VerifyMe, Inc. 10-K

ITEM 1. BUSINESS. Overview VerifyMe, Inc. (“VerifyMe,” or the “Company,” “we,” “us,” or “our”) is a technology solutions provider specializing in brand protection and supply chain functions such as counterfeit prevention, authentication, serialization, consumer engagement, track and trace features for labels, packaging and products. The Company was formed as LaserLock Technologies, Inc., in Nevada on November 10, 1999. Until 2018, we were primarily engaged in the research and development of our technologies. We began to commercialize our covert luminescent pigment, RainbowSecure®, in 2018, and we also developed the patented VeriPAS™ software system in 2018 which covertly and overtly serializes products to track a product’s “life cycle” for brand owners. We believe VeriPAS™ is the only invisible covert serialization and authentication solution deployed through variable digital printing on HP Indigo printing systems with a smartphone tracking and authentication system. VeriPAS™ is capable of fluorescing, decoding, and verifying invisible RainbowSecure® codes in the field designed to allow investigators to quickly and efficiently authenticate product throughout the distribution chain, including warehouses, ports of entry, retail locations, and product purchased over the Internet for inspection and investigative actions. This technology is coupled with a secure cloud-based track and trace software engine which allows brands and investigators to monitor the complete supply chain from product origination to the end user utilizing geolocation mapping and intelligent programable alerts. Brand owners access the VeriPAS™ software through a web portal over the Internet. Brand owners can then set rules of engagement, gather rich business intelligence, establish marketing programs for customer engagement and control, monitor and protect their products’ “life cycle.” We have derived minimal revenue from our VeriPAS™ software system and have derived limited revenue from the sale of our RainbowSecure® technology. Our brand protection technologies involve the utilization of invisible and/or color changing inks, which are compatible and printed with modern digital and standard printing presses. The inks may be used with certain printing systems such as digital, offset, flexographic, silkscreen, gravure, inkjet and toner-based laser printers. The inks can be used to print both static and variable images utilizing digital printing presses and third-party digital inkjet systems which are attached to traditional printing presses. Our invisible ink can be used in fixed images, variable images or serialized codes, bar codes or QR codes. We have developed a product which attaches to a smartphone that reads our invisible ink codes into sophisticated cloud-based track and trace software. We also have a product that informs users that our invisible ink is present for authentication. Based upon our experience, we believe that the ink technologies may be incorporated into most existing manufacturing processes. Business Update Recent Developments In March 2021, we signed a sales agency agreement with Syntax Ltd., HP Indigo’s authorized channel partner for China. Syntax is the only distributor authorized to sell and support HP Indigo products in China, and now has an exclusive agreement to sell our technology solutions for HP Indigo products in China. We also granted Syntax a non-exclusive right to sell our other products in China. In February 2021, David Sandello joined VerifyMe as Director of Sales and Business Development of North America to focus on expanding our revenue operations and to accelerate growth. Mr. Sandello brings 15 years of experience building, scaling and leading revenue organizations including new sales and growth through existing account management teams. In February 2021, we received an initial purchase order for 2 million pre-printed anti-counterfeiting labels. The labels will be utilized for track and trace and brand protection for 2 million boxes of surgical gloves, a personal protective equipment (“PPE”) necessity in fighting the ongoing Covid-19 pandemic. This initial purchase order for complete pre-printed tamper-evident labels with VeriPAS™ brand protection and consumer engagement is the first order under our strategic partnership with Renavotio (OTC: RIII). This is a custom-designed tamper proof label containing multiple layered technologies embedded and printed by VerifyMe. In February 2021, we entered into a strategic partnership with INX International Ink Company (“INX”). INX will supply us with conventional and ink jet inks that incorporate our RainbowSecure® marking technology for resale to our customers. The inks are developed and ready for market for metal container decorating, dry offset printing, gravure shrink sleeves, and flexographic fabric printing. The inks developed, and expected to be developed, under the supply agreement are applicable to a broad range of uses, including aluminum beverage cans and bottles, labels and packaging for the cannabis industry, personal protective equipment, aerospace parts, motor vehicle parts, weapons and ammunition, silicon chips and medical equipment. In February, 2021, as part of our public offering of an aggregate 1,750,000 shares of common stock, we generated aggregate gross proceeds of $9.2 million and net proceeds of $8.5 million, less underwriting discounts and commissions and other offering expenses, including the partial exercise of the over-allotment option resulting in gross proceeds of $530 thousand. 2 Table of Contents In January 2021, we signed Authentik, a company registered in Pakistan, as an independent sales contractor. Our relationship with Authentik will expand our global reach across critical industries, including pharmaceutical and food. Year Ended December 31, 2020 In 2020, we focused our efforts primarily on the completion of our products, and began the introduction of our products into the market and forging relationships that could help generate revenue in future periods. We continue to expand our business and grow organically. We also plan to pursue acquisition opportunities that will allow us to accelerate our growth plans. In November 2020, we announced a share repurchase program to spend up to $1.5 million to repurchase shares of our common stock over the next nine months. To date, no shares have been purchased, but the Company reserves the right to make purchases at any time under the terms set out in this program. In June 2020, we completed the closing of our underwritten public offering of an aggregate of 2,173,913 units at a price to the public of $4.60 per unit. Each unit issued in the offering consisted of one share of common stock and one warrant to purchase one share of common stock at an exercise price of $4.60. The common stock and warrants began trading on the Nasdaq Capital Market (“Nasdaq”) on June 18, 2020, under the symbols “VRME” and “VRMEW,” respectively. We received gross proceeds of $10.0 million, before deducting underwriting discounts and commissions and other estimated offering expenses. Concurrent with the offering, we also effectuated a reverse split of our issued and outstanding common stock and treasury stock at a ratio of 50-to-1. In March 2020, we completed the private placement of $1,992,000 senior secured convertible debentures (the “2020 Debentures”). We used $750,000 of the net proceeds to redeem prior outstanding convertible debentures issued in 2019. In connection with the issuance of the 2020 Debentures, we also issued warrants (“2020 Warrants”) to purchase 498,000 shares of common stock. Each of the 2020 Warrants had a three-year term and were immediately exercisable at an exercise price of $7.50 per share. On June 22, 2020, we 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. 