued and unpaid salary and expenses, a payment equal to 12 months of her then base salary, and six months of benefits.

If the Employment Agreement terminates due to a change of control of the Company, Ms.

Gezerlis will be entitled to a payment equal

to 18 months of her then base salary and 18 months of benefits.

If terminated upon the Company giving notice of non-renewal and

she remains employed until the end of the respective term, Ms.

Gezerlis is entitled to any accrued and unpaid salary and expenses

and six months of benefits.

On January 7, 2020, Ms.

Gezerlis received a grant of stock options

for 200,000 shares of common stock that expire in five-years which are exercisable at $0.0701 per share and vest quarterly over

2020 subject to continued service as an officer on each applicable vesting date.

Other Consulting Agreement

On June 29, 2017, the Company entered into a Consulting Agreement

with Norman Gardner.

Under the terms of the Consulting Agreement, Mr.

Gardner receives a consulting fee of $12,500 per month or

$150,000 per year over a three-year term.

The Consulting Agreement provides that the Company will reimburse Mr.

Gardner for up

to $1,000 a month for health insurance and other medical expenses.

Gardner received a grant of stock options for 10,000,000

shares of common stock that expire five-years from the date of grant which are exercisable at $0.07 per share and immediately vested.

In the event of termination without cause, Mr.

Gardner is entitled to receive any unpaid salary and expenses, a payment equal to

12 months of his consulting fee, and a continuation of benefits for a period of six-months.

The Consulting Agreement further provides

for 12 months of severance and health insurance reimbursement if it is terminated without cause and 18 months of severance and

health insurance reimbursement upon a change of control if Mr.

Gardner terminates the Agreement within one year of the change of

Outstanding Equity Awards at Fiscal Year End

Listed below is information with respect

to unexercised options that have not vested, and equity incentive plan awards for each named executive officer outstanding as of

December 31, 2019:

Option Awards

Unexercisable

Equity Incentive

Unearned Options

Exercise Price

Expiration Date

Patrick White

Keith Goldstein

1,000,000 (2)

Margaret Gezerlis

(1) These options are held by POC,

Goldstein is the managing member.

(2) Vest in equal annual installments

beginning on April 8, 2020.

Compensation of Directors

For 2019, non-employee members of our Board of Directors were

compensated as follows:

Director Compensation for the Fiscal

Year ended December 31, 2019

Fees Earned or

Norman Gardner

Howard Goldberg

Marshall Geller

Arthur Laffer

Christopher Gardner

Scott Greenberg

Eugene Robin (4)

(1) Amounts reported represent the aggregate

grant date fair value of awards granted without regards to forfeitures granted to the independent members of our Board of Directors

during 2019, computed in accordance with ASC 718.

This amount does not reflect the actual economic value realized by the director.

The assumptions used in calculating the grant date fair value of the option awards are set forth in Note 1 to our audited financial

statements included herein.

(2) Represents grants of restricted common

stock in 2019 vesting quarterly over a one-year period, and restricted stock granted in 2018 that vested in 2019.

Gardner receives a monthly consulting

fee of $12,500 and is reimbursed up to $1,000 a month for health insurance and other medical expenses.

See “Other Consulting

Agreement”

Robin is a former director.

The table below sets forth the unexercised options held by

each of our non-employee directors outstanding as of December 31, 2019.

Aggregate Number

of Unexercised

Option Awards

Outstanding at

December 31, 2019

Norman Gardner

Christopher Gardner

Marshall Geller

Howard Goldberg

Scott Greenberg

Arthur Laffer

Equity compensation plan information as of December 31,

EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

information required by this Item 10 is incorporated herein by reference from our proxy statement for our 2021 annual meeting of

stockholders under the headings “Questions and Answers About these Proxy Materials and Voting,”

“Proposal One:

Election of Directors,”

“Corporate Governance,”

“Management and Executive Officers”

and, if necessary,

“Delinquent Section 16(a) Reports,”

which proxy statement will be filed within 120 days after the December 31, 2020

fiscal year end.

information required by this Item 11 is incorporated herein by reference from our proxy statement for our 2021 annual meeting for

stockholders under the headings “Executive Compensation”

and “Director Compensation,”

which proxy statement

will be filed within 120 days after the December 31, 2020 fiscal year end.

SECURITY OWNERSHIP

OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Except for the information regarding securities

authorized for issuance under equity compensation plans (which is set forth below), the information required by this Item 12 is

incorporated herein by reference from our proxy statement for our 2021 annual meeting for stockholders under the heading “Security

Ownership of Management and Certain Beneficial Owners,”

which proxy statement will be filed within 120 days after the December

31, 2020 fiscal year end.

The following table summarizes the number

of shares subject to currently outstanding equity awards, their weighted-average exercise price, and the number of shares available

for future grants under our equity compensation plans as of December 31, 2020.

Equity Compensation Plan Information

as of December 31, 2020

Plan Category

Number of securities to be

issued upon exercise of

Number of securities

to be issued upon

outstanding options,

warrants and rights

Weighted-average exercise

price of outstanding options,

warrants and rights

warrants and other rights

Weighted average

exercise price of

outstanding options,

warrants and other rights

Number of securities

remaining available for

future issuance under equity

compensation plans

(excluding securities

reflected in column (a))

Equity compensation plans

approved by security holders

Equity compensation plans

not approved by security

(1) As of December 31, 2019, under the

VerifyMe, Inc.

2013 Equity Incentive Plan (the “2013 Plan”) and the 2017 Plan grants of restricted stock and options

to purchase 2,837,500 shares of common stock have been issued and are unvested or unexercised, and 17,262,500 shares of common

stock remain available for grants under the 2013 Plan and the 2017 Plan.

(2) Consists of individual grants to employees

and consultants for services rendered to the Company which were not made under the 2013 Plan or the 2017 Plan.

* As of December 31, 2019,

under the 2013 Plan and the 2017 Plan.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL

OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Voting securities and principal holders thereof

The following table sets forth the number of shares of the

Company’s common stock beneficially owned as of February 20, 2020, by (i) those persons known by the Company to be owners

of more than 5% of its common stock, (ii) each director, (iii) the Named Executive Officers (as disclosed in the Summary Compensation

Table), and (iv) the Company’s executive officers and directors as a group.

Unless otherwise specified in the notes to this

table, the address for each person is:

VerifyMe, Inc., Clinton Square, 75 S.

Clinton Ave, Suite 510 Rochester, NY 14604 Attention:

Corporate Secretary.

Title of Class

Named Executive Officers:

Patrick White (2)

Keith Goldstein (3)

Margaret Gezerlis (4)

Non-Officer Directors:

Christopher Gardner (5)

Norman Gardner (6)

Marshall Geller (7)

Howard Goldberg (8)

Scott Greenberg (9)

Arthur Laffer (10)

All directors and executive officers as a group (10 persons)

5% Shareholders:

Carl Berg (11)

* indicates less than 1%

(1) Based on 110,638,102 shares of common stock issued and outstanding

as of February 20, 2020 adjusted for stock options vested or vesting within 60 days and conversion of outstanding warrants into

shares of common stock.

Beneficial ownership is determined under the rules of the SEC and generally includes voting or investment

power with respect to securities.

A person is deemed to be a beneficial owner of securities that can be acquired by such person

within 60 days whether upon the exercise of options, warrants or conversion of notes.

Unless otherwise indicated in the footnotes

to this table, the Company believes that each of the shareholders named in the table has sole voting and investment power with

respect to the shares of common stock indicated as beneficially owned by them.

This table does not include any unvested stock options

except for those vesting within 60 days.

As for the 5% shareholders, the Company is relying upon Reports filed by each 5% shareholder

with the SEC.

(2) Patrick White - Consists of 150,000 shares of common stock and 7,500,000 shares of common

stock underlying vested stock options held by Mr.

White directly.

(3) Keith Goldstein - Consists of 500,000 shares of common stock underlying stock options exercisable

at $0.195 per share held directly by Mr.

Goldstein as well as 2,000,000 shares of common stock underlying stock options exercisable

at $0.04 per share and 1,000,000 shares of common stock underlying vested stock options exercisable at $0.2102 per share held by

POC Advisory Group LLC, an entity that Mr.

Goldstein controls.

(4) Margaret Gezerlis - Consists of 100,000 shares of common stock underlying stock options

exercisable at $0.321 per share and 50,000 shares of common stock underlying vested stock options exercisable at $0.0701 per share.

(5) Christopher Gardner –

Consists of 240,000 shares of restricted common stock and 625,000

shares of common stock underlying vested stock options exercisable at $0.0701 per share.

(6) Norman Gardner - Consists of 4,049,469 shares of common stock, 165,000 shares of common

stock underlying stock options exercisable at $0.11 per share, 250,000 shares of common stock underlying stock options exercisable

at $0.25 per share, and 4,500,000 stock options exercisable at $0.07 per share held directly by Mr.

Does not include Mr.

Gardner’s minority ownership of an entity that holds 44,820 shares of common stock.

(7) Marshall Geller - Consists of 445,000 shares of common stock and 625,000 shares of common

stock underlying vested stock options exercisable at $0.0701 per share held individually;

2,475,000 shares of common stock underlying

warrants exercisable at $0.15 per share and 4,975,000 shares of common stock held by the Marshall & Patricia Geller Living

Trust which are beneficially owned by Mr.

(8) Howard Goldberg - Consists of 1,884,500 shares of common stock underlying warrants exercisable

at $0.15, 625,000 shares of common stock underlying vested stock options exercisable at $0.0701 per share, and 2,422,255 shares

of common stock held by Mr.

(9) Arthur Laffer –

Consists of 656,050 shares of common stock and 625,000 shares of common

stock underlying vested stock options exercisable at $0.0701 per share.

(10) Scott Greenberg –

Consists of 397,500 shares of restricted common stock and 125,000

shares of common stock underlying vested stock options exercisable at $0.0701 per share.

(11) Carl Berg - Consists of 495,000 shares of common stock held directly by Mr.

Berg and 11,440,000

shares of common stock held by Berg & Berg Enterprises, LLC (“BB”), which are beneficially owned by Mr.

managing member and primary owner of BB.

The address for Mr.

Berg and BB is 10050 Bandley Dr., Cupertino CA, 95014.

future issuance under

equity compensation

plans (excluding

securities reflected in

Equity compensation

plans approved by

security holders

1,071,961 (3)

Equity compensation

plans not approved

by security holders

(1) Represents shares of common stock issuable upon exercise of stock options granted under the 2017

Equity Incentive Plan (the “2017 Plan”) and the 2013 Omnibus Equity Compensation Plan, as amended (the “2013

(2) Represents the weighted-average exercise price of outstanding stock options.

The weighted-average

exercise price does not take into account the shares issuable upon vesting of outstanding restricted stock units under the 2020

Equity Incentive Plan (the “2020 Plan”) or 2013 Plan, which do not have an exercise price.

(3) Includes 1,054,211 shares remaining available for issuance under the 2020 Plan and 17,750 shares

remaining for issuance under the 2013 Plan.

(4) Includes individual grants to employees and consultants for services rendered to the Company which

were not made under the Company’s existing equity incentive plans.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,

AND DIRECTOR INDEPENDENCE

Transactions with Related Persons

The following is a summary of transactions,

since January 1, 2018, to which we have been a party in which the amount involved exceeded the lesser of $120,000 or 1% of the

average of our total assets at December 31, 2018 and December 31, 2019, and in which any of our directors, executive officers,

beneficial holders of more than 5% of our capital stock or certain other related persons had or will have a direct or indirect

material interest, other than compensation arrangements that are described in sections of this Report entitled “Employment

and Consulting Agreements with Named Executive Officers.”

In February and March 2020

the Company sold $330,000 of the 2020 Debentures and warrants to the following officers and directors of the Company:

Officer/Director

Investment Amount

Christopher Gardner, Director

Marshall Geller, Director

Scott Greenberg, Director

Arthur Laffer, Director

Sandy Fliderman, Chief Technology Officer

(1) This investment

was made by an entity in which Mr.

Fliderman is a 51% owner and co-manager.

On January 7,

2020, the Company granted of stock options, vesting quarterly over 2020, to the following officer and directors for services to

be rendered in 2020:

Officer/Director

Exercise Price

Margaret Gezerlis, Chief Financial Officer

Christopher Gardner, Director

Arthur Laffer, Director

Marshall Geller, Director

Howard Goldberg, Director

Scott Greenberg, Director

On January 7,

2020, the Company granted of fully vested stock options to the following directors wherein the directors for services rendered

Exercise Price

Christopher Gardner, Director

Arthur Laffer, Director

Marshall Geller, Director

Howard Goldberg, Director

During the year ended December 31, 2019, the Company granted

restricted stock awards to six directors of the Company for their services.

The restricted stock awards vest in equal quarterly

installments in 2020 subject to the directors continuing to provide services for the Company on each applicable vesting date:

Christopher Gardner, Director

Scott Greenberg, Director

Howard Goldberg

Eugene Robin 1

Marshall Geller

Arthur Laffer

Robin resigned in September

2019 and forfeited 120,000 shares which had not vested.

On June 27, 2018, the Company granted shares

of restricted common stock to the then directors of the Company for their services:

Restricted Stock 1

Patrick White

Norman Gardner

Marshall Geller

Howard Goldberg

Laurence Blickman, Former Director

Harvey Eisen, Former Director

Carl Berg, Former Director

shares are now vested.

In January 2018, we issued 1,749,683 shares

and 1,749,683 warrants to purchase common stock at an exercise price of $0.15 per share to entities controlled by Paul Klapper,

a former member of our Board, relating to a note payable conversion that took place in June 2017 prior to the time he became a

On February 19, 2018, we authorized a warrant

reduction program (the “Program”) permitting warrant holders of our outstanding $0.15 warrants to exercise their warrants

for $0.10 per share (the “Reduced Price”) under the terms of the Program.

We received total gross proceeds of

approximately $2,079,345 from the exercise of warrants under the Program at the Reduced Price.

Included in the above

amounts are gross proceeds of $1,205,458, including $572,000 from Carl Berg, $110,000 from Marshall Geller, $71,500 from Harvey

Eisen, and $451,958 from Laurence Blickman, each a director at the time of the exercise.

On March 31, 2018, we entered into the

Settlement Agreement with Paul Klapper, who was at the time a member of our Board, and certain other parties named in the Settlement

Pursuant to the terms of the Settlement Agreement, we (i) paid a total of $500,000 (the “Settlement Amount”)

to a fund controlled by Paul Klapper and an additional party and (ii) issued a total of 1,000,000 shares of our common stock to the

fund and a third party (the “Settlement Shares”).

The Settlement Agreement provides for the cancellation of certain

revenue sharing agreements, as of March 31, 2018, between us and Mr.

Klapper (or an affiliate) and the third party, and termination

of our obligation to issue Mr.

Klapper or his affiliates warrants to purchase 3,700,000 shares of our common stock at an exercise

price of $0.40 per share.

As a condition of entering into the Settlement Agreement, we accelerated the vesting of 150,000

shares of restricted common stock held by Mr.

Klapper which were part of a 300,000 share grant in August 2017.

joined the Board on July 14, 2017 and resigned as of March 31, 2018.

On July 31, 2018, a former director, Laurence

Blickman, exercised 1,439,524 warrants held by an entity under his control at an exercise price of $0.15 per share for a total

price of $215,929.

PRINCIPAL ACCOUNTING FEES AND SERVICES.

All of the services

provided and fees charged by MaloneBailey, LLP , our principal accountant, were

approved by our Audit Committee.

The following table shows the fees paid to MaloneBailey,

LLP for the fiscal years ended December 31, 2019 and 2018.

Audit Fees –(1)

All Other Fees (3)

———————

(1) Audit fees –relate to services rendered for the audits of our annual financial statements, for the review of our quarterly

financial statements, and for services that are normally provided by the auditor in connection with statutory and regulatory filings

or engagements.

(2) Tax fees relate to services performed in connection with the Company’s annual tax return.

(3) All other fees relate to services rendered in connection with our registration statement filings with the SEC.

We did not incur any audit related

fees in fiscal 2019 or 2018.

Audit Committee’s Pre-Approval

The Audit Committee pre-approves all audit and permissible non-audit

services on a case-by-case basis.

In its review of non-audit services, the Audit Committee considers whether the engagement could

compromise the independence of our independent registered public accounting firm, and whether the reasons of efficiency or convenience

is in our best interest to engage our independent registered public accounting firm to perform the services.

All of the services

provided and fees charged by MaloneBailey, LLP were approved by our Audit Committee.

The information required by this Item 13

is incorporated herein by reference from our proxy statement for our 2021 annual meeting for stockholders under the heading “Certain

Relationships and Related Person Transactions,”

which proxy statement will be filed within 120 days after the December 31,

2020 fiscal year end.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item 14

is incorporated herein by reference from our proxy statement for our 2021 annual meeting for stockholders under the numbered proposal

with the heading “Ratification of the Appointment of our Independent Registered Public Accounting Firm,”

statement will be filed within 120 days after the December 31, 2020 fiscal year end.

FINANCIAL STATEMENT SCHEDULES.

Incorporated by Reference

Exhibit Description

Articles of Incorporation, as amended

August 19, 2015

Amended and Restated Bylaws of VerifyMe, Inc.

August 15, 2017

Second Amended Certificate of Designation for Series A Preferred Stock

June 18, 2015

Certificate of Designation for Series B Preferred Stock

June 18, 2015

Certificate of Withdrawal of Certificate of Designation for Series C and D Convertible Preferred Stock

Debenture dated September 18, 2019 with Peak One Opportunity Fund, LP

September 23, 2019

Debenture dated September 18, 2019 with TFK Investments, LLC

September 23, 2019

Form of Senior Secured Convertible Debenture

March 3, 2020

Form of Warrant for the Purchase of Shares of Common Stock of VerifyMe, Inc.

March 3, 2020

Description of Capital Stock

Securities Purchase Agreement, dated September 18, 2019 with Peak One Opportunity Fund, LP

September 23, 2019

Securities Purchase Agreement, dated September 18, 2019 with TFK Investments, LLC

September 23, 2019

Security Agreement, dated September 18, 2019 with Peak One Opportunity Fund, LP

September 23, 2019

Security Agreement, dated September 18, 2019 with TFK Investments, LLC

September 23, 2019

Security Agreement dated February 26, 2020

March 3, 2020

Confidential Settlement Agreement, dated March 31, 2018, among VerifyMe, Inc., Paul F.

Klapper, Stephen J.

Silver, PFK Development Group, Ltd.

and the other parties named therein +

April 16, 2018

Stock Purchase Agreement, dated March 31, 2018, among VerifyMe, Inc.

and the parties named therein +

April 16, 2018

2017 Equity Incentive Plan

November 20, 2017

Amendment to 2017 Equity Incentive Plan

April 29, 2019

Form of Employment Agreement for Patrick White dated 8/9/17 *

April 16, 2018

Amendment to Employment Agreement with Patrick White dated August 13, 2019*

October 10, 2019

Form of Compensation Agreement with Howard Goldberg dated 10/6/17*

April 16, 2018

Form of Consulting Agreement, as amended with Keith Goldstein dated 09/1/17 *

April 16, 2018

Second Amendment to Consulting Agreement with Keith Goldstein dated April 9, 2019 *

August 14, 2019

Form of Consulting Agreement with Norman Gardner dated 6/29/17 *

April 16, 2018

Form of Consulting Agreement for Jay Cardwell*

April 17, 2018

Registration Rights Agreement, dated March 31, 2018, among VerifyMe, Inc.

and the parties named therein

April 16, 2018

Restricted Stock Agreement

August 10, 2018

Employment Agreement for Margaret Gezerlis*

October 10, 2019

Certification of Principal Executive Officer (302)

Certification of Principal Financial Officer (302)

Certification of Principal Executive and Principal Financial Officer (906)

Certificate of Amendment to Amended and Restated Articles of Incorporation (incorporated herein by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on June 22, 2020)

Second Amended Certificate of Designation for Series A Convertible Preferred Stock (incorporated herein by reference from Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on June 18, 2015)

Certificate of Designation for Series B Convertible Preferred Stock (incorporated herein by reference from Exhibit 3.3 to the Company’s Current Report on Form 8-K filed on June 18, 2015)

Certificate of Withdrawal of Certificate of Designation for Series C and Series D Convertible Preferred Stock (incorporated herein by reference from Exhibit 4.5 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018)

Amended and Restated Bylaws of VerifyMe, Inc., as amended through July 24, 2020 (incorporated herein by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on July 29, 2020)

Form of Warrant for the Purchase of Common Stock (incorporated herein by reference from Exhibit 10.29 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017)

Form of Warrant for the Purchase of Shares of Common Stock (incorporated herein by reference from Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on March 3, 2020)

Form of Common Stock Purchase Warrant (incorporated herein by reference from Exhibit 4.3 to the Company’s Registration Statement on Form S-1/A (File No.

333-234155) filed on May 22, 2020)

Form of Warrant for the Purchase of Shares of Common Stock (incorporated herein by reference from Exhibit 4.6 to the Company’s Registration Statement on Form S-1/A (File No.

333-234155) filed on June 2, 2020)

Warrant Agent Agreement dated June 22, 2020 between the Company and West Coast Stock Transfer, Inc.

(incorporated herein by reference from Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on June 22, 2020)

Form of Representative’s Warrant (incorporated herein by reference from Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on June 22, 2020)

Description of Securities

Form of Indemnification Agreement (incorporated herein by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 18, 2021)

Form of Employment Agreement for Patrick White dated August 15, 2017 (incorporated herein by reference from Exhibit 10.17 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017)

Amendment to Employment Agreement for Patrick White dated August 13, 2019 (incorporated herein by reference from Exhibit 10.2 to the Company’s Registration Statement on Form S-1 (File No.

333-234155) filed on October 10, 2019)

Second Amendment to Employment Agreement for Patrick White dated May 19, 2020 (incorporated herein by reference from Exhibit 10.3 to the Company’s Registration Statement on Form S-1/A (File No.

333-237950) filed on May 21, 2020)

Third Amendment to Employment Agreement for Patrick White dated October 12, 2020 (incorporated herein by reference from Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020)

Employment Agreement for Margaret Gezerlis dated November 15, 2018 (incorporated herein by reference from Exhibit 10.3 to the Company’s Registration Statement on Form S-1 (File No.

333-234155) filed on October 10, 2019)

Form of Consulting Agreement with Norman Gardner dated June 29, 2017 (incorporated herein by reference from Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017)

Amendment to Consulting Agreement with Norman Gardner dated May 19, 2020 (incorporated herein by reference from Exhibit 10.6 to the Company’s Registration Statement on Form S-1/A (File No.

333-237950) filed on May 21, 2020)

Second Amendment to Consulting Agreement for Norman Gardner dated October 12, 2020 (incorporated herein by reference from Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020)

Consulting Agreement dated September 1, 2017 and First Amendment to Consulting Agreement dated March 1, 2018 for Keith Goldstein (incorporated herein by reference from Exhibit 10.19 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017)

Second Amendment to the Consulting Agreement dated April 9, 2019 for Keith Goldstein (incorporated herein by reference from Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019)

LaserLock Technologies, Inc.

2013 Omnibus Equity Compensation Plan (incorporated herein by reference from the Company’s Definitive Proxy Statement filed on November 19, 2013)

2017 Equity Incentive Plan (incorporated herein by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 20, 2017)

Amendment to the 2017 Equity Incentive Plan (incorporated herein by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 29, 2019)

2020 Equity Incentive Plan (incorporated herein by reference from Exhibit 4.4 to the Company’s Registration Statement on Form S-8 (File No.

333-249520) filed on October 16, 2020)

Non-Qualified Stock Option Agreement dated August 2017 between the Company and Patrick White (incorporated herein by reference from Exhibit 10.14 to the Company’s Registration Statement on Form S-1 (File No.

333-234155) filed on October 10, 2019)

Non-Qualified Stock Option Agreement dated April 17, 2018 between the Company and Patrick White (incorporated herein by reference from Exhibit 10.13 to the Company’s Registration Statement on Form S-1 (File No.

333-234155) filed on October 10, 2019)

Amendment to Non-Qualified Stock Option Agreement dated April 16, 2020 to that Non-Qualified Stock Option Agreement dated August 2017 and that Non-Qualified Stock Option Agreement dated April 17, 2018 between the Company and Patrick White (incorporated herein by reference from Exhibit 10.12 to the Company’s Registration Statement on Form S-1 (File No.

333-237950) filed on May 1, 2020)

Incentive Stock Option Agreement dated August 14, 2019 between the Company and Patrick White (incorporated herein by reference from Exhibit 10.15 to the Company’s Registration Statement on Form S-1 (File No.

333-234155) filed on October 10, 2019)

Incentive Stock Option Agreement dated March 11, 2019 between the Company and Margaret Gezerlis (incorporated herein by reference from Exhibit 10.16 to the Company’s Registration Statement on Form S-1 (File No.

333-234155) filed on October 10, 2019)

Incentive Stock Option Agreement dated January 7, 2020 between the Company and Margaret Gezerlis (incorporated herein by reference from Exhibit 10.15 to the Company’s Registration Statement on Form S-1 (File No.

333-237950) filed on May 1, 2020)

Non-Qualified Stock Option Agreement dated January 2018 between the Company and Norman Gardner (incorporated herein by reference from Exhibit 10.17 to the Company’s Registration Statement on Form S-1 (File No.

333-234155) filed on October 10, 2019)

Amendment to Non-Qualified Stock Option Agreement dated April 16, 2020 to that Non-Qualified Stock Option Agreement dated January 2018 between the Company and Norman Gardner (incorporated herein by reference from Exhibit 10.17 to the Company’s Registration Statement on Form S-1 (File No.

333-237950) filed on May 1, 2020)

Form of Restricted Stock Agreement (incorporated herein by reference from Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018)

Restricted Stock Agreement dated April 16, 2020 between the Company and Patrick White (incorporated herein by reference from Exhibit 10.19 to the Company’s Registration Statement on Form S-1 (File No.

333-237950) filed on May 1, 2020)

Form of Director Non-Qualified Stock Option Agreement (immediate vesting) (incorporated herein by reference from Exhibit 10.20 to the Company’s Registration Statement on Form S-1 (File No.

333-237950) filed on May 1, 2020)

Form of Director Non-Qualified Stock Option Agreement (quarterly vesting) (incorporated herein by reference from Exhibit 10.21 to the Company’s Registration Statement on Form S-1 (File No.

333-237950) filed on May 1, 2020)

Form of Restricted Stock Agreement pursuant to the 2013 Omnibus Equity Compensation Plan (incorporated herein by reference from Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020)

Form of Restricted Stock Agreement pursuant to the 2017 Equity Incentive Plan (incorporated herein by reference from Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020)

Form of Restricted Stock Unit Agreement (immediate vesting) pursuant to the 2020 Equity Incentive Plan (incorporated herein by reference from Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020)

Form of Non-Employee Director Restricted Stock Unit Agreement pursuant to the 2020 Equity Incentive Plan

Form of Senior Secured Convertible Debenture (incorporated herein by reference from Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 3, 2020)

Securities Purchase Agreement dated February 26, 2020 (incorporated herein by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 3, 2020)

Security Agreement dated February 26, 2020 (incorporated herein by reference from Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 3, 2020)

Letter Agreement dated February 28, 2020 between the Company and Bruce Evans (incorporated herein by reference from Exhibit 10.25 to the Company’s Registration Statement on Form S-1 (File No.

333-237950) filed on May 1, 2020)

Agreement dated as of June 15, 2020 (incorporated herein by reference from Exhibit 10.28 to the Company’s Registration Statement on Form S-1 (File No.

333-234155) filed on June 15, 2020)

Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

XBRL Instance Document

4 unchanged sentences

XBRL Taxonomy Extension Presentation Linkbase Document

* Management contract or compensatory plan or arrangement.

** This exhibit is being furnished rather than filed and shall not be deemed incorporated

by reference into any filing, in accordance with Item 601 of Regulation S-K.

schedules, appendices and exhibits to this agreement have been omitted in accordance with Item 601(b)(2) of Regulation S-K.

of any omitted schedule and/or exhibit will be furnished supplemental to the Securities and Exchange Commission staff upon request.

Copies of this report (including the financial statements) and

any of the exhibits referred to above will be furnished at no cost to our shareholders who make a written request to VerifyMe,

Inc., at the address on the cover page of this report, Attention:

Corporate Secretary.

* Filed herewith

# Denotes management compensation plan or contract

FORM 10-K SUMMARY

Not applicable.

Pursuant to the requirements of Section 13 or 15(d) of

the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned,

Pursuant to the requirements of Section 13

or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned,

thereunto duly authorized.

4 unchanged sentences

March 25, 2021

Pursuant to the requirements of the Securities Exchange Act

of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the

dates indicated:

Pursuant to the requirements of the Securities

Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities

and on the dates indicated:

/s/ Patrick White

33 unchanged sentences

STATEMENTS OF CASH FLOWS

STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

NOTES TO FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC

ACCOUNTING FIRM

To the Shareholders and Board of Directors of

REPORT OF INDEPENDENT

REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors

VerifyMe, Inc.

Opinion on the Financial Statements

Opinion on the Financial

We have audited the accompanying balance

7 unchanged sentences

the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Going Concern Matter

The accompanying financial statements have

been prepared assuming that the Company will continue as a going concern.

As discussed in Note 1 to the financial statements, the

Company has suffered recurring losses from operations and has a negative cash flows from operations that raises substantial doubt

about its ability to continue as a going concern.

Management's plans in regard to these matters are also described in Note 1.

financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

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reasonable basis for our opinion.

Critical Audit

The critical audit matters are matters

arising from the current period audit of the financial statements that were communicated or required to be communicated to the

audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved

our especially challenging, subjective, or complex judgments.

We determined that there are no critical audit matters.

/s/ MaloneBailey, LLP

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Houston, Texas

March 9, 2020

VerifyMe, Inc.

Balance Sheets

(In thousands, except share data)

December 31, 2020

December 31, 2019

CURRENT ASSETS

Cash and cash

Cash and cash equivalents

Accounts Receivable

Deposits on Equipment

Prepaid expenses and other

current assets

Prepaid expenses and other current assets

TOTAL CURRENT ASSETS

PROPERTY AND EQUIPMENT

Equipment for lease, net

Equipment for lease, net of accumulated amortization of

$50 thousand as of December 31, 2020 and $0 as of December 31, 2019,

INTANGIBLE ASSETS

Patents and Trademarks,

net of accumulated amortization of

$292,587 and $258,294 as of December 31, 2019

and December 31, 2018

Capitalized Software Costs,

net of accumulated amortization of $0

December 31, 2019 and December 31, 2018

LIABILITIES AND STOCKHOLDERS'

EQUITY (DEFICIT)

Patents and Trademarks, net of accumulated amortization of

$320 thousand and $292 thousand as of December 31, 2020 and December 31,

2019, respectively

Capitalized Software Costs, net of accumulated amortization of

$20 thousand and $0 as of December 31, 2020 and December 31, 2019,

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES

Convertible Debt, net of

unamortized debt discount

Convertible Debt, net of unamortized debt discount

Derivative Liability

Accounts payable and other

accrued expenses

Accounts payable and other accrued expenses

Accrued Payroll

TOTAL CURRENT LIABILITIES

LONG-TERM LIABILITIES

TOTAL LIABILITIES

STOCKHOLDERS' EQUITY (DEFICIT)

Series A Convertible Preferred

Stock, $.001 par value, 37,564,767 shares

0 shares issued and outstanding

as of December 31, 2019 and

304,778 shares issued and outstanding as of

December 31, 2018

Series B Convertible Preferred

Stock, $.001 par value;

0.85 shares issued

and outstanding as of December 31, 2019 and

December 31, 2018

stock of $.001 par value;

Series A Convertible Preferred Stock, $.001 par value, 37,564,767 shares

0 shares issued and outstanding as of December 31, 2020 and

0 shares issued and outstanding as of December 31, 2019

Series B Convertible Preferred Stock, $.001 par value;

0.85 shares issued and outstanding as of December 31, 2020 and

December 31, 2019, respectively

Common stock, $.001 par value;

675,000,000 authorized;

111,893,779 and

issued, 111,543,239 and 102,203,166 shares outstanding as of

31, 2019 and December 31, 2018

5,603,888 and 2,239,120 issued,

5,596,877 and 2,232,112 shares outstanding as of December 31, 2020 and December 31,

2019, respectively

Additional paid in capital

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Accumulated deficit

(59,263,550 )

STOCKHOLDERS' EQUITY (DEFICIT)

TOTAL LIABILITIES AND

STOCKHOLDERS' EQUITY (DEFICIT)

The accompanying notes are an integral part

of these financial statements.