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 upon closing of our listing on Nasdaq. In January 2020, we received a Notice of Allowance for the U.S. Patent Application from the U.S. Patent & Trademark Office for the dual code authentication process relating to our invisible QR code and smartphone reading system “Dual Code Authentication Process.” COVID-19 Pandemic The COVID-19 pandemic disrupted businesses and affect production and sales across a range of industries, as well as caused volatility in the financial markets, which negatively impacted our results of operations for 2020, and could further negatively impact our sales and results of operations. The pandemic has also caused a major spike in demand for safety products such as masks and gloves, COVID-19 test kits, medications, and vaccines to treat the virus, which we believe has further caused an increase in counterfeit products. Our suite of technology solutions for global manufacturers, distributors and sellers are designed to allow consumers to prove authenticity and we have proactively reached out to global manufacturers who are seeking to provide their customers authenticity in their products. Please see Item 1A, “Risk Factors—Risks Relating to the COVID-19 Pandemic” and ITEM 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—COVID-19 Pandemic” in this Report for additional information regarding certain risks associated with the pandemic and the pandemic’s effect on our results of operations. Commercialization of our Technologies In 2020, we entered into a number of strategic partnerships and agreements to accelerate the commercialization of our technology and announced a number of commercial milestones achieved by the Company, including: · In October 2020, we entered into an agreement with OWS Capital to market, promote and sell our security authentication technology solutions, including the VerifyMe® as Authentic® labels, in the United Arab Emirates and Middle East. · In October 2020, we extended our agreement with Micro Focus International PLC (“Micro Focus”) for three years. The original agreement was entered into in December 2017. Micro Focus cross-sells our technology and supports our VeriPAS™ software platform. To date, no sales have been made on our behalf by Micro Focus, and limited revenue has been derived from our VeriPAS™ supply chain serialization, track and trace technology. · In September 2020, we were notified that a Forbes Top 50 Private Company that sells nutrition, personal care, beauty and home care products, expects to add additional distribution in three additional countries; Japan, Vietnam and Taiwan. The client also ordered RainbowSecure® ink technology to meet required production volumes for products, in the first quarter of 2021. · In June 2020, we entered into a new partnership with Corsearch, Inc. (“Corsearch”), a brand clearance and protection leader, pursuant to which we have the right to use and offer Corsearch’s technical search platform ZERO® to our customers and Corsearch will have the right to offer its brand clients the full suite of our technologies to protect their e-commerce products. ZERO® is an online monitoring and enforcement platform that monitors and processes all information relating to a brand’s products, trademarks, copyrights, designs and patents. The initial term of the agreement is two years and becomes auto renewable after the initial period. To date, we have not derived revenue from this technology. We are beginning to demonstrate this technology to our customers as part of a broader strategy for a comprehensive provider of brand protection solutions, for e-commerce as well as our proprietary physical and digital supply chain product offerings . 3 Table of Contents · In June 2020, we executed a Technology Integration and Sales Referral Agreement with SmartGlyph Limited (“SmartGlyph”), a U.K-based digital solutions provider, for a two-year term, to integrate technologies and establish a sales referral relationship. Under the agreement, the combined offering will include the VeriPAS™ Smartphone Authenticator and its mobile app, VeriPAS™ serialization, track and trace technology and RainbowSecure® ink and SmartGlyph’s barcodes and multi-faceted, “software only” coding platform. In addition, the agreement includes a cross-selling agreement, pursuant to which the receiving party will pay the referring party a referral fee equal to 10% of the purchase price of the products purchased by a customer of the receiving party who was introduced by the referring party. · In June 2020, we received our first order for VeriPAS™ serialization, track and trace technology in the cannabis industry, combined with our VerifyMe® as Authentic® labels. The VeriPAS™ serialization, track and trace technology is being utilized on pre-printed tamper-proof labels in order for the client to protect itself from counterfeit products containing contaminants. The solution also allows the end-consumer to download the compulsory certificate of origin, directly from their smartphone, by scanning the overt barcode on the tamper-proof label. We derived approximately $16 thousand in revenue related to this order, and we received a similar reorder in the first quarter of 2021. · In June 2020, we entered into a strategic partnership with Techind Engineers & Consultants-Impex (“Techind”), part of the Gohar Group, of India, with a two-year term, pursuant to which Techind provides our VeriPAS™ serialization, track and trace technology to a broad range of industries and clients of Techind, with a specific focus on the pharmaceutical and food and beverage industries. We have demonstrated our solution to a number of global companies with a presence in India through our partnership with Techind. Our Anti-Counterfeit Technologies and Products In the areas of authentication and serialization of physical goods, we offer clients the following brand protection security and anti-counterfeit technologies: · RainbowSecure® · VeriPAS™ supply chain serialization, track and trace technology · VeriPAS™ Smartphone Authenticator · VerifyMe Beeper · VerifyMe® Web™ RainbowSecure® technology was our first technology to be patented. It combines an invisible ink with a proprietary tuned laser to enable counterfeit products to be exposed. In 2017, we signed a five-year contract with Indigo Division of HP Inc. (“HP Indigo”) to print this