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

The accompanying notes are an integral part of these financial

VerifyMe, Inc.

Statements of Operations

(In thousands, except share data)

December 31, 2020

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Total Operating expenses

LOSS BEFORE OTHER INCOME (EXPENSE)

LOSS BEFORE OTHER (EXPENSE), NET

OTHER (EXPENSE) INCOME

Interest income (expenses), net

Interest expenses, net

Change in fair value of embedded derivative

Gain on derecognition of note payable and accrued interest

Settlement agreement with shareholders

Gain on accounts payable forgiveness

$ (2,507,799 )

$ (2,932,462 )

Loss on extinguishment of debt

TOTAL OTHER EXPENSE, NET

LOSS PER SHARE

WEIGHTED AVERAGE COMMON SHARE OUTSTANDING

(a) Includes share-based compensation of $799,654 and $828,203 for

the year ended December 31, 2019 and 2018, respectively

(a) Includes share-based compensation of $1,345 thousand for the twelve months ended December 31, 2020 and $800 thousand for the

twelve months ended December 31, 2019.

The accompanying notes are an integral part

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Statements of Cash Flows

(In thousands)

Twelve Months Ended

December 31, 2020

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CASH FLOWS FROM OPERATING ACTIVITIES

$ (2,932,462 )

Adjustments to reconcile net loss to net cash used in

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Fair value of options in exchange for services

Fair value of restricted stock and restricted

stock units issued in exchange for services

Gain on accounts payable forgiveness

Share-based payment for settlement agreement

with shareholders

Gain on derecognition of note payable and accrued

Fair value of restricted stock awards issued in exchange for services

Fair value of restricted stock units issued in exchange for

Fair value of warrants in exchange for services

Loss on Extinguishment of Debt

Amortization of debt discount

Common stock issued for interest expense

Change in Fair Value of Embedded Derivative

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Prepaid expenses and other current assets

Accounts payable and accrued

Net cash used in operating

Accounts payable and accrued expenses

Net cash used in operating activities

CASH FLOWS FROM INVESTING ACTIVITIES

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Capitalized Software Costs

Net cash used in investing

Net cash used in investing activities

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from public offering of securities

Proceeds from issuance of notes payable

Repayment of bridge financing and early redemption fee

Proceeds from convertible debt, net of costs

Proceeds from exercise of warrants

Proceeds from sale of common stock

Net cash provided by financing

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

Net cash provided by financing activities

NET INCREASE (DECREASE) IN CASH AND

CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD

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Cash paid during the period for:

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

Series A Convertible Preferred Stock converted

to common stock

Series B Convertible Preferred Stock converted

to common stock

Cashless Exercise of Stock Options

Cashless Exercise of Warrants

Common Stock issued in relation to convertible

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND

FINANCING ACTIVITIES

Common Stock issued in relation to conversion of 2020 Debentures and warrant

Relative fair value of common stock issued in connection with 2020 Debentures

Relative fair value of warrants issued in connection with 2020 Debentures

Recognition of embedded derivative liability recorded as debt discount

Common Stock and Warrants Issued for Common

Stock Payable

Beneficial conversion feature in connection with 2020 Debentures

Common stock issued to settle accrued payroll

Common Stock issued in relation to convertible debt

Reclass on deposit for equipment held for lease

The accompanying notes are an integral part

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Statements of Stockholders' Equity (Deficit)

(In thousands, except share data)

Balance at December 31, 2018

(56,331,088 )

Conversion of Series A Convertible Preferred Stock

Conversion of Series B Convertible Preferred Stock

Sale of common stock

Settlement Agreement

Conversion of notes payable

Cash Exercise of Warrants

Conversion of Series A Convertible Preferred

Cashless Exercise of Warrants

Cashless Exercise of Stock Options

Fair value of stock option

Restricted Stock awards and Restricted Stock Units

Common stock and warrants issued for services

Warrant Forfeiture

Restricted Stock Awards

Common stock issued for services

Common stock issued in relation to Bridge Financing

Balance at December

(59,263,550 )

Balance at December 31, 2019

(59,263,550 )

Conversion of Series A Convertible Preferred Stock

Cashless Exercise of Warrants

Fair value of stock options

Restricted stock awards

Restricted Stock Units

Fair value of warrants issued for services

Common stock issued for services

Common stock issued in relation to bridge financing

Common stock in relation to conversion of 2020

interest expense and cancellation of warrants

Beneficial conversion feature in connection

with 2020 Debentures

Warrants issued in connection with 2020 Debentures

Common Stock in relation to conversion of 2020

interest expense and cancellation of warrants

Common stock issued in relation to public offering

of securities

Cancellation of Common Stock

Balance at December

(61,771,349 )

The accompanying notes are an integral part

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Notes to the Financial Statements

NOTE 1 –

SUMMARY OF SIGNIFICANT

ACCOUNTING POLICIES

Nature of Business

The Company was incorporated in the State

of Nevada on November 10, 1999.

The Company is based in Rochester, New York and its common stock, par value $0.001 per share,

is traded on the over-the-counter market and quoted on the OTCQB.

The Company 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.

Leveraging the Company’s covert luminescent pigment, RainbowSecure®,

which the Company began commercializing in 2018, it has also developed the patent pending VeriPAS™

software system in 2018,

which covertly and overtly serializes products to track a product’s “life cycle”

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of the Business

VerifyMe, Inc.

or the “Company,” “we,” “us,” or “our”) was incorporated in the State of Nevada

on November 10, 1999.

The Company is based in Rochester, New York and its common stock, par value $0.001 per share, and warrants

to purchase common stock are traded on The Nasdaq Capital Market (“Nasdaq”) under the trading symbols “VRME”

and “VRMEW,” respectively.

The Company is a technology solutions provider specializing

in brand protection and supply functions such as counterfeit prevention, authentication, serialization, consumer engagement, track

and trace features for labels, packaging and products.

Until 2018, the Company primarily engaged in the research and development

of its technologies.

The Company began to commercialize its covert luminescent pigment, RainbowSecure®, in 2018 and 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.

VeriPAS™

is the only invisible covert serialization and authentication solution deployed through variable digital printing

on HP Indigo printing systems with a smartphone tracking and authentication system.

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 see where products originate and where they are deployed with geo location

mapping and intelligent programable alerts.

Brand owners access the VeriPAS™

software over the internet.

Brand owners can

then set rules of engagement, establish marketing programs for customer engagement and control, and monitor and protect their products

is capable of fluorescing, decoding, and verifying invisible RainbowSecure®

in the field –

designed to allow investigators to quickly and efficiently authenticate products throughout the distribution

chain, including warehouses, ports of entry, retail locations, and product purchased over the Internet for inspection and investigative

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 geo location mapping and intelligent programable

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

engagement and control and monitor and protect their products’

“life cycle.”

The Company has not yet derived any revenue from the VeriPAS™

software system and has derived minimal

revenue from the sale of our RainbowSecure®

The Company’s activities are subject

to significant risks and uncertainties, including the need to secure additional funding for working capital and to further develop

the Company’s intellectual property.

We have derived minimal revenue

from our VeriPAS™

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

The Company’s activities are subject to significant risks

and uncertainties, including the need to secure additional funding for working capital and to further develop the Company’s

intellectual property.

Reverse Stock Split

On June 17, 2020, the Company filed a Certificate

of Amendment to the Company’s Amended and Restated Articles of Incorporation, as amended, with the Nevada Secretary of State

to effect a 50-to-1 reverse stock split of the Company’s issued and outstanding common stock and treasury stock, effective

on June 18, 2020 (the “Reverse Stock Split”).

The Reverse Stock Split did not affect the total number of shares of

common stock or preferred stock that the Company is authorized to issue.

The accompanying

financial statements and notes to the financial statements give retroactive effect to the Reverse Stock Split for all periods presented,

unless otherwise specified.

of Presentation

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financial statements are presented in accordance with accounting principles generally accepted in the United States of America

(“GAAP”).

Use of Estimates

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Fair Value of Financial Instruments

The Company’s financial instruments

consist of accounts receivable, accounts payable and accrued expenses, secured convertible debentures, embedded derivative liability

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based on rates and other terms currently available to the Company for similar debt instruments.

VerifyMe, Inc.

Notes to the Financial Statements

The Company follows FASB ASC 820, “Fair

Value Measurements and Disclosures,”

and applies it to all assets and liabilities that are being measured and reported on

The Company follows FASB ASC 820, “Fair

Value Measurements and Disclosures,” and applies it to all assets and liabilities that are being measured and reported on

a fair value basis.

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or unobservable inputs that are corroborated by market data

VerifyMe, Inc.

Notes to the Financial Statements

Unobservable inputs that

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and current economic conditions.

If the financial condition of the Company’s customers were to deteriorate, resulting in

an impairment of their ability to make payments, such allowances may be required.

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for doubtful accounts as of December 31, 2020 and 2019, respectively.

Concentration of Credit Risk

Involving Cash and Cash Equivalents

The Company’s cash and cash equivalents

Concentration of Credit Risk Involving

Cash and Cash Equivalents

The Company’s cash and cash equivalents

are held at one financial institution.

At times, the Company’s deposits may exceed Federal Deposit Insurance Corporation

(FDIC) coverage limits.

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and pigments and is stated at the lower of cost (determined by the first-in, first-out method) or net realizable value.

VerifyMe, Inc.

Notes to the Financial Statements

Patents and Trademarks

Our current patent and trademark portfolios consist of 9 granted

US patents and one granted European patent validated in four countries, four pending US and foreign patent applications, four registered

US trademarks, one EU foreign registration one and Colombian foreign registration, and seven pending US and foreign trademark applications.

Our registered patents expire between the years 2019 and 2033.

Costs associated with the registration and legal defense of

the patents have been capitalized and are amortized on a straight-line basis over the estimated lives of the patents which were

determined to be 17 to 19 years.

Equipment for Lease

Equipment for lease principally consists

of costs associated with the development, certification and production of the VerifyMe Beeper and the VeriPAS™

of costs associated with the development, certification and production of the VerifyMe Beeper and the VeriPAS™ Smartphone

Authenticator technology.

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renewable leases cancellable by either party by written notice provided 90 days in advance.

We examined the effect of ASU No.

“Lease (Topic 842)”

and determined the impact is not material.

Our policy is to capitalize the costs related to this

equipment and depreciate on a straight-line basis over the estimated lives of the equipment which was determined to be 5 years.

As the equipment became available at the end of 2019, there is $0 depreciation for each of the years ended December 31, 2019 and

2018, respectively.

We examined the effect of Accounting

Standards Update (“ASU”) No.

2016-02- “Lease (Topic 842)” and determined the impact is not material.

policy is to capitalize the costs related to this equipment and depreciate on a straight-line basis over the estimated lives of

the equipment which was determined to be 5 years.

There is $50 thousand in depreciation for the year ended December 31,2020 and

$0 for the year ended December 31, 2019 as the equipment became available at the end of 2019.

Capitalized Software

Costs incurred in connection with the development of software

related to our proprietary digital products are accounted for in accordance with the Financial Accounting Standards Board Accounting

Standards Codification ("ASC") 985 “Costs of Software to Be Sold, Leased or Marketed.”

Costs incurred

prior to the establishment of technological feasibility are charged to research and development expense.

Software development costs

are capitalized after a product is determined to be technologically feasible and is in the process of being developed for market.

Amortization of capitalized software development costs begins once the product is available to the market which started in January

Capitalized software development costs are amortized over the estimated life of the related product, generally five years,

using the straight-line method.

The Company will evaluate its software assets for impairment whenever events or change in circumstances

indicate that the carrying amount of such assets may not be recoverable.

During the years ended December 31, 2019 and 2018, the

Company capitalized $30,000 and $70,231, respectively, for capitalized software.

As the capitalized software became available at

the beginning of 2020, there is $0 amortization for each of the years ended December 31, 2019 and 2018.

Costs incurred in connection with the development

of software related to our proprietary digital products are accounted for in accordance with the Financial Accounting Standards

Board (“FASB”) Accounting Standards Codification ("ASC") 985 “Costs of Software to Be Sold, Leased

or Marketed.” Costs incurred prior to the establishment of technological feasibility are charged to research and development

Software development costs are capitalized after a product is determined to be technologically feasible and is in the

process of being developed for market.

Amortization of capitalized software development costs begins once the product is available

to the market which started in January 2020.

Capitalized software development costs are amortized over the estimated life of the

related product, generally five years, using the straight-line method.

The Company will evaluate its software assets for impairment

whenever events or change in circumstances indicate that the carrying amount of such assets may not be recoverable.

years ended December 31, 2020 and 2019, the Company capitalized $0 and $30 thousand, respectively, for capitalized software.

Company’s capitalized software became available at the beginning of 2020.

The Company recorded $20 thousand and $0 amortization

for capitalized software for the year ended December 31, 2020 and December 31, 2019, respectively.

Long-Lived Assets

The Company evaluates the recoverability

of its long-lived assets in accordance with ASC 360 “Property, Plant, and Equipment.”

The Company reviews long-lived

of its long-lived assets in accordance with ASC 360 “Property, Plant, and Equipment.” The Company reviews long-lived

assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

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value of the assets.

VerifyMe, Inc.

Notes to the Financial Statements

Related Parties

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to be related if they are subject to common control or common significant influence.

During the year ended December 31, 2019, the

Company did not incur any charges related to related parties.

During the year ended December 31, 2018, the Company incurred $30,000

related to consulting services performed by a then Director of the Board included in general and administrative on the Statement

of Operations.

During the year ended December 31, 2020 and

December 31, 2019, the Company did not incur any charges related to related parties.

During the year, four directors and an entity

in which one officer of the Company is a majority owner, participated in our 2020 Debenture offering, and two directors purchased

securities in the Company’s June 2020 underwritten public offering, see Note 5 –

Convertible Debt and Note 8 –

Stockholder’s Equity, respectively.

Derivative Instruments

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preferred stock, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify

as derivatives to be separately accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting

Standards Codification (“ASC”) 480, “Distinguish by Liabilities from Equity”

(FASB ASC 480), and FASB ASC

815, “Derivatives and Hedging”

(“FASB ASC 815”).

as derivatives to be separately accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting

Standards Codification (“ASC”) 480, “Distinguish by Liabilities from Equity” (FASB ASC 480), and FASB ASC

815, “Derivatives and Hedging” (“FASB ASC 815”).

The result of this accounting treatment is that the fair

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fair value is reclassified to equity.

VerifyMe, Inc.