technology on packages and labels on their 6000 series presses. Our technology has been tested and approved by HP Indigo 6000 series presses and more recently was qualified on HP Indigo’s 6900 series presses. In addition, we successfully trialed production on their 7900 press series used for sheet-fed products like folded cartons and plastic cards. HP Indigo informed us that other press models will be qualified once clients formally request in writing the need for qualification for current unqualified models. In addition, HP Indigo is producing sample secure government products such as tax stamp samples for governments with our RainbowSecure® invisible ink technology. HP Indigo has showcased these samples at various global government and print service providers trade shows. Customers can use a handheld beeping device, our VerifyMe Beepers, tuned to authenticate the unique frequency of our RainbowSecure® invisible ink, to broadcast a beeping sound to confirm the authenticity when placed on products, labels and packaging containing our RainbowSecure® ink. VerifyMe Beepers are being commercialized and leased to customers, typically for one year. In December 2017, we signed a contract with Micro Focus to use RainbowSecure® in their Global Product Authentication Service (GPAS). The technology also features a unique double layer of security which remains entirely covert at all times and provides licensees with additional protection. Under the contract with Micro Focus, we have a re-seller agreement where we sell the combined Micro Focus GPAS with our RainbowSecure® identifier under our own trademarked name, VeriPAS™. In May 2019, we entered into a strategic partnership with INX, the third largest producer of inks in North America, to co-develop inkjet inks to be used for inkjet printing in combination with high speed, high volume label and packaging printing presses. In 2020 INX, in conjunction with Print Craft Inc., successfully-tested an appeal garment containing our RainbowSecure® ink. This secured garment survived the 50 wash and dry cycle test. Sales and marketing efforts for this new VerifyMe secure apparel technology are commencing in 2021 in conjunction with INX and Print Craft Inc. In February 2021, INX completed the development of a version of our RainbowSecure® security ink for metal objects and INX is now co-marketing the new security ink to its global clients. The specially formulated inks will enable these printing presses to print our RainbowSecure® invisible ink technology, which includes our variable VeriPAS™ serialization, track and trace technology. We believe RainbowSecure® is particularly well-suited to closed and controlled environments that want to verify transactions within a specific area, as well as labels, packaging, textiles, plastics and metal products which need authentication. We have derived limited revenue from the sale of our RainbowSecure® technology. 4 Table of Contents VeriPAS™ supply chain serialization, track and trace technology combines the covert identifier of RainbowSecure® with the Micro Focus GPAS which provides brand owners geographical business intelligence on counterfeiting as well as the ability to authenticate labels, packaging and products. Using information from a smartphone screen, our VeriPAS TM technology, can provide authentication and data submission information. A customer or end-user can scan information from a product label or QR code and send it to the cloud where our VeriPAS TM software can verify authenticity of the product, as well as track and trace the product from production through delivery. Certain clients are in the testing stage with this product. Revenue was received for the first time in 2020 and a new order was received in the first quarter of 2021. To date, we have recognized minimal revenue from this technology. VeriPAS ™ Smartphone Authenticator technology is a piece of hardware with a built-in lighting system and software that scans invisible RainbowSecure® codes. Product investigators attach their smartphone to this device which then reveals the hidden RainbowSecure® images on the smartphone screen which are then sent to the VeriPAS TM software in the cloud for authentication and data submission. These devices have been commercialized and are being leased to customers. Leases are typically one year in length and are auto-renewable. A Forbes Top 50 Private Company added additional leases in 2020 for its international brand inspector team. Revenue from this product is at an initial stage and minimal at this time. VerifyMe Beeper technology is an authentication tool which we are marketing to customers in conjunction with our RainbowSecure® ink pigment. The VerifyMe Beeper is a handheld beeping device is tuned to authenticate the unique frequency of our RainbowSecure® invisible ink and will broadcast a beeping sound to confirm the authenticity when placed on products, labels and packaging containing our RainbowSecure® ink. The VerifyMe Beeper is designed for use by customers who desire instant authentication on items, such as event tickets at an entry gate. Our customized beeper will only positively identify a product bearing our unique anti-counterfeit solution. This technology is being commercialized and leased to customers, typically for one year auto-renewable terms. We are in the process of upgrading the functionality of this device so that it connects to a mobile phone via Bluetooth allowing authentication attempts to be recorded in the cloud by geo-location with time and date stamp. VerifyMe® as Authentic® labels are dual-purpose pre-printed labels with a visible serialized QR code for consumer scanning purposes, and an invisible serialized IR code for inspector scanning, authentication and tracking purposes. This label can be either a standard label or designed with tamper evident features. It was developed to provide covert brand protection for e-commerce retailers, to enable consumer product authentication, promotion, engagement and education through the visible serialized QR code. This technology has been successfully launched with tamper evident features and is being used in the cannabis sector by one customer, without the covert IR component. VerifyMe® Web TM includes, through our collaboration with Corsearch, a brand clearance and protection leader, technologies and services that better enable customers to effectively tackle counterfeit websites, domains and e-commerce platforms offering counterfeit products. To date, we have not derived revenue from this technology. We believe that our brand protection security technologies, coupled with our contract with HP Indigo, can be used to enable brand owners to securely prevent counterfeiting, prevent product diversion and authenticate labels, packaging and products and alleviate the brand owner’s liability from counterfeit products which physically harm consumers. Our covert technologies give brand owners the ability to control, monitor and protect their products life cycle. Also, our technologies allow brand owners to prove whether the product causing an issue is authentic or counterfeit. Brand Protection Technology Our brand protection technologies include (i) a technology utilizing invisible ink taggant that can be revealed by use of a special calibrated laser light for authentication purposes, (ii) an ink technology, which allows invisible codes to be printed, and (iii) a color changing technology that is activated by certain types of lights. Based on our knowledge and test results, we believe none of these technologies can be copied or scanned by counterfeiters. We believe the useful life of our technologies on a label or package is at least 20 years. In 2017, we signed a five-year contract with the HP Indigo to print this technology on packages and labels on their 6000 series digital presses. The 6000 series digital qualified presses are mainly used to print both static and variable high-quality images such as personalized labels and packaging for brand owners. In 2020, our technology was qualified on HP Indigo’s 6900 series presses, and we also successfully trialed production on their 7900 press series used for sheet-fed products like folded cartons and plastic cards. HP Indigo informed us that other press models will be qualified once clients formally request in writing the need for qualification for current unqualified models. In addition, HP Indigo is producing sample secure government products such as tax stamp samples for governments with our RainbowSecure® invisible ink technology. HP Indigo has showcased these samples at various global government and print service providers trade shows. This solution is marketed as RainbowSecure® powered by HP Indigo and sold globally by us to HP Indigo customers. The solution includes an HP Indigo security ElectroInk as well as our readers and authentication tools that can be used in conjunction with the security ElectroInk. Both companies provide support to HP Indigo customers that use the RainbowSecure® solution on HP Indigo’s digital printing presses. 5 Table of Contents The HP security ElectroInk containing RainbowSecure® is in an ink canister that is mounted into the digital HP Indigo printing press along with the other traditional ink stations. Since the HP Indigo is a digital press, the RainbowSecure® technology prints covert serialization numbers, codes or images either fixed or variable mainly on labels and packaging which are revealed when using our hand-held authentication devices, we call our VeriPAS™ Smartphone Authenticators. In combination with a smartphone, these authenticators utilize special calibrated laser light for authentication purposes. VeriPAS™ Smartphone Authenticators are being commercialized and leased to customers, typically for one year. In addition, in 2020, HP Indigo increased their own marketing of our RainbowSecure® invisible ink technology. We collaborated with HP Indigo at the Asia Security Group Virtual High Security Printing & Brand Protection Conference & Exhibition in December 2020 to showcase our RainbowSecure® solution on HP Indigo’s digital printing presses. HP Indigo also highlighted our RainbowSecure® invisible ink and VeriPAS™ Smartphone Authenticator in a webinar in July 2020. HP Indigo has trained their world-wide sales force on our technology to show to both print service providers and brand owners. HP Indigo has also installed our technology offerings in their HP Experience Centers located in Tel Aviv, Israel, Singapore, Barcelona, Spain and Alpharetta, Georgia where customers can perform tests and get hands on experience with our technologies. We also believe business will be generated from both internal sales efforts as well as from our strategic partners. S-One Labels and Packaging LLC, a division of S-One LP (“S-One”), has agreed to provide us with global sales, distribution, shipping, warehousing and promotion support for our products and employs representatives on an as needs basis to promote our products. Under the terms of our agreement with S-One, S-One will act as a sales and marketing contractor for our printed products and services on a global basis and will assist us in fulfilling our obligations under our signed current and future reseller agreements with global and domestic print providers and brand owners. In addition, in 2020 we entered into a consulting arrangement to develop relationships with brand owners, converters and other stakeholders in the food, pharmaceutical, medical device, fashion, apparel, household good and industrial products packaging industry, focusing on markets in the United Kingdom, European Union, Middle East and Asia. As an add-on track and trace feature of our RainbowSecure® covert imaging, we have contracted with Micro Focus, a global software developer to utilize their visible QR code system, GPAS, which is printed on labels and packaging along with our covert RainbowSecure® to store our hidden covert serial number in the cloud for product diversion investigators to authenticate with a proprietary application on a mobile device. The Micro Focus GPAS allows customers to use their smartphone to scan a product’s QR code or send the code via a text message. Immediate results help verify whether the product is real or counterfeit. This helps save customers from potential physical harm and businesses from facing lawsuits, loss of revenue and brand erosion. In addition to the anti-counterfeiting image, the Micro Focus GPAS has a “big data” gathering system with real-time analytics which geographically locate and identify counterfeiting activity by using an easily configured rules engine. Our covert or invisible RainbowSecure® system works as an extra layer of protection for the GPAS. When a professional product investigator scans the Micro Focus visible QR code with a special application on a smartphone it brings him or her to our secure cloud application to see what the hidden serialization number printed by the HP Indigo is for that particular label or package. The product investigator uses the RainbowSecure® reading device, the smartphone authenticator, to compare the hidden serialization number against the cloud number to prove authenticity. Under the contract with Micro Focus, VerifyMe has a re-seller agreement where we sell the combined Micro Focus GPAS with our RainbowSecure® identifier under our own trademarked name, VeriPAS™. Minimal revenue has been recognized from VeriPAS™. We also have a strategic partnership with INX, the third largest producer of inks in North America, to co-develop inkjet inks to be used for inkjet printing in combination with high speed, high volume label and packaging printing presses. The specially formulated inks enable these printing presses to print our RainbowSecure® invisible ink technology, which includes our variable VeriPAS™ serialization, track and trace technology. The inks are developed and ready for market for metal container decorating, dry offset printing, gravure shrink sleeves, and flexographic fabric printing. The inks developed, and expected to be developed, under our partnership agreement are applicable to a broad range of uses, including aluminum beverage cans and bottles, labels and