Notes to the Financial Statements

In circumstances where the embedded conversion

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12 months of the balance sheet date.

In connection with issuance of the Debentures, described in

Note 5 –

Convertible Debt, if any portion of the Debentures are outstanding on the 181st calendar day after the Effective

Date, the Company could become contingently obligated to issue shares potentially in excess of its authorized share limit.

Consequently,

the ability to settle these obligations with shares would be unavailable causing these and other share-settled obligations to potentially

be settled in cash.

The Company applies a sequencing policy regarding share settlement wherein equity-linked financial instruments

with the earliest issuance date would be settled first.

Thus, all equity-linked financial instruments, which are convertible or

exercisable into common stock, issued concurrent or subsequent to the Debentures are classified as derivative liabilities, with

the exception of instruments related to employee share-based compensation.

As of September 19, 2019, the Company adopted

a sequencing policy whereby all equity-linked instruments issued prior to the closing of the $600,000 secured convertible Debentures

on September 19, 2019 may be classified as equity and all future equity-linked instruments may be classified as a derivative liability

with the exception of instruments related to share-based compensation issued to employees or directors.

a sequencing policy whereby all equity-linked instruments issued prior to the closing of the $600 thousand secured convertible

debentures on September 19, 2019 may be classified as equity and all future equity-linked instruments may be classified as a derivative

liability with the exception of instruments related to stock-based compensation issued to employees or directors.

6, 2020, the Company redeemed the secured convertible debentures issued as of September 19, 2019 and as a result abandoned the

sequencing policy previously adopted, so that all equity-linked instruments going forward may be classified as equity.

Revenue Recognition

The Company accounts 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.

The Company accounts 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.

The Company applies the following five

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revenues were primarily made up of revenue generated from printing labels with the Company’s technology.

The Company follows FASB ASC 740, “Income

Taxes,”

when accounting for income taxes, which requires an asset and liability approach to financial accounting and reporting

VerifyMe, Inc.

Notes to the Financial Statements

The Company follows FASB ASC 740, “Income

Taxes,” when accounting for income taxes, which requires an asset and liability approach to financial accounting and reporting

for income taxes.

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from 2016 through 2019 remain subject to examination by major tax jurisdictions.

VerifyMe, Inc.

Notes to the Financial Statements

Stock-based Compensation

The Company accounts 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

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awards to non-employees in accordance with ASU No.

2018-07, Compensation –

Stock Based Compensation (Topic 718):

to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which aligns accounting for share-based payments issued

2018-07, Compensation – Stock Based Compensation (Topic 718):

to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which aligns accounting for share-based payments issued

to nonemployees to that of employees under the existing guidance of Topic 718, with certain exceptions.

This update supersedes

previous guidance for equity-based payments to nonemployees under Subtopic 505-50, Equity –

Equity-Based Payments to Non-Employees.

previous guidance for equity-based payments to nonemployees under Subtopic 505-50, Equity – Equity-Based Payments to Non-Employees.

All issuances of stock options or other

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Advertising costs are expensed as incurred.

Advertising costs were approximately $6,125 and $3,987 for the years ended December 31, 2019 and 2018, respectively, and are

included in Sales and Marketing on the Statement of Operations.

Advertising costs were $3 thousand and $6 thousand for the years ended December 31, 2020 and 2019, respectively, and are included

in Sales and Marketing on the Statement of Operations.

Research and Development Costs

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Research and development costs for the years ended December 31, 2020 and 2019

2018 were $5,119 and $187,655, respectively.

were $19 thousand and $5 thousand , respectively.

Basic and Diluted Net Income per

Share of Common Stock

The Company follows FASB ASC 260, “Earnings

Per Share,”

when reporting Earnings Per Share resulting in the presentation of basic and diluted earnings per share.

The Company follows FASB ASC 260, “Earnings

Per Share,” when reporting Earnings Per Share resulting in the presentation of basic and diluted earnings per share.

the Company reported a net loss for each of the years presented, common stock equivalents, including preferred stock, stock options

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therefore, the amounts reported for basic and diluted loss per share were the same.

For the years ended December 31, 2019 and 2018, there were shares potentially issuable, that could dilute

basic earnings per share in the future that were excluded from the calculation of diluted earnings per share because their inclusion

would have been anti-dilutive to the Company’s losses during the years presented.

For the year ended December 31, 2019 there were approximately 51,099,000 anti-dilutive shares consisting

of 21,963,000 anti-dilutive shares relating to warrants, 17,914,000 relating to options ,

7,222,000 relating to preferred share agreements and 4,000,000 relating to convertible debentures.

For the year ended December

31, 2018 there were approximately 54,173,000 anti-dilutive shares consisting of 22,241,000 anti-dilutive shares relating to warrants,

18,614,000 relating to options and 13,318,000 relating to preferred share agreements.

VerifyMe, Inc.

Notes to the Financial Statements

Adopted Accounting Pronouncements

Effective January 1, 2019, the Company

adopted ASU No.

2018-07, Compensation –

Stock Based Compensation (Topic 718):

Improvements to Nonemployee Share-Based Payment

Accounting (“ASU 2018-07”), which aligns accounting for share-based payments issued to nonemployees to that of employees

under the existing guidance of Topic 718, with certain exceptions.

This update supersedes previous guidance for equity-based payments

to nonemployees under Subtopic 505-50, Equity –

Equity-Based Payments to Non-Employees.

The adoption of ASU 2018-07 did

not have a material impact on the Company’s financial statements.

Effective January 1, 2019, the Company

adopted ASU No.

2016-02 –

“Lease (Topic 842)”

and the series of related Accounting Standards Updates that followed

(collectively referred to as “Topic 842”) using the modified retrospective approach.

The adoption of Topic 842 did

not have a material impact on the Company’s financial statements.

Going Concern

The Company has suffered recurring losses from operations and negative cash flows from operations.

conditions raise substantial doubt about the Company’s ability to continue as a going concern.

In order to continue as a

going concern, develop a reliable source of revenues, and achieve a profitable level of operations the Company will need, among

other things, additional capital resources.

Management's plans to continue as a going concern include raising additional capital

through increased sales of product and raising additional capital through incurrence of debt and the sale of our common stock and

other equity securities.

The Company’s business plans are dependent on the ability to raise capital through private placements

of the Company’s common stock and/or preferred stock, through the possible exercise of outstanding options and warrants,

through debt financing and/or through the future public offerings of our securities.

However, management cannot provide

any assurances that the Company will be successful in accomplishing any of its plans.

The Company needs to raise additional funds

in the future in order to remain operational past that date.

VerifyMe, Inc.

Notes to the Financial Statements

NOTE 2 –

EQUIPMENT FOR LEASE

During the years ended December 31, 2019 and 2018, the Company

capitalized $177,021 and $0, respectively, in connection with the certification and production of the VerifyMe Beeper and the VeriPAS™

For the years ended December 31, 2020 and

2019, there were shares potentially issuable, that could dilute basic earnings per share in the future that were excluded from

the calculation of diluted earnings per share because their inclusion would have been anti-dilutive to the Company’s losses

during the years presented.

For the year ended December

31, 2020, there were approximately 4,397,000 anti-dilutive shares consisting of 474,000 shares issuable upon exercise of options,

3,779,000 shares issuable upon exercise of warrants, and 144,000 shares issuable upon conversion of preferred stock.

For the year ended December 31, 2019 there

were approximately 1,022,000 anti-dilutive shares consisting of 439,000 anti-dilutive shares relating to warrants, 358,000 relating

to options, 144,000 relating to preferred share agreements and 80,000 relating to convertible debentures.

On August 27, 2014, FASB issued Accounting

Standards Update (“ASU”) 2014-05, Disclosure of Uncertainties about an Entity’s ability to Continue as

a Going Concern (“ASU 2014-05”), which requires management to assess a company’s ability to continue

as a going concern within one year from financial statement issuance and to provide related footnote disclosures in certain circumstances.

The accompanying financial statements and

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

During the year ended December 31, 2019 the Company

suffered from recurring losses from operations and negative cash flows from operations, resulting in a need for, among other things,

capital resources.

As of December 31, 2019, the Company had cash of $253 thousand and disclosed that its ability to continue as

a going concern was predicated on the Company’s ability to raise capital and to sustain adequate working capital to finance

its operations.

During the year ended December 31, 2020 the Company participated in an underwritten public offering and raised

approximately $10.0 million in gross proceeds, and $9,023 thousand in net proceeds after deducting discounts and commissions and

other offering expenses.

The Company met and exceeded those predications thus mitigating any substantial doubt about the Company’s

ability to continue as a going concern as defined by ASU 2014-05 and its ability to satisfy the estimated liquidity needs for the

twelve months from the issuance of the financial statements.

NOTE 2 – EQUIPMENT FOR LEASE

During the years

ended December 31, 2020 and 2019, the Company capitalized $73 thousand (including a $51 thousand deposit made in fiscal 2019) and

$177 thousand, respectively, in connection with the certification and production of the VerifyMe Beeper and the VeriPAS™

Smartphone Authenticator technology.

The Company will depreciate the equipment for lease over its useful life of five years.

the equipment became available at the end of 2019, there is $0 depreciation for each of the years ended December 31, 2019 and 2018,

respectively.

the equipment became available at the end of 2019, there is $50 thousand depreciation in the year ending December 31, 2020 and

$0 depreciation in the year ending December 31, 2019.

Depreciation expense for equipment for lease was $50 thousand and $0, for

the years ended December 31, 2020 and December 31, 2019, respectively, and is included in general and administrative expense

in the accompanying Statements of Operations.

– PATENTS AND TRADEMARKS

During the years

ended December 31, 2019 and 2018, the Company capitalized $43,815 and $38,505, respectively, for patent costs and trademarks.

Amortization and impairment expense for patents and trademarks was $34,294 and $20,963 for the years ended December 31, 2019 and

of December 31, 2020, the Company’s patent and trademark portfolios consisted of eleven granted U.S.

patents and one granted

European patent validated in four countries, six pending U.S.

and three foreign patent applications, six registered U.S.

seven registered foreign registrations, including two in Europe and one each in Australia, Colombia, Japan, Mexico, and Singapore,

and four pending U.S.

and foreign trademark applications.

In January 2020, the Company received a Notice of Allowance for the U.S.

patent application for the dual code authentication process relating to the Company’s invisible QR code and smartphone reading

system titled “Dual code authentication process.” This application was issued as U.S.

10,614,350 in April

Additionally, the Company received a Notice of Allowance for the U.S.

Patent Application titled “Device and method

for authentication” in June 2020, and this application was issued as U.S.

10,783,734 in September 2020.

The Company’s

issued patents expire between the years 2021 and 2038.

Costs associated with the registration, prosecution and legal defense of

the patents have been capitalized and are amortized on a straight-line basis over the estimated lives of the patents which were

determined to be 17 to 19 years.

During the years ended December 31, 2020

and 2019, the Company capitalized $103 thousand and $44 thousand, respectively, for patent costs and trademarks.

Amortization and

impairment expense for patents and trademarks was $28 thousand and $34 thousand for the years ended December 31, 2020 and 2019,

respectively.

NOTE 4 –

The reconciliation of income tax expense computed at the U.S.

federal statutory rate to the income tax provision for the years ended December 31, 2019 and 2018 is as follows (in thousands) :

VerifyMe, Inc.

Notes to the Financial Statements

NOTE 4 – INCOME TAXES

The reconciliation of income tax expense

computed at the U.S.

federal statutory rate to the income tax provision for the years ended December 31, 2020 and 2019 is as follows

(in thousands) :

Year Ended December 31

20 unchanged sentences

Net deferred tax assets / (liabilities)

VerifyMe, Inc.

Notes to the Financial Statements

As of December 31, 2019, the Company had federal and state net

operating loss carry forwards of $37.8 million and $11.4 million, respectively that may be offset against future taxable income,

subject to limitation under IRC Section 382, which begin to expire in 2020.

No tax benefit has been reported in the December

31, 2019 or 2018 financial statements due to the uncertainty surrounding the realizability of the benefit, based on a more likely

than not criteria and in consideration of available positive and negative evidence.

As of December 31, 2020, the Company had federal

and state net operating loss carry forwards of $40.3 million and $14.4 million, respectively that may be offset against future taxable

income, subject to limitation under Internal Revenue Code of 1986, as amended (“IRC”) Section 382, which begin to expire in

No tax benefit has been reported in the December 31, 2020 due to the uncertainty surrounding the realizability of the benefit,

based on a more likely than not criteria and in consideration of available positive and negative evidence.

Utilization of the net operating losses

(NOL) carryforwards may be subject to a substantial annual limitation due to ownership change limitations that may have occurred

or that could occur in the future, as required by Section 382 of the Internal Revenue Code (IRC) of 1986, as amended (the Code),

as well as similar state provisions.

These ownership changes may limit the amount of NOL carryforwards that can be utilized annually

to offset future taxable income.

In general, an “ownership change”

as defined by Section 382 of the Code results from

a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points

of the outstanding stock of a company by certain stockholders.

At the time of closing the books, the Company had not yet completed

a study to determine the extent of the limitation.

or that could occur in the future, as required by Section 382 of the IRC, as well as similar state provisions.

These ownership

changes may limit the amount of NOL carryforwards that can be utilized annually to offset future taxable income.

In general, an

“ownership change” as defined by Section 382 of the IRC results from a transaction or series of transactions over a

three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain

stockholders.

At the time of closing the books, the Company had not yet completed a study to determine the extent of the limitation.

The Company applied the "more-likely-than-not"

1 unchanged sentence

benefits as of December 31, 2020 and December 31, 2019, respectively.

The Company’s practice is to recognize

interest and/or penalties related to income tax matters in income tax expense.

The Company had no accrual for interest and penalties

on the balance sheets and has not recognized interest and/or penalties in the statements of operations and comprehensive loss for

the years ended December 31, 2019 and 2018.

on the balance sheets and has not recognized interest and/or penalties in the Statements of Operations loss for the years ended

December 31, 2020 and 2019.

VerifyMe, Inc.

Notes to the Financial Statements

The Company is subject to taxation in the

United States and various state jurisdictions.

The Company’s tax years from inception are subject to examination by the United

States and state taxing authorities due to the carryforward of unutilized NOLs.

On December 22, 2017, the United States

enacted significant changes to the U.S.

tax law following the passage and signing of H.R.1, “An Act to Provide for Reconciliation

Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018”

(the “Tax Act”)

(previously known as “The Tax Cuts and Jobs Act”).

The Tax Act significantly revised the U.S.

corporate income

tax regime by, among other things, lowering the corporate tax rate from 35% to 21%.

The Tax Act reduced the U.S.

income tax rate reduction to 21% becomes effective January 1, 2018.

The Company re-measured its deferred tax assets and liabilities

as of December 31, 2017, applying the reduced corporate income tax rate and recorded a provisional decrease to the deferred tax

assets and liabilities of $6.2 million, with a corresponding adjustment to the valuation allowance.

There are no taxes payable as of December

31, 2019 or December 31, 2018.

There are no taxes payable as of December 31, 2020 or December

NOTE 5- CONVERTIBLE DEBT

December 31, 2020

December 31, 2019

Convertible Debentures, due September 18, 2020:

6 unchanged sentences

Fair value of derivative liability, December 31, 2019

Fair value of derivative liability at issuance recorded as debt Discount

Change in fair value of derivative liability

Gain on extinguishment of Debt

Fair value of derivative liability, December 31, 2020

VerifyMe, Inc.

Notes to the Financial Statements

On September 19, 2019, we completed

the closing of $600,000 of secured convertible Debentures (the “Debentures”) for gross proceeds of $540,000 after

original issue discounts.

As of September 18, 2019 (the “Effective Date”), we entered into two substantially identical

securities purchase agreements (the “Securities Purchase Agreements”) with two purchasers (the “Purchasers”),

which provided for the issuance of up to an aggregate of $1.2 million in principal amount of Debentures (the “Bridge Financing”)

of which the first tranche of $600,000 has been issued.

The Securities Purchase Agreements provided for the issuance of the Debentures

due one year from the dates of issuance in two $600,000 tranches:

the first tranche as described above, and the second tranche,

at the discretion of the Purchasers and us, to occur any time after November 17, 2019.

If, at any time after November 17, 2019,

the Purchasers elect not to consummate the closing of the second tranche, then we may raise up to $600,000 from additional investors

(including our affiliates) who will have a security interest on a pari passu basis with the Purchasers in the first tranche,

so long as such investors agree not to convert the securities received until the Purchasers in the first tranche have completely

converted the Debentures or been fully repaid.

In connection with the Bridge

Financing, each of the Purchasers received commitment fees of $5,000 and 500,000 restricted shares (the “Commitment Shares”)

the closing of $600 thousand of secured convertible Debentures (the “2019 Debentures”) for gross proceeds of $540 thousand

after original issue discounts.

As of September 18, 2019 (the “Effective Date”), we entered into two substantially

identical securities purchase agreements (the “Securities Purchase Agreements”) with two purchasers (the “Purchasers”),

which provided for the issuance of up to an aggregate of $1.2 million in principal amount of 2019 Debentures (the “Bridge

Financing”) of which the first tranche of $600 thousand has been issued.

The Securities Purchase Agreements provided for

the issuance of the 2019 Debentures due one year from the dates of issuance in two $600 thousand tranches:

the first tranche as

described above, and the second tranche, at the discretion of the Purchasers and us, to occur any time after November 17, 2019.

If, at any time after November 17, 2019, the Purchasers elect not to consummate the closing of the second tranche, then we may

raise up to $600 thousand from additional investors (including our affiliates) who will have a security interest on a pari passu

basis with the Purchasers in the first tranche, so long as such investors agree not to convert the securities received until the

Purchasers in the first tranche have completely converted the 2019 Debentures or been fully repaid.

In connection with the Bridge Financing,

each of the Purchasers received commitment fees of $5 thousand and 500,000 restricted shares (the “Commitment Shares”)

of our common stock.

The placement agent for the Debentures received a cash fee of 8% of the gross proceeds received at each closing

and is entitled to receive 300,000 warrants convertible to 300,000 shares of common stock with an exercise price of $0.15 for

a five- year term.

The first tranche of the Debentures

will mature on September 18, 2020, and may be redeemed by us prior to the maturity date as described below.

All unpaid principal

due and payable on the maturity date will be paid in the form of common stock.

Any principal or interest that is due under each

of the Debentures, which is not paid by the respective maturity date, will bear interest at the rate of 18% per annum until it

is satisfied in full.

The Debentures are senior secured

obligations secured pursuant to the terms of security agreements dated as of September 18, 2019 (the “Security Agreements”)

by all of the Company’s assets.

Each Purchaser is entitled, at

any time, to convert all or any portion of the outstanding principal amount of its Debenture(s) plus any accrued interest into

restricted shares of common stock.

If we consummate a public offering within 180 calendar days of the Effective Date, then the

conversion price will be the lesser of (a) $0.15 or (b) 70% multiplied of the price per share of the common stock we issue in the

public offering (the “QPI Discounted Price”), subject to further adjustment as provided in the Debenture as well as

subject in each case to equitable adjustments resulting from any stock splits, stock dividends, recapitalizations or similar events.

Further, if we consummate a public offering of common stock which results in us receiving gross proceeds of at least $5 million

within 180 calendar days of the Effective Date then we are obligated to repay the outstanding amounts owed under the Debentures,

to the extent they are not converted and including the applicable redemption premium then in effect, within three days of consummation

of such an offering.

If any portion of the Debentures

are outstanding on the 181st calendar day after the Effective Date, then the conversion price shall equal the lesser of (a) $0.15,

(b) the QPI Discounted Price, or (c) 70% of the lowest volume-weighted average price (as reported by Bloomberg LP) of the common

stock on any trading day during the 20 trading days immediately preceding the date of conversion of the Debenture (provided, further,

that if either we are not DWAC operational at the time of conversion, the common stock is traded on the OTC Pink at the time of

conversion, or the conversion price is less than $0.01 per share, then 70% will automatically adjust to 60%).

The Debentures are subject to

a “conversion blocker”

such that the each of the Purchasers cannot convert the Debentures to the extent that the conversion

would result in the Purchaser and its affiliates holding more than 4.99% of the outstanding common stock (which the Purchaser can

increase to 9.99% upon at least 61 days prior written notice to us).

So long as no event of default

has occurred and is continuing under the Debentures, we may at our option call for redemption all or part of the Debentures prior

to the maturity date, upon not more than two calendar days written notice, for an amount equal to:

(i) if the redemption date is

90 calendar days or less from the date of issuance of the Debentures, 110% of the sum of the principal amount;

(ii) if the redemption

date is greater than or equal to 91 calendar days from the date of issuance of the Debentures and less than or equal to 150 calendar

days from the date of issuance of the Debentures, 120% of the sum of the principal amount;

(iii) if the redemption date is greater

than or equal to 151 calendar days from the date of issuance of the Debentures and less than or equal to 180 calendar days from

the date of issuance of the Debentures, 125% of the sum of the principal amount;

and (iv) if either (1) the Debentures are in default

but the holder consents to the redemption notwithstanding such default or (2) the redemption date is greater than or equal to 181

calendar days from the date of issuance of the Debentures, 130% of the sum of the principal amount.

The Debentures include an adjustment

provision that, subject to certain exceptions, reduces, at the Purchaser’s option, the conversion price if we issue common

stock or common stock equivalents (including in variable rate transactions) at a price lower than the then-current conversion price

of the Debentures.

Any reverse stock split of our outstanding shares will also result in an adjustment of the conversion price

of the Debentures.

The placement agent for the 2019 Debentures received a cash fee of 8% of the gross proceeds received at each

closing and was entitled to receive warrants convertible into shares of common stock until

May 2020 when the placement agent waived its right to receive the warrants.

2019 Debentures contained provisions that entitled each Purchaser, at any time, to convert all or any portion of the outstanding

principal amount of its 2019 Debenture(s) plus any accrued interest into restricted shares of common stock.

If the Company consummated

a public offering within 180 calendar days of the Effective Date, then the conversion price would be the lesser of (a) $7.50 or

(b) 70% multiplied by the price per share of the common stock we issued in the public offering (the “QPI Discounted Price”),

subject to further adjustment as provided in the 2019 Debentures as well as subject in each case to equitable adjustments resulting

from any stock splits, stock dividends, recapitalizations or similar events.

Further, if the Company consummated a public offering

of common stock which resulted in us receiving gross proceeds of at least $5 million within 180 calendar days of the Effective

Date then we would have been obligated to repay the outstanding amounts owed under the 2019 Debentures, to the extent they were

not converted and including the applicable redemption premium then in effect, within three days of consummation of such an offering.

If any portion of the

2019 Debentures was outstanding on the 181 st calendar day after the Effective Date, then the conversion price would

equal the lesser of (a) $7.50, (b) the QPI Discounted Price, or (c) 70% of the lowest volume-weighted average price (as reported

by Bloomberg LP) of the common stock on any trading day during the 20 trading days immediately preceding the date of conversion

of the 2019 Debentures (provided, further, that if either we are not DWAC operational at the time of conversion, the common stock

is traded on the OTC Pink at the time of conversion, or the conversion price was less than $0.50 per share, then 70% would automatically

adjust to 60%).

So long as no event of

default had occurred and was continuing under the 2019 Debentures, the Company could at our option call for redemption all or part

of the 2019 Debentures prior to the maturity date, upon not more than two calendar days written notice, for an amount equal to:

(i) if the redemption date was 90 calendar days or less from the date of issuance of the 2019 Debentures, 110% of the sum of the

principal amount;

(ii) if the redemption date was greater than or equal to 91 calendar days from the date of issuance of the 2019

Debentures and less than or equal to 150 calendar days from the date of issuance of the 2019 Debentures, 120% of the sum of the

principal amount;

(iii) if the redemption date was greater than or equal to 151 calendar days from the date of issuance of the

2019 Debentures and less than or equal to 180 calendar days from the date of issuance of the 2019 Debentures, 125% of the sum of

the principal amount;

and (iv) if either (1) the 2019 Debentures were in default but the holder consents to the redemption notwithstanding

such default or (2) the redemption date was greater than or equal to 181 calendar days from the date of issuance of the 2019 Debentures,

130% of the sum of the principal amount.

VerifyMe, Inc.

Notes to the Financial Statements

The Securities Purchase Agreements contain

customary representations, warranties and covenants.

In addition, pursuant to the Securities Purchase Agreements, the Purchasers

were granted piggy-back registration rights such that, from September 18, 2019 until the earlier of March 18, 2021 or the date

the Debentures have been converted and/or repaid in the entirety, if we contemplate making an offering of our common stock or securities

convertible into our common stock registered for sale under the Securities Act of 1933, as amended, or propose to file a registration

statement covering any of our securities (other than a registration statement filed by us within 45 days of the signing closing

date with the placement agent in the Bridge Financing acting as the underwriter), then each of the Purchasers will have the right

to include all or a pro rata share of its Commitment Shares, the common stock issuable upon conversion of the Debentures (the “Conversion

Shares”), and, to the extent applicable, any other shares of capital stock or other securities of ours that are issued upon

exchange of Conversion Shares and/or restricted stock held by the Purchaser (collectively, the “Purchaser’s Securities”).

The 2019 Debentures included

an adjustment provision that, subject to certain exceptions, would reduce, at the Purchaser’s option, the conversion price

if we issued common stock or common stock equivalents (including in variable rate transactions) at a price lower than the then-current

conversion price of the 2019 Debentures.

Any reverse stock split of our outstanding shares would also have resulted in an adjustment

of the conversion price of the 2019 Debentures.

The conversion option, the QPI put and

the put exercisable upon certain financing events are embedded derivatives that are collectively bifurcated at fair value, with

subsequent changes in fair value recognized in the Statement of Operations.

The fair value estimate is a Level 3 measurement as

defined by ASC Topic 820, Fair Value Measurements and Disclosures, as it is based on significant inputs not observable in the market.

The Company estimated the fair value of the monthly payment provision using a Monte Carlo Simulation, with 10,000 trials, with

the following key inputs:

the put that were exercisable upon certain financing events are embedded derivatives that are collectively bifurcated at fair value,

with subsequent changes in fair value recognized in the Statement of Operations.

The fair value estimate is a Level 3 measurement

as defined by ASC Topic 820, Fair Value Measurements and Disclosures, as it is based on significant inputs not observable in the

The Company estimated the fair value of the monthly payment provision using a Monte Carlo Simulation, with 10,000 trials,

with the following key inputs:

December 31, 2020

December 31, 2019

$3.50 - $5.00

4 unchanged sentences

Probability of QPI

As of December 31, 2019, the Company’s warrants issuable

to the Company’s placement agent in relation to the Debentures were treated as derivative liabilities and changes in the

fair value were recognized in earnings.

These Common Stock purchase warrants did not trade on an active securities market,

and as such, the Company estimated the fair value of these warrants using the Black-Scholes method and the following assumptions:

As of December 31, 2020, the Company’s

warrants issuable to the Company’s placement agent in relation to the 2019 Debentures were treated as derivative liabilities

and changes in the fair value were recognized in earnings.

These common stock purchase warrants did not trade on an active

securities market, and as such, the Company estimated the fair value of these warrants using the Black-Scholes method and the following

Closing trade price of Common Stock

5 unchanged sentences

445.01%-453.08%

Expected volatility was based primarily on historical volatility.

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 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.

The Company recorded a total of $401,957

debt discount upon the closing of Convertible Debt, including the $171,425 fair value of the embedded derivative liability, $70,100

fair value of the common stock issued, $78,693 of direct transaction costs incurred, $21,739 related to warrants issuable to the

placement agent, and $60,000 original issue discount.

The debt discount is amortized to interest expense over the term of the loan.

Amortization of the debt discount associated with the Debentures was $99,954 for the year ended December 31, 2019 and was included

in interest expense in the accompanying Statements of Operations.

The Company recorded a total of $402 thousand

debt discount upon the closing of the 2019 Debentures, including $171 thousand fair value of the embedded derivative liability,

$70 thousand fair value of the common stock issued, $79 thousand of direct transaction costs incurred, $22 thousand related to

warrants issuable to the placement agent, and $60 thousand original issue discount.

The debt discount is amortized to interest

expense over the term of the loan.

Amortization of the debt discount associated with the 2019 Debentures was $100 thousand for

the year ended December 31, 2019 and was included in interest expense in the Statements of Operations.

The 2019 Debentures were fully redeemed

on February 26, 2020 for a face value of $600 thousand and an early redemption fee of $150 thousand resulting in a $281 thousand

loss on extinguishment of debt included in the Statement of Operations.

VerifyMe, Inc.

Notes to the Financial Statements

NOTE 6 –

CONVERTIBLE PREFERRED

The Company has outstanding Series A Preferred

Stock (the “Series A”) and Series B Preferred Stock (the “Series B”).

As of December 31, 2019, there were

37,564,767 authorized and 0 outstanding shares of Series A and 85 authorized and 0.85 outstanding shares of Series B.

of Series A and Series B has limited voting rights, is entitled to participate with the common stock on liquidation and holders

of Series A and Series B have beneficial ownership limitations.

Series A Convertible Preferred Stock

During the year ended December 31, 2019,

304,778 shares of Series A Convertible Preferred Stock were converted into 6,095,569 shares of the Company’s common stock.

During the year ended December 31, 2018,

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

During the year ended December 31, 2019,

there were no conversions of Series B Convertible Preferred Stock into shares of the Company’s common stock.

During the year ended December 31, 2018 0.07 shares of Series

B Convertible Preferred Stock were converted into 599,362 shares of the Company’s Common Stock.

NOTE 7 –

STOCKHOLDERS’

On March 6, 2020, the Company completed

the offering of $1,992 thousand of senior secured convertible debentures (the “2020 Debentures”) and raised $1,992

thousand in gross proceeds from the sale of the 2020 Debentures and 2020 Warrants (defined below).

Of this amount, $330 thousand

was received from four directors and an entity in which one officer of the Company is a majority owner and co-manager.

received $1,747 thousand after deducting direct transaction costs.

The Company used $750 thousand of the net proceeds to redeem

the existing 2019 Debentures prior to maturity, with a face value of $600 thousand and an early redemption fee of $150 thousand.

2020 Debentures were due eighteen months following issuance as follows;

$932 thousand on August 26, 2021, $910 thousand on August

28, 2021 and $150 thousand on September 6, 2021.

The Company’s capital structure after

the closing had no outstanding variably-priced convertible instruments on its Balance Sheets.

The 2020 Debentures were secured

by a blanket lien on all assets of the Company until such time the 2020 Debentures were paid in full or converted in full.

The 2020 Debentures were automatically

convertible into shares of the Company’s common stock upon the earliest to occur of (i) the commencement of trading of the

common stock on the Nasdaq, New York Stock Exchange or NYSE American (an “Uplist”) at the Uplist Conversion Price (defined

or (ii) at any time the minimum bid price of the common stock exceeded $25.00 per share for twenty (20) consecutive trading

days and the average trading volume during the 10 trading days prior to the conversion was at least 2,000 shares and the shares

were registered under an effective registration statement or the shares were salable under Rule 144 (“Rule 144”) of

the Securities Act of 1933, as amended.

The “Uplist Conversion Price” was the lesser of $4.00 or a 30% discount to

the public offering price a share of common stock was offered to the public in a securities offering resulting in the listing of

the common stock on the Nasdaq, New York Stock Exchange or NYSE American.

The 2020 Debentures were convertible, at

any time, at the option of the holder, into shares of common stock, at a fixed conversion price equal to $4.00 per share.