packaging for the cannabis industry, personal protective equipment, aerospace parts, motor vehicle parts, weapons and ammunition, silicon chips, and medical equipment. This development has significantly expanded the market and availability of our technology to the broader and more voluminous label and packaging manufacturing industry. In addition, in May 2019, we entered into an equipment and software leasing contract with a Forbes Top 50 Private Company that sells nutrition, personal care, beauty and home care products around the globe. In September 2020, we received notice that this client plans to expand to cover additional products and three additional countries; Japan, Vietnam and Taiwan. We believe that our brand protection security technologies, coupled with our contract with HP Indigo, can be used to enable brand owners to securely prevent counterfeiting, prevent product diversion and authenticate labels, packaging and products and alleviate the brand owner’s liability from counterfeit products which physically harm consumers. Our covert technologies give brand owners the ability to control, monitor and protect their products life cycle. Also, our technologies allow brand owners to prove whether the product causing an issue is authentic or counterfeit. 6 Table of Contents Our technologies can be printed on labels and packaging and can also be applied to metals, plastics and textiles. In addition to packaging and labels, our brand protection security printing technologies can be applied to authenticate important credentials such as tax stamps, driver’s licenses, plastics, metal, apparel, birth certificates, immigration documents, gaming, apparel, currency, event and transportation tickets, passports, computer software, and credit cards. We can track and trace from production to ultimate consumption when coupled with our VeriPAS™ proprietary software. The Opportunity We believe our brand protection products have applications in many areas. Currently, we are aggressively marketing opportunities in the following: · Consumer Products – Counterfeit items are a significant and growing problem with all kinds of consumer-packaged goods, especially in the luxury retail and apparel industries. We believe our technologies are particularly suited for the cosmetics, health and beauty and apparel industries. We give the consumer the ability to test a products authenticity instantly with a smartphone. We can protect brand owners from liability litigation, product diversion and lost financial sales with our unique ink pigments which can be incorporated in dyes and used by manufacturers in these industries to combat counterfeiting and piracy of actual physical goods. Our pigments expressed as inks can also be used on packaging, as well as to track products that have been lost in transit, whether misplaced or stolen. We currently have a contract to assist with securing certain cosmetic products. · Pharmaceuticals/nutraceuticals – We believe counterfeit prescription pharmaceuticals are a growing trend, widely recognized as a public health risk and a serious concern to public health officials, private companies, and consumers. Counterfeiting can apply to both branded and generic products and counterfeit pharmaceuticals may include products with the correct ingredients but fake packaging, with the wrong ingredients, without active ingredients or with insufficient active ingredients. The United States enacted legislation requiring the implementation of a comprehensive system designed to combat counterfeit, diluted or falsely labelled pharmaceuticals, referred to as serialization or electronic pedigree (e-Pedigree). Our unique pigments embedded in the ink of a unique serialized barcode can provide a layered security foundation for a customer solution in this market. We are seeking to expand our business in this market and believe that as additional pharmaceutical companies seek to comply with the legislation we believe our products will provide attractive alternatives to address the need for product identifiers. We expect to engage third-party marketing and sales companies to present our solutions to the drug and pharmaceutical industry. · Food and Beverage – Counterfeit food threats are becoming more common as supply chains become more global and as imaging and manufacturing technology become more accessible. We believe our pigments and authentication tools can help in the battle against counterfeit foods and beverages. We are currently marketing our products in this market. Our Raw Material Suppliers Our security pigments are manufactured from naturally occurring inorganic rare earth materials. The manufacturing process includes both chemical and mechanical elements. In many cases, we produce pigments that are unique to a customer or product line. This uniqueness can be achieved through a variety of techniques, including custom formulation or combination of our proprietary pigments and/or incorporation of other specialized taggants. There are many manufacturers of these types of specialized pigments and we intend to maintain multiple simultaneous relationships to ensure ample sources of supply. Accordingly, we are not dependent on any principal suppliers. Manufacturing and Distribution We rely on third-party strategic partners to manufacture and distribute our RainbowSecure® products. We provide these strategic partners with pigment mixing instructions for the specific uses of each client based on their existing equipment and processes. We maintain policies and procedures to monitor, track and log access to and disposition of all pigment. Our customers are also required to agree to and implement these policies and procedures. In relation to our other products, such our hand held VerifyMe Beeper and VeriPAS™ Smartphone Authenticator devices, as well as our VerifyMe® as Authentic® tamper-proof labels, we provide instructions for the design of these products and rely on our strategic partners for manufacturing and distribution. Our Intellectual Property Intellectual property is important to our business. The current patent and trademark portfolios consist of eleven granted US patents and one granted European patent validated in four countries, nine pending US and foreign patent applications, six registered US trademarks, two EU trademark registrations, one Colombian trademark registration, one Australian trademark registration, one Japanese trademark registration, one Mexican trademark registration, one Singaporean trademark registration, and four pending US and foreign trademark applications. 