The embedded conversion feature was not

determined to be a derivative that required bifurcation pursuant to FASB ASC 815, “Derivatives and Hedging” (“ASC

815”), but was determined to be a beneficial conversion feature that required recognition within equity on the commitment

The beneficial conversion feature was recognized at its intrinsic value on the commitment date, limited to the proceeds allocated

to the convertible debt.

As such, the Company recorded $650 thousand within additional paid-in-capital on the Balance Sheets for

the beneficial conversion feature identified.

The debt discount arising from recognition of the beneficial conversion feature was

amortized as interest expense over the term of the convertible debt.

In connection with the issuance of the

2020 Debentures, the Company also issued warrants (“2020 Warrants”) to purchase 498,000 shares of common stock.

2020 Warrant had a three-year (3) term and was immediately exercisable at an exercise price of $7.50 per share.

If at any time

after six months following the issuance date and prior to the expiration date the Company failed to maintain an effective registration

statement (the “Registration Statement”) with the SEC covering the resale of the shares of common stock underlying

the 2020 Warrants, the 2020 Warrants could have been exercised by means of a “cashless exercise,” until such time as

there was an effective Registration Statement.

Each 2020 Warrant contained customary adjustment provisions in the event of a stock

split, reverse stock split or recapitalization.

2020 Warrants for 82,500 shares were issued to four directors and an entity in

which one officer of the Company is a majority owner.

The 2020 Warrants were determined to meet

equity classification pursuant to FASB ASC 480, “Distinguish by Liabilities from Equity” and ASC 815.

relative fair value of the 2020 Warrants was recorded as additional paid in capital on the Balance Sheets, which was determined

to be $1,063 thousand , on the issuance date.

The debt discount arising from recognition of the 2020 Warrants was amortized as

interest expense over the term of the convertible debt.

On June 22, 2020, the Company cancelled

the 2020 Warrants for twenty-three of the twenty-five warrant holders and issued to the holders of the cancelled 2020 Warrants

an aggregate of 179,200 shares of common Stock.

Of this amount, 33,000 shares of common stock were issued to four directors and

an entity in which one officer of the Company is a majority owner and co-manager.

2020 Warrants to purchase an aggregate of 81,700

shares of common stock at an exercise price of $4.59 per share remain outstanding.

Also, on such date, the 2020 Debentures were

automatically converted into an aggregate of 637,513 shares of common stock and warrants to purchase 573,479 shares of common stock.

Of this amount, 105,567 shares of common stock and warrants to purchase 105,567 shares of common stock were issued to four directors

and an entity in which one officer of the Company is a majority owner and co-manager.

See Note 9 – Stock Options, Restricted

Stock and Warrants.

In connection with the 2020 Debentures,

the Company entered into an agreement with a non-exclusive financial advisor and placement agent for a term of twelve months commencing

in January 2020.

Upon execution of the agreement, the Company issued 5,000 fully vested restricted shares of the Company’s

common stock and recorded $33 thousand included in general and administrative expense in the accompanying Statements of Operations.

On March 6, 2020, in connection with this agreement a cash compensation of $153 thousand was made by the Company and an additional

12,285 shares of the Company’s common stock were issued.

These amounts were included in the debt discount for the 2020 Debentures

VerifyMe, Inc.

Notes to the Financial Statements

In February 2020, the Company entered into

an agreement with a non-exclusive financial advisor and placement agent terminating the later of April 30, 2020 or upon closing

a successful private placement.

The agreement automatically extended for periods of thirty days until terminated in writing.

Company agreed to pay 10% of the gross proceeds raised by the financial advisor and placement agent and agreed to issue an amount

of restricted shares equal to 4% of the total securities sold in the private placement divided by the last reported closing price

of the stock on the closing date of the private placement.

On March 6, 2020, in connection with this agreement cash compensation

of $25 thousand was paid by the Company and 1,923 shares of the Company’s common stock were issued.

These amounts were included

in the debt discount for the 2020 Debentures noted above.

The Company recorded a total of $1,992

thousand debt discount upon the closing of the 2020 Debentures, including the $650 thousand intrinsic value of the beneficial conversion

option, $34 thousand relative fair value of the common stock issued to the placement agents, $245 thousand of direct transaction

costs incurred and $1,063 thousand related to the 2020 Warrants.

The debt discount was amortized to interest expense over the term

On June 22, 2020, upon the Company’s

consummation of the public offering (See Note 8 – Stockholders’ Equity) and the Company’s commencement of trading

on Nasdaq, the 2020 Debentures were automatically converted at $3.22, the QPI Discounted Price.

As a result, the unamortized debt

discount was fully amortized and included in interest expense in the accompanying Statements of Operations.

Amortization of the

debt discount associated with the 2020 Debentures was $1,992 thousand for the year ended December 31, 2020, and was included in

interest expense in the accompanying Statements of Operations.

On January 30, 2020 the Company issued

an unsecured promissory note payable to a stockholder of the Company with a face value of $75 thousand and an interest rate of

10% per annum payable in full on March 30, 2020, subject to the Company’s right to extend payment until May 29, 2020.

February 28, 2020, the holder of the $75 thousand promissory note which was to become due in March 2020 purchased $80 thousand

of the 2020 Debentures and 2020 Warrants, which was paid by exchanging the promissory note and paying

an additional $5 thousand .

This is included in the $1,992 thousand gross

proceeds raised.

Interest expense in relation to the unsecured promissory note of $1 thousand was

recorded for the year ended December 31, 2020.

NOTE 6 – TERM NOTE

On May 17, 2020, the Company 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

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.

NOTE 7 – CONVERTIBLE PREFERRED

The Company is authorized to issue Series

A Convertible Preferred Stock, par value of $0.001 per share (the “Series A”) and Series B Convertible Preferred Stock,

par value of $0.001 per share (the “Series B”).

As of December 31, 2020, there were no shares of Series A outstanding

and 0.85 of a share of Series B outstanding convertible into 144,444 shares of common stock.

During the years ended December 31,

2020 and 2019, 0 and 304,778 shares of Series A, respectively, were converted into 0 and 121,911 shares of the Company’s

common stock, respectively.

Each share of Series A and Series B has limited voting rights, is entitled to participate with the

common stock on liquidation and holders of Series A and Series B are subject to beneficial ownership limitations.

NOTE 8 – STOCKHOLDERS’

For the years ended December 31, 2020 and

2018, the Company expensed $0 and $8,625, respectively, relative to restricted stock units.

2019, the Company expensed $53 thousand and $0, respectively, relative to restricted stock units.

For the years ended December 31, 2020 and

2018, the Company expensed $238,530 and $446,265, respectively, relative to restricted stock awards.

2019, the Company expensed $461 thousand and $239 thousand, respectively, relative to restricted stock awards.

October 12, 2020, pursuant to the 2020 Plan (See Note 9 – Stock Options, Restricted Stock and Warrants), 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, with a total fair value of $53

VerifyMe, Inc.

Notes to the Financial Statements

On June 17, 2020, the Company entered into

an Underwriting Agreement (the “Underwriting Agreement”) with Maxim Group LLC, as representative of the underwriters

(the “Representative”), for an underwritten public offering (the “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.

The public offering price was $4.60 per unit and the underwriters

agreed to purchase 2,173,913 units at an 8.0% discount to the public offering price.

The Company granted the Representative a 45-day

option to purchase up to 326,087 shares of common stock and/or warrants to purchase up to 326,087 shares of common stock to cover

over-allotments, if any.

The Offering closed on June 22, 2020 resulting in gross proceeds of $10.0 million, before deducting

underwriting discounts and commissions and other offering expenses.

Also, on June 22, 2020, the Representative partially exercised

its over-allotment option to purchase 50,000 shares of common stock and 325,987 warrants for gross proceeds of $233 thousand .

The net proceeds in relation to the Offering and including the over-allotment option were $9,023 thousand .

The Company issued 30,000 shares of common stock for consulting services related to the Offering, with a fair value of $125 thousand

accounted for in additional paid in capital and included in the accompanying Balance Sheets.

Additionally, the Company issued 888 shares of common stock, with a fair value of $4 thousand ,

to its non-exclusive financial advisor and placement agent as commission for units purchased by an investor in the Offering.

Of the 2,173,913 units purchased in the

Offering, 17,800 units were purchased by two directors of the Company.

Pursuant to the Underwriting Agreement,

the Company agreed to issue to the Representative, as a portion of the underwriting compensation payable to the Representative,

warrants to purchase up to a total of 173,913 shares of common stock (the “Representative’s Warrants”).

The Representative’s

Warrants are exercisable at $5.06 per share, are initially exercisable 180 days after the effective date of the Offering and have

a term of three years from their initial exercise date.

See Note 9 – Stock Options, Restricted Stock and Warrants.

In connection to the closing of the Offering

and the related automatic conversion of the 2020 Debentures the Company issued 637,513 shares of common stock related to the principal

amount outstanding of $1,992 thousand and interest expense of $61 thousand and issued 179,200 shares of common stock related to

the cancellation of the 2020 Warrants (see Note 5 – Convertible Debt).

In connection to the 2020 Debentures (see

Note 5 – Convertible Debt) the Company issued 19,208 restricted shares of common stock to the placement agents in connection

with the private placement.

On August 5, 2020, the Company issued restricted

stock awards for an aggregate of 230,000 shares of restricted common stock to the Company’s directors in consideration of

their years of service to the Company that vest in full one-year from the date of grant, subject to the respective director’s

continued service as member of the Board of Directors on the vesting date.

During the year ended December 31, 2020, $351 thousand

was expensed related to these services.

In May 2020, the Company rescinded and

cancelled an aggregate of 19,401 shares of common stock that the Company had approved for issuance but were not yet issued and

outstanding shares.

On April 16, 2020, the Company granted

White a restricted stock award of 37,500 restricted shares of the Company’s common stock in lieu of $150 thousand in

deferred salary.

Of this amount, $119 thousand was accrued in prior years, and the remaining amount was expensed in payroll expenses

included in the accompanying Statement of Operations.

The restricted stock award vests in full one-year from the date of grant,

subject to Mr.

White’s continued services as an officer and employee of the Company on the vesting date.

During the year ended December 31, 2019,

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On February 27, 2019, three directors resigned from the

Company’s Board of Directors, effective March 1, 2019.

This resulted in a cancellation of 6,400 shares related to the portion

of the unvested restricted stock awards these directors had received.

On September 18, 2019 a director resigned from the Company’s

Board of Directors, effective immediately, resulting in a cancellation of 120,000 related to the portion of unvested restricted

stock awards this director had received.

On September 18, 2019 a director resigned from the Company’s

Board of Directors, effective immediately, resulting in a cancellation of 2,400 related to the portion of unvested restricted stock

awards this director had received.

In December 2019, the Company issued 4,800 shares of restricted common stock to a director,

for joining the Board of Directors.

On March 15, 2019, the Company engaged

an advisor to provide consulting services under an Investor Relations and Advisory Agreement (the "Agreement").

to the Agreement, the Company agreed to pay in advance of services a monthly fee of $5,000 in shares of restricted common stock

to the consulting firm for consulting services.

The number of shares to be issued will be calculated based on the closing price

of our common shares on the 1st or preceding day of each month, if the 1st were to fall on a weekend or holiday.

However, if the

stock were to trade below $0.15, the calculation would be based on $0.15.

On March 15, 2019, we engaged an advisor

to provide consulting services under an Investor Relations and Advisory Agreement (the “Agreement”).

Pursuant to the

Agreement, we agreed to pay in advance of services a monthly fee of $5 thousand in shares of restricted common stock to the consulting

firm for consulting services.

The number of shares to be issued will be calculated based on the closing price of our common shares

on the first day of each month or the preceding day, if the first were to fall on a weekend or holiday.

However, if the stock were

to trade below $4.60 per share, the calculation would be based on $4.60.

The shares shall not have registration rights, and the

shares may be sold subject to Rule 144.

During the year ended December 31, 2019, the Company issued 292,730 shares of restricted

common stock for a total expense of $35,870 related to these services.

During the year ended December 31, 2020, the Company issued 10,944 of restricted common

stock for a total expense of $43 thousand related to these services.

During the year ended December 31, 2019, the Company issued

5,855 shares of restricted common stock for a total expense of $36 thousand related to these services.

VerifyMe, Inc.

Notes to the Financial Statements

Effective July 31, 2019, the Company engaged

an advisor to provide consulting services to the Company’s Board of Directors.

The Company issued 4,000 shares of restricted

common stock during the year ended December 31, 2019 in related to this to this engagement for a value of $19,000.

common stock during the year ended December 31, 2019 in related to this to this engagement for a value of $19 thousand.

Effective July 15, 2019, the Company engaged an advisor for sales and marketing purposes.

During the year ended December 31, 2019,

the Company issued 680,000 shares of restricted common stock for a value of $83,572.

May 29, 2019, a former director completed a cashless exercise of 200,000 warrants and was issued 71,774 shares of the Company’s

common stock.

See Note 8 –

the Company issued 13,600 shares of restricted common stock for a value of $83 thousand.

On May 29, 2019, a former director completed

a cashless exercise of 4,000 warrants and was issued 1,435 shares of the Company’s common stock.

See Note 9– Stock

Options, Restricted Stock and Warrants.

On September 19, 2019, in connection

with the Bridge Financing, the Company issued a total of 20,000 restricted shares of common stock with a fair value of $70 thousand.

See Note 5 – Convertible Debt.

STOCK OPTIONS, RESTRICTED STOCK AND WARRANTS

VerifyMe, Inc.

Notes to the Financial Statements

19, 2019, in connection with the Bridge Financing, the Company issued a total of 1,000,000 restricted shares of common stock with

a fair value of $70,100.

See Note 5 –

Convertible Debt.

On September 8,

2017, the Company entered into a consulting agreement stipulating partial payment in restricted common stock.

As of December 31,

2017, 120,000 shares have been issued.

These shares were valued at the closing price of the Company’s common stock as they

became due for a total of $12,000 for the year ended December 31, 2017.

During the year ended December 31, 2018, the Company issued

49,500 shares and incurred $44,120 related to this agreement.

On August 9, 2017, the Company granted 300,000 shares of restricted

common stock to each of six non-employee directors and one attorney vesting quarterly over one year.

The common stock was measured

at fair value at the grant date and expensed based on the vesting schedule.

Common stock related to the Company’s attorney

were revalued as of the year end.

During the year ended December 31, 2018, $111,105 compensation expense was recorded in relation

to these awards.

As of December 31, 2018, there was $0 unrecognized compensation cost related to these shares of restricted common

During the year

ended December 31, 2018, 37,500 restricted stock units were vested in relation to a consulting service agreement and a total of

$8,625 was expensed.

During the year ended December 31, 2018, the Company granted

a total of 600,000 restricted stock awards to two directors of the Company, each receiving 300,000 shares of restricted common

stock, for joining the Board of Directors.

On April 25, 2018 the Company approved the immediate vesting of all of the Company’s

outstanding restricted common stock issued in 2017 and 2018 to non-employee directors of the Company.

During the year ended December

31, 2018, $160,500 compensation expense was recorded in relation to this issuance.

As of December 31, 2018, there was $0 unrecognized

compensation cost related to these shares of restricted common stock.

During the year ended December 31, 2018,

the Company granted a total of 1,425,000 shares of restricted common stock to the directors and the Chief Executive Officer of

the Company for their services and vesting quarterly over a one-year period and 150,000 shares to one attorney, vesting immediately.

During the year ended December 31, 2018, $174,660 compensation expense was recorded in relation to this issuance.

As of December

31, 2019, there is $0 unrecognized compensation cost related to these shares of restricted common stock.

In January 2018, the Chairman of the Board

of Directors, made a cashless exercise of 5,000,000 options related to services in 2017, whereby the Chairman disposed of 972,222

shares to the Company as part of his exercise, amounting to an issuance of 4,027,778 shares, see Note 8.

In 2017, the Company conducted a private placement offering with a maximum offering amount of $2,100,000

comprised of units consisting of 715,000 shares of common stock and 715,000 five-year warrants exercisable at $0.15 per share.

relation to the 2017 private placement with a maximum offering amount of $2,100,000 allowing investors to purchase units consisting

of 715,000 shares of common stock and 715,000 five-year warrants exercisable at $0.15 per share, the Company’s Board of Directors

increased the size of the private placement by an additional amount beyond the $2,100,000 limit.

During the year ended December

31, 2018 the Company raised gross proceeds of $1,153,645 for the purchase of 16,513,311 shares of common stock and 16,513,311 warrants.

Of these amounts, gross proceeds of $530,777 for the purchase of 7,590,111 shares of common stock and 7,590,111 warrants related

to current and then directors and relatives of the directors of the Company.

On January 30, 2018, the Company authorized

a 30-day offer, beginning on February 20, 2018, to the holders of the Company’s outstanding warrants exercisable at $0.15

to exercise their warrants at $0.10 per share.

This authorization was extended until June 30, 2018.

The Company authorized

certain holders, who had sent in their exercise notices prior to June 30, 2018, to submit payment before July 27, 2018 and exercise

their warrants at $0.10 per share.

For the year ended December 31, 2018, 20,787,784 warrants were exercised and a total of 20,787,784

shares of common stock were issued for gross proceeds of $2,079,345.

Included in the above amounts are gross proceeds of $1,205,458

from current and then directors in exchange for exercise of 12,054,576 warrants and issuance of 12,054,576 shares of common stock.

In January 2018, a member of the Board

exercised 104,876 warrants with an exercise price of $0.15 and a total of 104,876 shares of common stock were issued for gross

proceeds of $15,731.

VerifyMe, Inc.

Notes to the Financial Statements

On March 31, 2018, the Company entered into a Confidential

Settlement Agreement (the “Settlement Agreement”) with Paul Klapper, a member of the Company’s Board, Stephen

Silver, PFK Development Group, Ltd.

(“PFKD”) and certain other parties named in the Settlement Agreement.

to the terms of the Settlement Agreement, the Company (i) paid a total of $500,000 (the “Settlement Amount”) to PFKD

Silver and (ii) issued them each 500,000 shares of the Company’s common stock (the “Settlement Shares”).

The shares were valued at $279,000 whereby $139,500 related to common stock issued to a related party and $139,500 related to

common stock issued to a third party.

The Settlement Agreement provides for cancellation as of March 31, 2018 of certain revenue

sharing agreements between the Company and each of Mr.

Silver and PFKD, and terminates the Company’s obligation

to issue warrants to purchase 3.7 million shares of the Company’s common stock at an exercise price of $0.40 per share.

During the year ended December 31, 2018, 1,749,683 shares of common stock and 1,749,683 of warrants were issued to Mr.

in relation to a conversion of a note payable upon conversion for $120,000 principal and $2,478 accrued interest.

During the year

ended December 31, 2018, those shares of common stock and warrants were issued and delivered.

Pursuant to ASC 470-50- 40 Modifications

and Extinguishments, the Company assessed the nature of the transaction and based on its assessment concluded it is a capital

transaction in essence, and as such accounted for it through Additional Paid-In Capital with no gain or loss recognized in the

Income Statement during the year ended.

Klapper joined the Board of Directors on July 14, 2017 and resigned as of March 31,

In April 2018, the former Chief Executive

Officer of the Company exercised his warrants at an exercise price of $0.01 for gross proceeds of $1,000 resulting in an issuance

of 100,000 shares.

On July 27, 2018 the Company cancelled

607,143 shares as a result of an over-issuance of shares to an investor in connection with the Company’s 2017 exchange.

On July 31, 2018, a member of the Board

exercised 1,439,524 warrants held by an entity under his control at an exercise price of $0.15 per share for a total price of

NOTE 8 –

STOCK OPTIONS, RESTRICTED

STOCK AND WARRANTS

On December 17, 2003, the Company

created the 2003 Stock Option Plan (the “2003 Plan”).

Under the 2003 Plan, the Company is authorized to grant options

to purchase up to 18,000,000 shares of common stock to the Company’s employees, officers, directors, consultants, and other

agents and advisors.

During 2013, the Company adopted a new

incentive compensation plan (the “2013 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

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.

During 2013, the Company adopted the 2013

Omnibus Equity Compensation Plan (the “2013 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 up to an aggregate of 400,000 shares of

common stock.

The 2013 Plan is intended to permit certain 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-qualified stock options.

On November 14, 2017, the Executive Committee

of the Company’s Board of Directors adopted the 2017 Equity Incentive Plan (the “Plan”) which covers the potential

issuance of 13 million shares of common stock.

The Plan provides that directors, officers, employees, and consultants of the Company

will be eligible to receive equity incentives under the Plan at the discretion of the Board or the Board’s Compensation

The Board’s Compensation Committee may adopt rules and regulations to carry out the terms of the Plan.

terminates on November 14, 2027 unless sooner terminated.

The 2017 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.

of the Company’s Board of Directors adopted the 2017 Equity Incentive Plan (the “2017 Plan”) which covered the

potential issuance of 260,000 shares of common stock.

The 2017 Plan provided that directors, officers, employees, and consultants

of the Company were eligible to receive equity incentives under the 2017 Plan at the discretion of the Board or the Board’s

Compensation Committee.

On August 10, 2020, the Company’s

Board of Directors adopted the 2020 Equity Incentive Plan (the “2020 Plan”), subject to stockholder approval, which

covers the potential issuance of up to 1,069,110 shares of common stock.

On September 30, 2020, the Company’s stockholders

approved the 2020 Plan, and upon such approval the 2020 Plan became effective and the 2017 Plan was terminated.

Shares of common

stock underlying existing awards under the 2017 Plan may become available for issuance pursuant to the terms of the 2020 Plan under

certain circumstances.

Employees and non-employee directors of the Company or its affiliates, and other individuals who perform

services for the Company or any of its affiliates, are eligible to receive awards under the 2020 Plan at the discretion of the

Board of Directors or the Board’s Compensation Committee.

The 2020 Plan is administered by the 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,

1 unchanged sentence

(or 110% of the fair market value in the case of a grantee holding more than 10% of the outstanding stock of the Company).

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.

VerifyMe, Inc.

Notes to the Financial Statements

The Company issued Non-Statutory Stock

aggregate fair market value (determined at the time of the grant) of stock with respect to which incentive stock options are exercisable

for the first time by any individual during any calendar year (under all plans of the Company and its affiliates) shall not exceed

$100 thousand , and the options in excess of $100 thousand shall be deemed to be non-qualified stock options, including prices,

duration, transferability and limitations on exercise.

The maximum number of shares of common stock that may be issued under the

2020 Plan pursuant to incentive stock options may not exceed, in the aggregate, 1,000,000.

The Company issued non-qualified stock

options pursuant to contractual agreements with non-employees.

5 unchanged sentences

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.

The following

table presents the weighted-average assumptions used to estimate the fair values of the stock options granted during the years

ended December 31, 2019 and 2018:

The assumptions used in calculating the fair value represent management’s best estimates

and involve inherent uncertainties and judgements.

VerifyMe, Inc.

Notes to the Financial Statements

The following table presents the weighted-average

assumptions used to estimate the fair value of the stock options granted during the years ended December 31, 2020 and 2019:

Risk Free Interest Rate

3 unchanged sentences

Weighted average estimated fair value of options during the period

The following table summarizes the activities for the Company’s

stock options for the year ended December 31, 2020 and 2019:

3 unchanged sentences

Balance as of December 31, 2018

Balance December 31, 2018

Forfeited/Cancelled

Balance December 31, 2019

Vested and Exercisable at December 31, 2019

(1) The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted

price of the Company’s common stock for options that were in-the-money at each respective period.

During the years

ended December 31, 2019 and 2018, the aggregate intrinsic value of options exercised under the Company’s stock option plans

was $59,800 and $2,113,368, respectively.

Balance as of December 31, 2019

Forfeited/cancelled

Balance as of December 31, 2020

Vested and Exercisable as of December 31, 2020

(1) The aggregate intrinsic value is calculated as the difference between the exercise price of the

underlying awards and the quoted price of the Company’s common stock for options that were in-the-money at each respective

During the years ended December 31, 2020 and 2019, the aggregate intrinsic value of options exercised under the Company’s

stock option plans was $97 thousand and $60 thousand , respectively.

VerifyMe, Inc.

Notes to the Financial Statements

The following table summarizes the activities for the Company’s

unvested stock options for the year ended December 31, 2020 and 2019:

Unvested Options

Date Exercise Price

2 unchanged sentences

Balance December 31, 2020

During the year ended December 31, 2019, the Company amended the Consulting Agreement

it has with its Chief Operating Officer and granted him options to purchase 1,000,000 shares of common stock with an exercise

price of $0.195 that vest annually in equal increments over a two-year period.

Additionally, during the year ended

December 31, 2019, the Company amended the Chief Operating Officer’s consulting agreement to provide, among other things,

for a monthly consulting fee of $14,500 for services provided and to extend the term of the consulting agreement to March 1, 2021.

Effective January 2020, the Company awarded

its Chief Financial Officer incentive stock options exercisable for 4,000 shares of common stock with an exercise price of $3.505

vesting quarterly over a one-year period and expiring on January 7, 2025 with a fair value of $14 thousand.

Effective January 2020, the Company awarded

four directors non-qualified stock options exercisable for 40,000 shares in the aggregate, for services rendered to the Company

in 2019 with an exercise price of $3.505 vesting immediately and expiring on January 7, 2025 with a fair value of $137 thousand.

Effective January 2020, the Company awarded

five of its directors non-qualified stock options exercisable for 50,000 shares in the aggregate, for services to be rendered to

the Company in 2020 with an exercise price of $3.505 vesting quarterly over a one-year period and expiring on January 7, 2025 with

a fair value of $171 thousand.

On April 16, 2020, the Company approved

a three-year extension of the expiration date for certain options previously granted to Patrick White, the Company’s President

and Chief Executive Officer and to Norman Gardner, the Company’s Chairman.

As a result, 140,000 options previously granted

White now expire on August 15, 2025 and 90,000 options previously granted to Mr.

Gardner now expire on June 28, 2025.

other terms with respect to the option grants remain the same.

The Company applied FASB ASC 718, “Compensation—Stock

Compensation,” modification accounting and calculated a change in fair value of $154 thousand.

On April 16, 2020, the Company awarded

a director non-qualified stock options for 3,000 shares of common stock for services rendered to the Company with an exercise price

of $4.025 vesting immediately and expiring on April 16, 2025, with a fair value of $12 thousand.

On May 27, 2020, the Company awarded two

directors non-qualified stock options for an aggregate of 8,000 shares of common stock for services rendered to the Company with

an exercise price of $5.295 vesting immediately and expiring on May 27, 2025, with a fair value of $41 thousand.

In August 2020, the Company issued options

to purchase of 28,000 shares of common stock, that expire eighteen months from the date of grant and have an exercise price of

$4.60, for services performed by two sales consultants, with a fair value of $96 thousand.

During the year ended December 31, 2019,

the Company amended the Consulting Agreement it has with its Chief Operating Officer and granted him options to purchase 20,000

shares of common stock with an exercise price of $9.75 that vest annually in equal increments over a two-year period.

Additionally,

during the year ended December 31, 2019, the Company amended the Chief Operating Officer’s Consulting Agreement to provide,

among other things, for a monthly consulting fee of $15 thousand for services provided and to extend the term of the Consulting

Agreement to March 1, 2021.

VerifyMe, Inc.

Notes to the Financial Statements

In August 2019, the Company entered into

an amendment (the “Amendment”) to the Employment Agreement, dated August 15, 2017, with Patrick White, the Chief Executive

Officer of the Company (the “Employment Agreement”), which Employment Agreement automatically renewed on July 16,

an amendment (the “Amendment”) to the Employment Agreement, dated August 15, 2017, with Patrick White, the Chief Executive

Officer of the Company (the “Employment Agreement”), which Employment Agreement automatically renewed on July 16, 2019,

effective on August 15, 2019.

Pursuant to the Amendment, the term was reduced to one year and Mr.

White agreed to defer

receipt of sums due him to improve the Company’s liquidity.

White was due to receive $100,000 on August 15, 2019 representing

deferred salary (the “Deferral Amount”) that he had previously agreed to defer over the two years of the initial term

White agreed to defer receipt

of sums due him to improve the Company’s liquidity.

White was due to receive $100 thousand on August 15, 2019 representing

deferred salary (the “Deferral Amount”) that he had previously agreed to defer over the two years of the initial term

of his Employment Agreement.

5 unchanged sentences

White 10,000 five-year fully vested incentive stock options under the

Company’s 2017 Equity Incentive Plan exercisable at $0.14 per share.

Company’s 2017 Plan exercisable at $7.00 per share.

During the year ended December 31, 2019,

1 unchanged sentence

period has expired.

During the year ended December 31, 2018,

the Company amended the consulting agreement held with its Chief Operating Officer and granted him 1,000,000 stock options with

an exercise price of $0.2102 with 500,000 stock options vesting immediately and the remaining 500,000 stock options vesting on

February 28, 2019 subject to continuing to provide consulting services.

In January 2018, the Chairman of the Board

made a cashless exercise of 5,000,000 options related to services in 2017, whereby the Chairman disposed of 972,222 shares to the

Company as part of his exercise, amounting to an issuance of 4,027,778 shares, see Note 7.

In November 2018, 600,000 options were granted a weighted average

exercise price of $0.37 with a term of five years.

Of the 600,000 options, 500,000 options were issued to an employee of

the Company vesting monthly over a six-month period, 100,000 to the Chief Financial Officer vesting quarterly over a one-year period.

For the years ended December 31, 2019

and 2018, the Company expensed $422,682 and $329,193, respectively, related to the options.

For the years ended December 31, 2020 and

2019, the Company expensed $704 thousand and $423 thousand, respectively, related to the options.

As of December 31, 2020, there was $10

unrecognized compensation cost related to outstanding stock options expected to vest over the weighted average of 0.7 years.

VerifyMe, Inc.

Notes to the Financial Statements

thousand unrecognized compensation cost related to outstanding stock options expected to vest over the weighted average of 0.1

The following table summarizes the activities

for the Company’s warrants for the year ended December 31, 2019 and 2018:

for the Company’s warrants for the year ended December 31, 2020 and 2019:

Warrants Outstanding

Balance, December 31, 2017

(22,809,908 )

Balance as of December 31, 2018

Cancelled/Forfeited

Balance, December 31, 2018

Balance, December 31, 2019

Exercisable at December 31, 2019

(1) The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying warrants and the

closing stock price of $0.0699 for our common stock on December 31, 2019.

All warrants were vested

on the date of grant.

In May 2019, a former director made a cashless exercise of 200,000

warrants, whereby the warrant holder disposed of 128,226 shares of common stock to the Company as part of this exercise, amounting

to an issuance of 71,774 shares of common stock.

In January 2018, the Company

issued 1,749,683 shares of common stock and 1,749,683 warrants with an exercise price of $0.15 to Mr.

Klapper, a former director,

relating to the Note payable conversion that took place in June 2017.

Additionally, 3,700,000 warrants were forfeited.

In connection with the Bridge

Financing in September 2019, the placement agent for the Debentures is entitled to receive 300,000 warrants convertible to 300,000 shares of common

stock with an exercise price of $0.15 for a five- year term.

See Note 5 –

Convertible Debt.

During the year ended December 31, 2018,

in relation to the Settlement Agreement, the Company issued 464,775 warrants at an exercise price of $0.15 which were paid for

in 2014 but had not been previously issued.