7 Table of Contents In addition, seven patent applications are abandoned. We plan on considering filing for revival of some of the abandoned patent applications. We have attempted to achieve sufficient flexibility in our products and technologies so as to provide cost-effective solutions to a wide variety of counterfeiting problems. We intend to generate revenues primarily by selling pigment to manufacturers who incorporate our technologies into their manufacturing processes and their products as well as through licensing fees where we are providing unique or custom solutions. While some of our granted patents are commercially ready, we believe that others may have commercial application in the future but will require additional capital and/or a strategic partner in order to reach the potential markets. All of our patents are related to the inventions described above. Our registered patents expire between the years 2021 and 2038. The expiration date of a pending application that matures into a registration depends upon the issuance date and any adjustment under 35 U.S.C. 154(b). It is cost prohibitive to register patents in every country. We continue to develop new anti-counterfeiting technologies and we apply for patent protection for these technologies in countries with the most market potential and strong patent enforcement tools. When a new product or process is developed, we may seek to preserve the economic benefit of the product or process by applying for a patent in each jurisdiction in which the product or process is likely to be exploited. The issuance of a patent is considered prima facie evidence of validity. The granting of a patent does not prevent a third party from seeking a judicial determination that the patent is invalid. Such challenges to the validity of a patent are not uncommon and can be successful. There can be no assurance that a challenge will not be filed to one or more of our patents, if granted, and that if filed, such a challenge will not be successful. We have trademarked the VerifyMe TM brand in the United States and have registered and pending applications with respect to our brand internationally. However, our name and brand could be confused with brands that have similar names, including but not limited to Verified.Me, a service offered to Canadians by SecureKey Technologies Inc. We have a pending application for the VerifyMe name in Canada but can make no assurances regarding its approval. We are aware of names and marks similar to our service marks being used from time to time by other persons that could result in confusion and may diminish the value of our brands and adversely affect our business. See Item 1A “Risk Factors” for additional information regarding the risk of confusion of our name with other brands and other intellectual property risks. Research and Development Prior to 2019, we had been involved primarily in research and development since our inception. Through 2012, our research and development focused on pigment technologies. From 2012 through 2018, we allocated research and development efforts between digital and pigment technologies. Since 2019 our primary focus has shifted from research and development to commercialization of our products. Current research and development efforts are focused on expanding our technology into new areas of implementation and to develop unique customer applications. We spent approximately $19 thousand and $5 thousand during the years ended December 31, 2020 and 2019, respectively, on research and development. We are now researching the conversion of our VeriPAS™ cloud-based platform into an Ethereum de-centralized blockchain network to increase its security. We are looking at an existing Ethereum Blockchain-as-a-Service ("BaaS") platform system that we would upgrade with our patented digital features. Our goal for the new platform will be to provide a comprehensive blockchain platform offering product lifecycle management, supply chain process control, data mining, consumer engagement, product certification, and process certification. We envision that this new blockchain network could be utilized by any sized business, to further enhance brand protection and value as well as to possibly enable us to expand into new business models. Sales and Marketing Strategy The rise of e-commerce is a major opportunity for our products and technologies. Both brand owners and counterfeiters conduct a rapidly growing proportion of their trade online. E-commerce sites such as Amazon, Alibaba and, eBay and social media networks, including Facebook, Twitter and Instagram, have become major hubs for counterfeits. These e-commerce sites continue to outperform brick-and-mortar retail growth, and such performance has been accelerated by the significant travel restrictions, mandated closures and other effects of the COVID-19 pandemic. A virtual global marketplace provides multiple benefits for counterfeiters. We have identified the following factors that make it easier for counterfeiters to deceive customers about the authenticity of the products they are buying: · Product inspection occurs after payment and delivery; · Counterfeiters base themselves in jurisdictions where the laws on counterfeiting are less stringent; and · Product images on a website are often all the consumer has, to view and inspect prior to the sale. 8 Table of Contents We view this is a major opportunity to address this growing problem. VerifyMe has developed two strategies to address the growing e-commerce counterfeiting issue. 1. VerifyMe® as Authentic® tamper proof labels. This new pre-printed product is sold to large and small brand owners who want to provide their customers with the ability to instantly authenticate their product upon receipt using their customers own smartphone camera. The brand owner works with us to design the label and its security features and we manufacture the labels, through our strategic partnerships, and sell them to the brand owner to affix to their products for their customer to authenticate. As a side benefit the brand owner has the ability to engage with its customer and gather business intelligence about them. 2. VerifyMe® Web TM is another new e-commerce product line that VerifyMe markets to brand owners. This product is a search tool that brand owners subscribe to which reports back to the brand owner any counterfeit websites and or counterfeit products that are found on the internet. VerifyMe provides reports to the brand owner and shuts down the counterfeiting sites and products by legal means. In our opinion, standard historical optical security features such as holograms and Yellow UV Ink are still used but their effectiveness and usage are declining. Our product line has a standard optical feature known as RainbowSecure® Security Ink Taggant. The differentiator between our standard ink taggant feature and existing products is that our RainbowSecure® feature can be printed on digital presses making each label, package, or product completely unique with its own digital signature. In addition, our invisible code can be read into the cloud with a smartphone. This solution is invisible to the human eye, and each code is unique and stored in the cloud for each product, thereby preventing a counterfeiter from matching the codes to products that contain our RainbowSecure® feature. Our software also provides intelligent monitoring capabilities. For example, if a counterfeit is suspected or a product is not in the correct location (i.e. product diversion) the brand owner is alerted by our software. In conjunction with HP Indigo, we have modernized RainbowSecure® by