For the year ended December

31, 2018, 20,787,784 shares of warrants were exercised and a total of 20,787,784 shares of common stock were issued for

gross proceeds of $2,079,345.

January 2018, a member of the Board exercised 104,876 warrants with an exercise price of $0.15 and a total of 104,876 shares of

common stock were issued for gross proceeds of $15,731, see Note 7.

April 2018, the former Chief Executive Officer of the Company exercised 100,000 warrants at an exercise price of $0.01 for gross

proceeds of $1,000 resulting in an issuance of 100,000 shares, see Note 7.

On July 31, 2018, a member of the Board

exercised 1,439,524 warrants held by an entity under his control at an exercise price of $0.15 per share for a total price of $215,929.

In August 2018, a warrant holder, made

a cashless exercise of 366,047 warrants, whereby the warrant holder disposed of 190,386 shares to the Company as part of this exercise,

amounting to an issuance of 175,661 shares.

Balance as of December 31, 2019

Cancelled/Forfeited

Balance as of December 31, 2020

Exercisable as of December 31, 2020

(1) The aggregate intrinsic value is calculated as the difference between the exercise price of the

underlying warrants and the closing stock price of $3.60 for our common stock on December 31, 2020.

VerifyMe, Inc.

Notes to the Financial Statements

In October 2018, a warrant holder, made

a cashless exercise of 11,678 warrants, whereby the warrant holder disposed of 4,680 shares to the Company as part of this exercise,

amounting to an issuance of 6,998 shares.

During the year ended

December 31, 2018 an additional 1,250,000 warrants were forfeited in relation to a note payable conversion

occurring in the prior

NOTE 9–

FAIR VALUE OF FINANCIAL

All warrants were vested on the date of

The Company issued three-year 2020 Warrants

to purchase 498,000 shares of common stock to the purchasers of the 2020 Debentures (see Note 5 – Convertible Debt).

2020 Warrants have an exercise price of $7.50 per share, and may be exercised cashlessly if the Company fails to maintain an effective

registration statement at any time beginning six months after issuance.

Of this amount, 2020 Warrants to purchase 82,500 shares

were issued to four directors and an entity in which one officer of the Company is a majority owner and co-manager.

On June 22, 2020, 2020 Warrants to purchase

448,000 shares of common stock were cancelled (including 2020 Warrants for 82,500 shares that had been issued to four directors

and an entity in which one officer of the Company is a majority owner and co-manager) and warrants to purchase 573,479 shares of

common stock were issued upon closing of the Offering and conversion of the 2020 Debentures, with an exercise price of $4.60 and

an expiration term of five years.

Of this amount, warrants to purchase 105,567 of shares of common stock were issued to four directors

and an entity in which one officer of the Company is a majority owner and co-manager.

As a result of the Offering, the per share

exercise price for the outstanding but unexercised 2020 Warrants to purchase shares of common stock related to the two warrant

holders who did not cancel their 2020 Warrants, has been adjusted from $7.50 to $4.59 and the number of shares of common stock

underlying the outstanding but unexercised 2020 Warrants increased from an aggregate of 50,000 to 81,700 shares of common stock.

On May 27, 2020, the Company awarded four

non-employees warrants to purchase an aggregate of 11,000 shares of common stock for services rendered to the Company with an exercise

price of $5.295 vesting immediately and expiring on May 27, 2023, with a fair value of $54 thousand.

On June 18, 2020, in connection with the

Offering, the Representative provided a partial exercise notice of the over-allotment option to purchase 50,000 additional shares

of common stock and additional warrants to purchase 325,987 shares of common stock.

On June 22, 2020, in connection with the

Offering, the Company issued warrants to purchase 2,499,900 shares of common stock, with a five-year term and an exercise price

of $4.60, including the additional warrants pursuant to the over-allotment option exercise noted above.

In connection with the Offering, on June

22, 2020 the Company issued warrants to the Representative to purchase up to a total of 173,913 shares of common stock.

The Representative’s

Warrants are exercisable during the three-year period commencing 180 days from June 22, 2020.

The Representative’s Warrants

are exercisable at a per share price equal to $5.06 per share with a fair value of $523 thousand netted in additional paid in capital

included in the accompanying Balance Sheets.

In connection with the Bridge Financing

in September 2019, the placement agent for the 2019 Debentures was entitled to receive warrants to purchase 6,000 shares of common

stock with an exercise price of $7.50 for a five- year term until May 2020 when the placement agent waived its right to receive

the warrants.

See Note 5 – Convertible Debt.

In May 2019, a former director made a cashless

exercise of 4,000 warrants, whereby the warrant holder disposed of 2,565 shares of common stock to the Company as part of this

exercise, amounting to an issuance of 1,435 shares of common stock.

For the years ended December 31, 2020 and

2019, the Company expensed $51 thousand and $0, respectively, related to warrants.

NOTE 10– FAIR VALUE OF FINANCIAL

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.

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.

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

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.

VerifyMe, Inc.

Notes to the Financial Statements

Liabilities measured at fair value

on a recurring basis are summarized as follows:

on a recurring basis are summarized as follows (in thousands):

December 31, 2020

4 unchanged sentences

fair value of warrants

The Company has no assets that are measured at fair value on a recurring basis.

were no assets or liabilities measured at fair value on a non-recurring basis during the year ended December 31, 2019.

NOTE 10 –

DEBT FORGIVENESS

During the year ended December 31, 2018 the Company negotiated

with certain vendors regarding balances outstanding for prior year services resulting in a Gain on accounts payable forgiveness

included in the Statement of Operations for $352,008.

During the year ended December 31, 2019 there was $0 recorded as gain on

accounts payable forgiveness.

NOTE 11 –

OPERATING LEASES

ended December 31, 2019 and 2018, total rent expense under leases amounted to $14,746 and $12,395, respectively.

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 year ended December 31, 2020.

NOTE 11 – OPERATING LEASES

For the year ended

December 31, 2020 and 2019, total rent expense under leases amounted to $14 thousand and $15 thousand, respectively.

lease is for a period less than a year and falls outside of the scope of Lease (Topic 842).

At December 31, 2019, the Company

As of December 31, 2020, the Company

was not obligated under any non-cancelable operating leases.

NOTE 12 –

MAJOR CUSTOMERS/VENDORS

NOTE 12 – MAJOR CUSTOMERS/VENDORS

During the year ended December 31, 2020,

two customers accounted for 92% of total sales.

During the year ended December 31, 2018, four customers accounted for

During the year ended December 31, 2019, two customers accounted for

97% of total sales.

Generally, a substantial percentage of the Company's sales has been made to a small number of customers

and is typically on an open account basis.

During the years ended December 31, 2019

and 2018, the Company purchased 100.0% of pigment from one vendor.

Additionally, during the years ended December 31, 2019 and 2018,

the Company purchased 100.0% of canisters from one vendor.

Generally, a substantial percentage of the Company's sales has been made to a small number of customers and

is typically on an open account basis.

During the years ended December 31, 2020 and 2019, the Company

purchased 100 % of pigment from one vendor.

Additionally, during the years ended December 31, 2020 and 2019, the Company purchased

100% of canisters from one vendor.

As of December 31, 2020, two customers accounted for 96% of

total accounts receivable.

VerifyMe, Inc.

Notes to the Financial Statements

NOTE 13 –

SUBSEQUENT EVENTS

On January 15, 2020 the Company has received

a Notice of Allowance for the Company’s U.S.

Patent Application relating to the Company’s Invisible QR code and Smartphone

reading system.

In January 2020, the Company issued 33,333

shares of restricted common stock in relation to investor relation services.

Effective January 2020, the Company awarded its Chief Financial Officer 200,000 Incentive Stock Options with an exercise price

of $0.0701 vesting quarterly over a one-year period and expiring on January 7, 2025.

Effective January 2020, the Company awarded

four Directors 2,000,000 Non-Qualified Options for services rendered to the Company in 2019 with an exercise price of $0.0701

vesting immediately and expiring on January 7, 2025.

Effective January 2020, the Company awarded

five of its Directors 2,500,000 Non-Qualified Options for services to be rendered to the Company in 2020 with an exercise price

of $0.0701 vesting quarterly over a one-year period and expiring on January 7, 2025.

The Company entered into an agreement with

a non-exclusive financial advisor and placement agent for a term of twelve months commencing in January 2020.

Upon execution of

the agreement, the Company issued 250,000 fully vested restricted shares of the Company’s common stock.

In relation to this

agreement, the Company is subject to a success fee as follows:

Cash Compensation Fees for Equity or

Hybrid Equity Capital Raises

10% of the amount for any equity or hybrid equity capital raised up to $1,000,000

8% of the amount for any equity or hybrid equity capital raised up to $5,000,000

6% of the amount for any equity or hybrid equity capital raised over $5,000,000

Cash Compensation Fees for Debt Financing

125,000 fully vested restricted shares of the Company’s common stock for purchases of debt

that is not convertible into equity, within the greater of a two-year period commencing in January 2020 or within twelve months

after the termination of the agreement

Restricted Stock Fees for Capital Raise

Restricted shares of the Company’s common stock equal to 4% of the capital raised divided

by the last reported closing price of the stock on the date of close.

On March 6, 2020, in connection with this

agreement a cash compensation of $152,960 was made by the Company and an additional 614,205 shares of the Company’s common

stock were issued.

In February 2020, the Company entered into

an agreement with a non-exclusive financial advisor and placement agent terminating the later of April 30, 2020 or upon closing

of a successful private placement.

The agreement will automatically extend for periods of thirty days until terminated in writing.

The Company has agreed to pay 10% of the gross proceeds raised by the financial and placement agent and agrees to issue an amount

of restricted shares equal to 4% of the total securities sold in the private placement divided by the last reported closing price

of the stock on the closing date of the private placement.

On March 6, 2020, in connection with this agreement a cash compensation

of $25,000 was made by the Company and 96,154 shares of the Company’s common stock were issued.

VerifyMe, Inc.

Notes to the Financial Statements

On January 30, 2020 the Company

issued an unsecured promissory note payable to a shareholder of the Company with a face value of $75,000 and an interest rate

of 10% per annum payable in full on March 30, 2020, subject to the Company’s right to extend payment until May 29, 2020.

On February 28, 2020, the holder of the $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.

In January 2020 the Company authorized

a non-binding convertible debenture stock financing (“the Offering”) with an annual 10% cumulative interest rate and

a conversion price per share of $0.08.

In relation to the Offering the Company authorized a minimum offering amount of $900,000

and a maximum offering amount of $2,000,000.

The Offering will terminate on the first to occur of:

(1) February 28, 2020, (2) the

date of the acceptance of subscriptions for the maximum offering amount, or (3) the date the Offering is terminated by the Company.

The Company reserves the right to extend the Offering in its sole discretion.

The Company’s capital structure after

the initial closing will have no outstanding variably-priced convertible instruments on its Balance Sheets.

Any outstanding debt

held by officers or directors of the Company will be exchanged for convertible debentures upon initial closing.

The new convertible

debenture will have secured position on all IP and Patents of the Company along with a blanket lien on all assets until such time

the debenture is paid in full or converted in full.

The 2020 Debentures shall

automatically convert into shares of the Company’s common stock, par value $0.001 per share upon the earliest to occur of

(i) the commencement of trading of the Common Stock on the NASDAQ, New York Stock Exchange or NYSE American (an “Uplist”)

at the Uplist Conversion Price;

or (ii) at any time the minimum bid price of the Common Stock exceeds $0.50 per share for twenty

(20) consecutive trading days and the average trading volume during the 10 trading days prior to the conversion is at least 100,000

shares and the shares are registered under an Effective Registration Statement or the shares are salable under Rule 144.

The “Uplist

Conversion Price”

will be the lesser of $0.08 or a 30% discount to the public offering price a share of Common Stock is

offered to the public in a securities offering resulting in the listing of the Common Stock on the NASDAQ, New York Stock Exchange

or NYSE American.

The convertible debentures shall be convertible, at any time, at the option of the holder, into shares of Common Stock, at a fixed conversion price equal to $0.08.

The Company shall issue a warrant (“Warrant”)

to purchase the number of shares equal to the principal amount of the convertible debentures divided by .08.

Each Warrant has a

three-year (3) term and is immediately exercisable at an exercise price of $0.15 per share.

If at any time after six months following

the issuance date and prior to the expiration date the Company fails to maintain an effective registration statement (the “Registration

Statement”) with the Securities and Exchange Commission (the “SEC”) covering the resale of the shares of Common

Stock underlying the Warrants, the Warrant may be exercised by means of a “cashless exercise,”

until such time as there

is an effective Registration Statement.

Each warrant will contain customary adjustment provisions in the event of a stock split,

reverse stock split or recapitalization.

On March 6, 2020 the Company

completed the closing of the 2020 Debentures and raised $1,992,000 in gross proceeds from the sale of the 2020 Debentures and

warrants to purchase shares of the Company’s common stock.

Of this amount, $330,000 were received from four directors

and an entity in which one officer of the Company is a majority owner.

From this sale, the Company received $1,814,040 after the

payment of commissions and fees.

The Company used $750,000 of the net proceeds to redeem the existing convertible debentures

prior to maturity, with a face value of $600,000 and an early redemption fee of $150,000.

In connection to the 2020 Debentures, the

Company issued 24,900,000 three-year warrants to the purchasers.

The warrants have an exercise price of $0.15 per share, and may

be exercised cashlessly if the Company fails to maintain an effective registration statement at any time beginning six months after

Of this amount 4,125,000 warrants were issued to four directors and an entity in which one officer of the Company is

a majority owner.

As of December 31, 2019, two customers accounted for 97% of total accounts receivable.

NOTE 13 – SUBSEQUENT EVENTS

Effective January 1, 2022, the Company

approved restricted stock units or restricted stock awards, for each non-employee director, with a grant date fair value equal

If the non-employee director serves as a Board committee chair or Lead Independent director, he or she will also receive

and an additional award of restricted stock units or restricted stock award with a grant date fair value equal to $25 thousand.

These awards will vest in full on the earlier of the one-year anniversary of the date of grant subject to the non-employee director’s

continued service on the Board of Directors.

In January 2020, a total of 145,010 restricted stock units were issued to five non-employee

directors for a fair value of $625 thousand, vesting in one year from the date of issuance.

In February 2021, the Company issued 1,087

shares of restricted common stock in relation to investor relation services.

On February 9, 2021, the Company entered

into an underwriting agreement with Maxim Group LLC (“Maxim”), as the representative of several underwriters pursuant

to which the Company agreed to issue and sell to the underwriters in an underwritten public offering an aggregate of 1,650,000

shares of common stock, of the Company at a public offering price of $5.30 per share, less underwriting discounts and commissions.

The public offering closed on February 12, 2021 resulting in gross proceeds of $8.7 million and net proceeds of $8.0 million, less

underwriting discounts and commissions and other offering expenses.

In connection with the public offering

that closed on February 12, 2021, the Company granted Maxim a 45-day option to purchase up to 247,500 shares of common stock to

cover over-allotments, if any.

On February 19, 2021 Maxim partially exercised its over-allotment option to purchase 100,000

shares of common stock for gross proceeds of $530 thousand and net proceeds of $493 thousand, less underwriting discounts and commissions.

In March 2021, the Company issued 1,078

shares of restricted common stock in relation to investor relation services.

Effective March 1, 2021, the Company amended and restated the

Consulting Agreement it has with its Chief Operating Officer.

The amended and restated agreement provides among other things, an

annual fee of $214,400, a commission of 2% on all gross sales above $500,000, the issuance of 10,000 restricted stock awards and

the extension of the expiration date for options previously granted to him to the five-year anniversary of the agreement’s

effective date.

As a result, 80,000 options previously granted to the Company’s Chief Operating Officer now expire on March

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 9A. Controls and Procedures