creating unique signatures in the form of invisible codes that can be imbedded onto labels, packages and products that can be read with a smartphone into a supply chain management cloud-based software known as VeriPAS™. We market directly with HP Indigo to owners of the 6000 series and HP Indigo 7900 series digital presses as well as the label and packaging printing industry, including both traditional and digital printers and users to address their clients’ needs for our covert serialization. We expect those printers to market and resell our technologies to both current and future brand owner clients. HP Indigo has trained their international digital press salesforce in various security printing technologies including our RainbowSecure® and VeriPAS™ technologies. HP Indigo sales people have generated multiple leads on our behalf. In 2017, we entered into a five-year contract with HP to supply HP Indigo digital press ink canisters containing our RainbowSecure® pigment for use by HP Indigo digital press owners who print our security feature on labels and packages for their brand owners. Additionally, we enter into reseller agreements with print service providers. Pursuant to one of these agreements, a global label manufacturer began printing our technology in July 2018 and has major brand owners as clients which can utilize our technologies to protect their product labels and packaging from counterfeiting and product diversion. This label printer owns and operates printers and manufacturing equipment which can implement our technology. This reseller also has manufacturing facilities around the globe. In addition to the printing industry, we expect to market directly to all brand owners who utilize labels and packaging for their products. Brand owners can be licensed directly with us and direct their personal printer to print their labels and packaging with our printing technologies. The brand owner will therefore pay their royalties directly to us based on the number of labels and packages units to which their printer applied the technology. In 2019, we entered into a leasing agreement and purchase agreement with a major brand owner who is on the Forbes Top 50 Private Companies list. The brand owner began printing labels that include our product in the fourth quarter of 2019 and, in 2020, we received notice that this client plans to add additional products and three additional countries Japan, Vietnam and Taiwan. To date, we have derived limited revenue from this contract. In lieu of building, training, and supporting a world-wide internal sales force, we have engaged with multiple strategic partners who have existing government and brand owner relationships in their particular geographical locations. These strategic partnerships include both paid and commissioned sales only contract arrangements. These strategic partners are located in the Middle East, Europe, United Kingdom, India, China and Pakistan. We plan to continue to build new strategic partnerships throughout the globe. We have also established a network of commission only paid consultants within the United States. These consultants mainly focus on brand owners and they are not constricted geographically. We have also entered into commissioned sales contract arrangements with the global sales staff of our vendors, HP Indigo and S-One. We have a strategic partnership with S-One pursuant to which S-One provides us with global sales, distribution, shipping, help desk, warehousing and promotion support for our products and employs representatives on an as needs basis to promote our products. Under the terms of our agreement with S-One, S-One acts as a sales and marketing contractor for our printed products and services on a global basis to mainly print service providers (“PSP”) and assists us in fulfilling our obligations under our current and future reseller agreements with various global and domestic PSPs and brand owners. 9 Table of Contents In addition, we have cross-selling agreements with some of our strategic partners. Micro Focus, our track and trace partner, has agreed to cross sell our technologies as part of their GPAS. We are also contracted with Micro Focus to re-sell their GPAS product with our RainbowSecure® and our VeriPAS™ Smartphone Authenticator technology under our own trademarked name, VeriPAS™. Additionally, entered into a cross-selling agreement with SmartGlyph in 2020, pursuant to which we have agreed to integrate our technologies with their barcodes and multi-faceted, “software only” coding platform and sell to our respective customers. We plan for our sales and marketing strategy to include an outreach program and sales programs that tailor the product to the governmental body or merchant, as well as key partnerships with authorities and merchants whose products or audiences can be complementary to our own. In particular, we intend to focus on building relationships with key partners who can deliver our products to their existing and prospective customers in target markets, i.e., commercial printers/packagers, plastic card manufacturers and financial services intermediaries. We entered into an agreement with OWS Capital to market, promote and sell our security authentication technology solutions to the UAE government and companies located in the Middle East. HP Indigo’s Experience Centers located in Tel Aviv, Israel, Singapore, Barcelona, Spain and Alpharetta, Georgia have all been trained and outfitted with samples, including our VerifyMe Beepers, and VeriPAS™ Smartphone Authenticators, to demonstrate the technology to customers who visit the centers. Customers can perform tests and receive hands on experience with our technologies. In addition, we collaborated with HP Indigo at the Asia Security Group Virtual High Security Printing & Brand Protection Conference & Exhibition in December 2020 to showcase our RainbowSecure® solution on HP Indigo’s digital printing presses. HP Indigo also invited us to man a station in the security printing sections of their trade show booths such as the global LabelExpo show held in Brussels, Belgium in September 2019 and in Singapore in March 2019. HP Indigo has us display solutions at their annual VIP print service provider event held in Tel Aviv every year as well as invited VerifyMe to attend other trade shows in 2020, however, due to the COVID-19 pandemic, these shows were postponed or cancelled. Due to the strong security background of our management team, we have undertaken a major overhaul of our website to position us as a “one stop shop” for brand protection technologies, and as an expert advisor to brand owners to consult with them on their brand protection issues. Our new website is expected to launch in mid-April 2021. In addition to the website, a new social media advertising program will be launched to targeted customers. In addition to the website and social media expansion, we have recently signed on new salespeople from a large competitor to enhance our sales team. We anticipate that additional hiring of experienced salespeople will continue for the foreseeable future. Competition The market for protection from counterfeiting, diversion, theft and forgery is a mature industry dominated by a number of large, well-established companies, particularly in the area of traditional overt security technologies where repeating static produced images are commonly used. Security printing for currency production began in Europe over a century ago and has resulted in the establishment of old-line security printers which have branched out into brand and product protection as well. In North America, brand protection products, such as tamper-resistant packaging, security labels, and anti-theft devices are readily available and utilized on a widespread basis. In recent years, however, demand has increased for more sophisticated overt and covert security technologies with a strong desire for technologies that can provide variable images and data. Competitors can be segregated into the following groups: (i) security ink manufacturers who are generally well-established companies whose core business is manufacturing and selling printing inks; (ii) system integrators who have often evolved from other sectors in the printing industry, mainly security printing manufacturers, technology providers, or packaging and label manufacturers, and who typically offer a range of security solutions that enable them to provide a complete suite of solutions tailored to the customer’s specific needs and requirements; (iii) system consultancy groups who offer a range of technologies from several different providers and tailor specific solutions to end-users; (iv) traditional authentication technology providers which provide holograms and digital watermarking; (v) product diversion tracking providers which provide on-product and in-product tagging technologies; and (vi) traditional security printers whose core products are printing the world’s currencies. In general, we believe competition in our principal markets is primarily driven by product performance, features and liability; price; ease of implementation, technology effectiveness, digital instant verification; new laws and regulations; product innovation and timing of new product introductions; ability to develop, maintain and protect proprietary products and technologies; sales and distribution capabilities; technical support and service; brand loyalty; applications support; and breadth of product line. In 2020, new blockchain as a service (“BAAS”) technology companies have surfaced. These are mainly early-stage development companies that have begun to enter the marketplace using de-centralized blockchain networks to authenticate and validate products as well as traditional supply chain management including serialization, track and trace and internet of things (“IoT”) connectivity using codes, near field communication and RFID chips. We believe that converting our VeriPAS™ cloud-based platform into a de-centralized blockchain network will allow us to compete in this space with the advantage of blending our physical technologies for an enhanced product offering. 10 Table of Contents Amazon has become a competitor with their new “Project Zero” brand protection system utilizing their “Transparency” serialization product. Amazon’s product serialization service provides a unique code for every unit that is manufactured, and the brand puts these codes on its products as part of its manufacturing process, which Amazon scans and verifies. This differs from our covert luminescent pigment which is incorporated in the labeling process and our invisible covert serialization and authentication solution. Also, HP Indigo is selling a yellow ultraviolet ink and a color changing ink as a security product at inexpensive prices that directly competes with our products. There are a number of providers of inexpensive ultraviolet inks in the marketplace, however, we believe these inexpensive ultraviolet inks do not provide the level of security and safety that our products provide. 11 Table of Contents New types of security competition are also increasing, such as retail website monitoring, brand investigations, RFID and near field communications products using low powered radio signals to connect to products. To compete effectively, we are seeking to establish key relationships with major digital solution equipment and distribution providers as we have done with HP Indigo. While leveraging these relationships, we still expect that we will need to expend significant resources in sales and marketing. Many of our competitors have substantially greater financial, human and other resources than we have. As a result, we may not have sufficient resources to develop and market our services to the market effectively. We expect competition with our products and services to continue and intensify in the future. Major Customers/Vendors During the year ended December 31, 2020, two customers accounted for 92% of total sales. 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, 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. As of December 31, 2019, two customers accounted for 97% of total accounts receivable. Employees and External Sales Force As of March 19, 2021, we had three full-time employees, our Chief Executive Officer, our Chief Financial Officer, our Director of Sales and Business Development, North America, one part-time employee, our Chief Technology Officer, and four paid consultants, including our Chief Operating Officer and our Chairman. Because of the nature of our business, our employees and consultants can, and do, conduct their work for us remotely. In lieu of building, training and supporting a world-wide internal sales force, we have engaged with multiple strategic partners who have existing government and brand owner relationships in their particular geographical locations. These strategic partnerships include both paid and commissioned sales only contract arrangements. These strategic partners are located in the Middle East, Europe, United Kingdom, India, China and Pakistan. We plan to continue to build new strategic partnerships throughout the globe. We have also established a network of over a dozen commission-paid sales consultants within the United States. These consultants mainly focus on brand owners and they are not constricted geographically. We have also entered into commissioned sales contract arrangements with the global sales staff of our vendors, HP Indigo and S-One. Available Information We make available free of charge on our website, www.verifyme.com, all materials that we file electronically with the Securities and Exchange Commission (“SEC”), including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after electronically filing such materials with, or furnishing them to, the SEC. We have not incorporated by reference into this Report the information included, or that can be accessed through, our website and you should not consider it to be part of this Report. The SEC maintains an Internet website, www.sec.gov that contains reports, proxy and information statements and other information that we file electronically with the SEC.